Mutualist Political Economy
By Kevin A. Carson
Table of Contents
Part One--Theoretical Foundations: Value Theory 10
Chapter One: The Marginalist Assault on Classical Political Economy: An Assessment and Counter-Attack 10
A. Statement of the Classical Labor Theory of Value 10
B. Vulgar Political Economy, Marginalism, and the Issue of Ideological Motivation 14
C. The Marginalists versus Ricardo 22
D. Exceptions to the Cost-Principle: The Classicals in Their Own Defense 37
E. Generality and Paradigms 67
F. The Marshallian Synthesis 81
G. Rothbard versus the Marshallian Synthesis** 93
Chapter Two: A Subjective Recasting of the Labor Theory 119
Chapter Three: Time Preference and the Labor Theory of Value 194
Part Two--Capitalism and the State: Past, Present and Future 212
Introduction to Part II: Exploitation and the Political Means 212
Chapter Four--Primitive Accumulation and the Rise of Capitalism 266
A. The Expropriation of Land in the Old World 279
B. Political Preemption of Land in Settler Societies 303
C. Political Repression and Social Control in the Industrial Revolution. 309
D. Mercantilism, Colonialism, and the Creation of the "World Market" 328
Conclusion: “The World We Have Lost”--And Will Regain 346
Appendix: On the "Necessity" of Primitive Accumulation 362
Chapter Five: The State and Capitalism in the "Laissez-Faire" era. 387
A. Tucker‘s Big Four: The Land Monopoly. 390
B. Tucker‘s Big Four: The Money Monopoly. 434
C. Tucker's Big Four: Patents. 443
D. Tucker’s Big Four: Tariffs 455
E. Infrastructure 457
Chapter Six: The Rise of Monopoly Capitalism 476
A. Liberal Corporatism, Regulatory Cartelization, and the Permanent Warfare State. 483
B. Power Elite Theory. 517
C. Monopoly Capital and Super-Profits. 527
D. Socialization of Costs as a Form of Cartelization. 534
Chapter Seven--Monopoly Capitalism and Imperialism 556
Introduction: Elite Reaction to Crisis (with Digression on Maldistribution of Income) 556
A. "Open Door Imperialism" Through the 1930s. 567
B. The Bretton Woods System: Culmination of Open Door Empire 572
C. Export-Dependent Monopoly Capitalism (with Digression on Economy of Scale) 600
Chapter Eight--Crisis Tendencies 630
A. Accumulation Crisis 632
B. Fiscal and Input Crises 635
C. Legitimation Crisis 659
D. Neoliberal Reaction and Political Repression 662
E. Built-In Limits to Effectiveness of Neoliberal Reaction 679
F. Neoconservatism as Attempted Defense Against Legitimation Crisis 685
G. The Frankfurt School: Fascism and Abandonment of the Law of Value 690
H. Global Political Crisis of Imperialism 694
Part Three--Praxis 705
Chapter Nine: Ends and Means 705
A. Organizing Principles. 705
B. Getting There. 713
In the mid-nineteenth century, a vibrant native American school of anarchism, known as individualist anarchism, existed alongside the other varieties. Like most other contemporary socialist thought, it was based on a radical interpretation of Ricardian economics. The classical individualist anarchism of Josiah Warren, Benjamin Tucker and Lysander Spooner was both a socialist movement and a subcurrent of classical liberalism. It agreed with the rest of the socialist movement that labor was the source of exchange-value, and that labor was entitled to its full product. Unlike the rest of the socialist movement, the individualist anarchists believed that the natural wage of labor in a free market was its product, and that economic exploitation could only take place when capitalists and landlords harnessed the power of the state in their interests. Thus, individualist anarchism was an alternative both to the increasing statism of the mainstream socialist movement, and to a classical liberal movement that was moving toward a mere apologetic for the power of big business.
