Chapter Two: A Subjective Recasting of the Labor Theory
Eugen von Böhm-Bawerk's critique of the labor theory of value has been the most thorough to date. Many of his criticisms,
as we have seen above, were either attacks on straw-men, or based on his own idiosyncratic views about the level of generality
necessary for a theory of value. But a few of his criticisms were quite valid.
The most telling of Böhm-Bawerk's criticisms of the classical labor and cost theories of value concerned their lack of
an explicit theoretical foundation. Of Rodbertus, for example, he complained that that author was "content on almost every
occasion to assert... in the tone of an axiom," the proposition that labor creates exchange value. But to justify the
proposition Rodbertus appealed only to the authority of Smith and Ricardo.1 But neither Smith nor Ricardo had "given
any reason for this principle, but simply asserted its validity as something self-explanatory."2
Böhm-Bawerk cited Smith in particular as an example of this failing. After quoting him on the "rude state of society"
before the accumulation of capital, in which the quantity of labor "seem[ed] to be" the only basis for exchange
between deer and beaver hunters, Böhm-Bawerk commented:
In these words also we shall look in vain for any trace of a rational basis for the doctrine. Adam Smith simply says, "seems
to be the only circumstance," "should naturally," "it is natural," and so on, but throughout he leaves it to the reader to
convince himself of the "naturalness of such judgments--a task... that the critical reader will not find easy.3
Certainly Böhm-Bawerk was right in rejecting the process of elimination ("the logical and systematic processes of distillation")
by which Marx identified embodied labor as the only factor common to commodities, on which their exchange value could be based.4
But despite Böhm-Bawerk's criticism, the theoretical basis for the labor theory is implicit in other parts of Marx's work,
as well as that of the classical economists. They came very close to formulating it explicitly at times, and often at least
suggested it obliquely. In the end, however, they failed to formulate it deliberately and consciously.
In its implicit form, it appears in Adam Smith's work as his "toil and trouble" understanding of the nature of labor. In
the time after division of labor but before large-scale accumulation of capital, Smith wrote, all exchanges were exchanges
between producers of the surplus products of their respective labor.
When the division of labour has been once thoroughly established, it is but a very small part of a man's wants which the
produce of his own labour can supply. He supplies the far greater part of them by exchanging that surplus part of the produce
of his own labour, which is over and above his own consumption, for such parts of the produce of other men's labour as he
has occasion for.5
The "real price" of a thing, Smith went on to say, what it "really costs to the man who wants to acquire it,"
was "the toil and trouble of acquiring it...."
What is bought with money or with goods is purchased by labour as much as what we acquire by the toil of our own body....
Labour was the first price, the orginal purchase-money that was paid for all things. It was not by gold or silver, but by
labour, that all the wealth of the world was originally purchased....
....At all times and places that is dear which it is difficult to come at, or which it costs much labour to acquire; and
that cheap which is to be had easily, or with very little labour.6
And Smith made it clear that "toil and trouble" was to be measured from the laborer's subjective standpoint: "Equal
quantities of labour must at all times and in all places have the same value for the labourer. in his normal state of health,
strength and activity, and with the average degree of skill that he may possess, he must always give up the same portion of
his rest, his freedom, and his happiness."7
As Maurice Dobb commented, "Perhaps one could translate this into Marshallian terminology and say that it was equivalent
to claiming that labour was the ultimate real cost involved in economic activity."8 Eric Roll called it a "psychological
cost theory of value."9
The classical political economists occasionally suggested such an understanding of labor, but never developed it systematically.
For example, Ricardo at times appeared to recognize a subjective mechanism behind the operation of the cost principle. In
language reminiscent of Smith, he wrote:
I may be asked what I mean by the word value, and by what criterion I would judge whether a commodity had or had not changed
its value. I answer, I know of no other criterion of a thing being dear or cheap but by the sacrifices of labour made to obtain
it. Every thing is originally purchased by labour--nothing that has value can be produced without it, and therefore if a commodity
such as cloth required the labour of ten men for a year to produce it at one time, and only required the labour of five for
the same time to produce it at another it will be twice as cheap....
That the greater or less quantity of labour worked up in commodities can be the only cause of their alteration in value
is completely made out as soon as we are agreed that all commodities are the produce of labour and would have no value but
for the labour expended on them.10
But as to why this should be so, or why commodities should exchange according to the labor time required for their
production, he did not elaborate.
It is true, as Böhm-Bawerk charged, that the classicals did not elaborate in a sufficiently explicit form, the reason
that effort translated into exchange value; nevertheless, the rationale should be fairly straightforward on examination. The
subjective mechanism for the cost principle is implicitly assumed by the classical economists, to a large extent, because
it is rooted in a common sense and self-evident understanding of human nature. The basis of exchange value in the individual's
effort lies in the same a priori understanding of human behavior from which Bohm-Bawerk's disciple Mises derived his "praxeology,"
or science of human action.
The labor theory and cost principle are logically entailed in man's nature as a being who maximizes utility and (more to
the point) minimizes disutility. As James Buchanan wrote,
Even in so simple a model [Adam Smith's primitive exchange model of beavers and deer], why should relative costs
determine normal exchange values? They do so because hunters are assumed to be rational utility-maximizing individuals and
because the positively valued "goods" and the negatively valued "bads" in their utility functions can be identified. If, for
any reason, exchange values should settle in some ratio different from that of cost values, behavior will be modified. If
the individual hunter knows that he is able, on an outlay of one day's labor, to kill two deer or one beaver, he will not
choose to kill deer if the price of a beaver is three deer, even should he be a demander or final purchaser of deer alone.
He can "produce" deer more cheaply through exchange under these circumstances.... Since all hunters can be expected to behave
in the same way, no deer will be produced until and unless the expected exchange value returns to equality with the cost ratio.
Any divergence between expected exchange value and expected cost value in this model would reflect irrational
behavior on the part of the hunters.
In this interpretation, the classical theory embodies the notion of opportunity cost. To the hunter at the point of an
allocative decision, the cost of a beaver is two deer and the cost of a deer is one-half a beaver. At an expected exchange
ratio of one for two, each prospective hunter must be on the margin of indifference. Physical production and production-through-exchange
yield identical results. Labor time, the standard for measurement, is the common denominator in which the opportunity costs
A producer will continue to bring his goods to market only if he receives a price necessary, in his subjective evaluation,
to compensate him for the disutility involved in producing them. And he will be unable to charge a price greater than this
necessary amount, for a very long time, if market entry is free and supply is elastic, because competitors will enter the
field until price equals the disutility of producing the final increment of the commodity.
Such statements require no verification beyond an a priori understanding of human nature. Mises himself wrote on
the self-evident character of the axioms of praxeology, repeatedly and at length:
[praxeology's] statements and propositions are not derived from experience. They are, like those of logic and mathematics,
a priori. They are not subject to verification or falsification on the ground of experience and facts. They are both logically
and temporally antecedent to any comprehension of historical fact.....
....It [the a priori] refers to the essential and necessary character of the logical structure of the human
The fundamental logical relations are not subject to proof or disproof. Every attempt to prove them must presuppose their
validity. It is impossible to explain them to a being who would not possess them on his own account.... They are ultimate
unanalyzable categories. The human mind is utterly incapable of imagining logical categories at variance with them....
Aprioristic reasoning is purely conceptual and deductive. It cannot produce anything else but tautologies and analystic
judgments. All its implications are logically derived from the premises and were already contained in them....
All geometrical theorems are already implied in the axioms....
The starting point of praxeology is not a choice of axioms and a decision about methods of procedure, but reflection about
the essence of action.... There is no mode of action thinkable in which means and ends or costs and proceeds cannot be clearly
distinguished and precisely separated. There is nothing which only approximately or incompletely fits the economic category
of an exchange....12
The scope of praxeology is the explication of the category of human action. All that is needed for the deduction of all
praxeological theorems is knowledge of the essence of human action. It is a knowledge that is our own because we are men....
No special experience is needed in order to comprehend these theorems.... The only way to a cognition of these theorems is
logical analysis of our inherent knowledge of the category of action.... Like logic and mathematics, praxeological knowledge
is in us; it does not come from without.13
Similarly, the labor theory of value is based, not on an inductive generalization from the observed movement of prices,
but on an a priori assumption about why price approximates cost, except to the extent to which some natural or artificial
scarcity causes deviations from this relationship.
