Wednesday, June 24, 2020

Economics: the Marginalist Fallacy (2020)

From the June 2020 issue of the Socialist Standard

What is ‘value’ (economically speaking)? It is a good question and one that has often generated controversy. Classical economists like Adam Smith maintained that a commodity’s value depended on how much labour went into making it. This argument was taken up and refined by Marx. Then, in the late nineteenth century, partly in response to Marx’s own labour theory of value and the perceived threat it posed by exposing capitalism’s exploitative character, a new approach emerged. The ‘Marginalist Revolution’ in economics ushered in the idea of marginal utility – the satisfaction you get from consuming an additional unit of a good which declines with each additional unit consumed along with the price you are willing to pay. As the Austrian economist Ludwig von Mises put it: ‘It is ultimately always the subjective value judgments of individuals that determine the formation of prices’ (Human Action, 1940)

However, Von Mises’ explanation won’t wash. The ‘subjective value judgement’ a hungry beggar makes about a three-course meal contributes nothing to its price while they lack the money to afford it but there is, additionally, an obvious epistemological flaw in Mises’ thinking. ‘Subjective value judgements’ are something only individuals can make – not society – but prices are the emergent outcome of millions of individuals interacting, each of whom are external (objective) to everyone else. Furthermore, as social phenomena, prices clearly influence our valuation of a commodity by making us more – or less – inclined to buy it. So the subjective theory of value is based on circular reasoning. Prices are supposed to be determined by subjective valuations which, in turn, are determined by price.

Does this mean that subjective valuation – the utility or ‘use value’ of a good – has no role to play in price formation? Of course not. As Marx himself noted ‘nothing can have value, without being an object of utility’ (Capital, Vol. 1, Ch. 1). However, while the subjectivists conflate ‘use value’ with ‘exchange value’ he insisted they be distinguished. Use value could not account for exchange value even though it was a precondition of market exchange. Fundamentally, only labour could provide a sound explanation of value under capitalism.

Why? Drawing on Aristotle’s observation that ‘exchange cannot take place without equality, and equality not without commensurability’, Marx reasoned that this ruled out utility as the basis on which commodities exchanged. This was because the utilities of chalk and cheese (or anything else) are essentially incommensurable. Commodities can only exchange on the basis of something they have in common.

What jackets and pairs of shoes have in common is the fact that they are both products of human labour. Exchanging one for the other presupposes each took roughly the same amount of labour to produce. After all, no one would exchange something worth more for something worth less.

Equivalence is assured by adjusting the ratios in which commodities exchange. So if our jacket takes more labour to produce than a pair of shoes this may mean exchanging it for, say, three pairs of shoes to ensure equivalence. Of course, today we don’t normally exchange jackets for shoes – barter. Instead, we use money as a universal equivalent with the ‘exchange value’ of a good being expressed in price.

The relationship between price and value in Marxian theory often gives rise to misunderstandings. Largely, this is because critics fail to grasp Marx’s method. As Michael Harrington notes:
  ‘Therefore the reader must be warned that the opening pages of Das Kapital – or, for that matter, the entire first volume – contain conscious simplifications. Marx, like everyone else, actually began with the “chaotic whole” of immediate experience, but in his masterpiece he follows a logical rather than an experiential order. So in understanding any part of the Marxian analysis one must carefully ask: Under what simplifying assumptions is it subsumed’ (Socialism, 1972).
As Marx’s argument unfolds, one ‘conscious simplification’ after another disappears. The purpose of this procedure is to arrive at a progressively closer approximation of capitalist reality. Hence the initial hypothesis that commodities sell at their values gives way to a new hypothesis that commodities sell, not literally at, but around, their value and that their price is influenced by other factors apart from value – such as the interplay of supply and demand.

That does not invalidate the theory, however. Though there is a constant disequilibrium in capitalism, there is also a constant tendency for supply and demand to adjust to each other via the price mechanism. In the long run, argues Marx:
  ‘If supply equals demand, they cease to act, and for this very reason commodities are sold at their market-values. Whenever two forces operate equally in opposite directions, they balance one another, exert no outside influence, and any phenomena taking place in these circumstances must be explained by causes other than the effect of these two forces’ (Capital, Vol. 3. Ch. 10).
Thus, after balancing out supply and demand we have still to explain why, say, a Berlingo van consistently costs so much more than a Raleigh bicycle. It is at this deep structural level that the law of value exerts a powerful gravitational pull on prices. This is buttressed by the fact that prices cannot fall below a business’s costs of production for any length of time which has the effect of keeping them firmly within the orbit of value.

One should bear in mind also that Marx’s theory does not equate ‘value’ with the actual amount of labour it took to produce a good – ‘concrete labour’. If that were the case there would never be any incentive to introduce labour-displacing technology since this would mean less value being produced. Rather the metric of value is ‘abstract labour’ – the socially necessary labour time it takes to produce a good, from start to finish, under average industry-wide conditions.

