The other day a conversation on here veered towards the labor theory of value*. That made me think of a really great video that Don Boudreaux recently made about subjective value. One of the brilliant things about Don's video is that he was able to cut straight through the issue by essentially doing what econometricians do in his example: holding objective or labor value constant and looking at how value varied with subjective preferences. He had two t-shirts that he made with the same iron-on technology, the same amount of time, the same effort, etc. One had an iron-on image of Che Guevara and one with an image of Milton Friedman. He was easily able to explain from there that the costs of the Che t-shirt were the same as the Friedman t-shirt. The difference in prices (everyone - particularly market skeptics - know Che t-shirts sell well!) could clearly be attributed to subjective value in this case.
In thinking about actual objective value theorists, though, I began to wonder if we should cut them some slack. What occured to me was that the genius of Don's example was entirely derived from modern product differentiation. In the early 19th century you didn't really have iron-on t-shirts. You had much less variety and product differentiation in general than you do today, so I imagine it would be hard to do a thought-experiment holding costs constant. One of the greatest sources of poverty before the industrial revolution was precisely the lack of variety, choice, and diversity. One could say that precisely because the market responds to subjective values we have more examples to draw on today of the impact of subjective value theory than we did in less prosperous times.
One of the lessons of this, of course, is that product differentiation is in and of itself a product of the market and an important element of progress. Edward Chamberlin, the American developer of monopolistic competition theory (it was simultaneously discovered by Joan Robinson in the UK) acknowledged the importance of product differentiation for value theory in the sub-title to his book: "The Theory of Monopolistic Competition: A Reorientation of the Theory of Value".**
*There's still an open invitation to Mattheus to explain what he meant when he said that Keynes had a labor theory of value - we all were confused by that and Mattheus didn't seem interested in backing it up - I don't know if that means he's conceded or not.
**People have also made a lot of the differences between Robinson and Chamberlin on this question: Chamberlin saw product differentiation as welfare-enhancing. I agree, but I think people are often too hard on Robinson in this case. Yes, product differentiation is welfare-enhancing, and yes we would rather have differentiated products and choice rather than homogenous products, but that doesn't seem like any reason to deny the market power or excess capacity issues that also come out as results of monopolistic competition. As is often the case in intellectual history, some people have built up Robinson and Chamberlin as being deep, opposing thinkers. I think this is silly - economics is not a morality play.
Tuesday, July 19, 2011
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Don Boudreaux's video is ignorant and incompetent. Nobody has ever claimed that market prices cannot differ from prices of production. And one can introduce barriers to entry into an analysis of prices of production. Supposedly Paolo Sylos Labini did just this in some unpublished work in the 1960s.
ReplyDeleteChamberlin tried to differentiate his product from Robinson. Robinson didn't care since she ultimately rejected that analysis as being set in logical, not historical, time. Who, besides Chamberlin, has built up "Robinson and Chamberlin as being deep, opposing thinkers"?
"In the early 19th century you didn't really have iron-on t-shirts. You had much less variety and product differentiation in general than you do today, so I imagine it would be hard to do a thought-experiment holding costs constant. One of the greatest sources of poverty before the industrial revolution was precisely the lack of variety, choice, and diversity."
ReplyDeleteThe early 19th century was part of the IR.
Anyway, there were plenty of consumer goods by the 1600s and 1700s by which one could have made the subjective theory of value seem plausible. Sugar is one that comes to mind - white sugar being valued over less white versions of sugar - unless you think that varying levels of bone char are significant enough levels of labor inputs to create the significant price difference between white sugar and slightly less white sugar.
I'm not always impressed or in agreement with Don, but there's nothing ignorant or incompetent about this video. If all you're saying is that people have always had more nuanced value theories than we give them credit for, you're almost certainly right. But if you think glossing over that in a short video amounts to ignorance and incompetence, I think you've got an extremely skewed sense of what Don is trying to say. There's a reason why subjectivist theories of value are dated to the 1870s. There was an important and undeniable shift in thinking on this.
