Thursday, June 07, 2007


There is a concept of classical economics that attempts to ascertain the source of value (and thus prices) of commodities. Marx used it in his work, Das Kapital, but he just got it from Ricardo and Smith and developed it. Modern economics, known as "neo-classical", claims it has discovered the TRUE source of value, refuting Marx, Smith, and Ricardo. Classical economics gave us the labour theory of value and neo-classical gave us marginal utility. Each seeks to explain the basis of an economy.

They both make sense - to an extent. This will provide a brief overview of the ideas, their strengths and weaknesses, how they differ, how they are similar and complementary, and the addition of my own mad ramblings.

Marginal Utility (MU)

Let's say I have a hard drive that stores 30 GB. On it, in equal partitions, I have:
But suppose before it dies, I manage to get a new one, 40 GB, and move all my files over. I now have 10 GB of space I didn't have before. I now can use that as server space, and get greater utility out of it, which was dependent (in this case) on how much of it (hard drive space) I have:
In this instance, we can see that a larger hard drive is better because I can do more with it. Using this ordinal ranking, I can determine which hard drive I should buy, which determines how much I am willing to spend, and thus how much it costs.

By itself, MU is dangerous. If we base values on "utility" (based on price), and seek the greatest return for the minimum of outlay, we may begin to alter our standards. Instead of a delicious, enjoyable meal, food becomes something that makes you stop being hungry. So a consumer has a few bucks in his pocket, is hungry, and patrons a fast food restaurant. The value of the stale, congealed meat; starchy bread; wilted veggies and rancid mayonnaise is that it made the hungry fellow not hungry, and all for pocket change! I think this can be attributed to the MU assumption that utility = value = price. Goods on a market have a tendency to drop to the poorest quality standards that consumers are still keen on purchasing. I must also include anti-free will rhetoric, because, once again, "free" will gets in the way of true understanding:

Company A and Company B both make Product X and sell it for the same price. Company A invests in research to make X better, whilst Company B invests in advertising. Company B sells more units of Product X because they convinced more people to buy it than did Company A, which actually created a better product.

This is why even poor quality goods are available and purchased by consumers. If we're all rational, free agents as neo-classical economists would have us take as a prerequisite for MU,
we would expect (hope!) that the quality of goods on a market would begin to increase, not decrease. Advertising would simply be a way for consumers to become aware of the product. (Tactics of media saturation suggest otherwise.) MU hides potential by obscuring value behind an attractive price. The coop grocery where I shop offers goods at slightly higher prices than other retailers. Part of this is the small, local, coop nature of the beast, but it also has to do with the difference in quality of the goods of the goods offered. I have a great habit of reading labels, and have noticed time and again that cheaper, lower-quality goods are actually a worse buy than the higher-priced but also -quality goods, if value (nutrient abundance and variety) has anything to do with price (nutrient to cost ratio).

Another problem with MU is that it doesn't really explain the source of potential value. It is all very well and good to know how much more worthwhile an activity is, but by what universal standards would they be determined?
If we don't have a basis for value determination, we cannot truly appreciate the value of a product of an activity. Emphasis may be placed on tasks that yield values less desired over others. They do, however, yield a profit. Milton Friedman, an important neo-classical economist said:
There is only one social responsibility of business: to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which to say, engages in open and free competition without deception or fraud.
Whew! And here I thought we had to make quality products with love and care for individuals with whom we interact in the community without messing up the environment and indigenous cultures too much. Focusing on profit and assuming it represents real value, I can do anything that makes me a quick buck and feel good about it!

This is a snippet from a discussion I had with someone a while back and expresses their direct, unadulterated sentiments. It needs to be included as an item to be addressed:
Let's say you flip burgers in a nation with a relatively free market. Well, chances are you have no qualification beyond burger flipping. If you do, then there are probably too many people who have the same qualification, so there are no jobs. The cold truth but nonetheless the truth is that burger flipping is unfortunately the best you can do to help society
At this point, you may be wondering who gets to determine which task has more utility. Someone has to determine the value and worth of people as they relate to each other productively. With this in mind,
we see that value potential and value output determination is dependent on profit. McDonald's serves poor quality goods because it's after a profit. Wal-mart sells literally tons of cheap goods made in China, at a most inefficient expenditure of finite fossil fuels, because it seeks profit. Someone determines your worth to society as a measure of how useful (profitable) you are to them.

