THE VALUE OF VALUE AND THE PRICE OF PRICES - The Methodological Divide of Economic Analysis
I would like to say that the concrete results for my
purpose are of only secondary importance. In any case, as I said, I do not
strive for systematic completeness. Cure a relatively small number of basic
sentences is to be demonstrated. At the centre is the problem of equilibrium, the importance of which is small from
the point of view of practical applications of theory, but which is fundamental to science. In Germany,
it has not received sufficient attention and it is important to stress that it is the basis of our exact
system. The exchange, price and
money theory and their main application, the exact distribution theory, are
based on it and most of the following explanations are dedicated to them. These
things form that part of the national economy that is ripe for exact
treatment and to which one has been given so far.
My presentation is based on the fundamental divorce/scission
[Scheidung] between the "static" and "dynamics"
of the economy, a point whose importance cannot be overemphasized. For the time
being, the methods of pure economics are sufficient only for the former, and
only in the former yield their most important results. The "dynamics"
in every respect is something completely different from the
"statics", methodically as well as in content. This divorce/scission
[Scheidung] is not something new. (J. Schumpeter, Introduction to The Essence
and Content of Theoretical Economics,
1908).
A
cynic, quipped Oscar Wilde, is someone who knows the price of everything
and the value of nothing. An equilibrium schema describes how a
set of prices clears markets when the supply of goods meets the demand for
them. But the very equivalence of supply and demand in price proves to be the
very undoing of equilibrium theory as a theory. Because it does not explain why
a given price secures the equivalence of supply and demand. To do so, the price
should tell us “what” it is the price of! A system of relative prices
will not do, because aggregate relative prices will always (by
definition!) be equivalent to whatever aggregate we say that demand and
supply consist of – marginal utility (Menger, Jevons, Walras), labour
(Classical Political Economy), or socially necessary labour time (Marx). An
aggregate will always be equivalent to, and therefore in equilibrium with,
another aggregate! This is a tautology.
And
such an equilibrium theory will never be able to explain how the system
it describes, but does not explain, can ever move out of
equilibrium, except through external shocks or exogenous factors – in other
words, by evading any theoretical explanation intrinsic to the equilibrium
system itself! Schumpeter is therefore entirely wrong to opine that “for the time being, the methods of pure economics are
sufficient only for [equilibrium analysis]” because these methods will never
be able to deal with “dynamic” theory, with a theory that explains why as
well as how an economy changes due to endogenous or internal
forces. – Which is why Schumpeter is right in his very next proposition: -
namely, that “the ‘dynamics’ in every respect is something completely
different from the ‘statics’, methodically as well as in content”. So this
is the Scheidung – the scission, the fracture, the chasm, the yawning
gap at the heart of bourgeois economic science that Schumpeter identifies as early
as 1908 and that still troubles him thirty years later:
Walras
... would have said (and, as a matter of fact, he did say it to me the only
time that I had the opportunity to converse with him) that of course economic
life is essentially passive and merely adapts itself to the natural and social
influences which may be acting on it, so that the theory of a
stationary process constitutes really the whole of theoretical economics and
that as economic theorists we cannot say much about the factors that
account for historical change, but must simply register them. ... I felt
very strongly that this was wrong....
I was trying.... to answer the question of how the economic system generates
the force which incessantly transforms it.... a source of energy within the economic system which
would of itself disrupt any equilibrium that might be attained.... If
this is so, then there must be a purely economic theory of economic change
which does not merely rely on external factors propelling the economic system
from one equilibrium to another. It is such a theory that I have tried to build
...
(Schumpeter 1937/1989, p. 166)” (Preface to Japanese
edition of “Theorie”, quoted in N. Rosenberg, ‘Endogeneity’, p.7.)
It is clear that if indeed Schumpeter’s
Dynamik theorizes “an economic system [which] generates a force
[internally] which incessantly transforms it”, then this economic
system is and can never be in equilibrium, nor can it “be propelled from one
equilibrium to another”, because the notion of equilibrium is categorically
inapplicable to such an economic system unless it relies on external
factors, which Schumpeter expressly excludes. As we have amply shown, this Scheidung,
this categorical chasm between Statik and Dynamik is unbridgeable
because it is categorical! – Because equilibrium analysis is
conceptually incompatible with the theorization of economic change that is
generated internally to the system, by endogenous factors. But because
Schumpeter stubbornly wishes to preserve the presumed “scientificity” of
equilibrium analysis (which, again, is not a “theory” because it does not
explain prices), the only way he can attempt to bridge this gaping theoretical
abyss is by means of a subjective, voluntaristic criterion, by
means of an Ent-scheidung – literally, an “out-scission” – a decision
– “the entrepreneurial Act”! Thus, Schumpeter marries – bridges the
“divorce” (Scheidung) with an “out-of-divorce” leap (Ent-scheidung,
de-cision) – the instrumentalism that he applies to equilibrium analysis
with the purely voluntaristic Dezisionismus of his Entwicklungs-theorie
(theory of economic development) where the Innovations-prozess
(innovation process) with which he wishes to explain this
development/transformation of the economy is guided by the Unternehmer-geist
(the entrepreneurial spirit) that induces “the entrepreneurial Act”.