Shawn Wilbur has argued that the late-nineteenth century split between individualists and communists in the American anarchist movement (for which the ill-feeling between Benjamin Tucker and Johann Most is a good proxy) left the individualists marginalized and weak. As a result, much of the movement created by Benjamin Tucker was absorbed or colonized by the right. Although there are many honorable exceptions who still embrace the "socialist" label, most people who call themselves "individualist anarchists" today are followers of Murray Rothbard's Austrian economics, and have abandoned the labor theory of value. Had not the anarchism of Tucker been marginalized and supplanted by that of Goldman, it might have been the center of a uniquely American version of populist radicalism. It might have worked out a more elaborate economic theory that was both free market and anti-capitalist, instead of abandoning the socialist label and being co-opted by the Right.
Some self-described individualist anarchists still embrace the socialist aspect of Tucker's thought--Joe Peacott, Jonathan Simcock, and Shawn Wilbur, for example. The Voluntary Cooperation Movement promotes the kinds of mutualist practice advocated by Proudhon. Elements of the nineteenth century radical tradition also survive under other names, in a variety of movements: Georgist, distributist, "human scale" technology, etc. Unfortunately, individualist anarchist economic thought has for the most part been frozen in a time warp for over a hundred years. If the marginalists and subjectivists have not dealt the labor theory of value the final death blow they smugly claim for it, they have nevertheless raised questions that any viable labor theory must answer.
This book is an attempt to revive individualist anarchist political economy, to incorporate the useful developments of the last hundred years, and to make it relevant to the problems of the twenty-first century. We hope this work will go at least part of the way to providing a new theoretical and practical foundation for free market socialist economics.
In Part One, which concerns value theory, we construct the theoretical apparatus for our later analysis. In this section, we attempt to resurrect the classical labor theory of value, to answer the attacks of its marginalist and subjectivist critics, and at the same time to reformulate the theory in a way that both addresses their valid criticisms and incorporates their useful innovations. Part One starts with an assessment of the marginalist revolution and its claims to have demolished the labor theory of value, and then proceeds either to refute these criticisms or to incorporate them.
Part Two analyzes the origins of capitalism in light of this theoretical apparatus; it is an attempt to explicate, if the reader will pardon the expression, the laws of motion of state capitalist society--from its origins in statism, through its collapse from the internal contradictions inherent in coercion. We analyze capitalism in the light of individualist anarchism's central insight: that labor's natural wage in a free market is its product, and that coercion is the only means of exploitation. It is state intervention that distinguishes capitalism from the free market.
Part Three, finally, is a vision of mutualist practice, building both on our own previous theoretical analysis, and on the rich history of anarchist thought.
If there is one valuable practical insight in this entire book, it is the realization that coercive state policies are not necessary to remedy the evils of present-day capitalism. All these evils--exploitation of labor, monopoly and concentration, the energy crisis, pollution, waste--result from government intervention in the market on behalf of capitalists. The solution is not more government intervention, but to eliminate the existing government intervention from which the problems derive. A genuine free market society, in which all transactions are voluntary and all costs are internalized in price, would be a decentralized society of human-scale production, in which all of labor's product went to labor, instead of to capitalists, landlords and government bureaucrats.
Some of the material of Parts Two and Three appeared previously in other forms. Chapter Four is a radically expanded and revised version of the subheading "The Subsidy of History" in my pamphlet "The Iron Fist Behind the Invisible Hand," published by Red Lion Press in 2001. Chapter Five is likewise, an expanded version of other sections from the same pamphlet. Chapters Six and Seven are expanded versions of my article "Austrian and Marxist Theories of Monopoly Capitalism: A Mutualist Synthesis." Chapter Eight incorporates some material from the same article, along with the subheading "Political Repression" from "Iron Fist." Chapter Nine includes material from my article "A 'Political' Program for Anarchists."
Part One--Theoretical Foundations: Value Theory
Chapter One: The Marginalist Assault on Classical Political Economy: An Assessment and Counter-Attack
A. Statement of the Classical Labor Theory of Value
Either the labor theory of value, or, secondarily, some other form of cost theory of value,1 was common to the classical school of political economy in England.