ReplyDeleteAs for who besides Chamberlin - how about the guy I linked to Robert?
Chamberlin's QJE article on the subject is much less pronounced than the Bellante article I linked to. Chamberlin more or less says "a lot of people think that I'm responding to Marshall like Robinson, but actually I came at it from a different set of interests". Contrary to what you seem to be implying, Chamberlin himself didn't really bash Robinson that I'm aware of.
Gary -
ReplyDeleteI'm not fighting with you today over dumb stuff like this. I haven't claimed there was no variety to make these distinctions about, I claimed there was much less. Subjective assessments become less paramount in people's minds when you're living relatively close to subsistence, which was the condition of even the most developed parts of the world when classical economics was coming to fruition.
At subsistence level, everyone's subjective values are pretty similar.
I feel like Bourdeux is just restating some basic intl trade theory.
ReplyDeleteI had meant to post a reading list that deals with a long intelectual tradition of treating Keynes with a labor theory of value when this first came up but I'm in the middle of re-installing my tub and our house is unlivable without a shower so no blogging for me. Here is a post from my blog with a suggest reading list.
http://pigphilosophy.blogspot.com/2011/06/nopinion-libertarians-and-thier.html
Basically the idea of labor value is proposed as an alternative to thinking about capital as something that gets paid its marginal product and that the interest rate and profit are the same thing (as "marginalists" would have it). I've actually only started delving into the literature myself. There is a good wikipedia page about the "capital controversy" too.
One other thing that complicates all this, of course, is marginalism. Profits are maximized when marginal revenue is equal to marginal cost. We know the MC of the two t-shirts is equal. Che will keep getting printed until the market is saturated and the marginal benefit to consumers of an extra Che t-shirt IS actually equal to the marginal benefit of a Friedman t-shirt.
ReplyDeleteStill, I think Don's illustration is instructive. After all, to refute this simple version with an MR=MC argument you have to acknowledge that MR actually has a role to play!!! Which is essentially the subjective value point anyway.
Daniel,
ReplyDeleteThe point is that the evidence was there for those open to it - particularly those writing on the subject. Adam Smith is as I understand it all over the freaking map - he is constantly tinkering with the theory of value in other words. I suspect that is because he grew up in a commercial environment and was around commercial people most of his young and early adult life.
There was always vigorous debate about this from the classical world onward and Catholic orthodoxy on the subject never quite won the day in the middle ages.
So I'm not really for cutting them any slack.
This is a complicated subject. There were really many different labour theories of value. Some of them are seen by those using them as truly fundamental and basic. Others saw them as something like a microeconomic equilibrium theory. In that case it begins from the idea that some things have use-value and some don't.
ReplyDeleteRobert Vienneau,
Do you hold a labour theory of value yourself?
Che will keep getting printed until the market is saturated and the marginal benefit to consumers of an extra Che t-shirt IS actually equal to the marginal benefit of a Friedman t-shirt.
ReplyDeleteThat's the benefit to the individual. The "subjective" value of the Che shirt is still higher if you think of it in the aggregate. In which case the "consumer surplus" generated by the che shirt is larger than the consumer surplus generated by the friedman tshirt.
Right Andrew - the video uses the word "value" too (instead of "price"). But he's got dollar signs on the diagram and just to clarify - people need to be careful in how they talk about it, because price is likely to be equalized between the two points.
ReplyDeleteNot a big concern, because like I said by the time people can make this sophisticated of a counter-argument it means they already understand marginalism and subjectivism because you can't make that counter-argument about price without having accepted subjectivism.
Consider this comment:
ReplyDelete"Che will keep getting printed until the market is saturated and the marginal benefit to consumers of an extra Che t-shirt IS actually equal to the marginal benefit of a Friedman t-shirt."
and my comment:
"Nobody has ever claimed that market prices cannot differ from prices of production."
