'In the beginning the Universe was created. This has made a lot of people very angry and been widely regarded as a bad move.' -The Restaurant at the End of the Universe

Economics Anarchists Don't Want You To Know

by Ethan Glover, Fri, Oct 25, 2013 - (Edited) Fri, Oct 25, 2013

First, I want to note that by "anarchists" in the title, I don't mean actual peace loving non-aggression anarchists. I mean the central planning, force you to live in a terrible meaningless world communist/socialist anarchists. That being said, I want to precede this article by saying that I am by no means an expert on economics, my knowledge stems from a few Mises Academy courses and what I’ve picked up from various readings. As I study and find more and more criticisms against anarcho-capitalism and Austrian economics, I develop a better understanding of the two. With that, it can be said that this is a simple overview of a couple of economic theories that communists and socialists reject and ignore. But first, there is the one they always tout and speak of, despite being proven wrong in 1870. The wonderful LTV. These are the economics anarchists don't want you to know.


Labor Theory of Value

The labor theory of value is defined as, “the theory that the value of a commodity is influenced or determined by the amount of labor expended in its production”. Or to put in simpler terms, an object is worth the amount of labor that is put into it. For instance, if it takes a person 20 minutes to grill a hamburger, that hamburger is worth 20 minutes. This theory of course must expand from there, and in its raw form falls flat on its face in a modern economy. The first and most obvious thing this ignores is that there are thousands of processes that create and make every product possible. From the hamburger alone, we must consider not only the cow it came from but the housing and care that was needed to raise it. The grain that it ate, the paper and string that made up the bag that carried the grain and the raw resources that it required. The fencing to keep the cow on particular land, the land that it grazes, the living wage for the farmer, tractor use, gasoline, medicine, veterinary services. You can trace these things infinitely. It can be said, that for any one project, there is an infinite amount of labor that can be rightfully considered. When you trace the hamburger to the veterinary services and all the resources that it uses to include beef to feed the veterinarian, you’ve gone full circle. Charging merely for “20 minutes”, whatever that entails cuts out all the people who made that production possible and continues to act as a supplier for raw materials.

When getting into Marxism and how Karl Marx interprets this theory we see that he believed that wages should depend on what it takes to produce a person who is fit to work. So if it took five hours to produce the food, clothing, shelter and protection for a person to get to work the next day, that person should be working five hours a day and producing five hours worth of value. Or in other words, if one hour were equivalent to $1, the workers wage should be $5 a day. If you’re beginning to develop a picture of a bland life and a bland world without growth or excitement, you’re getting the right idea. Marx and his communist followers will say that the capitalist exploits and forces workers to work longer than the minimum required for survival. This act extracts surplus value and is morally wrong. However, if the worker owns his own labor and the results of that labor, that also means he may trade what he has produced for other items. The communist does not reject trade, but many of them believe it is useless as you can just grab new items any time you want in their system without scarcity. (Talk about wasteful.) This simple act of trading is exactly what capitalists do. They don’t enslave people. Capitalism is defined by free markets, not the things communists fear most. When people trade items, it is not necessarily out of necessity (although sometimes it is), rather it is because each person values what the other has more. That is Person A values Person B’s item more than his own item and Person B values Person A’s item more than his own. The reason this trade can exist is that the labor theory of value is wrong and should be replaced with Carl Menger’s subjective theory of value.

Just to drive the point home, let’s consider a few questions about value. If someone buys an old broken down car and repaints it 10 times, does it gain value to the tune of the amount of labor that was put into it? If someone spends three hours making a mud pie and it has been established that one hour of work is worth $1, is that mud pie worth $3? If you find some gold sitting in the middle of nowhere, obviously unclaimed and simply pick it up, is it less valuable than gold that has been mined from the ground? The answer, to all three of these questions is obviously no. One hour and $1 may mean totally different things to different individuals. The person who is more interested in living off the land obviously has less use for that $1 than the person who wants to live in a comfortable house and have access to a lot of technology. Each of these people subjectively value different things more. The “outdoorsman” may value one hour with nature than $1 and the “techie” may value the $1 more than 1 hour of camping. Subjective value does not depend on what is being valued, rather how things are perceived by the individual. This subjectivity and the failure of the labor theory of value are only two more things that have been rejected and ignored by the communist. Value can never be objective when considering the human mind. Trying to make it so is like trying to force socialized medicine on an entire country full of people with different approaches to their different health problems.

