Tuesday, 2 June 2009

Reclaiming Economics - Part 2

In the meantime, its necessary to continually challenge the underlying assumptions of bourgeois science such as those contained in Alchian & Allen’s book. To continue the analogy from Part 1, the strike is not an alternative to Workers Ownership. It constitutes only a skirmish, whereas the actual War can only be won with the triumph of workers property over Capitalist property. But, as Marx points out in his letter to Ruge, without workers engaging in such strikes they do not build up the means by which to create their own property. Attacking, the ideology of the bourgeoisie is like the strike, it represents individual skirmishes, and can in no way be seen as an alternative to building up the workers own ideological apparatus, but, without those skirmishes workers will not create the foundations of developing such an apparatus. The following represents just one of those skirmishes.

For those familiar to some extent with economics I would recommend Rudolph Hilferding’s response to Bohm-Bawerk’s, Karl Marx and the Close of His System .

See: Hilferding’s Reply

For those who have no grounding in Economics both may be a bit heavy going. In various posts I’ve tried to reduce things down to a level where non-economists can understand the basic ideas. For example, in my blog Water and Diamonds I looked at the basic arguments put forward by Bohm-Bawerk and Hilferding by looking at an oft cited case to support the subjectivist view of value based upon the idea of marginal utility, as compared to the solution provided by Marx’s Labour Theory of Value.

In my blog The Economics of Co-operation Part 1 , I dealt with two basic tenets of orthodox economics, firstly the idea of scarcity, and secondly the idea that competition not co-operation is normal human behaviour.

The following comments, using A&A as a vehicle, expand on some of those ideas, and deal with other underlying assumptions of orthodox economics.

1. Having defined a “Free Good” as something which exists in such abundance as to be had without cost – e.g. air – they say, “more of a free good does not add utility. More of an economic good does.” An economic good here is some good that is not a Free Good. Is this statement correct? No. Suppose I take water as a Free Good. If I want to wash then does a thimbleful provide me with the same utility as a basin-full? The basin full has the same economic value as the thimbleful, because both are free, but in terms of utility the basin-full clearly has more than the thimbleful! This is actually an important point for understanding different forms of Value.

As a Free Good, the Utility (or as Marxists would describe it he Use value) of a thimble full of water is less than that of a basin full, but the Exchange-Value is the same i.e. zero. So utility and Exchange Value are not different terms for the same thing. But, as economists it is the Exchange Value of commodities that concerns us, because we want to know what determines this Exchange Value or economic value of the goods, and we have just demonstrated that it is not their utility. A study of what determines utility of goods for different consumers might be an interesting study, but in reality as A&A admit it would be a study for a psychologist to undertake not an economist. Yet, the whole of orthodox economics is based on the idea that it IS this utility for each individual, which determines Value.

2. The Sleight of Hand. They then argue that for the individual, the Value of a Good can only be measured in terms of how much of some other goods they are prepared to substitute for it, and this will depend upon the relative utility derived from acquiring an extra unit of one good compared with the utility lost from giving up units of some other good.

Why a sleight of hand? Because they take as the assumption here that which has to be proved, that Value and Utility are the same thing, and that Utility can be defined solely in terms of the goods inherent qualities as they serve my purposes as a consumer. In fact, I’ve already shown that Utility and Exchange Value are not the same thing.

But, is the utility of a good solely about its inherent qualities for me as an individual consumer? If I am asked, how much of this would you exchange for that, am I only going to base my answer on the utility that the inherent properties of the good have for me? The answer is clearly no. Or, at least will not I consider one of those inherent properties to be what the good is worth in Exchange? Part of the utility of any good for me as a consumer will necessarily be not just the value that I place upon it, based on these inherent physical qualities, but will be the value that society places upon it in a number of ways. That in itself brings us back to the recognition that in order to determine the nature of Value we have to begin necessarily with the way society and not the individual achieves that! Firstly, fashions, preferences and so on are largely culturally not individually determined, but, more importantly the value we place on things has little to do with those inherent properties of the good, and everything to do with the Exchange Vale that society places upon it. I might hate the painting I have by Picasso, but I will still value it highly, because society values it highly. Just because I hate it, will not cause me to exchange it for a £10 print I happen to like in the local junk shop!

