Commentary on Political Economy

Saturday 29 March 2014

Circulus Vitiosus - Classical and Neoclassical Theories of Value

 The purpose of this piece is to summarise some of the points made in Capitalist Metaphysics before we embark on Part Two of our very popular essay on "Keynes and Einstein":

The Labor Theory of Value approaches the question of Value from the standpoint of the reproductive needs of a society, and then regards the total value produced by a society as the sum of the incomes of its various social classes dependent on their “ownership” of the various factors of production. The theory therefore starts with the notion of “social labor” required for the reproduction of the entire society, and not with the atomistic relationship between individual and “good” – which is what marginal utility does. The exchange value of a good is determined by the amount of labor it contains mediated by the labor contained in the means utilized for its production. But the “price” is conditioned by the fact that the distribution of the aggregate surplus value across different sectors of industry with varying rates of exploitation must be distributed according to an equalized rate of profit across all branches of capitalist industry. Market prices differ therefore from exchange values because it is the market that determines finally what labor time was socially necessary for the production of each good sold on the market. The market provides “the social osmosis of capital” in that it determines the distribution of the aggregate surplus value according to a rate of profit that is equal the total amount of capital invested.




The “circuitousness” of this theory of value is quite apparent because it describes labor time as “socially necessary” when in fact its “social necessity” is still determined ultimately by market forces – by supply and demand. As Bohm-Bawerk properly objected to Marx’s version of the theory – by far the most refined -, it is sheer “metaphysics” to insist that market prices can merely regulate the “equalization” of the “different surplus values” extracted in different sectors of production as an aliquot return or profit for the aggregate amount of capital invested, but cannot determine what is the “socially necessary labor time” on which surplus value is calculated! In other words, even in Marx’s version of the labor theory of value, it is still the market that determines ultimately what production is “socially necessary” and what is not, and therefore also what is the profit for each individual investment. It is this contra-diction in Marx about the possibility of an "equilibrium" whereby total market clearing prices and total "embodied value" of goods can be homologated and therefore "labor values" be transformed into monetary prices that Bohm-Bawerk attacks successfully.




The difference with marginal utility theory rests on the fact that marginal utility starts with the assumption that individuals already own the “goods” whose marginal utility will determine market prices and that these market prices are merely a reflection of the marginal utilities relative to the goods made available for exchange on the market! Put differently, the LTV starts with social necessity to determine distribution and ownership whereas marginal utility starts with ownership and “individual choice or preferences” to account for market prices. It then proceeds to explain the empirical behaviour of markets through their prices by describing the psychological motivations or justifications for that behaviour. It follows from this that whereas LTV looks at "input costs" to calculate the value or price of the "output", marginal utility operates in reverse, giving priority to the marginal utility of the finished product to calculate the marginal utilities of its "inputs".




Consequently, the LTV is more concerned with the pro-duction of goods whose value depends on the “labor power” or “effort” that goes into their production with distribution and ownership a “consequence” of this process, whereas marginal utility is concerned with goods already in existence and owned whose “exchange” is dependent on their “scarcity”. The LTV is a theory of pro-duction whilst marginal utility is one of “exchange” of existing resources that are legally owned by individuals (“endowments”).




From the foregoing it can be seen that both the LTV and MUT are “metaphysical” accounts or explanations of “value” because both treat “value” as some “entity” or “substance” that is “reflected” in market prices. The “metaphysics” consists in the fact that both Classical Political Economy and Neoclassical Theory ultimately agree that it is “the market” that decides what gets produced and how social resources are allocated. Both theories believe in the existence of a “market equilibrium” at which the “value” of goods exchanged in that market and their component factors or costs of production can be determined either objectively in terms of “socially necessary labor time” (in Marx’s version of the LTV) or else subjectively in terms of individual marginal utilities.

