Chyden Finance: profit from hypocrisy

Engels and Marx wrote in the mid-19^th Century in opposition to what they believed to be the abuses of industrialization. To understand why their ideas failed, it helps to bear two critical facts in mind: a) the institution of large-scale, centralized manufacturing and its concomitant widespread wage-income were relatively new, and b) economists had not yet abandoned the Labor Theory of value in favor of the Marginal Theory of value that was introduced in the 1870s by Jevons in England, Menger in Austria, and Walras in Switzerland.

Prior to the Industrial Revolution, agriculture was the predominant industry, and manufacturing was largely small-scale and conducted by local craftsmen. As late as one century ago, approximately 40% of the working population in the USA was engaged in agriculture; today, that figure has fallen to approximately 1%, and what farms remain tend to be operated by large, centralized multinational firms, and not as family homesteads.

As industrialization progressed, worker productivity increased, which enabled the payment of higher wages, albeit often with the intervention of labor unions. (Just because capitalists could afford higher wages does not imply that they wanted to pay higher wages.) That large numbers of individuals remained in the employ of industrial capitalists means that the workers’ ranked their next-best opportunities as even less desirable than the conditions that so unsettled Dickens, Engels, and Marx. If their next-best opportunities had been more desirable, the workers would have walked off the factory floor.

Nonetheless, memories of the agricultural peasant lifestyle were fresher a century-and-a-half ago than they are today. In this sense, Dickens, Engels, and Marx can be forgiven for lamenting the passing of more idyllic times, as can their modern caricature, Richard D. Wolff, when he barks about the flattening of real wages in the USA, which coincided with the cutting the last frayed thread connecting the US dollar to gold.

Similarly — although, in this case, modern ‘Marxists’ who prefer to live in countries that have market economies have no such excuse — Dickens, Engels, and Marx can be forgiven for promoting the economic fallacy of the Labor Theory of value. Prior to the 1870s, economists believed, as Adam Smith and Lysander Spooner believed, that the value of a good derives from the amount of labor that has gone into its production. The idea was, e.g., that wheat is less expensive on a per-unit basis than bread, because the bread contains the labor of the baker, the miller, and the farmer, whereas the raw wheat contains the labor of only the farmer.

However, if labor were the source of value, one could spend one’s day pushing against a tree with all of one’s strength and walk away wealthier. Alternatively, one could spend one’s efforts writing novels, recording songs, or making videos, which involve less perspiration than tree-pushing, but are time-consuming, nonetheless. Either way, work does not equate to value.

Jevons, Menger, and Walras showed independently that value comes from the confluence of supply and demand. The reason that wheat is less expensive on a per-unit basis than bread is that the supply of wheat is greater — in part because one can store wheat substantially longer than one can store bread — and demand for wheat by consumers is lower.

This revolutionary change in economists’ understanding of value was not embraced by the mainstream until Marshall popularized it in the early 20^th Century, a half-century after the publication of The Communist Manifesto.

Engels and Marx were not necessarily evil; they just did not know any better.

Additionally, wheat is a commodity that trades in a market that approximates perfect competition, i.e. individual suppliers can sell their entire output into the market without significantly affecting the price, which approaches the marginal cost of production. Bread, on the other hand, trades in a market that is either monopolistically competitive or oligopolistic, i.e. there is a relatively small number of suppliers who are able to sell at a price above the marginal cost of production.

If wages are low, it is because more labor-supplying individuals are willing to engage in an activity than labor-demanding employers are willing to hire at higher wages. If fewer individuals were willing to work in factories, wages would rise. As long as large numbers of individuals choose to accept low wages, wages will be low. Labor union leaders were able to effect wage increases by convincing workers to refuse to work for lower wages, and to back up their demands with threats of individual and governmental violence.

One can only imagine how differently socialism would have evolved, if it had been based on a correct economic foundation.

For one thing, if the focus had been more on increasing the demand for one’s skills than on ‘fair wage’ campaigns, the generally negative attitude toward education might not have been reinforced in popular culture.

Today, we are witnessing the descent of centralized factories in relative importance and the ascent of knowledge work. Knowledge work does not need to be centralized; with Internet access, it can be transnational. Many tasks, like financial analysis, translation, and education, can be automated to a large extent — though not completely — leaving the interesting, creative, high-level work for human individuals.

The problem facing the working classes in the wealthy parts of the world today is the exact opposite of what Dickens, Engels, and Marx objected to. Factories no longer are hungry maws that chew up proletarians; they have been converted into loft condominiums that yuppies live in.

The demand for the exploitation of the toiling masses is falling, because, as the world economy becomes more tightly integrated, unionized labor is priced out of the market.

This leaves large numbers of individuals with a choice between going on the dole or starting their own shops.

When large numbers of erstwhile proletarians start their own shops, the workers finally will be in control of the means of production, and a Marxism based on valid economics will be realized. They no longer will be wage-slaves.

The Labor Theory holdover of being paid per unit of time — whether the hour, the week, the month, or the year — is a form of slavery, in the sense that some other individual has the power to reassign, reschedule, or dismiss the wage-slave.

One can refuse to renew a consultant’s contract, boycott a shop, or retain the services of a different physician or lawyer, but one’s power is strictly negative; one can withhold one’s business. With wage-slaves, one’s power is positive; one can relocate them, promote and demote them, and punish them.

In general, consultants do not live in fear of their clients, shopkeepers do not live in fear of their customers, and physicians, lawyers, and barbers do not live in fear of their clients. Wage-slave employees, on the other hand, often live in abject fear of their employers.

Give the Marxists, socialists, and other leftists their due. Their hearts just might be in the right place, even if their heads are someplace dark and cramped. Update the economics by 150 years, and socialists and libertarians are indistinguishable.

Cast down the chains that bind you and invest accordingly.

CWE

A tip of the hat to Damien Perrotin for inspiring this post.