The Writings of the classical economists were beset by
an internal contradiction. On the one hand, they believed that labor was
the source of all value and that wage rates were determined by an
antagonistic struggle with capital. On the other hand, they were aware
that since one could only make a profit by providing consumers with what
they desired to buy, men out for their own gain were led as if "by an
invisible hand" to promote the common good. The classical economists
were unable to resolve their dilemma, and their writings gave rise to
two mutually exclusive interpretations of the workings of the capitalist
system: the "conflict of interest" and the "harmony of interest"
doctrines.
In Capital, Karl Marx claimed that commodities "in
which equal quantities of labor are embodied, or which can be produced
in the same time, have the same value."1 Thus, labor was held
to be the sole source of all value. It follows from this premise that
supply and demand can regulate nothing but the "temporary fluctuations"
of market prices, They can explain merely "why the market price of a
commodity rises above or sinks below its value, but they can never
account for that value."2 For Marx, "that which determines
the magnitude of the value of any article is the amount of labor
socially necessary . . . for its production,"3 It was at this
juncture that Marx felt he uncovered the antagonistic nature of
capitalism.
· Formulation of Wage Rates. Since the laborer doesn't
own the means of production, he is forced, in order to live, to sell his
"labor-power" to the capitalist at its value, i.e.
subsistence.4 But in buying his labor-power the capitalist
gets the labor for the entire day. It takes only a portion of the day
for the worker to produce the value of his wage. The remaining portion
of the day the worker produces profit, or "surplus value," for the
capitalist. The laborer, therefore, doesn't get the full value of his
product. He is exploited by the capitalist who lives off of the labor of
the workers.
Marx felt that there was an inverse relationship
between wages and profits. For one to rise the other had to fall. Since,
by the nature of the capitalist system, the interest of the workers was
diametrically opposed to that of the capitalists, there would be
irreconcilable class conflict so long as this system persisted.
· Principles of Exchange. While Marx focused on the
relationship between the workers and capitalists, his collaborator,
Frederick Engels, helped to complete the picture by dealing with the
more general aspects of exchange. Since the "true value" of commodities
was determined by labor-time, the only just basis for trade would be an
exchange of objects of equivalent labor-times. Since value was held to
be objective, it was obvious that profit was exploitive: the profit of
one would necessarily entail the loss of another. But if the exchange
were just, i.e., equivalent was exchanged for equivalent, then there
would be no profit and capitalism would collapse. As Engels neatly puts
it, "In every purchase and sale . . . two men with diametrically opposed
interests confront each other. The confrontation is decidedly
antagonistic, for each knows the intentions of the other -knows they are
opposed to his own. Therefore, the first consequence is . . . the
application of immoral means to attain an immoral end...." Hence,
concluded Engels, "In a word, trade is legalized fraud."5
Profit was always synonymous with exploitation.
The Subjectivity of Value
While Marx concentrated on the conflict features of
classical economics, the "Austrian School" set the stage for the further
development of the embryonic "harmony doctrine" by their destruction of
the labor theory of value. Value, argued the Austrians, was not
something objective; on the contrary, it was an individual subjective
phenomenon that had little to do with the amount of labor-time involved
in production. It did not lie in the object produced but in the
perceptions of the valuing individual.6 An ashtray, for
example, is more valuable to a smoker than a non-smoker, regardless of
the amount of labor and materials involved in its production.