It should come as no surprise that neo-classical economics places itself in opposition to classical, and thus Marxian, value appraisal methods. While MU has some validity, that is, at times utility does equal price and does equal value, without considering anything else, MU becomes an excuse for the abuses of the existing power structure.

By rejecting LTV, neo-classical economists can ignore the bulk of the critique modern environmental movements have about business practices, and almost all of what Marx had to say about capitalism, even as they adhere to the concept of the "invisible hand" that Adam Smith developed in classical economics.

Labour Theory of Value (LTV) This idea can be abstracted to a great many applications and circumstances, and it is in our distant past that I believe we developed an innate sense for it.

Suppose there are members of a small hunter-gatherer group each engaging in some unique activity. One gathers nuts, another berries, yet another roots, etc. The one with nuts has way too many nuts, the one with berries has far too many, etc. They bring their appropriations to a central location and trade their surplus goods for varied other goods. No money is used; it is all barter. Each gatherer determines the value of other goods in relation to their own, even though they don't want to keep all of what they have. Some exchange rate is decided, like,

3 nuts = 1 berry


10 berries = 1 root

Since no money is used, and each member indeed does determine some "value" of the goods available, how is this value reckoned? What does that equal sign equal?

Each and every member of this trading group expended a certain amount of labour to gather and retrieve the goods they brought together to share. As hungry monkeys, they want to recover the energy they used up and get a little extra for their trouble. They trade goods to get some nutritional variety.

This overly simple and crude model demonstrates that trade and exchange need not occur with money, but also that the source for much of our value appraisal takes place in relation to other products and in a social setting. Studies of animals in the wild suggest that organisms can assess energy needs and returns. A cheetah, for example, will chase after an antelope only for so long. Any more, and the cheetah may be expending more energy than she can retrieve, after which time she let's the prey escape. In this way, animals shape their behaviour. It should come as no surprise that humans have this ability as well. It is my humble thought that in the previous example, each member was aware of the energy they themselves expended, and could even roughly gauge how much effort was put forth by the others. These undoubtedly were factors in their decisions.

If we take LTV as the sole source of value, we have trouble assigning relative importance to particular tasks. There is also a degrading effect on humans by thinking of them as merely a source of labour, a means to an end. Inherent to these is waste and hiding of potential:

A big difference between classical and neo-classical is their mutually exclusive adherence to and acceptance of LTV and MU, respectively. If it is to come to such a stand off, I would have to say that LTV is better than MU, because it actually represents a real, concrete thing: labour. Subjective value judgments, although meaningful, cannot be indicative of value of expenditure or return.

Separate and opposed, they are each dangerous as a method of value determination. But I don't think it has to be this way. I think both make sense together.

An example that I find interesting is art. I like to use old cardboard and other "trash" materials to make art. When I dig something out of the trash and bring it home, it is still just that, a piece of trash. Right before I start to work on it, though, I get nervous. What if I mess up? What if I ruin it?

Ruin it!? It's a piece of trash! How could it be that even before I begin to work on it, something that did not matter to anybody mere moments ago, I value it? This is where marginal utility comes in. After I finish it and hang it up, I enjoy it because I put effort, patience, and concentration into it. I fulfilled some desire by labouring honestly for it; my labour becomes embodied in the object. This is labour theory of value. The two ideas together go a long way in explaining how we value commodities. When someone sees a work of art, they can appreciate the time, skill, and effort that went into the piece, as well as the subjective themes or expression of it. If they were to purchase the piece, both factors would be considered.

From an abstract standpoint, all labour, all effort is value, simply because it is energy expended. Ordinal rankings help determine relative values of activities, because not all labour is valuable. Thus, MU is a layer of value determination.
From previous hypotheticals and examples, it can be seen that this system, even as the combination of two major theories of value, is incapable of addressing all aspects of value. The Wal-Mart example with the waste of fossil fuels cannot be resolved with LTV nor MU. Therefore, I will introduce my

Mad Ramblings (ETV)

Fossil fuels contain energy that we utilize to power our modern economy. As monkeys, we jitter in cubes and factories, adding our own energy. Our special efforts combine knowledge and experience of currently alive individuals as well as those of the past in a unique way - though it is still energy. It is therefore logical and prudent to begin with this as a universal measure.