His conclusion, a strict
denial of any "methodological or material
connection" between
economics and psychology,23 has long remained
a contested issue. But
Schumpeter himself was by no means obstinate
or narrow in the matter. In
his own analytical work he soon found
it fruitful to discuss
types of human motivation and conduct. This
was particularly true when
he came to elaborate his model of economic
development, for which he
needed the conduct model of the
"dynamic
entrepreneur," of the man filling the "leadership function"
in the economic system.24 (F.
Machlup, p.465)
It is obvious that such Dezisionismus,
the Ent-scheidung (Latin, de-cision, break) that leads to the Ent-wicklung,
to the trans-crescence of the capitalist economy, will simply not do as
a theory of capitalist accumulation. Yet, the paramount importance of a theory
that can explain capitalist development from factors internal rather than
external to the capitalist economy could not be lost on a sharp and
sophisticated intellect such as Schumpeter surely possessed; nor was the fact
that the only theoretician who had made the attempt previously was Karl Marx
himself, the bete noire of bourgeois political economy:
It
was not clear to me at the outset what to the reader will perhaps be obvious at
once, namely, that this idea and this aim are exactly the same as the idea and
the aim which underlie the economic teaching of Karl Marx. In fact, what
distinguishes him from the economists of his own time and those who preceded
him, was precisely a vision of economic evolution as a distinct process
generated by the economic system itself.” (Schumpeter 1937/1989, p.
166) (Preface to Japanese edition of “Theorie”, quoted in N. Rosenberg,
‘Endogeneity’, p.7.)
The sheer inability of
bourgeois economic science to outline a proper theory – an explanation –
of capitalist economic development – or, as we prefer, trans-crescence, the
more literal translation of Schumpeter’s German term Ent-wicklung -, of
the accumulation of capital, is a constant lament recurring through all
bourgeois academic attempts to bridge the gap between static and dynamic
analysis. Joan Robinson’s account of this disarming and alarming inability due
to the appalling formalism of bourgeois thought is both a condemnation
and a symptom of this theoretical shipwreck:
Economic
analysis, serving for two centuries to win an understanding of the
Nature and Causes of the Wealth of Nations, has been fobbed off with another
bride — a Theory of Value. There were no doubt deep-seated political
reasons for the substitution but there was also a purely technical,
intellectual reason. It is excessively difficult to conduct analysis of
over-all movements of an economy through time, involving changes in population,
capital accumulation and technical change, at the same time as an analysis
of the detailed relations between output and price of particular commodities.
Both sets of problems require to be solved, but each has to be tackled
separately, ruling the other out by simplifying assumptions. Faced with the
choice of which to sacrifice first, economists for the last hundred years have
sacrificed dynamic theory in order to discuss relative prices. This has
been unfortunate, first because an assumption of static over-all conditions is
such a drastic departure from reality as to make it impossible to submit
anything evolved within it to the test of verification and, secondly, because
it ruled out the discussion of most of the problems that are actually
interesting and condemned economics to the arid formalism satirised by
J. H. Clapham in ' Of Empty Economic Boxes '. (J. Robinson, Preface to The Accumulation
of Capital)
Robinson is quite
right to stress how “relative prices”, which are invariably tied to equilibrium
analysis, do not – and, we add, cannot – form the theoretical basis of the Dynamik.
And she is wise to emphasise the word “analysis” rather than “theory” by reference
to her own approach to economics. But she is wrong to suggest, however
obliquely here, that “the Theory of Value” is necessarily tied to relative
prices and therefore to equilibrium analysis. True, to the extent that theories
of value, from Smith to Marx, seek to draw an aggregate equivalence
between value and prices – to that extent they end up being equilibrium schemata
that cannot draw a theoretical relationship between values and prices, except
tautologically because aggregates can always be equated (!). And least of all
can such theories of value account for the Dynamik – for the simple
reason, once again, that an economy that is “incessantly transforming”
itself cannot ever have values, and therefore also corresponding prices, that
relate to fixed measurable “quantities”.
