Friday, November 14, 2014

Ismael Hossein-Zadeh — Class Interests as Economic Theory

Succinct explanation of the transition from classical to neoclassical economics and marginalism.
The formal theoretical shift from classicism to neoclassicism was pioneered (in the last three decades of the 19th century) by three economists: William Stanley Jevons, Carl Menger and Leon Walras. A detailed discussion of these pioneers of neoclassical economics is beyond the purview of this essay. Suffice it to say that all three categorically shunned the labor theory of value in favor of utility theory of value, that is, “value depends entirely upon utility,” as Jevons put it. 
At the heart of the theoretical/philosophical shift was, therefore, the move from labor to utility as the source of value: a commodity’s value no longer came from its labor content, as classical economists had argued, but from its utility to consumers. The new paradigm thus shifted the focus of economic inquiry from the factory and production to the market and circulation, or exchange. 
By the same token as the new school of economic thought abandoned the classicals’ labor theory of value in favor of the utility theory of value, it also discarded the concept of value, which comes from human labor, in favor of price, which is formed (in the sphere of circulation or market) by supply and demand interactions. Henceforth, there was no difference between value and price; the two have since been used interchangeably or synonymously in the neoclassical economics. 
Once the focus of inquiry was thus shifted from how commodities are produced to how they are bought and sold, the distinction between workers and capitalists, between producers and appropriators, became invisible. In the marketplace all people appear as essentially identical: they are all households, consumers or “economic agents” who derive utility from consuming commodities, and who pay for those commodities “according to the amount of the utility/pleasure they derive from their consumption.” They are also identical in the neoclassical sense that they are all “rational,” “calculating,” and utility “maximizing” market players. 
An obvious implication (and a major advantage to the capitalist class) of this new perspective was that in the marketplace social harmony and “brotherhood,” not class conflict, was the prevailing mode of social structure. “The supposed conflict of labor with capital is a delusion,” Jevons asserted, arguing that “We ought not look at such subjects from a class point of view,” because “in economics at any rate [we] should regard all men as brothers” [8].
It should be pointed out (in passing) that the utility theory of value did not start with Jevons. The theory had already been spelled out in the late 18th and early 19th centuries by earlier economists such as Jeremy Bentham, Jean-Baptiste Say, Thomas Malthus and Claude Frédéric Bastiat. However, Jevons and his utilitarian contemporaries of the second half of the 19th century added a new concept to the received theory: the concept of marginal utility or, more specifically, diminishing marginal utility. According to this concept, the utility derived from the use or consumption of a commodity diminishes with every additional unit consumed. 
Despite the fact that Jevons’ addition of the concept of marginal utility to the received utility theory of value was conceptually very simple (indeed, the whole concept of utility and the so-called “law of diminishing marginal utility” are altogether banalities or truisms), it nonetheless proved to be instrumentally a very important notion in the neoclassical economics. For, the term “marginal” was soon extended to other economic categories such as marginal cost, marginal revenue, marginal propensity to consume, and the like; thereby paving the way for the application of differential calculus to economics. “By introducing the notion of marginalism into utilitarian economics, Jevons had found a way in which the utilitarian view of human beings as rational, calculating maximizers could be put into mathematical terms” [9].
Counterpunch
Class Interests as Economic Theory
Ismael Hossein-Zadeh | Professor Emeritus of Economics, Drake University

3 comments:

Ryan Harris said...
This comment has been removed by the author.
Roger Erickson said...

Well said Ryan!

"Economists make the most basic and stupid errors when they analyze and mix statistics."

Sums up all I've learned about orthodox economics. It used to be only grossly over-anthropomorphic. Now it's grossly over-class-based too. Might as well conduct in all in Latin while waving incense.

When will aggregates get incensed at the charlatans?

Ryan Harris said...

When they accepted that markets are basically efficient over the long term, that meant price basically represents utility. Then when they measure things like productivity differences using prices instead of measuring real inputs and outputs, the real value of inputs and output are obscured by markets which are imperfect. And the calculations became even simpler and more misleading because they could assume that averages are skewed but the skewing is justified because it implied that those less productive needed to be encouraged to change their behavior.

So an optimal economic condition might include 1 person making 1 million dollars and 1000 people making $1,000 rather than 900 people making $2,000 and 1 person making $100,000 (and 100 foreigners making 100 dollars!). As the economists say, we're all better off because there is more real output in the former, even though most are twice as poor and can afford to procure less in real terms while a few live lavishly and save lots of money to become even richer.

Economists make the most basic and stupid errors when they analyze and mix statistics. None of it is a big secret either, you can go to a place like the BLS and the statisticians disclose the flaws but the theoretical economists pretend they don't understand. Then a guy like Piketty comes along and dawns a cape and leotard says he has discovered some deep new pattern in capitalism. *puke* Sick and disgusting.