Just briefly, the demonstration of the "metaphysical" and therefore self-referential or tautologous definition of value and price in marginal utility is illustrated clearly and inconfutably in this passage from Bohm-Bawerk's Positive Theory of Capital:

In what follows I mean to inquire how prices are determined under the assumption that all who take part in the exchange act exclusively from the motive of pursuing their immediate economical advantage in it. The law which we shall arrive at in this way I have already,*2 for very good reasons, called the fundamental law of the formation of price. I am perfectly aware that, in practical life, this law does not exactly obtain. For, although the motive of self-advantage is almost never absent, and is almost always the most prominent motive, still, in price transactions, other motives do very often get mixed up; such motives as humanity, custom, friendship, vanity, or the influence of outside institutions, such as government taxation, union regulations, boards for fixing wages, and the like, give them another direction than that they would have taken if exclusively dominated by self-advantage. Such motives, indeed, scarcely ever get the upper hand of the other to the extent of making us conclude an exchange which would cause us positive economic loss; but they often make us decide to be content with a less amount of advantage than we should have got in steadily pursuing our interests. (IV.1.2)

It is entirely obvious that Bohm-Bawerk defines the purpose of exchange in determining prices as "the obtaining of immediate economical advantage". But that begs the question of "what" precisely determines "economic advantage" or "self-advantage" or, conversely, "positive economic loss"!! The tautology consists in defining prices (the definiendum) in terms of "advantage or loss" (the definiens) which is then defined again in terms of prices!



The important difference for us here is that the Labor Theory of Value interprets value in terms of “effort of production” whereas marginal utility looks at value in terms of “want of provision”. By taking “effort of production” as its starting point, the LTV assumes that “ownership” of the “pro-duct” is socially and politically determined and that “labor” provides the social synthesis that needs to be “validated” by the market in capitalist society and by “planning” under Socialism. By contrast, in starting from “want of provision”, marginal utility assumes that “goods” are already in existence and are “already endowed” to individuals, so that “society” – by which they mean, “the market mechanism as social synthesis or osmosis” – only decides the “exchange” of the existing value between individuals.




Under the LTV, “labor” is the active part of Value (effort, labor power); under marginal utility it is the passive part of value – labor as “want in search of provision”, labor as “dis-utility”.




We can see therefore how wrong Max Weber was to believe that “the Protestant work ethic” could ever provide “a specifically economic ethic” or explanation for “the spirit of capitalism”. Instead, we will have to return to Bohm-Bawerk to be able to add “time” to the Neoclassical theory of value and only then we shall be able to return to Schumpeter and Keynes.

Weber’s notion of the Problematik der Sozialismus consists precisely in this: - that the “riddle” or paradox of the rationalization of the economy and society and the preservation of “freedom” – that is to say, the coincidence of use value and exchange value - is one that belongs properly to socialism and not to market capitalism (though perhaps Schumpeter may add “monopoly capitalism”). Socialist planning is not a “problem” for “market” capitalism; rather, it is the other way around! Capitalism is “the” problem for Socialism because it shows that the only way to act “rationally” is by allowing the “free-dom” of social conflict over need-necessities through the “market”, which is what Socialism wishes to eliminate! For Weber, the “problematic of socialism” is the impossibility of reconciling choice (Wert-rationalitat) and rationality (Zweck-rationalitat), freedom and science, except from the choices and free-dom of in-dividuals! This is so because “free choice” applies only to ultimate substantive goals (which are irrational precisely because they are a matter of “in-dividual choice”) whereas rationality or “science” applies only to the instrumental choice of means to achieve chosen goals (which is “logico-mathematical and scientific” and therefore inter-subjective). The Sozialismus instead insists on finding an ultimate goal or “choice” within rationality itself or “science” – and this for Weber is the equivalent of seeking to square the circle. This is the “truth” of Weber’s methodological individualism. Paradoxically, it is Weber and Hayek (and Mises) who end up on the side of “individual freedom of choice” by denying that there is any “scientific” roadmap to market equilibrium for the precise reason that such a “roadmap” would depend on the information supplied by freely-choosing individuals – in complete antithesis with the “planned-society” tenets of the Sozialismus based on the Law of Value. Hayek of course applies the same critique to “totalitarian” Walrasian equilibrium.


