Although classical economists clarified the advantages of free trade and division of labor, they were hampered by a cost theory of value that would not be refuted until the discovery of marginalism in the 1870s (pp. 4.4:34-8). Because it is the faculty of mind that enables people to discover how to produce higher values at lower costs (thus distinguishing the value of a good from its cost), cost theories of value in effect reduce human action to a mindless, automatized process. Consequently, classical economics was unable to elucidate the principal economic advantage of economic freedom: namely, the liberation and free use of the individual's mind, with all the innovations and improvements it makes possible. (In earlier centuries, individuals had conceived many ingenious inventions, yet they could seldom be put to practical use because of regulatory restrictions and the political hierarchy of power.) For instance, economists of the Manchester school deduced an "iron law of wages" from the cost-based theory, asserting that the market wage would always tend toward a subsistence level, equivalent to the cost of bare survival for the worker. Any attempt to raise the wage would merely lead to growth in the working-class population, until the wage returned to this subsistence level. Thus free-market capitalism appeared to offer little hope or opportunity to the masses. Karl Marx accepted this erroneous viewpoint and took it to its logical conclusion. The capitalist, he argued, added no value to the product, since the product's value equated to the total costs incurred by the capitalist. Thus the latter's profit was an unearned surplus acquired through exploitation of the worker.

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