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1.2 The Just Price
The question of the ‘just price’ is as old as
Western civilization and of continuing relevance and concern to it.
In ancient Greece, Aristotle considered it;
in medieval Europe, St. Thomas Aquinas and his fellow Scholastics pondered
its mysteries;
in the age of conquest, Mercantilist economists re-considered it as New
World gold and plunder poured into the coffers of European kings and queens;
at the dawn of the Industrial Revolution, Classical economists from Adam
Smith to John Stuart Mill struggled to answer it;
Karl Marx re-established its moral imperative in the exploitation of labour;
at the height of the Industrial Revolution (about 1900), Alfred Marshall and
the Neo-Classical School seemingly resolved it through interaction of supply
and demand in a perfectly competitive marketplace;
in the pre-dawn of the Atomic Age, Keynes shifted the question from
individual markets to the economy as a whole; and,
today, in a post-modern ‘knowledge-based economy’ we continue to seek an
answer, for example, in view of Microsoft successfully building an economic
empire by initially, in effect, giving away a product (e.g. Windows '95)
that cost hundreds of millions of dollar to develop and then, once the
costumer base was secured, converting the product (Windows XP) into a
subscription service expected to earn micro-royalties from millions and
millions of consumers – individual and institutional.
I will try to sum up the origin and evolution of the question. I will do so
with broad brush strokes covering three and half millennia of human thought.
In the process, and inevitably, ‘finer’ points made by thinkers much deeper
than myself will be lost.
The Question
In economics the question is addressed in two
ways: either as 'price' theory or 'value' theory. The difference is
not trivial and yet not material in modern and post-modern times during
which they have tended to become one and the same excepting various potent
strains of religious fundamentalism apparent around the world including
Christian, Hindu, Judaic and Moslem fundamentalism. This merging
of price and value, at least in the secular humanist tradition, reflects the
triumph of 'materialism' expressed in both Markets and Marxism. In
fact, as we shall see, the theoretic underpinnings of Market
Materialism are, in many ways, much more severe than the historical
materialism of the Hegelian Marx.
'Price' implies extrinsic measurement of
worth; 'value' implies either extrinsic and/or intrinsic
worth. And extrinsic measurement requires external judgement;
intrinsic implies internal - to a subject and/or an object - judgement.
Many of the highest 'values' of humanity can only be assessed internally.
An expression that catches some sense of such internal assessment yet with
an external reference point, is: An obligation not felt is not an
obligation. This Japanese-type phrase illustrates the 'animistic'
character of Japanese culture in general and Shintoism in particular - a
sword or a book is not a 'thing' but rather the embodiment of a creator's
personality or soul. Today, we retain the slightest hint of this
'animist' tradition in concepts of intellectual property especially
copyright:
… intellectual property is, after all, the only absolute
possession in the world... The man who brings out of nothingness some child
of his thought has rights therein which cannot belong to any other sort of
property… (Chaffe 1945).
The Debate
In effect the debate involves the perceived
deviation between what the Ancient, pre- and Classical economists called
'the natural price' or what today we call 'the competitive price' and 'the
'market price'. In the ongoing debate four primary sources of value
have been identified:
a) Cost:
Does the value of a good or service emerge from
its cost of production? And if so, what factors of production should
legitimately be included in the calculation of cost? Should only the cost of
labour be included? Or, for example, should the costs of a trader or
distributor be included or the interest costs of capital associated with
production and distribution be included?
b) Exchange:
Is the value of a commodity determined simply
in exchange, that is, the market price or whatever the market will bear?
c) Scarcity:
Is the value of a
good or service simply a function of scarcity, for example, water is usually
abundant and therefore cheap but diamonds are scarce and therefore
expensive?
d) Use:
Is value simply a function of usefulness or
'utility' to the consumer?
To Aristotle, value was a essentially function of use and exchange. To
the Scholastics of the Middle Ages, it was essentially a function of
production and distribution costs. To the Mercantilists, it was based
on utility, that is, perceived value to the consumer. To Adam Smith
(see Adam Smith,
3. The Analysis of Value) and the Classical Economists including Marx,
it was a function of cost specifically, labour costs. To Marshall and
the Neo-Classical Economists is was the resolution of 'the willingness to
pay' and the 'willingness to supply' (see.