If the Law of Value is given an objective quantitative form, as every “socialist” wishes ardently to do, then there will be no space for that “subjective Law of Value” that is the common basis of both the negatives Denken and neoclassical economics! Without the social conflict of the latter springing from individual need-necessities and related “choices”, no proper “science” is possible without the last vestige of “free-dom” (market freedom) evaporating. For Weber, market free-dom begins precisely with the expropriation of workers from the means of production, with the Trennung intended as a pro-duct of the stahlhartes Gebaude. Then it continues with the discipline of the factory, on which “the exact calculation” of profit is based.



Lowith seems to argue that Weber is either seeking to reconcile these opposites or else that he harbors “illusions” about being able to do so! But we know that neither is the case because in this exact respect market capitalism represents for Weber the apex of both human free-dom and scientific rationality. Lowith here misses the point entirely!

Monday 24 March 2014

Capitalist Metaphysics, Part 3 - Use Value and Exchange Value

The universe of Classical Political Economy, of the Labour Theory of Value and of the Protestant Work Ethic is still a Newtonian ordered cosmos, a universe of absolute objective dimensions. The world of Neoclassical Theory is instead the Machian uni-verse of psychological inputs or “sensations” (Empfindungen) that are strictly metaphysically private and subjective, and can be rendered social and objective only by human convention of what remain absolutely private sensations or estimations. In this regard, Machism and Neoclassical Theory deny all relevance to “metaphysics” as the positing of a reality that goes beyond what is immediately perceived by each individual. From this perspective of “methodological individualism”, given the axiomatic incommunicability of “utility”, the principal problem of economics for Neoclassical Theory must be the problem of economic co-ordination (Hayek, Loasby). The negatives Denken decries and denigrates the notion that labour or anything other than the market exchange mechanism and its “prices” can provide the social synthesis (the social “glue” or amalgam) that allows a society to co-ordinate the activities of its members. The “objectivity” of economic science is not constituted by the objective “necessity” of labour as a universal human use value, but rather by the “necessity” of the competitive struggle between absolutely egoistic self-interested in-dividuals.



For the negatives Denken, Nature is not the essential universal sphere of “objectification” for human beings, whether individually or least of all collectively, but rather it is treated as a “quarry” whose resources are unavoidably rendered “scarce” by the impossibility of human subjective individual wants ever to be fulfilled or satiated as well as by the fact that individuals are in competition with one another to provide for these insatiable individual wants. Wealth is an entirely subjective estimation of “nature” by single individuals, it is “Subjective Value” (B-B) and is incapable of “objective” intersubjective use or even of agreement. What is “objective” about wealth is not its “use value” or the labour-content of values in exchange, as it was for Classical Political Economy. Rather it can only be its “value in exchange” between individuals as determined by the wholly independent competitive exchange of goods in the market at rates that constitute their “prices”.


Nature and wealth therefore do not have a universal human value, but only a subjective individual value whose objectivity is given only by the exchange of goods for subjective estimation as manifested by market prices. The market, not “labour”, is what makes otherwise wholly Subjective Value become Objective Value. From the perspective of the negatives Denken, “labour” also cannot be a uniform homogeneous commensurable “substance” that can be “embodied in” a universal “wealth” or indeed any kind of wealth, whether use value or exchange value. Labour simply cannot provide the social synthesis, that is to say, the material co-ordination of human interests – the material inter esse or comunitas, or even the spiritual summum bonum or social goal – that commonly constitutes “the social fabric”. Rather, this social synthesis or co-ordination is provided by the market mechanism through the exchange of “endowments” owned by entirely self-interested atomistic individuals through the fixing of market prices that are the only visible and material manifestation of their utilitarian preferences.


So long as labor was seen as the homogeneous direct creator of homogeneous wealth, then clearly the aim of production had to be the equitable distribution of wealth in direct proportion to the effort of each labourer. But once labor and wealth are seen as individually subjective notions, then the aim of economic coordination through the market mechanism can be only the redistribution of wealth in proportion to the initial endowments of market agents at Equilibrium where capital too constitutes an independent claim to such distribution! The principal difficulty of Classical Political Economy was always that of justifying how capital could constitute an independent claim to wealth once labor was acknowledged as the only source of wealth. Neoclassical Theory overcomes this difficulty by reinterpreting the entire metaphysics of labor and wealth-creation or value.



