Murphy, Nagel, and Marx on surplus value

This is the fourth article on the theories defended by Murphy and Nagel in their book, The Myth of Ownership


A new theory of the “surplus value”

So far, we have examined three arguments presented to sustain the claim that ownership is a myth: 1) that (most) governments create conditions that make industry and commerce possible –or at least safer; 2) that it is the market that generates differences in wealth; and 3) Ronald Dworkin’s attempt to portray the creation of wealth as accidental possession or accidental delay. The first one results in a non-sequitur; the second is –at best–  an inaccurate way of speaking. The third one…it is difficult to say anything about the third one.

Murphy and Nagel present another way to justify the main thesis of their book. They use for this purpose the notion of a “surplus value”[1], which sounds similar to Marx’s theory, but is quite different. However, there is a link between the two: both are part of efforts to prove that, in some odd way, the rich do not pay fully for what they get. According to Marx, they get work without paying the full value they get from it. According to Murphy and Nagel, the rich buy goods without paying the full value they get from them. Both theories share another characteristic: they are wrong.

The theory of surplus value was the cornerstone of Marx’s description of the relation between capitalists and workers. It provided also the motive for Marx’s prediction of capitalism’s doom. Marx believed that value is only determined by work, not by capital; therefore, what capitalists gain is actually taken from the workers, who receive enough to survive and reproduce, leaving the rest, the “surplus value”, to the capitalist. There, said Marx, lies the inner weakness of capitalism: competition leads capitalists to use more and more capital (machines and such) and less labor. But then their profit will diminish, because labor –and not capital– is the source from which they take their surplus. More machines and fewer workers mean a smaller surplus value for the capitalist. Certainly, Marx himself was aware that his theses were against the facts everyone knows to be true, and spent most of his life trying to fill this enormous hole below the waterline of his theory. Anyway, the whole explanation was proved wrong by Eugene Böhm-Bawerk, already in 1886.[2]

Murphy and Nagel do not attempt to revive Marx's “surplus value” theory, but they come up with something that would also (if true) show that the rich do not really pay (in some way) for what they get. They call this pernicious characteristic of capitalism, a “surplus” collected by the rich, and they conclude that it is only fair that the government pares it off. They explain that the market “automatically creates a large surplus –the difference between actual price and reserve price– for people who have lots of money. Poor people benefit from this surplus only with very cheap private goods like salt an digital watches. To them, most things do not feel cheap or costless, because most purchases are close to their reserve price”.[3]

In this explanation, our philosophers compare two prices: the actual market price people pay for a good –say a computer– which is the same for rich and for poor; the other is the highest price each individual buyer would be disposed to pay for that good: this is the reserve price. Of course, that highest price is different for each person. It varies according to his means, his views about the utility he expects from the good, his opinion about future prices, etc. There is also a minimum price for each seller, below which he will not sell: that is the reserve price of the seller, and it also varies according from person to person. And, for the same person, it may change several times following his changing views and needs.

Murphy and Nagel’s assumption that the reserve price is always higher for those with higher income is absolutely unwarranted. In auctions, the highest bidder is not always the richest person in the room. People who are always disposed to pay the highest price are not likely to remain rich –or become rich. Of course, if we leave the realm of real life and build instead imaginary situations (a favorite method in modern philosophy known in older times as “Jesuitism”), we may puzzle the reader for a while, and even convince him that what he knows to be false might be true –at least true in untrue situations. Let's tailor a very odd situation (maybe even impossible) to prove our thesis on it, and pretend that we may extend our conclusions to the real world.

Say we are in a lifeboat, and there is a shortage of water. Never mind that in such a case there would be rationing. We can always imagine things if it helps to prove our theses, and we can postulate that there is no rationing. Water is sold to the highest bidder. In such situation, a billionaire would be willing to pay billions for a single glass of water. Nevertheless, in every modern city we may see that the same rich man pays only cents for the same glass. Is that fair? If we take the price he would have been disposed to pay in an extreme situation as his reserve price, we might say that his gain is enormous. Now let’s compare that with the situation of a poor man in a lifeboat. At most he could offer some hundreds of dollars for the glass of water, but not millions. Therefore his reserve price is lower, and his gain is lower when he buys water for a few cents.

See, rich people get a surplus all the time. The richest of them get billions of surplus every single minute of their lives. Governments can dig in that immense heap of utility and give part of it to those whose surplus is smaller.

