Rudolf Hilferding on the Law of Value in Volume 1 of Capital

In 1904, Rudolf Hilferding wrote a response to Böhm-Bawerk (1896) called “Böhm-Bawerk’s Criticism of Marx” (Hilferding 1949 [1904]).

In this essay of Hilferding, we have a fascinating confirmation of the way in which the early Marxists were concerned to still vindicate the law of value in volume 1 of Capital – the idea that commodities tend to exchange at pure labour values – as an empirical theory.

Like Engels, they seized on Marx’s statement in Chapter 10 of volume 3 of Capital as follows:

“The exchange of commodities at their values, or approximately at their values, requires, therefore, a much lower stage than their exchange at their prices of production, which requires a relatively high development of capitalist production. ….

The assumption that the commodities of the various spheres of production are sold at their value implies, of course, only that their value is the center of gravity around which prices fluctuate, and around which their rise and fall tends to an equilibrium.” (Marx 1909: 208–210).

From this it was deduced, as Engels did, that the law of value in volume 1 – that commodities tend to exchange at their labour values which are the anchors of the price system – applied only to the pre-modern world of commodity exchange.

When we examine Hilferding’s essay “Böhm-Bawerk’s Criticism of Marx,” we discover that he – like Engels (1991 [1895]), Robert Wilbrandt (1920) and Ronald Meek (1973: 198–200) – also endorsed this view:

“Marx conceives the transformation of value into price of production as an historical process, which is summarized by Böhm-Bawerk as the ‘third argument’ in the following terms: ‘The law of value, Marx affirms, governs with undiminished authority the exchange of commodities in certain primary stages in which the change of values into prices of production has not yet been accomplished.’ … The conditions which are requisite in order that commodities shall be exchanged for their values are developed by Marx as follows: He assumes that the workers themselves own their respective means of production, that they labor on the average for an equal time and with equal intensity, and that they exchange their commodities directly. Then two workmen in any one day will by their labor have added to their product equal amounts of new value, but the respective products will vary in value in accordance with variations in the amount of labor previously incorporated in the means of production. This latter portion of value will correspond to the constant capital of the capitalist economy; the portion of the new value expended upon the workers' means of subsistence will correspond to the variable capital; while the portion of the new value which remains will correspond to the surplus value, which will accrue to the laborer. Thus both the laborers receive equal values after the value of the invested ‘constant’ capital has been deducted; but the relationship between the portion of value representing surplus value and the value of the means of production—that which corresponds to the capitalist rate of profit—will differ in the respective cases.” (Hilferding 1949 [1904]: 162–163).

“With the further progress of capitalism, when production no longer took place mainly for the purposes of the mercantile exporter, and when the capitalist began to effect a conquest of the whole market, his profit was chiefly dependent upon the following factors: His technical methods of production were superior, so that he could produce more cheaply than the handicraftsmen. Since for the time being the market value of the handicraftsman’s products determined prices, the capitalist was able to realize extra surplus value or extra profit, which was greater in proportion as his technical superiority was more marked. For the most part, through special legal privileges, the exploitation of superior technical methods was a monopoly of individual capitalists. Not until the days of monopoly were over, not until the restrictions upon the transferability of capital had been abolished, not until the shackles of the laborer had been removed, was the equalization of the varying rates of profit, originally so divergent, rendered possible.

First of all, by the supplanting of handicraftsmanship and by the increase of competition within the sphere of capitalist production, the extra profit realizable by capital was reduced; and subsequently freedom of transference from one sphere of production to another effectuated the equalization of profit to become average profit.” (Hilferding 1949 [1904]: 171).

“As soon, however, as capitalist competition has definitively established the equal rate of profit, that rate becomes the starting point for the calculations of the capitalists in the investment of capital in newly-created branches of production. The prices here fluctuate on either side of that price of production whose attainment makes the particular branch of production appear profitable. At the same time, the capitalist goes halfway to meet competition, for he himself accepts average profit as a regulative principle, and the sole effect of competition is to prevent his deviating from the norm and from securing an above-average profit for any considerable period.

“It is obvious, moreover, that the formation of price in capitalist society must differ from the formation of price in social conditions based upon the simple production of commodities.” (Hilferding 1949 [1904]: 172).

So a considerable section of Hilferding’s essay (1949 [1904]: 162–172) was devoted to defending the idea that commodities did once tend to exchange at their true labour values in the pre-modern world, and so to vindicate the law of value in volume 1 of Capital.

