We would do well to remember Austrian economist Eugen von Böhm-Bawerk whose birthday is today....
Today is the birthday of Eugen von Böhm-Bawerk, the Austrian economist who was one of the most energetic and persuasive critics of Marxism at the end of the nineteenth century. He was born in Brünn (now Brno) on 12 February 1851 and studied law and economics at the University of Vienna. He was one of the earliest disciples of Carl Menger who in the early 1870s revolutionised economics with the theory of marginal utility. Menger’s approach was quite simple. It was to break an economic good into units. A thirsty man finds his first cup of water delicious, but as the number of cups he consumes increases, the value of each of them for him goes down, to the point when an additional cup does not provide more satisfaction than something else on offer. This is the point where the marginal utility of water will be equal to the price offered for the cup of water in the marketplace, or for something else with the same capacity to satisfy a need. The marginal utility of a good is the utility of an additional unit, which usually decreases with increased consumption, until demand meets supply at a mutually acceptable price.
What this implied was that value was subjective. It was derived from the ability of a good to satisfy the needs of consumers and not from the production cost of the good. It followed, amongst other things, that Karl Marx’ labour theory of value was misconceived, and with it his theory of exploitation. Böhm-Bawerk identified several weaknesses in Marx’ theory of value. For example, it had been said that if it cost twice the labour to kill a beaver than a dear, then one beaver would exchange for two deer. Böhm-Bawerk observed that it might be ten times more difficult to catch an uncommon butterfly or a rare edible frog than a deer, but it did not follow that the butterfly or the frog would be ten times more valuable than the deer. Several other exceptions to the labour theory of value have to be made. The conclusion has to be, Böhm-Bawerk submitted, that Menger’s subjective theory of value explains these phenomena much more adequately. Old wine is more valuable than new wine and new bread more valuable than old bread because consumers have a preference for old wine and new bread.
Böhm-Bawerk also pointed out a basic inconsistency in Marx’ theory. In the first volume of Capital, published in 1867, Marx had made a distinction between variable and constant capital. Variable capital was the part of capital paid in wages, for the service of labour, whereas constant capital was the part paid for the means of production, such as raw materials, buildings and machinery. According to Marx, the surplus value extorted by the capitalists from the workers was in proportion to variable rather than constant capital. But enterprises are of different composition. Some are mostly dependent on the service of labour, for example restaurants. In other enterprises wages are a relatively small proportion of total outlays, for example in railways. The problem is that restaurants and railways, with their very different ratios of variable to constant capital, will in a free market be operated with roughly equal profit rates in the long run. Otherwise capital would flow from the less to the more profitable economic sectors.
Marx realised the problem and promised its solution in the third volume of Capital. When that book was published posthumously in 1894, the solution turned out to be: competition! Marx wrote that ‘These different rates of profit are equalized by competition to a single general rate of profit, which is the average of all these different rates of profit.’ Thus, he abandoned the labour theory of value stated in the first volume, that commodities exchange with one another in proportion to the labour they contain, as Böhm-Bawerk was quick to observe in a famous article in 1896.
Böhm-Bawerk was for a while Professor of Economics at the University of Innsbruck, and thrice Finance Minister of the Austrian part of the Habsburg Empire, until he in 1904 was appointed Professor of Economics at the University of Vienna, a position which he occupied to his untimely death in August 1914. His seminar on economics in Vienna became famous. It was attended by his able disciples, economic liberals such as Joseph Schumpeter and Ludwig von Mises, but also by socialists such as Otto Bauer and Rudolf Hilferding who tried, without much success, to respond to Böhm-Bawerk’s devastating arguments against Marxism. Even the Russian Bolshevik Nikolai Bukharin made an appearance at the seminar over which the unflappable Böhm-Bawerk always presided with courtesy and fairness.
Little did Böhm-Bawerk’s seminar participants know however what the future held in store. As dark clouds gathered over Europe between the two world wars, Schumpeter and Mises both moved to the United States, and the Jewish Mises, a Nazi target because of his race, indeed made a narrow escape from Vichy France in 1940. After the First World War, Bauer became one of the leaders of Austrian socialists, serving briefly as Foreign Minister of the Austrian Republic built on the ruins of the Habsburg Empire, but after the failed uprising of the socialists in 1934 he had to go into exile and died in 1938 of heart failure, a broken man. Having been German Finance Minister twice, Hilferding fell in 1941 into the hands of the Gestapo in France and was tortured to death. Bukharin, after a career as a Bolshevik revolutionary leader, was one of the defendants in Stalin’s 1938 notorious show trials in Moscow, and was subsequently executed in the basement of Lubyanka Prison. The different fates of these five seminar participants illustrate the famous observation that those who crave a quiet life made a bad choice by being born in the twentieth century.
If the twenty-first century will provide a quiet life for those who want it, something like the peace and economic progress of Vienna in the half a century before 1914, it will be because people will listen less to socialist intellectuals like Bukharin, Bauer, Hilferding and their ilk, and more to thinkers like Schumpeter, Mises, and Böhm-Bawerk.