In his formidable review of Neoclassical Theory, George Stigler here dismisses and denigrates from the point of view of Neoclassical Theory this Classical position of the old Political Economy - exemplified by its founder and architect, Adam Smith - as its greatest fallacy:



Drawing upon a long line of predecessors, Smith gave to his immediate successors, and they uncritically accepted, the distinction between value in use and value in exchange:


The word VALUE, it is to be observed, has two different meanings, and sometimes expresses the utility of some particular object, and sometimes the power of purchasing other goods which the possession of that object conveys. The one may be called "value in use"; the other, "value in exchange." 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 any thing; scarce any thing 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


The fame of this passage rivals its ambiguity. The paradox - that value in exchange may exceed or fall short of value in use - was, strictly speaking, a meaningless statement, for Smith had no basis (i.e., no concept of marginal utility of income or marginal price of utility) on which he could compare such heterogeneous quantities. On any reasonable interpretation, moreover, Smith's statement that value in use could be less than value in exchange was clearly a moral judgment, not shared by the possessors of diamonds. To avoid the incomparability of money and utility, one may interpret Smith to mean that the ratio of values of two commodities is not equal to the ratio of their total utilities.' On such a reading, Smith's statement deserves neither criticism nor quotation. This passage is not Smith's title to recognition in our history of utility. His role is different: it is to show that demand functions, as a set of empirical relationships, were already an established part of economic analysis.


Ambiguity. Meaninglessness. Moral bigotry. In this opening passage, the Nobel prize-winning Stigler (a close collaborator of Milton Friedman at the Chicago School of Economics), throws just about every conceivable intellectual insult at the father of “economics”, none other than the founder of Classical Political Economy, for whom even the most invective-prone iconoclastic critic of that theory, Karl Marx himself, could not suppress feelings of respect and even of pious devotion. No. George Stigler – a proto-fascist bastard if ever there was one – has an intellect so reduced, so blinded by his own training in a repressive economics faculty, that he simply fails to see entirely the excellent “paradox” highlighted by the great Scottish economist and philosopher, perhaps the greatest son of the “Scottish Enlightenment” of the eighteenth century.


In the quotation that Stigler so absurdly misrepresents (in a distasteful show of colossally culpable  ignorance, of intellectual turgidity coupled with moral turpitude), the great Adam Smith is drawing our attention to what is perhaps the most palpable paradox or contra-diction of the capitalist mode of production (in his time) and of the society of capital (in our time) – namely, that in this rotten society the things that are most “valuable” for human needs, the things with the greatest “use value” (such as air, water, health), have the least “exchange value”, and therefore are not considered “economically valuable”, whereas inversely the things with the least use value may well acquire the greatest exchange value and economic weight. This contradiction lies at the very heart of the society of capital, and indeed it is assuming ever-greater apocalyptic dimensions as capitalism poses growing “systemic risks” to human society and comes to threaten even the very survival of our species.


On one hand, Smith is saying that even the most useful and indispensable things, if available in great quantities, will command a lower price. It is this aspect of how supply and demand affect prices that Stigler acknowledges as the historically valuable aspect of Smith’s theory:


His role is different: it is to show that demand functions, as a set of empirical relationships, were already [in Smith’s time] an established part of economic analysis.”


Yet this is clearly the least valuable aspect of what Smith is saying – because if we define “price” as the value at which demand and supply coincide, then it is obvious that demand and supply have opposing effects on prices. No, the truly genial part of Smith’s economic analysis is that he was the first theoretician to suggest that “use values” play no role in the determination of prices in a capitalist economy. Instead, what determines prices is the amount of labour that is socially necessary for the production of goods. Smith therefore agrees that despite the fact that a market capitalist economy only values things that are available for exchange, the value of these goods for exchange can still be determined “objectively” because human needs are “social”, not “individual” or “subjective”, and therefore their satisfaction must have a common universal value for all human beings – and this common universal “sub-stance” of economic value is the “effort” that human beings must make to obtain a given good or resource.


