The history of all hitherto existing societies is the history of class struggle.
—Karl Marx 
The idea of class conflict has become virtually synonymous with Marxian political analysis. Indeed, it is widely believed that even to raise the topic is to indicate a sympathy for the Marxian program. Yet Marx did not originate this idea. He adopted it from others, adding to it his own innovations. As he stated in a letter to his German-American friend Joseph Weydemeyer:
And now as to myself, no credit is due to me for discovering the existence of classes in modern society, nor yet the struggle between them. Long before me bourgeois historians had described the historical development of this struggle of the classes and bourgeois economists the economic anatomy of the classes. What I did that was new was to prove: 1) that the existence of classes is only bound up with particular historical phases in the development of production; 2) that the class struggle necessarily leads to the dictatorship of the proletariat; 3) that this dictatorship itself only constitutes the transition to the abolition of all classes and to a classless society. 
When Marx writes in this instance of "bourgeois" historians and economists he is referring to the classical liberal writers of the preceding decades, notably the French liberal writers associated with the publication Le Censeur européen. In another letter, Marx referred to historian Augustin Thierry, one of the editors of Le Censeur européen, as "le père of the ‘class struggle’ in French historiography."  Marx borrowed a theory created by the fusion of a profound understanding of history and a powerful system of political economy and mired it in a mass of historical, political, and economic confusions.
At least four sources contribute to that confusion. First, by the time Marx began his study of French politics and history, the notion of the "bourgeoisie" as a class had been hopelessly confused; Saint- Simon and his disciples had needlessly complicated the model of classes elaborated by Thierry and his collaborators. Second, Marx misunderstood the writings of the so-called Ricardian Socialists, notably Thomas Hodgskin; Hodgskin’s attacks on "capital" were aimed at what today would be called "feudalism" or "mercantilism" and not at the market economy. Third, Marx superimposes over the historical and economic account of classes elaborated by the French liberals (known at the time as "industrialists," or advocates of the system of "industrialism") the Hegelian dialectical system, with its opposition between man in his particular and in his universal aspects. And fourth, Marx takes the Ricardian system of economics— based on a labor theory of value—to its logical conclusion, a virtual reductio ad absurdum made all the more lamentable by the fact that the first volume of Capital appeared in 1867, just three years before the science of economics was revolutionized and placed on a secure foundation.
I shall present a picture of the origins of class theory and of the changes and variations it underwent at the hands of social theorists from the classical liberal économistes to the Saint-Simonians to Marx. An appendix will offer a brief critique of the Marxian approach to class conflict and exploitation.
Conquest, Class Theory, and the Liberal Économistes
Marxists often say of classical liberalism that it is "ahistorical" and "naive," while the scientific system of Marxism is rooted in history. It may be true that some variants of liberalism are ahistorical and naive, but it is certainly not true of the liberal tradition initiated by the French idéologues and économistes, from whose work Marx drew some of his inspiration. The success of Marxism in attracting scholarly adherents may account for the lack of attention and credit to those liberal thinkers whose work was informed by history. Indeed, as Larry Seidentop remarks of the contrast between liberalism and socialism, "the contrast has come to be made in a way that neglects the richness of liberal thought in the nineteenth century, and ignores the extent to which modes of argument and themes which are usually assigned to ‘socialism’ formed an important part of liberal thought in that period. Indeed, some of these modes of argument and themes were introduced by liberal thinkers, and only later adopted by socialist writers. To that extent, it is fair to say that the conventional contrast between the two traditions is particularly unfair to liberalism— excluding from it some of its own progeny."  Among that progeny were the theories of classes and class conflict.
The theory of classes is certainly not new. Ancient political scientists wrote of the divisions between the few and the many, rich and poor, slave and free. What was new was a grounding of class theory on a rich understanding of history and of historical development made possible by a new approach to historical writing based on original sources, on the one hand, and on an understanding of the forces of production made possible by the nascent science of political economy.
The French économistes of the early nineteenth century elaborated a historical and economic account of classes that distinguished between productive and predatory classes. In this they echoed the distinction between society and state that was drawn by the American revolutionary Thomas Paine, among others. Paine, in his revolutionary tract Common Sense, sought to remove the mantle of divinity from the European ruling classes: "[I]t is more than probable that, could we take off the dark covering of antiquity and trace them [‘the present race of kings’] to their first rise, that we should find the first of them nothing better than the principal ruffian of some restless gang, whose savage manners of pre-eminence in subtilty obtained him the title of chief among plunderers and who, by increasing in power and extending his depredations, overawed the quiet and defenseless to purchase their safety by frequent contributions."  Of the origins of the English monarchy, Paine observed, "A French bastard landing with an armed banditti, and establishing himself King of England against the consent of the natives, is in plain terms a very paltry rascally original.—It certainly hath no divinity in it." 
