Labor Theory of Property: Intellectual History


David Ellerman

CHAPTER 4: Labor Theory of Property: Intellectual History

Locke’s Theory of Property

The purpose of this chapter is primarily to relate the modern treatment of the labor theory of property to Locke’s theory of property, to the labor theory of property as developed by the Ricardian Socialists, and to Marx’s treatment of the labor theory of value.

The core of Locke’s theory of property is presented in Chapter V, “Of Property”, in the Second Treatise of Two Treatises of Government.

Though the Earth, and all inferior Creatures be common to all Men, yet every Man has a Property in his own Person. This no Body has any Right to but himself. The Labour of his Body, and the Work of his hands, we may say, are properly his. Whatsoever then he removes out of the State that Nature hath provided, and left it in, he hath mixed his Labour with, and joyned to it something that is his own, and thereby makes it his Property. It being by him removed from the common state Nature placed it in, hath by this labour something annexed to it, that excludes the common right of other Men. For this Labour being the unquestionable Property of the Labourer, no Man but he can have a right to what that is once joyned to, at least where there is enough, and as good left in common for others. [Section 27]

This is Locke’s classic statement of the labor theory of property, the theory that people have the right to the fruits of their labor. The argument is set in a hypothetical original state of society prior to the accumulation of capital when nature is a common resource to all. The “right” Locke postulates is a natural right that is not dependent on the particular laws in a society. Indeed, the labor theory of property is sometimes referred to as the “natural rights theory of property” [e.g., in Schlatter 1951]. The theory is intended as a normative or prescriptive theory, not a positive or descriptive theory. A given legal system might or might not in fact recognize this natural right, but the theory holds that society should recognize and codify the natural right to the fruits of one’s labor in the system of positive laws.

The labor theory of property has throughout its history been entwined with and often totally confused with the labor theory of value. The admixture of the two labor theories was present even in Locke who had a somewhat rudimentary form of the labor theory of value.

For ’tis Labour indeed that puts the difference of value on every thing; and let any one consider, what the difference is between an Acre of Land planted with Tobacco, or Sugar, sown with Wheat or Barley; and an Acre of the same Land lying in common, without any Husbandry upon it, and he will find, that the improvement of labour makes the far greater part of the value. I think it will be but a modest Computation to say, that of the Products of the Earth useful to the Life of Man 9/10 are the effects of labour: nay, if we will rightly estimate things as they come to our use, and cast up the several Expenses about them, what in them is purely owing to Nature, and what to labour, we shall find, that in most of them 99/100 are wholly to be put on the account of labour. [Section 40]

The subsequent history of the labor theory of property has been largely a history of clarifying and elucidating the theory by disentwining it from the labor theory of value. But the mixture of the two labor theories was present from Locke onward. In the following representative quote from a modern commentator, both theories are mentioned in the same sentence.

The citizens of his [Locke’s] ideal commonwealth own property, whose possession is defined as a natural right; but the title to property is secured by labor, which is the source of value. [Lichtheim 1969, p. 108]

Indeed, the two theories are sometimes almost identified when it is held that labor is the sole source (not measure) of the value of produced property and that therefore labor should get the title to the property.

The classical laborists or Ricardian Socialists, such as Hodgskin, looked back not to Ricardo but to Locke for the labor basis to property.

I heartily and cordially concur with Mr. Locke, in his view of the origin and foundation of a right of property. …[Hodgskin then quotes the basic passages from Locke] Thus the principle Mr. Locke lays down is, that nature gives to each individual his body and his labour; and what he can make or obtain by his labour naturally belongs to him. [Hodgskin 1832, pp. 25-26]

Halevy notes that “Hodgskin, a philosopher at the same time as he is an economist, finds the true source of the labour theory of value in Locke” [1956, 181]. Hodgskin points out the inconsistency of orthodox social theorists who pay lip service to Locke’s theory and then defend the usual arrangements of property.

It is not a little extraordinary that every writer of any authority, since the days of Mr. Locke, has theoretically adopted this view of the origin of the right of property, and has, at the same time, in defending the present right of property in practice, continually denied it. This is the logical consistence of literary logicians. [p. 26]

Locke’s labor theory of property has what seems to be a paradoxical position in the history of thought. On the one hand, Locke is seen as the father of orthodox liberal democratic theory and Locke’s property theory usually receives theoretical support from orthodox theorists. On the other hand, the labor theory of property, with or without the labor theory of value, has been used as the basis for radical critiques of capitalism. It is part of our purpose here to address this seeming paradox.

A Re-examination of Locke’s Theory

Was Locke a “closet critic” of capitalist production? Is the critique of capitalist production based on the labor theory of property the descendant of Locke’s theory? In the standard passages quoted from Locke, the person reaping the “fruits of his labor” is working as a self-employed proprietor. The crucial test is Locke’s attitude towards wage labor. This attitude and Locke’s theory as a whole is illuminated by the justly famous Turfs passage.

Thus the Grass my Horse has bit; the Turfs my Servant has cut; and the Ore I have digg’d in any place where I have a right to them in common with others, become my Property, without the assignation or consent of any body. The labour that was mine, removing them out of that common state they were in, hath fixed my Property in them. [Locke, Second Treatise, section 28]

In the stock phrase “fruits of one’s labor,” it has almost always been assumed that Locke would take “one’s labor” to mean the labor that a person performs. On the contrary, we now see that Locke interprets “one’s labor” to mean the labor that one owns, not the labor that one performs. The servant performs the labor of cutting the turfs from the common, but the master owns the labor. Hence the master can say; “The labour that was mine, removing them out of that common state they were in, hath fixed by Property in them.”

Thus Locke’s theory is based less on a principle than on a pun, the pun of always interpreting the phrases such as “one’s labour,” “his labour,” “the labour that was mine” to mean the labor owned rather than the labor performed. Locke’s theory of property was not the labor theory of property at all. For centuries, commentators have misread Locke, always interpreting “one’s labor” to mean the labor one performed. One modern commentator, C.B. Macpherson, has clearly understood the nature of Locke’s theory.