Clearly, whether
through “innovation” or “accumulation”, the theorization of a dynamic economy
must treat both prices and values as political notions whose formal analysis
can only “describe how” but never “explain why” the economy functions the way
it does. Therein lies the fatal mistake or misapprehension under which both
Schumpeter and Robinson are obviously laboring! Quite evidently, they think that
theories of value, including the Marxian, involve or seek the quantitative
determination of market prices – and to the extent that they go beyond prices,
to “values”, they are purely “metaphysical” and “irrelevant” to economic
analysis. But because market prices in equilibrium analysis are necessarily
“relative prices”, it is blatantly obvious that any “values” assigned to them
must be “metaphysical” or “essentialist” (one could almost say “animistic”!) in
nature. - Because values are supposed to be the sub-stance lying behind or
beneath prices, because prices are only the visible empirical manifestation of under-lying
(sub-stantial) values, it is utterly evident that no theory will ever be able
to prove or disprove empirically the quantitative relation between values and
prices!
Schumpeter's emphasis on
the character of economics as a quantitative
science, as an equilibrium
system whose elements are "quantities
of goods," led him to regard it as
unnecessary and, hence, as
methodologically mistaken
for economics to deal with "economic conduct"
and with the "motives
of human conduct." 21 He conceded that
a relationship between the
value functions which the economist must
assume and certain
psychological or physiological facts may well
exist, but this
relationship "is only of philosophical interest. For the
economic remits it is irrelevant and
it can never be the task of the
economist to go into these
matters."(F. Machlup, Methodology of Economics, p.465)
Of course, Schumpeter’s methodological position here is wholly untenable
and, worse still, in stark contradiction with his own central “theory of economic development” based on the crucial concepts of “innovation” and “creative destruction”. These
are “politico-psychological” and “historico-philosophical” notions that form one leg of Schumpeter’s “dyad” wishing to combine Statik and Dynamik. Once again,
before we leave this aspect of bourgeois economic methodology, the Statik,
let us revisit Schumpeter’s own stance regarding with
regard to the “quantifiable facts” that supposedly form the foundation of the Economic
Equilibrium Schema. For it turns out that even the formal Schema of
Walrasian equilibrium analysis is erected on “facts” that are questionable on their own “arbitrary assumptions”:
The model or schema
(as it was invariably called in Schumpeter's
earlier work) rests
entirely on assumptions and "is, thus, a creation
of our discretion, just as
any other exact science. . . . To be sure,
neither our 'assumptions'
nor our 'laws' lie in the real world of phenomena.
. . . But this does not
preclude them from fitting the facts.
How can this be? Simply
because in constructing our schema we
proceeded, no doubt arbitrarily,
but reasonably in that we designed
the schema with the facts in mind!'33
This is the "decisive
point" in Schumpeter's epistemological position:
"On the one hand, our
theory is in essence arbitrary, and on this
are based its system, its
rigor, and its exactness; on the other hand,
it fits the phenomena and is conditioned by them, and this alone
gives
it content and
significance." 34
That our hypotheses,
"although just as arbitrary as our definitions"
are conditioned by
"facts," distinguishes them, in Schumpeter's view,
from "aprioristic
[philosophical] speculations." 35 He concedes that "some of our
refinements upon common
sense are logically anterior to the facts
we wish to study and must
be introduced first, because our factual
discussions would be
impossible without them." M But this must not
be confused with the
aprioristic position in economic theory. Schum-[468]
peter insists that the
"basic assumptions" of pure theory rest on "observation
of facts," only that
most of them "are so simple and are so
strikingly confirmed by
everyday experience as well as historical
experience that it would be
a shame to waste paper printing any
special compilations of
facts to confirm them." 37
(F.
Machlup, Methodology of Economics, pp.467-8.)
Two points must be made
immediately. The first is that Schumpeter, like all bourgeois economists,
completely leaves out the political reality that the “facts” on which the
“schema” is based are precisely (a) created and coerced by the
capitalist bourgeoisie, and (b) selected on the basis of assumptions that
the bourgeoisie itself mandates and imposes on the rest of
society! Schumpeter himself laid out the fundamental assumptions of bourgeois
economic equilibrium analysis:
The whole of pure
economics rests with Walras on the two
conditions that every
economic unit wants to maximize utility and
that demand for every good
equals supply. All his theorems follow
from· these two
assumptions.
