The Labor Theory of Value vs. The Capitalist

The root of this article is part of the book review of After Capitalism that I wrote for Amazon. Inspired by Karl Marx and the labor theory of value, the author criticizes what he calls passive capitalists, those who derive income – interest, dividends, profits -- from work that they don’t partake in.  He bases his argument on the labor theory of value (LTV).

Classical economists, the main ones being Adam Smith and David Riccardo, subscribed to the LTV to some extent. It’s obvious that labor does create things of value, but the classical economists also attributed value to land and capital.

Marx would have nothing of that and attributed all value to labor. Producing value from land requires some labor. Even the value of capital goods is all attributed to past labor. The author of After Capitalism also attributes all value to labor. However, his arguments and examples do not address different kinds of labor. He gives an example of workers growing corn, assuming the land is of uniform quality and the workers are all equally skilled. He doesn't say the workers do different kinds of work, like planting versus harvesting, so presumably they all do the same work.

Marx extended the LTV with notions of ‘abstract’ labor and ‘socially necessary’ labor. The former abstracts from the particular characteristics of all of the labor and is akin to an average, homogeneous labor. It was ‘abstraction run amok’ in my view. But it allowed him to side-step having to address different kinds of labor and different degrees of skill and efficiency, as did the author of After Capitalism.

This and the next two paragraphs are taken from my book review.  Suppose the following. An entrepreneurial builder (EB) wants to build a house. He estimates the total cost, including laborers and an architect who will be paid and interest to be paid after selling the house, to be $100,000. EB has only $20,000. Architecture documents and building materials and buying the land will cost $50,000, so he will borrow $30,000. The house is built and he sells it for, say, $125,000. He pays off the loan and interest of $31,000, leaving $94,000. How should the $94,000 be allocated between EB, the architect, excavators, carpenters, roofers, electricians, plumbers, concrete guys, etc.? (Presumably EB has first dibs for $50,000.) The LTV offers no answer. It attributes all value to labor, but doesn't answer this allocation question. Basing it on hours worked ignoring skills, quality, efficiency, etc. is absurd. The best it could do is look at market prices for these various kinds of work and allocate on that basis, but Marxist theory holds that market price and value are two very different things.

Hold on. Where is EB going to find all these workers who will wait to be paid until after the house is sold for an indeterminate amount? Being realistic, each will want payment as soon as his/her work is done at a rate or amount agreed to in advance, not some distant, indeterminate amount. Nor does each laborer desire to later argue with the rest and EB about what a fair distribution is. Alternatively, if laborers want paid as soon as his/her work is done, EB will need to borrow even more money and pay more interest. The capitalist-lender can save the day, and the project can proceed. Yet Schweickart asserts an entrepreneur like EB needs only the labor of others, and not money. Hmm, how will the workers be paid?

We could refine the example, saying that the $20,000 EB starts with was half provided by a passive capitalist, who will share in half the money that's left, if any, at the end of the project after a reasonable cut for EB's work on the project.

The author does see value in entrepreneurial work -- EB's is only one example -- but his analysis of capitalism fails to recognize that passive capitalists advance money to labor long before work is done and often wait to be paid when the workers' product is eventually sold. After Capitalism portrays passive capitalist income as entirely unjustified. It also claims savings and lending have "no direct effect on production" and production doesn't need savings.

The example could also be altered to assume that some or all the workers on the project combined have enough savings and willingness to lend the $30,000 to EB. Does that alter the analysis? It does very little in my view. Regarding the loan, they would be passive capitalists like a bank would be. Workers and passive capitalists being the same people should not matter. The functions remain separable. Qua workers their role on the project is no different. They might, however, be a little more diligent since they have a little more at stake on the success of the project. If they were to loan the money to EB at an interest rate set in advance, the dollars of interest are the same, barring the project going bad and EB defaulting.

On the other hand, suppose the workers supplied the $10,000 instead of the passive partner capitalist described above. Then the workers could have a greater stake in seeing how successful the project is, since the payoff to them is directly connected to the sale price of the house. They would be taking on some risk (uncertainty).

Let us return to the first two scenarios described. The first one in which EB doesn’t borrow from the bank and the workers are not paid until after the house is sold, I will call the “no passive capitalist” (NPC) scenario. The second one in which EB borrows from the bank and pays each worker as soon as his or her work is done at a preset rate or amount, I shall call the “passive capitalist” (PC)  scenario. Incidentally, After Capitalism doesn’t use the term, but EB could be called an “active capitalist,” an obvious contrast to “passive capitalist.”

After Capitalism grants value to an entrepreneur’s labor, management, and creativity. On the other hand, it says that a passive investor gains only at the expense of the people who produce the goods and services, by expropriating “surplus value” (p. 39), the favorite Marxist idea. He ridicules the idea that passive capitalists take any risk. For passive capitalists risk is a mere cover-up for expropriating “surplus value” from workers.

Let us compare the NPC and PC scenarios. If the house is sold near or above the price expected by EB, then in retrospect it’s easy to assume that the bank took no risk. However, the view at the time the loan is made is very different. What if the project fails and EB defaults on paying some or even all of the loan plus interest? In the PC scenario, the workers assume no risk for the project’s outcome. In the NPC scenario, they have significant risk. Remuneration for their work highly depends on the sale price of the finished house. Hence, one could argue that the workers’ risk in the NPC is transformed by the passive capitalist into the passive capitalist’s risk in the PC scenario. Arguing that the workers are merely expropriated is akin to arguing that workers are entitled to free insurance! Indeed, the passive capitalist has something in common with an insurer. It collects a “premium” in the form of interest, while it loses much more if disaster strikes. If a passive capitalist were to provide money that enables a project that employs workers, and is denied any interest, then who is exploiting whom?