Home » Uncategorized » Austrian Economics on Marxism. Part One, In Which the Very Basis of All Marxism is Shown to be Absurd.

Austrian Economics on Marxism. Part One, In Which the Very Basis of All Marxism is Shown to be Absurd.

Marx had first, a long, complicated explanation of why the free market is doomed, and second, a proposed solution to the problems he thought he found, Socialism.

Here at the blog, we have written at length about his proposed solution, Socialism, and why it is inherently flawed from an economic point of view, meaning that the laws of economics guarantee misery and death to any country that institutes Socialism, just like in North Korea, for example. Just do a search for Calculation Problem on this humble site.

Many have shown that politically as well Socialism is a guaranteed nightmare, but that’s not our thing. Politics makes Dave feel sick, so he avoids talking about it.

This article is not about Marx’s solution, Socialism, but about his complicated theoretical edifice, as laid out in his book Das Kapital, which he claims proves that the free market is evil and doomed. The content here is based on this excellent lecture by Richard Ebeling, and on various excellent works by the Austrian School . So let’s start right in.

We have a special guest with us tonight, Karl Marx himself, who has kindly agreed to rise from the grave to chat with us.

1. First mistake, the concept of Exchange Value.

Karl Marx: You’re off on the wrong foot right away, Dave. The great Adam Smith himself invented the concept of Exchange Value. Why are you picking on poor me when I have such a giant on my side?

Smiling Dave: That’s why I’m an Austrian, and not a follower of Adam Smith. The Austrians do not believe in the whole Exchange Value thing. To them the value of anything to anyone is subjective, meaning varies with the individual.

KM: I agree with that. I called it Use Value, you call it Subjective Value, same thing. But I went one step further. I claimed that Use Value is not what counts. What decides prices is something I discovered, called Exchange Value.

SD: Not what counts where?

KM: Go to the store. You see that five dollars can get you, say, a hammer, a sickle, a used math book, a pound of beef. They all have something in common, namely, the price tag. They are all worth five dollars. But they all have completely different uses. So what is it about them that they all have in common, that makes them all worth five bucks?

SD: You are going to say their exchange value.

KM: Exactly. We are forced to posit the existence of something abstract in each of them, some mystical entity that they all have in common, which manifests itself in the market as a price of five dollars. That five dollar price tag reveals to us that the hammer, the sickle, the math book, the beef, all have the same amount of mysterious something in the exact same quantity, that makes them all worth five dollars. I call that mysterious something Exchange Value, and I will later show that there is nothing mystical about it. I will show exactly what is it and where it comes from.

SD: OK, here we are. We have arrived at your first mistake. Exchange value is a flawed concept, and it also is an unnecessary one. The Subjective Value, or what you call the Use Value, is enough to explain everything.

KM: Well, it’s pretty boring down there in the grave. I like being up here. Amuse me with your explanation of how Use Value makes all those things equal, all worth five dollars.

SD: It’s very simple. Five dollars is what the owner of the hammer etc. thinks he can get for his hammer. He thinks he can find a customer who will pay five dollars, so he sets the price at five dollars.

KM: But why will the customer pay five dollars exactly?

SD: There is no such thing as “the customer”. Every customer is different. Some want hammers, some want sickles, some want nothing and stay at home and don’t come to the store.

KM: I knew that.

SD: So you also knew that the five dollar price tag is not meant for every customer. Those who don’t need hammers that much, or at all, will not pay five dollars for the hammer. The seller was not even talking to them when he puts a five dollar price tag on the hammer. To them, the hammer may be worth a dollar, or even zero.

KM: So you are saying that it is absurd to say that the hammer, sickle, book, and beef are all worth five dollars, when there is not a single person in the store or in the city who will pay five dollars for all of them. Smith will pay five for the hammer, but zero for the other stuff, Jones will pay five for the book, but nothing for the other stuff, and so on. And to everyone who stayed home and did not go the store, all of the objects are worth zero. Nobody equates them, nobody considers them of equal value. Certainly they are not worth five dollars to the seller, who is trying to get rid of them.

SD: Yep. The seller is putting a five dollar price tag on each because he thinks he will find one person out there who will want a hammer so badly he will pay five bucks for it, and so on.

KM: I still think I’m onto something, Dave. There must be a reason that the seller assumes there exists at least one person put there willing to pay five for the hammer, another to pay five for the sickle, etc. The fact that for each commodity in the list there exists at least one person willing to pay five bucks means there is something “five-dollary” about them all.

SD: Nah, it’s a coincidence, and I’ll prove it. See that bottled water? It’s going for twenty five cents now. But should the city water supply get infected with Ebola, that same bottle will go for five dollars.

