Bukharin on Austrian Marginal Utility

In his analysis of this relation, Böhm-Bawerk discovers the following simple “law,” intended as an expression of the relation between “consumption” and “commodities”: “The greater and the more important the needs requiring satisfaction, and the less the quantity of commodities available for the purpose ..... the higher ‘must’ therefore be the marginal utility.” In other words, the level of marginal utility is determined by two factors: a subjective factor (needs, requirements), and an objective factor (quantity of commodities). But how is this quantity itself determined? The theory of the Austrian School has no answer to this question. It simply assumes a certain number of products to be present, it presupposes a certain degree of “rarity” to be given for all time. But this point of view is theoretically weak, for the “establishment” whose phenomena are analysed by political economy includes an economic activity and above all the production of economic commodities. The concept of a “supply” of commodities, as A. Schor has quite correctly observed, pre-supposes a preliminary process of production, a phenomenon which in one way or other must have enormous influence on the evaluation of commodities.

...

Instead of offering an explanation for the value of typical products, products constituting a commodity, i.e. products bearing the stamp of factory production, [Böhm-Bawerk] prefers to speak of water and air. Even “bread” reveals the insufficiency of our professor’s position; we need only recall the sudden drop in grain prices at the beginning of the agricultural crisis caused in the decade 1880-1890 by overseas competition. The “supply of commodities” was altered at once, for the simple reason that new conditions of production, never mentioned in a single breath by Böhm-Bawerk, were here concerned. The process of production, however, is not a “complicated circumstance,” a “modification of the principal case,” as Böhm-Bawerk imagines. On the contrary, production is the basis of the social life in general and of its economic phase in particular. The “rarity” of commodities (except in a few cases which we have a right to ignore) is merely an expression for certain conditions of production, a function of the expenditure of social labour. Therefore an object once “rare” may become very common under altered conditions.[1]

-----------------------

I do find interesting the critique that marginal utility does not deal with the question of where supply comes from. I've encountered many libertarians that talk about how demand is subjective and it helps determines allocation, but they never treat companies the same way; they seem to think they can't have their cake by individuals being subjective and yet still eat it by assuming companies will immediately bend to the individual's will.

The only issue I really have with the quotations provided, however, is that the examples given by Böhm-Bawerk are not meant to be a way for him to not deal with the question of more industrial goods (although it certainly helps), but rather its an answer to Adam Smith's question about determining value between diamonds & water: 

The things which have the greatest value in use have frequently little or no value in exchange; and, on the contrary, those which have the greatest value in exchange have frequently little or no value in use. Nothing is more useful than water: but it will purchase scarce anything; scarce anything can be had in exchange for it. A diamond, on the contrary, has scarce any value in use; but a very great quantity of other goods may frequently be had in exchange for it.[2]

But the issue now is that marginal utility, even if true, cannot be used as a way to allocate resources; as proven by Albert & Hahnel (1990)[3], if you rely on the private benefit instead of the social benefit, you'll find that resources with more social benefit will get produced less & cost more, and the opposite is true the less socially beneficial the resource is.
To use water & diamonds as an example, we take water for granted; after all, we can always drink from the tap occasionally. Thus, the private benefit of water is fairly low even though the social benefit of water is immense. Diamonds, on the other hand, not only cost a lot to begin with but also can harm the environment its in, and don't even get me started on the conditions that people who mine diamonds go through. But because we've been conditioned into seeing diamonds as a rare and beautiful gift, we value the reputation we get by diamonds more than we do the environmental benefits of not mining diamonds; in other words, the private benefit outweighs the social benefit.

Sources Used

[1] https://www.marxists.org/archive/bukharin/works/1927/leisure-economics/ch03.htm#s2
[2] https://www.marxists.org/reference/archive/smith-adam/works/wealth-of-nations/book01/ch04.htm
[3] https://zcomm.org/wp-content/uploads/zbooks/www/books/7/7b.htm#7.8