The Myths of "Libertarian" economics.

* What determines price within capitalism?

Both "libertarian" and "anarcho" capitalists support the subjectivist theory 
of value (STV), as explained by the Austrian School of economics. Economists 
from this school included Ludwig Von Mises, Frederick Hayek and Murray 
Rothbard.

In a nutshell, the subjective theory of value states that the price of a 
commodity is determined by its marginal utility to the consumer. This is the 
point, on an individual's scale of satisfaction, at which the desire of a good 
is satisfied. Hence price is the result of individual, subjective evaluations 
within the market place. For anyone interested in individual freedom, the 
appeal of this can easily be seen.

However, the subjective theory of value is a myth. Like most myths, it does 
has an element of truth within it, but as an explanation of the price of a 
commodity it has serious flaws.

The element of truth which the theory contains is that, indeed, individuals, 
groups, companies, etc do value goods and consume them. This consumption is 
based on the use-value of goods to the users (although this is modified by 
price and income considerations). The use-value of a good is a highly 
subjective evaluation and so varies from case to case, depending on the 
individual's taste and needs. As such it has an *effect* on the price, as 
we will see. But as the means to *determine* a product's price it ignores 
the reality of production under capitalism.

The first problem within marginal utility is that it leads to circular 
reasoning. Prices are supposed to measure the "marginal utility" of the 
commodity. However, prices are required by the consumer in order to make the 
evaluations on how best to maximise their satisfaction. Hence subjective value 
"obviously rested on circular reasoning. Although it tries to explain prices, 
prices were necessary to explain marginal utility" [Paul Mattick, Economics, 
Politics and the Age of Inflation, p.58]

In addition, it ignores the differences in purchasing power between 
individuals and assumes the legal fiction that corporations are individual 
persons. If, as many Libertarians say, capitalism is "one dollar, one vote" 
its obvious whose values are going to be reflected in the market.

So, if the subjectivist theory of value is flawed, what does determine prices? 
Obviously, in the short term, prices are heavily influenced by supply and 
demand. If demand exceeds supply, the price rises and vice versa. This truism, 
however, does not answer the question. The key to understanding prices lies 
understanding the nature of capitalism, profit production.

Capitalism is based on production of profit. Once this and its implications 
are understood, the determination of price is simple. The price of a 
capitalist commodity will tend towards its production price in a free market, 
production price being cost price plus average profit rates.

Consumers, when shopping, are confronted by given prices and a given supply. 
The price determines the demand, based on the use-value of the product to the 
consumer and their money situation. If supply exceeds demand, supply is 
reduced until average profit rates are generated. If the given price generates 
above average profits, then capital will move from profit-poor areas into this 
profit-rich area, increasing supply and competition and so reducing the price 
until average profits are again produced. If the price results in demand 
exceeding supply, this causes a short term price increase and these extra 
profits indicate to other capitalists to move to this market. The supply of 
the commodity will stabilise at whatever level is demanded at this price 
which produces average profit rates. Any change from this level in the 
long term depends on changes on the production price of the good 
(lower production prices means higher profits and so indicates that 
the market could be profitable for new investment from other capitalists).

Thus production price determines the price of a commodity, not supply and 
demand, in the long term. In fact, price determines demand as consumers 
face prices as (usually) an already given objective value when they shop 
and make decisions based on these prices. The production price for a 
commodity is a given and so only profit levels indicate whether a 
given product is "valued" enough by consumers to warrant increased 
production. This means that "capital moves from relatively stagnating 
into rapidly developing industries... The extra profit, in excess 
of the average profit, won at a given price level disappears again, 
however, with the influx of capital from profit-poor into profit-rich 
industries" so increasing supply and reducing prices, and so profits. 
[Paul Mattick, Economic Crisis and Crisis Theory, p.49]

As can be seen, this theory (the labour theory of value) does not deny that 
consumers subjectivity evaluate goods and that this can have a short term 
effect on price (which determines supply and demand). However, it explains why 
a certain commodity sells at a certain price and not another, something which 
the subjective theory cannot do. It develops its ideas from a consideration of 
reality (namely prices exist before subjective evaluations can take place and 
the nature of capitalist production). 