To Locke a man’s labour is so unquestionably his own property that he may freely sell it for wages. A freeman may sell to another “for a certain time, the Service he undertakes to do, in exchange for Wages he is to receive” [Locke, section 85]. The labour thus sold becomes the property of the buyer, who is then entitled to appropriate the produce of that labour. [Macpherson 1962, 215]

If one rereads the classical passages with an eye to distinction between owned labor and performed labor, then one can see that Locke’s emphasis all along was on the ownership of the labor.

The Labour of his Body, and the Work of his Hands, we may say, are properly his. Whatsoever then he removes out of the State that Nature hath provided, and left it in, he hath mixed his Labour with, and joyned to it something that is his own, and thereby makes it his Property. … For this Labour being the unquestionable Property of the Labourer, no Man but he can have a right to what that is once joyned to,… . [emphasis added, section 27]

Since the labor theory of property has always been read into Locke, even by the classical laborists such as Hodgskin, Locke has looked like the ally, unwitting perhaps, of the radical critics of capitalism. But the implied radical critique was only in the eye of the beholder, not in Locke.

When Locke’s assumptions are understood as presented here, his doctrine of property appears in a new light, or, rather, is restored to the meaning it must have had for Locke and his contemporaries. For on this view his insistence that a man’s labour was his own … has almost the opposite significance from that more generally attributed to it in recent years; it provides a moral foundation for bourgeois appropriation. [Macpherson 1962, 221]

Further textual exegesis by Locke scholars [e.g., Tully 1980 and the references cited therein] has not, in our opinion, significantly shaken Macpherson’s conclusion.

Using the tools of the modern treatment of property theory to interpret Locke, we can see that he was simply describing laissez faire market appropriation where labor is the only exclusively owned factor. When labor is applied to commonly owned land and natural resources, then, as usual, the positive product is legally appropriated by the party which assumed the negative product, the costs of the used-up inputs. But if labor is the only exclusively owned input, then the owner of the labor laissez faire appropriates the product. That is exactly what Locke was describing. A comparable situation exists today when labor is applied to commonly owned resources such as fish or minerals in the ocean. When employees catch fish from the ocean (or cut turfs from the common), the employer laissez faire appropriates the fruits of “his labor.”

Locke imported into his so-called “state of nature” not only the whole employment relation (one of the great artificialities of history) but the laissez faire mechanism of appropriation used by positive law. Locke’s theory, being a description of this positive law mechanism, is without moral force. The laissez faire mechanism states that since the last legal owner of the input-assets has borne (appropriated) the input-liabilities or negative product, that party should also have the legally defensible claim on the positive product. But from the normative viewpoint, there is no reason why the owner of the input-assets ought to appropriate (i.e., “swallow”) the input-liabilities as opposed to being compensated for the used-up inputs. That is only the laissez faire solution (letting the input-liabilities lay where they fall).

The labor theory of property (juridical imputation principle) imputes the negative product to the party de facto responsible for using up the inputs. The ownership of the input-assets only determines to whom that rightful appropriator of the input-liabilities should be liable for the inputs.

Sometimes a theory is best understood and situated when it is generalized. How does Locke’s theory generalize when capital is introduced? When privately owned capital is introduced, then the party that bears the costs of the services of the labor and capital will laissez faire appropriate the fruits of “his labor and capital.” In the following remarkable passage, James Mill describes, without the benefit of the usual distributive shares metaphor, the employer’s laissez faire appropriation of all the produce by bearing all the costs.

The great capitalist, the owner of a manufactory, if he operated with slaves instead of free labourers, like the West India planter, would be regarded as owner both of the capital, and of the labour. He would be owner, in short, of both instruments of production: and the whole of the produce, without participation, would be his own.

What is the difference, in the case of the man, who operates by means of labourers receiving wages? The labourer, who receives wages sells his labour for a day, a week, a month, or a year, as the case may be. The manufacturer, who pays these wages, buys the labour, for the day, the year, or whatever period it may be. He is equally therefore the owner of the labour, with the manufacturer who operates with slaves. The only difference is, in the mode of purchasing. The owner of the slave purchases, at once, the whole of the labour, which the man can ever perform: he, who pays wages, purchases only so much of a man’s labour as he can perform in a day, or any other stipulated time. Being equally, however, the owner of the labour, so purchased, as the owner of the slave is of that of the slave, the produce, which is the result of this labour, combined with his capital, is all equally his own. In the state of society, in which we at present exist, it is in these circumstances that almost all production is effected: the capitalist is the owner of both instruments of production: and the whole of the produce is his. [James Mill 1826, Chapter I, section II]

That is the application of Locke’s theory in the general case when both capital and labor are privately owned inputs to production.

The elder Mill’s argument, that the capitalist’s claim on the product is as good as the slave owner’s claim, is ironically correct. The capitalist, like the slave owner, has used a legalized fraud, which pretends that the worker is an instrument, to arrive at the position of being the “owner of both instruments of production” so that he can then make a legally defensible claim on the positive product.

The truth about capitalist appropriation occasionally “slips out” in the literature of capitalist economics–usually before an appropriate metaphor has been established as the Official Truth. James Mill’s factual and non-metaphorical description of capitalist appropriation–”the whole of the produce is his”–is an example. He described (probably goaded by Hodgskin) the actual property rights involved in capitalist production before Ricardo had established the Official Metaphor of distributive shares. It is clear why modern orthodox economists now prefer to hide behind the facade of the distributive shares metaphor rather than address the actual structure of property rights in capitalist production. Even though one legal party owns the entire production input-output vector of an enterprise, i.e., the whole product, the happy consciousness of modern economics describes the outcome of production in terms of the “division of the product” seemingly without any second thoughts about actual property rights and liabilities.

The Ricardian Socialists

Various versions of the labor theory of value were used in the classical economic theories of Adam Smith and David Ricardo, without recognizing any property theoretic implications. Smith used labor as a measure of value in the sense that price could be viewed in terms of the labor it commanded. Ricardo interpreted the price of a commodity, for the most part, in terms of the labor directly or indirectly embodied in the commodity. The property theoretic implications of Ricardo’s labor theory of value were developed by the small band of radical economic thinkers known as the “Ricardian socialists” or classical “laborists” [e.g., in Lichtheim 1969, p. 135].

