The Man Who Answered Marx; D. Lipton

The Man Who Answered Marx Bohm-Bawerk DEAN LIPTON IT IS A SAFE BET that for every million persons who have heard of Karl Marx not more than one or two can recall the name of Eugen von· Bohm-Bawerk. In a major sense, this is unfortunate, for Bohm-Bawerk was the man who answered Marx. Nevertheless, it is quite under standable. Marx was primarily a propagandist, a polemicist, a gifted sloganizer. His life .story from. the time he was the editor of a radical newspaper in Germany to the years he struggled for con trol of the First International was the deliberate attempt to sway Mr. Lipton of San Francisco has been a news paperman and Army Historian and his ar ticles have appeared in numerous magazines. the minds of men. He was a poli tician in the guise of journalist, philosopher, and economic thinker. About all this, Bohm-Bawerk could not have cared less. He was the dedicated scientist searching for truth. He refined economic ideas· and· concepts in a way that few others ever had or could.

Where Marx borrowed heavily and uncritically "- from any past economist whose ideas could help him prove a point, Bohm-Bawerk would cut away at their falsity, never concerned with anything except arriving at the core of es sential truth. It was, of course, only natural that he would eventually clash with the ideas promoted by Karl 597 598 THE FREEMAN October Marx. They were starting their ascendant curve during the time Bohm-Bawerk was growing into manhood and beginning to think about the shape of the world, and the principles upon which human freedom and prosperity were based. Two Lines of Thought Eugen von Bohm-Bawerk was born in 1851. Three years earlier Marx (and his collaborator, Fried rich Engels) had published The Communist Manifesto containing the ringing declaration: "WORK ERS OF THE WORLD UNITE! YOUHA VE NOTHING TO LOSE BUT YOUR CHAINS." In 1867, when Bohm-Bawerk was just six teen, there appeared the first vol ume ofDas Kapital, the book which •was to become the bible of so-called scientific or modern so cialism.

Many of the young European intellectuals were swayed·by Marx ist .. ideas, but there is no record that Bohm-Bawerk ever was. In part, this was probably due to his teacher and mentor, the famous Carl Menger, who among other things formulated the important theory of marginal utility. At first, Bohm-Bawerk was only one of a group of brilliant, young economists gathered loosely around Menger, originating the renowned "Austrian" school of economics. But, in time, he surpassed them all, becoming the master, the man whose work left the greatest im pact. Historically, he and the other "Austrian" economists performed two important and vital functions. First, they .made corrections in the inaccuracies they saw in the work of the "Classical" econo mists, even daring to take on such masters of the past as Adam Smith and· David Ricardo.· Sec ondly, they were the main econom ic critics of Marx andhisfol lowers in the closing years .of ·the nineteenth century and the open ing years of this one.

There was another curious par adox between Karl Marx and Eugen von Bohm-Bawerk which should be mentioned. The polit ically-minded Marx never held public office. He was unable even to hold all of his followers, all the men who thought in •a gen eral way like him, together in the one enclave he knew was necessary for the quick seizure of power. Proudhon quarreled with the Marxists during the volatile days of the Paris Commune. The Marx ists expelled Bakunin from· the International. Lassalle broke with Marx to form his own Socialist party. The nonpolitical Bohm-Bawerk was appointed Minister of Finance in three different Austrian cabi nets (1895, 1897-98, and 1900-04.) 1967 THE MAN WHO ANSWERED MARX 599 But in each instance it was the·of flee seeking the tnan.Bohm-Baw erk had no political ambitions, but the political leaders of the Austria of his time knew that he had no peers in the fields of economics and finance. The post he enjoyed most was the· one he held for a long ·time as Honorary Professor of Political Economy at the Uni versity of Vienna.

