As people celebrate “Labor Day” today, it’s important not to get caught up in Marxist fallacies about the labor theory of value and think there is some kind of inherent conflict between “Labor” and “Capital.”  In reality, a market economy is an ecosystem of interests which tend to harmonize because of the nature of voluntary exchange.

According to Marx, capitalists gain “profits” by “expropriating” a part of the value created by the laborers and only pay them the fraction of what they actually produce to ensure enough laborers survive to guarantee a sufficient supply of labor.

Based on this horrific picture, labor unions and Marxist revolutionaries argued that there was and is an inherent conflict of interest between laborers and the owners of capital and that the only way laborers could improve their lot would be to gain the power of the state to compel capitalists to treat them well.

Thankfully, Marx’s predictions failed to materialize anywhere.  History shows that wherever relatively free markets have been tried for a sufficient period of time (and where the property rights of laborers, no matter how meager, were respected and protected), the real incomes of laboring classes have grown and grown and grown.

The reason Marx’s predictions failed was that they were based on a faulty Labor Theory of Value. The truth is, on the contrary  that wages for labor services are determined by the value consumers place on the goods those units of labor can produce.  (More precisely, wages are determined by entrepreneurs’ beliefs and expectations about what consumers will value. But entrepreneurs can’t lastingly pay much above or below this amount because if they do consumer behavior will cause them to suffer losses, or competing capitalists will attract underpaid laborers to their businesses.)

One interesting result of this is that capitalist-entrepreneurs actually forward money to laborers and bare the risk of the undertaking.  If consumers don’t like the product, the capitalists, not the laborers, suffer the loss. Thanks capitalists!

So what we see is that entrepreneurs, capitalists and factor-owners, such as laborers, trade with one another to satisfy each others subjective values, to create things that are valuable for one another.

The reason real wages have risen in relatively capitalist countries is that  investments in capital goods enabled by capitalist’ savings have increased what laborers can produce.  (Imagine digging a ditch with ones hands, vs. using a trowel, vs. using a spade, vs. using big earth-moving tractors.) So labor without capital is not as valuable and cannot have as high wages as it can with capital, and capital cannot produce value without labor.  Laborers are paid for the labor value they contribute. Capitalist-entrepreneurs are paid for delaying their consumption, for baring the risk productive undertakings, and for noticing value-creating arrangements of labor and capital.

(note: It is important to realize that laborers and capitalists can be the same people.  Laborers who have interest-baring accounts or insurance policies become “Capital” in one sphere of life and “Labor” in another.)

So there really is no inherent conflict.  What is crucial is the freedom to exchange to cooperate with one another to produce goods and services that enrich us and that increase our real wages.