Why was this the case? Because hostile critics like Böhm-Bawerk and Achille Loria rightly pointed out that Marx – apart from two obscure footnotes that blatantly and severely contradicted the main text – had said in volume 1 of Capital that commodities tend to exchange at labour values, and to any plain reader of the text stated and again and again that this was true for 19th century capitalism. For example, Marx stated explicitly his “laws of the exchange of commodities” in Chapter 5 of volume 1 of Capital:

“It is true, commodities may be sold at prices deviating from their values, but these deviations are to be considered as infractions of the laws of the exchange of commodities, which, in its normal state is an exchange of equivalents, consequently, no method for increasing value.” (Marx 1906: 176–177).

At least as late as 1878 in his work Herr Eugen Dühring’s Revolution in Science Engels also upheld Marx’s “laws of the exchange of commodities” in the sense above as applying to 19th century capitalism as we can see here.

But, when Engels edited and published the draft of volume 3 of Capital (a first draft of which had been written before 1867), the world was surprised to discover that Marx had used a different theory of price determination there by prices of production which totally contradicted the theory of price determination in volume 1. No wonder Marx never wanted to publish volumes 2 or 3 of Capital in his lifetime!

The essence of the problem had already been noted in Engels’ introduction to volume 2 of Capital in the transformation problem (see here).

Volume 1 of Capital seems to have been written by Marx as a tendentious work of Communist propaganda, to bolster the communist cause and with the emphasis on labour value. The theory of price determination there was very much a part of this dogmatism and propaganda, for in private Marx had sketched a price theory based on Classical prices of production in a letter to Engels of 2 August, 1862 (see here), although it is unclear how far he committed himself to it at this stage. Most probably Marx had different theories in his mind and seized on the most dogmatic for polemical purposes in volume 1.

Later, after the publication of volume 1 of Capital Marx seems to have tried very subtly to admit to Engels in a letter of 8 January, 1868 that the “law of value” in volume 1 was irrelevant to real world capitalism (see here), though perhaps Engels did not fully understand the import of this.

But, once Engels published volume 3, the inevitable happened: hostile critics of Marxism and even some sympathetic supporters of Marx pointed to this devastating contradiction between volumes 1 and 3.

Engels scrambled to re-write history and defend Marx: finally, in his “Supplement and Addendum” to Volume 3 of Capital published in 1895 Engels defended volume 1 by saying that the law of value there only applied to the pre-modern world of commodity exchange before prices of production came to dominate modern capitalism.

But that will not do: this was a dishonest and contemptible Marxist intellectual fraud by Engels; the two volumes of Capital were and are contradictory. It speaks volumes that at least a few Marxists continued to defend Engels’ legerdemain long after his death.

Even worse, what is really embarrassing is that many modern Marxists have totally forgotten this important episode in the history of their dogmatic theory. Instead, when confronted with the contradictions between volumes 1 and 3 of Capital, the laughable modern Marxist apologetic nonsense is that volume 1 of Capital is a purely abstract theory with simplifying assumptions not meant to be taken as an empirical theory (Baumol 1974: 53–54; Robinson 1950: 359). But even Joan Robinson noted that this is rubbish and will not do (Robinson 1950: 359). Marx had said specifically in volume 1 of Capital that, as he later put it, labour “value is the center of gravity around which prices fluctuate, and around which their rise and fall tends to an equilibrium” (Marx 1909: 208–210).

Joan Robinson also noted the absurdity of Engels’ later “historical” defence of Marx also used by Hilferding, Wilbrandt and Meek:

“The argument about how prices were determined in the pre-capitalist world is conducted in much the same style as the ‘bourgeois’ economists’ argument about how Robinson Crusoe equalised his marginal utilities, and is no more convincing. But even if it were true, it would not serve to rescue Marx from Böhm-Bawerk’s attack, for his [sc. Marx’s] so-called equation, ‘1 quarter of corn = x cwts of iron,’ was supposed to apply, not in an idyllic past, but in the contemporary capitalist market.” (Robinson 1950: 361; see also Robinson 1966: 15, n. 2).

This truth is still denied by many modern Marxists with their internecine and esoteric cults, all trying to interpret the Holy Writings of Marx and harmonise them in a manner so obviously evocative of religious fundamentalists attempting to harmonise the Bible.

BIBLIOGRAPHY
Baumol, William J. 1974. “The Transformation of Values: What Marx ‘Really’ Meant (An Interpretation),” Journal of Economic Literature 12.1: 51–62.