By selecting “labour time” as the “substance” or “content” of economic value and market prices, Smith is saying, first, that human needs are “objective” or universal, which is why “prices” can be “agreed upon” in a “market” that would be otherwise destructively competitive. And second, Smith is saying that a market economy can achieve both commutative and distributive justice by allocating social resources according to the amount of human “effort” that goes into their production – “to each according to his contribution”. Again, this Smithian position is a throwback to the jusnaturalist tradition (Natural Law) of Judaeo-Christian religion expounded by the Schoolmen in the Middle Ages – a tradition according to which human beings atone for their original sin by having to work to assure their own livelihood. And of course Smith is also being truthful to the Enlightenment movement of which he was so prominent a member by affirming the ability of human beings to order their society according to rational scientific principles. These principles form part of a “concordant” or “harmonious”  theory in the sense that its central tenet is that the substance of economic co-operation and exchange is constituted by homogeneous human needs and homogeneous human labour whose “value” or “price” can be determined “scientifically” simply by calculating the labour time that it takes to produce a given good for exchange. The contradiction in this theory is all but evident: for if indeed “labour” is the “source” of all value, then it becomes quite impossible to value labour itself, because the source of value and therefore the determinant of “prices” cannot itself have a “value” or a “price”! Yet Smith’s economic theory is based precisely on this contradiction – that is, that “labour” has a market price just like any other “commodity”. And we know that this is why Smith then goes on to contradict himself by stating that ultimately market prices are determined by “supply and demand”, that is to say, by…..”the market”! This is the contradiction on which both Ricardo and Marx pounced to castigate Smith’s Panglossian notion of “the invisible hand” of the market ensuring that only those goods would be produced that the market could clear, and that this ensured the orderly reproduction or co-ordination of what would be otherwise a hopelessly anarchical and antagonistic “marketplace society”.


In contrast to this “concordant” or “harmonious” Smithian economic theory, Stigler objects that there is not and there cannot be a contradiction or discordance between use values and exchange values – because the only “values” of which we can ever be aware are manifested in the actual prices that obtain in the market. All we can ever know is what we can “observe”. And whereas market prices are readily “observable”, labour values are quite simply un-observable and indeterminable, and therefore they are simply “meaningless” or “metaphysical”.


The paradox - that value in exchange may exceed or fall short of value in use - was, strictly speaking, a meaningless statement, for Smith had no basis (i.e., no concept of marginal utility of income or marginal price of utility) on which he could compare such heterogeneous quantities.


Labour cannot pro-duce wealth or be the measure of exchanged wealth or “value in exchange” because wealth is not the socially objective quantitative sum of use values meant for exchange but rather the “value-in-exchange” of these use values is a purely qualitative subjective estimation, a function of “utility”, whose objective manifestation and calculation or “valuation” can be obtained only through observable market prices.


From the jusnaturalist viewpoint of Smith, value and market prices are a dependent quantitative function of labour productivity. For him the market mechanism can only serve to facilitate the exchange of goods, but cannot determine the intrinsic “substantial” value-in-exchange of goods, which must therefore be measured by a universal “homogeneous substance” such as the amount of labour-power they contain. This is a “rationalist and humanist” worldview in which human “labour” has a creative universal role in the world that makes all exchange values comparable and measurable, that is, homogeneous. (Hegel’s dialectic of self-consciousness and Marx’s materialist elaboration are perhaps the highest expression of this Judaeo-Christian onto-theology).


Yet from the empiricist and positivist perspective of Neoclassical Theory (which Smith also paradoxically promoted and probably founded) all Value and market prices are “subjective”: there are no “use values” – least of all “labour”! - that are universally recognized as serving human needs and wants. It follows therefore that from this perspective, as Stigler notes, “there is no basis on which Smith could compare such heterogeneous quantities” as use values (utilities) and exchange values (money) because, given that utilities are inscrutable because they are deeply subjective, it is then impossible to measure them outside of the actual observable money prices that market agents are willing to pay for them in the course of market exchange. Because (to quote Stigler) “money and utilities are incomparable”. the use value or utility of a good can be measured only by “the amount of money that agents are willing to pay for that good” and not by some “universal homogeneous human value” such as “labour”. Use values and wealth can be “objective” (that is, they can be socially recognized) only through the relative estimation of their value-in-exchange by market agents in competitive conflict with one another as displayed in and by market prices – because only these market agents can determine subjectively the value in exchange of goods sold on the market. For Neoclassical Theory there can be no distinction between use values and exchange values because all Value is “Subjective Value”; and Values can become “objective” not through a universal homogeneous human “substance” such as “labour” but only to the extent that goods are “exchanged” by means of “prices” fixed competitively on the market.