But even though the axioms of praxeology are not derived from historical experience, Mises argued, they are nevertheless
useful in rendering the facts of history intelligible. Studies of economic history
do not deliver bricks for the construction of a posteriori hypotheses and theorems. On the contrary, they are without meaning
if not interpreted in the light of theories developed without reference to them.... No controversy concerning the causes of
a historical event can be solved on the ground of an examination of the facts which is not guided by definite praxeological
So not only does the unique disutility of labor provide a theoretical basis for a labor theory of value; but economic historians,
econometricians, etc., can make greater sense of the observed movements of price by using such a labor theory as a paradigm.
The marginalists themselves, both neoclassical and Austrian, have recognized that labor is a "real cost" in a unique sense.
The disutility of labor, for them, is a basic law of economics. The expenditure of other factors is limited only by their
availability, and by the need to economize in allocating them to the most productive marginal use. The only cost in the expenditure
of a factor other than labor is an opportunity cost--the other uses to which it might have been put, instead. But the expenditure
of labor is an absolute cost, regardless of the quantity available. Or to be more exact, the opportunity cost of an expenditure
of labor is not simply the alternative uses of labor, but non-labor. The laborer is allocating his time, not just between
competing forms of labor, but also between labor and non-labor.
William Stanley Jevons, one of the founders of the marginalist revolution and an originator of the marginalist idea of
disutility, explicitly tied the latter to Adam Smith's "toil and trouble." Smith's conception of labor, he wrote, was "substantially
true." "Labour," he stated provisionally, "is the painful exertion which we undergo to ward off pains of greater
amount, or to procure pleasures which leave a balance in our favour."15 Faced with questions about the bearing
of play and other enjoyable efforts, and of productive labor which was pleasant in its own right, he was forced to define
labor more exactly to exclude exertion which was "completely repaid by the immediate result...." Labor, to be more
exact, was "any painful exertion of mind or body undergone partly or wholly with a view to future good."16
Thus, it corresponded to what Mises was later to call "extraversive labor." Although even labor undertaken primarily for the
sake of the result might be innately pleasurable, additional increments of such labor would cease to provide additional pleasure
long before the laborer had satisfied his need for consumption. Even after the laborer had ceased to derive any satisfaction
from labor, however, the marginal utility of the product of additional increments of labor would outweigh the marginal disutility
of working: "It is true that labour may be both agreeablej at the time and conducive to future good; but it is only agreeable
in a limited amount, and most men are compelled by their wants to exert themselves longer and more severely than they would
otherwise do."17 The supply of labor was governed by the marginal utility of each increment of wages compared
to the marginal disutility of labor.18
For Marshall, as for Jevons, unpleasantness was just another quantitative factor alonside the pleasure of work, that entered
into the overall calculation of utility vs. disutility. To make the principle clearer, he gave the example of a person working
directly for his own consumption:
When a boy picks blackberries for his own eating, the action of picking is probably itself pleasurable for a while; and
for some time longer the pleasure of eating is more than enough to repay the trouble of picking. But after he has eaten a
good deal, the desire for more diminishes; while the task of picking begins to cause weariness, which may indeed be a feeling
of monotony rather than of fatigue. Equilibrium is reached when at last his eagerness to play and his disinclination for the
work of picking counterbalance the desire for eating.19
Like the earlier Jevons and the later Mises, Alfred Marshall defined labor in terms of its productive character, or its
2. All labour is directed towards producing some effect. For though some exertions are taken merely for their own sake,
as when a game is played for amusement, they are not counted as labour. We may define labour as any exertion of mind or body
undergone partly or wholly with a view to some good other than the pleasure derived directly from the work.20
Unlike Jevons, however, Marshall did not limit the term to painful exertions.21
Eugen von Böhm-Bawerk wrote at length on the distinction between the expenditure of labor as an opportunity cost (common
to all expenditures of production factors), and as a positive disutility (unique to labor).
The nature of all economic sacrifices that men make consists in some loss of wellbeing which they suffer; and the amount
of sacrifice is measured by the amount of this loss. It may be of two kinds: of a positive kind, where we inflict on ourselves
positive injury, pain, or trouble; or of a negative kind, where we do without a happiness or a satisfaction which we otherwise
might have had. In the majority of economical sacrifices which we make to gain a definite useful end, the only question is
about one of these kinds of loss....
It is otherwise with the sacrifice of labour. Labour presents two sides to economical consideration. On the one hand it
is, in the experience of most men, an effort connected with an amount of positive pain, and on the other, it is a means to
the attainment of many kinds of enjoyment. Therefore the man who expends labour for a definite useful end makes on the one
hand the positive sacrifice of pain, and on the other, the negative sacrifice of the other kinds of enjoyment that might have
been attained as results of the same labour.22
For Böhm-Bawerk, the value of labor was determined either by disutility or by opportunity cost, whichever was greater.
But as Buchanan pointed out above, opportunity cost itself was a means (at least in simple commodity exchange) by which the
prices of commodities tended to approximate the sacrifice of labor involved in their production.
For all these economists, the disutility of labor was purely quantitative, and could be offset even in the case of extraversive
labor by inherent pleasurableness of the work (at least for a time). For all of them, though, labor was also still unique
among "factors of production," in that positive disutility entered into the cost-benefit equation at all.
For Mises, unlike the previous thinkers, "extraversive" labor (labor undertaken for the sake of a result rather than for
its own sake) possessed an inherent qualitative disutility, from the very beginning of a job of work and regardless
of the quantity of pleasantness or unpleasantness of it.
The expenditure of labor is deemed painful. Not to work is considered a state of affairs more satisfactory than working.
Leisure is, other things being equal, preferred to travail. People work only when they value the return of labor higher than
the decrease in satisfaction brought about by the curtailment of leisure. To work involves disutility.
....For praxeology it is a datum that men are eager to enjoy leisure and therefore look upon their own capacity to bring
about effects with feelings different from those with which they look upon the capacity of material factors of production.
Man in considering the expenditure of his own labor investigates not only whether there is no more desirable end for the employment
of the quantity of labor in question, but no less whether it would not be more desirable to abstain from any further expenditure
The idea of labor as disutility has caused some to object that this reflects a crude economic man understanding of human
motivation, and ignores the fact that creative labor is an essential part of human nature. Whether man perceives labor as
mere travail, or as an expression of his inner nature, depends on the nature of power relations in the production process.
For example, Marx objected that Smith's "toil and trouble" view treated the expenditure of labor power "as the mere sacrifice
of rest, freedom, and happiness, and not as at the same time the normal activity of living beings. But then, he has the modern
wage labourer in his eye."24
But disutility, as Mises understood it, was not affected by the joy or tedium of labor. Labor can be especially unpleasant
or difficult. But it can also be pleasant. Joy in labor results from the "expectation of the labor's mediate gratification,
the anticipation of the enjoyment of its success and yield"; it also results from "the aesthetic appreciation of [the
worker's] skill and its product" (i.e., pride in craftsmanship; and finally, joy results from the satisfaction "of
having successfully overcome all the toil and trouble involved." But none of these things affects the disutility of labor
as such, for the reason that people work for the sake of the mediate gratification provided by labor's product, and not for
the pleasure intrinsic to the work itself.25
Rothbard, seemingly, shifted back somewhat toward Marshall's position. He treated the disutility of labor as another item
on the general scale of pleasantness and tedium.
For almost all actors, leisure is a consumers' good, to be weighed in the balance against
the prospect of acquiring other consumers' goods, including possible satisfaction from the effort itself. Consequently [quoting
Mises], "people work only when they value the return of labor higher than the decrease in satisfaction brought about by
the decrease in leisure." It is possible that included in this "return" of satisfaction yielded by labor may be satisfaction
in the labor itself, in the voluntary expenditure of energy on a productive task.... As the quantity of effort increases,
however, the utility of the satisfactions provided by labor itself declines, and the utility of the successive units of the
final product declines as well....
In some cases, labor itself may be positively disagreeable, not only because of the leisure foregone, but also because
of specific conditios attached to the particular labor that the actor finds disagreeable. In these cases, the marginal disutility
of labor includes both the disutility due to these conditions and the disutility due to leisure foregone....26
Nevertheless, in the next paragraph, Rothbard made it clear that the pleasures of extraversive labor were inseparable from
the anticipated utility of the product, and denied that such pleasures would have any utility for the laborer without the
product for which the labor was undertaken.