It was stated by Adam Smith in ambiguous form: "The real price of everything, what everything really costs to the man who wants to acquire it, is the toil and trouble of acquiring it.... Labour was the first price, the original purchase-money that was paid for all things."2 In the same passage, though, he spoke of the value of a commodity in one's possession as consisting of "the quantity of the labour which he can command...." And at other times, he seemed to make the market price of labor the source of its effect on exchange value.
The most clear-cut and effective statement of the labor theory was by David Ricardo, in Principles of Political Economy and Taxation: "The value of a commodity, or the quantity of any other commodity for which it will exchange, depends on the relative quantity of labour which is necessary for its production, and not as the greater or less compensation which is paid for that labour."3 In so defining the doctrine, Ricardo eliminated the confusion between labor as the source of exchange-value and wages as a component of price.
From this principle, it followed that income accruing to the owners of land and capital was a deduction from this exchange-value created by labor, and that wages varied inversely with profit: "If the corn is to be divided between the farmer and the labourer, the larger the proportion that is given to the latter, the less will remain for the former. So if cloth or cotton goods be divided between the workman and his employer, the larger the proportion given to the former, the less remains for the latter."4
It was only natural that the emerging socialist movement should seize on the political implications of this conclusion. The school of so-called "Ricardian socialists" in England took just such an inspiration. The greatest of them, Thomas Hodgskin, wrote in Labour Defended Against the Claims of Capital, "Wages vary inversely as profits, or wages rise when profits fall, and profits rise when wages fall; and it is therefore profits, or the capitalist's share of the national produce, which is opposed to wages, or the share of the labourer."5
Marx, in turn, was inspired by the Ricardian socialist interpretation of classical political economy, as well as by Proudhon. According to Engels, modern socialism was a direct outgrowth of the insights of "bourgeois political economy" on the nature of wages, rent, and profit.
Insofar as modern socialism, no matter of what tendency, starts out from bourgeois political economy, it almost without exception takes up the Ricardian theory of value. The two propositions which Ricardo proclaimed in 1817 right at the beginning of his Principles, 1) that the value of any commodity is purely and solely determined by the quantity of labour required for its production, and 2) that the product of the entire social labor is divided among the three classes: landowners (rent), capitalists (profit), and workers (wages)--these two propositions had ever since 1821 been utilized in England for socialist conclusions, and in part with such pointedness and resolution that this literature, which had then almost been forgotten and was to a large extent only rediscovered by Marx, remained surpassed until the appearance of Capital.6
The actual extent to which Marx's theory of value is a straightforward outgrowth of Ricardo's, and to which it was a preexisting Hegelian philosophy with Ricardian elements grafted on, is an issue in dispute.7 But for the present purpose, we will treat Marx's theory of value as relevant to our study to the extent that it is amenable to a Ricardian approach.
B. Vulgar Political Economy, Marginalism, and the Issue of Ideological Motivation
Given the fertile ground Ricardo's political economy presented for socialist conclusions, it was naturally seen as problematic by apologists for the newly arisen system of industrial capitalism. Marx made a fundamental distinction, in this regard, between the classical political economists and the "vulgar economists" who came after them. Smith, James Mill and Ricardo had developed their scientific political economy without fear of its revolutionary implications, because industrial capital was still the progressive underdog in a revolutionary struggle against the unearned income of feudal landlords and chartered monopolists. But that situation came to an end with the capitalists' acquisition of political power.
In France and England the bourgeoisie had conquered power [in the "decisive crisis" year of 1830]. Thenceforth, the class struggle, practically as well as theoretically, took on more and more outspoken and threatening forms. It sounded the knoll of scientific bourgeois economy. It was thenceforth no longer a question whether this theorem or that was true, but whether it was useful to capital or harmful, expedient or inexpedient, politically dangerous or not. In place of disinterested enquirers, there were hired prize-fighters; in place of genuine scientific research, the bad conscience and the evil intent of apologetic.8
Maurice Dobb, likewise, commented on the transition of political economy from a revolutionary to an apologetic role:
As a critique leveled simultaneously against the authoritarianism of an autocratic state and against the privileges and influence of the landed aristocracy Political Economy at its inception played a revolutionary role.... Only later, in its post-Ricardian phase, did it pass over from assault on privilege and restriction to apology for property.9
Although the break was perhaps not as fundamental as the Marxists have made it out to be, there is evidence that at least some of the political economists from the 1830s on, as well as the founders of marginalism, were conscious of the political aspect of the problem. According to Maurice Dobb, the "vulgar political economists" were consciously motivated by apologetic considerations; as an alternative to the mainstream classical school of England, they turned to the subjectivist continental school, which had been influenced by Say's interpretation of Adam Smith.
