I want to try to explain Eugen von Boehm-Bawerk’s critique of Karl Marx’s labor theory of value by borrowing heavily from a lecture by Richard Ebeling in 1988 and attempting to simplify it, and adding some of my own examples.
Before the 1880's, proponents of Marxism maintained that his labor theory of value was at the very heart of the Marxist system. That drastically changed after Eugen von Boehm-Bawerk dismantled this theory with simple deduction. From then on, in order to save face, they at best will just brush over it or ignore it all together when defending Marxism. I present this brief summary in hopes that I do Boehm-Bawerk, and Richard Ebeling justice.
Marx said that the usefulness of commodities were too diverse to establish value. In order to understand value there had to be a common denominator. In the exchange of two commodities there has to be a common factor of equal amount. He ascertains that this common factor is the amount of labor that went into each commodity.
How does one measure the labor? In the amount of time it takes to produce it. What about skilled labor vs. unskilled? Well, that's easy, skilled labor is a multiple of unskilled labor. A Doctor's labor is worth 10 times that of a ditch digger’s essentially.
He says that there is necessary labor, and surplus labor. Necessary labor is the amount of labor needed to produce enough value to maintain one's sustenance and the sustenance of his family. Any more than that is excess. This is where he gets the idea of the capitalist exploiting the worker. He says that the worker doesn't have access to the means of production to produce enough value for his sustenance himself. Because the capitalist controls the means of production, he can force the worker to work more hours to produce more than what would provide him his sustenance, but only pay him enough to maintain it, thus reaping the benefits of the surplus labor and living without effort which is a great injustice.
Marx says that there is an anomaly in the profits of industry. He says that this is because there is constant capital (i.e. machines purchased for production etc.) and variable capital (the surplus value exploited from the worker). He says that the capitalist pays full price for the constant capital because he purchases it for its full value from the other capitalist producer. The other capitalist enjoys the gains from the surplus value he has exploited from his workers, but there is no loss in exchange between the two capitalists. However, although two industries may enjoy the same surplus value, if one spends more on his constant capital then his overall gains are less than that of the other capitalist.
How does the market even this out? He says that because of competition the capitalists will shift what they are producing to ensure a common rate of profit through price of production.
So labor is the basis of value, commodities should exchange in terms of their labor input, and markets exploit the workers because of they live parasitically off of the profits from their surplus labor.
Eugen von Boehm-Bawerk sets out basically to see if this theory holds up to any facts, and where the theory comes from. He says the two things you have to look at when analyzing market phenomena is methodological individualism and methodological subjectivism. When you try to figure out how a market works, you have to look at what makes up the market. That is the individual. It's each individual that acts and makes choices. "All economic processes begin with man and his purposes". The individual decides what a commodity is worth by how the specifics of that commodity serve his purpose. It's irrelevant to him how much time and effort went into making the commodity. You can't look at it so abstractly.
I'll give you an example. Say you decide you want a painting to hang on your wall. You see two paintings. Both of them are painted by skilled artists. One was a little abstract and simplistic and it only took an hour to paint. The other is a really detailed landscape with every intricacy imaginable and took the artist a week to paint. By Marx's theory, the landscape has way more value than the abstract one, but the abstract one catches your eye and you decide that's the one that fits your taste. Does it matter to you at all how much labor went into it? Are you going to buy the landscape over the abstract because more labor went into it?
Boehm-Bawerk also exposes that what Marx has done in regards to commodity value is construct his definition of commodities in a way that in his analysis, labor can be the only common denominator. He does this in one way by ignoring the things nature gives us that have value. These are things that can't be reproduced by labor. By doing this he guarantees he'll have the results he wants by defining a commodity in a way where after reducing all commodities to a common denominator the only one he's left with is the one he's looking for.
One quick way of looking at only one aspect of this is: Say you have a guy who personally decides that fresh air and open spaces are more important to him than a nice condo in an 80 story high-rise in a busy city. Those things have more value to that individual than the conveniences and luxuries of city life. To him, a simple cottage on a hillside with a natural spring in his backyard and all the fresh air his lungs can handle has way more value than the smoggy, noisy, hectic city that took countless hours of labor to construct. He's not going to choose that condo over the cottage because more labor went into it.
The same thing goes for his idea of skilled and unskilled labor. Marx says that skilled labor is just a multiple of unskilled labor because skilled labor is paid more than unskilled labor. Therefore, its value is a multiple of the value of unskilled labor. He presumes what he sets out to prove. Instead of explaining how you could multiply unskilled labor into skilled labor, then derive an analysis on how the market generates these differences, he just says that because the differences exist, and how much the differences are, it proves his premise is correct.
The same way we evaluate commodity value based on the specific usefulness of it to our individual purposes, we evaluate labor value. We're not interested in labor in the abstract, but in the specific qualities, attributes and skills that can precisely serve the purposes we're looking for.
As far as Marx's discrepancies in his analysis of value, surplus value, and how profits should be equalized, Boehm-Bawerk says that Marx suffers from "methodological wholism". He treats an abstract concept constructed in his own mind as an expression and theoretical framework to understand the real world.
Marx says to imagine the economy as a single firm. We can average out the amount of return each individual company has in each industry, then average out all the individual industries, and then disperse them back to the divisions of our economy equally. The problem is that the economy is not some abstractly collectivized single unit. Individual actions and decisions are constantly changing and driving demands in one direction or the other. There is no relation to each individual firm that can be efficiently manipulated, let alone understood or possibly predicted by a central planner. It's not at all a theory of how economies actually function. It's a theory of how he thinks one could function, without taking into consideration any realistic observation of the individuals that make up an economy.
The one thing Marx and other Socialists never take into consideration is what Ludwig von Mises called "praxeology", which is the study of human behavior. That is precisely what drives economies. No central planner can begin to, as I said before, understand or predict it. Each individual making his or her own individual decisions on what they want, need, and value is what tells the market through our purchasing trends what is in demand, where resources should be most efficiently allocated, and when if at any time that demand changes, in which case, the continued level of focus or allocation of resources in that market would be an excess and wasteful.
Lastly, Marx says it's unfair that a producer can hire workers, pay them one price for what they produce, then turn around and sell it for more. Clearly the value of the product is more than what he pays the workers to produce it, so he's once again exploiting the worker and robbing him of what is his.
Boehm-Bawerk explains that what Marx has done is left out a very important ingredient in all human actions which is the element and evaluation of time. The producer pays the workers in commodities now in exchange for what he thinks he will get in the future. The workers trade what they might be able to make later down the road if they produce something themselves for payment in commodities now. Lesser payment for present goods is more important to them than the extra labor and deferred payment in the future. It's kind of like a loan where in the producer loans money out to his workers in exchange for the payment plus interest he will hopefully receive when the final product is sold for more than he paid to have it produced.
The option of getting money to buy a car now, knowing you will eventually pay back more than the original amount loaned is more important to most than the time it would take to save up the original amount even though they would save money in the long run. Time has a very important value. If you decide you would rather go to a record shop and buy a CD so you can listen to it now rather than order it online and wait for it to be delivered for a cheaper price, what you are doing is putting value on time.
Because of this simple reality, you can't say the discounted price the worker accepts now for what the producer receives later is unfair unless you ignore the value of time. Also, you would have to ignore the fact that the worker decides the lower price is worth the convenience of not having to put in the effort and risk required in building up his own business.
Even though Boehm-Bawerk has laid to rest these atrocious fallacies over a century ago, many people are not being taught these simplistic truths and that has opened the flood gates for the resurgence of all these long since debunked arguments.