In the end, the STV just states that "prices are determined marginal utility; 
marginal utility is measured by prices. Prices... are nothing more or less 
than prices. Marginalists, having begun their search in the field of 
subjectivity, proceeded to walk in circle". [Allan Engler, Apostle's of 
Greed, page 27]

In reality, the price of a capitalist commodity is, in the long term, equal to 
its production price, which in turn determines supply and demand. If demand 
changes, which it of course can and does as consumer values change, this will 
have a short term effect on prices but the average production price is the 
price around which a capitalist commodity sells for.

* Where do profits come from?

As can be seen, profits are the driving force of capitalism. If a profit 
cannot be made, a good is not produced, regardless of how many people 
"subjectively value" it. But where do profits come from?

In order to make more money, money must be transformed into capital, ie
worplaces, machinery and other "capital goods". However, by itself, 
capital (like money) produces nothing. Capital only becomes 
productive in the labour process, when workers use capital. Under 
capitalism, labour not only creates sufficient value (ie produced
commodities) to maintain existing capital and themselves, it also 
produces a surplus. The surplus expresses itself as a surplus of
goods, ie an excess of commodities. The price of all produced goods is 
greater than the money value represented by the workers wages when 
they were produced. The labour contained in these "surplus-products" 
is the source of profit, which has to be realised on the market 
(in practice, of course, the value represented by these surplus-products 
is distributed throughout all the commodities produced in the form of 
profit - the difference between the cost price and the market price).

This surplus is then used by the owners of capital for (a) investment, (b)
to pay themselves dividends on their stock, if any, and (c) to pay their
wage-slave drivers (i.e. executives and managers, who are sometimes
identical with owners) much higher salaries than workers. The surplus, 
like the labour used to reproduce existing capital, is embodied in 
the finished commodity and is realised once it is sold. This means that
workers do not receive the full value of their labour, since the surplus
appropriated by owners for investment, etc., represents value added by
labour; hence capitalism is based on exploitation. It is this 
appropriation of wealth from the worker by the owner which 
differentiates capitalism from the simple commodity production of 
artisan and peasant economies. 

It is the nature of capitalism for this monopolisation of the worker's
product by others to exist. It is enshrined in "property rights" enforced 
by either public or private states. A workers wage will always be less 
than the wealth he or she produces. This unpaid labour is the source 
of profits, which are used to increase capital, which in turn is used 
to increase profits.

At any given time, there is a given amount of unpaid labour in
circulation (ie available profits). This is either in the form of 
unpaid goods or services. Each company tries to maximise its share of the 
available total and if a company does realise an above average
share it means that some other companies recieve less than average.
The larger the company, the more likely that it will recieve
a larger share of the available surplus. The reasons for this will
be highlighted later, in the section on why the market becomes 
dominated by big business. The important thing to note here
is that there is, at any given time, a given surplus of unpaid 
labour (ie the available pool of profits) and that companies
compete to realise their share of it on the market. However, the
*source* of these profits do not lie in market, but in production.
You cannot buy what does not exist.

As indicated above, production prices determine market prices. In any 
company, wages determine a large percentage of the costs. Looking at 
other costs (such as raw materials), again wages play a large role 
in determining their price. Obviously the division of a commodity's 
price into costs and profits is not fixed, which mean that prices 
are the result of a complex interaction of wage levels and productivity. 
The class struggle determines, within the limits of a given 
situation, the degree of exploitation within a workplace and 
industry and so the relative amount of money which goes to labour 
(ie wages) and the company (profits). Therefore an increase 
in wages may not drive up prices as it may reduce profits or
be tied to productivity, but this will have more widespread effects 
as capital will move to other industries and countries in order to 
improve profit rates, if this is required. Usually wage increases lag 
behind productivity, (for example, during Thatcher's reign of freer markets, 
productivity rose by 4.2%, 1.4% higher than the increase in real 
earnings between 1980-88. Under Reagan, productivity increased by 
3.3%, accompanied by a fall of 0.8% in real earnings. Remember, 
though, these are averages and ignore often the massive differences 
in wages between employees, eg the CEO of McDonalds and one of its 
cleaners).

The effects of increased capital investment is discussed below.

* Why does the market become dominated by big business?