....In cases where the labor itself provides positive satisfactions, however, these are intertwined
with and cannot be separated from the prospect of obtaining
the final product. Deprived of the final product, man will consider his labor senseless and useless,
and the labor itself will no longer bring positive satisfactions. Those activities which are engaged in purely for
their own sake are not labor but pure play, consumers' goods in themselves.27
Labor is a "cost" in a uniquely positive sense. In comparison, other "costs," like so-called waiting or abstinence, are
entirely relative. Indeed, the nature of labor as a unique disutility implies that other costs are only relative. The
free gifts of nature, and natural processes, have "costs" (aside from the trouble of making them usable) only to the extent
that a privileged owner can regulate access to them, and thus charge for something that is not a real cost to him. The "sacrifice"
or "cost" entailed in providing natural goods is only such on the assumption of a "natural" state of affairs in which one
can control access. The free gifts of nature have exchange value only to the extent that access to them is controlled. As
Maurice Dobb wrote,
That labour constitutes a cost in a unique sense was, of course, an assumption. But it was an assumption born of a particular
view of what was the essence of the economic problem.... The crux of the economic problem, as this theory represented it,
and as it had been traditionally viewed, lay in the struggle of man with nature to wrest a livelihood for himself under various
forms of production at various stages of history. As Petty had said, labour is the father, nature the mother of wealth. To
this relationship the contrast between human activity and the processes of nature was fundamental.... And if we seek to give
any quantitative exprssion to this relationship--to man's mastery over nature--it is hard to see what simple notion one can
use other than the expenditure of human energies requisite... to produce a given result.... The essence of value, ...by contrast
with riches, was conceived to be cost, and the essence of cost to lie in labour, by contrast with nature. Labour, conceived
objectively as the output of human energy, was the measure and the essence of Ricardo's "difficulty or facility of production."28
Twentieth century economics has attempted, through the mechanism of opportunity cost, to render all cost entirely subjective.29
But like Marshall's "abstinence" and "real cost," the opportunity cost of Böhm-Bawerk and Wieser and of the twentieth century
Austrian and London School economists is entirely relative to whether one is in a position to charge for something. Unlike
labor, which is a positive expenditure of effort or travail, "abstinence" and "opportunity cost" are defined entirely in the
context of what one is enabled to charge for access to.
As Dobb explained, there was no limit to "real cost," short of imputing it "to any means by which an income could be
acquired in an exchange society."30 He argued that the notion of real cost was rid "of any real content," but
indistinguishable from what later came to be called "opportunity cost"--the cost of sacrificed alternatives (that "arithmetical
truism", as Mr. Durbin has called it). Such a quantity by itself affords no explanation, because it is itself not independent,
but something dependent on the total situation; and all that has been done by this definition is to shift the inquiry back
to the nature of the total situation of which both profit and this so-called "cost" are simultaneously resultant. Whether
a person does demand payment for a certain act (i. e. whether it has a "supply-price") depends on whether
he can demand payment; and this depends on the total situation of which he is a part. To adopt this criterion is to
make the existence or non-existence of a "sacrifice" depend, not on the nature of the action, but on the nature of the circumstances
surrounding the individual or class in question. A "sacrifice" can only be incurred in the measure that one has the luxury
of alternatives to forego.31
Unlike labor, which is an absolute sacrifice in the sense of the actual expenditure of effort, the "sacrifice" or "opportunity
cost" of a capitalist or landlord is only foregoing the further receipt of a good that did not cost him anything, and exists
at all only in the context of a set of alternative returns heavily influenced by statist privilege or monopoly.
And as Dobb pointed out, Alfred Marshall admitted as much himself, seeing as he "defined the term 'waiting' as applying,
not to 'abstemiousness', but to the simple fact that 'a person abstained from consuming anything which he had the power of
consuming, with the purpose of increasing his resources in the future'." If followed consistently, this principle
could produce distinctly absurd results:
This seems to imply that the concept was not limited by Senior's qualification, excluding inherited property, and that
it could equally well be applied to land--to the fact that a landlord leased his land for cultivation, instead of using it
for his own enjoyment or subjecting it to "exhaustive" cultivation himself. In which case, as a category of "real cost", it
was clearly so general as to lose any distinctive meaning.32
Such a definition sets aside the question of whether one's control of access to a property or one's acquisition of it is
legitimate, and thus whether one has a legitimate right to demand income from it. The only way to address such questions is
to go back to the ethical question of what constitutes legitimately acquired property. From the point of view of a mutualist
theory of land ownership, by which property rights are established only by occupancy and use, an absentee landlord's claim
to compensation for the "sacrifice" of allowing a tenant to use his land is as spurious as a mugger's for the "sacrifice"
of not shooting his victim. Even from the standpoint of a Lockean labor standard only for the initial acquisition of property,
the overwhelming majority of landlord claims are illegitimate results of statist collusion.
The subjectivists, in other words, treated the existing structure of property rights over "factors" as a given, and proceeded
to show how the product would be distributed among these "factors" according to their marginal contribution. By this method,
if slavery were still extant, a marginalist might with a straight face write of the marginal contribution of the slave to
the product (imputed, of course, to the slave-owner), and of the "opportunity cost" involved in committing the slave to one
or another use.
To take Dobb's illustration, "Suppose that toll-gates were a general institution, rooted in custom or ancient legal
Could it reasonably be denied that there would be an important sense in which the income of the toll-owning class represented
"an appropriation of goods produced by others" and not payment for an "activity directed to the production or transformation
of economic goods?" Yet toll-charges would be fixed in competition with alternative roadways, and hence would, presumably,
represent prices fixed "in an open market...." Would not the opening and shutting of toll-gates become an essential factor
of production, according to most current definitions of a factor of production, with as much reason at any rate as many of
the functions of the capitalist entrepreneur are so classed to-day? This factor, like others, could then be said to have a
"marginal productivity" and its price be regarded as the measure and equivalent of the service it rendered. At any rate, where
is a logical line to be drawn between toll-gates and property-rights over scarce resources in general?33
Or better yet, as Marx had put it almost a century before, "land becomes personified in the landlord and... gets on
its hind legs to demand, as an independent force, its share of the product created with its help. Thus, not the land receives
its due portion of the product for the restoration and improvement of its productivity, but instead the landlord takes a share
of this product to chaffer away or squander."34 The "trinitarian forumula" of labor-wages, capital-profit,
and land-rent is "an enchanted, perverted, topsy-turvy world, in which Monsieur le Capital and Madame la Terre do their
ghost-walking as social characters and at the same time directly as mere things."35
The point, of course, is not to compare existing property in the means of production to toll-gates, or to slavery. That
would be begging the question. The point is that questions of justice in ownership must be addressed first.
For the Ricardians, in a sense, distribution was prior to exchange. That is, "price-relations or exchange-values could
only be arrived at after the principle affecting distribution of the total product had been postulated."36
The marginalists, on the other hand, subsumed distribution within their price-theory.37
The change [of orientation] was associated... with the drawing of different boundary-lines to the "economic system",
as an "isolated system"; so that questions of property-ownership or class relations and conflicts were regarded as falling
outside the economist's domain, not directly affecting, in major respects at least, the phenomena and relations with which
economic analysis was properly concerned, and belonging instead to the province of the economic historian or the sociologist.38
[T]he reduction of distribution to the pricing of productive services or factors had the result of excluding the social
circumstances of the individuals (or social groups) associated with the supply of these "services"--even to the extent of
dropping from sight the very existence of these individuals.... The extreme case was where given factor-supplies were
postulated, and distribution consisted simply of the pricing of n factor inputs.... Hence the illusion of distribution
being integrated completely within the exchange-process was at its greatest.39
Of course, the banishment of such "irrelevant," "extra-economic" questions from the purview of economics was, from the
marginalist point of view, just another benefit of the new economics as a weapon in the war against socialism. As some Marxist
economic historians have pointed out, classical political economy was a revolutionary doctrine. Smith, Ricardo and Mill all
took a jaundiced view of landlords as an essentially parasitic class, whose sole "contribution" to productivity was to be
in a position to withhold land from production, and then to allow it to be used by the actually productive. The "productivity"
of land was then imputed to its owner. This aspect of classical political economy suggested a possible basis for an analogous
radical treatment of interest and profit. The question naturally seemed to suggest itself, of the extra-economic grounds on
which capitalists were in a position to control access to capital (i.e., how they came to be in possession of it), and to
withhold or release it from production depending on the revenue they derived from it. The heirs of classical political economy
were divided on how they reacted to these questions. One school, that of Senior and Longfield, rejected the potentially revolutionary
conclusions of Ricardo by setting aside his theory of rent as a parasitic income, and relegating land to the category of another
"factor" whose provision entailed a "real cost" to the landlord; in so doing, this school laid the ideological groundwork
for marginalism. Another school, that of market-oriented Ricardian socialists like Hodgskin and the American individualists,
seized on the radical implications of Ricardo and drew the obvious conclusions. And marginalism, by defining "productivity"
simply as the ability to withhold a productive factor from production, set these potentially explosive issues aside.40
Any general conception of "real cost" that put the disutility of labor in the same category as a capitalist's "abstention"
or "sacrifice," was nonsensical.