This cognition led to the conclusion that since value
is subjective, there could be no objective or "real" value determined by
adding up the hours of labor involved in production. On the contrary,
one starts with the final price of a good as determined by the
subjective valuations of the consumers. Prices for the factors of
production, including labor, are then derived from the final price. The
famous Law of Value was therefore demonstrated to be only a particular
law and, even where it was applicable, it was shown that "those costs
are not final, but only an intermediate cause of the value of goods. In
the last analysis they do not give value to their products; but receive
it from them." As Eugen von Bohm-Bawerk illustrated, "it would be
erroneous to assert that Tokay wine is valuable because Tokay vineyards
possess value;" rather, "those vineyards have a high value because their
product is highly valued."7
Mises and the Harmony Doctrine
In direct opposition to the Marxian conflict doctrine,
Ludwig von Mises, drawing on the insights of the "Austrians," developed
a comprehensive counter-philosophy that viewed capitalism as a system
premised on the harmony of interests of all participants. His thought
can be broken down into three interrelated parts: the demonstration (1)
that freedom is integrally connected with laissez-faire capitalism; (2)
that laissez-faire capitalism is able to harmonize diverse interests,
and (3) that laissez-faire capitalism constitutes a complete and viable
self-regulating system.
· Capitalism and Freedom. By centering his attention on
individuals instead of classes, Mises was able to formulate his "action
axiom." The action axiom asserts that human action is purposeful
behavior which always aims at making the actor happier, at substituting
a more satisfactory state of affairs for a less satisfactory one. While
Mises admitted that this axiom was tautological8 - since what
one actually values most at any one time can only be revealed by his
actions - he did believe that it had important ramifications. For the
more free the society, the better able all individuals would be to
choose their own individual goals and run their lives accordingly.
Hence, the happier they would be. Only a free society could maximize all
individual utilities.
Mises realized, however, that there could never be a
society free from all constraint. Regardless of the type of society,
one's freedom of choice would always be limited by the laws of logic and
nature. Action always has consequences, and one cannot attain
incompatible ends. An individual is free to take poison. If he does,
however, he is not free to continue living. Similarly, an individual is
free to be lazy. But then be must be prepared to suffer the consequences
of his laziness, such as poverty, just as a rude salesman must be
prepared to suffer the loss of his customers. As Mises points out, ,,In
nature there are no such things as liberty and freedom. There is only
the adamant rigidity of the laws of nature to which man must
unconditionally submit if he wants to attain any ends at
all.9 To live, man must eat, sleep and drink. While man's
ability to fashion his own destiny will always be limited by the laws of
nature, the scope of governmental power and the efficiency of the
economic process, Mises felt, were the two crucial factors in
determining the scope and extent of freedom in a society.
The popular distinction between the administration of
things and of people, he argued, was facile. If the government
institutes price controls, for example, this means that people are now
forced to alter their behavior from what it would have been in the
absence of the controls. Since according to the "action axiom" people
always choose the course of action which they deem will provide them
with the greatest possible satisfaction, the prohibition of any such
nonviolent activity, by reducing options, restricts the scope of freedom
of its citizens, and therefore reduces their happiness. This is so even
when the ostensible aim of the interventionists is to make people freer.
Aside from the economic fallacies of such intervention, "the liberty its
supporters advocate," he pointed out, is always the "liberty to do the
'right' things, i.e., the things they themselves want to be
done."10 But liberty is meaningless if it is only the liberty
to agree with those in power. Liberty is therefore always limited by the
prohibition of any non-violent activity.11 Since the power to
resort to violent actions is a government monopoly, Mises defined
freedom as "that state of affairs in which the individual's discretion
to choose is not constrained by government violence beyond the margin
within which the praxeological law restricts it anyway."12 A
laissez-faire society, he believed, where coercion can be used only
defensively, would provide the maximum scope of freedom for all its
citizens.
The second determinant of freedom is the efficiency of
the economic system. While in a laissez-faire society, all citizens have
the same freedom, to engage in any non-violent activity they desire, it
is obvious that the standard of living has a significant bearing on the
ability to use that freedom ' The wealthier one is, other things being
equal, the more options one has. Hence, the more efficient and
productive the economic system, the larger the freedom of choice open to
its individual participants. Since, for reasons sketched below, Mises
demonstrated that a pure laissez-faire system was far more productive
than any alternative, it follows that such a society would greatly
extend the realm of choice.
