- Capitalism and Alternatives -

The LTV - A Pragmatist's Objection

Posted by: Joel Jacobson ( The Fast Food Syndicate, United Surplus Appropriators (USA) ) on November 29, 1999 at 12:14:12:

Looking back at the last several weeks of post I can’t help but be amazed as to the discussion on the Labor Theory of Value as posited by the classical economists as well as by Marx.

First, I need to clear the air surrounding the so-called Subjective Theory of Value, or alternatively the Fantasy Theory of Value as SDF so snidely puts it. What everyone here is talking about is the theory of marginal utility as developed independently by Carl Menger, Leon Walras and Stanley Jevons in the last decades of the 19th Century. Stoller gets it right, unintentionally it seems, when he posts that the equilibrium model of marginal utility contains nothing about the [essential] nature of value. And he is right. The so-called Subjective Theory has absolutely nothing to say about the underlying essence of value, and instead focuses on economic entities, both individuals as well as groups of all sizes shapes and purposes, and how these entities operate within the overall scheme of production and consumption to achieve various goals. In short, the Subjective Theory, which I shall subsequently call the theory of marginal utility, is about how economic actors behave within the overall social setting of the economy, writ large.

Thus, the Labor Theory of Value and the theory of marginal utility do not necessarily oppose each other’s premises, as the first is an inquiry into the underlying essence of value as obscured by surface phenomena (1). The theory of marginal utility, however, has simply nothing to say about the underlying essences and instead offers pragmatist economists with a tool of understanding institutional and individual behavior. Indeed, the theory of marginal utility (TMU) both subsumes and then transcends the Labor Theory of Value (LTV) as the TMU both accounts for phenomena merely accepted as given by the LTV as well as phenomena explained by the LTV. Philosopher of science, Karl Popper, has described the development and choices of theories by explaining that all our scientific theories are due to social normative constraints and that we choose better theories mainly by observing that a new theory not only explains all that current theories explain but also explain inter-related and previously unexplained phenomena better than prior theories.(2)

For example: Let’s say that theory X predicts a certain phenomena x. Now in this current a scientist might have a to admit that x is related to phenomena y and that the interaction of the two is inseparable for purposes of analysis. Now the scientist would clearly admit that his theory X would be better if he had a theory XY that described both phenomena x and phenomena y. Almost certainly the scientists understanding of x under theory XY would surpass his understanding under the theory X, and additionally he would now possess a theory shedding light on y. Philosophers since Hegel have called such a condition where one simply takes a phenomenon such as y to be given as “immediacy”; the current terminology is “givenness” as coined by Wilfrid Sellars in Empiricism and the Philosophy of Mind.

Back to classical economics. The LTV basically notes, vaguely correct, that over the long run commodities tend to exchange at prices reflecting the underlying inputs of labor; this does hold if we adjust, as did Marx, for a myriad of external conditions. So here we have a theory X predicting phenomena x. Now, how does this happen? Theory X solely predicts that this will happen and noting a tendency surely can only be the beginning of a theory. Marx explains the appearance of this phenomenon, following the classical economists, through the concept of competition. But here Marx pulls a little bait-and-switch. He accuses the classical economists of being “unable to separate the form of appearance from the thing that appears.” (3) In order to find underlying essences Marx finds it necessary to “disregard all phenomena that hide the play of its inner mechanism” (4). For instance, “a scientific analysis of competition is not possible, before we have a [explanatory model] of the [essential] nature of capital” (5). Amazing! Marx is claiming that first we must select certain phenomena, and thus selectively ignore others, and then derive the inner essence that describes the particularly selected phenomena. After we have determined the “underlying essence” of economic reality we can go back to the previously discarded phenomena and describe them using our postulated essence. Note that the theoretical essence, labor units, does not include competition in what it initially explains (i.e. that units of socially necessary labor explain exchange-values and are thus the underlying essence of value), but only accepts as given to this particular theory the existence of competition as the method by which the LTV actually maintains its surface appearance.