Time Preference

From the idea of subjective value, we can see that some people value stable employment more than taking risks on the market. People have different perceptions of value and value different things at different times. One individual may prefer employment while another may not, this is perfectly OK and possible. There is an infinite amount of ways to make a living, especially in the absence of government regulation. It is a well known fact that there is very little risk in employment compared to ownership and hiring. It is possible to be fired as an employee, but you can get a guaranteed and contractually binded paycheck. An owner takes on financial risks of owning millions of dollars in stock (product) and sending items to the market that may not do as well as anticipated. Any losses, debt and even lawsuits go to the owner while the employee gets a paycheck and at worse has to find a new job upon failure. So, getting back to the commu/socialists we can say that profits come from putting off current consumptions, taking risks, doing the organization and doing the managerial work, not exploitation and slavery. This is what is known as “time preference”.

The Mises Wiki defines time preference as, “the assumption that, all else being equal, people prefer a given end to the achieved sooner rather than later.” Or in other words, a person usually prefers to have a value now to having the same value in the future. To the employee this means being paid his agreed to value before a product even goes to market. To the employer this means putting off gains now and gambling for, or more accurately working for, a higher value later. Profits should indeed be greater than the labor costs now to break even, let alone to be rewarded for the risks taken. The employees invest their labor for steady pay as a way to avoid the risk of marketing, producing and selling. When people work together in this way the division of labor creates good entrepreneurs who can raise businesses from scratch into highly profitable institutions in which everybody wins. The owner, the managers, the employees and customers.

Finally, it should be said that the overall value, or money in a market system, is not a static amount, there is no “piece of the pie”. This is a very simple fact that anti-capitalists often ignore. They grow a jealousy of the rich and speak of the “1%” without realizing that when they work they produce value and create money. This process is rooted in things like mining gold and extracting other natural resources. This is what puts money into the economy, not fiat printing. The rich usually gain their position by working very hard through the system, making very smart investments and creating something that many people enjoy and are willing to voluntarily pay for.

Economic Calculation

Lastly, we get to the issue of economic calculation which says that no one person can calculate every factor in the market and; therefore, it is impossible to centralize. By now, all three of these economic principles should be merging into one simple picture. The labor theory of value is impossible because you can not account for every process in the market. Time preference is a necessary consideration in economic theory because you can not put everyone’s preferences into simple formulas and assume everything will be alright. It won’t. Even the communist would agree with this logic when looking at government. There is no one system of government that fits everybody. That’s why it doesn’t work. Not every individual is the same. They are not even close enough to be put under the broadest of strokes.

If any market can be expected to be sustainable, it must have some sort of measurement. This is the idea of a “working price mechanism”, which is really just money. To use an example, if a railroad company moves to build a new line, should it use steel or titanium to build the rails? Both are possible, but titanium is much more expensive due to its scarcity and should, therefore, be saved for more important products or situations. When you get rid of markets or refuse to recognize value and scarcity, it is impossible to decide what is the better choice. Without profit, there is no real measure of production and what people want. One could say direct demand, or how much people are taking as such a measure, but it again ignores the consequences of using scarce resources without price mechanisms. To sum all that up; with no markets for the factors of production, there can be no prices for the factors of production. With no prices for the factors of production, it is impossible to know what is and isn’t profitable, without this knowledge it becomes impossible to know what goods to produce and how to produce them. Thus, economic calculation is a lost necessity within central planning philosophies, and without it markets will inevitably crash.

Sources for this article can be found here.