The idea that conquest formed the foundation of political authority was also given prominence in French liberal thought because of the influence of Benjamin Constant’s influential essay De l’esprit de conquête et de l’usurpation dans leur rapports avec la civilization européene (1814), which distinguished between the spirit of commerce and the spirit of war. This distinction was to receive both historical grounding and a scientific system with the French économistes. Augustin Thierry, the historian and collaborator of Charles Comte and Charles Dunoyer on the leading liberal publication of the early nineteenth century in France, Le Censeur européen,  was a pioneer in the establishment of the conquest theory of the state on firm historical ground. Thierry wrote of his reading of David Hume’s History of England, "In 1817, I contributed to the Censeur européen, the most serious, and at the same time most speculatively daring of all the liberal publications of that period. To a hatred of military despotism, a fruit of the reaction of the general spirit against the imperial government, I joined a profound aversion for revolutionary tyranny, and without a preference for any form of government whatever, I felt a certain disgust at English institutions, of which we then possessed only an odious and ridiculous imitation. One day when, in order to found this opinion on an historical examination, I had attentively read some chapters of Hume, I was struck with an idea which seemed to me a ray of light, and exclaimed as I closed the book, ‘All this dates from a conquest; there is a conquest underneath it."’  In 1826 he published his History of the Conquest of England by the Normans.
Thierry’s research focused to a large degree on the establishment of the English and French states, the former through his justly famous History of the Conquest of England by the Normans and the latter through his Lettres sur l’Histoire de France and the Tales of the Merovingian Franks (1840) and other works. The states of his day were the lasting legacy of the conquests of years before, in England of the Normans and in France of the Franks. Thierry set himself the task of writing the history of liberty, of chronicling the struggle of the oppressed and enslaved against their masters. In his History of the Conquest of England by the Normans, he recorded first the sufferings of the Celtic peoples under the rule of the barbarian Angles, Saxons, Jutes, and other invaders, then of the suffering of these groups under the assaults of the Danes, and finally of the cruelty of the fastening of Norman rule on the descendents of previous invaders, each invading group changing in turn from victor to vanquished. The history Thierry pioneered was to be a new history, a history that would tell the story of the growth of liberty, rather than of the crimes of the rulers, "the immemorable massacres which soil the annals of our nation."  As he wrote of the history of France in a review in Le Censeur européen,
Who among us has not heard told of the misery of a class of men who, in the time of the barbarian invasions, conserved for humanity the arts and morality of industry? Outraged and despoiled each day by their conquerors and masters, they struggled on painfully, gaining little from their labor but the knowledge of doing good and of guarding for their children and for the world the seeds of civilization.
These saviors of our arts were our fathers. We are the sons of these serfs, these tributaries, these townsmen whom the conquerors devoured at will. To their memory is attached the memories of virtue and glory. But, these memories shine palely, because history, which should transmit them, has been controlled by our fathers’ enemies. 
The history of liberty was the history of the shaking off of the bonds of servitude, beginning with the establishment of the revolutionary communes of the eleventh and twelfth centuries, whose "first concern was to organize and to cement their unity with a solemn oath. These were associations of labor and liberty where each devoted himself to produce for society and to defend it. Thus were the communes born."11 It was this movement that set the stage for the growth of the productive forces that were to change the world. While the feudal system of plunder and coercion grew and maintained itself, there grew alongside it—and in competition with it—a parallel system of liberty, production, and commerce. This change in the material productive forces of society was the driving power of the revolutions that were sweeping Europe.
While history had blurred and finally eliminated the distinctions of race and language that divided the predatory ruling classes from the oppressed and productive classes, the crucial distinction remained: through coercion some were able to plunder others who produced wealth through work and voluntary exchange. 
The distinction between production and society, on the one hand, and predation and the state, on the other, was given firm grounding in the science of economics being developed by Destutt de Tracy and Jean-Baptiste Say. Indeed, society was unambiguously identified with the market. As de Tracy wrote in his Treatise on Political Economy, "Society is purely and solely a continual series of exchanges." 
Exchange was paradigmatic for social intercourse, for "an exchange is a transaction in which the two contracting parties both gain. Whenever I make an exchange freely, and without constraint, it is because I desire the thing I receive more than that I give; and, on the contrary, he with whom I bargain desires what I offer more than that which he renders me."  As de Tracy remarks, "the true utility of society is to render possible amongst us a multitude of similar arrangements. It is this innumerable crowd of small particular advantages, unceasingly arising, which composes the general good, and which produces at length the wonders of perfected society." 
The world is divided between two great classes, the producers and the exploiters. As Charles Comte wrote in his essay "Of the Multiplication of Paupers, Officeholders, and Pensioners,"
We have already said that there exist in the world only two great parties; that of those who prefer to live from the produce of their labor or of their property, and that of those who prefer to live on the labor or the property of others; the party of the farmers, manufacturers, merchants, and scientists, and the party of the courtiers, office holders, monks, permanent armies, pirates, and beggars.
"Since the origin of the world, these two parties have always been in a state of war." 
Charles Dunoyer, too, divided the means of accumulating wealth between pillage and production. As he wrote at the beginning of his essay "Of the System of the Equilibrium of European Powers," "The first means to satisfy their needs that men have perceived is to take; to rob has been man’s first industry; this has also been the first object of human association, and history hardly knows of a society that was not at first formed for war and pillage. The ancient and best known peoples, the most civilized of modern nations, have been originally only savage hordes living from rapine."  Dunoyer elaborated a theory of history based on economics to explain the continuation of this system of exploitation; any group that might renounce war and pillage would merely open itself up as a target for the predation of others.  Thus, history and economics were joined in a sophisticated explanatory system.