In England, the principal Ricardian socialists or classical laborists were Thomas Hodgskin, William Thompson, and John Francis Bray [see Menger 1899 and Foxwell’s introduction for a description of this school]. Historians of economic thought have viewed the Ricardian socialists less as thinkers in their own right and more as precursors to Marx. This has affected the parts in the Ricardian socialists’ thought which are emphasized, namely the parts that were later developed by Marx. Indeed, many aspects of the Marxian labor theory of surplus-value and exploitation can be found in the Ricardian socialists. But the Ricardian socialists or classical laborists also explicitly developed the labor theory of property, and this property theoretic theme did not survive–at least explicitly–in the value theoretic focus of Marx’s thought. The deficiencies in their “classical” treatment of the labor theory of property, i.e., their neglect of the negative product in their “whole product” concept and their failure to use the juridical notion of responsibility to explain the uniqueness of labor, will be considered in the next section.

Deficiencies in the Classical Laborist Treatment of LTP

The development of the labor theory of property by the classical laborists such as Hodgskin, Thompson, and Bray suffered from several major deficiencies–which are addressed in the modern theory. While the use of the phrase “whole product” is borrowed from them, they failed to symmetrically include the all-important negative product in their concept of the whole product. They referred to the positive product, the produced outputs, as the “whole product.” But the classical laborists’ claim of “Labor’s right to the whole product” is incoherent without the inclusion of the negative product.

The classical laborists did, of course, realize that inputs do not fall like manna from heaven; worker-managed firms would have to pay for their inputs. For instance, when considering machinery and materials, Thompson noted that “the labourer must pay for the use of these, when so unfortunate as not himself to possess them” [1963, 167]. But Thompson and the others did not systematically emphasize the negative product. That seemed to leave them open to the idea that the positive product can be appropriated without also appropriating the negative product, an idea which might be called “immaculate appropriation.” Many critics have accused LTP proponents of advocating immaculate appropriation.

Consider, for example, an economy of self-managed firms where firm A produces capital goods such as machine lathes which are used by firm B to produce consumer goods. The firm A workers’ appropriation of the positive fruits of their labor is meaningless unless the firm B workers appropriate the negative fruits of their labor (i.e., bear the liabilities for using up the machine services). Unless the firm A workers will give away their positive product for free, the firm B workers must bear the negative fruits of their labor and satisfy those liabilities by leasing or buying the capital goods. The classical laborists’ failure to explicitly include the negative product in their notion of the whole product left them open to the orthodox banality that Labor cannot expect to get all the outputs without taking due account of the other scarce factors.

Another major deficiency in the classical laborists’ development of the labor theory of property was their failure to interpret the theory in terms of the juridical norm of legal imputation in accordance with de facto responsibility. The basic juridical principle of imputation is that de jure or legal responsibility is to be imputed in accordance with de facto or factual responsibility. For example, the legal responsibility for a civil or criminal wrong should be assigned to the person or persons who intentionally committed the act, i.e., to the de facto responsible party.

Since, in the economic context, intentional human actions are called “labor,” we have the following equivalence.

The Juridical Principle of Imputation = The Labor Theory of Property.

In other words, the juridical principle of imputation is the labor theory of property applied in the context of civil and criminal trials, and the labor theory of property is the juridical principle applied in the context of property appropriation. This equivalence was perhaps not evident in the classical treatment of the labor theory of property because that treatment ignored the negative product, and yet it is the negative side of the imputation principle that is applied explicitly in civil and criminal trials.

The lack of this juridical interpretation in the classical treatment led to the classical laborists’ notorious failure to ever justify the slogans such as “Only labor is creative” or “Only labor is productive.” Orthodox economists could correctly observe that all the factors of production, including land and capital, were “productive” in the sense that to add to or subtract from the employment of these factors would accordingly add to or subtract from the product. It is indeed true that land (including natural resources) and capital are “productive” in this sense of being causally efficacious in production. Otherwise there would be no occasion to use them. The reason that machine tools are used in metalworking and that good luck charms and magical incantations are not used is that the tools are much more efficacious.

The point is that while all the factors are “productive” in the sense of being efficacious, only labor is responsible. Capital goods and natural resources, no matter how useful they may be, cannot ever be responsible for anything. Guns and burglary tools, no matter how efficacious and “productive” they may be in the commission of a crime, will never be hauled into court and charged with the crime. Only human beings can be responsible for anything and thus only the humans involved in production can be responsible for the positive and negative results of production. In particular, the people working in an enterprise are factually responsible for using up the inputs and for producing the outputs. Hence the juridical principle of imputation (i.e., the labor theory of property) implies that the workers (in the inclusive sense) should have the legal liability for the used-up inputs and the legal ownership of the produced outputs.

Hegel’s Theory of Property and Inalienability

Hegel had a formative influence on Marx long before Marx became acquainted with the work of the classical laborists such as Proudhon, Hodgskin, and Bray. And, like the classical laborists, some version of the labor theory of property was central to Hegel’s vision. It would not be a complete overstatement to say that Hegel’s vision was the labor theory of property writ large in the grand German metaphysical style. Instead of the mundane focus on intentional human action transforming the inputs to produce the outputs, it is Spirit, Mind, or Ideality entering the world to realize itself in the world and to make the world its own. When this grandiose scheme is boiled down to a theory of property in the Philosophy of Right, the result is a version of the labor theory.

Hegel seems to have been the first to bring together the two intellectual streams of the labor theory of property and the de facto inalienability theory. It was politically and perhaps psychologically difficult for the conservative Hegel to work out the full implications of these theories, but the ideas and connections are present in Hegel’s work.

Rational humans have intentionality; they can intervene in the world to realize their purposes and impose their will on the brute mechanism of natural forces. In so doing, humans are responsible for the difference they make. They are responsible both for what they consume or otherwise use up and for what they create.

A person has as his substantive end the right of putting his will into any and every thing and thereby making it his, because it has no such end in itself and derives its destiny and soul from his will. This is the absolute right of appropriation which man has over all ‘things’. [Hegel 1967, ¤44, p. 41]

The property thus appropriated is “the embodiment of personality” [¤51. p. 45]. Alan Ryan has nicely paraphrased this Hegelian theme in modern terms.

In the search for freedom we distinguish ourselves from objects in the outside world which merely interact with each other in a mechanical, causal fashion; we use, alter, make, consume and control things. In doing this, we also alter the status of those things; they cease to be objects with no point or purpose, and come to reflect and embody our purposes. The world literally takes on human purposes. … Only if there were already a will like our own opposing our will would we have no right, which is why we cannot, in principle, make slaves out of other persons. [Ryan 1984a, 185-186; see also Ryan 1984b, chapter 5].

