Lesson 6 of 7
The argument with Marx
Bohm-Bawerk's case against Marx is narrow: the law of value and an equal rate of profit cannot both hold. It is why he is read outside this school.
By Javier Sanz
Founder of ValueScreener. Built Ninety Nine, a securities services provider, and sold it to a tier-one global bank; ran operations and internationalization at Alpaca, the brokerage API.
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In one minute
- The objection is not political. It is that two claims in Marx's own system cannot both be true: goods exchange in proportion to labour, and capital earns the same rate of profit across industries.
- Marx saw the problem and answered it by letting prices diverge from values while the totals still match. Bohm-Bawerk argues the answer changes the subject.
- His second objection is about method: the argument that labour must be the common element in exchange is assumed rather than established.
Bohm-Bawerk spent a book of Capital and Interest on the exploitation account of interest and then, in 1896, wrote a short book specifically about Marx. That book appeared in English in 1898 as Karl Marx and the Close of His System, translated by Macdonald, and it is the most widely read thing he wrote.
The two claims, and why they collide
The law of value
- Goods exchange in proportion to labour embodied in them.
- Only labour creates new value; machinery transfers old value.
- So an industry using more labour per dollar of capital generates more surplus.
- Profit rates should therefore differ by industry.
What competition does
- Capital moves out of low-return industries and into high ones.
- Returns are pushed toward a common rate.
- A heavily mechanised industry earns roughly what a labour-intensive one does.
- Profit rates therefore do not differ that way.
If capital earns the same rate everywhere, goods cannot be exchanging in proportion to labour.
The contradiction, and Marx's answer to it
Marx did not miss this. The third volume of Capital introduces prices of production: surplus value is treated as pooled across the whole of social capital and shared out so that each capital earns an average rate, which means goods sell above or below their labour values.
Bohm-Bawerk sets Marx's own defences out in chapter III of the 1898 book and answers each. The defence that individual deviations cancel so that total prices equal total values, he argues, gives up what a theory of value is for, which is explaining the ratio at which two particular goods exchange; an aggregate identity of that kind would equally confirm almost any principle you picked. The defence that labour governs the movement of prices, he answers, shows at most that labour is one influence among several, which is not the exclusivity the law claims. The historical defence, that goods did exchange at values before capitalist production, he treats as resting on claims about early exchange that cannot be checked. And the defence that labour governs prices indirectly through the total of surplus value he treats as restating the problem.
The second objection, about method
Chapter IV is about how the law was arrived at in the first place. Marx's route is to strip away everything two exchanged goods do not share until one common element is left, and to identify that element as abstract labour.
Bohm-Bawerk's reply is that nothing in the exchange relation forces labour to be the residue. The step assumes that equivalence in exchange requires a shared substance, and then selects which substance without argument. On his account the conclusion is put in at the start rather than derived.
What the argument does and does not settle
It is aimed at one system, and it is technical. It does not address whether workers are treated badly, whether firms have power over wages, or any political question, and this lesson takes no position on any of those either.
What it did do is make the gap between volume one and volume three a standing problem in economics, argued over by Marxist economists ever since. That is the honest description: not a demolition, a problem that has had a literature of replies.
Check yourself
What is the contradiction Bohm-Bawerk presses?
- That Marx's arithmetic is wrong
- That goods exchanging in proportion to labour and capital earning an equal rate cannot both hold
- That surplus value cannot be measured
Show the answer
Answer: B.
Marx states both, and the third volume of Capital is his attempt to reconcile them by letting prices of production diverge from values.What is his answer to the defence that total prices equal total values?
- That the totals do not in fact match
- That a theory of value exists to explain particular exchange ratios, so an aggregate identity does not do its job
- That aggregates cannot be computed
Show the answer
Answer: B.
Chapter III argues the aggregate claim would equally confirm almost any principle, and so establishes nothing about the ratio at which two particular goods exchange.What is his objection to how the law of value was derived?
- That Marx used the wrong statistics
- That the argument assumes exchange requires a common substance and then selects labour without establishing it
- That labour cannot be measured in hours
Show the answer
Answer: B.
Chapter IV treats the step as one where the conclusion is put in at the beginning rather than derived from the exchange relation.Sources
- Bohm-Bawerk, Karl Marx and the Close of His System, 1896, English translation by Macdonald 1898, chapter I on value and surplus value, chapter II on the average rate of profit and prices of production, chapter III on the question of the contradiction and Marx's four defences, and chapter IV on the origin of the error.
- Bohm-Bawerk, Capital and Interest, German original 1884, English translation by Smart 1890, Book II, chapter I on the productivity theories, and the later book of that work devoted to the exploitation theory.
What this leaves out
- This is a heterodox tradition. The mainstream account of the same phenomenon differs, and nothing here is a forecast or a view on any security.
- The two firms are invented round figures used to show the shape of the problem. They describe no company.
- Marxist economists have answered this argument for more than a century, including through reformulations of the transformation between values and prices. Those replies are not summarised here, and this lesson does not claim the dispute is closed.