The statement which the labour-theory implied was that exchange-values bore a certain relation to the output and using-up
of human energies, and in doing so provided a term which gave some meaning to the distinction between a gross and a net product
and to the concept of surplus, and provided a criterion for differentiating one type of income from another. Thus it is possible
in these terms to distinguish exchange-relationships which represent a passing of value-equivalents from those which do not:
for instance, the sale of labour-power representing the exchange of income against human energies expended in production,
contrasted with the sale of a property-right over the use of scarce resources, representing no such passing of equivalents
and constituting an invome by no means "necessary" in the fundamental sense in which a subsistence-income to labour is necessary
or the return to a machine of a value equal to what the operation of that machine has used up (in a physical sense).41
Dobb himself did not address the crucial issue of whether "scarce resources" were scarce by nature alone, or as a result
of State imposed monopoly and privilege as well. If the former, it is only a necessary result of a finite natural order that
the first to occupy and use a natural resource should collect some economic rent so long as they use it; if the latter, they
are robbers. Under capitalism, distinguished as a system of privilege from a genuine free market, most of the "sacrifices"
from which the ruling class derives income presume a set of alternatives that includes, say, controlling access to land one
does not use, or controlling access to credit in a seller's market.
Theories of the "productivity" of land and capital, like those of abstinence, are entirely relative, and based on the social
convention of imputing their productive qualities to an owner who controls access to them. The "value" created by them is
simply a monopoly price paid to their owner. Marx pointed this out at several places in Theories of Surplus Value.
In the section on Hodgskin, he wrote of the fetishism involved in making the "productivity" of capital a source of exchange-value.
One can only speak of the productivity of capital if one regards capital as the embodiment of definite social relations
of production. But if it is conceived in this way, then the historically transitory character of these relations becomes at
And in the section on "Revenue and Its Sources," he wrote at much greater length of the fetishistic quality of thought
involved in attributing exchange-value to the productivity of land and capital:
The land or nature as the source of rent... is fetishistic enough. But as a result of a convenient
confusion of use value with exchange value, the common imagination is still able to have recourse to the productive power
of nature itself, which, by some kind of hocus-pocus, is personified in the LANDLORD....43
Thus the participants in capitalist production live in a bewitched world and their own relationships appear to them as
properties of things, as properties of the material elements of production. It is however in the last, most derivative forms--forms
in which the intermediate stage has not only become invisible but has been turned into its direct opposite--that the various
aspects of capital appear as the real agencies and direct representatives of production. Interest-bearing capital is personified
in the MONIED capitalist, industrial capital in the INDUSTRIAL CAPITALIST, rent-bearing capital in the LANDLORD as the owner
of the land, and lastly, labour in the wage-worker.44
The so-called “trinitarian formula” (the division of the product among land, labor and capital according to
their “productivity”) is utterly erroneous. The natural wage of labor, in a free market, is its product. That
is not the same as saying, as do the Austrians, that labor is paid its "marginal product." Their use of the latter expression
implies that there is an exchange value, established independently of production cost by utility to the consumer, to which
labor "contributes" some portion. Rather, the exchange-value of a good derives from the labor involved in making it; it is
the disutility of labor and the need to persuade the worker to bring his services to the production process, unique among
all the "factors of production," that creates exchange value.
As Marx said, attributing exchange-value to the productivity of free natural goods, as such, is a confusion of exchange-value
with use-value. Use-values have exchange-value only to the extent that it requires some effort to appropriate or modify them.
The exchange-value of a pail of water, when access to water is free, is determined by the effort needed to draw the water
and carry it to its destination (plus the amortized effort involved in making the pail or earning its purchase price). One
can charge for the use-value of the water itself only if one controls the supply. Otherwise a competitor, seeing an opportunity,
will enter the market and charge a price closer to his actual effort, until the marginal price is just enough to compensate
for the effort of drawing and carrying water.
A producer will be able, in the long run, to pass on only that which is really a cost: the effort entailed in direct production,
and that entailed in the purchase of means of production. He will be able to charge for that which is not a genuine cost (i.e.,
charges for use of capital, based on abstinence, beyond the effort by which it was acquired) only when some form of scarcity
rent is involved. Some scarcity rents result from shifts in demand (in which case they will be corrected by market forces
and eventually fall to zero). Some scarcity rents result from natural scarcity, like innate skill, and land with above average
fertility or site advantage (in which case the scarcity rents are for all intents and purposes permanent). But a great deal
of scarcity rent results from the State's intervention to create market entry barriers, or artificially restrict access to
the supply of land and capital, so that privileged landlords and capitalists may draw monopoly incomes from land and capital;
these scarcity rents will be abolished with the forms of intervention that create them. So all exchange value is reducible
to the total subjective effort involved in production, plus scarcity rents. As Benjamin Tucker argued, "under free competition
there is no price where there is no burden."45 And as a corollary, "is there anything that costs except
labor or suffering (another name for labor)?"46
As Ronald Meek pointed out, Smith's and Marx's shared assumptions about labor as a standard of value in simple commodity
exchange were hardly arbitrary. Cost price, including both labor expended in direct production and that expended in acquiring
the means of production embodied in a commodity, was a natural standard from the viewpoint of artisans.
....for the major part of the period of commodity production as a whole, supply prices have in actual fact
been directly or indirectly determined by "values" in Marx's sense. And these supply prices are by no means hypothetical:
for most of the period of commodity production they have been firmly rooted in the consciousness of the producers themselves.
Even in primitive societies one can see the beginnings of the idea that the exchange of commodities "at their values" in the
Marxian sense is "the rational way, the natural law of their equilibrium". In quite a few cases, the prices asked and received
for commodities in primitive markets are based on production costs.... After a while, the producers of commodities come quite
naturally to think of the actual price they happen to receive for their commodity in terms of the extent to which this price
deviates from the supply price--i.e., roughly from the value of the commodity in Marx's sense. The value of the commodity,
although the market price may not often "tend" to conform to it at any particular stage of development owing to the existence
of certain specific forms of monopoly, state interference, etc., characteristic of that stage, is regarded by the producers
themselves as a sort of basis from which the deviations caused by these factors may legitimately be measured.
The idea that the exchange of commodities "at their values" represents the "natural" way of exchanging them was of course
often expressed in ethical terms. In other words, it often took the form of an idea concerning the manner in which exchanges
ought to be conducted if justice was to be done. But ideas as to what constitutes a "fair" exchange come into men's
minds in the first instance from earth and not from heaven. When the small capitalist who is faced with the competition of
a powerful monopolist says that he has a right to receive a "fair" profit on his capital, or when the peasant who exchanges
his produce for that of a guildsman on disadvantageous terms says that he has a right to receive a "fair" return for his labour,
the standard of "fairness" erected by each of the complainants actually has reference to the way in which exchanges would
in fact be conducted in the real world if the particular form of monopoly
to which he is objecting did not exist. In pre-capitalist times, there must always have been some commodities which were exchanged
more or less at their values, and some times and localities in which deviations of price from value were relatively small,
so that the "natural" method of exchanging commodities could actually be seen in operation. For obvious reasons, this "natural"
method was regarded as the only really "fair" one. Thus the persistence of the concept of a "just price" throughout the major
part of the pre-capitalist period seems to me to afford evidence in favour of the objective (and not merely hypothetical)
existence of supply prices proportionate to values during that period.
Thus although Adam Smith's picture of an "early and rude state of society" in which deer and beaver hunters exchanged their
products strictly in accordance with embodied labour ratios was indeed a "Robinsonade", it did at least contain this element
of truth--that in pre-capitalist societies the supply price of a commodity, which had an objective existence even though the
actual prices of the majority of commodities usually deviated from their supply prices for one reason or another, could be
regarded as directly determined by the value of the commodity.47
To go back to the quote from Buchanan above, the view of labor as the basis of "natural price" is logically implied by
the nature of man as a utility-maximizing being.