This labor-theoretic theme ties in with inalienability because a person can only put his or her will in another entity if the latter is “unoccupied” and has no will of its own. To use and to transform something, we must first take possession of it, i.e., must be able to put our will into it. For anything to be transferrable or alienable between persons, the giver must be able to take his or her will out of it so the receiver can take possession, occupy it, and employ it.

The voluntary slavery contract and the employer-employee contract applied this transferable commodity model to the long-term and short-term “transfer” of intentional human actions. But the voluntary slave (“warrantee”) and the employee cannot in fact take their will out of their intentional actions so that they could be “employed” by the master or employer. They can only agree to co-operate by following the instructions of the master/employer or his agents. Instead of recognizing these contracts as invalid due to the impossibility of transferring labor, the law can erect an institutionalized fraud to account for the “fulfillment” of the contract (i.e., in the past, for the slavery contract and, currently, for the labor contract). Co-operate with the master/employer and that will “count” as fulfilling the contract for the transfer of labor. If, however, this peculiar institution of the labor contract should be abused by the commission of crimes, then the whole fraudulent superstructure will be stripped away in favor of the actual facts. The master and servant co-operated together to commit the crime, and they will be held legally responsible for the fruits of their labor.

How much of this is Hegel and how much is a modern gloss? Hegel used this de facto inalienability argument in connection with slavery. Moreover, he apparently saw the argument reaching “beyond the pale” to implicate the wage labor contract. Hence he purposely moved to defuse the application to wage labor. Voluntary slavery and wage labor are as different as “universal and particular”; the particular can be alienated but not the universal [see Hegel 1967, ¤67]. Translated out of metaphysical doubletalk, this is the rather implausible assertion that a person can vacate his or her will for eight or so hours a day for weeks, months, or years on end but cannot do so for a working lifetime. Our purpose is not to show the desperation in Hegel’s attempt to defend the employment relation with a metaphysical distinction between a spot market and a futures market in labor. Our point is that he saw those implications so he may be given some credit (against his will) for broaching the de facto inalienability critique of the employment contract.

Hegel scholarship is currently enjoying something of a renaissance [e.g., MacGregor 1984, or Pelczynski 1984]. Anti-capitalist themes in Marx are being rediscovered in Hegel without turning Hegel upside down. Insofar as Marx’s labor theory of value is a veiled version of the labor theory of property, that property theme was explicit in Hegel. And the de facto inalienability argument against wage labor does not seem to have survived in Marx at all. Marx’s analysis emphasized the unequal bargaining power of the propertyless proletariat (the result of capitalist primitive accumulation) and exploitative wage rates in his labor theory of value and exploitation. Neither is a critique of the wage labor relationship itself. The inalienability argument implied the abolition of wage labor in favor of universal self-employment, but that argument lay buried in the work of Hegel.

“The Labor Theory”

At least since Marx’s time, any discussion of the labor theory of property as a critique of capitalism has been dominated by Marx’s labor theory of value and exploitation. The labor theory of property simply has not had an independent intellectual life. Yet many of the ideas underlying the support and interpretation of the “labor theory of value” actually are based on the labor theory of property. Hence it is best to speak firstly of “The Labor Theory” (LT) as a primordial theoretical soup without specifying “Value” or “Property.” Then the various overtones and undercurrents in LT can be classified as leaning towards the labor theory of value (LTV) or the labor theory of property (LTP).

Since so much of the literature is formulated in terms of LTV, it is further necessary to divide treatments of LTV that are really veiled versions of LTP from treatments that are focused on value theory as a quasi-price theory. The LTP-oriented versions emphasize labor as the source or cause of the value of the product, while the price-oriented versions consider labor as the measure of value.

Marx’s Labor Theory of Value and Exploitation

Methodological Introduction

First a word on methodology. One of the earmarks of a scientific theory is that it is intersubjectively communicable and understandable. It isn’t just an accumulation of a person’s views or pronouncements. Other scientists should be able to understand the theory and develop its consequences independently of the originator of the theory. Some of the implications may even run counter to the expectations and desires of the creator of the theory.

We do Marx the honor of treating his labor theory of value and exploitation as a scientific theory. Many Marxists prefer to treat Marx as an oracle rather than a scientist. If an implication of his theory falls short of his expectations, many Marxists think they can “disprove” the implications by finding appropriate quotations in the sacred texts.

The second point is that Marx used a “shotgun” approach to criticizing capitalism; he used several different critiques. A modern analogy would be a computer video game with several different levels of play. Neophytes were treated to an emotional attack on capitalism based on the working conditions of Marx’s day as reported by the factory inspectors. Those seeking a more principled criticism are taken to the next level of play.

The next level cites primitive accumulation which robs workers of the independent access to the means of labor. That, in turn, forces them as a propertyless proletariat to sell their labor to the capitalist class with its monopoly ownership of the means of production. But the sins of primitive accumulation in the past give little leverage in the present; they are tempered by the prescription of time. The unequal-bargaining-power critique of the wage labor contract is well within the bounds of liberal capitalism. It pushes towards the equalization of power through Big Labor collectively bargaining with Big Capital or through the competitive determination of wage rates without bargaining power on either side of the market.

Capitalist economists argued for the competitive solution to the monopoly power critique so that took Marx to the deepest level of play, the labor theory of value and exploitation. The purpose of that theory was to show that capitalist production was exploitative even under the (unrealistic) assumption that all markets were in perfectly competitive equilibrium.

The Exploitation Theory in Capital

The locus classicus of Marx’s exploitation theory is in Volume I of Capital. In Chapter 7, Marx develops an example where workers use a spindle to spin cotton into yarn. A worker is paid 3 shillings for a “day’s work.” In 6 hours, the worker transforms 10 shillings worth of cotton, with 2 shillings depreciation on the spindle, into 15 shillings of finished yarn.

Time is not a factor in the example. There are 15 shillings of costs and the product is worth 15 shillings. There is no profit, surplus labor, or exploitation.

Then Marx supposes that another 6 hours of labor can be extracted as part of a day’s work (no additional pay), so with twice the inputs there will be twice the outputs.

