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Thursday, December 13, 2007

The Labor Theory of Theft

I was reading about "The Labor Theory of Value" on the Internet. Mainstream economists roundly decry The Labor Theory of Value as nonsense, a discredited theory. Only Communists believe in the Labor Theory of Value.

I didn't like this post on Human Iterations. The poster says that anyone who believes in the Labor Theory of Value is a fool. I'm afraid that the author of "Human Iterations" falls under the category of "phony anarchist". There's so many of those!

These economists are the same ones who say "The Compound Interest Paradox" isn't true, and the same ones who say a gold standard is a quaint historic anomaly. My reaction to this sound dismissal of the Labor Theory of Value is "The Labor Theory of Value must be true in a free market."

If mainstream economists spend a lot of time and effort denouncing a theory, then it MUST be true! (At a minimum, it's worth a serious investigation.)

The Labor Theory of Value fails to hold in the current market, because the current market isn't a free market. Economists can't say "The current market is not a free market", so they're forced to say "The Labor Theory of Value is false."

I'll define what I mean by the Labor Theory of Value, because I've seen different definitions in different sources. The Labor Theory of Value says that labor is paid an amount proportional to the actual value of their work. If a job is difficult, it will be paid more than a job that is not difficult.

In a free market, capital is plentiful and cheap. Cost of capital is still a component of price in a free market, but the labor component winds up being the dominant factor.

For example, a cook in a restaurant produces actual real value, but is not well paid. A lawyer produces nothing of actual value, but is extremely well paid. Mainstream economists look at examples like this and say "The Labor Theory of Value is false".

Another example that discredits the Labor Theory of Value is that the stock market goes up 10%-15% per year, but wages only rise 3%-5% each year. Capital is able to get more than its fair share of profits. The reason is that the Federal Reserve and government regulations distort the capital market. The current market is unfairly biased against labor. With an inflation rate of 15% or more, stocks yield a total return of 15% just from inflation! (A stock investment is an inflation-hedged investment. Many large corporations have substantial debts, which means the shareholders BENEFIT from inflation.)

What would happen in a truly free market? Suppose a free market under a gold standard. Under a gold-standard, the risk-free interest rate will be very low. Let's suppose the risk-free interest rate is 2%. Anyone with capital can get a guaranteed return of 2%. Any skilled worker can borrow and raise capital at a cost of 2%, plus a very small fee.

In a free market, capital won't be able to earn returns much higher than 3% or 4%. Why not? Suppose there was an industry where it was possible to get a return on capital of 10%. In that case, skilled workers would borrow money and enter that industry. The excess returns would soon be arbitraged away. If an industry required skill, the workers would be paid more, proportional to the skill required. The return from working as a laborer would only be slightly less than the return from working as a business owner, due to free market competition among business owners. The most skilled workers would probably start their own businesses, instead of working for someone else. There would be no restrictions against starting a business imposed by the state. Business owners would receive as a return the risk-free interest rate on invested capital, plus the actual value of their labor, plus a little more as compensation for their risk.

Capital should earn a slightly higher return than the risk-free interest rate, because a business owner is taking risk. However, the premium can't be too large, or else the capital owner will find competition. There is no red market to shield capital from competition, and the free market guarantees easy access to capital.

Suppose the workers in an industry are overpaid. Other workers will start entering that industry, driving down salaries. People will start competing businesses. Suppose the workers in an industry are underpaid, because there are too many workers in that industry. Fewer new workers will enter that field, and some experienced workers will switch jobs. Suppose the workers in an industry are underpaid, because capital is getting too large a share of profits. In that case, some of those workers will start competing businesses.

The free market (if it existed) would cause salaries to adjust to the actual value of the labor. This arbitrage process doesn't occur in the current market, because the current market is not a free market.

In the current market, there are lots of friction costs that prevent workings from switching careers easily. These barriers are artificially imposed by the government. Many high-paying careers have state-imposed licensing requirements, which guarantee a shortage of workers and high salaries.

The problem is that government violence distorts the market. If I say "Restaurant cooks are overpaid; I'll go work as a restaurant cook", I probably could get such a job without much effort. If I say "Lawyers are overpaid; I'll go work as a lawyer", unless I have a government law license, I am committing a crime. I have to spend several years in law school, pay tuition/bribes, and then pass a test (bar exam), which is designed to restrict the supply of lawyers. If I say "The government provided legal system is inefficient", I can't go ahead and set up my own legal system. Lawyers have entered a conspiracy with the red market to restrict the supply of lawyers, and government violence guarantees that lawyers' services are always in demand. Judges discriminate against non-lawyers who try to represent themselves in a trial. If I'm not a government-licensed lawyer, other people can't hire me to help them defend themselves.

