"Most people are in arrested development and cannot use logic." Jacob.
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Friday, September 9, 2011

Karl Marx was Right? Part One.

Roubini : KARL Marx was right
Nouriel Roubini : "Karl Marx had it right. At some point capitalism can self-destroy itself because you cannot keep on shifting income from labour to capital without not having excess capacity and a lack of aggregate demand, and that's what's happening." - in an interview with The Wall Street Journal this week
Smiling Dave breaks it down. I'll make explicit the silly notions, then show why they are ridiculous:
  • Capitalism shifts income from labour to capital. The simplest thing is to ask where and when this happens. Marx has his well known answer, based on the labor theory of value, which has been proven ridiculous many times. He argues that since the worth of an object comes from how much labor was put into making it, and the worker, by definition, does all the work, then his employer deserves none of the profits.

Here are the well known flaws in the Labor theory of Value, compliments of David Gordon:
First, the value of some goods seems clearly not to depend on the labor time needed to produce them. Böhm-Bawerk noted that wine often increases in value the longer it is stored. The labor required to gather the grapes and turn them into wine contributes very little to the price of wine.

Second, the circular definition involved in "socially necessary". Marx realized that an expert works much faster than an incompetent, yet they both might make identical products. So the amount of labor in otherwise identical objects differs depending on who made it, but the prices are the same. Marx got round this by saying that what counts is the "socially necessary" labor needed to make it. And how much labor is socially necessary to make, say, a pizza? That depends on the market price of the pizza. If it sells for $10, then ten dollars worth of labor is the socially necessary amount.

We have a circular definition here. The market price of a good comes from how much socially necessary labor went into it, and how much labor is socially necessary comes from the market price of the good. Put another way, why doesn't the pizza cost $20, based on the labor of the guy who takes twice as long to make it? On the other hand, why doesn't it cost a buck, based on the labor of the expert who makes pizzas ten times as fast?

[Have a look at Gordon's book to see another variation of this fallacy that Marx makes.] 

Third, Marx admitted that in the real world, the Labor Theory of Value just doesn't work. He tried to weasel his way out of it, but has been shown to be mistaken. We refer the interested reader to Gordon's book.

Continued in Part Two.


  1. 20 year old wine and "properly aged beef" are "valuable" becuase it took the labor to age these things. The laborer must be sure not to have the wine turn to vinegar, or that the beef spoils. True, this seems like a trivial task, yet it accumulates to become a great burdensome task requiring great labor.

  2. "He argues that since the worth of an object comes from how much labor was put into making it, and the worker, by definition, does all the work, then his employer deserves none of the profits."

    I don't think Marx's argument (at least in Capital) is really about "deserving." Perhaps, his use of the term "exploitation" throws people off. But I think his use of this term is primarily descriptive and not normative. He also says that a farmer "exploits" the land. Marx after all is a communist, and therefore doesn't think goods should be distributed according to labor.

    As to the first criticism, Marx answers this in Vol. 3. Ultimately, most commodities are not sold at their value. Competition readjusts the price of commodities so that the rate of profit is equal. Aged wine has a longer turnover period than unaged wine. Let's say $1000 (in labor and materials) is the cost of making a barrel of wine. After the wine has aged for 1 year, it is sold for $1,100. The capitalist reinvests that same $1000 every year. Thus, after 10 years, the capitalist has only put up $1000 and has made $1000 in profits. If instead, the capitalist let's that initial barrel age for 10 years, then he has still put up $1000 but only has one barrel to sell. If the barrel sells for the same $1,100, then he has made $900 less in profits. Since competition necessitates an equal rate of profit, the price of the 10-year-old wine will likely be $2000. In addition to this, the fixed capital also contributes a different amount of its value to the wine. If a wine barrel costs $1000 and lasts for ten years, then it adds $100 to the 1-year wine but $1000 to the 10-year wine.

    To the second criticism, Marx's definition is not circular, because the amount of labor that is socially necessary to make a pizza does not "depend" on the price. The price is merely the expression of the socially necessary labor. Marx compares this to the measurement of weight. The weight of an object is determined by its mass and the strength of gravity. If a scale balances with a sack of potatoes on one end and five bars of lead on the other, then we say that the sack of potatoes weighs five bars of lead. Does this mean that the weight of the potatoes depends on the five bars of lead? Not at all. The weight is due to the mass and the strength of gravity. The five bars of lead is merely an expression of this weight through a relationship to another object of the same weight (and the same mass). It's the same with value. The value of the pizza is determined by its socially necessary labor time. The $10 has the same socially necessary labor time, so it can serve as an expression of the value of the pizza. How do we know that the sack of potatoes has the same weight as the five bars of lead? Because they balance on a scale. How do we know that the pizza has the same value as the $10? Because they trade at that rate on the market (or at least when the market is at certain ideal states).

    The third point isn't really an argument, so I'll leave things here.