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  • We’re Still Haunted by the Labor Theory of Value

    Posted on by Azrael Comment

    Why are so many students convinced that they should receive better grades for the papers they’ve spent so much time writing? It’s not a belief about the quality of those papers; it’s a belief about the hours and hours spent working on them.

    This fundamental misunderstanding about the value of labor is at the center of the Marxist critique of capitalism.

    The Center of Everything

    For thousands of years, humans were sure that the earth was the center of the universe and the sun revolved around it. With the advent of systematic inquiry, scientists had to develop more and more complex explanations for why their observations of the universe did not fit with that hypothesis. When Copernicus and others offered an alternative explanation that was able to explain the observed facts, and did so more clearly and concisely, the heliocentric model triumphed. The Copernican revolution changed science forever.

    There is a similar story in economics. For hundreds of years, many economists believed that the value of a good depended on the cost of producing it. In particular, many subscribed to the labor theory of value, which argued that a good’s value derived from the amount of work that went into making it.

    Much like the geocentric view of the universe, the labor theory of value had some superficial plausibility, as it does often seem that goods that involve more labor have more value. However, much like the story in astronomy, the theory got increasingly complicated as it tried to explain away some obvious objections. Starting in the 1870s, economics had its own version of the Copernican revolution as the subjective theory of value became the preferred explanation for the value of goods and services.

    Today, the labor theory of value has only a minuscule number of adherents among professional economists, but it remains all too common in other academic disciplines when they discuss economic issues, as well as among the general public. (The labor theory of grades is, as I noted above, particularly popular among college students.)

    The Specter of Karl Marx (and Adam Smith)

    One reason the theory is still the implicit explanation of value in many other disciplines is because they rely on the theory’s most famous adherent for their understanding of economics: Karl Marx. Marx was hardly the only economist to hold this view, nor is the labor theory of value unique to socialists. Adam Smith believed in a somewhat weaker version of the theory as well.

    Without the labor theory of value, it is not clear how much of Marx’s critique of capitalism remains valid.

    For Marx, the theory was at the center of his view of the problems of capitalism. The argument that capitalism exploited workers depended crucially on the view that labor was the source of all value and that the profits of capitalists were therefore “taken” from workers who deserved it. Marx’s concept of alienation focused on the centrality of labor to making us human and the ways in which capitalism destroyed our ability to take joy in our work and control the conditions under which we created value. Without the labor theory of value, it is not clear how much of Marx’s critique of capitalism remains valid.

    Part of the problem for Marx and others who accepted the theory was that there were so many seemingly obvious objections that they had to construct complex explanations to account for them. What about the value of land or other natural resources? What about great works of art that were produced with a small amount of labor but fetched extremely high prices? What about differences in individuals’ skill levels, which meant that there would be different amounts of time required to produce the same good?

    The classical economists, including Marx, offered explanations for all of these apparent exceptions, but, like the increasingly complex explanations of the geocentricists, they began to feel ad hoc and left people searching for a better answer.

    The Austrian Revolution

    In economics, that answer came when, much like Copernicus, several economists realized that the old explanation was precisely backward. This point was clearest in the work of Carl Menger, whose Principles of Economics not only offered a new explanation for the nature of economic value but also founded the Austrian school of economics in the process.

    What Menger and others argued was that value is subjective. That is, the value of a good is not determined by the physical inputs, including labor, that helped to create it. Instead, the value of a good emerges from human perceptions of its usefulness for the particular ends that people had at a particular point in time. Value is not something objective and transcendent. It is a function of the role that an object plays as a means toward the ends that are part of human purposes and plans.

    Thus, according to the subjectivists, land had value not because of the labor that went into tilling it, but because people believed that it could contribute to the satisfaction of some direct want of their own (such as growing crops to eat) or that it would contribute indirectly to other ends by being used to grow crops to sell at the market. Works of art had value because many people found them to be beautiful no matter how much or how little labor went into producing them. With value being determined by human judgments of usefulness, the variations in the quality of labor posed no trouble for explaining value.

    Indeed, economic value was a completely separate category from other forms of value, such as scientific value. That’s why people pay money to have someone give them a complete horoscope reading even though astrology has no scientific value whatsoever. What matters for understanding economic value is the perception of usefulness in pursuit of human purposes and plans, not some “objective” value of the good or service.

    Turning Marx Upside Down

    But the real Copernican revolution in economics was how the subjective theory of value related to the value of labor. Rather than seeing the value of outputs being determined by the value of the inputs like labor, the subjective theory of value showed that it’s the other way around: the value of inputs like labor were determined by the value of the outputs they helped to produce.

