The original formulation of Marxism as described in the writings of Karl Marx and Frederick Engels placed a heavy emphasis on the Labour Theory of Value as its basis. In the Labour Theory of Value, the value of a thing is proportional to the amount of labour used to create it, where labour is a concept akin to the time spent exerting energy through the human body and mind to produce.
As an idea this was attractive because it appeared simple to calculate, and also solved the Diamond-Water Paradox, where water seemed more critical to meeting human needs and yet diamonds were more valuable in the market. The argument went that the diamonds were more difficult to labour to produce compared with water. The Labour Theory of Value however runs into trouble with other counterexamples. For instance, you can expend significant amounts of labour to dig holes and fill them again, but no value as commonly understood appears to be produced. Most modern economists, ranging from Keynesians to the Neoclassical school, consider it an obsolete theory, replaced by the Theory of Marginal Utility.
Marginal Utility is based on the subjective usefulness of a thing (its utility), with the added explicit incorporation of the concept of marginality or the Law of Diminishing Marginal Utility, which is based on the observation that the first unit of something is generally worth relatively more subjectively than the second unit and so on. This also explains the Diamond-Water Paradox, in the idea that the first unit of water is very valuable but once the need is satisfied, the value of additional water decreases more quickly than diamonds.
These two theories of value prescribe different paradigms, and Marxism relies heavily on the idea of an objective labour value because it is essential to its argument that capitalists are extracting surplus value from workers. If this value is not surplus, but part of a mutually beneficial subjective exchange of value, the whole argument that capital inherently exploits labour collapses.
Another related contention is that the relationship between capital and labour is parasitic, that capital takes advantage of labour, by getting undeserved profit. Thus, the relationship appears one-sided. An argument most frequently made by libertarians in particular is that the relationship is not parasitic but symbiotic. They contend that rather than being one-sided, the labourer is receiving from capital the means to carry out production, without which they would be much worse off.
Capital not only gives the availability of the means of production, but also pays the expense of carrying the risk, which can be understood as a cost to production that is proportional to the probability of failure of the enterprise. In this sense, profit is seen not as a surplus extracted from workers, but as a reward that is rightfully due to the entrepreneur and investor who takes on the often considerable risk of making a loss. Profit is thus earned and justified, and evidence that the venture is sustainable.
Underlying all these arguments is a disagreement over the morality of profit. Marxism argues that profit is exploitation, a loaded term that carries a strong value judgment about the rightness or wrongness of it. However, Marxism fails to explain why exploitation is inherently wrong. Rather than appealing to an existing moral philosophy, Marx specifically denigrated all moral philosophies as being bourgeois attempts to justify the status quo and prevent class consciousness. But, perplexingly, Marx never provided his alternative moral framework that seems necessary to move from a description of facts to a normative demand for a change of these conditions. He doesn’t explain why capitalists exploiting workers is wrong, and why we should support workers and oppose capitalists, rather than simply saying, this is the state of nature and who are you to judge? Many people do find moral reasons to support Marxism, but they are almost always based around either their natural moral intuitions, or other theories like Utilitarianism, a theory that has also been used to support liberalism and libertarianism as well, and which Marx himself criticized strongly.
Ultimately then, the problem with Marxism is that it is unsound according to first principles, even if it is internally consistent and logical if you accept its basic premises. Like libertarianism, it tries to argue from underlying assumptions about the nature of the world and makes predictions that things will go better if only we did this instead. As such, it appeals to people’s hopes and imaginations while appearing rational at first glance. Many if not most political ideologies do the same thing, so this should not be a surprise to the keen observer.
What Marxism does get right is observing that the relationship between the worker and the capitalist is not strictly speaking a fair one, because the capitalist in practice has disproportionately more power than the worker. If we accept the fairly reasonable premise that all humans should be treated equally, then this power imbalance is problematic and can lead to abuse and actual exploitation. Note that this observation does not by itself depend on the Labour Theory of Value, or that the relationship is parasitic. The relationship can be symbiotic but also highly unequal.
Thus, this critique of Marxist theory does not dissolve all socialist arguments, but only the specific unsound basis that Marx and Engels used to try to specify the nature of the problem. This is the nuance that is often missed by those who see Marxism’s flaws as justification for a full-bodied defence of capitalism and all its excesses. There is room to criticize capitalism, without resorting to the doctrines of Marxism and its often unnecessarily propagandistic rhetoric, which tends to alienate and divide people artificially, although that criticism is more practical than theoretical.