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[Chapter 9 of This Bread Is Mine]

We must return to Adam Smith.

This great economist and father of the modern theory of free markets propounded an error which has haunted us ever since.

Smith's "labor theory of value" was mistaken. However, David Ricardo accepted it and elaborated it. As elaborated by Ricardo, the labor theory of value was still further developed by Karl Marx. Thus, we have a socialist theory of economic value resultant from a doubly compounded error. This error has become the moral fulcrum on which the political socialist lever rests.

What Smith was getting at, and what most individualists would agree with, is the moral certainty that the laborer is entitled to the full product of his own labor. Indeed, earlier in this essay that has been listed as a basic right of every human being.

Getting All That You Earn

The "surplus value" theory of Marx is derived from the "labor theory of value" of Smith and Ricardo. Briefly, the theory can be explained thusly: It is evident that natural resources do not prepare themselves for the use of man. Human energy and tools must be applied to the resources before they can be converted into usable form and transported to places where a demand for them exists.

One does not pay money to natural resources. Nor does one pay money to tools. It may be an essential to pay the person who owns the resources or the tools. But essentially, all money passes from one human hand into another human hand. And the passage relates to the amount of labor performed by the human energy supplied in each case.

Thus, one does not buy logs or lumber for building; one purchases the labor that has gone into the felling of the trees, the milling of the lumber. What are the logs worth while they are still trees? Fundamentally, they are worth whatever it costs to convert them. And here is Marx: If more than that basic cost of labor is included in the purchase price, the element of profit or "surplus value" appears. If you must pay a lumberman five dollars to fell a tree, trim it, saw it into usable lengths and thicknesses, and then deliver it, the tree is worth five dollars, no more, no less.

Superficially, this is reasonable enough — reasonable, that is, if this were a world in which hand tools were all that could ever be employed, land could never be privately owned, and our wants were such simple things as log houses. We are far from such a world. Such a world is contrary to the nature of man's basic rights; there is no desire for such a world. The "labor theory of value" is fallacious and the notion of "surplus value" based upon it is equally in error.

What Smith, Ricardo, and Marx have done, and what the followers of the latter two continue to do, is to confuse the meanings of two important words: cost and value. While it may be true in the above instance that it might cost five dollars to produce the lumber from a given tree, the value of the lumber from that tree has no immediate relationship to cost.

Value, as Eugen Ritter von Böhm-Bawerk, Ludwig von Mises, and others demonstrate is inevitably the result of a subjective judgment. Lumber may cost $5, but the intensity with which you, as a purchaser, desire the lumber determine whether it is worth $1 or $20 to you. If it is worth only $1 to you, you will not purchase it if it is priced above that sum, regardless of the cost expended in producing it. Similarly, if you would be glad to pay as much as $20 for it, you will consider it a bargain if it is priced at $10, even though the cost of producing the lumber was $5 and the other $5 represents a profit to the producer.

In short, as a purchaser, you do not consider either cost or profit to others. You concern yourself with value, which relates to your own desire and your own ability to pay. It is in this area that Smith, et al., come to grief. They conclude that cost and value are the same thing.

Two Kinds of Pies

Perhaps an illustration will best provide the demonstration. We are indebted to Leonard E. Read of the Foundation of Economic Education for the illustration. Let us suppose that "A" has a bakery. He hires a number of workers, buys the best raw materials, and produces the finest mince pies in town. His costs, including the interest on the money he has borrowed, the rent of the land he uses, and all of the other factors that enter into the equation, make it possible for him to produce these pies and deliver them to your door for 40¢. He charges 50¢.

Marx would insist that he should sell at a figure which excludes interest. But he may pay himself a salary for his pains. Marx in "Das Kapital" recognizes the validity of managerial work, contrary to popular belief, and wishes it to be paid for at a modicum. Marx will not recognize a profit as a legitimate part of the economic cycle.

So in the above case, he would hold that the man who has run the risk, borrowed the money, bears the responsibility, manages the enterprise and owns the tools, should receive only a salary and no more. We will deal with this idea in a moment. Let us concentrate on the 50¢ mince pie. At this price, the owner and manager can pay himself a salary and in addition can accrue a profit if business is brisk.

Now, let us consider "B." "B" also has a bakery. He hires the same number of workers as "A," buys the best raw materials, and produces the finest mud pies in town. His costs, the interest on the money he has borrowed, the rent of the land he uses, and all of the other factors that enter into the equation make it possible for him to produce these mud pies and deliver them to your door for exactly the same price as the mince pies of his competitor, "A." Now whether "B" insists on a profit or not, the fact of the matter is that it is almost inconceivable to imagine a going business in mud pies.

