Franz Oppenheimer's Economic Ideas

Social Research, New York, vol. 11, no. 1, Feb. 1944, pp. 27 - 39.

by Eduard Heimann

[p. 27] In Franz Oppenheimer the social sciences have lost a man in whom the great emancipators of the human mind in the seventeenth and eighteenth centuries seemed to have risen again, in new and original incorporation. He shared their flaming belief in the strength of human reason to organize the world, and in liberty, in which alone a real order could bloom. He was a liberal of that old, heroic, revolutionary brand which has otherwise died out long ago. This was his greatness, and it was his tragedy in an age wherein reason and liberty appear to turn into the very opposite of themselves, and to necessitate for their justification a new qualification and integration.

His philosophy of history - on a materialistic basis, in the eighteenth century tradition - saw the course of history dominated by a running battle between the "political means" of acquiring goods and the "economic means" to this end. The terms may appear paradoxical, and need some explanation. Men may acquire goods either by production and exchange - the economic means - or by imposing their rule on others and taking their products from them - the political means.

The latter represents coercion, organized as the state, to enforce a tribute, and stands for tyranny and exploitation. The political means enters history through the nomads, who fell upon agricultural tribes, seized their lands, and, instead of massacring them, enslaved them for the cultivation of those lands. Such a system, however, cannot be perpetuated, much less be made more efficient, without increasingly taking into account the interests of the ruled and thus preserving their ability and willingness to produce. The original [p. 28] robber state thus gradually shades off into the modern state, without giving up its identity.

The economic means stands for reason, liberty and equality. It constitutes the exchange economy, which presupposes personal freedom and equal rights, and benefits all partners. Every able man works for himself and owns his land or tools - individually in a pre-industrial technique of production; through a cooperative where large-scale production makes this necessary - and all these workers so distribute and redistribute themselves among the different occupations as to equalize annual returns from the exchange of products. Oppenheimer's interest is never focused on the isolated price of a product, but always on the income derived from that price.

The exchange economy becomes perverted by a compromise with the slave economy. In the "pure economy" no one could dream of appropriating more land than he and his family could till; such appropriation presupposes a slave system. Yet the exchange economy did tolerate great landed property, that economic institution of the political means, as legitimate and on an equal footing with property arising from work personally done. In the hybrid system which combines the transformed feudal property with the exchange economy - this is the definition of capitalism - harmony is distorted by two interrelated effects of great landed (feudal) property: the countryside's purchasing power for urban products is weakened by exploitation and ensuing inefficiency; and the urban labor market is flooded, and wages pressed down, by the slaves or serfs or agricultural workers who escape from pressure into the freedom of the cities. In a harmonious system, where the land is not appropriated, an urban worker would demand and get as much as he could otherwise receive as an independent peasant on free land; in the hybrid structure the wage is pressed down to that of an agricultural serf. This makes urban capital property a means of exploitation alongside great landed property: the propertyless suffers a deduction from his rightful wage, the product of his work, to the profit of the big owners. In this way Oppenheimer introduces his exploitation theory.

[p. 29] It can be seen from this all too brief sketch [1] why Oppenheimer calls himself a liberal socialist. He is a socialist in that he regards capitalism as a system of exploitation, and capital revenue as the gain of that exploitation, but a liberal in that he believes in the harmony of a genuinely free market. He parts from apologetic bourgeois liberalism in that he denies the harmonious character of the existing market, vitiated as it is by the foreign body, feudal property; only if this were rooted out would the cooperative and equilibrating character of the market assert itself. This position is unassailable in formal logic, like the rival positions of Malthus-Ricardo and of Marx. Faced with the disillusionment of the exuberant hopes that had accompanied the rise of the liberal economy, Malthus and Ricardo blamed the outcome on the scantiness of nature, as manifested in decreasing returns; Marx on the dynamics of bourgeois property; Oppenheimer on the incomplete character of the bourgeois revolution, which made a compromise with feudal property and thereby established capitalism as a "bastard of serfdom and liberty."