    The high market value of well-prepared food is not the result of the value of the chef’s labor. Rather, the chef’s labor is valuable precisely because he is able to produce food that the public finds especially tasty, beautiful, or healthy.

    On this view, labor gets rewarded according to its ability to produce things that others value. When you then consider the ways in which labor combining with capital enables that labor to produce goods that humans value even more, which in turn increases labor’s remuneration, Marx’s whole worldview is suddenly turned on its head. Capital does not exploit labor. Instead, it enhances labor’s value by giving labor the tools it needs to make even more of the things that humans value.

    Source: We’re Still Haunted by the Labor Theory of Value


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  • The War against Cash, Part II

    Posted on by Azrael Comment
    By DANIEL J. MITCHELL

    I wrote yesterday that governments want to eliminate cash in order to make it easier to squeeze more money from taxpayers.

    But that’s not the only reason why politicians are interested in banning paper money and coins.

    They also are worried that paper money inhibits the government’s ability to “stimulate” the economy with artificially low interest rates. Simply stated, they’ve already pushed interest rates close to zero and haven’t gotten the desired effect of more growth, so the thinking in official circles is that if you could implement negative interest rates, people could be pushed to be good little Keynesians because any money they have in their accounts would be losing value.

    I’m not joking.

    Here’s some of what Kenneth Rogoff, a professor at Harvard and a former economist at the International Monetary Fund, wrote for the U.K.-based Financial Times.

    Getting rid of physical currency and replacing it with electronic money would…eliminate the zero bound on policy interest rates that has handcuffed central banks since the financial crisis. At present, if central banks try setting rates too far below zero, people will start bailing out into cash.

    And here are some passages from an editorial that also was published in the FT.

    …authorities would do well to consider the arguments for phasing out their use as another “barbarous relic”…even a little physical currency can cause a lot of distortion to the economic system. The existence of cash — a bearer instrument with a zero interest rate — limits central banks’ ability to stimulate a depressed economy.

    Meanwhile, Bloomberg reports that the Willem Buiter of Citi (the same guy who endorsed military attacks on low-tax jurisdictions) supports the elimination of cash.

    Citi’s Willem Buiter looks at this problem, which is known as the effective lower bound (ELB) on nominal interest rates. …the ELB only exists at all due to the existence of cash, which is a bearer instrument that pays zero nominal rates. Why have your money on deposit at a negative rate that reduces your wealth when you can have it in cash and suffer no reduction? Cash therefore gives people an easy and effective way of avoiding negative nominal rates. …Buiter’s solution to cash’s ability to allow people to avoid negative deposit rates is to abolish cash altogether.

    So are they right? Should cash be abolished so central bankers and governments have more power to manipulate the economy?

    There’s a lot of opposition from very sensible people, particularly in the United Kingdom where the idea of banning cash is viewed as a more serious threat.

    Allister Heath of the U.K.-based Telegraph worries that governments would engage in more mischief if a nation got rid of cash.

    Many of our leading figures are preparing to give up on sound money. The intervention I’m most concerned about is Bank of England chief economist Andrew Haldane’s call for a 4pc inflation target, as well as his desire to abolish cash, embrace a purely electronic currency and thus make it easier for the Bank to impose substantially negative interest rates… Imagine that banks imposed -4pc interest rates on savings today: everybody would pull cash out and stuff it under their mattresses. But if all cash were digital, they would be trapped and forced to hand over their money. …all spending would become subject to the surveillance state, dramatically eroding individual liberty. …Money is already too loose – turning on the taps would merely further fuel bubbles at home and abroad.

    Also writing for the Telegraph, Matthew Lynn expresses reservations about this trend.

    As for negative interest rates, do we really want those? Or have we concluded that central bankers are doing more harm than good with their attempts to manipulate the economy? …a banknote is an incredibly efficient way to handle small transactions. It is costless, immediate, flexible, no one ever needs a password, it can’t be hacked, and the system doesn’t ever crash. More importantly, cash is about freedom. There are surely limits to the control over society we wish to hand over to governments and central banks? You don’t need to be a fully paid-up libertarian to question whether…we really want the banks and the state to know every single detail of what we are spending our money on and where. It is easy to surrender that freedom – but it will be a lot harder to get back.

    Merryn Somerset Webb, a business writer from the U.K., is properly concerned about the economic implications of a society with no cash.

    …at the beginning of the financial crisis, there was much talk about financial repression — the ways in which policymakers would seek to control the use of our money to deal with out-of-control public debt. …We’ve seen capital controls in the periphery of the eurozone… Interest rates everywhere have been at or below inflation for seven years — and negative interest rates are now snaking their nasty way around Europe… This makes debt interest cheap for governments…and it and forces once-prudent savers to move their money into the kind of risky assets that are supposed to drive growth (and tax receipts).