It was against this whole [Ricardian] mode of approach that the Senior-Longfield school reacted so strongly--not merely as an inapposite analytical tool..., but against its wider applications and corollaries. In reacting in this way, it was almost inevitable that they should be carried in the wake of (and eventually join) the other and rival tradition deriving from Smith, reinforcing it by so doing. If they are properly described at all as "improvers" or "conciliators", such a term should really be applied to their role in developing this Smithian tradition and not the Ricardian approach.10
Among the first generation of marginalists, Jevons at least was quite conscious of the political dimension of his anti-Ricardian project. To quote Dobb again, "...although Menger could be said to have represented this break with classical tradition even more clearly and completely, Jevons was apparently more conscious of the role he was playing in reshunting the 'car of economic science' which Ricardo had so perversely directed 'onto a wrong line.'"11
Dobb considered it telling that the marginalist refinement of subjectivism had been produced near-simultaneously by three different writers, within a decade of the publication of Capital. It indicated a prevailing atmosphere of ideological combat, and a vacancy for anti-Marxian polemicists waiting to be filled.
It is, at least, a remarkable fact that within ten years of the appearance of the first volume of Kapital, not only had the rival utility-principle been enunciated independently by a number of writers, but the new principle was finding a receptivity to its acceptance such as very few ideas of similar novelty can ever have met. If only by the effect of negation, the influence of Marx on the economic theory of the nineteenth century would appear to have been much more profound than it is fashionable to admit….
That so many of the economists of the last quarter of the century should have advertised their wares as such an epoch-making novelty, and tilted their lances so menacingly at their forebears, seems to have an obvious, if unflattering explanation: namely, the dangerous use to which Ricardian notions had been recently put by Marx.12
And of the second generation of Austrians, Böhm-Bawerk seemed quite aware, in Dobb's opinion, of the ideological nature of the task before him.
It seems clear that Böhm-Bawerk at any rate appreciated the problem which the classical theory had sought to solve. While he is sparing, almost niggardly, in paying tribute to Marx even for formulating the question accurately, there is every indication that he framed his theory directly to provide a substitute answer to the questions which Marx had posed.13
If such speculations on the political motives of the marginalist revolutionaries seem "unflattering," unfair, or ad hominem, it is worth bearing in mind that Böhm-Bawerk himself was not above pointing to the ideological motivations of his predecessors, in language very reminiscent of Marx's dismissal of the "vulgar economists." Even more than grinding his axe against Marx, Böhm-Bawerk seems to have been motivated by a desire to demonstrate the originality of his own views at the expense of previous defenses of interest, like that of Nassau Senior.
Senior's Abstinence theory has obtained great popularity among those economists who are favourably disposed to interest. It seems to me, however, that this popularity has been due, not so much to its superiority as a theory, as that it came in the nick of time to support interest against the severe attacks that had been made on it. I draw this inference from the peculiar circumstance that the vast majority of its later advocates do not profess it exclusively, but only add elements of the Abstinence theory in an eclectic way to other theories favourable to interest.14
Since Böhm-Bawerk was not above such a critique of his own predecessors, we have no obligation to spare him similar treatment, from an excess of chivalry.
It is remarkable, at least, how the cultural atmosphere of the classical liberal mainstream changed from the early nineteenth century on. From a revolutionary assault on the entrenched power of the landed aristocracy and chartered monopolies, by the late nineteenth century it had become an apology for the institutions and interests most closely resembling, in power and privilege, the ruling class of the Old Regime: the large corporations and the plutocracy.
