Classical Economics vs. The Exploitation Theory
For more than a century, one of the most popular economic doctrines in the world has been the exploitation theory. According to this theory, capitalism is a system of virtual slavery, serving the narrow interests of a comparative handful of businessmen and capitalists, who, driven by insatiable greed and power lust, exist as parasites upon the labor of the masses.
This view of capitalism has not been the least bit shaken by the steady rise in the average standard of living that has taken place in the capitalist countries since the beginning of the Industrial Revolution. The rise in the standard of living is not attributed to capitalism, but precisely to the infringements which have been made upon capitalism. People attribute economic progress to labor unions and social legislation, and to what they consider to be improved personal ethics on the part of employers.
By the same token, they tremble at the thought of unions not existing, of a society without minimum wage laws, maximum hours legislation, and child labor laws—at the thought of a society in which no legal obstacles stood in the way of employers pursuing their self-interest. In the absence of such legislation, people believe, wage rates would return to the minimum subsistence level; women and children would labor once more in the mines; and the hours of work would be as long and as hard as it is possible for human beings to bear—all for the benefit of the capitalists, precisely as Marx maintained.
**The Exploitation Theory and the Overthrow of Classical Economics **
It is obvious that the exploitation theory is one of the most powerful factors that have been operating to lead the world down The Road to Serfdom —as the title of Prof. Hayek’s book so aptly describes the trend toward socialism. [1] Indeed, the pernicious influence of the exploitation theory goes far beyond the direct and obvious support it gives to socialism. It has contributed to the triumph of socialism in more subtle ways, as well. It played a major, perhaps the decisive, role in the overthrow of British classical economics. The system of Smith and Ricardo was perceived as inescapably implying the essential tenets of the exploitation theory. The opponents of the exploitation theory, therefore, quite understandably felt obliged to discard such a perverse system. And discard it they did.
Along with “the labor theory of value” and the “iron law of wages,” they discarded such further features of classical political economy as the wages fund doctrine and its corollary that savings and capital are the source of almost all spending in the economic system. Two generations later, the abandonment of the classical doctrines on saving made possible the acceptance of Keynesianism and the policy of inflation, deficits, and ever expanding government spending. In similarly paradoxical fashion, the abandonment of the classical doctrine that cost of production, rather than supply and demand, is the direct (if not the ultimate) determinant of the prices of most manufactured or processed goods led, with just about the same time lag, to the promulgation of the doctrines of “pure and perfect competition,” “oligopoly,” “monopolistic competition,” and “administered prices,” with their implicit call for a policy of radical antitrust or outright nationalizations to “curb the abuses of big business.” Thus, along these two further paths, the influence of the exploitation theory has served to advance the cause of socialism.
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Exploitation and Socialism
As a final irony it turns out not only that capitalism is not a system of the exploitation of labor, but that the actual system of the exploitation of labor is socialism. Socialism establishes the very kind of exploitation for the alleged existence of which people seek to overthrow capitalism.
The socialist state holds a universal monopoly on employment and production. Its citizens are economically powerless in their capacity both as workers and as consumers. No economic factor compels the socialist state to take account of their wishes. From an economic point of view, the rulers of the socialist state need be concerned with the values of the citizens only insofar as it needs them to have the health and strength required to work.
Moreover, the leading moral-political principle of the socialist state is that the citizen is not an end in himself, as he is acknowledged to be under capitalism, but is a means to the ends of “society.” Since society does not inhabit any known mountain top, and cannot be communicated with in any direct way, its ends can be made known only through the rulers of the socialist state. Thus, the principle that the individual is the means to the ends of society necessarily means, in practice, that he is the means to the ends of society as divined, interpreted, and determined by the rulers of the socialist state. And what this means is that he is the means to the ends of the rulers. A more servile arrangement can hardly be imagined.
Thus, the position of the individual under socialism is that he must spend his life in toil for the ends of the rulers, who have no reason voluntarily to supply him with anything more than minimum physical subsistence. They will provide more (assuming they have the ability to do so) only if it is necessary to prevent riots or revolution or as a means of providing special incentives for the achievement of their own values, such as, above all, the power and prestige of the regime. Thus, they will provide a relatively high standard of living for rocket scientists, secret police agents, and such intellectuals and athletes whose accomplishments help to reflect glory on the regime. The average citizen, however, is fortunate if they provide him with subsistence. He is fortunate, because, as Mises and Hayek have shown, the economic discoordination and chaos of socialism is so great that in the absence of an outside capitalist world to turn to for aid, socialism would lead to the destruction of the division of labor and hence to a reversion to the primitive economic conditions of feudalism. To borrow some of the clichés of Marxism and use them truthfully for once, socialism “cannot even maintain its slaves in their slavery”; left to its own devices, it causes the average worker “to sink deeper and deeper into poverty,” until mass depopulation occurs.[23]
Summary and Conclusion
Despite the support which it historically gave to the exploitation theory, classical economics provides the basis for turning the exploitation theory upside down. On the basis of Ricardo’s concept of profit and J. S. Mill’s proposition that “demand for commodities is not demand for labour,” it makes it possible to show how profits, not wages, must be regarded as the original and primary form of income, from which other incomes emerge as a deduction. And, further, not only how profits are a labor income (despite their variation with the size of the capital invested and the period of time for which it is invested), but how the labor of businessmen and capitalists has more fundamental responsibility for the production of products than the labor of wage earners, with the result that “labor’s right to the whole produce” should mean the right of businessmen and capitalists to the sales receipts—a right which is honored every day, in the normal operations of a capitalist economy. In addition, the classical doctrines of supply and demand, the wage fund, the distinction between value and riches, and even the labor theory of value (appropriately modified along lines suggested by Ricardo and J. S. Mill and incorporating the advances in price theory made by Böhm-Bawerk) make possible an explanation of real wages based on the productivity of labor, which it is the economic function of businessmen and capitalists steadily to increase. Finally, it can be shown how socialism, with its universal state monopoly on employment and supply, is the economic system to which the exploitation theory actually applies.