Does Labor Create Capital? D. Lipton

However, Lincoln - an advocate of free capitalism, if there ever was one - and the classical econ omists differed from Marx and his followers on whose labor created capital. According to Marx, every one's labor created capital. But Lincoln and the classicists knew that capital came about only as someone saved from the fruits of his labor. How this works in the practical world may be demonstrated by two workingmen named Smith and J ones employed by Brown. Mr. Lipton of San Francisco has been a news paperman and Army Historian whose articles have appeared in numerous magazines. 118 Smith and Jones are equally gooc workers, industrious, competent and dependable. Brown pays eacl of them two hundred dollars ~ week. Smith spends all his wages: but Jones, planning to go int,o busi· ness for himself some day, savef twentyfive dollars each week. Two facts are apparent. Smitr. works as hard as does Jones and if as competent and dependable; hif labor adds to production every bi1 as much as does Jones'. However he has done nothing to help J one~ create his capital. If Smith hac worked twice as hard, he stH would have done no more to in· crease Jones' capital than if hE had not worked at all. Employe!

Brown, of course, might profii from the labor of both men and might convert such profits to cap ital. The great Austrian economisi Eugen von Bohm-Bawerk put ii into a brilliant equation: "Indus try plus savings equals capitaL" Bohm-Bawerk pointed out thai 1968 DOES LABOR CREATE CAPITAL? 119 the creation of capital is never accidental as it wouid have to be if it were the product of all labor, but comes always from the free choice of an individual - his de cision that a part of his wage should be put aside and invested as capital. For many generations, the eco nomic thinking of countless peo ple - not all of them Marxists has been tainted by the concept that labor collectively creates cap ital. The ethical as well as the economic basis for Marx's theory of surplus value rests on this idea. So do the wage-price beliefs pro mulgated by American and Euro pean labor unions. This "surplus value" idea accounts for the in sistent demands of union leaders that any increase in productivity be given to union members in the form of higher wages. Obviously, if capital were created simply by laboring, all the products of in dustry and commerce should be long to labor.

But, the theory will not stand scrutiny. Proof of it would have to show that man's native, inherent ability to produce has increased over the centuries. Marx himself knew better. He devoted pages to demonstrate how industrial pro ductivity increased only as the result of technological advances. Men who still work at the handi craft stage of development produce little more than their remote ancestors did. Capital, often .in the form of machinery, is what makes the difference between a lower and higher rate of productivity. There fore, there can be no sound ethical reason for the increased product going to the man operating the machine. A stronger ethical case could be made for it to go solely to the man who invented the ma chine. When Marx developed his theory of surplus value, he must have known this; yet he chose to ignore it. The entire moral basis of Marxian Socialism rests on the concept that capital is the collec tive creation of labor.

The Fads Deny the Theory The economic reasoning behind "surplus value" is also unsound. If there were any validity to it, the businessman with the largest labor force would always make the highest profit. Labor-saving machinery would be a drug on the market, since no businessman would want to displace a profit generating worker. A few years ago two great daily newspapers in San Francisco merged after operating at an an nual loss of a million dollars each. If the theory of "surplus value" were valid, their large, separate work forces should have generated profits rather than losses. A pri120 THE FREEMAN Februar mary reason for their merger was to avoid uneconomic labor costs. This also accounts for the rapid rise of automation. High wages are an inducement to savers to in vest in machinery while low wages tend to keep it out of use. Com petition among employers obliges them to automate as fast as they can and to pay wages as high as they can to attract their needed work forces. The facts of good business practice simply refute the theory of "surplus value" at every turn.

Like many of his other theories, "surplus value" was not original with Marx. Similar ideas were floating around in the nineteenth century. For instance, James Mill (the father of John Stuart Mill) wrote in his Elements of Political Economy, "profits of stock depend upon wages; rise as wages fall, and fall as wages rise." This was in 1826, more than forty years before the first volume of Marx's Capital was published. It contra dicted the whole history of capi talist development; and· the ques tion is: Why were thinking men like James Mill and Karl Marx so wrong? The answer should be apparent to anyone familiar with the Eng land of early-and-middle nine teenth century. Its primitive in dustrialism was grafted on a merC'antilist economy and its social system remained cluttere with feudal trappings. Mill an Marx observed the conditions i factory centers such as Londo and Manchester, and tried to dE rive from these limited observ~ tions some universal economi truths.