Böhm-Bawerk, Eugen von. 1949 [1896]. “Karl Marx and the Close of His System,” in Paul. M. Sweezy (ed.), Karl Marx and the Close of His System and Böhm-Bawerk’s Criticism of Marx. August M. Kelley, New York. 3–120.

Engels, F. 1991 [1895]. “Supplement and Addendum” to Volume 3 of Capital,” in Karl Marx, Capital. A Critique of Political Economy. Volume Three (trans. David Fernbach). Penguin Books, London.

Hilferding, Rudolf. 1949 [1904]. “Böhm-Bawerk’s Criticism of Marx,” in Paul. M. Sweezy (ed.), Karl Marx and the Close of His System and Böhm-Bawerk’s Criticism of Marx. August M. Kelley, New York. 121–196.

Marx, Karl. 1906. Capital. A Critique of Political Economy (vol. 1; rev. trans. by Ernest Untermann from 4th German edn.). The Modern Library, New York.

Marx, Karl. 1991. Capital. A Critique of Political Economy. Volume Three (trans. David Fernbach). Penguin Books, London.

Meek, Ronald L. 1973. Studies in the Labour Theory of Value (2nd edn.). Lawrence and Wishart, London.

Robinson, Joan. 1950. Review of Karl Marx and the Close of his System by Eugen von Böhm-Bawerk (ed. Paul Sweezy), The Economic Journal 60.238: 358–363.

Robinson, Joan. 1966. An Essay on Marxian Economics (2nd edn.; 1st edn. 1942). Macmillan, London.

Wilbrandt, Robert. 1920. Karl Marx: versuch einer Würdigung. B.G. Teubner, Leipzig.

Eugen von Böhm-Bawerk’s Critique of Marx: A Quick Summary

The Austrian economist Eugen von Böhm-Bawerk’s critique of Marx can be found in his essay “Zum Abschluss des Marxschen Systems” (1896), which is available in an English translation as “Karl Marx and the Close of His System” in Böhm-Bawerk (1949: 3–120).

Paul M. Sweezy summarises Böhm-Bawerk’s case against Marx:

“After a brief introduction, he devotes two chapters to setting out Marx’s theories of value, surplus value, average rate of profit, and price of production—‘for the sake of connection,’ as he says. On the basis of this exposition he concludes that Marx had not one but two theories of value (one in Volume I of Capital and another in Volume III) in Böhm-Bawerk’s sense of the term, that is, market exchange ratios. Moreover, according to Böhm-Bawerk, these two theories lead to different results, not occasionally or exceptionally but regularly and as a matter of principle. Hence, Böhm-Bawerk ‘cannot help himself’; he is forced to the conclusion that there is a contradiction between Volume I and Volume III of Capital. He next proceeds to analyze at length—more than a third of the whole critique is devoted to this—the arguments by which, according to Böhm-Bawerk, Marx seeks to prove that the contradiction is only apparent and that the theory of Volume I is valid, after all. Having disposed of these arguments one by one, Böhm-Bawerk is at last ready to deal with the heart of the matter, ‘the error in the Marxian system,’ for it is by now clear that error there must be. Naturally, he finds that the error lies in the fact that Marx started from the old-fashioned and exploded labor theory of value instead of pushing his way through to the new and scientifically correct subjective theory of value. This error ramifies throughout the system and vitiates it from top to bottom.” (Sweezy 1949: xiii–xiv).

Böhm-Bawerk was right that the theory of value in volume 3 of Capital contradicts that in volume 1. But Böhm-Bawerk was not the first to point this out at all. In actual fact, it was the Italian economist Achille Loria (1857–1943) – himself sympathetic to Marxism – who first pointed it out in an article of 1895 (Loria 1895), which was before Böhm-Bawerk’s essay of 1896.

Those on the left who from their own reading of Marx happen to hold the same opinion as Böhm-Bawerk – that Marx’s value theory in volume 1 of Capital is radically inconsistent with the value theory in volume 3 – are not endorsing Austrian economics or anything else Böhm-Bawerk said. It is pathetic to see Marxists trying to smear their opponents by using a blatant ad hominem argument here.

In fact, one need not accept anything else in Austrian economics to agree with Böhm-Bawerk on this point. One need not even accept that subjective value is the fundamental or only cause of exchange value/price to see that Böhm-Bawerk’s criticisms have some merit.