2. The Approach to the Analysis of Price). However, 'the
willingness to pay' or demand was rooted in the Benthamite calculus of
utility based on a physical unit of pleasure/pain called the 'utile' (see
The Triumph
of Materialism, below). To Keynes, once we rise above individual
markets to the economy as a whole, value depends on money as the link
between present and future (see Keynes,
The Theory of Prices).
Triumph of
Materialism
Economics, as a discipline of
thought or "a recognized field of tooled knowledge" (Schumpeter 1949: 143)
emerged in the late 18th century at about the same time as political rights
of the individual became a reality with the American and then the French
Revolutions. Adam Smith, writing just as the flood tide of revolution
began to inundate the Old Order of Privilege and Preference, demonstrated a
strong awareness of the cultural matrix of economic phenomena (Smith 1776).
Two of his successors, however, stripped economics of its cultural context
-- Jeremy Bentham and Karl Marx.
Jeremy Bentham was a
lawyer turned reformer. He believed in "La Raison" (Schumpeter 1949:
115) as the ultimate test of value to society. To Bentham, neither
God nor some "natural harmony" was at work in human affairs.
Furthermore, it was Bentham who introduced the premise that culture,
custom and tradition are not relevant to economic analysis:
On the
whole the most influential of the immediate successors of Adam Smith was
Bentham. He wrote little on economics himself, but he went far
towards setting the tone of the rising school of English economists at the
beginning of the nineteenth century
...[who]
therefore were inclined to think that the influence
of custom and sentiment in business affairs was harmful, that in England
at least it had diminished, was diminishing, and would soon vanish away:
and the disciples of Bentham were not slow to conclude that they need not
concern themselves much about custom. It was enough for them to
discuss the tendencies of man's action on the supposition that everyone
was always on the alert to find out what course would best promote his own
interest and was free and quick to follow it (Marshall 1920: 628-9).
As a pragmatic political
reformer, the opening terror of the French Revolution, its Napoleonic
second act and its denouement -- the reactionary Holy Alliance --
restrained Bentham from advocating the logical political conclusions of
his radical egalitarianism, i.e. not only redistribution of wealth but
also property.
Another way in
which he influenced the young economists
around him was through his passionate desire for security. He was
indeed an ardent reformer. He was an enemy of all artificial
distinctions between different classes of men; he declared with emphasis
that any one man's happiness was as important as any
other's, and that the aim of all action should be to
increase the sum total of happiness, he admitted that other things being
equal, this sum total would be greater the more equally wealth
was distributed. Nevertheless so full was his
mind of the terror of the French Revolution,
and so great were the evils which he attributed to the smallest attack on
security that, daring analyst as he was, he
felt himself and fostered in his disciples an almost
superstitious reverence for the existing
institutions of private property (Marshall 1920: 628-9).
While the political
implications of Bentham's radical egalitarianism were held in check by
terror of revolution, it held at least 4 significant implications for
economic thought. First, Bentham assumed that all the pleasures and
pains of an individual resulted from simple physical sensation and could
be measured and added into a quantity called `Happiness'. Assuming
the happiness of each individual was weighted equally, individual
"happinesses"
could, in turn, be summed into a social total which was equal to the
common good or welfare of society. Thus the social good was nothing
more nor less than the sum of individual
sensations of pleasure or pain -- the only ultimate realities (Schumpeter
1949: 131) -- the two sovereign masters of humanity (Clough 1964: 825).
The assumption that
pleasure and pain could be measured became
reified as money. Lack of money was
the source of misery. Enough money was the source of happiness.
This led to equating value to society -- of an object, product, process or
person -- with its dollar price in the marketplace. This assumption
fostered development of an illusory calculus which became the centrepiece
for the economic theory of consumer behaviour -- the marginal utility
theory of value (Blaug 1968: 304). It also provided Marshall and
Pigou with the foundation for contemporary welfare economics.
