June 26, 2015

Value — the Bermuda triangle for economic theories

Comment on ‘Economic Value is not Price’


“Repeated reflection and inquiry have led me to the somewhat novel opinion, that value depends entirely on utility.” (Jevons, 1911, p. 1)

Since Jevons and the other Neoclassicals utility and equilibrium have been seen as the two pillars that support the whole theoretical superstructure of standard economics. It is common knowledge that standard economics is a failure. And it is pretty clear why. Utility and equilibrium are nonentities, green-cheese assumptions, much too swampy and muddy to build anything more upon than a shaky proto-scientific construct.

Because of this, the new heterodox curriculum will certainly not mention these concepts except as an example for orthodox incompetence, or worse. By the way, that utility is not such a good starting point for a serious theory of value is known since Cournot.

“The abstract idea of wealth or value in exchange ... must be carefully distinguished from accessory ideas of utility, scarcity and suitability to the needs and enjoyment of mankind .... These ideas are variable, and by nature indeterminate and consequently ill suited for the foundation of a scientific theory ....” (Cournot 1897, quoted in Mirowski, 1995, p. 208)

What is more, as already Ricardo saw clearly, the theory of value cannot be based on exchange alone but must include production.

“In speaking the of commodities, of their exchangeable value, and of the laws which regulate their relative prices, we mean always such commodities only as can be increased in quantity by the exertion of human industry, and on the production of which competition operates without restraint.” (Ricardo, 1981, p. 12)

Marx developed this idea further in his analysis of surplus value. This goes in the right direction because the ultimate goal of value theory is the explanation of profit.

“But in the act of exchange viewed as a whole, equals are in general always exchanged for equals, individual variations being canceled out. How then, are profits made, for, obviously, they are made?” (Kirkenfeld, 1948, p. 35)

As real-world economists, the Classicals and Marx had an objective value theory in mind while Jevons ended in subjective wish-wash. In a nutshell, this is his value theory.
“The truth is that pearls are valuable because there are so many ladies who have not got pearl necklaces, and who would like to have them.” (Jevons, see Google-Books)

This slipslop counts as explanation among orthodox economists. Or take Samuelson's entirely tautological solution of the so-called water-diamond paradox.
“In other words, how is it that water, which is essential to life, has little value, while diamonds, which are generally used for conspicuous consumption, command an exalted price? Although it troubled Adam Smith 200 years ago, we can resolve this paradox as follows: ‘The supply and demand curves for water intersect at a very low price, while supply and demand for diamonds are such that their equilibrium price is very high’.” (Samuelson and Nordhaus, 1998, p. 90), see also (2011b)

Note well that supply and demand curves, too, are nonentities because they are ultimately based on utility. So, on closer inspection, economics has no acceptable value theory.

I think that there can be no doubt that a lot of New Economic Thinking is required for Heterodoxy to develop a superior value theory — without ever mentioning utility again (for a start see 2011a).

Egmont Kakarot-Handtke

Jevons, W. S. (1911). The Theory of Political Economy. London, Bombay, etc.: Macmillan, 4th edition. URL
Kakarot-Handtke, E. (2011a). The Pure Logic of Value, Profit, Interest. SSRN Working Paper Series, 1838203: 1–27. URL
Kakarot-Handtke, E. (2011b). The Value of Water and Diamonds: Back to Square One. SSRN Working Paper Series, 1954047: 1–19. URL
Kirkenfeld, T. (1948). The Paradox of Profit. Science & Society, 12(1): 33–41. URL
Mirowski, P. (1995). More Heat than Light. Cambridge: Cambridge University Press.
Ricardo, D. (1981). On the Principles of Political Economy and Taxation. The Works and Correspondence of David Ricardo. Cambridge, New York, NY, etc.: Cambridge University Press. URL
Samuelson, P. A., and Nordhaus, W. D. (1998). Economics. Boston, MA, Burr Ridge, IL, etc.: Irwin, McGraw-Hill, 16th edition.