KM: You’re saying that it’s absurd to think there is something inherently five-dollary about a particular item when each person has his own estimation of the worth of the thing, each day, sometimes each minute, these estimations change, outside events unrelated to the object change its price, the whole price system is so personal, and so fluid, and so influenced by events that do not change the composition of the object, that it is foolish to think there is some abstract quality in the object that determines its price.

SD: Yeppers. The whole Exchange Value thing was created to solve a theoretical problem that didn’t exist in the first place. And the concept itself is fatally flawed.

KM: OK. So the very basis of my whole book has now been destroyed. But don’t send me back to the grave. I hate it there. Let’s talk about other flaws in my book.

SD: Maybe next time.

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6 Comments

  1. Josh says:

    Smiling Dave,

    Where does the concept of confidence fit in to AE? By this I mean both “business confidence” and “consumer confidence”.
    Usually I just see AE scholars blithely dismiss Keynes’ “animal spirits” and then move on to discuss Say’s law etc.; no proper treatment of the idea.
    Thoughts?

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  2. Smiling Dave says:

    0. General intro about Keynes. There is an elephant in the room about him, namely that he offered no empirical evidence, nor any chain of reasoning, for his assertions. The burden of proof is on him and his followers, and they have yet to provide any.

    1. Business confidence: Austrians have pointed out that the failures of FDR and Obama to help the economy stem in part from the “regime uncertainty” they created. How could a businessman make serious plans when these guys were in charge, known to be actively hostile to business? This discouraged investment, the main thing we need to improve the economy. I refer you to http://austrianeconomics.wikia.com/wiki/Regime_uncertainty.

    Keynes had a whole different meaning to business confidence. He postulated [with no evidence] that businessmen are irrational, moved by animal spirits to act more or less at random. Thus, we need the govt to take their money and decide what to do with it, because politicians are different from anyone else, and they behave rationally and unselfishly, taking the long view. [Do a search for Solyndra to see how that idea worked out in practice.]

    Here’s what he says at the end of the notorious Chapter 12, where he asserts the animal spirits thing, and concludes with:

    “I expect to see the State, which is in a position to calculate the marginal efficiency of capital-goods on long views [= which businessman lack, guided as they are by animal spirits] and on the basis of the general social advantage [= as opposed to the selfish businessman], taking an ever greater responsibility for directly organising investment; since it seems likely that the fluctuations in the market estimation of the marginal efficiency of different types of capital, calculated on the principles I have described above [= the principles that businessmen are animals who cannot think straight], will be too great to be offset by any practicable changes in the rate of interest. [= and so the govt should not only meddle with the interest rate, it should also directly take over all money and decide how to invest it].

    AE scholars have not blithely dismissed Keynes. Henry Hazlitt wrote one book, and edited another, devoted exclusively to Keynes. What he writes about Keynes’s Chapter 12, the animal spirits chapter, is easy to understand, and demolishes Keynes’s arguments, such as they are. His book is available free, and called the Failure of the New Economics.

    2. Consumer confidence. I don’t know anything about this topic. My guess is that, since Keynes postulated that what we need is more spending, we have to make good and sure consumers will be confident of something or other, [my guess is confidence that prices will be ever higher], so they will just keep on spending.

    If that is the case, you can see why Austrians waste little time talking about such a thing. Lack of consumer spending is never a cause of anything, according to AE, but merely a byproduct of other causes. Thus worrying about consumer spending is like the chef who tries to fix his poorly cooked meal by changing the plates it is served on.

    But as I said, I know nothing about consumer confidence, what they are confident about, nor why we care if they are confident.

    I did find this in Hazlitt’s book:
    Ricardo’s answer was, it is true, weak or incomplete at
    certain points. Thus he did not address himself to the problem
    of what happens in a crisis of confidence, when for a time
    even the commodities that are relatively underproduced may
    not sell at existing price levels, because consumers, even though
    they have the purchasing power and the desire to buy those
    commodities, do not trust existing prices and expect them to go
    still lower. But the basic truth of Say’s Law (and Say’s Law
    was only intended as a basic or ultimate truth) is not
    invalidated but merely concealed by a temporary abnormal
    situation of this kind. This situation is possible only in those
    periods when a substantial number of consumers and
    businessmen remain unconvinced that “bottom” has been
    reached in wages and prices, or feel that their job or solvency
    may still be in danger. And this is likely to happen precisely
    when wage-rates are artificially forced or held above the
    equilibrium level of marginal labor productivity.

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  3. Felipe Neves says:

    Dave, but couldn’t the marxist argue that you’re talking about prices and not value? Prices being influenced by many different market variables.