The history of the human race was divided by these advocates of "industrialism" (i.e., of the system of industrial production rather than of coercive predation) into three stages: the stage of hunting, gathering, and robbing; the stage of war and exploitation; and the stage of production and cooperation.  Each stage was distinguished by the means of accumulating material wealth. In the first stage, material wealth was simply accumulated by means of appropriating the spontaneous products of nature or by taking what others had appropriated. In the second, wealth was accumulated by appropriating the produce of others, either through war, as in the case of the early Roman republic, or through exploitation of coerced labor, as in the manorial system of the feudal period. In the third and final stage, the new age into which European civilization was entering, wealth would be accumulated by production and voluntary exchange alone. In each case, "the means that the people are capable of employing in order to procure things necessary to their existence determine the form of their social organization and the choice of men who should direct them."  (This understanding of the relationship between "material base" and "superstructure" was later adopted in a more rigid form by Karl Marx.)
Thierry and his associates elaborated a theory of social and historical change that combined history with political economy. Stage did not succeed stage in an ever recurring cycle, nor in response to vague social "forces"; the interests of real human beings and the incentives they faced provided the motive force of historical change. As Thierry wrote, "Do you want to know accurately who has created an institution, who has conceived a social enterprise? Search among those who have truly had need of it; to them must belong the first thought, the will to act, and at least the greatest part in the execution." 
The French liberals associated with Le Censeur européen saw themselves in the transition phase between the second and third stages. The growth of productive forces begun with the establishment of the communes had outpaced feudalism and set the stage for a struggle between these two systems of social organization. As one historian characterized the liberals’ view of this struggle, it was "a struggle between government and nations, between aristocrats and the industrious, between the non-productive and the productive elements within human society, in short, old Europe and new Europe. In this contest, according to the ‘industrialists,’ the former favored war, arbitrariness, and economic control while the latter wanted only peace, justice, and liberty." 
The parties in the war between the newly emerging industrial society of peace, freedom, and prosperity and the old order of war, exploitation, and poverty had come to blows with the French Revolution of 1789. The failure of this revolution provided a significant problem for the classical liberal historians and political economists. The Revolution had degenerated into the Terror, the Directory, and ultimately the Empire. Something had surely gone wrong. The group associated with Le Censeur européen explained the failure of the Revolution in two ways. First, along with many other defenders of the Revolution, they charged royalist plotting with diverting the Revolution from its true course, provoking the Terror.  Second, they pointed to the inappropriateness to the new social conditions of the ideas of the group that came to power.  In Comte’s words, "in place of studying things, they had learned systems, and without ascertaining what was the state of civilization and what were the needs of their contemporaries, they made laws that were suitable only for a people of another age."  The ruling ideas of the age were atavistic remnants of the age of exploitation, inappropriate to the new age of production, exchange, and voluntarism. This cleft between ideas and social reality, so clearly pointed out by the French liberals, remains to this day a major factor in the growth of parasitic government. 
Henri Saint-Simon, however, saw things somewhat differently. Until 1817, in association with the classical liberal "industrialists" (Thierry was his secretary until they split over the priority given by Saint-Simon to order, by Thierry to liberty), Saint-Simon retained the historicist and deterministic approach of the "industrialists" but made it even more deterministic.  While Thierry, Comte, and Dunoyer blamed the failure of the productive classes in the French Revolution on the bad ideas of the revolutionists and accordingly set themselves the task of eliminating these atavistic remnants of feudalism that prevented the free society from replacing feudal society, Saint-Simon fell back on historicism and determinism to explain the degeneration of the Revolution of 1789. He posited another stage and another class in order to explain the failure of the "industrial class" to attain victory in its struggle with the parasitic class. As Shirley Gruner explains, around 1820, Saint-Simon "developed the idea that industrialism cannot come about without a period of transition, an intermediary system formed of a class derived from the old yet in some way independent of it, a kind of transitional aristocracy which provided the critical force to break up the old yet was itself unable to create the requirements of the new."  As Gruner remarks, "by a singularly unfortunate choice of words, this subclass of feudalism was termed the bourgeois class, the bourgeoisie, just at the time when Thierry was developing the notion that the bourgeoisie was, in fact, the mass of the nation—the industrials themselves. From now on, the bourgeoisie take on the alarming ability of shrinking to a vicious elite or expanding to the industrious masses, dependent on the views of the writer." 
The Marxian Confusion
This ambiguity of the term "bourgeoisie" led to so much confusion among later thinkers. In the hands of the later Saint-Simonists, the Fourierists, and Marx, the term bourgeoisie came to designate both an oppressive class of bureaucrats, soldiers, and privileged beneficiaries of state largesse and the class of merchants, bankers, and businessmen. The critical distinction between producers and non-producers founded in the union of history and political economy was lost in a tangled clot of terminological confusion and economic misunderstanding.
Marx manages to use both senses of the term "bourgeoisie" in his works. In the "Manifesto of the Communist Party," Marx writes, "The bourgeoisie, by the rapid improvement of all instruments of production, by the immensely facilitated means of communication, draws all, even the most barbarian, nations into civilization. The cheap prices of its commodities are the heavy artillery with which it batters down all Chinese walls, with which it forces the barbarians’ intensely obstinate hatred of foreigners to capitulate."  Marx conjures up with these words a vision of an industrious class of producers, yet in his writings on the class struggles in France, Marx presents a completely different view of the "bourgeoisie." Writes Marx, "The indebtedness of the state was . . . in the direct interest of the bourgeoisie which ruled and legislated in parliament. The state deficit was, in fact, the actual object of its speculation and its main source of enrichment. At the end of each year a new deficit. After four or five more years a new loan. And every new loan gave the financial aristocracy a fresh opportunity to swindle the state, which was artificially kept hovering on the brink of bankruptcy and was forced to do business with the bankers on the most unfavourable terms."  "The July Monarchy," wrote Marx, "was nothing more than a joint-stock company for the exploitation of France’s national wealth, whose dividends were divided among ministers, parliament, 240,000 voters and their adherents." 