In the Benthamite tradition,
however, maximizing pleasure was restrained by the tenets of Ethical
Hedonism, a very Protestant Ethic. This ethic, beyond concern with the
moral value of work, also involved social inhibitions against conspicuous
consumption (Veblen 1899). Such ethical or moral restrictions were
reinforced by the lingering effects of feudal sumptuary legislation which
made "status forgeries illegal and created the disincentive of trial and
punishment" (McCracken 1988: 33). But, as noted by Daniel Bell (Bell
1976: 20-22), when the Protestant ethic collapsed during the Industrial
Revolution, only hedonism remained -- in all its unrestrained, irrational
incarnations. Without a generally accepted moral code, the law
became the accepted social institution to moderate individual
pleasure-seeking. Benthamite traditions concerning crime and
punishment in fact continue to guide both the law and economic research,
e.g. Bentham's famous and seemingly plausible dictum `the more deficient
in certainty a punishment is, the severer it should be' (Becker 1968).
Second, for Bentham
culture, custom and tradition were irrelevant to economic analysis because
they were irrational and interfered with application of pure reason in the
maximumization
of Happiness, a neologism coined by Bentham himself (Bell 1976: 224). Yet
this radical individualism flies in the face of demonstrable traditional
and ideological attachments which shape an individual's actions into
collective acts (Bell 1981: 70-72).
Third, in the Benthamite
tradition all men were not just equal but also nondescript and malleable
(Schumpeter 1949: 132-4). Therefore, tastes were the same, or would
become so through another Benthamite policy -compulsory education.
Questions of taste and style were, therefore, irrelevant to economic
investigation.
Even aesthetics were
affected, shrinking to analysis of the pleasurable sensations evoked by a
work of art. In this aesthetic, a thing is beautiful because it
pleases, it does not please because it is `objectively' beautiful
(Schumpeter 1949: 126-7). This aesthetic, combined with Benthamite
emphasis on functional utility,
meant that application of artistic effort to
contribute beauty of form
to the function was rejected as "irrational".
In industrial design and architecture, this aesthetic reached its logical
conclusion in the aphorism: form follows
function. This contributed to the
development of a simplistic and sterile consumer theory of economic
behaviour and a theory of production in which design is not, in theory,
considered a factor.
Fourth, Bentham's
Utilitarianism reshaped not only the definition of means but also the
ultimate ends of human activity. As a philosophy of life it ruled
out as contrary to reason all that is really important to the individual.
The Utilitarians are credited with:
having created
something that was new in literature... namely, the shallowest of all
conceivable philosophies of life that stands indeed in a position of
irreconcilable antagonism to the rest of them
(Schumpeter 1949:132-4).
While Bentham was restrained
by the terror of revolution, Karl Marx saw revolution as the hope for the
working man and for the final triumph of human reason in economic and
political life. Perhaps this reflects the fact that Marx was born
into the romance rather than the terror of revolution. In many ways,
however, Marx is the direct heir of Bentham. In a sense, he simply
extended Bentham's logic beyond the inhibiting fear of revolution.
By the mid- to
late-19th century, political economy had split into two opposing camps
reflecting, among other things:
-
conflicting views
concerning the impact of culture or stage of cultural development on
economic behaviour - yes for Marxists, no for the mainstream;
-
conflicting theories of
value, specifically whether labour was the only productive economic factor
as Marxists believed or, whether capital was also productive as the
mainstream contended;
-
conflicting beliefs in
the efficacy of collectivist solutions to political economic problems such
as the role of the Party as revolutionary vanguard and the dictatorship of
the proletariat versus individualist solutions such as pluralistic
democracy and the market mechanism; and,
-
conflicting theories about
the legitimacy of private property deemed exploitive by the Marxists and
essential by the mainstream.
The intensity of this schism became, by the
mid-20th century, as potentially apocalyptic as the European Religious Wars
of the 16th and 17th centuries. It was, of course, the turmoil of
these wars which led to the triumph of secular science. The schism,
however, completed the fissioning of the old Moral Philosophy -- the total
of all the sciences of mind and society (Schumpeter 1949: 141) -- into
sociology, political science, psychology and what is called Market
Economics. This further contributed to economics losing its original
sense of culture and becoming an abstract discipline which assumes itself
unaffected by culture and disembodies the volitional behaviour of labour
into a shadow of homogenous units (Boulding 1972: 267).