    Amen. She’s right that low interest rates are good news for governments and not very good news for people in the productive sector.

    Last but not least, Chris Giles wrote a column for the FT and made one final point that is very much worth sharing.

    Mr Haldane’s proposal to ban cash has all the hallmarks of a public official confusing what is convenient for the central bank with what is in the public interest.

    Especially since the central bankers are probably undermining long-run economic prosperity with short-run tinkering.

    Moreover, the option to engage in Keynesian monetary policy also gives politicians an excuse to avoid the reforms that actually would boost economic performance. Indeed, it’s quite likely that an easy-money policy exacerbates the problems caused by bad fiscal and regulatory policy.

    Let’s conclude by noting that maybe the right approach isn’t to give politicians and central bankers more control over money, but rather to reduce government’s control over money. That’s one of the arguments I made in this video I narrated for the Center for Freedom and Prosperity.

    Source: The War against Cash, Part II


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  • After Five Years Of Obamanomics, A Record 100 Million Americans Not Working

    Posted on by Azrael 1 Comment

    The Bureau of Labor Statistics (BLS) jobs report for December counted 74,000 jobs created last month. That was less than half the 200,000 new jobs expected.

    Nevertheless, the BLS reported those 74,000 new jobs as reducing at least what it calls the U3 unemployment rate by three tenths of a percentage point, from 7.0% to 6.7%. That was because 347,000 workers fled the work force altogether last month, and so were no longer counted as unemployed.

    Those 347,000 workers leaving the workforce altogether were almost 5 times (4.689) the 74,000 new jobs created. But the BLS, and the New York Times, still count that as headline unemployment plummeting on net to 6.7% from 7.0%. In fact, all of the decline in the U3 headline unemployment rate since President Obama entered office has been due to workers leaving the work force, and therefore no longer counted as unemployed, rather than to new jobs created.
    Those 347,000 for December, 2013, however, are still out there not working, and suffering. Indeed, they joined a near record of more than 102 million Americans not working in December, all still out there and suffering without jobs. Those 102 million Americans are the human face of an employment-population ratio stuck at a pitiful 58.6%. In fact, more than 100 million Americans were not working in Obama’s workers’ paradise for all of 2013 and 2012.
    The 102.159 million Americans not working in December is not the all-time record of Americans not working. That all-time record was set in October, 2013, at 102.896 million. The employment-population ratio that month was an even more pitiful 58.2%.

    That was the lowest in 30 years, all the way back to 1983, the first year of the recovery from Reagan’s recession, which finally slayed the historic double digit inflation of the 1970s. The employment-population ratio of 57.9% in 1983 was up by the fifth year of Reagan’s recovery to 61.5%, on its way to 63.0% in 1989. That represented an increase of 17 million jobs since that recession started in July, 1981.

    But that was when America was following pro-growth economic policies. Today we have President Obama emphasizing equality rather than growth, and after 5 years of Obama as President, we still have not recovered all of the jobs lost since the recession began in 2007. When the recession began in December, 2007, the economy was employing 146.273 million Americans. Today, after 5 years of Obamanomics, in December, 2013 the number of Americans employed was still only 144.586 million, about 1.7 million fewer jobs.

    President Obama is not the only President to be challenged by a recession while in office. Since the Great Depression, there have been 10 other recessions before this last one. On average, all the jobs lost in those recessions were recovered within two years after the recession started, as reflected in the official historical data, which is well presented on the website of the Federal Reserve Bank of Minneapolis. But here we are today under President Obama, more than 6 years after the recession started, and we still have not recovered all of the lost jobs!

    Moreover, Obama apologists cannot say that Obama’s recovery from the recession is so bad because the recession was so bad. The historical record for the American economy has always been the worse the recession, the stronger the recovery. America has forgotten that experience, because Reaganomics produced 25 years of steady, often booming growth, from 1982 to 2007, with only two, short, shallow recessions. But under every other President in U.S. history, going back for well over a century at least, the economy was in a booming recovery within 5 years as President Obama has had, even under Franklin Roosevelt during the Great Depression!

    Today’s economic reality is better represented by what the BLS calls the U6 unemployment rate. That rate includes discouraged workers who have given up looking for a job in the past 4 weeks, and others the BLS considers marginally attached to the work force. It also includes involuntary part time workers who want a full time job but could only find part time work. That U6 unemployment rate was 13.1% in December.

    But the full reality is best understood by recognizing that over the past 8 years the U.S. working age population has increased by 19.3 million, but the number of jobs in America has grown by only 1.8 million during that time. That is what never recovering from the recession means in the real world.

    Source: After Five Years Of Obamanomics, A Record 100 Million Americans Not Working


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