Even at an individual level then, few of the decisions we make are based upon this purely utilitarian view. If we take the example A&A give of the amount of bottles of coke someone is prepared to give up for a packet of fags, most people would first want to know what is the price of the bottle of coke, what is the price of the fags? I I am being told, “Forget the price, only consider the physical qualities of each”, then I am being told to forget what is the most important quality of the good – the fact that it has an Exchange Value that I can realise to purchase other goods! It means taking the analysis out of the real world where these Goods DO have prices! In effect, I am being asked to treat them as though they were free goods. But, then the theory has a basic contradiction, because A&A have told us that Free Goods do not add utility, and so can have no marginal utility either i.e. the extra utility derived from an additional unit. They have to argue this because under the orthodox theory Value is equal to Marginal Utility. If the Value of a Free Good is zero its Marginal Utility has to be zero too!

On the other hand, if I DO take price into consideration a further problem arises. Its from the determination of Marginal Utility, which arises from the comparison of the relative utility derived from one extra unit of one good measured by the decline in utility suffered by the reduction of some other good that the individuals Demand curve is determined. The theory goes on to tell us that Price is a function of the interaction of the sum total of these Demand curves with the total Supply Curve. But, this is a circular argument, a chicken and egg situation. It explains Price by Demand, and Demand by Price!

3. A&A argue that the Marginal Utility derived from a good depends upon the quantity already possessed by the individual. Generally, the more you already have the less utility you place on each additional unit. Is this true? Clearly not. Does an alcoholic or drug addict value things that way? No. More importantly, such a view is totally removed from economic reality by simply demanding that the view of utility/value is framed in terms of the individual’s own personal consumption, which is at odds with an economic system based upon Exchange, let alone a system based upon production FOR exchange.

Suppose, I have a Rolls Royce, and I’m asked would you exchange it for a mars Bar. The answer will be, no. Why? Because, however much I might fancy a mars Bar, I know that the Rolls is worth (its value is) more than that of a Mars Bar. Suppose I have Rolls Royces coming out of my ears, will my decision be different? No, because the same thing applies. I will know that I could sell one of the Rolls Royces and buy a million Mars Bars with the proceeds, so why would I exchange it at par???

Viewed from the actual operation of Capitalism, this is even more apparent. Did the fact, that Henry Ford owned 1,000 Model T’s that had come off his production line mean he placed less value on the last than on the first? Of course not, because he did not produce them for his own consumption. The utility of each vehicle for him had absolutely nothing to do with the inherent physical qualities of the car for him, its utility (what Marxists call Use Value) was wholly derived from the fact that he could sell it, that it had Exchange Value. Far from the fact of having a thousand for him meaning that he increasingly desired fewer, on the contrary his goal was to produce and own MORE, so that he could sell them! For him, what was important was how much it cost to produce, and how much profit he could then make on his Capital compared to its alternative uses. Whatever, the individual preferences and valuations that individuals might place on his product are irrelevant in determining its actual value. The most those individual decisions can do is to determine how many if any of those cars would be demanded, and, therefore, produced at that value, because, unless he can meet those costs and make that profit, he will not produce, and if consumers want to buy, that is the price they will have to pay!

But, what does this come down to? It comes down to the fact that the price of goods is determined by their cost of production plus the average rate of profit – what Marx calls the Price of Production. The cost of production comes down to the amount paid out by the Capitalist for means of production – machines, buildings, materials – which equates to the Labour-time required for their production, and the amount he pays out in wages, which again equates to the Labour-time required for the reproduction of workers. But, that cost is less than the Price of Production – the Value of the commodity, the difference being the Surplus Value or profit of the Capitalist, and that is equivalent to all of the labour time expended on the production of those commodities, for which the Capitalist has not paid.

So, ultimately, as Marx says, it is this which determines the price of goods, whilst the only function of consumers preferences is to determine if and how much of any commodity is demanded and produced at that price. Marxists do not deny the role of Demand and Supply in bringing about short term movements in prices as a result of changes in demand and supply, but it is only in explaining such movements in prices, rather than explaining why those movements take place around a particular price level that Demand and Supply has a role.

Forward To Part 3

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