[Part of An Anarcho-Capitalist Case Against Left-Libertarianism series]

As part of Kevin Carson’s mutualist economic theories  in Studies in Mutualist Political Economy, he necessarily supports a labor theory of value (LTV).  However, recognizing the failures of the classical LTV, he attempts to recast the theory as a subjective one.  Instead of having value simply because the laborer works for a certain number of hours, Carson contends that this value arises because of the psychological cost of labor to the laborer.  In other words, what Mises referred to as the “disutility of labor”¹ in his treatise Human Action.  However, even with a most gracious interpretation, Carson presents zero rationale for the valuations of others beyond the producer – a key aspect of the exchange economy.  Why should I, as the buyer of a product, value a good as I do?  I have not labored to produce it at all.  Nor does Carson explain why, for instance, a laboring carpenter might choose to design a new chair rather than a new bookcase in the same amount of time.  The (disutility of) labor involved is the same.  Only the results differ – but if this is relevant, then value cannot solely be from the disutility of labor.

And yet, this disutility, Carson contends, is the “real” cost of labor, and thus the basis for exchange value (as he contends prices tend to equal costs).  This he claims is the necessary outcome, as:

A producer will continue to bring his goods to market only if he receives a price necessary, in his subjective evaluation, to compensate him for the disutility involved in producing them. And he will be unable to charge a price greater than this necessary amount, for a very long time, if market entry is free and supply is elastic, because competitors will enter the field until price equals the disutility of producing the final increment of the commodity.

Here Carson’s view of price formation and competition is flawed. In an evenly rotating economy, the price of a good or service will equal its cost of production because the valuation consumers place upon consumer goods will be imputed backwards to the prices of the factors of production used to produce said consumer goods. The supply will consist of individuals who are willing to sell their product at a price which they believe is more valuable than the good they give up. It cannot be established a priori that the disutility of an individual’s labor is what causes them to rank their good above or below the compensation they receive on the market. If one started with the imaginary construction of the evenly rotating economy in disequilibrium, entrepreneurs would enter a new industry up to the point in which the costs of factors of production are bid up, with the necessary allowance for time preference, to the productive capability they yield in the production of their respective consumer goods. Note that entrepreneurs enter markets based upon the expectation of a profit and/or higher rates of return, and not because of a discrepancy in the disutility of labor and the price of a particular good. Entrepreneurs do not calculate in disutility; they appraise the value of their capital stock, labor inputs, and their final products using market prices, irrespective of the disutility of labor involved in the production of the good.

And here is the root of the error that Carson makes.  There is no uniform “subjective disutility of labor”.  Each individual has a different view of this disutility and this differs according to the law of diminishing marginal utility as well – each hour given up has an increasing disutility, while the benefits of laboring for that hour are diminishing in utility.  

While true that the laborer will stop working at the point where the subjective benefits gained are viewed as less valuable than the subjective cost of laboring, this only creates a lower bound on compensation.  Instead of his hypothetical with elastic supply, the resulting market looks far closer to something like this chart Rothbard uses in Man, Economy and State (Chapter 2, Section 5: “Determination of Price: Equilibrium Price” ) to explain the formation of an equilibrium price.  As can be seen by the chart, multiple sellers (and buyers) profit by obtaining a difference between the minimum (maximum) price they are willing to pay and the price they actually do pay on the market.

graph

 

Further, as people have different disutilities of labor, we can find that this is only one factor in the determination of price. Should I go to two bakers and examine the price of bread, I will not pay one more because he worked harder at the baking of the bread – had more subjective disutility to his labor.  This is irrelevant to me as a consumer.  I will pay according to how much I value the bread.  Bread of a greater subjective quality after the same time investment will be compensated higher in all cases – the disutility to the baker only factors in should he cease baking as it is too costly to him.  Again, we find, only the lower bound is created here.

This lower bound due to the subjective disutility of labor is simply a part of what the Austrians refer to as “reservation demand”.  Rothbard discusses this concept in Man, Economy, and State Chapter 2, Section 8 “Stock and the Total Demand to Hold”:

The total demand-stock analysis is a useful twin companion to the supply-demand analysis. Each has advantages for use in dif­ferent spheres. One relative defect of the total demand-stock anal­ysis is that it does not reveal the differences between the buyers and the sellers. In considering total demand, it abstracts from actual exchanges, and therefore does not, in contrast to the sup­ply-demand curves, determine the quantity of exchanges. It re­veals only the equilibrium price, without demonstrating the equi­librium quantity exchanged. However, it focuses more sharply on the fundamental truth that price is determined solely by utility. The supply curve is reducible to a reservation demand curve and to a quantity of physical stock. The demand-stock analysis there­fore shows that the supply curve is not based on some sort of “cost” that is independent of utility on individual value scales. We see that the fundamental determinants of price are the value scales of all individuals (buyers and sellers) in the market and that the physical stock simply assumes its place on these scales.²