Meek's comments on "just price" theory correspond closely to Tawney's treatment of the prevailing concept of "usury" as
it existed in the Middle Ages. Usury, contrary to modern caricature, was not a price above some arbitrarily set "just price,"
established by scholastic specialists in angelological choreography; it was any form of income extracted from a position of
power, in which one was enabled to charge whatever the market would bear.
The essence of the medieval scheme of economic ethics had been its insistence on equity in bargaining--a contract is fair,
St. Thomas had said, when both parties gain from it equally. The prohibition of usury had been the kernel of its doctrines,
not because the gains of the money-lender were the only species, but because, in the economic conditions of the age, they
were the most conspicuous species, of extortion.
In reality, alike in the Middle Ages and in the sixteenth century, the word usury had not the specialized sense which it
carries today.... The truth is, indeed, that any bargain, in which one party obviously gained more advantage than the other,
and used his power to the full, was regarded as usurious.48
It is fair to say that medieval producers, with their concepts of the "just price," had a more common-sensical understanding
of reality, than the sophisticates today who set up straw man caricatures of the theory for ridicule. The latter are open
to charges of provincialism in time.
The medieval concept of usury corresponds pretty closely to Gary Elkin's use of the term: "the exaction of tribute for
the use of any object whose artificial scarcity and monopolization by an elite class are created and protected by the State."49
One implication of the subjectively-based LTV, as we have stated it, is the need to abandon embodied labor-time as the
basis for quantifying labor. But that standard, as used by Marx and Ricardo, was untenable anyway. Both Marx and Ricardo started
from a basic standard of embodied labor-time; they were nevertheless forced to reconcile this with the fact that labor of
different intensities, skill, and other qualities, received differing rates of pay. The results were comparable to the elaborate
system of epicycles added to Ptolemy's astronomy to make it correspond to the observed facts. What it amounted to, in practice,
was that they moved toward a market standard for allocating pay to labor based on its disutility, without explicitly abandoning
their labor-time standard.
What both finally wound up with, then, was the principle that, given two labors of a certain identical quality,
the only basis for comparing them was their respective duration. And it was through the market that the value of various intensities
or skills of labor was determined. In practice, the result was something awfully like Smith's "higgling and bargaining of
the market" as a mechanism for distributing the produce of labor among laborers. But despite thus robbing labor-time of any
practical meaning as a basis for value, they never abandoned it in theory.
Ricardo, for example, in the process of speaking of labor as "the foundation of all value, and the relative quantity
of labour as almost exclusively determining the relative value of commodities," at the same time acknowledged
the difficulty of comparing an hour's or a day's labour, in one employment, with the same duration of labour in another.
The estimation in which different qualities of labour are held, comes soon to be adjusted in the market with sufficient precision
for all practical purposes, and depends much on the comparative skill of the labourer, and intensity of the labour performed.50
Marx, likewise, for all intents and purposes backed off from labor-time as an objective measure of value, in denying "that
the days are equivalent, and that the day of one is worth the day of another."
Let us suppose for a moment that a jeweler's day is equivalent to three days of a weaver; the fact remains that any change
in the value of jewels relative to that of woven materials, unless it be the transitory result of the fluctuations of demand
and supply, must have as its cause a reduction or an increase in the labour time expended in the production of one or the
other.... Thus values may be measured by labour time, in spite of the inequality of value of different working days; but to
apply such a measure we must have a comparative scale of the different working days: it is competition that sets up this scale.
Is your hour's labour worth mine? That is a question which is decided by competition.51
In A Contribution to the Critique of Political Economy, Marx argued that labor-time was the only possible measure
for comparing different quantities of labor; he argued at the same time that the labor-time standard assumed uniform quality,
and that skilled or intense labor could be reduced to "simple labor" by a multiplier system.
Just as motion is measured by time, so is labour by labour-time. Variations in the duration of labour are the only
possible difference that can occur if the quality of labour is assumed to be given....
....This abstraction, human labour in general, exists in the form of average labour which, in a given society, the
average person can perform, productive expenditure expenditure of a certain amount of human muscles, nerves, brain, etc. It
is simple labour which any average individual can be trained to do and which in one way or another he has to perform....
But what is the position with regard to more complicated labour which, being labour of greater intensity and greater specific
gravity, rises above the general level? This kind of labour resolves itself into simple labour; it is simple labour raised
to a higher power, so that for example one day of skilled labour may equal three days of simple labour. The laws governing
this reduction do not concern us here. It is, however, clear that the reduction is made, for, as exchange-value, the product
of highly skilled labour is equivalent, in definite proportions, to the product of simple average labour....
The determination of exchange-value by labour time, moreover, presupposes that the same amount of labour
is materialized in a particular commodity..., irrespective of whether it is the work of A or B, that is to say, different
individuals expend equal amounts of labour-time to produce use-values which are qualitatively and quantitatively equal. In
other words, it is assumed that the labour-time contained in a commodity is the labour-time necessary for its production,
namely the labour-time required, under the generally prevailing conditions of production, to produce another unit of the same
Marx stated this same principle, in similar terms, in Volume One of Capital. And as previously, he appealed to the
every day activity of the market as proof that such reductions of complex to simple labor took place.
Skilled labour counts only as simple labour intensified, or rather, as multiplied simple labour, a given quantity of skilled
being considered equal to a greater quantity of simple labour. Experience shows that this reduction is constantly being made.
A commodity may be the product of the most skilled labour, but its value, by equating it to the product of simple unskilled
labour, represents a definite quantity of the latter labour alone. The different proportions in which different sorts of labour
are reduced to unskilled labour as their standard, are established by a social process that goes on behind the backs of the
producers, and, consequently, appear to be fixed by custom.53
By subjecting his labor-time standard to skill and intensity multipliers, which were obtained by taking observed market
values and then reducing one to a multiple of another, Marx rendered his labor-time standard empirically unfalsifiable. Böhm-Bawerk
justly ridiculed Marx for this retreat into circular logic:
The naivety of this theoretical juggle is almost stupefying. That a day's labour of a sculptor may be considered equal
to five days' labour of a miner in many respects--for instance, in money valuation--there can be no doubt. But that twelve
hours' labour of a sculptor actually are sixty hours' common labour no one will maintain. Now in questions of theory...
it is not a matter of what fictions men may set up, but of what actually is. For theory the day's production of the sculptor
is, and remains, the product of one day's labour, and if a good which is the product of one day's labour, is worth as much
as another which is the product of five days' labour, men may invent what fictions they please; there is here an exception
from the rule asserted, that the exchange value of goods is regulated by the amount of human labour incorporated in them.54
Actually, the variation in the value of the product based on qualities of labor does not constitute an exception
to the regulation of value by "the amount of human labour incorporated in them," but only indicates that "amount" of labor
is not the same as its duration.
At any rate, the only way to make such a reduction without circularity, by market forces, would be by reference
to some feature common to both "complex" and "simple" labor, in terms of which they can be compared on a common scale: i.e.,
the subjective disutility experienced by laborers as participants in the labor market (including the past disutility involved
in learning particular skills). And Marx rejected any such subjective factor as a quantifier of labor.
Since Marx refused to establish the labor theory on any alternative causal mechanism like the psychology of economic actors,
he was left as a result with only a general law, unverifiable and asserted in circular form, with no independent reference
point to explain it.
Smith, on the other hand, started out with subjective "toil and trouble" as his standard for the labor theory of value.
In contrast to Marx, his labor-time standard in the celebrated "deer and beaver" model of primitive exchange was a deliberate
simplification; he assumed, for the purpose of illustration, that labor was of equal intensity. But he quickly passed on to
the assumption that, while commodities exchanged according to quantity of labor ("[e]qual quantities of labour, at all
times and places, may be said to be of equal value to the labourer"55) quantities of labor were by no means
necessarily compared in units of time. And his qualification "to the labourer" makes it clear that the laborer's subjective
perception of the disutility of labor was the basis of exchange-value.
In a deservedly famous passage, Smith made the "higgling and bargaining" of the market the mechanism by which the comparative
value of different acts of labor was established.
