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!

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