The shift toward reaction was by no means uniform, however. The revolutionary and anti-privilege character of the early movement continued in many strands of liberalism. Thomas Hodgskin, squarely in the classical liberal tradition and also by far the most market-oriented of the Ricardian socialists, criticized the power of the industrial capitalist in language reminiscent of Adam Smith's attack on landlords and mercantilists--and on very much the same principles.
The American school of individualist anarchism, likewise, turned the weapons of free market analysis against the statist props of capitalist privilege. Even Hodgskin's disciple Spencer, usually regarded as a stereotypical apologist for capitalism, at times displayed such tendencies. Henry George and his follower Albert Nock, likewise, turned classical liberalism toward radically populist ends. Our own version of free market socialism, set out in this book, comes from these heirs of the armed doctrine of classical liberalism.
At any rate, regardless of their political motivations, the marginalists performed a necessary role. Their detailed critique of classical political economy pointed out many areas in need of clarification, or of a more explicit philosophical basis. And the marginalist critique, especially that of Böhm-Bawerk, produced genuinely valuable innovations which any viable labor theory of value must incorporate. One such criticism (Böhm-Bawerk's critique of the labor-theory for its lack of an adequate mechanism), and one innovation (the Austrian time preference theory) will be integrated, in the following chapters, into a reworked labor theory of value.
C. The Marginalists versus Ricardo
Although subsequent marginalist criticisms of Ricardo were more thorough, Jevons fired the opening salvo quite dramatically. He explicitly formulated his utility-based theory of value in opposition to the labor theory. In his Introduction to The Theory of Political Economy, he wrote:
Repeated reflection and inquiry have led me to the somewhat novel opinion, that valuedependsentirelyuponutility. Prevailing opinions make labour rather than utility the origin of value; and there are even those who distinctly assert that labour is the cause of value. I show, on the contrary, that we have only to trace out carefully the natural laws of the variation of utility, as depending upon the quantity of commodity in our possession, in order to arrive at a satisfactory theory of exchange, of which the ordinary laws of supply and demand are a necessary consequence. This theory is in harmony with facts; and, whenever there is any apparent reason for the belief that labour is the cause of value, we obtain an explanation of the reason. Labour is found often to determine value, but only in an indirect manner, by varying the degree of utility of the commodity through an increase or limitation of the supply.15
On the face of it, the bald assertion that utility determines value seems utter nonsense. The only way the supplier of a good can charge according to its utility to the buyer, is if he is in a monopoly situation which enables him to charge whatever the market will bear, without regard to the cost of production. But by qualifying this statement to treat marginal utility as a dependent variable determined by the quantity in our possession, he makes it clear that the influence of value on price assumes a snapshot of the balance of supply and demand in a market at any given time. This is also a shortcoming of the Austrian utility theory, as it was developed by Böhm-Bawerk and his Austrian followers, up to the present. Not only did the later Austrians inadequately treat the time dimension, but they were forced to a position of radical skepticism regarding the notions of "equilibrium price," in order to avoid a Marshallian understanding of the dynamic effect of production cost on price, through the effect of market price on supply. To the extent that Jevons admitted the dimension of time, and made supply itself a function of the supplier's response to market price, he was also forced to admit the effect of labor on value "in an indirect manner," in much the same way that Marshall was later to do with his famous scissors.
