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).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.
“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).
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).But that radically contradicts what Marx said in volume 1 of Capital, and Böhm-Bawerk points to the paradox:
“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).
“‘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).Many other critics of Marx have argued the same thing (Shove 1944: 48–49; Robinson 1966: 10, 14).
“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).
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.
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.