Theory of value I. Pretensions vs reality.
If there is something which can be observed throughout economics history, from the very beginning, is the pretension to be a formal science, like maths or physics. Such ambition is clearly exemplified in the evolution along the economical thought of the value theory. See, formal sciences study fixed phenomena, which can be observed in nature to always fulfill a concrete set of rules. Therefore, natural laws can be stablished upon them. That is, theories and propositions can be suggested, such that in no observable case the outcome of the observed event will differ from the one expected.
Being that said, economics, and this should be clear to anyone familiarized with the discipline, does not meet the requirements to be a formal science. No, economics is what is regarded as social/human science. And there is a fundamental difference between both types of disciplines: the subject of study in a social science is human behavior, which is not a fixed phenomenon. Behavior is subjective, emotional, biased and situational, and can change dramatically over time. Therefore, the outcome of behavior related phenomena, e. g. economic actions, is far from fixed or given, neither stable over time. The result is, I’m afraid, economics is not a formal science, hence it cannot be treated as such.
Notwithstanding, along history of economic thought, it has been treated like it was so. And that, precisely, has been a major error all over the trajectory of economics as a discipline. Economic laws are very few and limited in scope. Most of the theories are strongly based upon models, which are based on rather unrealistic assumptions (rational behavior, perfect competition, etc), resulting in capacity of perfectly explaining situations which hardly ever take place (e. g. one factor economy or an only two agents exchange market).
In general, economic thought is able to explain what would happen under a given scenario, but nothing about how is that situation reached and what would happen if one thought outside the box (indeed the type of situations most commonly found on real life are outside that box) There is few to none consensus over basic rules, and lots of contradicting theories trying to explain economic phenomena, which are mostly solid but very restricted in terms of what fraction of reality they comprehend for the shake of keeping internal consistency, what leads to many of them feeling rather incomplete. (e. g. development or trade theories).
Last, but not least, there is an unforgivable issue with economics as a science: the incapacity to establish magnitudes that can be empirically and reliably measured. Any formal science must be able to set basic magnitudes to compare and scale the object of its studies. For instance, in physics there are speed, mass, force… But what about economics? Is there any reasonable way to stablish a standard to reflect basic concepts such as utility, risk, willingness to buy, or the term that occupies us today, value?
These are the ongoing problems with economics and the focus of its study along history. And value theory is an ideal example to see them in practice.
After all, there have been several approaches by multitude of authors, and none seems to be fully satisfying. Furthermore, the authors are constantly rebating their predecessors (Ricardo to Smith, Cantillon to Petty)
This is going to be the recurring lens through which I will examine the history of economic ideas. Because I believe that the clear problems of economic thought are deeper than just mere subtleties of the models, which is the way in which most authors have treated them. They have spent their careers looking for mistakes in other’s models and trying to come up themselves with the ultimate version of the model. Instead, I believe the problem is in the methodology, in the very use of models as if this could be treated like a formal science.
Of course some indicators are necessary, to summarize realities which would otherwise be too complex, and ease decision making. That said, economist, I observe, tend to rely excessively on them and give for granted the frameworks already stablished by these models, committing the fundamental mistake of misunderstanding or forgetting the reality behind the framework. Since indicators and models are a representation of reality, it is wrong to give to the results they yield all the importance, without comprehending the underlying limitations and the reasons why those results are yielded. Putting math, or rationalist “natural law observation”, above common sense, in a discipline in which observable variables are non-quantifiable, is a fundamental error that economic thought has repeated.
Hopefully, as a result of this critical examination, it will be possible to come up with a fresh approach, more grounded and close to the subject of study, to economics.
Being that said, I have already extended quite a lot for this entry, while I have barely touched upon the subject matter of it: value theory. The reason is that this introduction was needed to understand the scope and purpose with which my review to history of economic thought will be made. Now, for the remaining of this entry, I will exemplify briefly the points I have been making with the value concept evolution. Since I have yet another entry to build on value theory, I will further expand in there.
Value, in itself, is a magnitude. It is one of the pillar concepts in economics. This because, in last instance, economics is a discipline about exchange and allocation of limited resources between multiple human beings with unlimited needs. And this resource distribution has to take place under some basis: that is the function of value. Determine how much things are worth so to be able to assess how satisfied you should be with a determined quantity of that product, and, as a result, how much value needs to be created to satisfy the market/society.
Any proper formal science should be able to measure such a pivotal magnitude clear and flawlessly. Is such the case in economics? A review to the evolution of economic thought reveals that it is not. There are multitude of approaches and methods, but no consensus still to this day on the right way.
Some have looked at the demand side and bargaining (Roman Jurist, 17th century Europeans, Lloyd). Others at the production side and the costs (Ricardo, Marx, Petty, Cantillon). Some have tried to combine both (Aristotle, Smith, Mill). All their theories feel like they are missing something, they feel incomplete. Most of them have been criticized and, at least partially, rebated.
Smith talks about the famous invisible hand, but is unable to specify what is it (we know today it is human behavior, the milestone of economics which has been largely omitted or assumed to behave universally on a certain way along history). Ricardo based his proposal on an invariable standard that he could never find and has yet not been found. Most of the Anglo-Saxon deviation thinkers dismissed another fundamental concept in economics, which is productivity. Aristotle, Aquinas, Plato and the rest of ancient thinkers believed in the notion of “fair” value, inherent on things, but never were able to find a convincing way to figure out what was it. So on so forth.
Neither could never, none of them, give a satisfactory solution to the great dilemma in value theory: is there any relation between value and price, and if so, which one? To address that issue, I will dedicate the next entry of this review to economic thought, considering the authors arisen from the so-called Marginal Revolution.