The TMU, in contrast sets up a general model that seeks to predict in all situations how economic entities behave. It involves far more general premises and obtains far fewer exclusionary clauses. Why do I stress the necessity of generality? Because we could take an initial theory and if in every instance the theory is incapable of generating an explanation we could apply some modifying exclusion. But then why have a theory in the first place, since we continuously modify it to suit every different observation to which we apply our theory. In fact, in such an extreme example our theory has simply ceased to exist. Generality is not the only problem facing the LTV, though. Because of its insistence on uncovering the underlying essence of value the LTV becomes virtually impotent of a pragmatic application of any principle for courses of action.

Within any economic setting decision makers, both individuals as well as collective groups, decide upon certain means in order to achieve a certain set of goals. For instance, someone considering buying a new car would look at the extra amount of time they would have to work in order to earn enough money to afford the car they are considering. Here we have two considerations:

a) By giving up my free time to work for the car I desire I gain more utility than by spending my free time playing hoops or camping in the mountains
b) By purchasing a particular good, a car in this case, I have realized the maximum amount of utility possible from giving up my free time.

The theory of marginal utility attempts to explain the actions of the particular economic actor described in the above situation and does not even mention value. In no way does this deny the impact of production upon the decisions of whether or not to produce or consume or upon what to consume. For instance, a certain input may become rare due to any number of factors and the competition for the finished product will immediately push up the price to reflect the scarcity of the product. Depending upon the preference set of a particular economic entity the decision to engage in consumption of that particular item may become negatory. Let’s say I place a particular amount of utility upon consumption of a particular item in relation to free time. At a given time I might make, marginally, the decision to trade my time for consumption of that particular item; I value a reduced amount of free time with the addition of a particular consumable good more than a greater amount of free time without that particular good. But, due to some event the social cost of producing an item becomes greater, and in such a circumstance the price rises and I no longer decide to consume that item. I might choose to consume another good or if no other particular goods marginally compensate me for my lost free time then I will simply cut back on my decision to produce whether as labor power or as an independent.

Certainly, this whole description could easily apply to a hypothetical pre-socialized individual working for himself in a state of nature. He would measure his free time versus his labor time and again seeking to maximize his utilization of his labor time based upon his preference sets he would choose to produce a particular good in accordance with his particular preference set. It is important to note that at any time these preference sets may change, and in no way should they be construed as some static psychological essence.

Now we must be aware that in economies such as hunter/gatherer (I’m being very generous to Marx here as both myself and as far as I’m aware ethologists and anthropologists dispute this)(6) this analysis does not take form consciously. In such economies the very decisions made by consuming economic entities are simultaneously made by producing economic entities; indeed, this occurs because production and consumption occur within one particular solidified (congealed for all you Marxists) economic entity. Because of monistic nature of production/consumption decisions conscious analyses do not need to occur, as the very actions to consume and produce are in themselves the decisions as such. However, when different economic entities occur within the same economy the need arises for a model to show said entities how to maximize their particular utilities since the decisions to produce and consume have been separated from each other. Each entity in this situation must be able to decide how to act if in their particular sphere production has been separated in activity from consumption. Just to make sure I haven’t lost anyone I must again state that a self-contained entity that consumes all it produces still makes economic decisions, but it does not need to be aware that it is making such decisions because the very acts of consumption and production and mutually self- contained within said entity.

Self-containment, though, is not the case when society consists of more than one economic entity, and we reach a stage of inter-relatedness amongst economic entities. We now need theories that describe the inter-relation between different economic entities and the subsequent relation to economic objects, objects requiring socially-necessary labor. These theories are irrelevant if they are not practical and do not give us clues as to what particular means can help us achieve our particular ends. Looking closely at the LTV we see that all it really says is that due to competition (which falls outside the initial postulate as admitted by Marx himself) we can see ex post the economic decisions have, very roughly and with many exclusionary conditions, produced market prices that correspond to the labor inputs, and yet we do not have any explanation as to what these decisions were or how they were made. The TMU corrects this manifest deficiency.