Now the costs of the output is 27 shillings, but output sells for 30 shillings so there is a 3 shilling pure profit. Since there was no profit before the last 6 hours of work, Marx concludes that they represent surplus labor and exploitation.

One could also concoct examples where there were losses, the selling price was less than the costs. What would be the point? The challenge to Marx was to show that there could be exploitation of labor in a competitive equilibrium. The example is competitive (no monopoly power argument) but it is not an equilibrium and there is no unique connection to labor.

The same “story” could be told to make it seem that a spindle owner is exploited who rents out a spindle for 4 shillings for a “day’s spinning.” Let us suppose the same situation except that the workers are paid even less, one shilling for six hours of work. The spindle is used for 6 hours along with 10 pounds of cotton and six hours of labor to produce 15 shillings worth of yarn.

Since the costs are also 15 shillings there is no profit.

Since the spindle has already been rented for the day, it is used for another six hours (no additional rent) along with twice the other inputs to yield twice the outputs.

Now the costs of the output is 26 shillings, but output sells for 30 shillings so there is a 4 shilling pure profit. Since there was no profit before the last 6 hours of spinning on the spindle (with no additional rent), one could conclude that they represent “exploitation” of the spindle or the spindle’s owner (even with workers paid less than before).

This result is to be expected. Marx’s analysis is not based on any unique property of labor so one can easily reconfigure the examples to make it seem that any other rented input such as a spindle is exploited. One could even develop the analogous jargon about buying a day’s “spinning-power” and then extracting more “spinning-time” than is equivalent to the day’s spinning-power. This illustrates the non-uniqueness of labor in Marx’s analysis of exploitation.

The other difficulty is that the situation is not an equilibrium. In Marx’s original example, the 3 shilling profit would lead the given producers or other profit-hungry capitalists to expand production which would bid up the price of cotton, spindles, and labor while reducing the price of the yarn flooding out onto the market. Thus any configuration of prices that yielded profits could not be an equilibrium.

There is, however, a modern explication of Marx’s exploitation theory which does produce an exploitation result under competitive equilibrium–so we turn to that modern treatment of Marx’s labor theory of value and exploitation.

The Modern Marxian Labor Theory of Value and Exploitation

Marx’s value theory has been successfully formulated as a scientific theory–although the success has been a double-edged sword. Input-output theory, developed by Leontief and by Sraffa, has provided the mathematical framework for a rigorous modern development of Marx’s labor theory of value and exploitation [e.g., Morishima and Seton, 1961; Okishio, 1963; Morishima 1973; Wolfstetter, 1973]. While controversy has continued to flourish, at least there is now a common analytical core. Proofs can be given without footnotes referring to the sacred texts. It is this development above all others that has lifted Marx from being a luminary in the dark underworld of heretics to a respectful position in the neoclassical parthenon of economists as a precursor to Leontief, von Neumann, and Sraffa. The “downside” for Marxian economics is that untoward implications can no longer be “disproved” by consulting the oracle. The theory now has a life of its own. As we will see, the father may well want to disown his progeny.

The full development of modern Marxian value theory requires a heavy dose of matrix algebra. However, the basic import as a critique of capitalist production can be seen in the simplest case of one commodity (corn) and labor which requires no matrix algebra. In a more technical chaper below, the same simple corn and labor model is used to illustrate marginal productivity theory, the Marxian labor theory of value, and the labor theory of property. Only the outcome of the analysis is summarized here.

It is interesting to note which parts of the usual literary presentation of Marx’s theory have no role in the modern theory. Marx tried to relate the exploitation analysis to the workplace power relationship of the employer over the workers. The capitalist forces the workers to expend more labor-time than it took to reproduce their labor-power. In spite of such rhetoric which usually accompanies presentations of the modern theory, the role of power relations did not survive in the modern reformulation. No assumptions about power relations were made in the input-output model, yet the presence of Marxian exploitation can still be derived. Hence the result does not depend on power relationships. As Robert Paul Wolff notes, there “is in fact no place in the formal analysis at which the labor/labor power distinction gets introduced” [1984, 178]. The veneer of rhetoric about power relations and the labor-time/labor-power distinction only obscures the real basis of the exploitation result.

The modern theory also fails to be based on any unique attribute of labor. It does not explain any role of labor as either a source or measure of value since “Marxian value” is simply defined as labor content. As Robert Paul Wolff has also shown, one can even formulate a “corn theory of value and exploitation” and rederive analogous results that the corn suppliers are exploited.

By reproducing for corn or iron or coal, all the striking results that Marx derived concerning for labor, we have, it seems to me, raised questions about the foundations of Marx’s critique of capitalism and classical political economy. [Wolff 1984, 172]

Neo-classical economists appraise the Marxian labor theory of value as if it was intended as a price theory. But that pretense is dropped in the modern theory; it is fully acknowledged that Marxian labor values will systematically diverge from competitive market prices and that the agents in the economy will respond to prices, not “values.” What then is the point of “value theory”? Is it an unnecessary detour on the way to price theory?

The Marxian literature is quite taken with the germanic philosophical jargon of “appearance versus reality.” Veils are constantly being stripped off of surface appearances to reveal hidden inner realities. Apparently “prices” are a superficial market epiphenomenon while “Marxian values” reveal a hidden deep structure. For instance, the analysis of capitalist exploitation in the modern theory results in what Morishima calls the “Fundamental Marxian Theorem”: the rate of exploitation is positive if and only the rate of profit (= interest rate) is positive. This is interpreted as showing that exploitation is the hidden meaning of the surface phenomenon of a positive interest rate (a.k.a., profit rate). Without Marxian value theory to strip away the veil, one would have only the observation of positive interest rates without the inner meaning.

The machinery of input-output theory allows the calculation of the stream of primary inputs (non-produced inputs) that were used up in the production of some output. The Marxian model ignores land and natural resources, and uses labor as the only primary input. Hence the calculation of the labor content or Marxian value is possible. Produced intermediate goods such as the seed corn are ultimately dissolved into labor so all the direct and indirect labor embodied in a bushel of corn can be summed to obtain the Marxian value of a bushel.

