George Bernard Shaw finds one of two crucial mistakes in Karl Marx; George Stigler finds the other.
One of the late George Stigler’s many contributions to economics, one that was not recognized by the Nobel Committee when it made its award in 1982, but that I briefly recognized in my bio of him in The Concise Encyclopedia of Economics, was his work on the history of economic thought. He did this relatively early in his career, but it’s some of his best work.
Here’s a lengthy quote from his 1959 piece “Bernard Shaw, Sidney Webb and the Theory of Fabian Socialism,” reprinted in Kurt R. Leube and Thomas Gale Moore, The Essence of Stigler:
The criticisms of Henry George by English Marxists drove Shaw to the French edition of Volume 1 of Das Kapital. He was captivated without being persuaded of the validity of all its economic theory. These doubts spilled into print in a letter to a weekly, Justice, entitled “Who Is the Thief?” It is a tribute to Shaw’s penetration that he had found for himself a crucial flaw in Marx’s labor theory of value.
Marx’s central argument was that the capitalists, by their control over capital equipment and the means of subsistence, forced a worker who added ten shillings of value to ten shillings of material, to work for only three shillings (his assumed subsistence requirement), yielding up seven shillings of surplus value.
[This is Shaw.] But mark what must ensue. Some rival capitalist, trading in tables on the same principle, will content himself with six shillings profit for the sake of attracting custom. He will sell the table for nineteen shillings; that is, he will allow the purchaser one shilling out of his profit as a bribe to secure his custom. The first capitalist will thus be compelled to lower his price to nineteen shillings also, and presently the competition of brisk young traders, believing in small profits and quick returns, will bring the price of tables down to thirteen shillings and sixpence.
[Back to Stigler.] But if the worker is being robbed of seven shillings, then the purchaser is committing thirteen-fourteenths of the theft–every English consumer is the thief. The criticism received no reply.
The assumptions of competition and of surplus value are indeed incompatible, and even today I would like to amend Shaw’s argument in only two respects. The competition of capitalists would also take place in the labor market, and force wages up. And, secondly, the customer-thieves are, of course, chiefly the workmen and their families.
READER COMMENTS
Philo
Jan 1 2017 at 1:02pm
Of course, in buying the product for 13 shillings sixpence the customer is “thieving” only on the assumption that twenty shillings is the “just price,” which itself is based on the assumption that ten shillings per item is the “just wage.” But on what is this latter assumption based?
David R. Henderson
Jan 1 2017 at 1:46pm
@Philo,
Of course, in buying the product for 13 shillings sixpence the customer is “thieving” only on the assumption that twenty shillings is the “just price,” which itself is based on the assumption that ten shillings per item is the “just wage.”
True.
But on what is this latter assumption based?
This part from the Stigler quote: “a worker who added ten shillings of value to ten shillings of material”
James
Jan 1 2017 at 4:01pm
Shaw and Stigler’s arguments make sense as they pertain to voluntary transactions.
Are there any Marxian economists with the intellectual honesty to apply their framework to coerced transactions such as those in which the government is a party?
For example, suppose I am self employed so that I receive the full value of my labor from my sales. I am taxed at a rate of 20%. Each week in order to keep the wages of 40 hours, I must work for 50 hours and surrender the wages of 10 hours to the state. If any part of the money I pay in taxes is used to fund transfer payments, the services provided to me by the state with the remainder must require less than 10 hours of wages to produce, in which case then the state is exploiting me.
Dan Hill
Jan 1 2017 at 4:31pm
It’s the same class of error “progressives” make when they complain about big box stores coming to town (I live in a small town where I here this nonsense all the time).
It isn’t Walmart that drives the local “mom and pop” store out of business, it’s the consumers choosing to shop where they get a better deal – i.e. capture the surplus (cue the stock explanation of predatory pricing, because we all know the first thing Walmart does once they send their competitors under is raise their prices. Well, any day now…)
Philo
Jan 1 2017 at 10:12pm
In our scenario workers produce the items, using 10 shillings of material for each item.
Period 1: a customer buys one item for 20 shillings, ergo the worker added 10 shillings of value. The worker is paid 3 shillings, the capitalist appropriates 7 shillings.
Period 2: a customer buys an item for 19 shillings (perhaps from a competing capitalist employing a competing worker). It would seem that this worker added only 9 shillings of value, for which he was paid 3 shillings while the capitalist appropriates only 6; as before, the customer is guiltless. If you want to insist that the worker actually added 10 shillings of value, the capitalist and the customer splitting the appropriated 7 shillings 6 to one, don’t you have to maintain that even though 19 shillings was the selling price, 20 shillings was the just price?
