Marxist Apologist (Later for Nazism) Werner Sombart Admits that the Marxian Law of Value Is False If It Claims To Be in Harmony with Actual Experience

An apologist of Marx, as intelligent as he is ardent, has lately appeared in the person of Werner Sombart. His apology, however, shows one peculiar feature. In order to be able to defend Marx's doctrines he has first to put a new interpretation upon them.

Let us go at once to the main point. Sombart admits (and even adds some very subtle arguments to the proof) that the Marxian law of value is false if it claims to be in harmony with actual experience. He says (p. 573) of the Marxian law of value that it “is not exhibited in the exchange relation of capitalistically produced commodities,” that it “does not by any means indicate the point towards which market prices gravitate,” that “just as little does it act as a factor of distribution in the division of the yearly social product,” and that “it never comes into evidence anywhere” (p. 577). The “outlawed value” has only “one place of refuge left—the thought of the theoretical economist. . . . If we want to sum up the characteristics of Marx's value, we would say, his value is a fact not of experience but of thought” (p. 574).

--Eugen von Böhm-Bawerk, Karl Marx and the Close of His System, ed. Paul M. Sweezy (New York: Augustus M. Kelley, 1949), 102.

The Dispute with the Socialists Was Soon to Become a Permanent Fixture of the Austrian School

The dispute with the socialists was soon to become a permanent fixture of the Austrian School. It is an irony of history that it was this school of thought that first introduced academic discourse about socialism into the seminar rooms and libraries of established economics departments. Criticism was aimed primarily at the labor theory of value, whose contradictions and shortcomings were thought to have been overcome once and for all with the subjective theory of value. The socialist theory did not represent progress, but rather regression (cf. Zuckerkandl 1889, p. 296). Fierce controversy between Böhm-Bawerk (1890 and 1892a), Dietzel (1890 and 1891), and even Zuckerkandl (1890), among others, brought competition between the two doctrines to a head. Dietzel held to the labor theory of value, and held fast to the view that the principle of marginal utility was, in the end, nothing more than the good old law of supply and demand (Dietzel 1890, p. 570).

Disputes with socialism soon went beyond the labor theory of value and brought the “socialist state” into question in many respects. Böhm-Bawerk, for example, regarded interest as an economic category wholly independent of the social system; interest would exist even in the “socialist state” (Böhm-Bawerk 1891/1930, pp. 365–371). Wieser criticized socialist writers for their inadequate teaching of value’s role in the socialist state. He came to the conclusion that “not for one day could the [socialist] economic state of the future be administered according to any such reading of value.” For Wieser, “in the socialist theory of value pretty nearly everything is wrong” (cf. Wieser 1889/1893, pp. 64–66). Johann von Komorzynski extended the analysis to political science: he distinguished between a “true,” “philanthropic socialism,” and a “delusory socialism” aimed purely at class interests (Komorzynski 1893).

--Eugen Maria Schulak and Herbert Unterköfler, The Austrian School of Economics: A History of Its Ideas, Ambassadors, and Institutions, trans. Arlene Oost-Zinner (Auburn, AL: Ludwig von Mises Institute, 2011), 91-92.

The Abandonment of the Wages-Fund Doctrine Made Possible the Acceptance of Keynesianism and the Policy of Inflation, Deficits, and Ever Expanding Government Spending

The tragedy of the relationship between classical economics and the exploitation theory has not only been that errors and confusions in classical economics have supported the exploitation theory and thereby the assault on capitalism and advancement of the cause of socialism. That would have been bad enough. The further tragedy and irony has been that because this support was perceived as necessary and inescapable—as based on the essential nature of classical economics—the opponents of the exploitation theory—that is, the defenders of capitalism from the late nineteenth century on, who had the most to gain from the knowledge provided by classical economics—felt obliged to discard virtually the whole of it insofar as it could not immediately be validated on the basis of the neoclassical principle of diminishing marginal utility, or otherwise independently of classical economics’ basic framework.