There is, however, another scarce resource that enters the model in a different way, namely time. Time is not a resource along side of labor, capital, or land; time availability is an aspect of all resources. As any corn farmer can attest, corn available to be used as seed at planting time is different from having the otherwise identical corn after the planting season has passed, and similarly for other resources. The market price attached to the time availability of resources is the interest rate. To get the corn earlier rather than later, one must borrow funds to buy it so the additional price attached to the early availability of the corn is the interest on the borrowed funds.

Time puts a difference on commodities. Corn at planting time is an economically distinct commodity from corn at harvest time, and similarly for labor. Yet the definition of Marxian value ignores time. Summing the labor directly and indirectly embodied in a bushel of corn treats all the past labor as being the same so it can be meaningfully summed. But if labor at different times is distinct like “apples and oranges” then the sum is as meaningful as “3 apples + 4 oranges.”

Marxian values systematically diverge from competitive market prices. Why? Because Marxian values ignore time. In the later chapter on Marxian Value Theory, it is shown that when the definition of Marxian value is corrected to take time into account using the interest rate, then value is identical with price. Thus Marxian value is less of the “hidden inner reality” of price than just a faulty definition of price.

This analysis of Marxian value throws light on the analysis of “exploitation.” The modern formulation of the Marxian labor theory of value and exploitation is in fact a just-price theory. It takes as a normative benchmark the time-saturated regime where the rate of interest r is zero. It evaluates the transactions of the actual economic regime where the interest rate is positive at the benchmark prices. It finds that the workers receive less in the actual regime than they would in the benchmark regime; that difference is precisely the “exploitation.”

The same sort of “exploitation” analysis could be applied to any price change. Sell apples instead of labor. Suppose in the benchmark situation,

Benchmark Prices: 10 Apples = 1 Bushel of Corn.

“Value” is defined as the benchmark prices; they are the “just prices.” In the actual situation, the price of apples dropped relative to corn.

Actual Prices: 15 Apples = 1 Bushel of Corn.

Suppose the apple-owner sells 300 apples in return for 300/15 = 20 bushels of corn. Let us “pierce the veil” of this competitive market transaction to “reveal its inner nature.” In return for the 20 bushels, the apple seller first gives up 200 apples. The 200 apples have the same “value” as the 20 bushels (i.e., at benchmark prices). Everything seems fair and square. The 200 apples were “paid for” by the 20 bushels. But then the apple-seller is “forced to alienate” an additional 100 apples which is “appropriated as a surplus” by the corn-owner without any further corn payment in return. These extra 100 apples are the “unpaid” apples. In terms of corn, the corn-owner gave up 20 bushels to receive the “value” of 30 bushels so the surplus appropriated by the corn-owner represented 10 bushels of corn. The ratio of the unpaid apples to the paid apples is 100/200 = .5 so there is a 50% rate of exploitation. “Beneath the facade” of the market transaction, we have revealed the “exploitation” of the apple-seller by the “forced alienation” of the surplus apples.

Marxian exploitation theory applies this same methodology to the labor contract. It clearly has nothing to do with workplace power relations. In the benchmark regime, the just interest rate is zero, the just corn price per bushel (in terms of labor) is Marxian value v, and the just wage in terms of corn is the reciprocal (1/v). As the interest rate increases from zero in the hypothetical benchmark regime to a positive value in the model, the price of labor (like the price of apples) decreases relative to the price of the wage goods (corn), so the labor-sellers are “exploited” (like the apple-sellers). Thus there is “exploitation” if and only if the interest rate is positive. That “Fundamental Marxian Theorem” may “be considered as the heart and soul of Marxian philosophy…” [Morishima 1973, p. 6]. That theorem is often interpreted as showing that exploitation is the hidden inner meaning of a positive interest rate. We have shown that the opposite is the case. The charging of interest is the hidden inner meaning of “exploitation” in the modern input-output version of Marxian value theory.

In its precise modern form, Marxian value theory has emerged as a not particularly insightful “just-price” theory expressing a Marxian version of the old Aristotle-Aquinas interest grumble. Even if one takes it seriously as a just-price theory, it is not a critique of the institution of wage labor but only a critique of unjust wage rates, i.e., the “exploitative” wage rates corresponding to positive rates of interest. Yet Marx’s conviction was most certainly against wage labor itself, not just exploitative wage rates. Thus Marx hardly wanted to point out the shortcomings of the theory by discussing a “just” or non-exploitative wage rate, although that occasionally slips out.

It will be seen later that the labour expended during the so-called normal day is paid below its value, so that the overtime is simply a capitalist trick to extort more surplus labour. In any case, this would remain true of overtime even if the labour-power expended during the normal working day were paid for at its full value. [Marx 1977, 357 fn.]

The just wage is the wage at which labor is “paid for at its full value.”

Capitalism is a property system that uses the wage labor contract to systematically violate people’s right to appropriate the fruits of their labor. Even if Marx’s labor theory of value and exploitation had no difficulties, it would only be a value theory. It would only be a critique of exploitatively low wage rates, not a critique of the wage labor contract itself. A critique of the contract itself requires a jurisprudential argument that implicates the very validity of the contract, e.g., the de facto inalienability argument. Marx sent a value theory to do battle with a property system. It takes an alternative property theory to provide a critique of a property system, e.g., the labor theory of property.

Property Theoretic Themes in Marxian Value Theory

The modern Marxian labor theory of value and exploitation (a variant of the labor-as-measure LTV) gives no glimpse of any relevant unique property of labor. It simply defines “value” as labor content. Marx, however, started (like Hegel) by singling out human action as the unique activity that acted upon the world to endow it with intents and purposes–even though Marx and Hegel did not use the modern vocabulary of intentionality and responsibility.

But although part of Nature and subject to the determinism of natural laws, Man as a conscious being had the distinctive capability of struggling with and against Nature–of subordinating and ultimately transforming it for his own purposes. This was the unique r™le of human productive activity, or human labour, which differentiated man from all (or nearly all) other animate creatures …. [Dobb 1973, 143-144]

Marx clearly saw that physical causal processes can never be co-responsible with human agents; the causal processes serve only as “conductors” to transmit human intentions. As Wieser put it, “The imputation takes for granted physical causality” [1889, 76]. Indeed, in more advanced production processes, the natural forces are so arranged or (in modern terms) programmed so that with very little further human input, the interplay of natural processes will “automatically” realize the human intentions. As Marx noted, this is what Hegel called “the Cunning of Reason” [see Marx 1977, 285, footnote 2].