While we can see that the equilibrium price then is influenced by both the seller and the buyer’s valuations.  As such, the seller is not paid according to his valuation alone – nor is the laborer paid on his valuation of labor’s disutility.  Just as some individuals will not labor as they will not receive enough compensation to make it a good bargain to them, there are people who are paid more than the minimum it would take for them to overcome the subjective disutility of laboring.

Another thing is that goods with higher prices are made with less pleasant labor – the more the work sucks, the more the good will cost. Which is already wrong enough intuitively and from experience, but it gets worse. I have an array of productive tasks to choose from. Those with higher utility (higher prices) come with higher disutility (less pleasant labor). I’ll make the selection either to maximize utility or to avoid disutility. If I want to minimize disutility, I’ll make my way down the list and find that I can best minimize disutility by selecting none of them – by not laboring it all. If I decide to try to maximize utility, Carson’s made a circular argument: I’m only doing this labor because of the price of the final product, which he claims comes from the labor itself, when the price in this case is necessarily antecedent to the labor. So if Carson is correct, people must make productive choices in favor of avoiding disutility, and nobody would ever work.

Carson’s formulation of the LVT also creates a curious implication that if someone really dislikes their job, the work they do is somehow “worth more” (another consideration is the utility of leisure forgone, but this is not the same as the disutility of the labor itself – the dislike of laboring, regardless of what is forgone).  After all, they have a higher subjective disutility of labor the less they enjoy doing that work.  But then, I enjoy my work – why is it that I get paid so much, while a garbage collector does not get paid so much?  This is clearly a conundrum that must be explained in greater detail to see where the error lies.

To illustrate, we start with a highly specific factor of production – one suitable only to the production of a single good. As an imperfect example (because they all are – specificity is a matter of degree, and I’m not sure there can be a purely specific factor) let’s say the skilled labor necessary to make an old school folded-steel katana as the Samurai used to make. Carson’s LTV says the value of this guy’s labor is a function of his distaste for it – its subjective disutility, for him. Austrian subjective theory of value (STV) says that by virtue of its specificity to the task, his wage will be determined by the price of the katana he produces, which will itself be a function of supply and demand. Say the sword costs $10,000. Its production involves some nonspecific factors of production like charcoal for the fire and carbon, iron for the blade, leather for the grip. As non-specific factors, the costs of these items are determined by the prices of all the goods whose production requires them, a fact which leads to the error of assuming their cost determines prices, since no single producer can have a very important influence on their price, owing to their non-specificity.

Now,  it could be asked that if costs don’t determine price, then why does labor-saving technology tend to bring prices down? However, labor-saving tech invariably leads to dramatic increases in supply. It’s still 100% supply and demand, and one of those variables is changed by the deployment of capital. You could posit a situation where this isn’t the case, where capital lowers costs but doesn’t allow any more of the good to be produced (or where the producer chooses not to exploit the possibility of increasing supply). In this case the price doesn’t change – the seller has no incentive to lower the asking price, and the buyer’s situation is unchanged. The seller will just reap additional profits.

In our  katana example, these costs are trivial compared to the price, so for simplicity I think it’s safe to ignore them. If we’re looking at this empirically it would be easy to reach the conclusion that the sword is so expensive because the skill to produce it is rare and demands a high wage – that is, it’s expensive to produce and therefore expensive to buy. But this is an error. A Samurai-quality folded-steel refrigerator housing would involve a nearly identical skill set, and what is its price? It has none, because it doesn’t get produced, because nobody has a use for such an item that would impel him to pay enough for it to be produced. Likewise, if the difficult and labor-intensive process of producing a Samurai sword resulted in a product not easily distinguishable from the weapons you can get for $100, there would be no market for this skill and the swordmaker’s wage would be very small – because, again, price determines cost. But as it happens, our swordmaker’s efforts produce a sword with qualities no other sword can (presently) match. No other method of production yet exists to replicate the product of his skill.

