Value theory II. The Marginal Revolution. Value as utility.

 

After going through the remaining authors from Marx, with whom I concluded last entry, to nowadays, the question which was left unanswered at that time comes up once more, seeking for fulfillment: Can we explain the nature of value, effectively measure it as a fundamental magnitude for economics’ pretensions as a science, and understand its relation with prices? After this last bunch of authors, I have gone through the so called Marginal Revolution, a fresh shift of focus from the macro to the micro, and thus revised as well its consequences in ulterior developments.

As a brief curiosity, I will point out what I consider a funny paradox, which is how the Marginal Revolution, which aimed to focus on the micro and transactional level, by recovering the Aristotelian idea of utility and building on it, ended up evolving after almost 2 centuries, by the hand of Wald, based on Walras bilateral exchange equilibrium analysis, and his successors (who at the same time were building up in the notion of Pareto Equilibrium), in an attempt to come up with a “General Equilibrium” notion which is probably the most ambitious macro concept ever suggested and completely forgot about the individual and transactional origins of the idea of utility.

Back to the point, the issue is: has the Marginal revolution and its evolutions served to give the seeked answer? Well, given the lack of consensus and continuous back and forth rebating of what earlier thought had established, and the way in which authors have consistently failed to fully realize their goals (Jevons couldn’t get rid of Ricardian production cost based approach, Pareto couldn’t escape from the need of contemplating utility, or the General Equilibrium approach has so far failed to take shape into something solid and operational, just to put some examples) I consider clear enough that the response is negative. There have been some quite interesting attempts, don’t get me wrong, but mostly they have failed due to the problems of dealing with economics as a formal science that I introduced on entry I.

The persistence with trying to mathematise that which can’t be mathematised has condemned most attempts. Again, General Equilibrium theory is the prime example of my point. Debreu, one of its most remarkable developers, actually came to the conclusion that for the shake of fulfilling mathematic formalism, the only way was to ignore reality and build up a logical system assuming it worked in reality, but with 0 guarantee about that indeed. Furthermore, Marshall and the Marginal Revolution authors focused so much on coming up with an utility function, that they left on the way the human, moral and philosophical consequences of such a consideration about human beings, which could lead to humanly devastating conclusions, such as those which the debate about self-interest pursuit and sustainable growth raises. Edgeworth developed his model, the so known “Edgeworth box”, which perfectly described a useless situation, an ideal equilibrium for which certain initial allocations of resources are required to be able to reach it, but never have we been explained how to reach that situation from a different starting point, more realistic.

Where is the failure though? Is it something wrong related to maths? Or is it deeper?

If we observe the Austrian School’s failed attempt with the opportunity cost, which is a formally logic approach (same than with maths coincidentally) but hardly operational, we realize that it is not just maths to blame. There is a pattern between both approaches: dealing with economics as a formal science. In other words, the consideration that fundamental and universal truths can be established for it. The Austrians may regard themselves as more flexible because they don’t use that much math, but they are still rationalist. The aim of rationalism, philosophically, is the pursuit of absolute truth by using the reason. Therefore, they use different tools than the others, but behave in a similar way.

The problem is not which is the absolute truth. Before that, we need to clarify: Is it possible to have absolute truths in economics? And this leads us to the debate of absolutism vs subjectivism, but let’s wait a bit more to dive into that. First of all, because we don’t know enough yet to reply. As some of the latest authors suggested, in physics, a Newton didn’t sit down and came up with his laws until prior intellectuals had gathered enough data for him to do it knowledgeably. Do we have, currently, enough information about economic phenomenons to cover all possibilities and be 100% sure before making affirmations? No. Nonetheless, the fact that reaching an absolute truth is harder in economics than in physics, doesn’t mean that it’s impossible. So probably, before trying to formulate absolute truths, we should gather enough information as to be sure. Right now, the debate is opened, and nobody can close it definitively.

Additionally, there has been one further problem. As I commented on entry I, one of the biggest issues with economics as formal science, is that it cannot measure key magnitudes reliably. This has been, as I see it, the biggest reason for the failure of the utility (and derivatives) based approach. Unable to quantify the magnitude “value”, they tried to ignore it and switched to “price”, but to determine price they recurred to a new magnitude they couldn’t measure: “utility”. The thoroughly discussed limitations of the proposals from each author proves the point. They just switched magnitudes, with the same problem persisting between both.

In order to come up with a more positive final reflection, maybe no individual proposal has succeeded to give a satisfactory solution to the problem. But, can we learn something from looking at the evolution of all of them together? I believe so. It can be observed, that at the beginning of history of thought rationalism dominated the scene, and hence the answers were absolutist. Thus, initially, the notion of value was seen as an objective and universal truth, and prices ought to reflect it. Progressively, thanks to the key step undertaken by Thomas Aquinas, it was admitted that market forces and circumstance could alter the price, evolving to a mixed perspective. Smith and the other classical authors maintained that perspective and developed it.

Anyway, as economic knowledge grew more complex, the focus shifted from production cost based value to exchange determined prices. As a result, prices took the edge, displacing value to a subjective notion (yet not disappeared, look at current debates such as the increased price of toilet paper during a pandemic, or folks questioning if IPhone is actually worth its elevated price. Reminiscence of old intrinsic value notion is still appreciated) The thing is, the theory of value and price formation, started in the absolutism and, due to complexity, has evolved towards subjectivism.

This is actually an ongoing, much broader, topic, nowadays, involving any type of knowledge and with its core in a deeper philosophical debate: rationalism (traditional) vs post-modernism (new), which goal is to clarify the nature of truth itself. Infinite discussion has taken place over this, yet the dilemma remains unresolved. I have already given my thoughts on what respects to economics a few lines before.

Yet, both approaches have failed to resolve the value issue. That leads me to think the problem with economics is not there, not if there is such an absolute truth. The problem, as I have thoroughly discussed, is the methodology used by either approach to try to find an answer: It has the wrong focus. Both classical and neoclassical thinkers treated economics as a formal science and seeked to establish laws and theorems, whether those were based on objective or subjective criteria.  I said it on entry I, economics is a social science, because it deals with humans. And the subject of study, persons, are not constant, which is the requisite for establishing such laws, it is continually evolving and can be altered by too many factors in too short of a time.

Maybe, what economist should do, is start to better understand human behavior, which is the actual law by which the subject of study works. In doing so, they might be able to finally collect enough data as to resolve the big question of absolutism vs relativism, and start establishing more grounded and accurate laws, that don’t deal with expected scenarios, but with actual phenomena. I am positive to this, I see that Samuelson already suggested the importance of a behavioral approach (although he ended up falling in the vice of surrealistic assumptions) thus seeding the ground for the future arise of behavioral economics. Besides, Debreu admitted that mathematic formality was incompatible with human instability.

I might have extended more than intended on this entry, but I will cut it down on the following since now, after this exposition, I can finally make my point:

Maybe economics should stop relying on maths and other formal methods so heavily, and start to get additional help by the disciplines actually related to its subject of study, the human being. Descartes already adverted the relevance of choosing a sound method. I will build further on this idea on the following entries, but for today that’s all.

 

AUTHOR: Pablo Moral Pérez

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