This problem of absolute utility is represented in the water-diamond paradox, in which water, which is essential to life, is cheap, whereas diamonds, which are not, are very expensive. The rescue for neoclassical economics to this paradox was provided by the marginalists, who answered, like Smith, that it is not a question of absolute utility, but of marginal utility that is determinant. So, they give the example of someone in a desert with a diamond, dying of thirst, who gives up the diamond for a glass of water.
In terms of production, and basing themselves on the assumption of diminishing factor returns, the marginalists look at the utility of each factor of production in terms of the additional output that results from adding one additional unit of that factor, whilst holding all others constant. By taking this marginal physical product for each factor of production, and multiplying it by the market price of the commodity, a marginal revenue product is obtained, and this should then determine the price of that factor of production, so that the total new value it creates equals the total it receives in revenue. Wherever, the MRP is greater than say the wage paid to labour, adding more labour will increase profits. If wages are higher than the MRP, then replacing labour with capital, so that wages fall, will increase profits.
The mathematical economists were then able to turn this into mathematical models, using indifference curves, production functions, Pareto Optimality conditions, and so on, to generate a series of mathematical models showing that equilibrium factor prices, and output prices result such that a general equilibrium of supply and demand at these prices is established.
In the debates between economists at Cambridge, England, with those based in Cambridge, Massachusetts, the latter were forced to resort to a defence of the General Equilibrium Model, as against the Partial Equilibrium Model used to teach economics undergraduates, in order to sustain their claims of internal coherence of their theory. The assumptions of both models are unsustainable, but those of the General Equilibrium Model are even more removed from reality. However, the point is that both of these models are removed from reality, because both take, as their starting point, Smith's absurd dogma that the value of commodities resolves entirely into revenues, and so, therefore, does the value of total output. The Keynesians also accept that starting point, which is central to their model in which National Income = GDP = National Expenditure = National Output.
Whether the model is internally consistent or not is irrelevant if the basic assumption about what that model is supposed to be describing is false. If you assume there are no black swans, you can construct a complex mathematical model describing such a world. It doesn't change the fact that there are black swans, and so any model, no matter how complex, how mathematically beautiful, will be wrong.
The basic assumption underlying all modern economic theory, and mathematical models is Smith's absurd dogma that the value of commodities resolves entirely into revenues. But, as set out, that dogma is clearly wrong. The value resolves into revenues – wages, profits, rent, interest, taxes – but also into constant capital – materials, wear and tear – whose value does not resolve into revenues, but is preserved in and reproduced out of final output. Consequently, none of those models, no matter how beautiful or internally consistent, are right.
Lenin also had to deal with this issue, including the problem faced today of some who call themselves Marxists, but who also fall foul of Smith's absurd dogma. He dealt with it in his arguments against the Narodniks and Legal Marxists in “On The So Called Market Question”, as well as in “A Characterisation of Economic Romanticism”, dealing with Sismondi, and the use of his work by the Narodniks.
No comments:
Post a Comment