One of the most important theories to make the rounds in 20th century world politics was the ‘exploitation theory’ proposed by the German Political theorist Karl Marx. Leftists all over the world have found it to their political convenience to blindly accept this theory, and to convince themselves of the morality of the workers’ hours of toil.

Karl Marx shouted that the source of the profits gained by the Capitalists is the exploitation of labor’s productive effort. He accused scornfully, the capitalists of looting the workers of their rightful share of the returns of their productive labor. So according to Marx, profits are nothing but the ‘surplus value’ that the capitalist with-holds from the laborer.

Much of this proposition could be dismissed as emotional outburst of an unstable individual, unless there was a ‘scientific’ discourse from the man himself, in his famous work ‘Das Kapital’ published in 1867.

Marx’s theory of value

Marx, like other Classical economists, recognized the two kinds of values of any commodity: use value and exchange value. Use value being the personal utility that the commodity used as a consumer good yields to the consumer; while exchange value being the value that the commodity commands in a trade exchange in the market.

Marx in his preconceived mindset to arrive at an ‘objective’ theory of value, tried to find similarities in the properties of commodities that traded at the same exchange value at some particular point of time. He finally concluded that commodities with the same exchange value had the same amount(hours) of labor involved in producing them, and hence exchanged on equal terms. Thus was born Marx’s version of the Labor Theory of Value.

The fallacy in Marx’s theory of value

Marx believed that if two commodities were exchanged for each other, they had something in common and Marx propounded that to be the amount of labor hours required to produce the commodities. Thus Marx proposed that people exchange commodities which had equal number of labor hours spent in producing them.

The basic fallacy here with Marx’s perception of trade relations lies with the conditions of trade, and the source of value of any commodity. The question to be considered with respect to trade is: why would people exchange commodities of equal value?

If Alice and Bob have eggs and apples respectively, and both value the commodity that the other person has the same as the commodity he/she has, why would either of the two want to trade with each other? The only way trade could happen in this case is only when Alice values apples more than eggs; and Bob values eggs more than apples. Marx’s theory falls into a pit!

The other even more basic question on which Marx’s theory turns out to be nothing short of absurdity is: why would people consider the amount of labor hours involved in producing a commodity while valuing it? The only consideration of a buyer is to consider the commodity’s personal use value to him, which is based purely on his subjective preference scale.

In addition to that there are many questions which Marx’s ideology does not want to answer. For example if there are only 10 eggs in the market, and there are 15 buyers(they all want 15 eggs in total) then which 10 buyers will have their demand fulfilled. In the market the prices of the eggs will go up, which will result in the top most 10 buyers who value the eggs highest will get the eggs. But under Marx’s theory of value since the eggs had some specific hours of labor involved in it, therefore they cannot have some arbitrary higher values. Marxians do not bother themselves with the fact that there are not sufficient eggs to fulfill the needs of every individual.

What Austrian economics offers?

Austrian economic theory, unlike Marxism, offers two important points for anybody to remember:

1) People exchange commodities with each other because they expect to benefit from the exchange. The only condition is that, the parties involved must value the commodity that they buy from the other person more than the commodity that they give up(or sell).

2) The value of commodity is based on the subjective valuation of the buyer. Commodities have no ‘objective’ value.

In our previous example where there aren’t enough eggs in the market, the prices of eggs will go up and only the 10 most highest payers of eggs will get those eggs. This helps in the production of more eggs. Because the prices of eggs went up, there is no more profit incentive to the egg producer to produce eggs, and next time bring 15 eggs in the market. But under Marxian theory of exploitation since only rich people are able to buy the eggs for higher prices, the whole economy looks like a conspiracy against the poor people.