swap_horiz Working More Doesn't Create More Value
report_off The claim
"A boss doesn't work a thousand times harder than his employees, so he doesn't deserve to earn a thousand times more than them."
Imagine two people. A spends twelve hours building a chair nobody wants. B spends two hours writing software that millions of people find extremely useful. Who “created” more value? The labor-based intuition says A, since he worked longer. It’s wrong.
For Carl Menger, value isn’t a physical property of a good, nor a quantity of labor embedded in it. It’s subjective: a good has value because it lets an individual satisfy a need he considers important. More labor doesn’t mean more value. An object can take a hundred hours to make and be worth almost nothing if nobody wants it, like A’s chair. Conversely, an innovation requiring only a few extra hours can have immense economic value if it meets a widely shared need, like B’s software.
The mistake is reasoning in a straight line: labor leads to value leads to pay. The Austrian approach sees a much longer process: a subjective need, an entrepreneurial anticipation of that need, a combination of factors of production to meet it, actual production, exchange, and finally a value revealed by the market through consumers’ choices. Labor takes part in that process. It’s one link among others, not the sole, automatic source of the result’s value.
That’s why an entrepreneur can earn far more than some of his employees without working “a thousand times harder.” He isn’t just selling his working time. He bears the risk of losing his capital, the uncertainty of future demand, the responsibility of coordinating the factors of production, the discovery of opportunities nobody else had spotted yet, and the anticipation of consumers’ future preferences. This is exactly the uncertainty Ludwig von Mises places at the heart of entrepreneurial activity: unlike an employee who carries out defined tasks for pay agreed in advance, the entrepreneur commits resources today for a future outcome he doesn’t actually know.
Profit, then, isn’t a reward for working harder. It can be the payoff for a correct forecast in an uncertain world, or the penalty for a wrong one, which is exactly why the entrepreneur can also lose everything. Comparing a boss’s hours to his employees’ to deduce what he “deserves” confuses effort with outcome. It isn’t the number of hours spent producing something that determines its economic value. It’s the judgment of consumers, revealed through their choices and their exchanges, that determines it, and that judgment is never measured in hours.
Quotes
View full quote"Value is nothing inherent in goods and no property of them, but merely the importance we first attribute to the satisfaction of our needs, and in consequence carry over to economic goods as the exclusive causes of the satisfaction of..."
View full quote"What distinguishes the successful entrepreneur and promoter from other people is precisely the fact that he does not let himself be guided by what was and is, but arranges his affairs on the ground of his opinion about the future...."
Books
Principles of Economics
Menger's groundbreaking work that founded the Austrian School of Economics, introducing the theory of marginal utility and subjective value. This r...
Read MoreHuman Action: A Treatise on Economics
Ludwig von Mises' magnum opus and the most comprehensive systematic treatment of economics from the Austrian School perspective. Mises develops pra...
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