Plainly no reasoning can lead to a decision between the rival positions; the decision remains a subjective one. Much depends, of course, on the plausibility of the authors' elaboration of their rival theses - although no criticism is likely to be conclusive in the face of the objection that the criticized inadequacy is not essential to the fundamental position which it is supposed to serve. But Oppenheimer's [p. 30] rationalism would never have bowed to such skepticism, and he attempted to force the decision by brilliant critiques of the rival systems.

Against Ricardo he argues that while land rent is only a differential, and is not caused by monopolistic exploitation of consumers, what matters is not the rent per acre but the total amount of rent which accrues to one owner, depending on the number of acres which the system permits him to own. And while rent follows from cost price, which is equivalent price, this does not preclude the possibility of an exploitation gain being included in this price as a result of a cost factor being paid less than its due. Historically rent, according to Rodbertus' brilliant analysis, to which Oppenheimer refers, is the tribute in kind which the owner used to exact from his serfs; only as the market price rises sufficiently to yield him an equal money rent over his cost will he supply the market - thus transforming his feudal rent, illegitimate in bourgeois opinion, into a money rent acceptable to that opinion.

Oppenheimer goes so far as to assert that in a system where unused land is freely accessible, rent cannot survive. Rent-bearing land would be partitioned through inheritance; while land that did not bear rent would remain unpartitioned in the hands of one heir, the other heirs taking new lands. Thus the sizes of properties would be in inverse proportion to their rent capacity, and the smaller a property the more intensively it would be cultivated until rents were eliminated by diminishing returns. Suppose the normal income is 10 but fertile land brings 11; two heirs to the fertile land, partitioning the property, are not able, through intensification, to double the income to 22, but can perhaps achieve only 20 - the original rent of 1 is offset by a negative rent of 1, attributable to diminishing returns, and each owner has only the normal income.

Under such conditions the order of cultivation would differ from that in the capitalist market, where cultivation could theoretically never be extended or intensified to produce negative rents but would stop at rentfree returns, thus leaving the intramarginal rents intact. The entire reasoning, however, is doubtful. In Oppenheimer's [p. 31] utopia the individual farmer, faced with the choice between a larger and rent-bearing property extensively cultivated and a reduced size intensively cultivated, would prefer the former alternative because it would leave him intramarginal and in possession of the rent which the intensification of the smaller property would eliminate. Intensification, resulting from inheritance, cannot be counted upon to eliminate rent, because marriage, for example, may join two properties. Oppenheimer has not considered these implications.

Against Malthus Oppenheimer argues that the test of diminishing returns to agriculture would be a percentage shift of the population from industry to agriculture as the population grows. Thus, if 50 agriculturists fed themselves and 50 industrialists, then a doubled population would require, if agricultural returns were diminishing, not 100 but perhaps 110 agriculturists. But the statistics of occupations prove that the contrary has taken place, and that the law of decreasing returns has been overcompensated. The argument is not conclusive, of course, because many auxiliary activities of agriculture have been transformed into industries, such as the production and repair of certain tools, the making of clothes, and so on. Hence statistical inquiries into the space still available in the various countries, and in the world as a whole, become decisive, and they strikingly buttress Oppenheimer's thesis. What weakens his argument is the consideration that under modern conditions an independent agricultural existence, in isolation or in cooperatives, requires considerable capital in addition to the land.

In Marx's system the target of Oppenheimer's criticism is the argument that the workers are inescapably tied to capitalism. Marx says that a rise of wages, because it is at the expense of profit, would blunt the stimulus of profit, cause the capitalists to consume rather than accumulate their profits, and thus press down wages again. This argument is parallel to the Malthus-Ricardo argument, according to which it is the increase of the working population, in response to a wage rise, which presses wages down again to the minimum. Oppenheimer argues that the higher the productivity of [p. 32] labor, the more discrepancy there is between the wage that would permit the workers to save and gradually create their own businesses or cooperatives, and the wage that would leave the capitalists without the minimum profit required for further investment; Marx always presupposes that the two points coincide. The criticism is irrefutable, and has since appeared in many quarters. It points to the solution that Oppenheimer envisages - that the workers' cooperatives build up the capital required for the purchase of landed or urban enterprises, while the capitalist system continues to function. The question must arise, of course, whether such a peaceful liquidation of capitalism by sale is practicable - a question that may be answered differently in different countries.