Capital. and Interest Even if Bohm-Bawerk had not exposed the Marxist fallacies, his work would have had lasting sig nificance. He was among the first to explore the complicated· laby rinth of price fluctuations. Al though many have tried, no one has successfully .supplanted his two theories of interest. Here, it is only fair to point out that both were hinted at by Nassau William Senior, an English economist, in 1836. However, Senior had left them in an unfinished state, and it was Bohm-Bawerk's work which pointed up their importance. In the abstinence theory, he demonstrated that interest was compensation for the postpone mentor waiting for thesatisfac tion of a person's wants. While this idea may seem commonplace today, it wasn't in Bohm-Bawerk's time. His second theory dealt with the importance of interest to the productive process. He insisted that it was the most efficient way to secure capital investments, stat;..

ing that even a socialist .state would have· to make use of it, or some equivalent,if it were to sur vive "economically.The experiences of Soviet Russia in the years im mediately following the Russian Revolution proved· him right. In 1894, the final two volumes of Marx's Das Kapital were pub lished posthumously. They had been edited from··Marx's· notes by his long-time associate,Friedrich Engels, and we, of course,have no way·· of knowing how different they might have been if Marx had lived to do his own editing. How ever, the chances are reasonably good that the two versions would not have differed in any signifi cant· respect. Marx and Engels were intellectual twins. A com mon thread running through all of their ideas was the "exploita tion of labor." According to them, every economic process ofa free society was designed to exploit the workingman. With his usual logical thorough ness, Bohm-Bawerkdisposed of this argument in whatever Marx ist theory it occurred. Marx ar gued that interest was derived only by exploiting labor. Bohm Bawerk answered this contention by pointing out that if .interest were the just compensation for saving ashe conclusively proved 600 THE FREEMAN October in his ~bstinence theory, and ab solutely essential to the productive processes of a modern industrial nation, it could not be exploitative in the Marxist sense.

Another sample of Marxist rea soning was, that all the profits of the entrepreneur and, the capital ist were "surplus value" created bylabor. Iflab9r had not been ex ploited, there would be no profit. The corollary to this, of course, was that alJ' so-call~d "surplus value" should be returned to the worker. Bohm-Bawerk, p<?inted out that as long as a maj or part of "su,r plus value" was re-invest'ed in ,a nation's industrial capacity - ~nd not used to satisfy the capitalist's or entrepreneur's, personal wants it went ,back to the people in an ever-rising standard of living. In another one of his uncanny predic tions, he foretold that under so cialism "surplus value" would not be returned to labor, any more than it was under capitalism. If it were, the socialist nation ,would lack the means to build or main tain an industrial economy. Again the •experiences of both Soviet Russia and Communist China proved him right. In f~ct, both Russia and China expriQpriated so much of the worker's product that millions of people" were deliber ately starved, so that rapid in dustrialization could be achieved.

Labor Theory of Value Exposed But it was on the Marxist La borTheory of Value, that Bo!J.m Baw.erk turned the" full force of his powerful mind. The idea that labor "created" value did not orig inate with Marx ..Sir William Pet ty developed something lik~ it two centuries earlier, and Ricardo .de vised a similar theory. Marx 'bor rowed the Ricardian concept, and added a few sophisticated touches to it. He himself admitted that his ,whole theoretical structure rested upon the Labor ,Theory of Value, and that if it could be dis proved, "scientific" socialism would be, rendered invalid. After Bohm-Bawerk finished de molishing it, there was not a sin gle major economist who would accept the Labor Theory of Value as anything. other than an" inter estinghistorical oddity. Even many branches of World Social ism, such as the Fabian Socialists in England, discarded it as unten able. The "ambiguities and contradic tions" in Marx's language offended good sense, Bohm-Bawerk, pointed out. Marx claimed that the value of a product was determined by the "socially ,useful" labor .in volved in its production. Bohm Bawerk found the phraseology meaningless, and pointed out that it differed little from Adam Smith's distinction between productive and 1967 THE MAN WHO ANSWERED MARX 601 unproductive labor. Smith had used the artisan as an example of productive labor· and the me nial servant to.· illustrate unpro ductive labor. Bohm-B·awerk stated that· if the servant's efforts re leased his master to perform pro ductivework, then his labor .was also prod ucti ve The universal application of Bohm-Bawerk's analysis can be seen by taking the· case of ·a widow with young children who re-enters the labor force as a stenographer.

