Neoclassical Economics
What is valued and how do we value it? This is a question humans asked and attempted to answer long before the classical school of economics was born with Smith’s Wealth of Nations. Aristotle believed that value was intrinsic to an object, a property of its underlying substance. While David Hume would reject this claim to powerful effect in the mid-1700’s, the field of economics would not fully shake itself free of this conception until the late-19th century. The labor theory of value, elaborated and utilized tenaciously by Karl Marx in his attacks against capitalism, was not merely some communist delusion; it was the basis of the classical economists’ explanation of prices, which were thought merely to fluctuate around a commodity’s “real” value - the amount of labor accumulated in the commodity. This came from the immediate physical labor of the worker, but also from the machinery (itself built by labor) that was used in the production process. The money fetched by the commodity, then, was thought to be distributed according to the labor each member of the production process could mobilize. Thus did the capitalists, mobilizing labor through their tools and machines, get their piece in the form of profits, the workers get their piece in the form of wages, and so forth.
This conception of value was problematic, in that it consistently failed to predict the buyer’s willingness to pay for an item given what it was worth. A paradigm shift took place, its intellectual roots in David Hume’s work in which he argued that their was nothing intrinsic to any object (including humans); rather, knowledge was based on the juxtaposition of things and their qualities, and thus so was value. This in mind either explicitly or implicitly, late-19th century economists became less interested in the real “worth” of an object and more in how buyers and sellers seemed to value items in relation to one another. This was the groundwork of the so-called marginal revolution, which suggested that people were not interested in the “real” value of a commodity - that is, it’s value in terms of labor - but rather in the extra utility (revenue) that purchasing (producing and selling) one more unit of the commodity would provide to the buyer (producer), relative to the costs of acquiring (making) it. When theses costs and benefits are in equilibrium, no more units will be bought or sold. Value becomes linked to notions of scarcity and unlimited wants, and the tensions between the two is worked out in markets. This is the basis for supply and demand analysis, and it also clarifies market entrance and exit on both sides of the exchange. Along with the help of a few simplifying assumptions, it comprises the foundations of what we now call neoclassical economics.
These assumptions, as discussed in the article, are threefold:
1) People have rational preferences among outcomes.
2) Individuals maximize utility and firms maximize profits.
3) People act independently on the basis of full and relevant information.
Neoclassical economics atomizes the individual so that her decisions come down to the solutions to one or two simple equations, and when economists aggregate those decisions they can develop workable theories of markets for just about anything one can conceive - from Playstation 3’s and the labor used to build them to marriage partners. It was the mathematization of economics, as the author of this article discusses, that gained it acceptance as something on par with physics as a science. The insatiable appetite for that which satisfied notions of modernism - the idea that the world can only benefit from progress and development technologically, intellectually, morally, and so on (and that the ‘modern’ society embodies those ideas) - encouraged these developments and made them concrete. Once neoclassical, mainstream economics gained recognition as a science, it became extremely difficult to challenge in the countries that most esteem this label, such as the UK and USA. In these bastions of economic thought, it is the neoclassical conception of economics that students are taught, to the exclusion of alternative approaches, such as Marxian, Austrian, neo-institutional, and so on. For the most part, neoclassical economics does not abdicate authority to these heterodox groups when it fails to explain certain phenomena, but rather borrows from them and implements their ideas as necessary and in such a way as satisfies the neoclassical notions of optimization.