In his pamphlet "The Eighteenth Brumaire of Louis Bonaparte," Marx wrote of the alienation of the state apparatus from civil society and of the aim of class struggle to gain access to this state:
In France the executive has at its disposal an army of more than half a million individual offices and it therefore constantly maintains an immense mass of interests and livelihoods in a state of the most unconditional dependence; the state enmeshes, controls, regulates, supervises, and regiments civil society from the most all-embracing expressions of its life down to its most insignificant motions, from its most general modes of existence down to the private life of individuals. This parasitic body acquires, through the most extraordinary centralization, an omnipresence, an omniscience, an elasticity and an accelerated rapidity of movement which find their only appropriate complement in the real social body’s helpless irresolution and its lack of a consistent formation. . . . [T]he material interest of the French bourgeoisie is most intimately imbricated precisely with the maintenance of that extensive and highly ramified state machine. It is that machine which provides its surplus population with jobs, and makes up through state salaries for what it cannot pocket in the form of profits, interest, rents, and fees. Its political interest equally compelled it daily to increase the repression, and therefore to increase the resources and the personnel of the state power. 
Thus, the bourgeoisie, as Marx is here using the term, is intimately connected with the state power and dependent on its predatory behavior for its income.
Further on he argues that the state takes on an existence of its own, altogether independent of the civil society over which it rules:
This frightful parasitic body, which surrounds the body of French society like a caul and stops up all its pores, arose in the time of the absolute monarchy, with the decay of the feudal system, which it helped to accelerate. The seigniorial privileges of the landowners and towns were transformed into attributes of the state power, the feudal dignitaries became paid officials, and the variegated medieval pattern of conflicting plenary authorities became the regulated plan of a state authority characterized by a centralization and division of labour reminiscent of a factory. . . . Every common interest was immediately detached from society, opposed to it as a higher, general interest, torn away from the self-activity of the individual members of society and made a subject for governmental activity, whether it was a bridge, a schoolhouse, the communal property of a village community, or the railways, the national wealth and the national university of France. Finally, the parliamentary republic was compelled in its struggle against the revolution to strengthen by means of repressive measures the resources and centralization of governmental power. All political upheavals perfected this machine instead of smashing it. The parties that strove in turn for mastery regarded possession of this immense state edifice as the main booty for the victory.
This conflict of classes looks much like that described by the French liberals, while the conflict in Capital is of an altogether different sort. The confusion is inherent in Marx’s use of the term "bourgeoisie," for, as historian Ralph Raico remarks, "On the Continent . . . the term bourgeoisie has no . . . necessary connection with the market: it can just as easily mean the class of ‘civil servants’ and rentiers off the public debt as the class of businessmen in the process of social production."  Shirley Gruner makes it clear that "Marx felt he had got a grip on reality when he found the ‘bourgeoisie’ but in fact he had merely got hold of a very slippery term."  This slippery term is at the heart of Marx’s class theory, resulting in a contradictory and incoherent theory.
Another source of the confusion comes from Marx’s superimposition on to economic/political classes of the Hegelian distinction between man in his particular existence and man in his universal existence. By another unhappy coincidence, the term Hegel uses for civil society, in which man exists as particular, is "bu¨ rgerliche Gesellschaft," a term that is neatly translated into French as "société bourgeoise."37 Thus, Marx was able to superimpose the Hegelian dialectical framework onto the conflict of classes founded on a material base, yielding a system of dialectical materialism.
Appendix: Confusions in the Marxian Theory of Exploitation
Yet another source of confusion in the Marxian attitude to class is located in his complementary theory of exploitation. This is in turn based on a virtual reductio ad absurdum of the Ricardian theory of wages and on a misreading of the English economic writer and political theorist Thomas Hodgskin, who had written extensively on the relations between "labor" and "capital." (This misreading of Hodgskin remains common today.) Each deserves at least a brief discussion before going on to a rehabilitation of the classical liberal theory of class and class conflict.
Thomas Hodgskin, the author of Labor Defended against the Claims of Capital (1825), Popular Political Economy (1827), and The Natural and Artificial Right of Property Contrasted (1832), among other works, is cited by Karl Marx a number of times in support of his exploitation thesis in Capital. Often called a "Ricardian socialist" by later writers, Hodgskin was in fact neither a Ricardian nor a socialist, as the terms are understood today.  He was instead more of a follower of the economic doctrines of Adam Smith and a defender of laissez-faire. To put the matter briefly, Hodgskin was interested only in the justice of the distribution of wealth and not in determining the quantitative relationships between wages, profits, interest, and rents. Working from the Smithian doctrine that wealth is produced by labor, Hodgskin criticized the landowners and "capitalists" whose wealth was originally acquired not through voluntary exchange of their products but through acts of conquest. Conquest was at the root of the European land system, for during the barbarian invasions
all Europe was parcelled out by the German tribes, in what are now princely proportions. The followers of Alboin in Italy, of Theodoric in Spain, of Clovis in France, of Hengist in England, and subsequently of William the Conqueror, appropriated the land, not according to what quantity each man could dig by his hand, but rather according to the quantity his horse could gallop round. The appropriation of the land in such large portions was, for our subject the original sin. . . . The persons who thus appropriated the soil of Europe, did so by a right of conquest. They did not lay down the sword the instant they had overrun the land, they kept it drawn in their hand, and engraved with it laws for the conquered. 