Marx also was by no means exclusively concerned with developing the labor-as-a-measure version of LTV. It was not simply that value is a function of labor, but that direct labor creates the value added to the material inputs.

For the capitalist, the selling price of the commodities produced by the worker is divided into three parts: first, the replacement of the price of the raw materials advanced by him together with replacement of the depreciation of the tools, machinery and other means of labour also advanced by him; secondly, the replacement of the wages advanced by him, and thirdly, the surplus left over, the capitalist’s profit. While the first part only replaces previously existing values, it is clear that both the replacement of the wages and also the surplus profit of the capitalist are, on the whole, taken from the new value created by the worker’s labour and added to the raw materials. [Marx 1972, 182]

We previously drew a conceptual roadmap of “The Labor Theory” which saw it divide into LTP and LTV. Then LTV divided into “labor as source” and “labor as measure” theories. The source versions of LTV are best understood as (confused) value-theoretic renditions of the labor theory of property.

The source/measure dichotomy should not be confused with a prescriptive-descriptive dichotomy. “Value” can be interpreted descriptively or normatively, and value theory in economics is intended as a descriptive theory. Similarly, “responsibility for” (or “source of”) has a descriptive (de facto) and a normative (de jure) interpretation. The descriptive question of who is de facto responsible for committing a burglary is distinct from the normative question of who should be held de jure responsible for the burglary. The imputation principle–that de jure responsibility should be assigned according to de facto responsibility–provides the link between the two questions.

In a technical chapter of Part III below, marginal productivity theory, Marxian value theory, and the labor theory of property are all developed in the same simple corn and labor model so that the theories can be precisely compared. The theories diverge on the factual question of “What does Labor produce?”–the marginal product of labor, the net product, or Labor’s product. There is no explicit divergence on the normative question of whether Labor should get what Labor produces although economists, including Marx, consider it scientifically uncouth to explicitly advocate any normative principle. MP theorists, such as Milton Friedman, take it as fact that competitive capitalism imputes to each factor what it produces. But, unlike John Bates Clark, Friedman leaves the reader to supply the obvious normative evaluation.

The source version of LTV and LTP also have both a descriptive and a prescriptive side. The controversy lies largely on the descriptive side although the normative parts are necessary to complete any critique of capitalist production. The descriptive side of MP theory resorts to metaphor (pathetic fallacy) to picture causality as responsibility–to picture each causally efficacious factor as being responsible for producing a share of the product.

Classical laborists, such as Thomas Hodgskin, as well as Marx criticized this personification of the factors (which antedated MP theory). They based the source-LTV and LTP on the unique attribute of labor that it is the only “creative” factor. That attribute of de facto responsibility is not a concept of the natural sciences. The de facto responsibility of labor–the fact that Labor is the source of the whole product–does not even show in the physics/engineering description of a production process (e.g., in a production function). But it is central to the descriptive side of the source-LTV.

The crucial descriptive aspect remains the capturing of the human dimension of production and distribution in the labour theory of value viewed as a category of descriptive statements, rather than the possibility of ‘determining’ or ‘predicting’ prices on the basis of values,…. [Sen 1978, 183]

Economists who seem to take their professional mission to rationalize an economy that treats persons as things (by allowing them to be rented) may well tend to adopt the science of things (physics and engineering) as the scientific model for “Economics” [viz. Mirowski 1989]. Attempts to use notions unique to the human sciences–such as the notions of “responsibility” or “intentionality”–to differentiate labor from the services of things are thus deemed inappropriate in the science of Economics.

Marx did take Labor as the unique source of the value added so Marx played both sides of the source/measure dichotomy. It was not simply that direct labor was a measure of the value of the surplus product but that direct labor was the source of the surplus product. Indeed, Marx’s whole exploitation analysis only makes sense under the labor-as-source interpretation of the labor theory of value.

Thus we come to two quite different interpretations of Marx’s labor theory of value and exploitation: the labor-as-measure and the labor-as-source interpretations.

The measure-version (the “standard” interpretation) leads to the modern input-output treatment of LTV. As a descriptive theory, it applies only to a benchmark regime that is time-saturated so that time may be ignored. As a normative theory, it is a just-price theory, an Aristotle-Aquinas interest grumble, that considers just prices or “values” to be the prices in the time-saturated benchmark regime and defines “exploitation” accordingly (so there is exploitation if and only if the interest rate is positive).

The source interpretation leads to the labor theory of property. The point was not that labor created the value of the product, but that Labor created the product itself.

And it is this fairly obvious truth which, I contend, lies at the heart of the Marxist charge of exploitation. The real basis of that charge is not that workers produce value, but that they produce what has it. [Cohen 1981, 219]

In the assertion that “labor created the value of the product,” the phrase “the value of” can be deleted and thrown into the dustbin of intellectual history–and then the source-LTV quickly arrives at the labor theory of property.

The descriptive assertion of the source-LTV as the labor theory of property is that Labor (the workers in the enterprise) create the whole product [i.e., (Q, –K, –L)] as well as the labor services [i.e., (0, 0, L)] which sum to Labor’s product [i.e., (Q, –K, 0)]. However, Labor receives legal rights only to the labor services which are sold in the labor contract while the employer appropriates the whole product. The normative side of the theory states that Labor should appropriate what Labor produces, namely the whole product plus the labor which sum to Labor’s product.

Some economists have been quite explicit about the (non-orthodox) property-theoretic interpretation of Marx’s value theory. Thorstein Veblen was never a slave to the standard or orthodox interpretation of any theory. Veblen saw natural rights arguments standing behind the general thrust of Marx’s theory.

By his later training he is an expert in the system of Natural Rights and Natural Liberty, ingrained in his ideals of life and held inviolate throughout. He does not take a critical attitude toward the underlying principles of Natural Rights. Even his Hegelian preconceptions of development never carry him the length of questioning the fundamental principles of that system. He is only more ruthlessly consistent in working out their content than his natural-rights antagonists in the liberal-classical school. [Veblen 1952, 315]

Veblen sees the claim of Labor’s right to the whole product implicit in Marx and traces it to the classical laborists or Ricardian Socialists.

