Value and Utility in a Historical Perspective

* Article: Value and utility in a historical perspective. By Peter Pogany. MPRA_paper_43477, 2012

URL = https://mpra.ub.uni-muenchen.de/43477/?

"This paper identifies three major phases in the evolution of thinking about value and utility: An extended macrohistoric implosion may lead to a third form of global self-organization: two-level economy/maximum bank reserve money/strong multilateralism".

Abstract

"Since value and utility are the highest profile abstractions that underlie an epoch’s intellectual climate and ethical principles, their evolution reflects the transformation of socioeconomic conditions and institutions.

• The “Classical Phase” flourished during the first global system, laissez-faire/metal money/zero multilateralism (GS1);

• the second, “Subjective/Utilitarian” phase marked the long transition to

• the current epoch of “Modern Subjectivism/General Equilibrium,” tied to the second and extant global system, mixed economy/minimum reserve banking/weak multilateralism (GS2).

History has witnessed the material de-essentialization of value and substantialization of utility.

But now the two concepts face a thorough transvaluation as the world’s combined demographic and economic expansion encounters ecological/physical limitations. An extended macrohistoric implosion may lead to a third form of global self-organization: two-level economy/maximum bank reserve money/strong multilateralism (GS3). If history unfolds along the suggested path, not only economics, but also thinking about economics would change. It would be considered an evolving hermeneutic of the human condition expressed through global-system-specific texts. The implied critical alteration, with the recognition of the entropy law’s importance as its focal point, matches the prediction of Swiss thinker Jean Gebser (1905-1973) about the impending mutation of human consciousness into its integral/arational structure. Such extrapolations form the context in which the fourth historical phase of value and utility is hypothesized, leading to the material re-essentialization of value and de-substantialization of utility."

Excerpts

Historical De-Essentialization of Value and Substantialization of Utility

Peter Pogany:

"Do goods have intrinsic, absolute, natural values that differ from their exchange values and exist independently from the satisfaction (i.e., the utility) their consumption provides? If yes, can its cause be pinned down, can its magnitude be measured, and if not would arguments about it match the merit of deciding how many angels can frolic on the tip of a needle? From Plato (5th century BCE) and Aristotle (4th century BCE) to the present, economic thought has tried to come to terms with this problem. But every time someone cried ―Eureka, I got it; period, end of story, some new development upset what may (at least in retrospect) be regarded as a shaky consensus.

During the past two and a half centuries, efforts to interpret value as an objective numerically expressible absolute that exists as an essence independent of consciousness petered out. This is what is meant by the word de-essentialization. The implied historical transformation may be broken down into three major phases: classical theories (committed to one form or another of an objective/absolute magnitude); subjective theories (built around the utilitarian view of consumption), and the contemporary (―modern‖) subjective approach, which through ―gestalt mathematics, using only some of the logical features and patterns (―consistency postulates) of early subjective/utilitarian tenets, has seemingly eliminated the need for any further theorizing about value.

It is important to underscore that characteristic thinking about value during each of the three phases also represents characteristic thinking about utility. In the end, the positivist trend that has come to dominate social sciences since the beginning of the 20th century has eliminated the difficulty of grasping the subjective, qualitative sensation attached to satisfaction derived from goods.

Utility in contemporary models has been equated with the level of consumption (―p x q‖). This is what ―substantiation of utility‖ means.

After briefly reviewing the three phases, it will be shown that the current satisfaction among mainstream economists that the problems of value and utility have been solved once and for all is based on a puerile, anthropocentric reduction of humanity‘s thermodynamic reality.

The Classical Phase

Adam Smith (1723-1790) telescoped and expanded the work of several major thinkers before him to formulate his labor theory of value (LTV); expand it to a rudimentary ―cost of production‖ approach, casting light on the importance of relative values. David Ricardo (1772-1823) made definitive changes on all these accounts. He pointed out the significance of the relative amounts of labor in determining exchange rates among commodities (i.e., their real prices); elaborated the ―cost of production‖ approach, and applied the principle of diminishing returns -- attributed to Robert Malthus (1776-1834) - - to value determination.

John Stuart Mill (1806-1873) developed his own cost-of-production theory of value (wages accounting for the disutility of labor plus profits stemming from the abstinence of capitalists) and further underscored the significance of relative values, the importance of supply and demand relations.

10 He sighed with great satisfaction in 1848: ―Happily, there is nothing in the laws of value which remains for the present or any future writer to clear up; the theory of the subject is complete‖ (Marshall, 1967, p.119). In his magnum opus, the first volume of Das Kapital (1867), Karl Marx (1818-1883) forcefully criticized all previous formulations of LTV as erroneous, insufficient, or apologetic of capitalist exploitation.

The special features of Marxian LTV are (

a) shifting emphasis from the role of the margin (as in Ricardo‘s theory) to the average, to the socalled ―socially necessary abstract labor time

(b) reducing value-determining factors to labor; 11 and

(c) categorically divorcing the forces that shape absolute (or immanent) value from those that determine prices.