· Capitalism and the Harmony of Interests. Next, Mises
argued that in a free society everyone's long run interests can be
harmonized. Since consumers buy only what is useful to them, there can
be no distinction between production for use and production for profit.
Those eager to make profits can do so only by producing, better than
others, what the consumers wish to buy. The more satisfactorily one
serves the consumers, the more profit he will earn and, therefore, the
better able he will be to pursue his own goals. In this way the market
is able to harmonize a plethora of diverse and seemingly incompatible
individual goals. Under the free market everyone is free to pursue any
interest he desires, running the gamut from purely selfish to
altruistic. But it is evident that the best way to attain one's own ends
is to offer services desired by others. Thus, in the capitalistic
exchange society everyone serves, but in doing so everyone is served by
others. For it follows from the subjectivity of values that under a
system of voluntary exchange each party must value what he receives more
than what he gives up, otherwise no exchange would be made. This applies
to all members of society, workers, employers and consumers. Under
capitalism, therefore, society can be maintained by voluntary exchange
for mutual benefit and without the need for coercion.
· Capitalism as a Self-Regulating System. While it is
commonly believed that a society where all individuals would be free to
engage in any and all peaceful activities they desire would produce a
chaotic state of affairs that would require regulation by the state,
Mises demonstrated that the exact opposite is true: a capitalist society
is in fact a highly complex but orderly and self-correcting system. On
the other hand, any type of government intervention reduces the standard
of living and generates societal conflicts. Mises' reasoning runs as
follows.
. . . liberty is meaningles if it is only the liberty
to agree with those I power.
Since profit can only be made by serving the consumers,
it follows that the consumers direct production by their buying and
abstention from buying. If a desired object is in short supply, 'the
price tends to rise. The lure of higher profits will tend to attract
capital into the area. The resulting increased production will cause the
price to return to its equilibrium level. But to produce the product in
the first place, the capitalist needs workers and must therefore offer
wages high enough to attract the laborers he needs. Since what the
capitalist can pay in wages is limited by his expected return from the
sale of his product, the consumers also determine the height of wages.
If returns are not high enough to cover the cost of a particular
operation this means that there is, in the eyes of the consumers, a more
important use for the factors of production elsewhere.13 In
this way Mises felt that not only was the purely free market completely
self-regulating but, in the long run, it also worked to increase the
subjective utilities of all participants by employing "every factor of
production for the best possible satisfaction of the most urgent needs
of the consumer." Consequently, if "government interferes with this
process, it can only impair satisfaction; it can never improve
it."14
. . .human action is puposeful behavior which always
aims at making the actor happier. If subsidies or tariffs, for example,
are granted to those groups favored by the government, then everyone
else is forced to engage in activities they consider less desirable than
those they would have adopted. The privileged groups are therefore
benefited at the expense of the rest of society, and political conflicts
are then generated by the desire of every group to use the coercive arm
of government for their own benefit. But if the practice of granting
privileges becomes general, everyone loses as much by the privileges
granted to others as he gains by those granted to him.
What is more is that since government interference
distorts the operations of the market it must necessarily misallocate
resources. Since that will lower output, the long run effect is to hurt
everyone, even the initial beneficiaries of the privileges, by reducing
their standards of living below what they would have been on the free
market.15
For Mises, the two crucial determinants of freedom were
seen as integrally interrelated. As the scope of government was
extended, not only would the citizens' freedom of action be ever more
limited by the threat of government violence, but the more inefficient
the economic process would become. Both would work to generate social
conflict and limit the scope of free choice. Conversely, he felt that
capitalism was a viable system, premised on the long-run harmony of
interests of all participants, and that it served to maximize individual
freedom.
Conflict or Harmony?
From this outlook Mises derived the following
conclusions regarding the Marxian theory of exploitation.
