Thursday, March 14, 2013

Fallacy of Karl Marx’s Das Capital : Labour theory of surplus value

Fallacy of Karl Marx's Das Capital : Labour theory of surplus value

'Exploitation of the workers' is the moral basis for all forms of
leftist ideologies and Marxism. This concept has permeated the
collective conscience of human kind in the past 200 years like no
other concept before. The moral basis provided by this concept had
caused more deaths, mayhem, mass murder, suppression of human rights,
stagnation of economies and corruption than any other ideology
including Nazism or any religious dogma. But the whole basis for this
concept of exploitation of the surplus value of labour by the
capitalists, which is derived from Karl Marx's magnum opus "Das
Capital' is an invalid and disproved hypothesis.

Marx argued in Das Capital that the one and only source of profits
(which accumulate into capital subsequently) is the exploitation of
'surplus' value of labour for which the workers are not paid. He
evokes complex mathematical models to 'prove' this hypothesis. But
when this 'value' is translated in prices, the theory looses its
validity. According the Das Capital, profits are derived solely from
the surplus value of labour. He makes no allowance for the
enterprising and organising skills of the 'entrepreneur-capitalist' ;
But we shall see that the profits are created solely by the
entrepreneur's abilities and hard work.

The following projections are put forth by Marx based on labour theory
of surplus value :

1. Profits tend to fall within a business cycle as well as in the long
term due to come due to competition among capitalists who will
innovate and introduce labour saving machines to reduce cost of
production. As the surlplus value of the labour is the only source for
profits, introduction of more machines that displace labourers will
reduce the profits.

2. Each business cycle will be progressively worse than the previous
one and at the end of each business cycle, the smaller firms will be
bought out by large firms which will grow in size.

3. The standard of living of the workers will always tend to border
the subsistence levels and can never ever increase to reasonable

4. As the troughs of each business cycle tends be lower than the
trough of the previous cycle, this downward spiral of the whole system
will ultimately end in a massive collapse of the capitalistic system
itself from which the socialistic state will emerge.

But the economic history of the world since Marx's time has not
progressed as per the above projections. Business cycles have not
worsened in the way he predicted nor did profits fall with the
introduction of labour saving machines. Most importantly the standard
of living and working conditions of the workers have improved
dramatically in the past 150 years ; Especially in the developed
nations in Europe, N.America, Japan, S.Korea, Taiwan, etc. Even in the
developing nations like India, China, Chile, Botswana, etc the average
standard of living of the proletariat has improved a lot in the past
60 years.

All these results contradict Marx's hypothesis and hence it can be
assumed that the basis of his theory : surplus value of labour itself
is invalid. For the workers are always paid first according to the
market value of their labour, while the capitalist-entrepreneur may or
may not get the rewards for his risk taking and entrepreneurial
abilities. Some practical points that need to be explained by
Marxists are :

1. Assuming two or more similar companies engaged in the same industry
are located within the same industrial estate with similar capital
structure, machineries and labourers, the output, profitability and
growth of each unit varies considerably. Assuming the labour
productivity is the same for all the workers in this area, then what
can be the explanation for the sharp difference in the efficiency,
output, and profit margins of these companies ?

2. What explains the very high profit ratios in many industries which
had dramatically reduced the labour component in their production
costs by introducing automation and innovative machineries during the
course of a few decades. For example, in agriculture and textiles in
developed nations, in spite of the tremendous shift of populations
from these sectors to other sectors as a result of introduction of
enormous machines, the profitability in these sectors had not fallen
proportionately. Marxists may try to explain this paradox by arguing
that the surplus labour that went into the manufacturing of these
machines are the reason. But this again gives rise to the same
question about those industries that produce capital goods. No valid
and empirical proof exists for this theory !

3. According to Das Capital, the net surplus value in a system is
constant (and will vary with the variation of the workers population
only) ; But in reality the 'surplus' within many systems have
increased exponentially while the workers population had not grown
proportionately. Hence how did this exponential growth of total
surplus value occur ?

Any worker turned entrepreneur (there are many) would vouch for the
fact that it is the entrepreneurial ability that makes the vital
difference in the performance of the firm. All these worker turned
entrepreneurs had started their lives as workers, working along
millions of similarly placed workers. But some of them managed to save
and / or get into partnerships with co-workers to start small firms
which ultimately grew into giants. All the corporate giants in this
world were once tiny start ups fired by the sheer enthusiasm and
determination of those pioneers. Can anyone name any company which is
continuously existing in its present size and form for many centuries
? Petrochemical giants, pharma majors, automobile majors, IT majors,
companies like Walmart, CNN, Dell, Sony, Apple, Virgin Atlantic, etc :
all were founded by pioneering individuals with nothing but their bare
hands. Their legal heirs had expanded these companies into giants over
the decades.

There are of course, criminal elements among capitalists and corporate
who misuse the loopholes in the rule of law, especially in the
developing nations which have high levels of corruption and cronyism.
But these are exception rather than the rule. Generally in nations
where the rule of law is upheld systematically and where the ethics
remain high, (like in Scandinavian nations, etc) the misuse by
companies are rare. But Marxists usually cherry pick these exception
to paint a distorted picture while glossing over the terrible crimes
caused by their socialistic alternative to the system.

It is always the risk taking, hard working and pioneering effort of
the entrepreneur that makes the difference. Nothing else ; neither
government 'help' nor 'looting' from the public nor wars. These
pioneers are heroes and not the villains (who exploit the workers)
that they are portrayed to be by the Marxists. I salute them all.
All the nations which had allowed full freedom for these innovators
and pioneers to get along their vision, without blocking their
entrepreneurship in any manner had prospered over the centuries, while
all those nations which did the opposite stagnated and remained
impoverished. Indian and Japanese experience since 1947 are the
prime examples for this basic difference.

However the myth of 'exploited' workers still wreck havoc and is very
difficult to eradicate from the minds of emotional idealists who only
see the sharp contrast between the poor and the wealthy. Only way to
eradicate poverty and usher in prosperity on a mass scale is thru a
free market system based on liberal democracy along with a welfare