Eugen von Böhm-Bawerk (1851-1914), the
second-generation giant of Austrian economics, famously refuted the theory,
most commonly associated with Marx, that the employer-employee relationship is
intrinsically exploitative. Less well known is that Böhm-Bawerk had an
exploitation theory of his own, which he expressed in his 1889
masterpiece, Positive Theory of Interest, volume two of his
three-part Capital
and Interest.
To recap his critique, which
is found in History and Critique of Interest Theories (volume
one of Capital
and Interest, 1884): Marx (and pre-Marxian thinkers) believed
workers are routinely exploited by being paid less than what their products
fetch in the market. That’s because, as the Stanford Encyclopedia of
Philosophy notes, for Marx labor is priced “in terms
of the amount of socially necessary labour power required to produce it,” that
is, the products necessary just to keep the worker alive. (Marx derived this
from the labor theory of value he inherited from Adam Smith and David Ricardo.)
Yet a worker may produce more than that bare amount in a day. In that case
the “surplus value” goes to the employer, or capitalist. Capitalists get away
with this because they control the means of production. Workers, having been
deprived of those means, have no choice but to offer themselves as laborers and
take whatever they can get. The alternative is starvation. Thus they are ripe
for exploitation.
“Distribution” Taken for
Granted
In focusing on the
exploitation question, Böhm-Bawerk took the legitimacy of the “distribution” of
the means of production for granted, and of course he rejected the labor theory
of value, or of price formation. (I can’t discuss here the legitimate
objection that historically governments arranged for the
few to control the means of the production at the expense of the many, forcing
them onto the labor market. To the extent that is true, the wage system isexploitative,
but the culprit is the State, not the market.)
Böhm-Bawerk responded to the
exploitation theorists that the difference between what a worker is paid and
the market price of his product can be explained without resort to exploitation
theory. One component of the employer’s profit is interest on the money he
advances workers as wages while the product is being readied for sale. Making
and marketing products take time. Typically, Böhm-Bawerk said, workers cannot
afford to wait until the product is sold before they are paid. They want a
check every week. But how can they be paid before their products have been
sold? Their employers pay them out of money accumulated previously. Thus wages
are in effect a loan, which like all loans is repaid with interest. This is so
because of time preference: We value present goods more highly than future
goods, meaning present goods are discounted from their future value. Other
things equal, X future dollars are worth less than X dollars today. Or to look
at it from the other direction, if you want to use my X dollars today,
requiring me to abstain from using them, I’ll want to be paid more than X
dollars when the loan comes due. The interest payment is my reward for
abstention.
As Böhm-Bawerk wrote, “We have
traced all kinds and methods of acquiring interest to one identical source —
the increasing value of future goods as they ripen into present goods.”
If Böhm-Bawerk is right, and
wages are in effect a loan to be “repaid” when the product sells, then we
shouldn’t be surprised if the revenue from the sale is greater than wages paid
(and other input costs). No exploitation need have occurred. (“Profit” has
other components as well, including pure entrepreneurial profit from arbitrage,
that is, from actualizing the hitherto overlooked potential value of
undervalued resources.)
Pure Theory
Böhm-Bawerk was writing pure
theory, as if he were saying, “In a free market here is what would happen.” He
was not implying that the theory would describe a particular time and place
where the market was less than free “[T]he essence of an institution is one
thing, and the circumstances which may accidentally accompany it in its
practical working out are another,” he wrote.
In fact, Böhm-Bawerk noted,
exploitation can occur when competition among employers is suppressed, raising
the employer’s rate of interest to a level higher than it would have been under
free competition and thus lowering wages. That, he said, was usury.
He writes, “It is undeniable
that, in this exchange of present commodities against future, the circumstances
are of such a nature as to threaten the poor with exploitation of monopolists.”
Böhm-Bawerk was merely
applying the more general exploitation theory held by free-market thinkers at
least back to Adam Smith: Monopolies and oligopolies (suppressed competition)
harm consumers and workers through higher prices and lower wages. For Smith
monopoly was essentially the result of government privilege. This largely has
been the view of later Austrians, also. (Mises allowed for the theoretical
possibility of a resource monopoly without government privilege.) However,
Böhm-Bawerk did not explicitly attribute monopolistic exploitation to the State
in this discussion.
Competition Suspended
“[E]very now and then,” he
wrote, “something will
suspend the capitalists’ competition, and then those unfortunates, whom fate
has thrown on a local market ruled by monopoly, are delivered over to the
discretion of the adversary…. [H]ence the low wages forcibly exploited from the
workers — sometimes the workers of individual factories, sometimes of
individual branches of production, sometimes — though happily not often, and
only under peculiarly unfavourable circumstances — of whole nations” (emphasis
added).
Böhm-Bawerk doesn’t say what
that “something” might be. Maybe he means private collusion; maybe he means government
protection from competition. He gives only this clue: “[L]ike every other human
institution, interest is exposed to the danger of exaggeration, degeneration,
abuse; and, perhaps, to a greater extent than most institutions.” (Alas, thanks
to government-corporate collusion, what he thought was rare has actually been
the rule in so-called “capitalist” countries.)
He cautions that “what we
might stigmatise as ‘usury’ does not consist in the obtaining of a gain out of
the loan, or out of the buying of labour, but in the immoderate extent of that
gain…. Some gain or profit on capital there would be if there were no
compulsion on the poor, and no monopolising of property…. It is only the height
of this gain where, in particular cases, it reaches an excess, that is open to
criticism, and, of course, the very unequal conditions of wealth in our modern
communities bring us unpleasantly near the danger of exploitation and of
usurious rates of interest.”
The Essence of Interest
Böhm-Bawerk takes pains to
emphasize that he is not condemning interest per se: “But what is the
conclusion from all this? Surely that, owing to accessory circumstances,
interest may be associated with a usurious exploitation and with bad social
conditions; not that, in its innermost essence, it is rotten.”
Yet he asks, “[W]hat if these
abuses are so inseparably connected with interest that they cannot be
eradicated, or cannot be quite eradicated?” His response:
Even then it is by no means certain that the
institution should be abolished…. Arrangements absolutely free from drawback
are never allotted to us in human affairs….
Instead of the absolute good, which is beyond reach,
we must choose what, on the whole, is the relative best, where the balance,
between attainable advantage and the drawbacks that must be taken into the
bargain, is the most favourable possible for us.
In the end he doesn’t believe
abuse is inseparably connected to interest: “There is no inherent blot in the
essential nature of interest. Those, then, who demand its abolition may base
their demand on certain considerations of expediency, but not, as the
Socialists do at present, on the assertion that this kind of income is
essentially unjustifiable.”
There are unanswered questions
about Böhm-Bawerk’s position, but we do know that the thinker who refuted
Marx’s exploitation theory had one of his own.
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