I think these two comments say fairly close to the same things in different theoretical languages. (The Non-Substitution Theorem is a rigorous statement of some such idea.
This sophisticated of a counter-argument about price - being close to Ricardo's - can, of course, be made without having accepted subjectivism.
What's truly interesting about the Che shirts is that most of the people who wear them would either not be alive under a regime run by Che (and they certainly wouldn't be able to listen to decadent Western music) or they'd be in some sort of gulag.
ReplyDeleteI don't know... slapping a revolutionary leader's face on your stuff has traditionally been a pretty good way to stay in the good graces of said revolutionary leader.
ReplyDeleteNow seems an appropriate time to link to this: http://reason.tv/video/show/killer-chic
ReplyDeleteDaniel: there's no presumption that differentiation is welfare-enhancing. Do you know the Hotelling circle model where firms locate around a circle of customers who incur travel costs? In the competitive, zero profit,equilibrium
ReplyDeleteyou have twice as many firms as would be optimal in the sense of minimizing the sum of production and travel costs.
I tried posting already and it didn't seem to take, so I'm trying again. If both do show up, sorry for the duplication.
Kevin Quinn
Well I noted the excess capacity under monopolistic competition relative to "perfect competition".
ReplyDeleteBut it's an odd comparison to make, isn't it? You're saying monopolistic competition reduces welfare relative to a competitive situation where the dimension on which products are differentiated doesn't exist!!!
I never quite know how to think about inefficiency in a product differentiation perspective. The demand curves for any kind of competitive benchmark are fundamentally different from the monopolistic competition demand curves because the competitive case ignores differentiation. So on what basis to we judge welfare? You're comparing apples and oranges.
What is the Hotelling model (I believe his was a line - Salop's was the circle) welfare reducing relative to?
I'm afraid making these welfare claims for things like the Hotelling model amounts to saying "in a world where we can instantly transport places and don't have to locate stores and specific points in space, choosing to differentiate stores by location in space would be welfare reducing". That doesn't seem to tell you much.
Robert Vienneau, doesn't what you say change though if returns to scale are not constant?
ReplyDeleteWoops. I wrote that comment and I forgot to check back. Let me do that now.
ReplyDelete"doesn't what you say change though if returns to scale are not constant?"
ReplyDeleteIf the assumptions of the non-substitution theorem are false, the conclusions need not hold. I've discussed a case, for example, with joint production.
It is still the case that one can calculate prices of production, given (1) the levels of output in each industry, (2) the technical coefficients at these levels, (3) the distribution of income, and (4) maybe some technical assumptions such as the rate of growth being close to the rate of profits, in some sense.
The vision, underlying the marginal revolution, of prices as scarcity indices is simply incorrect, both theoretically and empirically.
Cost-based theories of value attract much derision, but can still act as very reasonable proxies for value (= market clearing price) in many cases... Especially in sectors characterised by high competition and resource availability.
ReplyDeleteDaniel: I should have been clearer. I am interested in the socially optimal amount of differentiation and how that compares to the monopolistically competitive equilibrium. So in the circle model - I guess it was Salop, not Hotelling, as you say- let there be one customer for every unit of distance around the perimeter. Firms locate D miles apart. For simplicity, let firms have only a fixed cost, no variable costs (this doesn't alter the result). Each customer demands one unit inelastically and will get it where it is cheapest net of travel costs, which are t*the distance to the firm for some constant t. If a firm charges P while his neighbor on the right charges P* he sells a quantity d defined by:
ReplyDeleteP + td = P* + t(D-d) so has an inverse demand curve, therefore: P = P* + tD -2td and his profit-maximizing price is (P* + tD)/2. The Bertrand equilibrium price is then tD and he sells D/2 units in each direction so profits are tD^2 less fixed costs. Entry leads to zero profits , so in the market equilibrium D=the square root of FC/t. The optimal D is the one that minimizes the sum of production costs and travel costs. You want to minimize:
FC/D + tD/4 (the first term is unit production costs; the second is average travel costs. The D that minimizes this is equal to:
2* the square root of FC/t. So optimally there ought to be 1/2 as many firms serving markets twice as big. Travel costs will increase by less than production costs fall.