Böhm-Bawerk was at his best in systematically analyzing the exceptions to the labor-theory and the cost-principle. In so doing, however, he was forced to admit a rough statistical correlation between cost and price in cases of reproducible goods; and in so admitting, he was forced to reduce his argument to quibbling over the required level of generality of a theory of value. So, Böhm-Bawerk having set the terms of discussion, let us proceed to examine his list of exceptions to Ricardo's cost-theory of price. He begins with a general statement of his criticism:
Experience shows that the exchange value of goods stands in proportion to that amount of labour which their production costs only in the case of one class of goods, and even then only approximately. Well known as this should be, considering that the facts on which it rests are so familiar, it is very seldom estimated at its proper value. Of course everybody, including the socialist writers, agrees that experience does not entirely confirm the Labour Principle. It is commonly imagined, however, that the cases in which actual facts confirm the labour principle form the rule, and that the cases which contradict the principle form a relatively insignificant exception. This view is very erroneous, and to correct it once and for all I shall put together in groups the exceptions by which experience proves the labour principle to be limited in economic life. We shall see that the exceptions so much preponderate that they scarcely leave any room for the rule.16
As we shall see later, though, it is of questionable value to measure quantitatively the exceptions to the law of value; it makes more sense to treat the effect of cost as a first-order generalization, and then to treat scarcity exceptions as second-order deviations from this generalization. This was the approach of both Ricardo, in treating cost and scarcity as twin principles of value, and Marshall, with his scissors. The longer the time frame, the more cost is shown to be the main influence on the price of goods whose supply can be increased in response to demand, and scarcity rents are shown to be short-term deviations through which the cost-principle works itself out.
The first exception to the labor theory of value Böhm-Bawerk listed was that for scarce goods with an inelastic supply.
1. From the scope of the Labour Principle are excepted all "scarce" goods that, from actual or legal hindrances, cannot be reproduced at all, or can be reproduced only in limited amount. Ricardo names, by way of example, rare statues and pictures, scarce books and coins, wines of a peculiar quality, and adds the remark that such goods form only a very small proportion of the goods daily exchanged in the market. If, however, we consider that to this category belongs the whole of the land, and, further, those numerous goods in the production of which patents, copyrights, and trade secrets come into play, it will be found that the extent of these "exceptions" is by no means inconsiderable.17
Goods that are permanently inelastic in supply are, indeed, the most fundamental exception to Ricardo's labor theory of value. Such completely inelastic goods are, however, a relatively minor portion of all commodities. The production of most goods can, eventually, be expanded to a level sufficient to meet demand. For such elastic goods, the only question is the duration required for such adjustment. Böhm-Bawerk addressed that "exception" (not really an exception at all, as we shall see, since it does not in any way violate the correspondence between labor-value and equilibrium price) in his fourth point, quoted below. As for the example of rare works of art, etc., Böhm-Bawark himself admitted that Ricardo had acknowledged them.
The final group of exceptions--land, patents, etc.--deserves close consideration. Böhm-Bawerk lumped together all goods with an inelastic supply, regardless of whether their inelasticity results from "actual or legal hindrances." But the mutualist version of the labor theory of value states that, excepting goods naturally inelastic in supply, profit results from unequal exchange--itself a result of state intervention in the market. To the extent that scarcity of land is natural, and absentee landlord claims are not enforced by the state, economic rent on land is a form of scarcity rent that will prevail under any system. But to the extent that the scarcity is artificial, resulting from government or absentee landlord restrictions on access to vacant land, or landlord rent on those actually occupying and using land, the mutualist contention is that such rent is a deviation from normal exchange-value caused by unequal exchange. Patents, likewise, are such a deviation, being nothing but a monopoly imposed by the state. Such examples, therefore, have no bearing whatsoever on the validity of the labor theory of value.
As his second item in the list of exceptions, Böhm-Bawerk mentioned the product of skilled labor. In the process of his discussion, he ridiculed Marx's attempt to salvage a uniform labor-time standard by reducing skilled labor to a multiple of common labor.18 In this, Böhm-Bawerk was entirely correct. The validity of this criticism was one factor in our attempt to rework the labor theory of value on the basis of Smith's and Hodgskin's subjective "toil and trouble," in place of Ricardo's and Marx's embodied labor time. This will be discussed in detail in a later chapter.
The third kind of exception, similarly, included "those goods---not, it is true, a very important class--that are produced by abnormally badly paid labour."19 But the labor theory of value, as Ricardo formulated it at least, stated that the exchange values of goods were regulated by the quantity of labor embodied in them--not by the wages of labor. And according to the mutualist version of the theory, low wages in relation to the total product of labor are a result of unequal exchange between capital and labor within the production process.
