|
E. Generality and Paradigms
Böhm-Bawerk grudgingly admitted a correlation between price and cost: in almost Marshallian terms, he conceded that Ricardo
went only "a very little way" too far in downplaying the influence of scarcity, and in overstating the importance of labor
as one factor among several.
...the conclusion might very well be drawn that expenditure of labour is one circumstance which exerts a powerful influence
on the value of many goods; always remembering that labour is not an ultimate cause--for an ultimate cause must be common
to all the phenomena of value--but a particular and intermediate cause....
Ricardo himself only went a very little way over the proper limits. As I have shown, he knew right well that his law of
value was only a particular law; he knew, for instance, that the value of scarce goods rests on quite another principle. He
only erred in so far as he very much over-estimated the extent to which his law is valid, and practically ascribed to it a
validity almost universal. The consequence is that, later on, he forgot almost entirely the little exceptions he had rightly
made but too little considered at the beginning of his work, and often spoke of his law as if it were really a universal law
of value.60
Indeed, but for deviations caused by "friction" and the time element, the correlation between production cost and price
would be quite close.
If--what is practically inconceivable--production were carried on in ideal circumstances, unfettered by limitations of
place and time, with no friction, with the most perfect knowledge of the position of human wants requiring satisfaction, and
without any disturbing changes of wants, stocks, or techniques, than the original productive powers would, with ideal and
mathematical exactitude, be invested in the most remunerative employments, and the law of costs, so far as we can speak of
such a law, would hold in ideal completeness. The complementary groups of goods from which, in the long-run, the finished
good proceeds, would maintain exactly the same value and price at al stages of the process; the commodity would be exactly
equal to costs; these costs to their costs, and so on, back to the last original productive powers from which ultimately all
goods come.61
The assumptions here sound quite similar to the Misean theoretical construct of the "evenly rotating economy," which we
shall discuss below. Böhm-Bawerk went on to elaborate on friction and time as causes for deviation from this ideal model:
The first of these [disturbing causes] I may call by the general name of Friction. Almost invariably there is some
hindrance, great or small, permanent or temporary, to the due investment of the original productive powers in the employments
and forms of consumption which are the most remunerative at the time. In consequence the provision for wants, and likewise
the prices, are somewhat unsymmetrical. Sometimes it is that individual branches of want are, relatively, more amply supplied
than others.... But sometimes it may be that groups of productive materials, successively transformed till they are changed
at last into the finished commodity, are not equally valued at all stages of the process [here he used the analogy of
a stream to illustrate bottlenecks at various stages of the production process]....
In practical life such frictional disturbances are innumerable. At no moment and in no branch of production are they entirely
absent. And thus it is that the law of costs is recognized as a law that is only approximately valid; a law riddled through
and through with exceptions. These innumerable exceptions, small and great, are the inexhaustible source of the undertakers'
profits, but also of the undertakers' losses.
The second disturbing cause is the Lapse of Time--the weeks, months, years which must stretch between the inception of
the original productive powers, and the presentation of their finished and final product. The difference of time, in exerting
a far-reaching influence on our valuation of goods, makes a normal difference between the value of the productive groups standing
at different points of the production process...; and is, therefore, a difference to be kept quite distinct from the unsymmetrical
divergences caused by frictional disturbances.62
The time element is the subject of Chapter Three below, in which time preference is incorporated into our mutualist version
of the labor theory. As for "friction," all scarcity rents can arguably be classed under this heading. And Böhm-Bawerk's treatment
of cost and various forms of friction as simultaneously codetermining influences on value is questionable, at best. It is
much more useful and informative to treat labor or cost as the primary influence on normal value (i.e., equilibrium
price given elasticity), and to say that value deviates from this norm to the extent that friction comes into the picture.
Maurice Dobb argued ably that a key difference between the classical political economists and the subjectivists was their
opinion on the level of generality necessary for an adequate theory of value. Much of the disagreement over the Ricardian
paradigm stems from a difference of opinion on whether the exceptions Ricardo admitted to the law of value were sufficient
to invalidate it. For Dobb, obviously, the answer was "no."
In Political Economy and Capitalism, he detailed the simplifying assumptions of Marx's value theory, and the various
exceptions to it resulting from scarcity or differing compositions of capital. These exceptions were "held to be fatal"
by the marginalists, and were "the onus of Böhm-Bawerk's criticism of Marx."
But all abstractions remain only approximations to reality: this is their essential nature; and it is no criticism of a
theory of value merely to say that this is so. Whether such assumptions are permissible or no is a matter of the type of question,
the nature of the problem, with which the principle is designed to deal. The criticism only becomes valid if it shows that
the implicit assumptions preclude the generalization from sustaining these corollaries which it is employed to sustain....
It is too seldom remembered to-day that the concern of classical Political Economy was with what one may term the "macroscopic"
problems of economic society, and only very secondarily with "microscopic" problems, in the shape of the movements of particular
commodity prices.
Dobb compared Marx's general law of value, as a first approximation, and the second approximations adjusting it for deviations
resulting from scarcity and differences in organic composition of capital, to the successive approximations of the law of
projectiles in physics made necessary by wind resistance and other countervailing influences.63
In discussing the proper levels of generality of paradigms, Dobb mentioned Kuhn's thesis of paradigm shift in science,
and the recurring practice of incorporating rival paradigms as "special theories" within a larger and more general framework.64
This model is applicable here. Marginal utility is quite useful not only in describing the laws of behavior governing scarcity
exceptions to the labor theory of value, but the laws of behavior governing how much of a commodity is consumed at its
labor value. Marginal utility theory, if incorporated into a labor theory of value, would be a major improvement in the
sophistication with which the theory explained how and why the law of value operated through the subjective
perceptions and decisions of concrete human beings.