The practical side of these critical studies is followed through by Oppenheimer in his historical studies, the profundity and erudition of which are still not fully appreciated. There he shows how his utopia was closely approximated from 1000 to 1400 in Germany, and almost the whole of Europe. In Germany settlers were needed for the subjugated and depopulated regions of the northeast, and thus serfdom on the feudal estates became nominal, as evidenced by the fact that rent was fixed and that for centuries every increase in productivity accrued solely to the peasants. Throughout Europe, during those centuries, the labor force of the feudal estates was drained by the growth of the towns, under the legal proposition that "town air makes free" and the military arrangements that gave reality to this claim. Such a drain could not fail to raise the condition of the peasants everywhere, and thus it provided the craftsmen and merchants of the towns with customers. That period, distinguished by the blossoming of many famous towns, all small in size, came to an abrupt end when eastern colonization was closed and the lords regained control of their serfs.

Adam Smith similarly described the American colonies as a prosperous community wherein everyone could become an independent farmer as he pleased, and in this anticipation of the frontier theory Karl Marx seconded him, in an explicit chapter, unfortunately without drawing conclusions for his system. In his last important [p. 33] work[2] Oppenheimer continued this line of study by an investigation of recent developments in this country; here, as in Ireland, eastern Germany, Poland, southern Italy and elsewhere, he saw the main sources of emigration into the industrial centers as not the densely settled regions of free farmers but the thinly peopled districts of large estates - an observation that tallies with his historical and theoretical considerations.

* _* *

In his analysis of the capitalist order Oppenheimer translates into terms of economic theory the sociological concepts of power and exploitation. The central theme of his system is monopoly, again in line with radical liberalism from Adam Smith down. Marx is a socialist because he finds exploitation also in competition; monopoly has no legitimate place in his system, which is one of cost price. Oppenheimer is a liberal in that he blames the defects of capitalism on land monopoly, and associates freedom and welfare with real competition in a monopoly-free set-up. He defines monopoly as a position of economic power which makes exchange differently urgent for the partners, thus violating the equivalence of exchange essential for a free society.

Prices in competitive equilibrium are determined by labor values because this makes labor incomes equal. This is the starting point of all value theory, from Petty on; it is only property incomes that can become unequal because, while the rates per unit of property are equalized, owners own different numbers of units. Oppenheimer's entire system rests on this foundation. There can be two ways of violating the standard of equality: by raising price at the expense of buyers; and by lowering it at the expense of sellers. A third kind of monopoly does not affect price; it is an advantage in production over the competitor, thus giving rise to a differential rent, as in many personal and impersonal qualifications and in the temporary profit of a pioneering entrepreneur. Competitive capitalism [p. 34] is an order in which commodities are sold at values, but labor sells under the class monopoly, which spreads from land monopoly to include all capital ownership. In a free society "every two employers would run after one worker," because no one would be forced to look for employment on the property of some one else; in capitalism "every two workers run after one employer," most conspicuously in an era of unemployment.

It is surprising to find Oppenheimer using labor value as a basis for a theory of monopoly; his is the only such attempt in history. Traditionally monopoly is one of the rocks on which labor value theory founders, since monopoly price violates labor value. Hence all classical writers put monopoly price outside their systems, and explicitly state that to determine it one has to refer to demand, while normal competitive price is determined by cost. Oppenheimer admits that monopoly price proper cannot be accurately derived from his objective value concept, but he maintains that the prices of competing and substitutable goods narrow the space available for monopoly price - and was the first theorist to do so. This, he says, suffices for a market theory.