With this understanding, we can approach the question of value determination from several angles. As mentioned before, we have labour and relative utility, but now, thanks to the energy theory of value, we can measure net energy, comparing initial energy costs to total energy output:
Now we have a system that factors into the cost of production the use of fossil fuels and other energy expenditures. Right away we can see that the costs of pollution on human health alone far outweigh the costs of preventative measures. A recent White House study concluded that a total of $120 billion and $193 billion was detracted from the economy to deal with the effects of pollution (hospitalization, illness, etc). About $23 billion to $26 billion was allotted to reduce such pollution, which is a fair amount below the cost of ignoring it. So, looks like businesses that write off environmental concerns as a threat to their bottom line are actually hurting themselves.

Conveniently, ETV integrates well with our modern information and energy dependent society, providing a standard of value. Energy is analogous to information, so viewing information embodied as energy allows it to become a commodity like anything else.

This understanding becomes really good at making sense of blogs and open source. I was asked in the park once if I felt that our generation was more industrious than previous ones. Affirming this was so, I made the case that work we do is often not economically fruitful labour (monetarily), but labour nonetheless. I certainly don't get paid to blog, but feel it is productive. The entire open source movement relies on people volunteering their labour and time (and thus energy!) to survive. It does more than that, and, in my opinion, a lot better than other methods of software development, because it reflects an appreciation of LTV and MU. Labour is allocated to maximize utility (that is, returns on energy investment), not to maximize profit - which, as we have seen, is by no means a meaningful standard of value.

Considering energy costs and use helps us spot dependencies in terms of energy. We see that Wal-Mart is horribly dependent on fossil fuels, not only in the use of overseas transportation, but also the electricity generated (without environmental concern) by China. We are dependent on each other in terms of energy. From an LTV standpoint, by being aware that the line of dependency flows from the workers to their bosses, and that the line of profit flows the opposite way, by being aware of who directs whom in productive (energetic) activity within a corporate hierarchy, we can dismantle and reshape our interactions to reshape economic structures, hopefully more along democratic, autonomous, and decentralized lines (see: open source movement, wikipedia, libertarian socialism, etc).

Another ancillary idea is the connection between life, energy, and information as value. Concern for the environment is very often a low priority for businesses operating with profit as a goal. They do not factor in nor appreciate the energy stored in bio-systems, and often mutilate them horribly. Wasteful excesses like the planned-obsolescence of Wal-Mart products and the obscene disregard for nutritional value and environmental concerns of fast food places like McDonald's can no longer be written off as being necessary for creating value. By considering our world in terms of energy, appraisal of products becomes more than just a matter of what they cost to us in terms of money. Suppose cars were designed with energy use in mind, as a rule, or new appliances were designed around efficiency. To do these things and be consistent about it, we must have a consistent framework for understanding, judging, and reacting to our need and use of energy. Now we can include other, wider-ranging concerns, many which can also be included seamlessly with energy - like life. Rather than compete with and/or out-and-out destroy nature, perhaps we can learn to mold it (nicely!!!) to our mutual purposes.

Historical Materialism, Energy, and Kondratieff Long Waves

In keeping with a materialist conception of history and economics, it follows that I would accept and defend LTV more than the subjective-value-based MU, and include real, quantifiable energy as another source of value (ETV).

A nice bonus to this framework is a greater understanding of the changes wrought by the industrial revolution(s). Machines become an active participant in the use of energy. Sure, humans have been utilizing power external to themselves for a very long time (camp fires), but never in such cleverly directed and enormous amounts.
No surprise that the inclusion of machine power rocketed a bunch of motley monkeys into a world of material abundance. In the process of using machines as an aid to production, humans use them as a source of profit, often at the expense of those humans of lesser means. The rate of expansion of industry and the world market allowed more and more wealth (energy) total to be developed. But the shares of this energy were increasingly gobbled up by those in a better position to do so, such that of the total energy input, those who participated very intimately with the creation process (the workers), received less and less for their efforts.
Two thoughts to mention here. If the inclusion of machine power increases the total energy output, why did workers end up working longer hours? Secondly, there was a dramatic change in the ownership patterns of society following a revolution in machine technology. An economist by the name of Kondratieff noticed certain patterns of behaviour when it came to the inclusion of new technology and the stagnation and obsolescence of old technology. He also included other events like wars to make a compelling chart showing something called "Kondratieff Long Waves".