Thus, if we assume the market price of this sword is $10,000 and ignore the cost of the leather and so on, how much will the swordmaker get for making the katana? If we also ignore the likelihood that there will be middle-men between the producer and the buyer, the answer is $10,000. If we don’t ignore that, the figure will probably be trivially different, and we could analyze the specifics but they’re not especially relevant here. What would happen if the few people willing to pay this kind of money for a sword in the era of guns all died of old age, and nobody was left who was willing to pay more than $1000? STV says the wage of the swordmaker will plummet, and if no swordmaker is willing to ply his trade for $1000 per item, these swords will cease to be produced and the swordmakers will enter some other line of production.  If this is true – and it clearly is – then STV is correct, LTV is erroneous, and we find that price determines cost, not the other way around. Cost is, after all, just another price which in the LTV remains to be explained.

What leads to the error in the LTV, as I mentioned above, is that most factors of production are nonspecific. The iron used in the sword, for example, is used in the production of millions of different goods, so there is no single good the price of which is likely to noticeably affect the price of iron, which is determined by the prices of all those goods.  As such, we “see” that the price of iron determines the cost of producing the sword – but in reality, the only reason the price of iron stays high while the price of the swords plummets is because the iron is highly desired for production of other goods – hammers, refrigerators, etc.

In response to this, Carson (or any other supporter of this theory) could respond that the sword maker not being willing to work to make the sword at a $1000 price is due to the disutility of labor thus “proving him right”. However, this disutility is itself a subjective measure based on opportunity cost, well noted in Austrian theory, but can only put a floor on the price from one producer. As any source of reservation demand would do.  And so we are back to the original problem – the assumed universality of what is in fact a subjective and variable consideration.

Carson, in effect, assumes away the buyer of the service.  But what is it that creates a situation where a person would pay nothing for multiple hours of a laborer making mud pies, $10 an hour for a fry cook at McDonald’s, $30 an hour for a computer programmer, but effectively thousands of dollars an hour for the labor that went into producing Van Gogh’s Starry Night?  Surely, painting masterpieces can’t be that onerous?  And what reason would one wine have a price of $500 on the market while another, made with the same techniques and labor, go to market for only $20?  Why should aging spirits add to the price? After all, this takes no labor at all, as the good just sits for a determined period of time   Rather, it seems that the Austrian analysis in its original form was correct – what matters is the supply of a good and how much it is in demand, with the subjective disutility of labor only relevant in determining at which point individual laborers will stop producing, and even then only in comparison to the utility they obtain from laboring.

It seems that Carson’s “recasting” of the labor theory of value is nothing more than a rather weak attempt to revive the LTV (which is akin to still arguing the world is flat) because he finds it ideologically necessary for his mutualist proposals. Robert Murphy makes the point here:

“As this simplistic numerical example illustrates, one could theoretically trace back the expenditures on inputs until all intermediate capital goods had been eliminated. This procedure is quite similar, of course, to the process by which Austrians impute all net productivity to the “original factors” of land and labor. The difference, however, lies in the fact that the labor theorist of value does not believe the owner of an original natural resource can earn a rent on his or her factor input.  Because only human beings experience discomfort from providing labor, even the prices of natural resources can ultimately be reduced to inputs of labor; Mother Nature never charges for her services.”³

In other words, the physiocrats only thought about land, the classical economists only thought about labor, the Knightians ignore land and labor, the right way is to consider both land and labor. Essentially what I mean by this is if LTV is wrong, Carson’s entire worldview goes with it, so he desperately wants to rescue it. You could ask how that conclusion is reached, sure. Well it depends on seldom-encountered details about what the theory actually says, but it seems to come down to the concept of “surplus value” that rightfully belongs to labor but is appropriated by the capitalist. Under a subjective theory of value it’s an awful lot harder to arrive at justifications for workers seizing the means of production. That’s a big part of it anyway, but it’s very pervasive throughout leftist thought.The LTV is necessary to get to the conclusion that for-profit firms are unnecessary, which is where economic calculation plays a big factor. Without rental prices for land, money, and human capital, society can’t calculate. Occupancy and use ownership, like Carson advocates, by definition eliminates all rental prices for land, human capital, and money (and any other form of capital). In addition to that, Carson completely ignore economies of scale: it’s believed that, absent the state, no large firms will exist, democratic or otherwise. It completely ignores relatively fixed costs that occur due to non-specificity of production inputs, and it involves an enormous pretense of knowledge to even make that prediction. Furthermore, it (quite conveniently) delegitimatizes all private business larger than a mom and pop shop. Carson’s whole ideology seems to be built on the idea that value is the product of labor. “Labor owns its product”, etc, which provides the justification for all the notions of workers seizing capital from its owners (which is handy since Carson’s favorite economic arrangements of collections of poorer laborers wouldn’t be able produce any new capital).