Thus, along with “the labor theory of value” and the “iron law of wages,” they discarded such further features of classical economics as the wages-fund doctrine and its corollary that savings and capital are the source of almost all spending in the economic system. (The wages-fund doctrine held that at any given time there is a determinate total expenditure of funds for the payment of wages in the economic system, and that the wages of the employees of business firms are paid by businessmen and capitalists, out of capital, which is the result of saving; not by consumers in the purchase of consumers’ goods.) Two generations later, the abandonment of the wages-fund doctrine and with it, classical economics’ perspective on saving and capital, made possible the acceptance of Keynesianism and the policy of inflation, deficits, and ever expanding government spending. In similarly paradoxical fashion, and with just about the same time lag, the abandonment of the classical doctrine that cost of production, rather than supply and demand, is the direct (though not the ultimate) determinant of the prices of most manufactured or processed goods led to the promulgation of the doctrines of “pure and perfect competition,” “oligopoly,” “monopolistic competition,” and “administered prices,” with their implicit call for a policy of radical antitrust or outright nationalizations to “curb the abuses of big business.” Thus, along these two further paths, the errors of classical economics in support of the exploitation theory have served in the assault on capitalism and to advance the cause of socialism. But this time, it was with the implicit support of those who had abandoned classical economics because of its service in the advancement of socialism, and who now, precisely because of that abandonment, were themselves making possible the advancement of socialism, however much they may have believed themselves to be incapable of acting in such a destructive way.

Indeed, so strong has been the conviction on the part of the defenders of capitalism that classical economics is permeated with support for Marxism, that even to suggest such a classical doctrine as that cost of production can be a direct determinant of price, is to invite one’s own censure for allegedly being sympathetic to Marxism—as well as for allegedly being ignorant of all that economics has taught on the subject of prices since 1870. Not surprisingly, in the great majority of cases, this hostility to classical economics on the part of the defenders of capitalism has kept them from any serious study of it.

--George Reisman, Capitalism: A Treatise on Economics (Laguna Hills, CA: TJS Books, 1998), 474-475.

If Interest Sprang from Some Feature of Human Choice, Then It Sprang from a Fundamental Value Inequality

Eugen von Böhm-Bawerk’s great achievement was to formulate the problem of interest theory as a value problem. He sought to explain interest as resulting from human choice and exchange, rather than as being caused by some factor outside of human action. The crucial point was that, if interest sprang from some feature of human choice, then it sprang from a fundamental value inequality, because choice involved the preference in action of a more valuable alternative over a less valuable one. Accordingly, observable interest rates manifested an inequality between the value of products and the total value of the corresponding means of production, including “waiting” or the “use” of capital.

--Jörg Guido Hülsmann, “A Theory of Interest,” Quarterly Journal of Austrian Economics 5, no. 4 (Winter 2002): 78.

Frank Fetter Was the First Economist to Integrate Interest Theory into a Causal-Realist Conception of Economics

The genius of Carl Menger is seen as much in his perception of where economics needed to go and how it could get there as in his correction of the faulty course set for it by the British Classical economists. In the preface to his Principles of Economics, he wrote:

I have devoted special attention to the investigation of the causal connections between economic phenomena involving products and the corresponding agents of production, not only for the purpose of establishing a price theory based upon reality and placing all price phenomena (including interest, wages, ground rent, etc.) together under one unified point of view, but also because of the important insights we thereby gain into many other economic processes heretofore completely misunderstood.

The caliber of intellectuals in the second and third generations of Menger’s followers in the causal realist tradition, who rose to the challenge of building a general theory of economics, testifies to the power of Menger’s vision.

Frank Fetter was the first economist to integrate interest theory into a causal-realist conception of economics. In 1914 he wrote, “In an elementary textbook published in 1904 this [i.e., the Pure Time Preference] conception of the interest theory was embodied, not as a thing apart from, but as an integral part of, a general theory of value.” Thus, eight years before Ludwig von Mises would integrate money into causal-realist economic theory, Fetter had already integrated interest into Menger’s system. Reflecting on what he had accomplished, he wrote:

This interest theory was new in its order of development from elementary choice; in the priority it assigned to capitalization above contract interest; in its unified psychological explanation of all the phenomena of the surplus that emerges when undervalued expected incomes approach maturity, the surplus all being derived from the value of enjoyable (direct) goods, not by two separate theories, for consumption and production goods respectively; in the integration of the interest theory with the whole theory of distribution; and in a number of details necessarily related to these features.

--Jeffrey M. Herbener, ed., introduction to The Pure Time-Preference Theory of Interest (Auburn, AL: Ludwig von Mises Institute, 2011), 11-12.