Far from opposing property or the free market, Hodgskin opposed feudalism and its residue, mercantilism. Property titles founded on conquest were illegitimate. As Emilio Pacheco explains, for Hodgskin, "The payment of rent and profits, the cause of the labourer’s misery, is only possible because the natural right of property on land has been overridden by the ‘artificial’ property that the law has enshrined."  Since labor produces all wealth, and workers must pay the hereditary owners of land and capital (originally acquired through conquest) fees for the use of the land, profits and rents simply represent deductions from the produce of labor. They are therefore exploitative.
To say this is certainly not to condemn the categories of profit and rent as they are understood in modern economics; rather, Hodgskin was condemning the system of feudalism, whereby producers had to pay the landed aristocracy and their allies for the use of their unjustly acquired land and other resources. Hodgskin offers as an alternative a system of justice in property titles—including land— that followed the argument of John Locke in his Second Treatise of Government.
Hodgskin’s purpose was to address the justice of market relations, not to offer a "science of values" that would explain the relative proportions of wages, profit, and rent, in the manner of David Ricardo. 
To sum up, Marx misunderstood Hodgskin’s comments on the claims of labor against capital as an attack on the market system (or "capitalism" in contemporary terms), while Hodgskin’s true target was not the market at all, but feudalism and mercantilism.
The relationship of Ricardian economics to Marxian doctrines of exploitation is more complex. Marx is, unlike Hodgskin, directly interested in ascertaining the laws determining the relative proportions of wages, profit, and rent. Marx founded his theory of exchange on Aristotle’s notion that exchange was based on equality, with the only factor common to all commodities being labor.  Real historical prices are therefore determined by the quantity of "congealed socially necessary labor time" required for the production of commodities. The prices of commodities will therefore be set by the amount of labor needed to reproduce them. The wages of labor, however, differ in a most important respect from the prices of other commodities, for labor is the only commodity that produces more than is necessary for its own reproduction. Marx follows Ricardo in postulating that the wages of labor will be driven down to the subsistence level—or, in Marx’s terms, to the level required for the reproduction of labor power. (In Ricardo’s account this driving down of wages is due to the increase in population and the consequent cultivation of ever less productive land, the two factors jointly diminishing the returns to labor.) Labor, then, produces more than its exchange value, the surplus being appropriated by the capitalist as profit.
This theory of exploitation allows Marx to combine his economic theory with both his theory of history and his theory of class conflict, for the vast accumulation of capital made possible by the rule of the bourgeoisie is none other than the surplus value accumulated by this class!
As Marx argues (echoing Thierry) in the "Manifesto of the Communist Party," "From the serfs of the Middle Ages sprang the chartered burghers of the earliest towns. From these burgesses the first elements of the bourgeoisie developed."  In the ensuing centuries this class "has accomplished wonders far surpassing Egyptian pyramids, Roman aqueducts, and Gothic cathedrals; it has conducted expeditions that put in the shade all former exoduses of nations and crusades."  Since seizing power and putting the feudal classes to flight, "The bourgeoisie, during its rule of scarce one hundred years, has created more massive and more colossal productive forces than have all preceding generations together. Subjection of nature’s forces to man, machinery, application of chemistry to industry and agriculture, steam navigation, railways, electric telegraphs, clearing of whole continents for cultivation, canalization of rivers, whole populations conjured out of the ground—what earlier century had even a presentiment that such productive forces slumbered in the lap of social labor?" 
Thus, Marx brings together his theory of history, economics, and politics.
Unfortunately, the entire edifice is built on error and confusion. The political and historical confusions over the notion of the "bourgeoisie" and the evolution of classes have been dealt with above. What remains is to discuss briefly Marx’s theory of exploitation, which not only rests on a theory of value that has been superseded, but also contains a fatal internal contradiction.
How sad it is that the first volume of Capital was to appear in 1867, only three years before William Stanley Jevons, Leon Walras, and above all Carl Menger put the science of economics on an entirely new footing. In 1870 these three thinkers simultaneously offered an answer to the value paradox of classical economics, to which school Marx is inextricably connected. In one version of this problem (known as the "water-diamond" paradox), this problem asks how an obviously valuable commodity such as water can command less in exchange than a diamond, which offers but little to the sustenance of human life. Classical economists had attempted to construct elaborate explanatory schemes based on labor. None was successful. (In Smith’s Wealth of Nations, this is taken up in the famous deer-beaver model and then dropped in embarrassment to be replaced later in the text with references to "supply and demand.")
The "marginal revolution" of 1870 came from a realization that the question was improperly phrased. The key to solving the puzzle is determining what the relevant unit of choice is. Were one to be given a choice between all the water in the world and no diamonds and all the diamonds in the world and no water, almost nobody would choose diamonds. But we are never faced with such a choice. Rather, all choices are made "on the margin," that is, we face the choice of an additional unit of diamonds or an additional unit of water. Since water is available in most places in great supply, our more pressing needs for water are easily satisfied. And, since (for the purpose of understanding the essence of such an exchange) each unit of water is equivalent to every other unit, the value of a unit of water will be determined by the final use satisfied. That is to say, the value of water will be determined by the "marginal" unit. Diamonds, on the other hand, are in much shorter supply, and therefore there are fewer to satisfy our more pressing needs for diamonds, and, like water, their value will be determined by the marginal unit. Were diamonds as abundant as water, we would expect the value of each unit to fall to that of the marginal use, which might be that of paving stones or landfill. Without going on at greater detail into the determination of relative prices (also made possible by choice on the margin), we shall simply point out that this explanatory scheme offers a far better framework for understanding real historical prices than that offered by the classical economists, including Marx.
