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As always, Böhm-Bawerk illustrates his general arguments with specific examples to assure the unsatisfied reader. He asks us to imagine a steam engine that requires five years of labor to produce, and has a final price of $5,500. Suppose that one worker labors for five consecutive years to produce one such engine. How much is the worker due? The obvious answer is $5,500, i.e., the full value of his product. But notice that the worker can only be paid this full amount if he is willing to wait the full five years.[/FONT]
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Now what if we have a more realistic situation, where the worker is paid in continual yearly installments? In particular, suppose the worker labors for just one year, and then expects to be paid. How much is he due? Böhm-Bawerk answers, The worker will get justice if he gets all that he has labored to produce up to this point. If . . . he has up to this time produced a pile of unfinished ore
then he will be justly treated if he receives . . . the full exchange value which this pile of material has, and of course has now (p. 264).[/FONT]
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But now we must inquire further: What will be the exact dollar value of this unfinished ore? A superficial analysis might indicate that, because the worker has produced (so far) one-fifth of the labor going into the steam engine, then the worker ought to receive one-fifth of the exchange value of a steam engine, i.e. $1,100. Yet Böhm-Bawerk declares:[/FONT]
[FONT=Verdana, Helvetica]That is wrong. One thousand one hundred dollars is one-fifth of the price of a completed, present steam engine. But what the worker has produced up to this time is not one-fifth of a machine that is already finished, but only one-fifth of a machine which will not be finished for another four years. And those are two different things. Not different by a sophistical splitting of verbal hairs, but actually different as to the thing itself. The former fifth has a value different from that of the latter fifth, just as surely as a complete present machine has a different value in terms of present valuation from that of a machine that will not be available for another four years. (pp. 26465)[/FONT]
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Because present goods are more valuable than future goods, it necessarily follows that one-fifth of a machine-to-be-delivered-in-four-years is worth less than one-fifth of a present steam engine. Therefore, the worker cannot possibly be paid $1,100 for his first year of labor, if he insists on payment upfront (rather than waiting until the engine is completed and sold). If we assume a rate of interest of 5 percent, the worker will be paid roughly $1,000 for his first year of labor.[/FONT]
[FONT=Verdana, Helvetica]Workers Can Always Choose to Lend Their Wages at Interest[/FONT]
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Böhm-Bawerk offers yet another argument to convince the skeptic. If there is any doubt that the worker above is being treated fairly by being paid only the discounted value of his marginal product (i.e. $1,000) rather than the eventual present value of his marginal product, Böhm-Bawerk points out that the worker is certainly free to lend his wages out at the prevailing rate of interest of 5 percent per year. After four years, the worker will have $1,200 (ignoring compounding),[/FONT]
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and there is thus no basis to claim that the institutional framework somehow forces the worker to receive less than the full value of his contribution.[/FONT]
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If the worker is willing to wait until the product of his labor actually accrues into a saleable product, then he will have the full value that even a socialist analysis would require. However, if the worker is not willing to wait, and desires an advance in the form of present goods in exchange for his labor (that will not produce consumable goods until the future), then he must be willing to pay the market premium on present goods.[/FONT]
[FONT=Verdana, Helvetica]Conclusion[/FONT]
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Böhm-Bawerks refutation of the exploitation theory is valuable not merely as a critique of an erroneous doctrine, but also as a lucid exposition of subjective value theory. Even the professional economist would probably benefit from Böhm-Bawerks analysis, for he raises many subtle points that I have not included in this article. Regardless of ones opinion of Böhm-Bawerks own theory of interest, reading his History and Critique of Interest Theories is certainly time well spent.[/FONT]