In closing, most LTVs are “nuanced”, but those nuances – for example, the “socially necessary” modification – are either meaningless, or lead you straight back to STV. “Socially necessary” labor time is supposedly the time an average person (skill, etc.) must expend on labor to produce the “socially necessary” supply of a good (i.e. the supply that matches with demand). If the market for a commodity is oversupplied, then labor-time has been expended in excess of what was socially necessary, and exchange value falls. If the market for a commodity is under supplied, then the labor-time expended on its production has been less than what is socially necessary, and exchange value rises. It’s basically supply and demand in the first place, with some nonsense about average productivity of an “average” worker (there is no such thing). The average person could labor for decades to do none of what I can do in 10 minutes as a web designer, and the same thing for me trying to design and build a skyscraper.  Even a highly practiced janitor will be far quicker at cleaning a building than I would. The whole concept is absurd. “Socially necessary” labor time concepts are supposed to explain the obvious fact that mud pies have no value, because mud pies are “socially unnecessary” and ergo so is the labor that produces them.But how can we define “socially necessary” without reference to what people are willing to buy, which brings us back to STV? I dare an explanation to be presented for “socially necessary labor time” without arriving at STV. Or to be more explicit, this is simply supply and demand in the final analysis and the addition that a person who takes four times as long to produce a good gets less is a tautological addition that does not need such an explanation. (In fact, it is merely a roundabout way to explain that one gets paid the same for a good no matter how much time was spent on it – a drastic hole in the “standard” labor theory of value.)

Yet, Carson’s theory of value doesn’t solve the “socially necessary” problem by a long shot. Like so many other busted theories, it takes the existence of capital as a given and merely redistributes it. It doesn’t only fail to solve for how new capital will come about – it renders capital production virtually impossible, and mass abject poverty inevitable.  All of this stems from an error of focusing on one small aspect of the process of price formation – the reservation demand of an individual laborer – as the “source” of value, instead of the preference scales of the participants involved.

Lastly, it draws a lot of his conclusions elsewhere into question. The primary result of a faulty labor theory is an erroneous price theory and failure to recognize the importance of subjective determination of marginal cost. The problems will compound from there, similar to if you were trying to solve a complex mathematical equation but forgot to carry the 1 in the first of 50 steps. The first noticeable problem is marginal analysis as set forth by Menger. Focusing on the “subjective disutility” takes the analysis out of the means-ends framework; the basis for analysis of human action in the span of economics. Second issue: price theory. If you have a faulty marginal analysis, your price theory will also fail. And the fact that his theory can only account for some prices but not why, say, diamonds sell for so much. Does it take more labor to bring up the diamonds of the same weight but different quality? No. Carson tries to get around this with an opportunity cost argument for labor which doesn’t make much sense: if a diamond asteroid lands and diamonds are plentiful (and the diamonds cartel ends) the opportunity cost for labor won’t change but the price of diamonds will decrease  which is an argument against Carsons theory.

Carson can’t help but get a lot of things wrong starting with a problem like his LTV. However, between that and his other questionable positions (free market as socialism, Hayeks Knowledge Problem, interest rates would be zero in a free market), it brings him into suspect. If your starting point is incorrect, anything you deduce from that will result in the same.

 

 

[1] Human Action XXI. WORK AND WAGES

  1. The Supply of Labor as Affected by the Disutility of Labor

http://mises.org/humanaction/chap21sec7.asp

[2] Man, Economy, and State Chapter 2, Section 8 “Stock and the Total Demand to Hold”

http://mises.org/rothbard/mes/chap2c.asp

[3] The Labor Theory of Value: A Critique of Carsons Studies in Mutualist Political Economy

https://mises.org/journals/jls/20_1/20_1_3.pdf

Further reading:

Principles in Economics by Carl Menger

http://mises.org/Books/Mengerprinciples.pdf

Man, Economy, and State, with Power and Market by Murray Rothbard

http://mises.org/document/1082/Man-Economy-and-State-with-Power-and-Market

Kevin Carson as Dr. Jekyll and Mr. Hyde by Walter Block

https://mises.org/journals/jls/20_1/20_1_4.pdf

Freedom is Slavery: Laissez-Faire Capitalism is Government Intervention: A Critique of Kevin Carsons Studies in Mutualist Political Economy by George Reisman

https://mises.org/journals/jls/20_1/20_1_5.pdf

Special thanks to: Robert Murphy, Rocco Stanzione, Andrew Criscione, Andrew Katherman, Von Fugal, Jason Lee Byas.