It is this problem of real historical prices that also proves fatal to Marx’s system, not on the grounds that it has been supplanted by an economic theory of greater power, but because it suffers from an internal inconsistency.  Marx divided "capital" into two sorts. "Constant" capital denotes the means of production; it does not alter the amount of its value in its contribution to production and is therefore called "constant capital."  "Variable" capital, on the other hand, is capital that is converted into labor power, which, being the only source of value and producing more than it takes to reproduce, "reproduces the equivalent of its own value, and also produces an excess, a surplus-value, which may itself vary, may be more or less according to circumstances. This part of capital is constantly being transformed from a constant into a variable magnitude. I therefore call it the variable part of capital, or, shortly, variable capital."  The ratio between these two kinds of capital is known as the "organic composition" of capital.
The inconsistency lies in this: If profit arises only from investment in variable capital (for constant capital merely reproduces itself in the product, without a surplus), then we would naturally expect industries with varying ratios of constant to variable capital investments to yield varying rates of profit. But this is not observed to be the case. Indeed, the rate of return on capital investment tends to equalize over varying industries (ceteris paribus), as entrepreneurs shift capital from one use to another in response to discrepancies between expected rates of return, thus acting to equalize expected rates of return.
As Marx admits in the posthumously published third volume of Capital, according to the theory he set forth in the first volume,
different lines of industry have different rates of profit, which correspond to differences in the organic composition of their capitals and, within indicated limits, also to their different periods of turnover; given the same time of turnover, the law (as a general tendency) that profits are related to one another as the magnitudes of the capitals, and that, consequently, capitals of equal magnitude yield equal profits in equal periods, applies only to capitals of the same organic composition, even with the same rate of surplus-value. These statements hold good on the assumption which has been the basis of all our analyses so far, namely that the commodities are sold at their values. There is no doubt, on the other hand, that aside from unessential, incidental and mutually compensating distinctions, differences in the average rate of profit in the various branches of industry do not exist in reality, and could not exist without abolishing the entire system of capitalist production. 
Marx’s solution to this problem is to deny his earlier contention, on which his entire system is based, "namely that the commodities are sold at their values"! I will abstain from presenting a critique of Marx’s elaborate attempt to dodge this contradiction and merely note that—besides abandoning all pretence to a theory of the determination of the relative magnitudes of wages, labor, interest, and profit—his theory collapses into the triviality that all the labor in society is equal in value to all the labor in society.
[FN: Originally published as a working paper, George Mason University Institute for Humane Studies, July 1988.]
1. Karl Marx, "Manifesto of the Communist Party," in David Fernbach, ed., Karl Marx: Political Writings, Vol. I, The Revolutions of 1848 (New York: Vintage Books, 1974), p. 67.
2. Karl Marx, Letter of March 5, 1852, to Joseph Weydemeyer, in Selected Works: Vol. I (Moscow: 1951).
3. Karl Marx, Letter to Frederick Engels, July 27, 1854. In this letter Marx refers to Thierry’s important work, Essai sur l’histoire de la formation et des progrès du Tiers État (1853; Geneva: Megariotis Reprints, 1974), in the introduction to which Thierry criticized those who see class conflict within the voluntary interactions of the free market.
4. Larry Seidentop, "Two Liberal Traditions," in Alan Ryan, ed., The Idea of Freedom: Essays in Honour of Isaiah Berlin (Oxford: Oxford University Press, 1979), p. 153.
5. Thomas Paine, Common Sense (New York: Penguin Books, 1976), p. 77. Paine was also quite explicit on the distinction between society and the state. In the opening lines of Common Sense, he paints the distinction with sure strokes:
Some writers have so confounded society with government, as to leave little or no distinction between them; whereas they are not only different, but have different origins. Society is produced by our wants, and government by our wickedness; the former promotes our happiness positively by uniting our affections, the latter negatively by restraining our vices. The one encourages intercourse, the other creates distinctions. The first is a patron, the last a punisher.
Society in every state is a blessing, but government even in its best state is but a necessary evil (ibid., p. 65).
6. Ibid., p. 78.
7. For discussion and background information on the social analysis of this group of thinkers, see Leonard P. Liggio, "Charles Dunoyer and French Classical Liberalism," Journal of Libertarian Studies 1, Summer 1977, and Mark Weinburg, "The Social Analysis of Three Early 19th Century French Liberals: Say, Comte, and Dunoyer," Journal of Libertarian Studies 2, Winter 1978.
8. Augustin Thierry, The Historical Essays (Philadelphia: Carey and Hart, 1845), p. vii. The disgust for English institutions Thierry expresses was a reaction to the idealization of "English liberty" by previous French writers and the realization that it was England that stood for illiberal reaction on the European continent. See the discussion of the change from the "Anglomania" of the French liberals to their "Anglophobia" by Ralph Raico, "Classical Liberal Exploitation Theory: A Comment on Professor Liggio’s Paper," Journal of Libertarian Studies 1, Summer 1977, p. 181–182.