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  4. Smiling Dave says:

    Felipe, I’m very interested in your take on the following reply.

    You make a very important point, namely, that indeed I was talking about price, and the Marxists say that price and exchange value are not the same thing. To quote wikipedia, “Strictly speaking, the exchange value of a commodity is for Marx not identical to its price, but represents rather what (quantity of) other commodities it will exchange for, if traded.”

    So, yes, my terminology was sloppy.

    That said, the argument in the humble article applies to exchange value as well. All you have to do is replace the word “dollars” with the word “potatoes”. For example, in the original we have:
    SD: It’s very simple. Five dollars is what the owner of the hammer etc. thinks he can get for his hammer. He thinks he can find a customer who will pay five dollars, so he sets the price at five dollars.

    KM: But why will the customer pay five dollars exactly?

    SD: There is no such thing as “the customer”. Every customer is different. Some want hammers, some want sickles, some want nothing and stay at home and don’t come to the store.

    KM: I knew that.

    SD: So you also knew that the five dollar price tag is not meant for every customer. Those who don’t need hammers that much, or at all, will not pay five dollars for the hammer. The seller was not even talking to them when he puts a five dollar price tag on the hammer. To them, the hammer may be worth a dollar, or even zero.

    KM: So you are saying that it is absurd to say that the hammer, sickle, book, and beef are all worth five dollars, when there is not a single person in the store or in the city who will pay five dollars for all of them. Smith will pay five for the hammer, but zero for the other stuff, Jones will pay five for the book, but nothing for the other stuff, and so on. And to everyone who stayed home and did not go the store, all of the objects are worth zero. Nobody equates them, nobody considers them of equal value. Certainly they are not worth five dollars to the seller, who is trying to get rid of them.

    SD: Yep. The seller is putting a five dollar price tag on each because he thinks he will find one person out there who will want a hammer so badly he will pay five bucks for it, and so on.

    Replace with:
    SD: It’s very simple. Five potatoes is what the owner of the hammer etc. thinks he can get for his hammer. He thinks he can find a customer who will pay five potatoes, so he sets the price at five potatoes.

    KM: But why will the customer pay five potatoes exactly?

    SD: There is no such thing as “the customer”. Every customer is different. Some want hammers, some want sickles, some want nothing and stay at home and don’t come to the store.

    KM: I knew that.

    SD: So you also knew that the five dollar price tag is not meant for every customer. Those who don’t need hammers that much, or at all, will not pay five potatoes for the hammer. The seller was not even talking to them when he puts a five dollar price tag on the hammer. To them, the hammer may be worth a dollar, or even zero.

    KM: So you are saying that it is absurd to say that the hammer, sickle, book, and beef are all worth five potatoes, when there is not a single person in the store or in the city who will pay five potatoes for all of them. Smith will pay five for the hammer, but zero for the other stuff, Jones will pay five for the book, but nothing for the other stuff, and so on. And to everyone who stayed home and did not go the store, all of the objects are worth zero. Nobody equates them, nobody considers them of equal value. Certainly they are not worth five potatoes to the seller, who is trying to get rid of them.

    SD: Yep. The seller is putting a five dollar price tag on each because he thinks he will find one person out there who will want a hammer so badly he will pay five bucks for it, and so on.

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  5. Felipe Neves says:

    I see. But I still have problems with the whole price/value difference. The price will come from the exchange value? So the exchange value is in itself the “natural price”, which is exactly the cost to produce something? Example: it cost 10 dollars to produce a bottle of water, so the exchange value is 10 dollars?

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  6. Smiling Dave says:

    The Austrian view is that there is no inherent price. Price is what the market will bear. Meaning it is an individual subjective thing.
    The buyer does not care in the least how much it cost to produce something. He cares about one thing only, how badly he wants it.
    The seller, too, thinks the same way. He does not care how much it cost to produce the thing. To him it is a question about how badly he wants the cash.

    Now of course in the normal state of affairs, if the seller is not desperate for cash, if the thing is not cluttering up his garage and he knows he will never use it, etc etc, he will not sell at a loss if he thinks he can wait a bit and sell at a profit.

    But again, all these things are not inherent in the the object being sold. No magical “price”, or “exchange value”, or “labor involved”, or anything else exists inside the object. The price is determined by what exists insides peoples’s heads, not inside the object. That is why prices can change drastically very quickly, why there are fads and fire sales and all the crazy things we see every day when it comes to prices. Yes, cost of production may be inside someone’s head as one of many factors. But it is just that, one of many factors, and it does not automatically determine the price.

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