As common sense would lead us to suspect, there is a fundamental mistake in the above reasoning. If there is one fallacy in economics that is worse than all the others, it is that in which the utility of goods is assigned in the abstract to a genera ("water", "gold", "corn") and not to a concrete piece of it, for a concrete individual, in concrete circumstances. If we think in terms of the value of nourishment as compared to that of ornament, then we would conclude that people should pay more for bread and water than for gold and for the most beautiful pieces of art. But that is only true if we are starving, and it would be unsound to exchange a Rembrandt for a bar of chocolate –except in very unusual circumstances. 

For sure, practical men rarely disregard the circumstances in which they make their choices; nevertheless, theoreticians have been often deluded by paying attention only to the abstract utility of a good, the utility of the whole genera. Böhm-Bawerk called it a wrong turn in economic theory.[4] It misled economists for a long time, but it has been corrected more than a century ago. Today we know that it is nonsensical to ask whether iron is more useful than gold and water more useful than iron, all taken as genera. Of course we can live –though miserably– without iron tools but not without water. It does not prove that I do right in paying more for a glass of water than for any tool made of iron. And, unless we live in starving conditions, or labor without tools, I may do right in buying a gold ring for the woman I love. These are basic notions that should be explained and learned in the first lesson of economics.

Now we can return to Murphy and Nagel and their claim that, for the same price and article, rich people collect a larger surplus than the poor. To prove that, they must assume that the price a man would pay in an extreme situation is his reserve price in any other situation, which is wrong. If instead what they claim is that in normal circumstances the more money a man has the higher would be the price he is willing to pay for the same good, that is plainly false. On the other hand, if their claim is that a rich man would pay millions for the last glass of water on a lifeboat, then the only thing that they are saying is that a rich man is able to spend more money than others in those goods he considers more important in each circumstance. But they are not saying (let alone proving) that all rich men –in all circumstances– consider a glass of water of immense value. That is true only on the lifeboat. It is hardly a proof that the rich man gets a larger utility –more for the same money– than the poor one when both buy a glass of water in a restaurant.

Murphy and Nagel write that “With a public good [from roads and defense to subsidies to the arts] individuals can’t obtain different amounts of it and there is no need to charge everyone the same, so there is no automatic radically unequal allocation of surplus. The question for the state then becomes what single amount of the good to provide to everybody, and to what separate price for each?” They think that governments acting in this way can be compared to monopolies: “The government must operate more like a price-discriminating monopoly. It needs to figure out how much the public good is worth to each individual and charge each of them accordingly”[5] (I have added the bold italics for reasons that will be clear in the next paragraph).

All this is wrong: merely a page before these words, the authors had acknowledged that public goods (say defense against foreign attacks) are worth the same for the rich and for the poor. They admit that “The main reason for this difference in value is not that some people care more about the dangers of military invasion than others, but that some people have more money than others, so that a dollar more taken from them to be spent on defense, does not mean a dollar less for basic necessities, but only for something less important”.[6] If we think about the consequences of this caveat, we must realize that what the authors call “reserve price” does not show or say that a good is always more valuable to the rich buyer; it only says that he can afford it. Unfortunately, Murphy and Nagel create the impression that the good is worth more for those who could afford it. The authors themselves seem to be convinced of that in one page –but also of the opposite in another page. Public goods are worth more for the rich and they are not worth more for the rich.

As in the automatic “generation” of differences among individuals by the market, in the theory of the surplus we find again what we may call the fallacy of the “forgotten caveat”. Of course, caveats are legitimate defensive weapons in theoretical warfare, but only if what is acknowledged in them has a real role in the theory. If not, they are better called “contradictions”.

Shifting between cardinal and ordinal numbers

The notion of a “reserve price” is very apt to lead to confusion, and that can be seen in Murphy and Nagel’s use of it. Of course, a reserve price is not a price. It is not paid or offered by anyone. It is just a way of saying that we –or a bureaucrat– think that someone would have been disposed to pay a higher price –either in real life or in a lifeboat. It is a loose way of referring to someone’s valuation of a good, his expectations of future prices, and a host of other things, but not to a price. Unfortunately, the notion makes the shift between cardinal numbers and ordinal numbers seem natural and unobjectionable.