Socially necessary labour-time is not something you can measure with a stop watch – like concrete labour. Moreover, it can only express itself through market exchange. As Marx explained in the same work:
‘Social labour-time exists in these commodities in a latent state, so to speak, and becomes evident only in the course of their exchange. Universal social labour is consequently not a ready-made prerequisite but an emerging result’.
This means that the value of a product can change even after it has been produced as a result of ongoing technological and other changes.
Robin Cox

Lesser evil or lose-lose situation? (2020)

From the June 2020 issue of the Socialist Standard

On the face of it, the lesser evil argument seems only common sense. If you have a choice between something bad and something worse, who would choose the worse? In fact, in everyday life, who does?

In politics it is rather more complicated as there are not just two options since, even if there are only two candidates, you can always choose not to vote for either of them by not voting at all. And there is not always agreement either on what is ‘evil’ or on what is ‘lesser’.

In Britain at election time we socialists come up against this argument from those who want us to vote Labour on the grounds that it is the lesser evil compared to the Tories. But it is not just socialists who are confronted with the lesser-evil argument. For instance, in Northern Ireland if you are a Unionist living in a predominately Irish Nationalist area you may find yourself in a situation where only Sinn Fein or a moderate Nationalist has a realistic chance of being elected; in that case you might be open to persuasion to vote for the moderate Nationalist. On the other hand, you might consider a united Ireland so ‘evil’ that you wouldn’t vote for either of them.

Socialists feel the same when confronted with a choice of two (or more) candidates standing for capitalism. For us, capitalism is the ‘evil’, which is why it is a matter of indifference to us which particular party forms the government under it. This is based on the nature and lived experience of governments under capitalism. On paper the programme of the Labour Party seems more attractive – offering more reforms to benefit working people – than the Tories. However, as everyone knows, what a party does when in office is not the same as what it says it will do.

There is a reason for this. Any party that takes on the job of being a government under capitalism in the end has no choice but to bend to the economic laws of capitalism and give priority to profits and conditions that facilitate profit-making. Thus we have seen Labour governments cut benefits, impose wage restraint, oppose strikes, bring in racist immigration controls, prepare for wars, etc, just as Tory governments have. This makes choosing between them irrelevant. Changing governments changes nothing; capitalism continues and it is capitalism that is the problem.

In the US, as it’s a presidential election year there, whether or not to vote for a perceived lesser evil is a big issue. A veteran leftist, Mitch Abidor, in an article in the New York Times (13 May) subtitled ‘Many disappointed fans of Bernie Sanders would prefer a quixotic display of principle’, urged them not to make the same mistake his generation of leftists made in 1968. Then they voted for third-party candidates rather than for Hubert Humphrey the Democratic Party candidate, so helping Nixon to win (though actually Nixon would have won anyway). He summarises their argument as:
  ‘The two major parties are merely the right and left wings of the capitalist system. Six of one, half a dozen of the other.’
This is true and a view we can endorse. Note, however, that those Abidor was criticising are planning to vote for the Green Party candidate, Howie Hawkins, as opposed to not voting for any candidate who stands for capitalism (after all, they were planning to vote for Sanders and his programme of more state intervention in the capitalist economy), as does the Green Party, even if it wants to go back to an idealised smaller-scale capitalism.

As a sexist, racist, xenophobic loudmouth Trump is the perfect bogeyman, the ideal ‘greater evil’. Who wouldn’t want to vote him out? Quite a few actually. Ok, how could any ‘progressive’ not want to vote him out? Yes, but who are they going to vote in instead? The Democratic Party is indeed ‘the left wing of the capitalist system’. If he wins, Biden would be presiding over the affairs of the US capitalist class and, in accordance with the past policy and record of Democratic presidents, would defend its interests abroad. The form might change (he might be more polite) but the content (defence of US interests throughout the world) would continue. It really would be half a dozen of the other.

In Britain, over time fewer and fewer people are being convinced by the lesser-evil argument and at election time are refusing to choose between Labour and the Tories as the only two parties with a realistic chance of forming a government. They vote instead for the party that best expresses what they do want. In this, they follow the advice of Eugene Debs, a leader of the pre-WW1 reformist Socialist Party of America:
  ‘It is better to vote for what you want, and not get it, than to vote for what you don’t want, and get it.’
We agree with that too but there is another reason why we in particular refuse to vote for any candidate or party that stands for capitalism or wants to try to reform it. The capitalist class are the ruling class – the class that controls political power – because the excluded wage-working majority class acquiesce in this by, among other things, voting for politicians and political parties who accept the capitalist economic system and the right of the capitalist class to live off incomes ultimately derived from the exploitation of the majority class.

From this perspective, voting in an election where all the candidates stand for capitalism is a lose-lose situation. There is no lesser evil.
Adam Buick