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200 Years Of Karl Marx

Dr. Chris Erickson

Commentary: The 200th anniversary of Karl Marx’s birth is this month. Marx has not fared well with economists. His poor reputation primarily arises from Marx’s labor theory of value. This is the idea that value of an object is determined by the amount labor, both direct and indirect, it contains.

The idea is that something becomes useful only on the application of labor. Take the production of a Tesla. Add up all the hours of labor used in producing the Tesla and that is its value. This total should include the workers currently employed in the factory, the labor that went into making the robots and other machines used in production, the hours spent training the engineers and other skilled workers, and so.

Because all value is created by labor, all payment should go to the workers. Any profit going to capitalist is exploitation, thus, means that the capitalist system is inherently unfair.

Man the barricades; start the revolution! Time to over through the system!

The problem is that the labor theory of value is nonsense. Its failure is made clear by considering a person contemplating a sunset. Clearly a beautiful sunset has value for the observer but involves no human labor. That Marx so emphasized the labor theory is precisely why his reputation is so poor among contemporary economists.

While Marx was wrong on valuation theory, that doesn’t mean that he was wrong on other issues. In fact, Marx was a good (but not great) economist whose ideas about labor management are surprising modern.

Marx wanted to understand how capitalist could dominate labor in a market economy. His answer to this question sounds striking like principal-agent theory—a theory that is now the underpinning of many of the recent advances in economists understanding of market structure and the need for government regulation.

Marx argued that capitalists hire the worker’s time, not their effort. The worker’s effort cannot be specified in a contract as too many unobservable factors determine productivity. For this reason, wages are only loosely tied to effort, hence, productivity.

One worker might be well paid yet goofs off at work. Another worker, who is self-motivated, perhaps driven by pride in their own accomplishments, is less well paid but works harder. The capitalist can’t pay based on effort because much of the effort is hidden and unobservable.

The way the capitalist, according to Marx, extract effort from the worker, or using Marx’s own terminology, how capitalists exploit the worker, is by structuring the workplace so that power rested with the capitalists.

The capitalists own the means of production, access to which is necessary if the worker is to ply their trade, but the capitalist can cut off this access. It is this power that is the stick capitalists use to force workers to work hard. If the worker slacks off, they will be fired.

Marx’s ideas about the structure of labor markets, sheared of the judgmental terminology, is surprising similar to economists’ current understanding of how these markets work. In this sense, Marx, at age 200, has aged well.

Christopher A. Erickson, Ph.D., is a professor of economics at NMSU. Despite recognizing Marx’s contributions to economics in this article, he is definitely not a Marxist, but rather is a market economist. The opinions expressed may not be shared by the regents and administration of NMSU. Chris can be reached at chrerick@nmsu.edu