9. Augustin Thierry, Review of Commentaire sur l’Esprit des lois de Montesquieu. Le Censeur européen VII (1818). English translation by Mark Weinburg, "Theory of Classical Liberal Industrielisme," Occasional Paper no. 5 (New York: Center for Libertarian Studies, 1978).
11. Ibid. See also the discussion of the foundation of communes governed by oaths in Harold Berman, Law and Revolution: The Formation of the Western Legal Tradition (Cambridge, Mass.: Harvard University Press, 1983), esp. pp. 357–403.
12. Augustin Thierry, History of the Conquest of England by the Normans (New York: E. P. Dutton & Co., 1927), p. 3:
The upper and lower classes which we now see struggling with each other for systems of ideas or of government are, in several countries, no other than the conquering nations and the enslaved nations of an earlier period. Thus the sword of conquest, while changing the face of Europe, and the distribution of its inhabitants into distinct nations, has left its original features to each nation created by the mixture of several races. The race of invaders, when it had ceased to be a distinct people, remained a privileged class. It formed a warlike nobility, which, to prevent its own extinction, recruited its ranks from the ambitious, the adventurous, and the turbulent, among the lower orders, and held dominion over the laborious and peaceable mass, until the termination of the military government resulting from the conquest. The invaded race, deprived of its property in the soil, of command, and of liberty—living, not by arms, but by labour—dwelling, not in castles, but in towns—formed another society, coexistent with the military society of the conquerors.
13. Antoine-Louis-Claude Destutt, comte de Tracy, Treatise on Political Economy (1817; New York: Augustus M. Kelley, 1970), p. 6.
14. Ibid., p. 8.
15. Ibid., p. 9. For a discussion of the influence of the political economy of Jean- Baptiste Say on Comte, Dunoyer, and Thierry, see Robert Warren Brown, The Generation of 1820 during the Bourbon Restoration in France: A Biographical and Intellectual Portrait of the First Wave, 1814–1824 (Durham, N.C.: Duke University, unpublished Ph.D. dissertation, 1979), pp. 152–54.
16. Charles Comte, "De la multiplication des pauvres, des gens à place, et des gens à pensions," Le Censeur européen VII, 1818, p. 1.
17. Charles Dunoyer, "Du système de l’équilibre des puissances européenes," Le Censeur européen I, 1817.
18. Contemporary social scientists would describe this situation as a prisoner’s dilemma.
19. Charles Comte, in his essay, "De l’organisation sociale considerée dans ses rapports avec les moyens de subsistance des peuples," Le Censeur européen II, 1817, identifies three means of satisfying human needs: the "spontaneous products of nature," the "means by which he robs his fellows," and the "products of his industry." Cf. Robert Warren Brown, op. cit., pp. 157–162, 168–174.
20. Charles Comte, "De l’organisation sociale considerée dans ses rapports avec les moyens de subsistance des peuples," Le Censeur européen II, 1817, p. 5. A similar argument is advanced by Benjamin Constant. According to Shirley Gruner, Constant "explained the difference between the antique world and the modern world as being due to economic factors. Owing to the new method of production, the birth of commerce and industry, a new life had become possible so that without this development, the new life and the new man would be quite inconceivable, thereby erecting an effective barrier against any historical cyclicism." Shirley M. Gruner, Economic Materialism and Social Moralism (The Hague: Mouton, 1973), p. 91.
21. Augustin Thierry, "Sur l’Affranchissement des Communes," Oeuvres Complètes, Tome III (Paris: Fume et Ce., 1851), p. 492.
22. Robert Warren Brown, op. cit., p. 162.
23. See, however, the more recent work of the classical liberal economic historian Florin Aftalion, L’Économie de la Révolution française (Paris: Hachette, 1987) for a historical account of the inflationary policies of the Revolutionary government, which had assumed the debts of the monarchy, and of its decision to impose price controls. It was this chain of events that led to attacks on "speculators" and others and constituted much of the reign of Terror.
24. For a discussion of the response of the Le Censeur européen group to the failure of the Revolution, see Robert Warren Brown, op. cit., pp. 148–150. See also the discussion in Stanley Mellon, The Political Uses of History: A Study of Historians in the French Restoration (Stanford, Calif.: Stanford University Press, 1958). Mellon refers to Thierry as "perhaps the greatest French historian of the Restoration."
25. Charles Comte, "Considerations sur l’état présent," cited in Robert Warren Brown, op. cit., p. 149.
26. Not only did the ideas of parasitism survive, but so did the parasitic institutions themselves. See Arno J. Mayer, The Persistence of the Old Regime: Europe to the Great War (New York: Pantheon Books, 1981).
27. The relationship between Saint-Simon and Augustin Thierry, Charles Comte, and Charles Dunoyer is explored inÉ lie Halévy, "Saint-Simonian Economic Doctrine," in The Era of Tyrannies: Essays on Socialism and War (London: Allen Lane the Penguin Press, 1967). Of the break between this group and Saint-Simon, Halevy writes, "Thierry, who had led him to discover first political and then economic liberalism, was disturbed to see an authoritarian conception of social organization reappearing in his conversation. One day Saint-Simon declared, ‘I cannot imagine association without government by someone.’ Thierry answered, ‘And I cannot imagine association without liberty.’ Saint-Simon broke with Augustin Thierry, probably towards the end of July 1817. . ." (p. 27).