As another example, if I say "The health care system is inefficient; I'll go work as a doctor", I'm barred by the government. If I practice medicine without a government license, I am committing a crime. The AMA has entered a conspiracy with the red market to artificially restrict the supply of doctors. I need to spend years in medical school and years in a residence, paying a lot in tuition/bribes, to get a license to practice medicine. There's no mechanism where individuals can arbitrage away the inefficiencies in the health care system, because the state restricts the supply of doctors.

For my actual career, computer programmer, I'm not protected by the state. However, the average person can't say "Programmers are overpaid; I'll go work as a programmer." Being a good computer programmer requires actual skill. A good computer programmer can outperform an average programmer by 10x-100x or more; a good computer programmer is never paid more than 2x as much as an average programmer. This guarantees I should always be able to find a job. I still experience frustration with the market, because the market is not a truly free market.

Government violence distorts the credit market. The Federal Reserve keeps real interest rates negative. This is a huge subsidy to current capital holders. Current capital holders are inflation hedged, whereas the average person receives negative real wage increases and negative interest rates on their savings. The process I outlined in "How the State Destroys Small Businesses" discriminates against small business owners. An individual who tries to accumulate capital in a bank account finds himself credited with a negative inflation-adjusted interest rate. An individual who tries to accumulate capital in the stock market may be put off by the possibility that he might lose money; he may receive bad advice from "financial planners" who receive a commission by selling a specific product. An individual who tries to borrow to fund a business finds himself paying a much higher rate than a large corporation.

If the Labor Theory of Value fails to hold in the current non-free market, it must be replaced by another assumption. My replacement axiom for the Labor Theory of Value is the Labor Theory of Theft.

The Labor Theory of Theft says "A worker is paid, not by the actual value of his work, but by the extent to which he exploits the red market to gain favors." The highest paid workers are the leading red market workers: bankers, lawyers, politicians, lobbyists, and CEOs. The highest paid workers are those who most effectively exploit the state. The next highest paid workers are pink market workers, such as doctors. Pink market workers provide a useful service, but they are shielded from competition by the state. The worst-paid workers are those who do actual productive work, the white market workers.

The Labor Theory of Value is not a Communist idea. It's a free market idea! Mainstream economists falsely tout the USA as being a free market, while the USA actually is a Communist country! If you tout the Labor Theory of Value as being true, you're denounced as being a Communist! Everything is backwards!

4 comments:

David_Z said...

The Labor Theory of Value says that labor is paid an amount proportional to the actual value of their work. If a job is difficult, it will be paid more than a job that is not difficult.

The LTV proposes that only labor can impute value to an output. From which LTV deduces that "more difficult" ought to equal "more valuable." Because both "difficult" and "valuable" are subjective, the argument is demonstrably false.

For example, a cook in a restaurant produces actual real value, but is not well paid. A lawyer produces nothing of actual value, but is extremely well paid.

I strongly disagree with the assertion that the lawyer produces nothing of actual value. Lawyers produce a service. Just like a bus driver produces a service. Or a waitress. Or a security guard.

I think that there are many strong points in this post, (e.g., competition and the risk-free rate of return, plentiful capital, etc.) but I'm afraid your characterization of the LTV is mistaken.

Anonymous said...

Lawyers create no value because the law is made so complicated by the State with its own specialist language that you need a parasite lawyer to interpret and apply the law.

Anonymous said...

This theory simply says that the value(price) of a product can be computed by the amount of labor it takes to produce. This is not true because value is created by the valuer.

Will said...

The value of the capital inputs into a good is not the ultimate source of value. The 'value' of something is only what a buyer is willing to pay in a specific transaction. Nothing has absolute objective value in a market, only that value which the buyer ascribes to it at the specific time and conditions of the trade. If I expend X resources to build something, but that something has no buyers, then it is worthless or at least worth no more than scrap value. The wealth that went into creating this good is actually lost. This is capital decumulation: actual squandering of real wealth in the economy. This is the meaning of business losses and failure. The function of the market is to determine whose product or service is valued and whose is not, thus guiding limited resources to their most productive uses.

The LTV got a foothold due to some unfortunate problems in Adam Smith's "Wealth of Nations" and progressed from there. Marxist exploitation and 'surplus value' theory were logical extentions of LTV. The LTV was and is the intellectual bedrock of socialist/communist/nationalist confiscation and nationalization schemes. Greed and envy are of course the non-intellectual components serving to rouse the rabble.

I strongly recommend some readings in Austrian economics and subjective marginal utility theory in general. Understanding time preference and the time value of money as the source of the originary rate of interest would also assist with some of your other investigations. See Ludwig von Mises particularly. You can obtain his books at www.mises.org/store/. Particularly: "Socialism"; "Human Action". George Reisman's "Capitalism" is also a tremendous reference work.

Here is a good online reprint of a good introduction to value theory: http://mises.org/story/2422

Here is a good online introduction to marginal utility theory: http://mises.org/story/2610

I hope this information is helpful. I enjoy reading your blog.

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