Edward Gibbon Wakefield A young contemporary of J ame Mill, and a close friend of his SOl John Stuart Mill, was Edwar Gibbon Wakefield. Wakefield at proached the capitalist movemel1 with a different point of vie' from that of James Mill and Mar} and history confirms the accurac of his conclusions. An unfortunate personal mH adventure caused Wakefield's reI: utation to be downgraded in hi own time, and· today his work i known .only to specialists in cc lonial history. However, Wakefiel l was more than a narrow specialis1 His polemical·· writings were cel tainly the equal of Disraeli's an Cobden's; and in a wide range 0 economic and social fields, Wake field possessed a brilliant, power ful, and perceptive mind. Yet, ex cept for John Stuart Mill, mos of the so-called intellectual lead ers of Wakefield's time dismissel him as of little importance. Wakefield knew the England 0 the nineteenth century as well a did James Mill and Marx, but h 1968 DOES LABOR CREATE CAPITAL? 121 also knew that conditions there were not applicable to the rest of the world. His economic investiga. tions were broader than those of any other man of his time. They ranged from the United States and Canada to western Europe to Australia. He set forth his ideas on wages and profits in a .book, England and America, published seven years after James Mill's Elements of Political Economy and more than thirty years before the first volume of Marx's Capital.

In one bold stroke, Wakefield de molished every existing theory of wages and profit, including David Ricardo' s wage-fund theory. Where Marx would contend that the rich could grow richer only as the poor became poorer, Wakefield insisted that high wages and high profits went together. He pointed out that in England where profits were comparatively low, wages were also low, and in the United States where profits were high, wages were also comparably high er. Marx predicted that capitalism would destroy the middle class. Wakefield predicted that the mid dle class would flourish under cap italism. Marx based the validity of his ideas - as Bohm-Bawerk took great pains to point out - on exchange value~ Wakefield wrote, "economists in treating of the production and distribution of wealth have overlooked the chief element of production, namely, the field in which capital and labor are employed." What was necessary to sustain both high wages and high profits? Wakefield's answer, "the proper utilization of productive facilities in relationship to land."

It is obvious from his usage of the word "land" that he meant it to cover all other factors of pro duction in general. Consumers Determine Proper,Use Under free market conditions, this is the way it is accomplished. Land, labor, and capital are brought into use because of the demand by consumers for certain products. When the needs and wants of consumers change, then the producers' requirements must also change. Otherwise, those fail ures go out of business, and other businesses take their place. The free market makes possible a rich and variegated supply of goods because the businessmen who op erate in it must meet the desires of consumers; and as consumers develop new wants business quickly seizes the opportunity to meet them. There is, therefore, a nat ural allocation of land, labor, and capital following the needs and wants of the market place. The only other way to allocate a nation's resources is through government edict, workers being told when and where they can 122 THE FREEMAN Februar1 work, and equipment and material being controlled· by bureaucratic decisions. Wherever this has been tried, it has produced limited com modities of a dreary and monoto nousuniformity.

Increased productivity - mak ing possible both higher wages and higher profits - depends upon original ideas frequently devel oped as machinery-the product of an inventor's genius, not a worker's skill. In the abstract, the idea-man, the inventor would seem to be entitled to all the increased productivity. He is the one ir replaceable link in the productive chain. Both investors and workers exist in great numbers. Inventive geni us does not. But there are a number of things wrong ,vith this analysis. First, it must be realized that no matter how brilliant the idea, it will profit no one unless there is a market for the product, unles: people want it enough to pay fOJ it. Secondly, the inventor mus' ordinarily be financed for man~ years, sometimes for most of hi: life, before his invention bear: fruit. So the people who finance him are entitled to a part of wha1 the product brings in sale to othel people. Finally, the high promise of capitalism is an ever-increasin~ standard of living. So part of thi~ increased productivity and sale~ must be returned to all of thE people.

Improved standards of living fOl all will be possible only when in· creased technology permits a morE widespread lowering of prices in· stead of heralding an automatic increase in wages to union memo bers. In the end, it is the con· sumer who determines both the returns upon capital and the wages of labor. ~ Consumers Control Production With full competition And freedom of trade, Each dollar, as spent, Votes what shall be made. A thousand commissions, Working daytime and night, Could not guide production So nearly aright. WILLFORD I. KING, Economics in Rhyme A REVIEWER'S NOTEBOOK JOHN CHAMBERLAIN I'LL NEVER FORGET the shock I ex perienced when, some thirty-five years ago, I heard Isabel Paterson say with magisterial scorn, "Marx was a fool." The depression was then at its lowest point, capitalism was staggering all over the world, and the "Russian experiment," with its Five-Year Plan, had not yet been exposed as a hollow fail ure. So how could Marx be re garded as a fool when some of his most cherished predictions seemed about to come true?