For the analysis of monopsony on the labor market, however, he uses exclusively his objective concepts. The price of really free labor is the product, or its equivalent in exchange under a proper distribution of total labor among the industries - a distribution that makes incomes equal. The monopoly price of labor is the living minimum, which changes historically, as was pointed out by Malthus, Ricardo and Marx; the difference between this wage and the value of the product is the profit, the gain of a class monopoly, to which every member of the owning class is entitled in equilibrium. The wage of special skills of labor can also be expressed in objective terms, with the price of the product determined by marginal labor value. The price of an acquired qualification is expressed by the cost of training it; a personal advantage in efficiency or skill manifests itself in higher productivity, that is, in a higher number of products than are produced at the margin. The only goods and services not accessible to this analysis are the standard examples of [p. 35] classical theory, paintings by old masters, and the like, which are outside the normal course of the social economy.

This, with much brilliant refinement, is Oppenheimer's labor value theory, the rival of Marx's. According to Marx the wage is the full and legitimate equivalent of labor power; the worker receives his full due under the laws of the market. According to Oppenheimer the wage is artificially depressed below the normal and legitimate value. According to Marx profit is the result of a logical trick, which gives the workers the value of their labor power while part of the value of the product is still confiscated for the employer; the fact that the labor power bought by the capitalist produced more than its own value is "particularly good luck for the buyer, but no wrong at all done to the seller." According to Oppenheimer profit is the fruit of plain monopoly. The superiority of his version is striking on all counts.

There are problems in it. Oppenheimer long wavered as to how to draw the line between capital profit and land rent, the reason being that in his theory it is land property which enables capital property to reap a profit. At this point can be seen the wide difference in theory between Oppenheimer and Henry George, for all their emphatic agreement in sentiment and ideals. George, like all agrarian socialists, makes land rent his target, as the gain of monopoly in land. Oppenheimer seems inclined to believe that all properties, land and capital, share in the profit, and that land has its rent in addition. The obstacle to this solution is the fact that in a competitive market a general equalization of profits takes place. The profit that accrues to capital is not the surplus of the value of the specific product over the wage of the specific workers. In different industries capital is differently capable of employing labor, and would be differently profitable if its profit uniquely depended on the exploitation of its own labor. But in competition capital is withdrawn from less profitable - less labor-absorbing - industries and reinvested in more profitable - more labor-absorbing - industries, thus raising price and profit in the former and lowering them in the latter group, until equal profit rates are attained. This mechanism, [p. 36] implying as it does a comparison between profit rates in different industries, presupposes capital values to which the profit sums in the various industries can be related. Machines, buildings and the like are valued at their cost. Land, however, has no original capital value; its value is calculated from the prevailing profit rate by way of capitalization, and cannot figure in the determination of that rate. The only logical, although not plausible, conclusion is that land does not partake of the profit which it creates; only the capital invested on the land, in tools and buildings, can share in the profit. Oppenheimer is never very specific on this point.

What is worse, Oppenheimer's theory, doubtless the maturest form of exploitation theory, nevertheless does not escape the general objections to all forms of that theory. One such objection, which Siegfried Budge seems to have been the first to raise,[3] contends that, in classical reasoning, what price is supposed to cover is real cost as paid for by the seller; there can be no doubt that real expenditure must be replaced if production is to continue. In any exploitation theory, however, the buyers replace for the capitalist not only the cost of the labor he paid for but also the cost of the labor he did not pay for; this leaves profit as a mere surplus, which would be unable to survive in the competition of employers for labor. If it be granted to Oppenheimer that the beneficiaries of the class monopoly not only want to, but are actually able to, restrict their competition for profit-bearing laborers, then we run into the insoluble difficulty arising from the differences in capital-intensity, as suggested above. Equilibrium prices exceed strict labor values in the capital-intensive industries, and remain short of them in the labor-intensive industries; consumers pay less than an equivalent price here, and use the gain to pay more there. But consumers are not a homogeneous group; they are either capitalists or workers. Therefore it may happen that capitalists buy prevailingly the goods that sell below values, and workers primarily those that sell above; or the opposite may [p. 37] happen. Both cases are incompatible with Oppenheimer's or any other possible version of the theory; only if it could be asserted and proved that the two classes share in the consumption of the two

groups of goods in equal proportion would the theory be tenable.[4] Given a price system in which capital intensities force deviations from labor values, there is no way out but to recognize that capital is an independent cost factor.

