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openDemocracy And The Ignorance Of Neoclassical Economics

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openDemocracy wants to tell us all that coronavirus has entirely upended the assumptions of neoclassical economics. This is because openDemocracy doesn’t have the first clue abuot the assumptions of neoclassical economics. This is not, therefore, a good starting point for a reordering of the economic assumptions we use when trying to deal with reality.

Our example:

The Covid crisis is questioning many of the hidden assumptions of contemporary capitalist economies. Already policy innovations by governments have begun to crack the carapace of business as usual. I suggest here that this includes the hegemony of the neo-classical theory of value – that price determines value, and that rating the social contribution of different sectors, groups of workers and consumption practices is an impertinence. It is not.

Neoclassical economics does not insist that price determines value. Nor does it say that trying to determine social value is an impertinence. What it does say is that price allows us to count the value that people apply to something. And that there are values which are missed by this method of counting. Which is, when you come to think of it, a fairly large misunderstanding of the point at issue.

Identifying essential workers in this way has been anathema to conventional neo-classical economic theory, where any activity is deemed valuable or productive if it is remunerated, whatever its social value or disvalue.

Nope. Simply nonsense. It’s not even neo-classical – or neoclassical – theory that’s being critiqued here, it’s GDP or national accounting.

Simon Kuznets sat down to try to work out the size of national economies. How can we measure this? So, he said that we can look at prices in a market economy and thereby see what people are willing to pay for something. The value of that thing must be at least what people are willing to pay for it. If it were less they’d not buy it. If more, they will and think they’ve a bargain. We can thus tot up what people do spend on stuff and assume that they are gaining at least that much value.

Right back there at the start it was obvious that there are holes in this method. Things that are not monetised have no value in this method of counting. Thus Keynes and the national economy shrinking when a man marries his housekeeper. All domestic labour and household production is valueless – not something that anyone actually thinks is true at all. The point here being that this is a known problem. Not something ignored.

We even have the Sarkozy Commission, near a century later, which applied a value to such labours – around and about minimum wage.

This is not all. There is also that problem of things commercially supplied – say, the NHS, or the state schools, commercially in the sense that it’s not household production – but where there is no market price. A workaround is that these are valued at the cost of provision. We know that’s wrong. The government spending on the rule of law is far more valuable than the cost of doing so. The government spending upon a diversity adviser is, at least arguably, less.

We know this is a problem.

Thirdly, to be Murphesque, we don’t in fact assume that the price paid is that value. We say that it’s the minimum value it could possibly be. Which is how we get to hte idea of the consumer surplus. People would, often enough, be willing to pay more than they have to for something. They’re thus gaining some amount of value buckshee. That value they gain which they don’t have to pay for is that consumer surplus. Conventional estimates are – entirely as a rule of thumb and no more – that this is about 100% of GDP. We gain about twice the value we have to pay for. Some goods or services this grossly underestimates. The Google search engine has been valued at $18,000 per head per year. What we pay for it is nothing. In GDP it appears as the advertising associated with it, perhaps $50 per head per year.

Don’t worry too much about the specific numbers there but this is telling us that there’s a problem with that assumption that value is only what people pay for something.

Running the argument the other way around. If people willingly pay for something then yes, it does have value. Because people will only hand over something of value – the money which represents all their other possible choices – for something they value more. Take money out of it if you wish. I only take the rubbish out of an evening because I value my wife’s smiling countenance – rather than the scowl if I don’t – more than the effort of taking out the rubbish. Shrug, that’s just the way humans work.

Which brings us back to the neoclassical theory of value. It isn’t that only things which are monetised which are of value. Nor is it that the value is only what is monetised. Rather, things which are monetised must be of at least that value to those doing the evaluating, the participants in that monetising episode. And put that way who can argue with the concept?

The Covid crisis is questioning many of the hidden assumptions of contemporary capitalist economies. Already policy innovations by governments have begun to crack the carapace of business as usual. I suggest that this includes the hegemony of the neo-classical theory of value – that price determines value, and that distinguishing the social contribution of different sectors, groups of workers and consumption practices is an irrelevance or an impertinence. It is not. It is absolutely central to building a sustainable and just economy.

Well, y’know, it would help if you actually understood the neoclassical theory of value in the first place – peeps value this whatever at least this much because that’s what they’re willing to give up to get it – and then grasped how national accounting works. Useful preconditions for trying to change how valuations and national accounting are done.

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3 COMMENTS

    • I suspect F.A. Hayek was in error there – I suspect that some (some socialists – the leading ones) understand economics very well – Hayek’s error was to assume that their motives were good. If one does not make that assumption, if one assumes instead that the objective of some (some) socialists is to do harm – then their policy proposals make logical sense.

      On economic value – price does not determine economic value, it is more like the other way round. People are prepared to pay for something because they value it – they will pay less than the value they put upon it, and the seller will sell for more than the value they put upon it. This is because economic value is subjective – it is not the same for buyer and seller, so BOTH benefit by the exchange (the act of trade).

      On Covid 19 – most governments have operated on the basis that their regulations (edicts) and spending, has no real cost. They, and “openDemocracy”, are in error – terrible error. Oddly enough some leftist governments have actually rejected “lockdowns” and so on because they do understand the costs – for example Nicaragua, Sweden and Belarus. Ironically these leftist governments have followed, on Covid 19, a far less damaging policy than the “right wing” governments of such countries as the United Kingdom.

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