It is often difficult to ascertain the proportion between two different quantities of labour. The time spent in two different
sorts of work will not always alone determine this proportion. The different degrees of hardship endured, and of ingenuity
exercised, must likewise be taken into account. There may be more labour in an hour's hard work than in two hour's easy business;
or in an hour's application to a trade which it cost ten years' labour to learn, than in a month's industry at an ordinary
and obvious employment. But it is not easy to find any accurate measure either of hardship or ingenuity. In exchanging, indeed,
the different productions of different sorts of labour for one another, some allowance is commonly made for both. It is adjusted,
however, not by any accurate measure, but by the higgling and bargaining of the market, according to that sort of rough equality
which, though not exact, is sufficient to carry on the business of common life.56
And note that, unlike Marx, who treated the assignment of value to different qualities of labor as an abstract social process,
going on "behind the laborer's back," and without any apparent reference to his desires, Smith made constant reference to
such subjective concepts as "hardship," the "long application" or "ease and cheapness" involved in learning a trade, etc.:
If the one species of labour should be more severe than the other, some allowance will naturally be made for this superior
hardship; and the produce of one hour's labour in the one way may frequently exchange for that of two hours' labour in the
Or if the one species of labour requires an uncommon degree of dexterity and ingenuity, the esteem which men have for such
talents will naturally give a value to their produce, superior to what would be due to the time employed about it. Such talents
can seldom be acquired but in consequence of long application, and the superior value of their produce may frequently be no
more than a reasonable compensation for the time and labour which must be spent in acquiring them.57
Unlike Marx's concept of exchange, which can be parodied as an "outward and visible sign" of the mystical phenomenon of
social labor, Smith's labor market was the cumulative outcome of countless individual acts of exchange. Smith always went
back to the worker's perception, and the need for "compensation" to persuade him, as an economic actor, to bring the product
of his labor to market. For Smith, the "higgling and bargaining" of the market would result in wages tending toward a balance
between the advantages and disadvantages in various lines of work, so that pay would be distributed according to the net disutility
One assumption not properly addressed by Smith was that, for such "higgling and bargaining" to distribute wages equitably
according to laborers' subjective feelings of disutility, they had to be in a position of equality with one another and with
their employers. Unequal exchange would force laborers to sell their labor for less than what would be necessary to compensate
their disutility in a free market. The intervention of the state, by creating unequal exchange between laborer and capitalist,
results in workers selling their labor in a buyer's market, and in Marx's famous difference between the value of labor-power
as a commodity and the value of labor's product.
This question was explicitly addressed by Hodgskin, in his own version of the "toil and trouble" standard. In Labour
Defended Against the Claims of Capital, he argued that the State's interference in the free market, on behalf of employers,
was the reason labor received less than its full product in wages. Hodgskin was one of the earliest writers to use the term
"capitalism," and may indeed have been the first to coin it. By "capitalism," he meant a system of privilege in which the
State enabled the owners of capital to draw monopoly returns on it, in the same sense that the feudal ruling class was able
to draw monopoly returns on land; or, as left-Rothbardian Samuel Konkin put it, "Capitalism is state rule by and for those
who own large amounts of capital."59
But in a genuinely free market, labor would receive its full product in wages. And this product would be distributed among
laborers, through the "higgling" process, in accordance to their respective toil and trouble.
But though this [that the whole produce of labor ought to belong to the laborer], as a general proposition, is quite
evident, and quite true, there is a difficulty, in its practical application, which no individual can surmount. There is no
principle or rule, as far as I know, for dividing the produce of joint labour among the different individuals who concur in
production, but the judgment of the individuals themselves; that judgment depending on the value men may set on different
species of labour can never be known, nor can any rule be given for its application by any single person....
....Wherever the division of labour is introduced..., the judgment of other men intervenes before he labourer can realise
his earnings, and there is no longer any thing which we can call the natural reward of individual labour.... Between the commencement
of any joint operation, ...and the division of its product among the different persons whose combined exertions have produced
it, the judgment of men must intervene several times, and the question is, how much of this joint product should go to each
of the individuals whose united labours produce it?
I know of no way of deciding this but by leaving it to be settled by the unfettered judgments of the labourers themselves.
If all kinds of labour were perfectly free..., there would be no difficulty on this point, and the wages of individual labour
would be justly settled by what Dr Smith calls the "higgling of the market."60
Of course, this same process applies to the higgling of artisans and independent producers, who exchange their products
likewise according to their subjective feelings of disutility. The general principle is that all of society's product, in
a free market, will go to labor; and that it will be apportioned among laborers according to their respective toil and trouble.
Those who find the average market compensation for a particular form of labor insufficient compensation for their subjective
feeling of disutility, will leave it for some other kind of work. And likewise, those who consider the compensation more than
sufficient will gravitate toward that kind of work. And the average rate of compensation will thus be adjusted to the level
necessary to equate the number of people supplying a particular form of labor to the effective demand at that wage.
Franz Oppenheimer, a later free market socialist, described the process in a slightly different manner: under the inducements
of a truly free labor market, labor would distribute itself among employments until incomes became "equal"--in our terms,
equal in relation to given quantities of subjectively perceived effort.61 Oppenheimer, in "A Post-Mortem on Cambridge
Economics," quoted with approval Adam Smith's claim that "[t]he whole of the advantages and disadvantages of the different
employments of labour and stock must, in the same neighbourhood, be either perfectly equal or continually tending to equality."
He also quoted, with like approval, Johann Henirich von Thuenen's posited equilibrium at which "labor of equal quality
is equally rewarded in all branches of production...."62
The neo-Ricardians Dobb and Meek, among others, have criticized a "toil and trouble" LTV as creating an opening for a Marshallian
treatment: that is, consolidating effort with the disutility of "waiting" or "abstinence" as simply one element of "real cost."
Ricardo and Marx, in contrast, properly conceived labor objectively as "the expenditure of a given quantum of human energy,"63
Conceived as disutility, however, it was inevitable
that the very juxtaposition of labour (which Ricardo had always regarded as something objective) and abstinence (which
had necessarily to be regarded as something subjective) must have encouraged the growing tendency to conceive economic categories
in subjective terms, in abstraction from the relations of production....64
And a theory of profits as the reward for "abstinence," to be incorporated into a "real cost" theory, required labor to
be recast theoretically in purely subjective terms.
"Abstinence" is capable of being defined, it is true, objectively in terms of the things abstained from; but such abstaining
could have no significance as a cost--no more than any other act of free exchange--unless one were to suppose that some special
"pain" to the owner was involved in parting with these things. And if "abstinence," as the subjective equivalent of profit,
was to be conceived in a psychological sense, then so presumably must labour be: labour as a cost for which wages were paid
by being regarded not as a human activity, involving a given expenditure of physical energy, but as the strength of the psychological
disinclination to work. Abstraction was to be made of human activity, its characteristics and its relationships, and only
the reflection of them in the mind to be taken as the data for economic interpretation.
Already among previous writers there had been signs of an inclination, if shown only in ambiguity, to conceive the notion
of "real cost" as something subjective rather than objective. Adam Smith had used the phrase "toil and trouble"....65
But on closer inspection, this vulnerability does not exist in any legitimate sense. It would exist only if the marginalists'
equation of the capitalist's sacrifice to that of the laborer is a valid one. And labor, we have already seen Dobb himself
to have acknowledged, is a "cost" in a unique sense. No system of "real cost" that puts the "sacrifice" or "abstinence" of
a capitalist in the same category as positive human effort, can stand up to critical evaluation. Positive human effort is
a sacrifice in an absolute sense; whereas the "sacrifices" of the capitalist and landlord are so only in a relative sense.
The essential dualism of this theory of real cost was admitted by Marshall when, in an article in 1876, he referred to
the fact that it was only possible to measure "an effort and an abstinence... in terms of some common unit" through the medium
of some artificial mode of measuring them"--namely, through their market-values.... This difficulty he considered to apply
similarly to the measurement of "two diverse efforts". While the difficulty in this latter case is much less than in
the case of two quite dissimilar things such as "effort" and "abstinence", it remains a much greater problem when effort is
conceived in subjective terms than when it is conceived objectively in terms of output of physical energy.66
The treatment of labor as an "output of physical energy" is a recurring theme in Dobb, appearing in several block quotes
in this chapter. But he does not say why the "objective output of human energy" should create exchange value,
except for disutility to the laborer.