· The Formulation of Wages. Contrary to Marxian
doctrine, wages and profits are not inversely related, and there is no
"class conflict" between workers and capitalists. What enables wages to
rise is precisely that the capitalists, interested in increasing their
profits, save and invest their money in productive machinery. Since this
augments the marginal productivity of labor, real wages are forced up,
i.e., either money wages rise or prices fall, or both. But artificial
attempts to raise wages beyond the increase in marginal productivity
ultimately result in lower, rather than higher, real wage rates. For if
wages are forced above their respective equilibrium levels, the income
of the entrepreneurs will be reduced, forcing the marginal producers out
of business. The resulting restriction of production will then enable
prices to rise, restoring the former ratio between wages and profits.
However, those who lost their jobs when production was curtailed will be
forced either to remain unemployed, or look for jobs in other areas,
thereby lowering wage rates in those areas. Further, since less will
have been produced due to the distortion of the market and the
restriction of production, real wages for those still employed will not
be much higher, and may even be lower, than that prior to the rise in
money wages.
. . .human action is purposeful behavior which always
aims at making the actor happier. . .
The more satisfactorily one serves the consumers, the
more profit he will earn and, therefore, the better able he will be to
pursue his goals.
The problem, believed Mises, is aggravated if an
attempt is then made to effect a permanent rise in real wages by
recourse to price controls. For if wages are raised above their free
market rates while prices are held below theirs, the result will be a
decline in the amount of capital accumulated. Since more is now being
spent on consumer goods, there is a shifting of production in the
direction of more consumers' goods and less producers' goods. This can
temporarily bring about an increase in the standard of living. However,
once the machines currently in existence begin to be used up and wear
out, there will not have been enough new ones produced to replace them.
Productivity will suffer, causing a decline in real wages. And since the
only way this process can be reversed is through a resuscitation of
capital accumulation, real wages, initially, will have to be reduced
even further.
Far from the wealth of one implying the poverty of
others, the reverse is true: one can only acquire wealth by serving
others.
Thus, far from varying inversely as assumed by Marx,
wages and profits tend to vary positively. And any deviation from the
market process produces, in the long run, effects detrimental to both
capital and labor.
· Principles of Exchange. If profits aren't obtained at
the expense of the worker, neither are they obtained at the expense of
the consumer. "The only means to acquire wealth and to preserve it, in a
market economy not adulterated by government-made privileges and
restrictions," argues Mises, "is to serve the consumers in the best and
cheapest way."16 Far from the wealth of one implying the
poverty of others, the reverse is true: one can only acquire wealth by
serving others. As soon as an entrepreneur ceases to serve the
consumers, they will take their business elsewhere.
The progressive income tax and other limitations on
individual fortunes have several consequences: (1) if the revenue from
the tax is spent on current consumption it impedes capital accumulation,
bringing about the effects discussed above; (2) it discourages precisely
those who best serve the public, and (3) since the only way small firms
can expand is to make large profits and then plough them back into their
businesses, the confiscation of the greater part of these profits
prevents the growth of small businesses, thereby shielding the larger
firms from the threat of competition.17 The result is that
the poor, usually the intended beneficiaries, are the onces most hurt by
government programs to redistribute wealth and limit profits, for it is
precisely the poor who can least afford the squandering of scarce
resources. The best way to raise the standard of living is to remove
government restrictions on profits, for as Mises remarked, "The process
that makes some people rich is ... the corollary of the process that
improves many peoples' want satisfaction."18
Conclusion
People act on what they believe. If they believe that
capitalism is an unstable system based on the conflict of interests,
they will either strive to replace the system by one ostensibly more
harmonious, or to adopt political programs designed to regulate and
mollify the conflict. It is this latter alternative that is popular in
this country. Hence the realm of government interference is continually
expanded.
This is not really surprising since it is rare for any
college text even to acknowledge the existence of the harmony doctrine.