But, if Smith, Ricardo, and Marx are correct, then the product of "A's" factory, which costs 40¢ to produce, must be valued at precisely the value of the product of "B's" factory, since this product, also, costs just 40¢ to produce. If value is determined by cost, the mud pies and mince pies are of equal value if the sum expended to produce is equal.

Certainly, this is ridiculous. But this is the labor theory of value, to wit: The cost of the human energy expended in the production of any commodity is the value of the commodity.

One has only to imagine a situation such as this: Some enterprising genius discovers a way to manufacture yachts by an extrusion process which makes the cost of a yacht so small that it can be purchased in quantity lots for as little as $100 each. A second individual discovers a way to make elaborate igloos of ice and snow, completely equipped with air conditioning, which cost $1,000 each because of all the hand labor which must be utilized in the construction. In the Marxian catalogue, the igloo would be worth ten times what the yacht would be worth, regardless of the fact that many people would like to buy the yacht and there are virtually no takers for the igloos.

But, under Marxian or Fabian socialism, both industries would be owned and operated by the government; the taxpayers would underwrite the costs of both, and thus all persons would help to pay for igloos, of which few, if any, are wanted.

It is inconceivable that rational human beings could endorse such stupidity, but so cleverly have the results of socialist fallacy been hidden from them, and so thoroughly are they imbued with the holy grail of equality, that they shut their eyes to the certain results and blindly support the doctrine.

Question of Profit

Now let us examine more closely the "surplus value" concept, since the "labor theory of value" has been revealed for what it is. What Marx and other socialists envisage is the elimination of all profits, interest, and rent. What we must immediately do is to examine the nature of enterprise to discover, if we can, if enterprise can exist without the so-called element of surplus value, or profit.

Here the socialists contribute to their own downfall. For virtually, without exception, the socialist wishes to see all costs of production paid. What he is getting at, he says, is not the cheating of any human being, but rather the elimination of cheating. He wants the laborer to be paid what he is worth and not one cent less.

Very well, what are the costs of doing business? Again, we are indebted to the American Economic Foundation. There are only five costs. Whatever business you wish to select as an illustration, five costs will cover all expenses in connection with its operation. These five costs are:

1. Goods and Services Furnished by Others

The socialist will have no objection to meeting this payment. He expects those who furnish services and goods to be reimbursed. He just wants to make certain that profits are eliminated. But he has no objection to a person paying for the goods or services he hires. In fact, the socialist would insist that these things be paid for.

2. Human Energy

Here the socialist will wax eloquent. This is precisely the point, he will tell you. He wants the human energy paid for at full cost value. So he certainly has no objection to item two.

3. Taxes

Here again you will find no objection from the dyed-in-the-wool wealth-sharer. Since he is probably privy to the fact that the socialist movement is in the process of transferring all goods and all wealth out of private hands and into the hands of the state, the socialist will strongly support taxes, even high taxes, which others must pay.

4. Maintaining Tools

This one will cause the socialist to review his position slightly. But if one presents his facts carefully, one can usually convince the collectivist that machines do wear out and must be replaced. Further, machines can be improved upon and such improvements or replacements cost money.

After careful review, the socialist will concede, though begrudgingly, for he rarely thinks about such mundane things as repairs, research, and maintenance, that item four is an essential. If tools aren't replaced, they are broken or worn out and there will be no more work. There is no job in existence which does not require a certain amount of tooling, from the steel man with his enormous blast furnaces, to the door-to-door salesman selling brushes.

5. Using the Tools

Again we remind the socialist that tools do not grow on trees, nor do they protrude from the wrist of homo sapiens. Tools have to be made. Also, they have to be paid for. And somewhere the money has to be found to provide the tools of production.

If you can convey the idea of paying for the use of tools, as well as the purchase of goods and services, the socialist is defeated. This is the most difficult point to get across. But non-socialists will ultimately see that the man who owns the tools will not permit others to use them unless he is paid for so doing. Why should he? Why should anyone share what he has with someone else unless he gets something in return?

So the tool owner wants to be paid for his goods and services, just as the shopkeeper wishes to be paid for his goods and the worker wishes to be paid for his labor. If you will not pay for the goods, you are not entitled to them. If you will not pay for the labor, you are not entitled to it. If you will not pay for the use of the tools, you are not entitled to use them.

If this is finally granted, behold, we have covered the item of profit. Profit is the payment to the owner of the tool for its use. The owner of the tool can be anyone. Tools can be owned by individuals, partnerships, or corporations. In the latter case, and especially when large and expensive tools are required, stockholders are the true owners. But whether the owner uses the tool himself or permits others to use it, a payment for that use is both essential and honest.

We have by no means exhausted this subject. But if a little time is spent on this formula of the five costs of production, it is simple to establish that there is no such thing as "surplus value," and that the "labor theory of value" is an oversimplification.