Which brings us to the main objection to the Labor Theory of Value.

Why would we want an economic theory that is completely incapable of showing us how economic decisions are made and, more importantly, how to make economic decisions in view of particular economic ends? In all past, present and, presumably, the future all social situations have been required by both necessity and by desire to make economic decisions based upon both consumptive and productive factors. There is no possible way to ascertain this empirically but it seems more than reasonable to assume that there has never been an economic entity completely self-contained and capable of making economic decisions independent of other economic entities. We see throughout the world that different animals within any particular species continuously compete with one another for scarce resources, mates, etc.,(7) and it appears safe, at least to me, to extrapolate from this that there have always been competing economic entities within what we call the human species. Yes, tribes have internally co-operated but they have always obviously competed with external tribal entities for scarce resources; I must add that numerous anthropologists and ethologists have disputed that tribes were self-contained entities and, thus, individual tribal members were only manifestations of the concrete whole of the tribe. (8) In fact, I haven’t found one recent scientist from either of the above disciplines giving any validity to the idea of primitive communism as envisioned by Marx.

The complexity of productive and consumptive factors has grown by literally trillions of times since the hunter/gatherer era. These factors require that we have practical methods and theories upon which to base our economic decisions as economic entities, and I find it churlish to propose a method, like the Labor Theory of Value, that has absolutely no relation to economic decision-making.

In summary:

a) the TMU explains everything explained by the LTV, but in a superior fashion; in other words, the TMU subsumes the LTV
b) the TMU trancends the LTV by explaining more phenomena (i.e. it is more complete)
c) the TMU is a pragmatic model of how things happen, while the LTV is essentialist in attempting to describe underlying essences as opposed to informing us as to the usefulness of differing courses of action
d) following from c) the TMU is useful for explaining phenomena and for giving advice relating to action
e) following from c) the LTV is mainly an investigation into the underlying essence of reality and, thus, even though predicting certain phenomena it really doesn’t advise on how action achieves such results
f) the LTV continuously conflates theory and data while the TMU does not engage in such activity
g) relating to f) the TMU is a simpler more generalized theory but predicts a far richer array of results; for example 1992 Nobel prize winner Gary Becker has used the TMU to predict even the behaviors of different species both human and non-human (9)
h) relating to f) the LTV is a complex and convoluted theory with a myriad of exclusions and modifying addenda accepting as “given/immediate” data what economic theories should predict; additionally, it predicts and enlightens us of a much smaller array of phenomena than does the LTV

Again, the pragmatist TMU subsumes and transcends the essentialist LTV, and so the LTV should be discarded for the Platonist dogma it exemplifies. Note, that I’m not disregarding the LTV as a genuine effort in economics, but rather insisting that manifestly superior theories should replace older theories when the newer theories achieve results in a far richer variety of situations. The TMU is manifestly superior because it explains more comprehensively everything explained by the LTV, and also because it explains much that the LTV is incapable of or capable of only with a myriad of exclusionary statements. If someone would please explain why an abjectly useless theory is worthwhile it would be much appreciated. In no way does the TMU necessarily contradict the LTV.

1. Karl Marx, Kapital I, pg 43, 45, 55, 57, 70, 76, 82, 95, 106, 114, 185; Theories of Surplus Value, pg 261
2. Karl Popper, Objective Knowledge, pg 191-205
3. Karl Marx, Kapital I, pg 569
4. Karl Marx, Kapital I, pg 565
5. Karl Marx, Kapital I, pg 316
6. Summarized in Torsten Malmberg, Human Territoriality , pg 86
7. Konrad Lorenz, et al, Motivation of Human and Animal Behaviors
8. Tony Honore, Oxford Essays in Jurisprudence; see also L. Becker, et al, Property: Cases, Concepts, Critiques, pg 79
9. Gary Becker, Human Capital, and Becker, The Economic Way of Looking at Behavior Journal of Political Economy 101 (June 1993), pg 385-40

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