As Böhm-Bawerk (1949: 10–11) points out, it is obvious that in volume 1 of Capital Marx refers to labour value determining real individual exchange values, as a type of regulative law of exchange value, and this can be seen in Chapter 1 and in Chapter 3 in Marx’s analysis of money.

Even though conditions of supply and demand cause prices to deviate from their pure labour values, they are brought back to them in a kind of equilibrium process:

“The production of commodities must be fully developed before the scientific conviction emerges, from experience itself, that all the different kinds of private labour (which are carried on independently of each other; and yet, as spontaneously developed branches of the social division of labour, are in a situation of all-round dependence on each other) are continually being reduced to the quantitative proportions in which society requires them. The reason for this reduction is that in the midst of the accidental and ever-fluctuating exchange relations between the products, the labour-time socially necessary to produce them asserts itself as a regulative law of nature. In the same way, the law of gravity asserts itself when a person’s house collapses on top of him. The determination of the magnitude of value by labour-time is therefore a secret hidden under the apparent movements in the relative values of commodities.” (Marx 1982: 168).

“It is not money that renders commodities commensurable. Just the contrary. It is because all commodities, as values, are realised human labour, and therefore commensurable, that their values can be measured by one and the same special commodity, and the latter be converted into the common measure of their values, i.e., into money. Money as a measure of value, is the phenomenal form that must of necessity be assumed by that measure of value which is immanent in commodities, labour-time.” (Marx 1906: 106).

When Marx, for example, says that it is possible to accurately measure the value of skilled labour by looking at the exchange values of products of skilled labour as against products of unskilled labour (Marx 1906: 51–52), this makes no sense unless Marx really believes that commodities tend to exchange at pure labour values.

Furthermore, for Marx money must by necessity be a produced commodity with a labour value in order to even function as money, and commodity money like gold or silver, when it is initially brought to market, is exchanged with other commodities with an equal socially necessary labour time value as a barter transaction (Marx 1906: 122). And Marx thought that prices are determined by (at the least) (1) the long-run labour value of gold as determined by the abstract socially necessary labour time required for gold’s production and (2) as this labour value of gold relates in exchange to the labour value of other commodities (Marx 1906: 108) (on this, see here). Of course, these ideas, if taken seriously, require that the actual exchange value of gold as money against other commodities gravitates around the long-run value of the abstract socially necessary labour time needed to produce gold.

But in volume 3 Marx abandons the idea that individual exchange values tend to equal abstract socially-necessary labour time in his attempts to solve the transformation problem and in his acceptance that Classical prices of production are the long-run anchors for prices:

“To speak plainly his solution [sc. to the transformation problem] is obtained at the cost of the assumption from which Marx has hitherto started, that commodities exchange according to their values. This assumption Marx now simply drops.” (Böhm-Bawerk 1949: 21).

“And the actual exchange relation of the separate commodities is no longer determined by their values but by their prices of production; or as Marx likes to put it ‘the values change into prices of production’ (III, 231). Value and price of production are only exceptionally and accidentally coincident, namely, in those commodities which are produced by the aid of a capital, the organic composition of which chances to coincide exactly with the average composition of the whole social capital. In all other cases value and production price necessarily and in principle part company.” (Böhm-Bawerk 1949: 24).

But that radically contradicts what Marx said in volume 1 of Capital, and Böhm-Bawerk points to the paradox:

“‘Either products do actually exchange in the long run in proportion to the labor attaching to them—in which case an equalization of the gains of capital is impossible; or there is an equalization of the gains of capital—in which case it is impossible that products should continue to exchange in proportion to the labor attaching to them.’” (Böhm-Bawerk 1949: 28).

“I do not think that any one who examines the matter impartially and soberly can remain long in doubt. In the first volume it was maintained, with the greatest emphasis, that all value is based on labor and labor alone, and that values of commodities were in proportion to the working time necessary for their production. These propositions were deduced and distilled directly and exclusively from the exchange relations of commodities in which they were ‘immanent.’ We were directed ‘to start from the exchange value, and exchange relation of commodities, in order to come upon the track of the value concealed in them’ (I, 55). The value was declared to be ‘the common factor which appears in the exchange relation of commodities’ (I, 45). We were told, in the form and with the emphasis of a stringent syllogistic conclusion, allowing of no exception, that to set down two commodities as equivalents in exchange implied that ‘a common factor of the same magnitude’ existed in both, to which each of the two ‘must be reducible’ (I, 43). Apart, therefore, from temporary and occasional variations which ‘appear to be a breach of the law of the exchange of commodities’ (I, 177), commodities which embody the same amount of labor must on principle, in the long run, exchange for each other. And now in the third volume we are told briefly and dryly that what, according to the teaching of the first volume, must be, is not and never can be; that individual commodities do and must exchange with each other in a proportion different from that of the labor incorporated in them, and this not accidentally and temporarily, but of necessity and permanently.