One may say that by concentrating on the cost (supply) side of the market, the classics (including Mill) searched for the same thing as the Greek philosophers and medieval scholastics; that is, for some essence in commodity values, which, by being ―natural‖ and objective, is independent from the infinite variety of contingent circumstances; the vagaries of individual judgment.

Utility and value remained understandably disjointed concepts during the first phase. While value was regarded quantitatively proportional to the exertion of human effort in the process of production, the founder of utilitarianism, Jeremy Bentham (1748-1832), considered utility a complicated psychological phenomenon that emerges in the process of consumption. Value could be measured at least in principle, but dwelling in the Platonic realm of inaccessible ideas, utility could be recognized only through introspection and self-observation.

In contrast, the second phase thrived on connecting value and utility.

The Subjective/Utilitarian Phase

A breakthrough in the search for the meaning of value occurred toward the end of the 19th century when analysis began to focus on utility as a quantitative phenomenon. The concept of marginal utility was born.13 The understanding of value based on it revolves around the satisfaction derived from consuming the last unit of a commodity. The approach was ostensibly demand-oriented but, contrary to the often heard opinion, it did not ignore production costs. (See, Schumpeter, 1954, pp. 921-924). Marginal utilitarianism did recognize the ―supply side‖ but considered it subordinate to demand, a view that, in many respects, is quite close to the prevalent conviction that the material desires of sovereign consumers indirectly guide the allocation of resources with profound implications for the costs of production in a free-market, competitive economy. If a single word had to be chosen to characterize the operating principle behind the marginal utilitarian view, it ought to be scarcity. When a good is scarce, its marginal utility is high, but as it becomes increasingly abundant, its marginal utility declines. That is, value is determined on the margin.

Thoughts about general equilibrium (GE) logically followed from this view, with further consequences regarding ― value. Early elaborators of GE, Leon Walras (1834-1910), and (to a lesser extent) Alfred Marshall (1842-1924), had reconnected value with price but in very tentative ways. Although Walras claimed that interrelated markets would engage in tâtonnement toward equilibrium prices, which, by imputation, would reflect the immanent values of commodities; and Marshall considered equilibrium across markets approximating ―normal prices‖ (production costs) theoretically acceptable, both men were keenly aware that the chances of such ideal conditions becoming reality were practically zero.

Nonetheless, in the eyes of present-day neoclassical writers, both the marginal utility school (which included the first wave of ―Austrians‖) and the early predecessors of modern GE analysis (with Walras as an obvious overlap by virtue of occurring on both lists) share the credit for no longer thinking about value as an absolute but rather as a relative measure. According to this relativistic perspective, which received detailed elaboration and strong emphasis in Marshall‘s work, value can have no meaning except in reference to a given quantity of another good, i.e., to its opportunity cost. Thus, by all appearances, the problem of finding an absolute, intrinsic measure of value had been eliminated through the emphasis of subjectivity (a touchstone of ―Austrian‖ value theory) and measurement through other commodities rather than through the costs of production.

Value became a strictly subjective phenomenon that has meaning only in a relative sense; i.e., as the opportunity cost of consuming a good or employing a productive input, and only in the context of aggregate consumption and production. Although the concept had remained of central importance during the second phase, the locus of its determination gradually shifted to the entire system of interrelated markets. In the end, values became mutually determining moving targets; never self-standing and expressible only through the elusive (money-price-based) valuation of other commodities. This tendency culminated during the third phase.

The Phase of Modern Subjectivism in the Framework of General Equilibrium

John Richard Hicks (1904-1989), a scholar and a gentleman in an older tradition, often mingled praise with criticism. In his period-defining Value and Capital (Hicks, 1946), he attributed more error and sterility to Walras, whose program he pledged to continue, than to Marshall – whom he profoundly admired -- while breaking the ground under his edifice. Hicks considered quantitative utility, hence marginal utility (crucial during the Victorian period of the previous phase but still present in Marshall‘s conceptualization of GE) arbitrary, dubious, and irrelevant (Hicks, 1946, pp. 17, 18, 19, and 24). Indifference maps -- the brainchild of Francis Ysidore Edgeworth (1845-1926) with major elaborations by Vilfredo Pareto (1848-1923) and Irving Fisher (1867-1947) -- as a source of information to analyze consumer preferences in developing a value theory did not fare much better.

But all these preliminaries were necessary for Hicks to move thinking about value to the next level.

By seeing through the possibilities of ― gestalt mathematics, Hicks formulated a set of equations (testable for consistency and optimizability) in which unknowns could be calculated by relying on readily acceptable correspondences among unknowable variables and parameters. We may not be able to calculate marginal utilities but we can say something crucial about their relationship to prices in equilibrium. We may not know a single indifference curve (hyper-surface) but can reasonably characterize the slope of each curve and the movement along it over time. Then analog conceptualizations on the supply side for the representative firm (with institutional assumptions about the ―generalized law of demand‖ and interest rates of a definitively Keynesian flavor) will result in a robustly consistent, static GE.

Prices (ratios) approach their equilibrium levels and this process may be expected to resume after a slight disturbance as long as parameters (defined by the optimization scheme‘s internal algebra) remain within their specified range.