On any reasonable interpretation, moreover, Smith's statement that value in use could be less than value in exchange was clearly a moral judgment, not shared by the possessors of diamonds. To avoid the incomparability of money and utility, one may interpret Smith to mean that the ratio of values of two commodities is not equal to the ratio of their total utilities.'



Consequently, for Neoclassical Theory use values as the universally recognized qualities of goods for human beings whose “prices” are then determined by the amount of labour necessary to bring them to market (to pro-duce them) simply cannot form the basis of economic analysis - only observable market prices can. If it were at all possible to calculate scientifically the amount of labour time “socially necessary” for the production of a given good, it would then also be possible to decide scientifically the just distribution of the value produced according to the labour time expended. Yet this “objective value”, this “common interest” or inter esse – this “community of interest”, this “social contract” or “agreement”, this contractus unionis - independent of market competitive conflict or “dis-agreement” that leads to the fixing of market prices is precisely what Neoclassical Theory steadfastly denies is possible! For Neoclassical Theory market prices are not the result of “agreement”, except for the setting of a “level playing field” through “market rules”, but they are exclusively the result of “haggling”, of conflict, of individual self-interests pulling and tugging in opposite directions in their “mechanical free-dom”!


For Classical Political Economy and the Labour Theory of Value, all wealth is “objective” whether it be “use values” that are not produced or “exchange values” that are produced by means of “labour” as a universal homogeneous human value, as an inter esse (communion). Indeed, given the homogeneity of all exchange values as products of labour and measurable by labour, Classical Political Economy identifies “Value” with “exchange value” because only exchange values are economically significant in that their “value” can be quantified by measuring the “labour time” that is embodied in goods on the market. Thus, use values are not omitted from economic analysis but are simply replaced by another universal use value, a homogeneous substance, called “labour” or “labour power” or “labour time” or “labour content”.


In total contrast, Neoclassical Theory obliterates all universal homogeneous human values: it omits use value from economic analysis because all use values are seen as being strictly “subjective” and therefore the only objectivity possible for goods, their Objective Values, are the observable prices in market exchange which are the product not of a concordant and scientifically ascertainable homogeneous human quality (labour) but rather of discordant competitive and antagonistic subjectivities whereby these prices are determined through the “haggling” of the marketplace. Thus, Neoclassical Theory can eliminate the notion of “Value” from economic analysis altogether, dismissing it as “metaphysics”, and merely concentrate on market prices that are “positively observable”!


The “economy” intended by Neoclassical Theory is not one that furthers human interests understood collectively as a universal goal or aim or finality shared by all human beings, but rather it is an “economy” that is purely instrumental in character and therefore can serve only the interests of human beings taken as in-dividuals and not collectively. Worse still, these individuals have needs and wants that are antagonistic and in competitive conflict with one another! The very notion of “utility” that subtends all neoclassical economic theory is and must be based entirely and exclusively on the “in-commun-icability” of private utilities. And because private utilities (a pleonasm) are incommunicable, the only manner in which these utilities can be measured is objectively, that is, by means of competitive conflict, a struggle, between individuals that finds its observable quantitative manifestation in market prices. (Neoclassical Theory never explains, of course, how “market rules” or “the rules of competition” can ever be agreed by these competing individuals!) Utility therefore does not explain prices for the simple reason that in neoclassical economic theory prices are the ultimate “facts” that allow of no further “explanation”. Whereas classical political economy sought to discover a “reality” behind prices that could enable the maximization of “welfare” as measured by a universal “substance” – that is, labour or labour-time or labour-power -, neoclassical theory does not admit of any such “universal substance” or “source of wealth”. Neoclassical theory understands “wealth” in purely subjective terms – and that is why prices must be the sole and ultimate manifestation (not explanation!) of (individual, subjective) utilities.