Monday, 18 September 2017

The Austrian School Dismissed - Part 1

The following series of posts are part of a response I made some years ago to contributors to an Austrian School Discussion Board.  They may be useful for anyone confronting such ideas today.

“The value of commodities is derived wholly from their utility, but the utility they afford is not wholly convertible into value.” (Friedrich von Weiser)

This opening comment by Weiser demonstrates a lack of clarity of thinking and confusion from the beginning. From the time of Plato commodities had been seen as having a dual nature possessing both a use value, and an exchange value. This distinction was drawn out even more clearly by Aristotle, who Weiser like all neo classicists claims to follow. But Weiser does not tell us here in what context he is using the word value. Does he mean use value, or does he mean exchange value. In fact he means neither. Instead of the word use value he uses “utility” so to say a commodity's utility derives from its utility would be meaningless. But he does not mean exchange value either because neoclassical economists reject the idea of exchange value (what Thomas Aquinas and the scholastics called the “just price”, and Adam Smith calls "the natural price") believing instead that there is no difference between the just price and the market price. In other words when Weiser uses the term value here he does not mean value but market price.

Moreover, if the utility is not wholly converted to value then perhaps he could tell us how much utility is converted to value, and by what mechanism.

“Commodities which may be had freely in abundance are of no value, however much utility they may afford.” (ibid)

This is nonsense and shows superficial thinking. Aristotle having developed the notion of the duality of the commodity tried to develop a theory of value derived from its use value, but his attempt failed leading down a dead end. The Austrians have learned nothing from all the philosophers and economists since Aristotle who recognised his error and went down a new route. Consequently, the Austrians find themselves in the same dead end.

To say as he does here that commodities (actually the items he describes are not commodities which demonstrates his utter confusion right from the beginning – a commodity is something produced in order to be sold, and for someone to produce an item for sale which has no value they would have to have the same intellect as Weiser), which are abundant have no value is ridiculous. They do not have any exchange value, for the simple reason that they require no labour for their production, but they most certainly have use value. Just try depriving yourself of oxygen for a few minutes and see whether you value it or not.

The statement undermines Weiser’s argument right from the beginning. Air has no exchange value because we breathe it without requiring the expenditure of labour to do so. But Weiser and the Austrians argument is there is no such thing as exchange value only market price derived from utility. To begin by saying then that those things, which are the most useful, the most vital to our very existence, have no value, means that value cannot possibly be derived from utility but that is precisely what he wants to argue.

“But those commodities too, which, because they are not to be had in sufficient quantity, are valuable for the sake of their utility, acquire a value which as a rule is less than their utility.” (ibid)

The formulation here is very weak. What is meant by “as a rule”? Does he mean it literally i.e. it is a rule that value is always less than utility? If that is so then how does he explain gold? It has little utility in itself. Silver is far more useful as is copper. Yet gold has a higher value. In fact it is because gold has a high value that gives it its main utility as a store of value. But then this defeats the whole Austrian argument. If gold’s utility derives mainly from its value then its value cannot logically derive from its utility because its value precedes its utility. Its value then must arise from some other source than its utility. The answer to where gold’s value comes from was given by Benjamin Franklin in his book “A Modest Inquiry into the Nature and Necessity of a Paper Currency” pp 265 and 267, where he writes,

“By labour may the value of silver be measured as well as other things. As, suppose one man is employed to raise corn, while another is digging and refining silver; at the year’s end, or at any other period of time, the complete produce of corn, and that of silver, are the natural price of each other; and if one be twenty bushels, and the other be twenty ounces, then an ounce of that silver is worth the labour of raising a bushel of that corn. Now if by the discovery of some nearer, more easy or more plentiful mines, a man may get forty ounces of silver as easily as formerly he did twenty, and the same labour is still required to raise twenty bushels of corn, then two ounces of silver will be worth no more than the same labour of raising one bushel of corn, and that bushel of corn will be as cheap at two ounces, as it was before at one ceteris paribus. Thus the riches of a country are to be valued by the quantity of labour its inhabitants are able to purchase.”

And, “trade in general being nothing else but the exchange of labour for labour, the value of all things is, as I have said before, most justly measured by labour.”

But then we know now that Austrians think Adam Smith was a socialist presumably they think Ben Franklin was a socialist too.

If Weiser doesn’t mean that it is a rule then the statement, like the theory as a whole, is vacuous. If value flows from utility then there must be some proportional relationship between the two that can be measured and used as a basis of calculation. If sometimes value is greater than utility and sometimes less what are the laws which govern this relationship. How are we to know whether value will be more or less in any given case, and by how much. The answer from Weiser as from all the neo classicists is dumb silence.

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