Karl Marx in his formulation of the economic system of communism had made five fatal flaws in making in his theories. Those flaws are:
1- Using the labor theory of value.
2- Lack of understanding of information propagation and signaling in the market.
3- Lack of understanding of the role of discovery, learning, and creativity in the market.
4- Misinterpreting the direction of history (historical materialism).
5- Lack of understanding of the laws of causality (the relationship between cause and effect).
In this post, I will address the first topic, namely the theory of value. Hopefully, in future posts I will address the rest of the flaws in Karl Marx's theory of economics. Please note that most of the flaws in Karl Marx's theory were result of poor understanding of economics in the 19th century, so this post is not meant to question the intelligence of Karl Marx, but rather review his theory in the light of advances in economic theory in the 20th and the 21st century.
The Labor Theory of Value:
The labor theory of value states that the value of a commodity is proportional to the amount of labor that went into the production of that commodity. This means that any two commodities that had the same amount of labor invested in them should be equally priced, and sold for the same price. Similarly, if twice the amount of labor went into one commodity, then it's price should be double.
The labor theory of value is part of a sub-class of theories of value, called objective theories of value. Objective theories of value are those theories that state that commodities should have a specific value (and consequently specific price). Labor is one of the metrics that objective theories of value use.
The Subjective Theory of Value:
The subjective theory of value state that the value of a commodity is subjectively determined by both producers and consumers.
To illustrate the flaws of the labor theory of value, let's consider this example:
Let's assume for the sake of argument, that the same amount of labor went into the production of those two T-shirts. Do both T-shirts have the same value?! Certainly not! For a person who loves Jesus, the second T-shirt has negative value. That is to say, that person would not take the second T-shirt even if it was offered for free! Different people would have different valuations for the same commodity. This means that objective theories of value are all necessarily false including -among others- the labor theory of value.
Trade is a Positive-Sum Game:
A positive-sum game is the type of game where the sum of values of all players after the process is larger than the sum of values of all players before the process.
Let's consider an example of a zero-sum game to illustrate the meaning of the term. Let's say that two friends make a bet on the outcome of a football match, such that the loser of the bet would pay the winner of the bet 10$. This is a zero-sum game because in order for one person to gain 10$, the other person has to lose 10$. So, the winner had 10$ before, and 20$ after. The loser had 10$ before, and 0$ after. The sum of money before was 10$+10$ = 20$, and after is 20$+0$ = 20$.
Since, the difference in the amount before and after is zero, then it is a zero-sum game. In other words, in a zero-sum game, in order for one player to gain a certain amount of value, the other player must lose an equal amount of value.
Sexual intercourse is a good example of a positive-sum game. Both parties involved in a sexual interaction gain satisfaction. In other words, it is a win-win situation, where all players gain value.
Is trade a zero-sum game? Positive-sum game? Or negative-sum game?
If we assume that commodities have a fixed objective value, then trade is a zero-sum game. If PersonX owned ItemX and PersonY owned ItemY, and those items had fixed objective values, then a trade will not change the sum of values in the system.
However, when we assume the subjective theory of value, we see how trade is a positive-sum game. To illustrate that, let's go back to our T-shirts example. Say, Mr. Jesus Lover got the "I hate Jesus" T-shirt as a gift. And his friend, Mr. Jesus Hater got the "I love Jesus" T-shirt as a gift. Both of these individuals have negative valuation of the items they received. On the other hand, they both have positive valuation of the item their friend has received.
Let's say, Mr. Jesus Lover proposes a trade to Mr. Jesus Hater. Let's consider the conditions on which this trade will be successful.
1- Mr. Jesus Lover values the shirt his friend has more than he values the shirt he already has; Otherwise, he wouldn't have proposed the trade in the first place.
2- Mr. Jesus Hater values the shirt his friend offered more than he values the shirt he already has. If he did not value it more, he would refuse to make the trade.
From (1) and (2), we can easily see that voluntary trade is necessarily a positive-sum game.
Karl Marx's Theory of Exploitation:
I am not going to explore Marx's theory of exploitation in full, it is a mathematically intensive theory. But what is important to realize, is that the whole theory is based on the labor theory of value, and that trade is a zero-sum game.
According to the theory of exploitation, every trade is either neutral or exploitative. So, if two individuals enter into a trade, they are either going to trade items of equal value, or trade items of different values. In the case two people trade of items of different values, the person who got the more valuable item is an "exploiter", and the person who got the less valuable item is "exploited".
Then Marx focused on the trade between a business owner (the capitalist) and the employee (proletariat). And then went on to prove that the wages employees get is necessarily exploitative. In other words, employees are always exploited.
The proof is relatively simple. The price at which a product that is sold on the market equals the amount of labor that went into making the product. So, the only way the business owner can make a profit is to pay his employees less than the true value of their labor. So, the only way a business owner can make any profit whatsoever, is by exploiting his employees. And the more profit a business owner makes, the more exploitative his wages are.
To give a numerical example, let's say a cars factory owner bought the raw materials (steel and other raw materials) for 200$. This 200$ is the value of labor required to mine those raw materials. He then hires one worker to assemble a car in his factory. Later, the factory owner sells the car for, say, 1200$. According to the labor theory of value, the price of the car (1200$) is the value of the total labor that went into the production of the car. The value that the worker at the factory added is 1000$ (since 200$ was the price of the raw materials). So, if the factory owner gives his worker 800$ as a salary, and keeps 200$ as profit, then the factory owner has exploited his worker by not compensating him for 20% of his labor (200$ of the 1000$).
It can be easily seen, how in the labor theory of value, any profit a business owner makes is necessarily an act of exploiting his workers. Fortunately, it is obvious that the labor theory of value is not a valid assumption to build a theory.
It is also important to note that, Karl Marx's theory of historical materialism is derived from his theory of exploitation, and so, that theory as well needs to be put in question.
In this series:
Economics and The Theory of Value (1)
Economics and The Theory of Value (2)
Next: Economics and The Theory of Value (3)
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1 comment:
What if we take that 200 as the wages for the employer that manage all that process from buying the raw materials to built the factory? Still it called exploitive?
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