The "free" market becomes dominated by a few firms, which results in 
oligarchic competition and higher profits for the companies in question. This 
is due to the ability to enter the market being reduced, as only other 
established firms can afford the large capital investments needed to compete. 
For people with little or no capital, entering competition is limited to new 
markets, with low capital costs. Sadly, however, due to competition, these 
markets become dominated by a few big firms as some fail and capital costs 
increase. "Each time capital completes its cycle, the individual grows smaller 
in proportion to it" [Josephine Guerts, Anarchy 41, page 48]

Therefore, due to the nature of the market, certain firms receive 
a bigger share of the available surplus value in the economy due to
their size. However, "it should not be concluded that oligopolies can 
set prices as high as they like. If prices are set too high, dominant 
firms from other industries would be tempted to move in and gain a 
share of the exceptional returns. Small producers - using more expensive
materials or out-dated technologies - would be able to increase their 
share of the market and make the competitive rate of profit or better." 
[Elgar, op. cit., page 53]

This form of competition results in big business having an unfair slice of 
available profits, leading many small businessmen and member of the middle-
class to hate them (while trying to replace them!) and embracing idealogies 
which promise to wipe them out. Hence we see that both idealogies of the 
"radical" middle-class, libertarianism and fascism, attack big business 
(either as "the socialism of big business" of "Libertarianism" or the 
"International Plutocracy" of fascism).

However, the tendency of markets to become dominated by a few big firms is an 
obvious side effect of capitalism. In their drive to expand (which they must 
do in order to survive) capitalists invest in new machinery in order to reduce 
production costs (and so increase profits). This increases the productivity of 
labour, so allowing wages to be also increased (but not by the same amount). 
With the increasing ratio of capital to worker, the costs in starting a rival 
firm prohibit all but other large firms from so doing.

This would be the case under "anarcho" capitalism, with the other obvious
result that the market for private "defense" firms would also soon be run
by a few large companies, which however no one would be allowed to call 
a "state" without being fired even though that's what it would be.

* What causes the capitalist business cycle?

Increased capital results in the individual worker being reduced to a small 
cog in a big wheel. As indicated in section b.3 (Is capitalism based on 
freedom?) increased capital investment results in increased control of the 
worker by capital *plus* the transformation of the individual into "the mass 
worker" who can be fired and replaced with little or no hassle.

But where there is oppression, there is resistance; where there is authority, 
there is the will to freedom. This means that capitalism is marked by a 
continuous struggle between worker and boss at the point of production. It is 
this struggle that determines wages, and so the prices of commodities on the 
market. 

The common "Libertarian" myth which flows from the STV is that free market 
capitalism will result in continuous boom as it is state control of credit and 
money which is the problem. Let us assume, for a moment, that this is the case 
(it is, in fact, not the case as will be highlighted). In the "boom economy" 
of Libertarian dreams, there will be full employment. But in periods of full 
employment, workers are in a very strong position as the "reserve army" of the 
unemployed is low, thereby protecting wage levels and strengthening labour's 
bargaining power.

As Errico Malatesta said, if workers "succeed in getting what they demand, 
they will be better off: they will earn more, work fewer hours and will have 
more time and energy to reflect on things that matter to them, and will 
immediately make greater demands and have greater needs... there exists no 
natural law (law of wages) which determines what part of a worker's labour 
should go to him [or her]... Wages, hours and other conditions of employment 
are the result of the struggle between bosses and workers... Through struggle, 
by resistance against the bosses, therefore, workers can up to a certain 
point, prevent a worsening of their conditions as well as obtaining real 
improvement" [Life and Ideas, p. 191-2].

If an industry or country experiences high unemployment workers will put up 
with longer hours, worse conditions and new technology in order to remain in 
work. This allows capital to extract a higher level of profit from those 
workers, which, in turn signals other capitalists to invest in that area. As 
investment increases, unemployment falls so workers are in a better position 
and so resist capital's agenda, even going so far as to propose their own. As 
workers power increases, profit rates decrease and capital moves, seeking more 
profitable pastures, causing unemployment. And so the cycle continues.