A profound warning from several Marxian scholars whom I read is the ability of unscrupulous power-mongers to monopolize or otherwise restrict information, skill training, technology, etc. Very often this is to the great detriment of those who lack these things. Well, if K-Waves are to be believed, there will soon be another shift in technology and energy utilization, and a new opportunity for more equitable energy distribution. It could be that we are being set up for the most horrible of repressive regimes to develop in the wake of awesome technology, or perhaps a new foundation upon which we can finally curtail idiotic and greed-induced destruction.

Biotechnology serves as a great example of this. New and exotic treatments and cures can be developed thanks to more powerful analytical tools and other advances. At the same time, though, a great chance for abuse begins with the creation of a patent system that caters to biological information (which is, as previously established, synonymous with energy) being restricted for profit-based use. I have already shown that value is not the same thing as price, and profit does not necessarily mean a net gain. Such restrictions on use accentuate already existing power distortions, favouring those who have plenty of it already. When crops with self-terminating seeds are the dominant mode of agriculture, society will necessarily be VERY dependent on a VERY small group of people for their very subsistence needs.

Software also has this potential problem. As mentioned before, open source is a much more viable approach to maximising utility because profit does not direct activity. Patenting software for profit reduces the potential for maximising utility. If A.I. is to come about, we must acknowledge that a great potential for abuse lies in the use of it in military technology. I could talk all day about nanotechnology. In a world ever more driven by information technology, funneling more and more control of essential tools into the hands of profit-driven institutions will hinder a free and open information society.

For these reasons, activists need to be aware of technological phenomena so preparations can be made. Some technology can be adapted to become more conducive to equitable and responsible energy distribution, whereas others that only maximise profits (and not value) will need to be replaced or abandoned. We can develop technology around workplace democracy and other inclusive measures to ensure that widely disparate knowledge-based strata do not threaten society. We can see to it that applications are beneficial and maximise energy return while minimizing harm. We can see to it that the pie grows at the same time the shares become more indicative of effort and net gain.

This was a really long post to compose. If any of it makes sense, or, better yet, if it doesn't, please let me know. I feel that I could have elaborated a great deal more, but the general outline needed to come out before I forgot. Any additions or corrections would be most welcome and encouraged. I will likely draw on these ideas as a framework in sorting or categorizing other ideas and posts (see my business plan, which I wrote with many of these ideas in mind).


Anonymous calmdude said...

You are my sunshine, my only sunshine. You make me happy ... when skies are grey.

Some study questions for the kiddos out there:

Give examples of the marginal utility of the sun.

What are the benefits of a labor-valued medical system?

Give examples from the Star Trek TNG universe for both MU and LTV? Of which is there more? Why do you think it is?

Is intellectualism hindered or engendered by LTV? What about MU?

08 June, 2007 00:51  
Blogger Delta said...

Good post, it looks like you've put some good thought into these topics. The various theories of value is something that I have not spend a good deal of time analyzing (especially as of late when research has been taking up 100% of my time; well, that and learning french =)). Another type of value system for an economy may be the idea that life itself is valuable. With increasing productivity due to technology the pressures associated with dividing up scarce goods may begin to disappear, at which people's needs will be provided for because they are human beings, irrespective of the abilities that they have. Of course the ones who are naturally gifted or work hard to improve themselves will enjoy greater respect from their peers, and thus will have greater self-respect for themselves, have a better selection when choosing their mates, and all those other things that today we associate with having more money.

I agree that energy usage should be included when discussing the various options that one could take in the economy. Today it is more or less completely neglected, unless it translates to more dollars, the only item in a capitalist society that always maintains its value (people surely don't, as can be seen in 3rd world sweatshops).

I'm a big fan of the free software movemment, which is one of the reasons why I use Linux and do my work with non-proprietary software. It's a nice application of the idea that people should work together using the variety of their skills to provide for human need, not for private profit. Richard Stallman, one of the founders of this movement, once said that charging money for software is a crime against humanity. He's actually fairly left-wing, and on his blog supports the Green party. Although it's not clear from what I've seen if he's a libertarian of the true sort, although it's certain that some of these ideas are involved in his thinking.

09 June, 2007 22:13  

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