Students are taught that conflict is endemic to capitalism. John Kenneth
Galbraith's American Capitalism argues that competition has been
replaced by oligopolies. To prevent exploitation by the capitalists, the
government must encourage the formation of "countervailing power," i.e.,
oligopsonies in regard to the consumer via the formation of mass retail
buyers on one side of the market, and large labor unions on the other. A
social balance is to be attained by having one power center offset
another, antagonistic power center. The government is to regulate these
struggles to insure that no side gets the upper hand.19 After
a brilliant dissection of contemporary "interest group liberalism" in
The End of Liberalism, Theodore Lowi reaches the paradoxical conclusion
that what is needed to combat exploitation by governmentally privileged
interest groups is more government. And in A History of Economic
Thought, John Bell presents a caricature of the harmony of interest
doctrine and quickly dismisses it as naive and "open to severe
criticism." But none is given.
It is indeed ironic that in a country that is allegedly
capitalistic, the writings of Ludwig von Mises should be so little known
and discussed. But as Mises, himself, said, "truth persists, even if
nobody is left to utter it."20
At the time of the original publication, Mr. Osterfeld
of Cincinnati, Ohio, was a graduate student majoring in political
theory.
1 Karl Marx, Capital (New York, 1906), p. 46.
2 Karl Marx, Wages, Price and Profit (Peking, 1972), p.
27.
3 Marx defines "socially necessary" as "that required
to produce an article under normal conditions of production and with the
average degree of skill and intensity prevalent at the time." Capital,
p. 46.
4 Since under capitalism labor is bought and sold, its
value "is determined, like that of all other commodities, by the
labor-time required for its production.... The value of labor-power is
the value of subsistence necessary for the maintenance of the owner. . .
." Frederick Engels, On Capital (New York, 1974), pp. 67-8.
5 Frederick Engels, Outlines of a Critique of Political
Economy. Appendix to Karl Marx's The Economic and Philosophic
Manuscripts of 1844 (New York, 1973), pp. 201-2.
6 In fairness to Marx, it should be pointed out that he
was aware of the existence of subjective use-value but erroneously
contended that "we should leave out of sight the use-value of
commodities" since, as exchange-values, commodities "are merely
different quantities and consequently do not contain an atom of
use-value." Capital, p. 44. Because of his emphasis on labor as the
source of value, Marx ignored the function of time in the productive
process. He did not realize that without interest, the large scale
"roundabout" methods of production would become impossible.
7 Eugen von Bohm-Bawerk, Capital and Interest (South
Holland, Ill., 1959), Vol. 11, Positive Theory of Capital, pp. 175-6.
8 Ludwig von Mises, Human Action (Chicago, 1966), p.
15.
9 Ludwig von Mises, Socialism (London, 1969), p. .568.
10 Ibid., p. 541.
11 Mises defined "violent" as the use of physical
force, the threat of its use, and the use of such types of implied
violence as theft and fraud. All other actions are to be considered
non-violent.
12 Mises, Human Action, p, 281,
13 Ibid., p. 340.
14 Ibid., p. 744.
15 Ludwig von Mises, Theory and History (New Rochelle,
N. Y., 1969), pp. 32-3, and pp. 236-237.
16 Mises, Socialism, p. 535.
17 Mises, Hwatan Action, pp. 806-9.
18 Ludwig von Mises, The Anti-Capitalistic Mentality
(New York, 1956), p. 43.
19 It is somewhat surprising that this Look should have
attained the stature that it has for there are several curious lapses in
logic, not the least of which is the entire thesis of the book. While
Galbraith uses the "countervailing power" thesis precisely to explain
the prosperity of the 1945-52 period, he emphatically insists that
inflation "dissolves" countervailing power. But Galbraith, himself,
admits that the 1945-52 period was inflationary. It seems a bit strange
that one should try to explain' an event by the use of a concept that,
by the author's own admission, shouldn't even be applicable to it.
20 Ludwig von Mises, The Historical Setting of the
Austrian School of Economics (New Rochelle, N.Y., 1969), p. 45.
Reprinted with permission from The
Freeman, a publication of The Foundation for Economic Education, Inc.,
April, 1975, Vol. 25, No. 4.
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