For an example, look at the crisis which ended post-war Keynesianism in the 
early 1970's and paved the way for the "supply side" revolutions of Thatcher 
and Reagan. This period was marked by calls for workers control while actual 
post-tax real wages and productivity in advanced capitalist countries 
increased at about the same rate from 1960 to 1968 (4%) but between 1968 to 
1973, the former increased by an average of 4.5% compared to a productivity 
rise of 3.4%. As a result, the share of profits in business output fell by 
about 15% in that period. Every slump within capitalism has occurred when 
workers have seen their living standards improve, not a coincidence.

The Philips Curve, which indicates that inflation rises as employment falls is 
also a strong indication of this relationship.  Inflation is the result of
having more money in circulation than is needed for the sale of the various
commodities on the market. The reason *why* there is too much money in
circulation is that inflation is "an expression of inadequate profits 
that must be offset by price and money policies... Under any 
circumstances inflation spells the need for higher profits..."[Paul 
Mattick, Economic Crisis and Crisis Theory, p.19]. It does this by making 
labour cheaper as it reduces "the real wages of workers... [which] directly 
benefits employers... [as] prices rise faster than wages, income that would 
have gone to workers goes to business instead" [Brecher and Costello, Common 
Sense for hard times, page 120]. 

Hence, from a consideration of the authority relations implicit in capitalism 
and the nature of profit generation, a continual "boom" economy is an 
impossibility simply because capitalism is driven by profit considerations. 
With full employment, capital is weak, labour strong and working class 
people are in a stronger position to fight for economic freedom - 
self-management in the workplace and the community. 

However, even assuming that individuals can be totally happy in a capitalist 
economy, willing to sell their freedom and creativity for a few extra pounds, 
capitalism does have objective limits to its development. These limits are 
discussed now.

* Is state control of credit the cause of the business cycle?

The rise of productivity means that profit is spread over an increasing number 
of commodities, and still needs to be realised on the market. As wages lag 
behind productivity, the demand for goods cannot meet the supply and so a glut 
occurs on the market. This is caused by the fact that labour is not productive 
enough to satisfy the profit needs of capital accumulation (which is the point 
of production). Because not *enough* has been produced, capital cannot expand 
at a rate which would allow full realisation of what *has been* produced.
As the profit rates fall, this leads to cost cutting in an attempt to
realise more profits. Production is cut back and workers laid off, which
leads to declining demand which makes it harder to realise profit on
the market, leading to more cost cutting until such time as profit levels
stablise at an acceptable level. The social costs of such cost cutting
is yet another "externality", to be bothered with only if it threatens
capitalist power and wealth.

Hence, capitalism will suffer from a boom and bust cycle due to its nature as 
capitalist profit production, even if we ignore the subjective revolt 
against authority by workers explained before. It is this two way pressure
on profit rates, the subjective and objective, which cause the business
cycle and such economic problems as "stagflation". The question of state 
manipulation of credit is of far lessor effect, being more related to 
indirect profit generating activity such as ensuring a "natural" level 
of unemployment to keep profits up, an acceptable level of inflation to 
ensure increased profits and so forth. 

It is a fact, of course, that all crises have been preceded by a 
speculatively-enhanced expansion of production and credit. This does not mean, 
however, that overproduction results from speculation and the expansion of 
credit. The expansion and contraction of credit is a mere symptom of the 
periodic changes in the business cycle as the decline of profitability 
contracts credit just as an increase enlarges it. But Libertarians confuse the 
symptons for the disease. 

Where there is no profit to be had, credit will not be sought. While extension 
of the credit system "can be a factor deferring crisis, the actual outbreak of 
crisis makes it into an aggravating factor because of the larger amount of 
capital that must be devalued" [Mattick, op cit, p.138]. But this is a problem 
facing private companies, using the gold standard as "the expansion of 
production or trade unaccompanied by an increase in the amount of money must 
cause a fall in the price level... Token money was developed at an early date 
to shelter trade from the enforced defaltions that accompanied the use of 
specie when the volume of business swelled.... Specie is an inadequate money 
just because it is a commodity and its amount cannot be increased at will. The 
amount of gold available... [cannot be increased] by as many dozen [per cent] 
within a few weeks, as might be required to carry out a sudden expansion of 
transactions" [Polyani, The Great Transformation, p. 193].

Hence token money would increase and decrease in line with capitalist 
profitablity, as predicted in Libertarian economic theory. But this could not 
affect the business cycle which has its roots within production for capital 
and capitalist authority relations and which the credit supply would obviously 
be tied, and not vice versa.