Period 3: a customer buys an item for 13 shillings sixpence (perhaps from still another competing capitalist employing still another worker). Now it seems that the worker added only 3 shillings sixpence of value, of which the capitalist appropriated only sixpence (as before, the customer is guiltless). But, again, if (and only if) the just price was 20 shillings, the customer is guilty of appropriating 6 shillings sixpence that should have gone to the worker.
(By the way, does Shaw think that competition will drive the capitalist’s appropriation down no further than to sixpence? Why not to zero, or to just infinitesimally more than zero? If sixpence profit on an investment of 13 shillings really is the limit (with an elapsed time between investment and sale of one year, this would imply a “normal profit” of just under 4% per annum), is it morally all right for the capitalist to take this normal profit, or would that still be stealing/”appropriating”?)
In sum, if the true value–the just price–is the selling price, the customer is guiltless. To accuse him of stealing from the worker, we need to embrace just-price theory.
Thaomas
Jan 2 2017 at 8:07am
So this leaves open the possibility that Marx may indeed apply in a case in which the entire economy is not perfectly competitive (= operating at zero profit). The State should own all the means of production in which perfect competition does not apply? A pretty weak defense, I’d say. I prefer the Neo-Liberal stance of letting markets work as the will (excepting market failures) and taxing the “surplus value” for redistribution and purchase of collective consumption.
Swimmy
Jan 2 2017 at 5:27pm
@Philo:
You’re right, the model as-is doesn’t make sense. If you want to keep worker contribution constant, you also need product quantity. And as Stigler pointed out, if you’re adding firms, you can’t keep quantity/price of workers constant either.
But the central argument is still correct. Here’s my shortened understanding:
“If producer surplus is exploitation, so must be consumer surplus, because under Marx’s assumptions they come from the same place.”
Seth
Jan 3 2017 at 10:26am
“Marx’s central argument was that the capitalists, by their control over capital equipment and the means of subsistence, forced a worker…”
I don’t think they even had to get into the nuts and bolts of the 10 schillings of added value. Why not first explore the tortured use of the words “control” and “forced”.
Matthew Opitz
Jan 6 2017 at 3:39pm
I also don’t quite understand the argument against Marx being made here, seeing as how it seems to depend on an assumption that the “real” “just” value of the item is its value in some hypothetically pre-competitive situation. The price of a commodity, after adjusting for competition, just is what the price is. If a competitor undercuts with a lower price, that new price is no less the “real” price of the item as the previous one. Both are instances of spot-prices groping towards a market price that corresponds with the price of production: a price for an item that includes the cost of production and an average rate of profit needed by society to call forth a given level of production of the item. (And that price of production will, in turn, fluctuate over time according to labor values as the technical conditions of production of that item change, requiring less labor time to create the inputs, and as the average rate of profit changes).
Marx always assumed (as per the classical economists) that there was competition and that differential rates of profit per time period would equalize through investors noticing industries with higher rates of profit and increasing investment in those, driving up supply and increasing the competition among sellers to drive the price of the commodity back down to where its producers on average obtained merely an average rate of profit.
As for why the rate of profit doesn’t get competed down to zero (which I think this excerpt of Shaw’s might be haphazardly groping towards), the answer is that it would take a large number of self-sacrificing capitalists to make that happen. Let’s say the average rate of profit at a given time is 30%, which a capitalist could get by selling an item that cost $7 in materials and $3 in labor for $13. What incentive would a capitalist have for cutting the price to $11 or $10 when there are plenty of other opportunities to make at least the average rate of profit? And if the average rate of profit were itself close to zero, then capitalists would have no incentive to take the risk of investment and would be misers with their money, hoarding it in the form of some asset that would not depreciate, which nowadays would not be dollars, but most likely gold.
As for explaining what determines the exact level of this (non-zero) rate of profit, that’s a whole other can of worms….
But, in any case, I don’t see where the consumer gets “bribed” in any case. If the consumer pays $15 for an item, then the “real” price in that case is $15. As for whether that price is sustainable or not depends on where it is in relation to a price that would yield an average rate of profit. Maybe a silly capitalist cuts the price to $10 temporarily, and notices that he/she is not making any profit. In that case, the consumer of that particular capitalist’s product is getting lucky for a brief period of time. The situation cannot last. I would not call this a “bribe.”
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