Without someone to· care for the children, she would· be unable· to work, and so the girl she .hires as a baby sitter certainly per forms productive or essential work. Utility, Scarcity, and Choice To demonstrate the validity of the Labor Theo:ry· of Value,Marx used the diamond, insisting that it was valuable because of the amount of labor expended to mine it. In other words, a diamond at the bottom of· a deep .mine shaft requiring the work of many men to dig would be worth more than a diamond found accidentally on the surface of the ground. QUite obviously, any diamond merchant who estimated the worth of a stone on this basis instead· of the usual reasons such as the number of carats or its crystalline flaw lessness would go out of business in ~hort order. To Marx, value was a concrete condition created in much the same manner that an article might be manufactured .. To Bohm Bawerk, it was a relative system of measurement depending at. any time on external factors.· He dem~ onstrated that· the Marxist con cept failed to take two important elements into consideration: util ity (or usefulness) and the nearly equally important· subjective qual ity of want or desire. Despite the appearing solidity of the Labor Theory of Value, it was nebulous, vague, and unpredictable. It lacked every characteristic that a science was supposed to have. Conversely, the Bohm-Bawerkian law worked with mathematical precision.

It could be summarized into the following formula: 1. Utility is the basis of· value. 2. ScarCity is the measure of value. 3. Price is the evidence of value .. Nothing is valuable unless it is in some way or degree useful. The decrease or increase of its value is dependent on the rise or decline of its supply. Valuable goods are costly either in terms of other goods or money. To this he added another factor for the determination of price: the sub jective quality of want. If no one wanted an article - no matter how scarce it was - its price could hardly be very great. The importance of want or de602 THE FREEMAN October sire is self-evident. The more the seller values an article, the higher his. asking price will· be. The more the buyer wants the article, the more he is willing to pay for it. This, of course, works in· reverse. The· lower the buyer's personal evaluation of an article, the less he .will be willing to pay for it.

If a seller places little value on an article, he will be willing to sell it for a low price. Subjedive Value Judgments Bohm-Bawerk covered allpossi hIe criticism before it could be leveled. He did it so well that the Marxists ever since have found themselves in the position. of hav ing to .answer the unanswerable. Take the .. way he disposed of any future objection to· the utilitarian basis for value in his monumental work, The Positive Theory of Cap tal, * for instance.. After noting that such infinitely more useful items as bread and water ordi narily.are far ·.less valuable than diamonds or pearls, he points out that they only appear to be be,;, cause under normal circumstances they are in such abundant supply while pearls and diamonds are relatively rare. But when food becomes scarce, the value of a sandwich to a starving man is far greater than that of a large and flawless diamond. A man· dying of thirst in the desert will run first to a .canteen of· water .before he even considers the bag of pearls lying a few feet away.

Bohm-Bawerk finally concluded: "Thus those very facts. which, at first sight, seemed to contradict our theory that the amount·· of value is dependent on the amount of utility condition, on closer ex amination afford a· striking con firmation of it." + A Miracle? RICHARD D. HAMMOND IF I hadn't been there, I would hardly have believed it myself. We decided to "do it ourselves." Such a decision can scarcely be de scribed as a miracle, although these days it seems almost like one. It happens that some time ago I was asked to serve on an advisory board of a voluntary organization that helps the handicapped to help themselves. This is a fine organi zation, with a worthy purpose, certainly. The time came for an expansion of facilities. The director came to the board with a well-worked out proposal which involved our raising $20,000 so that we could qualify for a 4 to 1 Federal grant which would give us $80,000. He described this "opportunity" as "growth money."