One of the ironies is that both Marxism and
Market Economics conclude that under perfect conditions there is no role for
the State. In Marxist thought this is called 'the withering away of
the State'; in Market Economics, it is called 'perfect competition'.
The
Benthamite Legacy
Following Bentham, each generation of
mainstream economists struggled for release from Utilitarian inhibition.
John Stuart Mill tried to modify Benthamite confidence in the calculus of
happiness by, among other things, observing "better Socrates dissatisfied
than a fool satisfied" to express different orders of pleasure and the
importance of qualitative as well as quantitative factors in economic
analysis (Barber 1967: 94-5). He also highlighted the cultural factors
contributing to the subjugation of women (Mill 1869). Similarly,
Marshall attempted a reconciliation of the Benthamite calculus of happiness
with the English historical school and its insistence on the cultural and
historical context of economic behaviour (Blaug 1968: 305).
Keynes, like Mill and
Marshall before him, thought that he and his generation had finally thrown
off restrictive Protestant hedonism and escaped the Benthamite tradition (Innis
1951: 79-80):
I do now regard
that as the worm which has been gnawing at the insides of modern
civilization and is responsible for its present moral decay. We used
to regard the Christians as the enemy, because they appeared as the
representatives of tradition, convention and hocus-pocus. In truth, it
was the Benthamite calculus, based on an over-valuation of the economic
criterion, which was destroying the quality of the popular Ideal.
Moreover, it was this escape from Bentham, ... which has served to protect
the whole lot of us from the final reductio
ad absurdum of Benthamism known as Marxism
(Keynes 1949: 96-7).
In spite of Keynes'
hope, as well as his involvement with Bloomsbury and his role in
establishing the Arts Council of Great Britain (Keynes 1975), the impact
of Bentham continues. Perhaps this too reflects fear of revolution,
fear of Marx's revolution come true in Russia. It places limits on
what phenomena are considered legitimate subjects of economic
investigation. It continues to blind mainstream economists to the
cultural context of economic behaviour. Daniel Bell, quoting the
author of the most widely read economics textbook in the history of the
world, observed:
Paul
Samuelson has noted that many economists would "separate economics from
sociology on the basis of rational or irrational behavior, where these
terms are defined in the penumbra of utility theory." Utility is
defined as egoism, or self-interest, and rationality is defined as
consistency - that is, preferences are transitive ....
Yet the
crucial question is whether the obverse of the rational is the irrational
rather than the non-rational , and whether or not non-rational motivations
can provide a valid assumption for an understanding of economic behaviour,
i.e. to behavior which seeks to enhance the wealth and welfare of mankind
(Bell 1981: 70-72).
Put another way, can
non-rational motivations provide the foundation of an inclusive or
catholic
economics to balance the materialistic, protestant, exclusionary
rationality of contemporary economics? In this regard, Tibor
Scitovsky (1972, 1976, 1989) has gone further than anyone in re-tooling
economics to account for 'irrational' behaviour, e.g. cultural activities
including the arts. Where Bentham used the associationist psychology
of his, day to define pleasure and pain as the ultimate principles of
behaviour, Scitovsky, after investigating contemporary clinical
psychology, substitutes 'comfort and stimulus'. But the Scitovsky
model still uses marginal utility. On the one hand, he argues that
the similarity between productive and cultural activities explains why the
economist's neglect to include culture explicitly in the model of human
behaviour has not detracted from its usefulness. On the other, he
notes the ultimate obstacle to greater artistic creation is the Puritan
ethic (Scitovsky 1989). He does not accept that a Benthamite
cultural bias has become part of the analytic mechanism itself.
To escape Western
cultural bias implicit in utility theory, one can envisage a
mythic economics
based on depth psychology of Carl Jung (Jung 1964), or a
multicultural economics
that explicitly allows for the effect of culture,
custom and tradition on economic behaviour.