This is not to say that Oppenheimer is wrong. Whether profit is a legitimate income, as "bourgeois theory" assumes, or an illegitimate income, according to Oppenheimer or any other theorist of exploitation, the worker receives only his wage if he does not own his tools, and the full value of the product if he does. And whatever the nature of profit, no one doubts that with a larger supply of workers the marginal product of labor, and us wage, are smaller than with a smaller supply. Oppenheimer's thesis is that monopoly in land causes flight from the land, which in turn floods the industrial labor market with applicants, presses down the wage, and raises the profit. This thesis is compatible with any theory worthy of the name.

The thesis does not end there. It explains the existence of a reserve army of capital, responsible for the inflation of the cities and the distortion of the income structure, and parallel to the Marxian reserve army. But while the latter is permanent and self-perpetuating in capitalism, Oppenheimer's reserve army is temporary, nourished as it is by the surplus population of the feudal areas, the people who cannot stand the pressure. It is only this reserve army which gives rise to the profit mechanism; compared with it even the Marxian reserve army is accidental, since its relationship to the profit mechanism which is embedded in the logic of the value concept is nowhere explained. According to Oppenheimer the very existence of capitalism depends on the existence of his reserve army, which capitalism, however, does not produce or reproduce; it is presupposed in capitalism. [p. 38] Hence capitalism will vanish as soon as the feudal areas are either completely depopulated or reorganized on the basis of freeholds and cooperatives.

Meanwhile the existence of the reserve army, result of distortion, leads to further distortion, in the economic crisis. It enables entrepreneurs, in periods of shrinking profit rates, to enlarge their output in order to maintain aggregate profit. This policy is rational from the point of view of an isolated individual, but contrary, of course, to the significance of the price signals, and disastrous for the market. In the society of the free and equal the coincidence of the private and the public interests would manifest itself, in the contraction of production when price fell, and the consequent avoidance of the glut.

The doctrine of opposite types of behavior arising from different situations - in line with the requirements of the system in the pure economy, contrary to them in the political economy - is instructive and, in Oppenheimer's hands, lends itself to important applications. Consumers are in "peaceful competition," producers for the most part in "hostile contest," because the former are interested in a great many prices, without too much emphasis on any one, whi1e for the latter everything depends on the one price of their product (thus it is difficult to organize consumers and easy to organize producers). Oppenheimer classifies the many kinds of cooperatives - and guilds in the different phases of mediaeval history - according to whether they are interested in obtaining more members, in order to benefit by internal economies, or in restricting membership; the success of the consumers' cooperatives is due to free accessibility. But for the theory of the crisis the doctrine does not seem to perform what Oppenheimer assigns to it. For even without a reserve army the individual producer, when faced with a falling income per unit of his output, can seek a way out by enlarging his output through an extension of his workday. On the other hand, it is doubtful that capitalist producers do enlarge their output in the face of falling prices, except in the isolated and hence unfortunate instance of farmers. And if they did, it might remedy the crisis instead of aggravating it. [p. 39] Finally, Oppenheimer discusses only the reaction to falling prices, not the reason why price falls. In this field Marx is infinitely superior.

Again, however, the theory of the reserve army in itself is not thereby refuted. It is remarkable that Gustav Cassel, many years after Oppenheimer, bases his theory of the crisis-punctuated development of capitalism on the absorption of a continuously flowing agricultural surplus population by urban industry, and predicts that the cyclical movement will end as this source dries out - true to the model that he does not seem to know. Even where Oppenheimer is not successful in his elaboration, he remains one of those rare men whose very errors are capable of bearing fruit; while the profundity and the tremendous sweep of his problems make the study of them obligatory.