For example, Leif Johansen attempted in two articles to show how marginal utility could be incorporated into a labor theory
of value. In "Marxism and Mathematical Economics," he described the general terms of such a synthesis:
The Marxist labor theory of value has been the object of attacks particularly from the point of view of "marginal utility
theory" or "subjective theory of value," which has been a main component of non-Marxist mathematical economics. Marxists have
usually rejected this whole theory and all concepts and mathematical arguments introduced in connection with it, as if acceptance
of it, or elements of it, would necessarily imply a rejection of the labor theory of value. However, this is not so. For goods
which can be reproduced on any scale (i.e. such goods as have been the center of interest of Marxian value theory) it is very
easy to demonstrate that a complete model still leaves prices determined by the labor theory of value even if one accepts
the marginal utility theory of consumers' behavior.65
Elaborating on this statement in a later article, Johansen described a model in which prices were determined by the conditions
of production, while "[t]he marginal utility functions interact with the prices thus given only in determining the quantities
to be produced and consumed of the different commodities."66
In any case, the labor theory of value as we develop it in the next chapter is not an inductive generalization from the
empirical data of prices in the market. It is, rather, a law deduced from basic assumptions on the nature of human action,
quite similar to those of Mises' praxeology. As Mises wrote, the variables of the market are so many that no laws can be induced
from mere observation, without the aid of valid starting assumptions established on an a priori basis. The laws of praxeology
were a tool for analyzing market phenomena, not a generalization from them. Like Mises' laws of praxeology, our labor theory
of value is not an inductive law of market price, but an a priori assumption in terms of which the observed phenomena of the
market make better sense. Starting with our assumptions on the subjective mechanism of human behavior, we can understand why
equilibrium price will approximate cost. And given this baseline understanding of the primary law of equilibrium price, we
can understand why price deviates from the cost principle in cases of scarcity.
If an adequate theory of value requires a high degree of predictive value concerning concrete prices, then both the labor
theory and subjective theory fall apart equally. On the other hand, if value theory in the sense of an empirical rule for
predicting concrete prices is impossible because the variables are too many, then both theories are likewise on equally untenable
ground. But like Mises' subjective theory of value, our version of the labor theory is a set of a priori axioms and the deductions
from them, which can be used to more usefully interpret market data after the fact. Böhm-Bawerk's critiques of Ricardo
or Marx, based on the failure of experience to bear them out in all cases, are equally applicable to Mises' theory of value.
The Austrians have made a closely related argument: that equilibrium price is an imaginary construct that can never be
observed in the real marketplace. But (as we shall see in a later section of this chapter) this radical epistemological skepticism
does not bear much looking into, given the Austrian concept of the "Final State." Any criticism of equilibrium price, as a
standpoint from which to examine actual market prices at any given time, applies equally to the "final state" or "final equilibrium."
As Mises himself wrote,
The specific method of economics is the method of imaginary constructions.
This method is the method of praxeology....
An imaginary construction is a conceptual image of a sequence of events logically evolved from the elements of action employed
in its formation. It is a product of deduction, ultimately derived from the fundamental category of action, the act of preferring
and setting aside....
The main formula for designing of imaginary constructions is to abstract from the operation of some conditions present
in actual action. Then we are in a position to grasp the hypothetical consequences of the absence of these conditions and
to conceive the effects of their existence....
The imaginary construction of a pure or unhampered market economy assumes that there is a division of labor and private
ownership (control) of the means of production and that consequently there is market exchange of goods and services. It assumes
that the operation of the market is not obstructed by institutional factors.... The market is free; there is no interference
of factors, foreign to the market, with prices, wage rates, and interest rates. Starting from these assumptions economics
tries to elucidate the operation of a pure market economy. Only at a later stage... does it turn to the study of the various
problems raised by interference with the market on the part of government and other agencies employing coercion and compulsion.67
Böhm-Bawerk's hypothetical description of a "frictionless" economy, above, can be taken as an early attempt at such an
abstract conceptual model. Mises’ "final state" was another, a model of the values toward which prices were tending
at any time:
The prices of all commodities and services are at any instant moving toward a final state.... However, the changing economy
never reaches the imaginary final state. New data emerge again and again and divert the trend of prices from the previous
goal of their movement toward a different final state...."68
Rothbard developed the concept still further as "final equilibrium." Despite his straw-man caricatures and semantic quibbling
with Marshall, it closely resembled Marshall's concept of the "long run."
It is to be distinguished from the market equilibrium prices that are set each day by the action of supply and demand.
The final equilibrium state is one which the economy is always
tending to approach.... In actual life, however, the data are always changing, and therefore, before
arriving at a final equilibrium point, the economy must shift direction, towards some final equilibrium position.
Hence, the final equilibrium position is always changing, and consequently no one such position is ever reached in practice.
But even though it is never reached in practice, it has a very real importance. In the first place, it is like the mechanical
rabbit being chased by the dog. It is never reached in practice and it is always changing, but it explains the direction in
which the dog is moving.69
Ah! So Rothbard's objection to the Marshallian "scissors" was Marshall's claim that "equilibrium price" or the "long run"
could be reached in practice! Strangely enough, though, I can't recall ever seeing any such claim by Marshall.
We should be careful, by the way, to distinguish the Austrian concepts of "final state" and final "equilibrium" from that
of the "Evenly Rotating Economy." Marshall's "long run," although bearing some resemblance to the "final equilibrium," differed
fundamentally from the "Evenly Rotating Economy." The latter was an imaginary construct of a static economy from which all
change was abstracted. The "long run," on the other hand, was a goal toward which the economy was tending at any given moment
through the subjective valuations of market actors and the fluctuations of the market (much like Adam Smith's "natural
price").
|