The most important exception, after the first, was the fourth: the fluctuations of commodity prices above and below the axis of their labor-value, in response to changes in supply and demand.
4. A fourth exception to the Labour Principle may be found in the familiar and universally admitted phenomenon that even those goods, in which exchange value entirely corresponds with the labour costs, do not show this correspondence at every moment. By the fluctuations of supply and demand their exchange value is put sometimes above, sometimes below the level corresponding to the amount of labour incorporated in them. The amount of labour only indicates the point toward which exchange value gravitates,--not any fixed point of value. This exception, too, the socialist adherents of the labour principle seem to me to make too light of. They mention it indeed, but they treat it as a little transitory irregularity, the existence of which does not interfere with the great "law" of exchange value. But it is undeniable that these irregularities are just so many cases where exchange value is regulated by other determinants than the amount of labour costs. They might at all events have suggested the inquiry whether there is not perhaps a more universal principle of exchange value, to which might be traceable, not only the regular formations of value, but also those formations which, from the standpoint of the labour theory, appear to be "irregular." But we should look in vain for any such inquiry among the theorists of this school.20
In fact, this fourth exception is absolutely devoid of substance, unless one adopts the later Austrian pose of radical epistemological skepticism toward the notion of "equilibrium price." And if, as Böhm-Bawerk said, Ricardo himself admitted the existence of that exception, it can only be deduced that Ricardo did not view it as a fatal flaw in the labor theory. It would seem to follow that Böhm-Bawerk and Ricardo differed in their opinions of the significance of the phenomenon--in which case, Böhm-Bawerk's real task would be to show why Ricardo was mistaken in his views of what constituted an adequate theory.
The labor theory of Ricardo did not just implicitly assume such fluctuation, but depended on it. It was only the process of competition over time, and the response of suppliers and consumers to the fluctuating market price, that continually caused equilibrium price to gravitate around labor value. And Marx said as much explicitly, as we shall see below.
Ricardo for the most part treated "value" and "price" as synonymous, and claimed only that value approximated embodied labor over a period of time. Marx, on the other hand, used "value" in a sense much closer to equilibrium price. Both, then, asserted no more than that the equilibrium price of a good in elastic supply approximates its labor-value. And for both, price fluctuations under the influence of supply and demand were the very mechanism by which the law of value operated.
Finally, Böhm-Bawerk pointed, as a fifth exception, to those cases in which prices "constantly" diverged from labor-value, "and that not inconsiderably," to the extent that their production "require[d] the greater advance of 'previous' labour...."21 If he was referring here to amortization cost of past capital outlays, that presents no problem at all for the labor theory, given its view of capital as accumulated past labor. If he was referring to the problems presented the labor theory of value by capitals of different organic composition and the general rate of profit, an at-length study of that issue is beyond our scope here. Suffice it to say that Ricardo as well as Marx recognized differing capital compositions as a distorting factor; and Marx saw the general rate of profit only as redistributing surplus-value, and thus rendering the operation of the law of value indirect. And from the mutualist point of view, profit and interest are monopoly returns on capital resulting from state intervention in the marketplace; so for mutualism, the rate of profit (excepting the relatively minor part of net profit resulting from time-preference, with which we will deal in Chapter 3) is simply another example of the distortions by which unequal exchange causes a deviation from "normal values."
Böhm-Bawerk summed up all the deviations from the labor principle, and concluded that the labor theory of value "does not hold at all in the case of a very considerable proportion of goods; in the case of the others, does not hold always, and never holds exactly. These are the facts of experience with which the value theorists have to reckon."22
Böhm-Bawerk's straw-man caricature of what the labor theory was intended to demonstrate, certainly, did not hold up at all well under his onslaught. But then, straw-men are deliberately constructed to be knocked down. He would have made as much sense in saying that the law of gravity was invalidated by all the exceptions presented by air resistance, wind, obstacles, human effort, and so forth. The force operates at all times, but its operation is always qualified by the action of secondary forces. But it is clear, in the case of gravity, which is the first-order phenomenon, and which are second-order deviations from it.