Thus, ― natural value of a commodity as a partial phenomenon, already substantially weakened by the marginal school, became explicitly subject to the influence of all interacting parts in Hick‘s comprehensive multimarket algebra. Values, resulting from averaging out aggregated subjective preferences, expressed in terms of some arbitrary numeraire, have moved to the inaccessible realm of pure ideas. We see only their rudimentary, imperfect reflections on the cave wall, as in Plato‘s famous parable.

The last two pages in the second edition (1946) of Value and Capital contain a kind of afterthought to afterthoughts. It bears the title ―Professor Samuelson‘s Dynamic Theory.‖ With unfailing insight into the foundational significance of Keynesian analysis and the potential of Paul Samuelson to turn it into a comprehensive system of fundamentals, Hicks may be regarded as the first neo-Keynesian (or neoclassical) synthesizer. The work of Paul Anthony Samuelson (1915 – 2009) was a critical milestone in the development of the third, contemporary phase of de-essentializing value. His ― Foundations of Economic Analysis (Samuelson, 1948) laid the theoretical groundwork for turning ― neoclassical synthesis into GS2 economics. His introductory textbook with its cryptic, end-all title, ― Economics, was first published in the same year. Several editions of ― Economics have seen the daylight since then and it served as the boiler plate for competing efforts on the undergraduate textbook market. It became the prevalent global system‘s text. More will be said about the social role of the text below. Suffice it to say here that one would not be mistaken by comparing it to a catechism, the corpus of information required for the practice of faith. It embodies the minimum standard knowledge that policymakers must either possess or must have immediate access to through appropriately trained staff members.

The de-essentialization of value, which moved into high gear with Hicks, intensified with Samuelson: ―. . . many writers have ceased to believe in the existence of any introspective magnitude or quantity of a cardinal, numerical kind. With this skepticism has come the recognition that a cardinal measure of utility is, in any case, unnecessary: that only an ordinal preference, involving ―more‖ or ―less‖ but not ―how much,‖ is required for the analysis of consumer‘s behavior‖ (Samuelson, 1948, p. 91).

This does not mean the complete discarding of the utility (subjective value) school (dubbed ―modern‖ to distinguish it from the classics in the first phase). The ultimate push to de-essentializing through gestalt-mathematics is built on it. Samuelson: ―. . . modern utility theory with all its qualifications is not in a technical sense meaningless. It is a hypothesis which places definite restrictions upon demand functions and price-quantity data‖ (op. cit., p. 92).

The de-essentialization of value became complete through the ―axiomatic analysis of economic equilibrium‖ (Debreu, 1959). In this penultimate step to building computable general equilibrium models for policy analysis, ―value‖ no longer lingers even as a shadow: ―The fact that the price of a commodity is positive, null, or negative is not an intrinsic property of that commodity; it depends on the technology, the tastes, the resources . . . (Debreu, 1959, p. 33.)

Parallel with the disappearance of value in the swirling quagmire of ―general equilibrium‖ topology; thinking about utility -- an elusive metaphysical-psychological concept since its inception -- had bifurcated. While one branch became etherized by moving in the direction of the Neumann-Morgenstern utility expectation model (a virtual savant, game-theoretical construct that has resisted valiant efforts to be put to any significant practical use), the other gained corporeity by becoming a continuous function that (―rational‖) consumers want to maximize.

Economists linked the concept of utility to demand theory, thus to consumer behavior; struggling, of course, with the problem of social utility.

The comprehensive work of Deaton and Muellbauer (1980), which has served as a basic reference for so much research in the field, attests to this transformation. The heavily algebraic and econometric treatment of the utility-consumer/utility-social welfare link masked this reduction. Preoccupation with testing and qualifying the additive and homothetic nature of ―utility functions‖ (containing nothing but commodities and a budget constraint) made related research appear deep, rich, sophisticated, and even revolutionary by virtue of contradicting established conventions.

Modern subjectivism does not attribute economic value to leisure time. Thus, income has only one component: real income. But, of course, the subject did not disappear from economic analysis. Leisure and income jointly appear in standard microeconomic algebra and introductory texts show the wage rate as the equilibrating factor between marginal preferences.

In general, mathematical modeling in economics is both intellectually satisfying and prestigious. The unrecognized downside is the elimination of the space between comprehension and acceptance. Widespread absorption of meaningfully deployed mathematical methodology makes a theory or a proposition to be regarded as ―knowledge,‖ especially if it comes from a first water academic source.

When all this is transcribed into applied general equilibrium calculations -- with apologies along the line that ―there is nothing better out there for the moment‖ -- consumption approximates utility; and consequently, the maximization of global output (without the slightest thought about its scale limit) struts the stage in the role of an uncontested universal telos.

To sum up, the conceptual ―de-essentialization‖ of value has been accompanied by a crass materialistic ―substantiation‖ of utility, from an imaginary quantity, determined by many different factors, including the enjoyment of leisure, to ―hedonometry‖ (Edgeworth), viz., consumption, plain and simple. Although the two tendencies are each other‘s exact opposites, their result is identical: value and utility have been removed from the agenda of economic theorizing."

More information

• New Historical Materialism