A Vanguard of Socialism, the Federal Reserve System Is the World's Central Bank and the Champion and Vanguard of the Political Command System

The Federal Reserve System is even more than the world central bank. Since its modest beginning, it frequently has acted as the champion and vanguard of the political command system. Many of the amendments to the Federal Reserve Act, giving the System ever greater power for monetary expansion, were enacted upon the recommendations of the governors. In its annual reports, the Board frequently included a section recommending legislation for enactment by Congress. Only during the early years of the Roosevelt New Deal was the federal government at times more demanding in its legislation than was the Board in its recommendations, but even then, the federal government did not act without the Board's advice.

Today, the System is holding practically unlimited power of expansion, yet the Board is clamoring for more. It is pleading and insisting that it be granted permanent power to control the uses to which its credit may be put. In other words, it would like to manage the credit markets to channel the benefits of inflation and credit expansion towards its most favored debtor, the federal government.

--Hans F. Sennholz, Money and Freedom (Cedar Falls, IA: Center for Futures Education, 1985), 20.

Full Socialism Requires Nothing More Than the Socialization of New Investment Plus the Lapse of Time; Incredibly, Keynes Is Touted As a Man Who Saved Capitalism

In other words, Keynes sees the effect of his policies as that of accomplishing the just demands of Marxism—the expropriation of the “expropriators” and the redistribution of their allegedly excessive and ill-gotten wealth to the state and the population at large—but without the necessity of a violent revolution.

Not surprisingly he advocates the socialization of investment: “Furthermore, it seems unlikely that the influence of banking policy on the rate of interest will be sufficient by itself to determine an optimum rate of investment. I conceive, therefore, that a somewhat comprehensive socialisation of investment will prove the only means of securing an approximation to full employment.”

The meaning of this last passage is that Keynes thinks it unlikely that an increase in the quantity of money (which is what he means by “banking policy”) will be sufficient by itself to drive the rate of return below 2 percent, and that investment by the government, which will be willing to invest at a rate of return below 2 percent, will be necessary. Keynes claims to believe that nothing momentous is involved in the socialization of investment, for he immediately adds the words: “But beyond this no obvious case is made out for a system of State Socialism which would embrace most of the economic
life of the community.” These words in turn are quickly followed by the admission: “Moreover, the necessary measures of socialisation can be introduced gradually and without a break in the general traditions of society.” It should be obvious, of course, that since the total of all the capital that is accumulated is nothing but the summation of the investments of the preceding years, full socialism requires nothing more than the socialization of new investment plus the lapse of time. Nevertheless, incredibly, Keynes is touted as a man who saved capitalism.

--George Reisman, Capitalism: A Treatise on Economics (Laguna Hills, CA: TJS Books, 1998), 891.

The Theory of Subjective Valuation Was Defended Against the New System Based on Labor Costs by Condillac Who Said “Costs Are Not the Cause of Value; Rather, Value Is the Cause of Costs”

With Galiani and Turgot subjective valuation becomes the keystone for a system of thinking. This theory had to be defended against the new classical system which was based on labor costs. The defense of Galiani, his followers, and his friends was taken over by Condillac. According to him, costs are not the cause of value; rather, value is the cause of costs. Condillac's counter-attack against the classical cost theory is the parting shot of an army falling back. Before 1800 Italian and French writers were already drawn into the orbit of British classical thinking. An attempted synthesis of utility value and cost theory was the main object of later Italian writers.

--Emil Kauder, A History of Marginal Utility Theory (Princeton, NJ: Princeton University Press, 1965), 27.

For Menger, Value Was a “Bilateral” Relationship Between One Individual and One Economic Good, But for Mises, Value Was a “Trilateral” Relationship Involving One Individual and Two Economic Goods

In the few passages that he devotes to value theory in his money book, Mises decisively elaborates on Menger’s somewhat vague definition of value as “the importance that individual goods or quantities of goods attain for us because we are conscious of being dependent on command of them for the satisfaction of our needs.” In Menger’s definition, value was a bilateral relationship between one individual and one economic good. By contrast, in Mises’s exposition, value was a trilateral relationship involving one individual and two economic goods. Mises in fact discussed the value of one good always in explicit context with the value of another good with which it was compared, and he stressed that this “comparison” was based on choice insofar as it involved “acts of valuation.” In his words:

Every economic transaction presupposes a comparison of values. But the necessity for such a comparison, as well as the possibility of it, is due only to the circumstance that the person concerned has to choose between several commodities.

--Jörg Guido Hülsmann, introduction to the third edition of Epistemological Problems of Economics, by Ludwig von Mises (Auburn, AL: Ludwig von Mises Institute, 2003), xxxvi.