Not all schools of
Western economics, however, lost sight of the role of culture, custom and
tradition. Rooted in the German Historical School of the late 18th
and early 19th centuries (Schumpeter 1949: 807-824), one school maintains
the linkage - Institutional Economics. This school includes American
economists Thorstein Veblen, John R. Commons (Commons 1934), W.C. Mitchell
and Clarence Ayres, as well as European economists Max Weber, Sydney and
Beatrice Webb, Selig Perlman and especially Joseph Schumpeter whose work
stressed the influence of class, technological change and institutional
setting on economic behaviour (Schumpeter 1942: 1949).
Like the mainstream,
Institutionalists consider the competitive marketplace the most efficient
and effective institution ever devised for economic production and
consumption. However, they also recognize: the trade union as a
legitimate political institution functioning in the economic arena
(Commons 1909); the impact of culture, custom and tradition (Veblen 1899);
and, the effect of law on the nature and form of economic behaviour
(Commons 1926).
Legal and cultural relativism
is also part of the legacy of Canadian economist Harold Innis,
particularly his work on the economic impact of communications
technologies (Innis 1950, 1951). He recognized that all scholarship
must be grounded in analysis of the radical particularities of time and
place, history and geography (Carey 1981: 79). Through his study of
communications media, Innis identified a fundamental relationship between
culture and communications. A culture is extensive in time, i.e. it
has duration, to the extent its dominant communications medium is durable,
e.g. stone, clay or parchment. Alternatively, a culture is extensive
in space if its dominant communications medium is easily transported, e.g.
papyrus and paper. Using this hypothesis, Innis tried to explain the
rise and fall of empires through history.
One of Innis'
colleagues, Marshall McLuhan, took this relativism, first to
the medium is the message,
and then to human consciousness altered by the
emergence of new electronic communications media (McLuhan 1978).
Elsewhere I have noted the unique nature of contemporary communications
media (Chartrand 1987a). In many ways, however, Innis is the Father
of the Information Economy (Porat 1977). He was the first to
recognize communications media as an economic staple in the Post-Modern
Economy.
Thus Institutionalism
is characterized by cultural, historical
and legal relativism, inductive method and general systems analysis.
On the other hand, mainstream economics is
characterized by positivism, deductive
method and mechanistic systems analysis.
In essence, two
questions separate Institutionalists from the mainstream. First, can
economic behaviour be simply reduced to quantitative expression?
Second, even if in theory this can be done, do
we possess, or will we
ever possess, the necessary technology of measurement? I think not,
in part because "even in the physical sciences, a
new notion of quality now emerges at the
thermodynamic level - a quality which is irreducible to quantity (Jantsch
1975: 95).
There is at least one
ongoing debate between Institutionalists and mainstream economics which
takes the guise of Cultural Economics
versus the Economics of
Culture (Seaman
1981).
Cultural Economics
can be defined as
the study of the evolutionary influence
of cultural
differences on economic thought and behaviour.
Cultural Economics assumes economic behaviour varies
according to cultural context. The seminal and leading exponent of
transdisciplinary, relativistic cultural economics is Kenneth Boulding (Boulding
1972; 1973; 1985; 1986].
The Economics of Culture, on the other hand,
can be defined as the study of the allocation of scarce resources within
the cultural sector. It assumes objective laws apply to economic behaviour
regardless of cultural differences. It places emphasis on the scientific
nature of economics and application of abstract mathematical techniques.
The seminal and leading exponent of the positivist economics of culture is
William Baumol (Baumol, Bowen 1966; Baumol 1977; 1984; 1987; Baumol,
Baumol 1984).
Between the two is
Scitovsky (Scitovsky 1972, 1976, 1989) who, on the one hand, insightfully
and explicitly recognizes the impact of culture and, on the other, is
attempting to re-tool Benthamite analysis. All three are required for a
complete understanding of economic phenomena, if for no other reason than
that all three form part of the contemporary economic ethos. But we still
must await, it appears, for the emergence of a
truly Humane Science to replace the
integration of thought embodied in pre-Benthamite
Moral Philosophy.
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