Commentary on Political Economy

Wednesday 2 November 2011

Bohm-Bawerk and the Austrian School, or the Bourgeois Theory of Capital

The reason why economists failed in this simple task [of defining Capital] was that they did not allow the facts to speak for themselves. Instead of simply describing them as they were, explanations were read into them and added to them; one feature was pushed into the foreground, another kept in the background, a third was quite overlooked, while perhaps a fourth was entirely absent, but was read into them. When every man had thus imported his own particular views bodily into the facts, it was, of course, no wonder that everybody got something different out of them. (The Positive Theory of Capital. II.1.4)

“The facts speak for themselves”. Eugen Bohm-Bawerk, “the bourgeois Marx”, had already demolished the labor theory of value by uncovering its metaphysical premises. The “Value” of goods sold on the market – their “prices” – is the immediate “fact”, the empirical “phenomenon” that needs to be “described” and not “explained”. The task of economic science, as with the physical sciences, is NOT to “explain” phenomena” but to link them together in a manner that makes them visible and “predictable” – so as “to let the facts, the phenomena, speak for themselves”, without the aid of an “explanation” that must be “superfluous” and redundant. The market price is not a “phenomenon” that can be “explained” with a “sub-stance”, an “es-sence”, a “hypo-stasis” – a “whatness” or “reality” that stands “behind” or “under” or “inside” the phenomenon. Such essentialism or substantivism as is proffered by the labour theory of value that seeks to go “behind and beyond” the empirical “facts” of market prices can be nothing more than pure meta-physics, sheer confabulation, pure fantasy. Esse est percipi: what you see is what you get. Economic science must be a theory that allows us to place the phenomena in a “regular and predictable” relation with one another so that they can be “described” mathematically.

And this is exactly what the new theory of marginal utility developed by Heinrich Gossen first, then by Stanley Jevons and Karl Menger right here in Vienna – where Bohm-Bawerk taught, and so did Ernst Mach, the scientist behind this empiricist Berkeleyan “philosophy of science” – allows us to do. The “price” of a good cannot tell us anything about its “objective amount of value” or “utility” because the law of supply and demand tells us only what the actual, real, “visible” valuation of goods is by market participants. Therefore, the price of a good can indicate only the relative and subjective “utility” of that good to its sellers and purchasers: a “utility” obviously not measurable in “quantities” but in terms of the subjective utility of the last marginal quantity offered in exchange for another good. The total utility of a good can be measured not cardinally but ordinally in “relative terms” calculated “at the margin” of exchange. Prices thus indicate the “marginal utility” of a good to its seller and purchaser relative to all other goods exchanged on the market.

No objective “quantity” such as “labor” to explain “prices” – no “substance” behind “value”. Value is quite simply the actual “phenomenon” indicated by market prices: no Freudian “oceanic feeling”, no Schopenhauerian “sympathy” – only the “physiological sign” of the subjective “marginal utility”, its “visible manifestation”. Esse ist percipi. To be is the same as to be perceived. Sichtbar machen: to render visible is the task of science, and to con-nect “facts” in the simplest possible relation – mathematically – so that they can “speak for themselves”. In short, Simplex sigillum veri – simplicity is the seal of truth. Truth is “certainty”. That is the aim and scope of “science”.

But marginal utility – market prices – are not a “substance” that can provide a “social synthesis”, an inter esse – as did “labor” in the socialist “metaphysics”. Market prices represent only the “subjective valuations” of market participants. They unite only in the division; they co-ordinate choices only in their “self-interest”, only in their “atomicity”. Unlike the “totalitarian nightmare” of “collective socialist planning”, the market mechanism allows the “free competition” of self-interest – the “unplanned spontaneity” of “individual choice”. Such is the great merit of “economic science”: to have shown that an “equilibrium” is possible, can “exist” at least mathematically without the Smithian “invisible hand”.

It is not Labor that is the substance behind the Value that is distorted by market prices. Labor does not “create” pro-ducts or goods. Labor rather “consumes” what is already there, in Nature (!). Physical science tells us that nothing can be created; everything is conserved; everything is transformed. Labor simply “trans-forms” the natural resources available to it so as to be able to reproduce itself, to survive. Labor has no “utility” therefore: it has only “dis-utility”. And the only way in which it “makes possible” the pro-duction of Value is by utilizing “labor-saving devices”. And that is the precise definition of Capital. It is Capital, not Labor, that allows human labor to be “productive”; it is “tools” that allow workers to produce more. And it is only by “saving labor” that these “tools” or “productive capital” can be produced.

Here then is the inversion of Max Weber’s proposition in the Ethik that saw the ascetic adoption of “labor as an end in itself” as the “specifically bourgeois economic ethic”. No! It is not “labor as an end in itself”: it is the “saving of labor” that allows its diversion to the construction of “tools” or productive capital that will permit labor to be more productive!

Adam Smith's celebrated proposition therefore—"Parsimony and not industry is the immediate cause of the increase of capital"—is, strictly speaking, to be turned just the other way about. The immediate cause of the origin of capital is production; the mediate cause is a previous saving. (II.4, fn.30)

It is “industry” and not “parsimony” that is “the immediate cause of the increase of capital”. But “industry” here does not mean “Labor”!! It means “the use of labor-saving devices”, the use of “productive capital”! So here – finally! – we have what Max Weber was looking for but could not find with his definitions and approach in the Ethik: - A specifically bourgeois economic ethic”! Indeed, an “economic science”. The Neoclassical Counter-revolution against Socialist ideology of the industrial proletariat had finally arrived!!

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