Chief among these doctrines, in the apprehension of his critics, is the theory of value, with its corollaries: (a) the doctrines of the exploitation of labor by capital; and (b) the laborer’s claim to the whole product of his labor. Avowedly, Marx traces his doctrine of labor value to Ricardo, and through him to the classical economists. The laborer’s claim to the whole product of labor, which is pretty constantly implied, though not frequently avowed by Marx, he has in all probability taken from English writers of the early nineteenth century, more particularly from William Thompson. [Veblen 1952, 316]

Recent scholarship would, however, emphasize the influence on Marx of Hodgskin and Bray more than Thompson [see King 1983 and Henderson 1985].

Gunnar Myrdal finds a similar reason behind even Ricardo’s use of labor as the basis for his value theory in spite of criticism from Malthus, Say, and Bentham.

The solution of this puzzle may be found in the natural law notion that property has its natural justification in the labour bestowed on an object. [Myrdal 1969, 70]

But the implications of the labor theory inevitably conflict with classical liberalism which fully accepted wage labor.

The most fatal internal criticism of their laissez-faire doctrine is therefore that it contradicts its basic belief that labour is the source of value and property. [Myrdal 1969, 71]

The foundation of the theory is the uniqueness of labor; of all the causally efficacious factors, labor is the only responsible agent.

Man alone is alive, nature is dead; human work alone creates values, nature is passive. Man alone is cause, as Rodbertus said later, whilst external nature is only a set of conditions. Human work is the only active cause which is capable of creating value. This is also the origin of the concept ‘productive factor’. It is not surprising that the classics recognized only one productive factor, viz., labour. The same metaphysical analogies that were used to establish natural rights were also used to expound the idea of natural or real value. It is an example of the previously mentioned attempt of the philosophy of natural law to derive both rights and value from the same ultimate principles. [Myrdal 1969, 72]

Thus the Janus-headed “labor theory” has long served as both a property theory and a value theory–even though orthodox economists only want to see it as a (fallacious) price theory in Marx.

They tend to focus attention on the theory of exchange value [and] neglect its foundations …. Marx was right in saying that his surplus value theory follows from the classical theory of real value, admittedly with additions from other sources. Moreover, Marx was not the first to draw radical conclusions from it. All pre-Marxist British socialist derived their arguments from Adam Smith and later from Ricardo. [Myrdal 1969, 78]

It is time to step back for a moment and consider Marx’s value theory in a larger context.

[T]he ‘naturalness’ of labour as the moral title to what is created by that labour has been a commonplace of political and economic radicalism for three hundred years; and political and economic conservatism has had a continuous struggle to defuse the revolutionary implications of it. [Ryan 1984b, 1]

In the forefront of “political and economic radicalism” has been Marxism and the Marxian labor theory of value and exploitation.

The central point of the labour theory as a theory of exploitation is that labour is the only human contribution to economic activity, and the exercise of labour power should be the only way in which a claim to the net product of a nonexploitative economic system is acquired. [Nuti 1977, 96]

Attempts by Marxists to claim that “None of this, by the way, implies that Marx intended the labor theory of value as a theory of property rights, ˆ la Locke or even Proudhon” [Shaikh 1977, 121] are more examples of the “tunnel vision” and dogmatic literalism that has long plagued Marxism.

Our purpose was not to shed any startling new light on the hidden inner meaning of Marx’s doctrines. We sought only to read the labor theory of property in the entrails of Marx’s labor theory of value. In any case, “Marxist scholars have interpreted his doctrines in this way and that. The point however is to change them.” [Nove 1983, 60].

Mill on Property

John Stuart Mill “thought the tendency towards political and economic democracy was irresistable” [Ryan 1984, 151]; the vector of history pointed towards democratic worker ownership.

The form of association, … which if mankind continue to improve, must be expected in the end to predominate, is not that which can exist between a capitalist as chief, and workpeople without a voice in the management, but the association of the labourers themselves on terms of equality, collectively owning the capital with which they carry on their operations, and working under managers elected and removable by themselves. [Mill 1970, 133]

Mill did not use a rights-based argument. He supported economic democracy as a means towards the self-development, automony, and self-control of working people.

While Mill did not derive his support for worker ownership from the labor theory of property, he did use a version of the theory.

The institution of property, when limited to its essential elements, consists in the recognition, in each person, of a right to the exclusive disposal of what he or she have produced by their own exertions, or received either by gift or by fair agreement, without force or fraud, from those who produced it. The foundation of the whole is, the right of producers to what they themselves have produced. [Mill 1970, 368]

Mill recognizes that this may seem to conflict with capitalist appropriation–which he describes in remarkably candid terms.

It may be objected, therefore, to the institution as it now exists, that it recognizes rights of property in individuals over things which they have not produced. For example (it may be said) the operatives in a manufactory create, by their labour and skill, the whole produce; yet, instead of its belonging to them, the law gives them only their stipulated hire, and transfers the produce to some one who has merely supplied the funds, without perhaps contributing anything to the work itself, even in the form of superintendence. [368]

Mill notes that labor requires materials and machinery, the “fruits of previous labor.” Then follows a rather curious sentence.

If the labourers were possessed of them, they would not need to divide the produce with any one; …

The workers are the subject of the sentence. They are appropriating the produce, and if they already owned the inputs, they would not need to divide the produce with anyone. The next step in the argument seems to be that if the workers did not already have all the inputs, then they would have to use some of the revenue from the produce to pay for the fruits of previous labor. That is, the workers would have to pay for the inputs they use up. Thus Mill would seem to be arguing not for capitalist production but for worker-managed firms (that pay their costs). But then the sentence continues:

…but while they have them not, an equivalent must be given to those who have, both for the antecedent labour, and for the abstinence by which the produce of that labour, instead of being expended on indulgences, has been reserved for this use. [Mill 1970, 368]

The remarkable feature of Mill’s argument is that he apparently takes it as allowing capitalist production. Yet, the argument only concludes that the producers should not treat the inputs an manna falling from heaven; the workers would have to pay their costs. Mill never gives an argument for capitalist appropriation which he had just described. The “institution as it now exists” is not one where workers appropriate the product they produce and pay for the costs they incur–but one where the law “transfers the produce to some one who has merely supplied the funds” and gives to the workers “only their stipulated hire.”

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