Ricardo's distinction between reproducible and non-reproducible goods, true enough, was misleading. Although goods whose supply is absolutely limited relative to demand are a relatively minor portion of all commodities, it is nevertheless true that even reproducible goods take a greater or lesser period of time for supply to accommodate demand. At any given time, the price of most commodities is probably greater or less than labor-value, as a result of imbalance between supply and demand. It is only over time that price approximates labor-value. So rather than stressing the quantitative insignificance of scarcity deviations from cost, Ricardo would have been more accurate to emphasize the character of such deviations as a secondary phenomenon in the overall process by which equilibrium price approximates labor-value.
But the Austrians were guilty of their own ambiguity. Although Menger and Böhm-Bawerk regarded the influence of production cost as virtually irrelevant in all cases of scarcity, they were unclear exactly what they meant by scarcity.
Menger distinguished economic goods, which were characterized by scarcity, from non-economic goods: "the difference between economic and non-economic goods is ultimately founded on a difference... in the relationship between requirements for and available quantities of these goods...."23 Of non-economic goods, he wrote:
The relationship responsible for the non-economic character of goods consists in requirements for goods being smaller than their available quantities. Thus there are always portions of the whole supply of non-economic goods that are related to no human need.... Hence no satisfaction depends on our control of any one of the units of a good having non-economic character....24
The problem, though, is that goods are almost never "non-economic" in this sense of having no exchange-value whatever. Unless an unlimited supply of a good is located at its point of consumption, and requires no effort to appropriate, it will acquire some value from the effort necessary to transport it to the final user in usable form. Even when a village is surrounded by forest, with no limit on the amount that may be cut by an individual household, firewood has an exchange-value. Even in Cockaigne or Big Rock Candy Mountain, one must make the effort of picking the roast chickens off the bush or dipping the whiskey from the stream.
Menger's disciple, Böhm-Bawerk, likewise made scarcity relative to demand the basis of value. Economic value required "scarcity as well as usefulness--"
not absolute scarcity, but scarcity relative to the demand for the particular class of goods. To put it more exactly: goods acquire value when the whole available stock of them is not sufficient to cover the wants depending on them for satisfaction, or when the stock would not be sufficient without these particular goods.25
And this scarcity, as Böhm-Bawerk put it, was a scarcity of "present goods":
Now it can be shown--and with this we come to the goal of our long inquiry--that the supply of present goods must be numerically less than the demand. The supply, even in the richest nation, is limited by the amount of the people's wealth at the moment. The demand, on the other hand, is practically infinite....26
This concept of "scarcity," as used by Menger and Böhm-Bawerk, has three problems. First, as we have already suggested above, making scarcity and utility depend on the balance of demand and "present goods" at the present moment, it ignores the dynamic factor. In taking the balance of supply and demand in a particular market at a particular time as a "snapshot," and deriving value from "utility" in this context, it ignores the effect of short-term price on the future behavior of market actors: the very mechanism through which price is made to approximate cost over time.
Second, it confuses two kinds of scarcity: 1) the kind of scarcity that makes economic goods (i.e., a difficulty of production or appropriation sufficient to require some effort or disutility to acquire them in a usable form); and 2) the kind of scarcity in which a good is in more or less inelastic supply, so that it cannot be produced in quantities proportional to effort. In a sense, the former kind is set up in opposition to a straw man: as we said above, there are virtually no non-economic goods.
And third, the claim that demand is virtually infinite relative to supply is misleading. "Demand" is not an independent variable, but depends on the price at which goods are available. To be "reproducible" in the Ricardian sense, a good need not be reproducible without limit, in any quantities an individual might conceivably be willing to consume of it, if it cost nothing. It has only to be reproducible in the quantities for which there is effective demand at the cost of production. And as we pointed out above, regardless of the degree of elasticity, so long as supply can eventually be adapted to demand, the equilibrium price will approximate the cost of production.