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.