* Would laissez-faire reduce unemployment, as right libertarians claim?

The right libertarian argument is that if workers are allowed to compete
'freely' among themselves for jobs then wages would increase and unemployment
would fall. State intervention (eg minimum wage laws, legal rights to
organise, etc.) according to this theory is the cause of unemployment, as 
this forces wages above their market level, thus increasing production
costs and `forcing` employers to "let people go".  According to neoliberal 
economic theory, firms adjust production to bring the marginal cost of 
their products (the cost of producing one more item) into equality with 
the product's market-determined price.  So a drop in costs theoretically 
leads to an expansion in production, producing jobs for the "temporarily" 
unemployed and moving the economy toward full-employment equilibrium.

However, as David Schweickhart points out in _Against Capitalism_
(Cambridge Univ. Press, 1993, pp. 106-107), this argument ignores the fact
that when wages decline, so does workers' purchasing power; and if this is
not offset by an increase in spending elsewhere, total demand will decline.

The traditional neoliberal reply is that investment spending will increase
because lower costs will mean greater profits, leading to greater savings,
leading to greater investment.

But lower costs will mean greater profits only if the products are sold,
which they might not be if demand is adversely affected.  Moreover, as
Keynes pointed out long ago, the forces and motivations governing saving
are quite distinct from those  governing investment.  Hence there is no
necessity for the two quantities always to coincide.   So firms that have
reduced wages may not be able to sell as much as before, let alone more.
In that case they will cut production, adding to unemployment and  further
lowering demand.  This can set off a vicious downward spiral of falling
demand and falling production leading to recession.

As Schweickhart notes, such considerations undercut the neoliberal
contention that labor unions and minimum-wage laws are responsible for
unemployment.  To the contrary, insofar as labor unions, mimimum-wage laws,
and various welfare provisions prevent demand from falling as low as it
might otherwise go during a slump, they apply a brake to the downward
spiral.  Far from being responsible for unemployment, they actually
mitigate it.  This is obvious as wages may be costs for some firms, but they
are revenue for even more.  Taking the example of the USA, if miminum
wages caused unemployment, then why did the South Eastern states (with
a *lower* mimimum wage and weaker unions) have a *higher* unemployment
rate than North Western states?

Moreover, it should be obvious merely from a glance at the history of
capitalism during its laissez-faire heyday in the 19th century that free
competition among workers for jobs does not lead to full employment.  As
indicated above, full employment *cannot* be a fixed feature of capitalism
due to its authoritarian nature.

* Will "free market" capitalism benefit everyone, *especially* the poor?

Murray Rothbard and a host of other free marketeers make this claim. Again, it 
does contain an element of truth. As capitalism is a "grow or die" economy, 
obviously the amount of wealth available to society increases for *all*. So 
the poor will be better *absolutely* in any growth economy. This was the case 
under soviet state capitalism as well, the poorest worker in the 1980's was 
obviously far better off economically than one in the 1920's.

However, what counts is *relative* differences between classes and periods 
within a growth economy. Given the thesis that free market capitalism will 
benefit the poor *especially*, we have to ask the question, can all other 
classes benefit as well?

As noted above, wages are dependent on productivity, with increases in the 
former lagging behind increases in the latter. If in a free market, the poor 
"especially" benefit then we would have to see wages increase *faster* than 
productivity if the worker is to see an increased share in social wealth. 
However, if this was the case, the amount of profit going to the upper classes 
would be proportionally smaller. Hence if capitalism especially benefits the 
poor, it cannot do the same for those who life off the profit generated by the 
worker.

But, as indicated above, productivity *must* rise faster than wages, so 
workers produce more profits for the company by producing more goods than they 
would receive back in wages. Otherwise, profits fall and capital dis-invests. 
To claim that all would benefit from a free market ignores the fact that 
capitalism is a profit driven system and that for profits to exist, workers 
cannot receive the full fruits of their labour. As Spooner noted over 100 
years ago, "almost all fortunes are made out of the capital and labour of 
other men than those who realize them. Indeed, large fortunes could rarely be 
made at all by one individual, except by his sponging capital and labour from 
others" [Poverty: Its Illegal Cases and Legal Cure]