After all, in the end, what valid basis can any labor theory of value have except the disutility of labor as experienced
by the laborer himself? It should be self-evident that the reason labor is unique in creating exchange-value is that the laborer
(unlike the land, natural forces, etc.) is unique in having to be persuaded that it is worth his while to bring goods
to market. To use Dobb's own words in the quote above against him, labor "as a human activity" must be characterized by something
more than "a given expenditure of physical energy," since even a lump of coal is capable of the latter. The reason the human
demands payment for his "expenditure of physical energy" and the lump of coal doesn't, is that he feels somewhat differently
about the expenditure than does the lump of coal.
This relationship between subjective cost as a source of exchange-value, and the resulting lack of exchange-value on the
part of natural goods (not counting the effort of appropriation), was widely recognized among the classical political economists.
Jean-Baptiste Say, for example, referred to the "productive agency of natural agents," such as the fertility of soil,
the biological potential of seed, and the sum total of the "process performed by the soil, the air, the rain, and the sun,
wherein mankind bears no part, but which nevertheless concurs in the new product that will be acquired at the season of harvest...."67
But he went on to undercut, in a later passage, any implication this might have for the exchange-value of natural agents as
Labour of an unproductive kind, that is to say, such as does not contribute to the raising of the products of some branch
of industry or other, is seldom undertaken voluntarily; for labour... implies trouble, and trouble, and trouble so bestowed
could yield no compensation or resulting benefit....68
This strongly implied that labor was unique, as a factor of production, in the need to be persuaded to contribute its own
powers to the production process. And from this, it would seem to follow that natural agents, which experienced no such disutility
and therefore needed no such persuasion, lacked the basis of exchange-value:
Of these wants, some are satisfied by the gratuitous agency of natural objects; as of air, water, or solar light. These
may be denominated natural wealth, because they are the spontaneous offering of nature; and as such, mankind is not
called upon to earn them by any sacrifice or exertion whatever; for which reason, they are never possessed of any exchangeable
Ricardo made explicit the implications of these latter passages, in denying that the "productive agency of natural agents"
was a source of exchange-value.
In contradiction to the opinion of Adam Smith, M. Say, in the fourth chapter, speaks of the value which is given to commodities
by natural agents, such as the sun, the air, the pressure of the atmosphere, &c., which are sometimes substituted for
the labour of man, and sometimes concur with him in producing. But these natural agents, though they add greatly to value
in use, never add exchangeable value... to a commodity: as soon as... you oblige natural agents to do the work which was before
done by man, the exchangeable value of such work falls accordingly.... M. Say constantly overlooks the essential difference
that there is between value in use, and value in exchange.
M. Say accuses Dr. Smith of having overlooked the value which is given to commodities by natural agents, and by machinery,
because he considered that the value of all things was derived from the labour of man; but it does not appear to me, that
this charge is made out; for Adam Smith nowhere undervalues the services which these natural agents and machinery perform
for us...; but as they perform their work gratuitously, as nothing is paid for the use of air, of heat, and of water, the
assistance which they afford us adds nothing to value in exchange.70
Of course, purely natural goods are quite rare. Most gifts of nature require some human labor to be made usable; and to
that extent, they acquire exchange-value. Even spontaneously arising natural goods like wild honey, fruit, etc., John Stuart
Mill wrote, required "a considerable quantity of labour..., not for the purpose of creating, but of finding and appropriating
them. In all but these few... cases, the objects supplied by nature are only instrumental to human wants, after having undergone
some degree of transformation by human exertion."71
Natural goods do, at times, obtain exchange-value from scarcity alone, and not just from the labor of alteration or appropriation.
Böhm-Bawerk dismissed as "simply false" Rodbertus' claim that natural goods did not possess economic value: "Even purely
natural goods have a place in economic consideration, provided only they are scarce as compared with the need for them."72
John Stuart Mill, earlier, had written of the difference in degree of scarcity between various natural goods, and their
resulting economic value:
Of natural powers, some are unlimited, others limited in quantity. By an unlimited quantity is of course not meant literally,
but practically unlimited: a quantity beyond the use of which can in any, or at least in present circumstances, be made of
it. Land is, in some newly settled countries, practically unlimited in quantity: there is more than can be used by the existing
population of the counry, or by any accession likely to be made of it for generations to come. But even here, land favourably
situated with regard to markets or means of carriage, is generally limited in quantity: there is not so much of it as persons
would gladly occupy and cultivate, or otherwise turn to use. In all old countries, land capable of cultivation, land at least
of any tolerable fertility, must be ranked among agents limited in quantity...
.... [S]o long as the quantity of a natural agent is practically unlimited, it cannot, unless susceptible of artificial
monopoly, bear any value in the market, since no one will give anything for what can be obtained gratis.73
But that leaves open the question, as Mill's last sentence suggests, of how much of this scarcity is natural, and how much
is conventional or legal. (This latter question we will study in much greater depth in our examination, in a later chapter,
of the political appropriation of land.) Mill distinguished between natural and artificial scarcity in a hypothetical case
It is possible to imagine circumstances in which air would be a part of wealth.... [I]f from any revolution in nature
the atmosphere became too scanty for the consumption, or could be monopolized, air might acquire a very high marketable value.
In such a case, the possession of it, beyond his own wants, would be, to its owner, wealth; and the general wealth of mankind
might at first sight appear to be increased, by what would be so great a calamity to them. The error would be in not considering,
that however rich the possessor of air might become at the expense of the rest of the community, all persons else would be
poorer by all that they were compelled to pay for what they had before obtained without payment.74
In any case, the exchange-value accruing to natural goods as such is, along with other scarcity-rents, a secondary deviation
from the law of labor-value. In the case of natural resources made artificially scarce by political appropriation, absentee
landlordism, etc., it is a state-enforced monopoly income. In the case of natural scarcity of the most fertile land in in
the environs of a particular city, it is a spontaneously occurring scarcity rent, like differences in innate skill.
This subjective emphasis of labor as disutility received, at the same time, criticisms from the right. Rothbard treated
Marshall's reduction of both labor disutility and "waiting" to the common denominator of "real cost," as an admission that
value was purely subjective.
This is not to deny... that subjective costs, in the sense of opportunity costs and utilities foregone, are important in
the analysis of production. In particular, the disutilities of labor and of waiting--as expressed in the time-preference ratios--determine
how much of people's energies and how much of their earnings will go into the production process. This, in the broadest sense,
will determine or help to determine the total supply of all goods that will be produced. But these costs are themselves subjective
utilities, so that both "blades of the scissors" are governed by the subjective utility of individuals. This is a monistic
and not a dualistic causal explanation....
....The price necessary to call forth a non-specific factor is the highest price this factor can earn elsewhere--an opportunity
The proper response is, "so what?" There is a great deal of difference between the formulation of a subjective mechanism
by which the law of cost operates, and the relegation of value to a purely arbitrary basis on subjective utility. Both Ricardo's
and Marx's versions of the labor theory at least implicitly relied on a subjective mechanism--after all, as we asked
above, why else would labor create exchange-value, except for the fact that the laborer, unlike coal, had to be persuaded
to bring his services to market? As for opportunity cost as the basis for the cost-principle, it is worth bearing in mind
that "the subjective utility of individuals" is not determined in a vacuum; "the highest price [a] factor can earn elsewehere"
is entirely relative, and is conditional on many things, not least among them the existence of monopoly returns enforced by
Böhm-Bawerk himself suggested why a subjective approach to economics was necessary, in his comments on Sombart's contrast
between the objective approach of Marx and the subjective approach of the marginalist. Böhm-Bawerk pointed out that "the
knowledge of such an objective connection, without the knowledge of the subjective links which help to form the chain of causation,
is by no means the highest degree of knowledge, but that a full comprehension will only be attained by a knowledge of both
the internal and external links of the chain." The objective and subjective approaches, therefore, were necessarily
complementary. And he added, "as a matter of opinion," that
it is just in the region of economics, where we have to deal so largely with conscious and calculated human action, that
the first of the two sources of knowledge, the objective source, can at the best contribute a very poor and, especially when
standing alone, an altogether inadequate part of the total of attainable knowledge."76
So even Bohm-Bawerk understood that subjective value-judgments were not necessarily arbitrary or independent variables,
but could be the mechanism through which objective factors made themselves felt in the market.