I cannot help myself; I see here no explanation and reconciliation of a contradiction, but the bare contradiction itself. Marx’s third volume contradicts the first. The theory of the average rate of profit and of the prices of production cannot be reconciled with the theory of value. This is the impression which must, I believe, be received by every logical thinker.” (Böhm-Bawerk 1949: 29–30).

Many other critics of Marx have argued the same thing (Shove 1944: 48–49; Robinson 1966: 10, 14).

And, as Böhm-Bawerk noted, Marx attempted to solve this severe contradiction by certain arguments.

The most important of them was that, when the profit rate is equalised and stands at an average percentage of profit, prices above values and prices below values cancel out so that in the aggregate prices equal value (Böhm-Bawerk 1949: 32). But, given that labour value cannot even be properly defended in the first place, this is an absurd and empirically empty idea lacking any explanatory power.

Böhm-Bawerk knew this fundamental problem well: economists have no reason to accept the basic labour theory of value in the first place (Böhm-Bawerk 1949: 64–66).

That idea that exchange value fundamentally depends on quantities of labour expended in production of commodities is not “self-evident” (Böhm-Bawerk 1949: 65). That is, it is not some empirical proposition confirmed by convincing and clear evidence:

“Now it is certain that the exchange values, that is to say the prices of the commodities as well as the quantities of labor which are necessary for their reproduction, are real, external quantities, which on the whole it is quite possible to determine empirically. Obviously, therefore, Marx ought to have turned to experience for the proof of a proposition the correctness or incorrectness of which must be manifested in the facts of experience; or in other words, he should have given a purely empirical proof in support of a proposition adapted to a purely empirical proof. This, however, Marx does not do. And one cannot even say that he heedlessly passes by this possible and certainly proper source of knowledge and conviction. The reasoning of the third volume proves that he was quite aware of the nature of the empirical facts, and that they were opposed to his proposition. He knew that the prices of commodities were not in proportion to the amount of incorporated labor, but to the total cost of production, which comprises other elements besides. He did not therefore accidentally overlook this, the most natural proof of his proposition, but turned away from it with the full consciousness that upon this road no issue favourable to his theory could be obtained.” (Böhm-Bawerk 1949: 66).

There is no convincing empirical evidence that the labour theory of value is correct, and Marxists often reduce it to a mere tautologous analytic statement that is empirically-empty anyway.

The remaining parts of Böhm-Bawerk’s essay mostly focus on diminishing marginal utility theory as an alternative theory of value, but one simply does not need to accept this to see the merits of Böhm-Bawerk’s critique as sketched above.

BIBLIOGRAPHY
Böhm-Bawerk, Eugen von. 1949. “Karl Marx and the Close of His System,” in Paul. M. Sweezy (ed.), Karl Marx and the Close of His System and Böhm-Bawerk’s Criticism of Marx. August M. Kelley, New York. 3–120.

Loria, Achille. 1895. “L’opera postuma di Carlo Marx,” Nuova Antologia di Scienze 55.3 (February): 460–496.

Loria, Achille. 1920. Karl Marx. (trans. Eden and Cedar Paul), George Allen and Unwin Ltd., London.

Marx, Karl. 1906. Capital. A Critique of Political Economy (vol. 1; trans. Samuel Moore and Edward Aveling from 3rd German edn.; rev. from 4th German edn. by Ernest Untermann). The Modern Library, New York.

Marx, Karl. 1982. Capital. Volume One. A Critique of Political Economy (trans. Ben Fowkes). Penguin Books, Harmondsworth, England.

Robinson, Joan. 1966. An Essay on Marxian Economics (2nd edn.). Macmillan, London.

Shove, Gerald F. 1944. “Mrs. Robinson on Marxian Economics,” The Economic Journal 54.213: 47–61.

Sweezy, Paul. M. 1949. “Editor’s Introduction,” in Paul. M. Sweezy (ed.), Karl Marx and the Close of His System and Böhm-Bawerk’s Criticism of Marx. August M. Kelley, New York. v–xxx.