Actually, socialists do understand the Invisible Hand

ImageThere’s a common notion among free marketers that critics of capitalism simply don’t understand capitalism. If we but saw how markets, via competitive self-interest, align individuals’ interests with the broader interests of society, the scales would fall from our eyes and we’d understand that the only way to motivate people is by putting them in a market where the only government regulation is protection of private property. As Ms. Thatcher implies above, a society in which resource-distribution is regulated by some mechanism other than private property simply wouldn’t motivate anyone to work.

This is a strange attitude to hold, given both economic history and the actual substance of the criticisms made (at least by Karl Marx) against capitalism. Historically, private property as the main vehicle of resource control is a recent development (see examples of older communalism here and here). If private property (in the sense of a broad economic mechanism, not just ‘owning’ a few household items) is the only feasible way to organize resources, then it’s difficult to see explain the overwhelming majority of human history has lacked private property. How did our species survive? Answer: private property is not the only feasible economic mechanism.

For his part, Marx certainly understood how competitive markets facilitate the efficient production of commodities that buyers want; how the ‘the invisible hand’ forces people to become useful to others in order to make any money and thus survive; and how perfect competition pushes market prices to match the cost of production (because if you try to over-price, customers will just go to a competitor who’s selling the same thing for less). Indeed, the latter fact is the starting point for his argument that profit can only come from exploitation of the worker.

The argument goes like this. First, we assume a perfect market, in which every commodity sells for its ‘natural price,’ i.e. at the cost of production. If it costs me five hours of labor to produce a barrel of apples, then I’ll be able to sell that barrel of apples for the monetary equivalent of five hours of labor–no more. Second, we observe that this assumption creates a problem: where does profit come from? It can’t be through exchange, as we saw above. So where? Marx’s answer is that there is one commodity, human labor, which has the unique ability to product more value than the cost of its own production & maintenance.* Say the cost of keeping a laborer alive for one day is the monetary equivalent of 5 hours of labor; it follows that the ‘invisible hand’ will push the price (i.e. wage) of a laborer toward the monetary equivalent of 5 hours of labor. But suppose the laborer works 6 hours per day instead of 5. The value produced during the 6th hour will not go to the laborer, who only gets 5 hours worth of pay; instead, it goes to the employer in the form of profit.

So that’s Marx’s argument for why profit (“surplus value”) must come from exploitation of the workers. On this view, socialists are not ‘spending other people’s money,’ they’re just reclaiming their own money from thieving capitalists.

Whether one agrees with this argument or not, it pretty clearly demonstrates that Marx understood Smith’s argument in favor of capitalism. I suggest, therefore, that proponents of capitalism and critics of socialism take the time to understand their adversaries’ arguments, rather than attack Cold War-era straw men. Honest debate can (through the “marketplace of ideas,” as O.W. Holmes put it) bring forth the best from opposing viewpoints. Sophism, on the other hand, makes a critical appraisal of either capitalism or socialism impossible, and hands victory to the loudest.

*A new machine which can produce more apples at less cost can, at first, produce more value than the cost of its own production & maintenance. But as more firms use this new machine, competition will drive down the price of apples, so that in the long run the machine will produce more apples but not more exchange value. (I think the reason the same thing doesn’t happen with laborers is that human laborers can’t be produced as needed, i.e. the supply of laborers doesn’t increase [at least not very quickly] when the demand for labor increases.)

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