Here it may be useful to make a short comment about the difference between ordinal and cardinal numbers as they are used in economics. Individuals may put their priorities in a list and assign numbers to them, but these are ordinal numbers. They express priorities: this first, that second, etc. It makes no sense to add, multiply, or do any arithmetic with them, other than saying: first of all I must have the roof repaired, and then buy a new pair of shoes, etc. If a new pair of shoes is in the second place in my list of priorities, then two new pairs do not equal the utility I expect from the roof that is first in my list. Furthermore, ordinal numbers have meaning only within the choices of an individual: I cannot say that the item that is topmost in my buying list is for that reason more important than the item that is second in yours –more important to whom?

Prices are cardinal numbers. It makes sense to add prices, to multiply them, etc. And I can compare prices offered and paid by different people. When I say that this computer’s price is twice as much as that other one, I am using cardinal numbers. I know that ten hammers will cost me ten times the price of a single hammer. But when I say that a computer is of more value to me than to you I am engaging in comparisons between choices of different people. I am using (or rather misusing) ordinal numbers.

Apart from wrongly assuming that a reserve price must be “automatically” higher for rich people, Murphy and Nagel misuse the notion of the “reserve price” to implicitly engage in comparisons between scales of utility for different people, which is wrong and radically different from comparing real prices. As we have seen, they suggest that governments have to establish how much a good is worth for different people –i.e. according to the “reserve prices” they would pay, as established or guessed by some government’s bureaucrat. However, it is one thing to compare the price of computers offered in two stores, and quite another to compare the utility that a computer has in your scale of priorities as against the priority it has in the scale of your rich neighbor. To say that the eleventh element in my scale should be considered more valuable than the twentieth in yours is nonsense. To acknowledge that truth we do not need to endorse relativism: it is enough to realize that value is always value for an individual. Most readers of this article do not plan to buy a pneumatic hammer, and that does not mean that they deny that it may be useful to those who buy it.

 We often hear that one dollar more is of less marginal value for a rich taxpayer than to a poor one. That assertion is at the base of many arguments in The Myth of Ownership. It is a confusing way of saying that, if that dollar is taken from him, the rich taxpayer would have to give up the satisfaction of an item that is many steps down on his present scale of utility. It would be the last one, say one more drill bit to be used in one of the hundreds of bench drills in his mill. If a dollar is taken from a poor taxpayer –say a plumber– he too will be forced to give up his last item, which actually might be a similar drill bit. Our plumber would have used it with his only hand drill. We must understand that nothing of that means that we are justified in saying that one more bit is more valuable for the plumber than for the industrialist (more valuable to whom?). We cannot build an “impersonal” scale from all the others and assume that there is any meaning in it. Relative positions have meaning within an individual’s scale.[7] If we forget it, we would be led to think that it is wise to say that the good at the 21st place in Smith's scale of utility (a new subscription to a science magazine) is of less value than the good at the 20th place in Johnson's scale (a new subscription to a porn magazine).

In short: it does not seem that the notion of a “surplus” value collected automatically by all the rich is anything more than another rhetoric device of the kind Murphy and Nagel so justly condemn. And the notion of a “reserve price” does not improve their justification of higher taxes, unless we take the price of goods in lifeboat situations to be the reserve price in normal times. Furthermore, we should not be led to forget for a minute that conflating individual scales of utility is meaningless.

As an aside, it is useful to remember that at the first steps of the production of new goods, they are usually sold to the rich and that they often pay exorbitant sums for that privilege. The first books, cars, and computers were very expensive, and only the rich –sometimes with a love for novelty and experiments could pay for them. In a way, and contrary to the suggestion that the rich get a surplus that is denied to the poor, the rich finance the development of products that initially could not be made for the mass market. Of course, no rich person would think it sensible to say that the poor owe him anything for it. And that is fair. We do not have to pay for all the consequences that have been made possible by rich people –or by governments.

---

[1] Pages 82-83.

[2] Böhm-Bawerk, E: Marx and the close of his system. The essay can be downloaded freely from www.mises.org/books/karlmarx.pdf. Concerning Marxism, as with many other issues, the Internet removes the excuse of ignorance.

[3] P. 83.

[4] Positive Theory of Capital. Libertarian Press, p. 138

[5] P. 83.

[6] P. 82.

[7] And we must also bear in mind that individual preferences and choices are not fixed for life but change daily, not necessarily because of whim, but because we have to face different conditions.