“‘Nowadays people know the price of everything and the value of nothing.’ Oscar Wilde in The Picture of Dorian Gray.
WHAT is economic value and how is it created? This a key question and one that hasn’t seriously been addressed for a long time. For some it underpins all the critiques of modern capitalism including extreme individualism and the atomization of society. We all know about inequality, which was one of the problems discussed at Salisbury Democracy Café on 11 January, and the concept of the Superhero Homo Economicus is all powerful. The philosophical underpinning for this comes in the form of libertarian philosophers like Robert Nozick in Anarchy, State and Utopia. Meanwhile Ayn Rand expressed it in literary form in Atlas Shrugged. It was driven by economists like Hayek and Mises and politically by Thatcher and Reagan. But is there an underlying narrative that holds all this together?
It turns out that there may be – and it has all to do with the definition of economic value. According to Mariana Mazzucato – Prof in the Economics of Innovation and Public Value at University College, London – in her book The Value of Everything. According to her the first attempt to establish a formal theory of value was made in the mid-18th century by a group of French thinkers dubbed the Physiocrats. One of them, Francois Quesney, thought that value rested in the soil – or rather the farming of the soil. But it was Adam Smith, followed by David Ricardo, who first attempted to establish value in labour. And then Karl Marx refined these theories and came up with his own theory of value, culminating in the claim that ‘labour power creates surplus’, which is then expropriated by capitalists. This was his answer to the question relating to how capitalists and financiers came to be so rich when value was created by labour. Indeed, this was a very awkward question for the wealthy clique who desperately needed an alternative narrative, one that would justify their privileged position.
A group of thinkers including William Thompson, Thomas Hodgskin and John Gray came up with the solution in the form of Marginal Utility theory, which, according to Mazzucato, states that ‘all income is rewards for a productive undertaking’. Up until now value was assumed to reside in labour or the land, but Marginal Utility theory conveniently turns this on its head so that instead of prices being determined by value, value is determined by price. This means that all income and wealth is justified because income and wealth determines value. For our purposes, the significance is that whereas previously thinkers placed non-productive (wealth extraction) and productive (wealth creation) activities in separate categories, Marginal Utility theory placed them in one category – wealth creation!
However, for all this to work as it should two more assumptions were required. These were provided by ad hoc additions in the form of ‘rational choice theory’ – giving rise to our Superhero Homo Economicus and allowing its proponents to categorise unemployment as a lifestyle choice and poverty the result of poor decisions – and the notion of ‘equilibrium with perfect competition’ with its private good/public bad narrative. Lo and behold! You now have an entirely different theory of value and one that at a stroke eliminates the value of labour itself, not to mention Marx’s view of the volatile dynamism of capitalism.
Mazzucato concludes: “I have tried to open the new dialogue by showing that the creation of value is collective, that policy can be more active around co-shaping and co-creating markets, and that real progress requires a dynamic division of labour focused on the problems that twenty-first-century societies are facing.”
The problem is that Marginal Utility theory and its corollaries is so dominant that it doesn’t even appear as a theory but simply a part of the natural world like the air we breath. Even the Great Recession of 2008 barely dented it. And students of economics in our universities are not taught about alternative theories. But we should remember that for decades thinkers like Hayek and Mises were outriders and it was years before their ideas started to gain traction as Les Trente Glorieueses began to unravel. It’s happened before so it can happen again but it needs many more books like The Value of Everything and other communicators to make the case before we can finally announce the death of our Superhero – Homo Economicus.