Marx himself, Bohm-Bawerk went on to charge, brought in the subjective factor as a mechanism for his labor theory, but
did so only unsystematically:
Marx did not hold fast to the "objective" pale. He could not help referring to the motives of the operators as to an active
force in his system. He does this pre-eminently by his appeal to "competition." Is it too much to demand that if he introduces
subjective interpolations into his system they should be correct, well founded, and non-contradictory?77
There was a reason for Marx's ambivalence toward a subjective mechanism. Despite the spuriousness of some Marxist criticism,
as we have shown above, a subjective "higgling" basis is indeed vulnerable at first glance to its own charges of unverifiability
or circularity. As Dobb pointed out, making subjective disutility, effort or unpleasantness, rather than time, the basis of
quantity, would make market price the only objective standard for comparing quantities of labor. Nevertheless, this vulnerability
is only apparent. The difference is that, unlike Marx's ratios of simple to complex labor, we are not comparing one set of
data to another in a circular process. We are first asserting, on the grounds of an axiomatic understanding of human nature,
the basis of all exchange value in subjective effort; deviation from this principle, caused by scarcity rents, are a secondary
phenomenon. Once this a priori principle that labor is the basis of exchange value is accepted, we go on to explain why labor's
product will be distributed according to the degree of disutility of labor.
Or to approach it from the opposite direction, we can start with the law of cost as the basis of price, and from there
systematically eliminate all the subordinate factors that only have a price because of artificial scarcity, leaving only labor
as a creator of exchange-value in its own right (at least for the equilibrium prices of goods in elastic supply).
1. Eugen von Böhm-Bawerk, Capital and Interest: A Critical History of Economical Theory, trans. William Smart (New
York: Brentanno’s, 1922) 338.
2. Ibid. 376.
3. Ibid. 379-80.
4. Ibid. 382-3; Eugen von Böhm-Bawerk, Karl Marx and the Close of His System (published in a single volume with
Rudolf Hilferding, Böhm-Bawerk’s Criticism of Marx) (New York: Augustus M. Kelley, 1945) 68-77.
5. Adam Smith, An Inquiry Into the Nature and Causes of the Wealth of Nations (Chicago, London, Toronto: Encyclopedia
Britannica, Inc., 1952) 10.
6. Ibid. 13-4.
7. Ibid. 14.
8. Maurice Dobb, Theories of Value and Distribution Since Adam Smith: Ideology and Economic Theory (Cambridge: Cambridge
University Press, 1973) 48.
9. Eric Roll, A History of Economic Thought, 3rd ed. (Englewood, N.J.: Prentice-Hall, Inc., 1956) 159.
10. David Ricardo, “Absolute Value and Exchangeable Value (A Rough Draft),” vol. 4 of Piero Sraffa ed., The
Works and Correspondence of David Ricardo (Cambridge: Cambridge University Press, 1951) 397.
11. James Buchanan, Cost and Choice: An Inquiry in Economic Theory, vol. 6 of Collected Works (Indianapolis:
Liberty Fund, 1999) 4.
12. Ludwig von Mises, Human Action (Chicago: Regnery, 1949, 1963, 1966) 32, 34, 38-40.
13. Ibid. 64.
14. Ibid. 867-8.
15. William Stanley Jevons, The Theory of Political Economy, 5th ed. (Kelley & Millman, Inc., 1957)
16. Ibid. 168.
17. Ibid. 168-9.
18. Ibid. 172-4.
19. Alfred Marshall, Principles of Economics: An Introductory Volume, 8th ed. (New York: The MacMillan
Company, 1948) 330.
20. Ibid. 65.
21. Ibid. 65n.
22. Böhm-Bawerk, Capital and Interest 282-3.
23. Mises, Human Action 131-2.
24. Karl Marx and Friedrich Engels, Capital vol. 1, vol. 35 of Marx and Engels Collected Works (New York:
International Publishers, 1996) 56n; see also Marx, Grundrisse, vol. 28 of Marx and Engels Collected Works (New
York: International Publishers, 1986) 529-33.
25. Mises, Human Action 589-91.
26. Murray Rothbard, Man, Economy, and State: A Treatise on Economic Principles (Auburn University, Alabama: Ludwig
von Mises Institute, 1993) 38-9.
27. Ibid. 39.
28. Maurice Dobb, Political Economy and Capitalism: Some Essays in Economic Tradition, 2nd rev. ed. (London:
Routledge & Kegan Paul Ltd, 1940, 1960) 19-20.
29. See Buchanan’s Cost and Choice, op. cit., for an excellent historical survey of this line of thought.
30. Dobb, Political Economy and Capitalism 141-2.
31. Ibid. 147-8.
32. Ibid. 143n.
33. Ibid. 66.
34. Karl Marx and Friedrich Engels, Capital vol. 3, vol. 37 of Marx and Engels Collected Works (New York:
International Publishers, 1998) 811.
35. Ibid. 817.
36. Dobb, Theories of Value and Distribution 169.
37. Ibid. 33-4.
38. Ibid. 172-3.
39. Ibid. 175.
40. Dobb, Political Economy and Capitalism 49-50.
41. Ibid. 22.
42. Karl Marx, Theories of Surplus Value, vol. 32 of Marx and Engels Collected Works (New York: International
Publishers, 1989) 398.
43. Ibid. 450.
44. Ibid. 514.
45. Benjamin Tucker, “Shall the Transfer Papers Be Taxed?” Liberty August 18, 1888, in Benjamin Tucker,
Instead of a Book, By a Man Too Busy to Write One, Gordon Press Facsimile (New York: 1897/1973) 214.
46. Benjamin Tucker, “Should Labor Be Paid or Not?” Liberty April 28, 1888, in Tucker, Instead of
a Book 403.
47. Ronald Meek, Studies in the Labour Theory of Value, 2nd ed. (New York and London: Monthly Review
Press, 1956) 294-6.
48. R. H. Tawney, Religion and the Rise of Capitalism (New York: Harcourt, Brace and Company, Inc., 1926) 130-1.
49. Gary Elkin, Mutual Banking.
50. David Ricardo, Principles of Political Economy and Taxation, 3rd ed. (London: John Murray, Albemarle
Street, 1821), vol. 1 of Piero Sraffa, ed., The Works and Correspondence of David Ricardo (Cambridge: Cambridge University
Press, 1951) 20.
51. Karl Marx, The Poverty of Philosophy, vol. 6 of Marx and Engels Collected Works (New York: International
Publishers, 1976) 126.
52. Karl Marx, A Contribution to the Critique of Political Economy, vol. 29 of Marx and Engels Collected Works
(New York: International Publishers, 1987) 271-3.
53. Marx and Engels, Capital vol. 1: 54.
54. Böhm-Bawerk, Capital and Interest 384-5; see similar criticism in Böhm-Bawerk, Karl Marx and the Close of
His System, 80-5.
55. Smith, Wealth of Nations 14.
56. Ibid. 13.
57. Ibid. 20.
58. Ibid. 48-9.
59. “Bad Capitalists Good Entrepreneurs,” Message 3758 (July 24, 2000) LeftLibertarian@Yahoogroups.com. http://groups.yahoo.com/group/LeftLibertarian/message/3758
Captured August 4, 2004.
60. Thomas Hodgskin, Labour Defended Against the Claims of Capital (New York: Augustus M. Kelley, 1963 (1823)) 83-6.
61. Eduard Heimann, “Franz Oppenheimer’s Economic Ideas,” Social Research February 1949 34.
62. Franz Oppenheimer, “A Post Mortem on Cambridge Economics (Part I),” The American Journal of Economics
and Sociology 1942/43 373-4.
63. Dobb, Political Economy and Capitalism 13.
64. Meek, Studies in the Labour Theory of Value 246.
65. Dobb, Political Economy and Capitalism 140-1.
66. Ibid. 144n.
67. John-Baptiste Say, A Treatise on Political Economy, trans. C. R. Prinsep from 4th ed. (Philadelphia:
John Grigg, 1827) 14.
68. Ibid. 26.
69. Ibid. 237.
70. Ricardo, Principles of Political Economy and Taxation 285-7.
71. John Stuart Mill, Principles of Political Economy: With Some of Their Applications to Social Philosophy, vol.
2 of Collected Works of John Stuart Mill (Toronto: University of Toronto Press, 1965) 25.
72. Böhm-Bawerk, Capital and Interest 338.
73. Mill, Principles of Political Economy 29-30.
74. Ibid. 8.
75. Rothbard, Man, Economy, and State 307-8.
76. Böhm-Bawerk, Karl Marx and the Close of His System 115.
77. Ibid. 116.