In neoclassical economics, outcomes are considered best in the Pareto-efficient sense when “any other allocation of goods and services would leave someone better off,” meaning that if someone were to take an equilibrium defined by a well-functioning market and redistribute the resultant allocation, the total utility experienced at equilibrium would be less than the one produced by the unfettered machinations of the “invisible hand.” Much of the frustration that spawns alternative schools of economic thought arises from disagreement with the mainstream’s fundamental assumptions as outlined above. In my opinion, the resilience of the mainstream seems to arise from two factors. First, it aligns quite readily with how westerners buy and large tend to think of themselves and others. We often see ourselves as rational, autonomous individuals that make the decisions that are most satisfying to us given the outcomes we expect, and as we are the ones most often under study in economics, we are prone to impute such assumptions into our analyses. Second, evidence that goes against the assumptions is often and easily construed in a way that it is made to fit the framework. Notions of “incomplete information”, “bounded rationality”, and cultural peculiarities can be modeled or otherwise understood with a fair degree of accuracy using probability distributions, cognitive neuroscience, or careful study of the subject and subsequent retooling of the fundamental decision equations. Neoclassical economics is notoriously flexible as an analytical framework, is able to maintain an acceptable level of clarity even after some relaxation of its assumptions, and on these facts turns its continued support and utility as the main school of thought in economics.
This article is short and easily understood, but some may question the author’s objectivity as a commentator on such important information (though certainly not as an economist); his judgment in calling detractors from the mainstream “kooks” or “antiscientific” is not only a gloss - it is outright wrong. Except to the extent that adherents often downplay these alternative views, however, there is nothing “wrong” with neoclassical economics. In any event, the idea of value in economics has some very deep and fascinating roots that one can learn in any class or book on the history of economic thought.
Reference: Weintraub, E. Roy, “Neoclassical Economics”, The Concise Encyclopedia of Economics. Liberty Fund, Inc. Ed. David R. Henderson. Library of Economics and Liberty. 18 January 2008. <http://www.econlib.org/library/Enc/NeoclassicalEconomics.html>.
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January 21st, 2008 at 1:47 am
Hello Isaac!
It’s a bit late, but I’ll try to make this a coherent comment.
I enjoyed reading your post very much, and I have thought a lot about the same linkages between philosophy and economics. Did the author really go so in depth about Hume and Marx? What a find.
I do have a few comments about your genealogy of thought. Forgive me in advance; any conversation about philosophy is going to be esoteric and contentious, and I only go so in depth because I know how well you know this stuff.
1) I agree with you so much Isaac, especially about economics being done from a limited, essentialist view point. I’m just going to run through some philosophy stuff, in part because I’m bored. Marx does lodge an attack on capitalism beginning from the assumptions of the labor theory of value, but imagine this model instead for a second. With all of his distrust of “knowledge,” “essence,” and “theology,” in terms of economics, I feel that Hume’s contribution was in line with many of his predecessors—namely Descartes. Not in the details of course (i.e. the cogito), but rather in their shared approaches to the question of human relatedness to objects, that is, as subjects. The world is what it is as a bunch of objects, and here we are as subjects confronted with “world”; thought and world remain like two separate and mutually exclusive categories of beings. I see what you mean though: Hume crushed many of the Cartesian arguments for “unity,” and made the way for Kant and Hegel. Maybe however, Hume was too early and Kant would be a better candidate.
2) Marxian thought proceeded Hume, and embodied the struggle against subject/object, “substantial/accidental” dualism that Hume implicitly condones; I am not saying that Hume agrees with Aristotle or substances or essences, rather, I am saying that because Hume precedes Kant and Nietzsche and all that Copernican stuff, he is actually arguing from within the framework that he is critiquing. He fails to recognize this weakness, however, because he only looks at one piece at a time, like “substances,” or “time.” It was Hegel and Marx that broke from this tradition of subject/object dualism’s, because they define these terms as co-dependent. Following Hegel, Marx proposes an alternative conception of history, in which material forces are the primary movers of self-awareness. Individuals will only understand themselves as they can relate to others; insofar as the human is essentially productive, then only from within the visceral production process can we expect to define our relationships. Under Capitalism however, the production process has been alienated from the producer and therefore the producer from himself, in so far as production is self-actualizing for the worker.
So man has no essence besides being-social. S/he is defined by relationships, but the exchange and production of commodities define relationships. If man defines value, then value is also socially defined. Where does that leave us? In capitalism, value can only manifest itself in the social relations of commodity to commodity, where relations of exchange appear to supercede the original social relations between men, and this is a bad thing. In this situation we have only “material relations between persons, and social relationships between materials.” I don’t think Marx means to imbue a commodity with an essence, rather, I think he wants to show the impact of commodities on us, who also do not have essences.
