Monday, August 13, 2012

Obama’s Labor Theory of Value

Beyond being infuriating and insulting, President Obama’s now notorious “you didn’t build that” speech probably left many people puzzled. It is so foreign to how most Americans think they might have wondered where such thinking comes from.

Whether or not you think it’s accurate to call Obama a Marxist, his perspective on how the economy works is Marxian through and through. More specifically, it is a reflection of what’s referred to as Marx’s “labor theory of value.”

That theory is defined in the Dictionary of Economics as “[t]he worth of a product or service is in proportion to the labor employed to generate it.”

Economists not under the spell of Marxism consider the labor theory of value to be a convoluted mess. Marx himself had great difficulty papering over the logical gaps and contradictions of the theory. One obvious problem is that “labor” is not a homogeneous resource. Furthermore, it is not the only scarce resource necessary for the production of practically every product or service.

The question of how relative prices are determined is still a central question in economics. “Price theory” is what comprises most of microeconomics.

Today the mainstream conclusion about what determines relative prices is that they result from the interaction of “supply and demand.” In the context of price theory, supply and demand are like file drawers where numerous factors can be organized and analyzed.

The price of any product is affected by the quantity of all the resources necessary to produce it — labor, energy, land, information, time, for example. Marx’s position was that only one of these resources mattered, i.e., labor. Furthermore, he devoted none of his attention to the demand side of price determination. It’s as though he tried to design a pair of scissors using a single blade and, in fact, only a small piece of a single blade. I don’t think that it’s an exaggeration to say that no economist, other than true-believer Marxists, thinks that the labor theory of value makes any economic sense or is useful in understanding how an economy actually works.

In his classic textbook on the history of economic thought, William Fellner poses the following question about the labor theory of value and offers an explanation:

What function does the theory perform in the Marxian system, and why do contemporary Marxists continue to cling to it? The answer, we suggest, is that a simple and sweeping doctrine of exploitation is the essence of Marxism as a creed, and that it is impossible to obtain a doctrine of exploitation as simple and sweeping as is the Marxian from premises other than the “worker’s right to the whole produce.” Marxism as a creed is founded on the idea that all income going to the owners of wealth results from exploitation. The Marxian creed requires the exploitation doctrine as its foundation. (Emphasis in original.) — William Fellner, Modern Economic Analysis

A belief in the labor theory of value is what explains the hostility toward profits that is so prevalent on the left. If labor is 100 percent responsible for the creation of value, profit is theft. Profits are only possible if labor is exploited and only if capitalists get what’s not rightfully theirs. Likewise, property is theft, as are various forms of capital. Marx is the inventor of the word “capitalism.” His turgid three volume magnum opus is titled Das Kapital.

In countless ways Marxism is an intellectual mess. Theoretically it makes no sense. In practice it has led not to utopia, but to dystopia. The most horrific and repressive regimes in the world today — North Korea, Cuba, and Zimbabwe, for example — are Marxian in theory and practice.

Nevertheless, a Marxian view of the world continues to be popular on the left. Obama’s speech reflects his deeply held belief that business owners do not deserve the share of income and wealth they receive. All value ought to go to the workers. Any other outcome is the result of “the exploitation of humans by humans.” According to Marx, that’s what happens under capitalism and will continue to happen until private property rights are abolished. Only then can true equality be achieved.

It’s important to remember that even bankrupt ideas can be popular over long periods of time. Two other leading examples are Malthusianism and Keynesianism. Their predictions and policy prescriptions have proven wrong countless times, yet as doctrines they still hold wide appeal. Malthus’s Essay on the Principle of Population was published in 1798 and Keynes’ General Theory of Employment, Interest, and Money was published in 1936. The failure of the Democrats’ massive stimulus spending ought to be enough to toss Keynesianism into the dumpster of ideas that sound good but turn out to be disasters when applied to the real world.

Marx fully expected capitalism to collapse within a few years after the publication of The Communist Manifesto in 1848. V. I. Lenin’s Imperialism: The Highest Stage of Capitalism, published in 1916, was essentially an attempt to explain why capitalism still existed. By then Marxists fully expected that capitalism would be long gone.

One thing that J.M. Keynes got right was his understanding of the power of ideology. In the final paragraph of The General Theory he wrote, “The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood.… Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.”

Whether or not Barack Obama is a Marxist depends on how you define Marxist. Most everyone who acts like a Marxist reacts strongly if called a Marxist. There are probably a hundred Marxists for every one who admits to being one. The birth certificate I would like to see is one that would show where Obama’s ideology was born.


Obama’s Labor Theory of Value August 13, 2012

Ron Ross Ph.D. is a former economics professor and author of The Unbeatable Market. Ron resides in Arcata, California and is a founder of Premier Financial Group, a wealth management firm located in Eureka, California. He is a native of Tulsa, Oklahoma and can be reached at

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