(TGE 79)
The first objection, of
course, is that the economy rests on “units” (individuals) who wish “to
maximize” something – and that something is “utility”! But “utility” is nothing
other than the very “metaphysics” that Schumpeter pretended to eschew from “economic
analysis” in the first place! The second objection is: What must “demand”
must equal which supply? Schumpeter has elided and avoided here the very
essence of economic activity as political action – the fact that the demand and
supply in capitalist society do not serve human needs at all! (We shall deal
with these matters shortly.) Schumpeter himself, joining Weber’s discussion in “Objektivitat”,
acknowledges that the “explanatory” – “theoretical”, we say – power of economic
analysis is extremely limited aetiologically and epistemologically – that is,
in terms of causation and in terms of constitutiong scientific knowledge:
If facts—the
simple facts of our immediate everyday experience as
well as "statistical
and historical facts"—"induce the theoretical
work
and determine its
pattern," can they also fill "the function that
theorists usually assign to
them—the function of verification?" 38 No,
said Schumpeter, and he
explained his answer with reference to
statistical facts:
"But no statistical finding can ever either prove or
disprove a proposition
which we have reason to believe by virtue of
simpler and more
fundamental facts. It cannot prove such a proposition,
because one and the same
behaviour of a time series can analytically
be accounted for in an
indefinite number of ways. It cannot
disprove the proposition,
because a very real relation may be so overlaid
by other influences acting
on the statistical material under study
as to become entirely lost
in the numerical picture, without thereby
losing its importance for
our understanding of the case. It follows
that the claim usually made
for statistical induction and verification
must be qualified. Material
exposed to so many disturbances as ours
is, does not fulfill the
logical requirements of the process of induction."
(Machlup, pp.468)
Furthermore, the
conclusion now imposes itself that, first, bourgeois economic theory can offer
very little help in the theorization of capitalism, and second, that no theory
of capitalist accumulation can ever separate or “divorce” (Schumpeter’s famous “Scheidung”)
the theory of capitalist accumulation from the political antagonism that lies
at the core of the notion of “value”! In this precise context, here is Robinson
attempting to do the impossible:
At
the same time, I believe that modern academic economics has something to offer
to the Marxists. First, a reconsideration of Marx's argument in the light of
the more precise and refined methods of modern analysis clears up many
obscurities in his theory, and helps to
AN
ESSAY ON MARXIAN ECONOMICS
reveal
its strong and weak points. Second, in the analysis of effective demand
— the theory of employment — modern economics provides a basis for the study of
the law of motion of capitalism, which is suggested, but not fully
developed, by Marx himself…
I have confined my argument to Marx's economic analysis in the narrow
sense, and made no attempt to deal with the broad treatment of history and
sociology which forms the most important part of Marx's doctrine. This
specialised approach is perhaps an unnatural one, and it is true that no
particular aspect of Marx's argument can be properly understood without a grasp
of the whole. But at the same time a detailed study of particular aspects is also
useful, and the aspect which I have chosen to discuss is one of the highest
importance in the development of the whole. (Preface)
One must give praise to
Robinson for at least intuiting the difficulty involved in theorising the
accumulation of capital – without ensuring that it includes as an indissoluble
element “the broad treatment of history and sociology which forms the most
important part of Marx’s doctrine”! This is Robinson’s own attempt to
confront the Schumpeterian “Scheidung” – the separation of economics and
politics implicit in equilibrium analysis. In both cases – Schumpeter and
Robinson – the difficulty lies in the utter inability of bourgeois economic
theory to understand “value” in anything other than quantifiable
entities! And not only quantifiable entities, but indeed the formal schematic
mathematical relationship between presumably quantifiable entities that now
bear no direct relationship to the mathematical equilibrium schema! Thus,
bourgeois economic analysis, far from being “theoretical” is actually formalism
to the nth degree! (We shall examine this point further in connection with J.
Hicks’s Value and Capital.)
Now we can finally
understand what seemed so mysterious to Schumpeter, and why it had to appear to
be so mysterious to him and Robinson and all bourgeois economists:– the
“chemical bond” in Marx’s economic theory lay precisely in the political
antagonism contained in his theory of value, in the Marxian notion of value,
without which the trans-crescence (development) of the capitalist
economy and its corollary accumulation of capital will always break down into the
formal mechanicism and antinomy of bourgeois thought: the unbridgeable
separation (Scheidung) between formal Schema (Statik) and historical transformation
(Schumpeter’s Ent-scheidung):
There
is however one thing of fundamental importance for the methodology of economics which he [Marx] actually achieved.
Economists always have either themselves done work in economic history or else
used the historical work of others. But the facts of economic history were
assigned to a separate compartment. They entered theory, if at all, merely in
the role of illustrations, or possibly of verifications of results. They mixed with it only mechanically. Now Marx’s mixture is a chemical one; that is
to say, he introduced them into the very argument that produces the results. He
was the first economist of top rank to see and to teach systematically how
economic theory may be turned into historical analysis and how the historical
narrative may be turned into histoire
raisonnee. (J. Schumpeter, Capitalism, Socialism and
Democracy, p.44)
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