LTV Is Useless for Economic Calculation Because of the “Reduction Problem” and Because It Ignores Natural Factors of Production

Von Mises finally discusses Leichter, who rigorously adheres to the labor theory of value. Von Mises repeats the arguments he made against this theory in his 1922 book Die Gemeinwirtschaft. The labor theory of value is useless for economic calculation because it is incapable of converting labor of different qualities to a single standard (the so-called “reduction problem”) and because it does not take into account the natural factors of production. Leichter believes that the importance of the various labor tasks can be compared with each other. Von Mises says that such comparisons can of course be made, but that they will lead to different results, depending on the subjective valuations of the person who made them. And what does “importance” mean in this context? Does it refer to the importance of being on the job, of producing better work, or the arduousness of the work, and so forth? Each of these comparisons yields a different result, but only one can be the basis of the reduction factor. Leichter’s contention that practice daily solves this problem by establishing wages (which was also Marx’s solution to this problem) is wholly erroneous. Wage rates are established in market exchange on the basis of subjective valuations, and the problem is precisely whether it is possible to reduce the various kinds of labor to a single standard in a society without market exchange. Leichter attempts his way out of this circular reasoning by stressing that modern wage negotiations have “nearly” nothing to do with “market haggling” in the normal sense of the word—supply and demand play “nearly” no role in determining the wage differentials. Von Mises notes that the double insertion of the word “nearly” robs these arguments of their basis.

The origin of Leichter’s (and Marx’s) error lies in an inadequate and unclear comprehension of the nature of the market mechanism and market price creation. To Leichter, the essence of the market seems to be “haggling” and reference to supply and demand. Von Mises states, however, that “haggling” may even be absent altogether. Even where “fixed” prices that “allow of no reduction” exist, the market mechanism acts in its usual way, except that the state of the market does not so much influence the price through the actual negotiations of the market parties, but through their behavior, such as the absence or queuing of buyers and the corresponding behavior of the sellers.

Von Mises’s other argument against the labor theory of value is that economic calculation should not only comprise labor, but also the material means of production, such as those provided by Nature. Leichter does not demonstrate how the problem of socialist economic calculation can be solved regarding these scarce goods, on which no labor has been spent. He does remark that “society” will set higher prices for these scarce goods. Von Mises argues that the problem is not whether society sets higher or lower prices, but whether it will be able to do so on the basis of the results of economic calculation. “It was never doubted that society can dispose: I maintain that it cannot do so rationally, i.e. on the basis of a calculation” (N.B., p. 500). Orthodox Marxists have been as incapable as others in finding a useful system of economic calculation for a socialist society.

—William Keizer, “Two Forgotten Articles by Ludwig von Mises on the Rationality of Socialist Economic Calculation,” Review of Austrian Economics 1, no. 1 (1987): 117-118.