3) Anyway, I really agree with what you said about neo-classical approach. I think your right in saying that “marginal” economic approach has its foundations in Humean thought, and that neo-classical thought cannot reconcile Marxism; and I think you might agree with me that Cartesian tradition is essentialist, and the Marxian tradition that has been ignored. You really nailed this point, when you see that economics is a science, and also must carry with it certain assumptions about man being a “rational” animal, as a subject confronted with objects, as a thing that defines his/her surroundings but will not be defined by those surroundings. How Cartesian! Anyway, really cool discussion of the ideas.
January 24th, 2008 at 12:25 pm
Hey Billy thanks for the thought-provoking response (and the occasional correction
I suppose I should first say that this summary has one uncited reference, and that is the short paper I wrote on Marx in philosophy last year. It concerned the argument about which was a better or “more correct” notion of value - utility or imbued labor. Much of my discussion concerning the philosophical foundations of economics are based on that, and not on the article, which avoided - I think - the less economic and more philosophical question of whether or not neoclassical economics gets value “right.”
So with respect to 1), you’re right, of course. Hume escaped nothing, but seemed rather only to recognize the inherent contradictions of the thought-currents in which he was caught up. However, I’m disinclined to think that we’ve moved beyond pre-Kantian philosophy when we consider how scienctific knowledge is obtained. No scientist, performing (say) titrations on an unknown compound, is interested in the question of the underlying substance of that compound, only in how said compound exhibits characteristics of known elements and molecules (or, if they fail to exhibit those characteristics, in finding a way to fit the results into the existing superstructure of scientific thought, i.e. by identifying the new element or molecule under observation). In any event, the only aspects of “hard” science that might require a post-Kantian perspective is quantum mechanics or perhaps relativity. Subject-object dichotomies are just what the doctor ordered, otherwise. I think by and large, economists are devoted to this notion, as well. We even go the extra mile by using model humans in the way that chemists use the model atom, the only difference being that we might include a stochastic error term. I don’t think you need Kant to do that.
2) See I always understood Marx, leaving everything else aside for a moment, as saying that our purposeful productive activities were what made us human (as opposed to, say, animals), and that what we produced was not merely the fruit of our labor, but remained part and parcel of us; Marx may have struggled with essentialism, but I don’t see that he ever moved past it. Anyway, when we sell our labor to the capitalists, we are alienated from ourselves, and - as our products are bought and sold and mediate our relationships - alienated from one another. I think Marx’s version of the labor theory of value was such that what we produced was almost invaluable; an object’s market ‘worth’ was irrelevant. But that does nothing to advance a theory of markets under capitalism; Marx was a lot of things, but a good economist (defined in modern terms) he was not. I don’t think LTV is “wrong,” but Marx, by taking it to its utter extreme, seems to have hammered the final nail into its coffin as a theory of value. Again, I think its really hard to argue that anyone, no matter how they use LTV, is not implying some sort of essentialism.
In conclusion, what I find most fascinating from the philosophical perspective is that despite the fact that neoclassical economics clings to essentialist notions of humanity, it is still able to shine a bright light on the function of markets. Like it or not, you and I understand the function of markets primarily from a neoclassical perspective and usually find that those theories work well to one extent or another. I’m inclined to think that since it is primarily upon and within the neoclassical perspective that most of our markets are built, policed, and innovated, that those markets and the actions of participants will necessarily reflect - or at least be construed to reflect - those principles. If such is true, then it certainly does not follow that neoclassicism is the “correct” perspective; rather, it would be evidence that neoclassical economists hold the authority to advise those with the power to make markets in society, and through that mechanism the perspective is actualized and reproduced. I believe this would be the analysis of the cutting edge in the other social sciences, inspired by the work of Foucault (and by extension Nietzsche) among others. To simply provoke discussion, I’ll go so far as to suggest that the modern mainstream economist is a member of an ad hoc priestly class in our society.