I could have asked Robert Vienneau loads of things about his theory:
ReplyDelete* What about multiple non-produced resources?
* What about technology changes and their application by entrepreneurship?
* What about discovery of new resources?
* What about changes in government policy or wars?
* What about changes in taste, including taste for work?
If the result that "taste doesn't affect prices" isn't robust if we have joint production then it isn't robust in the real world, the same is true if it isn't robust to non-constant returns-to-scale.
I agree, of course, that it's very important that labour is used to produce output that are worth more than inputs. But, to make cost-of-production theories of value plausible it's necessary to assume that either even-rotation has been achieved, or only labour is scarce in the long run. Robert does both on his blog.
But, neither of these assumptions are relevant to real economies. In real economies the capital, both human and physical, that we are gifted by posterity is the result of accident as well as design. That means how they are used always requires marginal decisions. But, since we don't live in even-rotation they are important to practical economics.
I don't think the models that Robert Vienneau gives on your blog are relevant to any practical economic issue.
Stickman,
I don't think marginalists would disagree with you. If the production techniques are well known then costs of production dominate price and profit is small. But, this is well explained using marginalism. The production knowledge is not scarce. While the capital equipment needed and labour needed can be bought at similar prices by all competing businesses. Competition therefore brings prices down.
This doesn't mean cost-of-production theories of value are valid since for them to be valid they must apply across all capitalist economies. In this case the marginal productivity of the inputs is still important.
It is simply false that for an approach emphasizing prices of production to be valid, even-rotation must be assumed to have been established, only one non-produced resource must exist, technology must be unchanging, new resources cannot be discovered, etc. All of these issues have been discussed in the literature.
ReplyDeleteI know.
ReplyDeleteMy point is that
* Your approach generally works that way.
* Without making these assumptions you can't get rid of marginalism in a meaningful way.
@ Current,
ReplyDeleteYes, I think we are pretty much on the same page. Like most of us here, I owe a great intellectual debt to the marginalists. (Jevons more than the others, though that lies more with my area of specialisation than anything else.)
My point was more to counter some of the knee-jerk disdain that I see attached to CBToV. Yes, they offer an imperfect understanding of "true" value in many sectors, but still yield very fruitful starting points. This matters particularly for goods characterised by imperfect markets (e.g. water) and non-market valuation techniques.
Stickman,
ReplyDeleteSuppose we have a water company that is a regulated monopoly in a particular area. Costs can be compared between it and a second water company in a similar sort of area. If the first water companies costs are higher then that would suggest that they aren't as efficient. If the costs are similar but the profits of one are higher than the other then that means that customers are being charged more than they could be.
Is this the sort of thing that you mean? I don't really see this as an application of the cost of production theory of value. I also think that this sort of cost-of-production thought really relies on marginalism, even if it scorns it.
Bohm-Bawerk discusses this humourously in the paper "Value, Cost, and Marginal Utility" translated here by Reisman:
http://www.capitalism.net/articles/Reisman%20Full.pdf , see p.36-37 of the documents pages or p.55-56 counting the PDF files' pages.
Current,
ReplyDeleteSorry if I wasn't clear, but I more meant revealing the value of unpriced inputs (such as water) in cases where a relevant, priced comparison might not be available. So, for example, the logic underlying the residual input approach to determine the value of water as an intermediate good in production (e.g. see pp 32-33 of this document.)
I was really just trying to give a quick practical example of how this type of value approach could be useful to us. You are quite correct, however, that this is really an extension of marginalism.
With regard to water markets, competition and pricing, I'm pretty sure we'd be in similar camps. Some of my thoughts on these issues can be found here.