28. Shirley M. Gruner, op. cit., p. 116.
29. Ibid., p. 118.
30. Karl Marx, "Manifesto of the Communist Party," in David Fernbach, ed., Karl Marx: The Revolutions of 1848: Political Writings, Volume I (New York: Vintage Books, 1974), p. 71.
31. Karl Marx, "The Class Struggles in France: 1848 to 1850," in David Fernbach, ed., Karl Marx: Surveys from Exile: Political Writings, Volume II (New York: Vintage Books, 1974), p. 37.
32. Ibid., p. 38. ed., Karl Marx: Surveys from Exile: Political Writings, Volume II, op. cit., p. 186.
33. Karl Marx, "The Eighteenth Brumaire of Louis Bonaparte," in David Fernbach,
ed., Karl Marx: Surveys from Exile: Political Writings, Volume II, op. cit., p. 186.
34. Ibid., p. 237–238.
35. Ralph Raico, "Classical Liberal Exploitation Theory: A Comment on Professor Liggio’s Paper," op. cit., p. 179.
36. Shirley M. Gruner, op. cit., pp. 189–190.
37. Cf. Shirley M. Gruner, op. cit., p. 183: "By some strange chance of course, the German for civil society is bu¨ rgerliche Gesellschaft, the society of the burgher or ‘bourgeois’ although in fact neither Hegel nor Marx had any acquaintance with the French term ‘bourgeoisie’ as it developed in France, particularly after 1830 when it virtually became a mere term of abuse."
38. See the discussion of Hodgskin in Emilio J. Pacheco-Rodriguez, Utility and Rights: The Science of Morals in Britain in the First Half of the Nineteenth Century (Oxford: Oxford University, unpublished D.Phil. dissertation, 1986), esp. pp. 116–146.
39. Thomas Hodgskin, The Natural and Artificial Right of Property Contrasted (1832; Clifton, N.J.: Augustus M. Kelley, 1973), pp. 71–73.
40. Emilio Pacheco-Rodriguez, op. cit., p. 140.
41. Thomas Hodgskin, Popular Political Economy (1827; New York: Augustus M. Kelley, 1966), p. 43. Cf. Emilio Pacheco-Rodriguez, op. cit., p. 129: "The distinction between ‘natural’ and ‘artificial’ price does not explain how rents and profits are determined, but that should not be surprising since Hodgskin clearly stated he did not want to explain relative prices: political economy, he said, is not concerned with the question of values, an error made by the French and adopted by the English political economists."
42. Karl Marx, Capital, Vol. I, A Critical Analysis of Capitalist Production (1867; New York: International Publishers, 1967), p. 59: "Aristotle . . . clearly enunciates that the money-form of commodities is only the further development of the simple form of value—i.e., of the expression of the value of one commodity in some other commodity taken at random; for he says—5 beds 1 house (klinai pente anti oikias) is not to be distinguished from 5 beds so much money. (klinai pente anti. . . hoson ai pente klinai) He further sees that the value relation which gives rise to this expression makes it necessary that the house should qualitatively be made the equal of the bed, and that, without such an equalisation, these two clearly different things could not be compared with each other as commensurable quantities." Marx, of course, argues that the one thing common to both that makes the equality of exchange possible is labor, something Aristotle was unable to see because Greek society was founded on slavery, and that the equality of labor (p. 61) "cannot be deciphered, until the notion of human equality has already acquired the fixity of a popular prejudice." As with his reading of Hodgskin, Marx seems not to notice that Aristotle is offering an account of justice in exchange and not an account of the determinations of real historical exchanges. Aristotle’s statements are based on his theory of justice (cf. Nicomachean Ethics, VI, iii on justice and equality), and they cannot be understood outside of that context. As James Bonar remarks in Philosophy and Political Economy (1893; New York: Humanities Press, 1967), p. 39, "When Aristotle gives us a theory of exchanges, under the head of Particular Justice (or justice in the narrow sense of the word as distinguished from justice in general), it is not an economic theory; and economic questions are touched very incidentally." Bonar uses the term "economic" in the same way that Hodgskin used the phrase "science of values."
43. Karl Marx, "Manifesto of the Communist Party," op. cit., p. 68. 274
44. Ibid., p. 70.
45. Ibid., p. 72.
46. The reader is referred for a detailed and complete treatment of this problem to Eugen von Böhm-Bawerk’s work, Karl Marx and the Close of His System (1896; New York: Augustus M. Kelley, 1949). A better translation of Böhm-Bawerk’s title would be, "On the Conclusion of the Marxian System." Böhm-Bawerk refers in his title to the publication of the third volume of Capital, which "concluded" the Marxian system. It should be noted that Böhm-Bawerk’s criticism is altogether an internal critique, and does not rest in any way on the results of the "marginal revolution" in economic science that took place in 1870.
47. Karl Marx, Capital, Vol. I, op. cit., p. 209: "That part of capital then, which is represented by the means of production, by raw material, auxiliary material and the instruments of labor, does not, in the process of production, undergo any quantitative alteration of value. I therefore call it the constant part of capital, or, more shortly, constant capital."
48. Ibid., p. 209.
49. Karl Marx, Capital, Vol. III, The Process of Capitalist Production as a Whole (1894; New York: International Publishers, 1967), p. 153. 275