By Aristippus

Friedrich Engels (1820-1895) is considered, with Karl Marx, the founder of Marxism. In his work The Origin of the Family, Private Property, and the State (1884), published after Marx’s death, but based strongly on his work, one finds the following passage describing the role of merchants:

“Now for the first time a class appears which, without in any way participating in production, captures the direction of production as a whole and economically subjugates the producers; which makes itself into an indispensable middleman between any two producers and exploits them both. Under the pretext that they save the producers the trouble and risk of exchange, extend the sale of their products to distant markets and are therefore the most useful class of the population, a class of parasites comes into being, “genuine social ichneumons,” who, as a reward for their actually very insignificant services, skim all the cream off production at home and abroad, rapidly amass enormous wealth and correspondingly social influence, and for that reason receive under civilization ever higher honors and ever greater control of production”

In this one passage we find the key error in the entire Marxian system: the failure to understand the role of uncertainty and the importance of entrepreneurship in the market.

Engels characterises the merchant as a purely parasitic middle-man, who unnecessarily stands between the producer and the consumer. For Engels, the only difference in an economy lacking such middle-men would be that the workers receive the full product of their labour. The goods sold and the manner in which they are produced would remain the same. We can conclude that much from Engels’ remark that merchants do not participate in production, i.e. do not labour. This, according to Marxists such as Engels, is the only legitimate means of acquiring wealth, and the merchants’ services are therefore “actually very insignificant”.

We must also see Engel’s criticism extending beyond the middle-man merchant to other entrepreneurs such as the speculator and the entrepreneur-promoter [1]. All three of these individuals have the capacity to profit on the market without providing labour power in the Marxian sense of ‘participating in production’. Likewise, as we shall see, the function of each is a result of the existence of uncertainty. It is therefore clear that Engels’ analysis of middle-men applies equally to speculators and entrepreneur-promoters overall. We shall thus consider each in turn, and show – despite the fact that they do not engage in production as understood by Marxists – that they nevertheless make enormous and valuable contributions to the economy. This demonstrates a major flaw at the cornerstone of Marxist theory: without all value coming from labour, the entire Marxist system is irrelevant.

We consider, now, the middle-man. The middle-man attempts to make money by transporting goods from one context to another, and selling them at a higher price. In this he indeed performs the functions that Engels accuses him of holding as a mere pretext: bearing the risk of exchange. Note that the activities of the middle-man do not simply require the physical transportation of goods, but the knowledge of where to sell goods, what goods to sell, and in what quantities. The middle-man, therefore, tries to gauge uncertain demand. His profit comes from his ability accurately anticipate demand, but for him to profit at all is not a certainty. Should he fail to correctly determine demand, he will make a loss. Thus not only does he provide something worthwhile through allowing an allocation of goods that otherwise wouldn’t take place, he has no guarantee that he will be rewarded for his effort. In all this it must be realised that his role is in alleviating uncertainty inherent in the economy, and creating an allocation of goods that would not exist if not for his efforts. The results of his work is very real, and the claim that it is a mere ‘prextext’ completely misses the mark.

Like the middle-man, the speculator does not engage in production through supplying his ‘labour power’, as Marxists understand it. Instead, he seeks to earn a profit by buying or selling depending on fluctuations in the market. Unlike the middle-man, he does not move goods from one place to another. Instead, the speculator merely buys and sells in the same market at different times. How, then, can the acquisition of profits merely by buying and selling at different times be justified? The speculator, by attempting to anticipate the future supply and demand of goods, prevents great shifts in supply and demand. Walter Block explains this process with the example of food prices:

“In times of plenty, when food prices are unusually low, the speculator buys. He takes some of the food off the market, thus causing prices to rise. In the lean years that follow, this stored food goes on the market, thus causing prices to fall. Of course, food will be costly during a famine, and the speculator will sell it for more than his original purchase price. But food will not be as costly as it would have been without his activity.” (Block, Defending the Undefendable, p. 168)

Thus the speculator’s action on the market, even though he is not ‘participating in production’, is beneficial and provides an important service.

The entrepreneur-promoter is an individual who seeks to adjust production to expected changes in conditions through devising novel products and methods of production. Since he is a manager of production rather than a labourer, he still does not satisfy the Marxian requirement to engage in labour to provide value. Is it really true, though, that he does not provide value? The entrepreneur-promoter is a key driver of change in an economy, since without his innovations directed towards satisfying the demands of consumers, such adjustments to demand would not occur. Due to the presence of uncertainty, every kind of product and every kind of method of production are not known, and there is, therefore, room for the entrepreneur-promoter to come up with ever new advances. And are not those ideas a requirement for the physical products that they engender? It cannot be denied that they are, and therefore it must be realised that the work of the enterepreneur-promoter, though not labour in the Marxian sense, is crucial in the production process. Without the entrepreneur-promoter discovering, through the market, which goods would be newly demand, there is no method through which economic progress can occur according to the desires of consumers.

The fact that all three of these figures do provide value, and that the key attributes between them is their lack of participation in labour production and their anticipation of future, made possible by the a situation of uncertainty, demonstrates a deficiency on the part of Engels to understand the existence of uncertainty and its ramifications, which causes him to erroneously require the employment of labour-power in the creation of value. Now, with the assumption of perfect information, which we can only understand as occurring in an economy which goes through the same motions day-to-day, Engels would be quite correct. In this evenly-rotating economy, not only do producers know exactly what goods need to be produced and in what quantities, but they also are able to supply them as required and fulfil all demand. In such an environment, where people’s preferences do not change day-to-day, there is no need to anticipate future changes in demand, and no risk in any business ventures. If such a being were to somehow to exist and to hold a position of wealth in such an economy, we would, with Engels, necessarily consider him a parasite, since it would be impossible for him to provide anything due to the lack of uncertainty (which, we have established above, is the reason his services are required).

The evenly-rotating economy, however, does not describe real world economies. Instead of preferences being set in an endlessly repeating sequence, particular human desires are constantly changing in the real world, and there is great uncertainty as to the specifics of what they will entail in the future. On the real-world market, then, entrepreneur-promoters attempt to adjust production to what they believe will be future demand. In doing so, they are creating a fundamental difference in the goods produced, the quantity in which they are produced, and the methods through which they are produced. Without them, such changes in the economy, aimed at fulfilling the desires of those demanding such changes, would not take place. There is, of course, no guarantee that their anticipations will turn out to be correct ones, due to the inherent uncertainty of the situation. Even so, without this task being taken up by them, production cannot be directed towards the changing desires of a population. Here we see a huge amount of value arising from undertakings that cannot be understood within the Marxian paradigm, in which it is only labour power that can provide value.

Engels, however, cannot see the enormous contribution of entrepreneurship in the economy. He imagines that the right goods will simply be produced, and that they will necessarily be allocated according to value scales and the ability to pay. He does not recognise that the lack of information in determining the correct manner of undertaking those tasks may require the efforts of individuals who attempt to anticipate the economic changes despite their inherent uncertainty. To him, the claim that entrepreneurs provide value is simply a pretext for parasitism. If it were not simply a pretext, the Marxian labour theory of production and the entire Marxian system upon which it is based would crumble into nothing. Realising the importance of entrepreneurship, however, implores us to throw out these Marxian errors and consign Marxism to its final resting place in the dust-bin of intellectual history.

[1] I should note here that the concept of the entrepreneur-promoter is distinct from the theoretical concept of the entrepreneur, which can be understood to include all individuals acting under conditions of uncertainty.