Response to Paul Mattick's Criticism of STV

Economics Economics Questions
1

Paul Mattick criticized the subjective theory of value (STV) by arguing that it involves circular reasoning. He said, “Although it tries to explain prices, prices were necessary to explain marginal utility.”

Now, I think I’ve got an answer to Mattick, but I’m not entirely sure how effective a counterargument it is. So, I want to submit it to a (friendly) critique by anyone on here who may be interested in evaluating it. Here it is:

In response to Mattick and Engler it may be pointed out that as consumers’ subjective value scales change, prices change. That is, if a commodity’s marginal utility drastically decreases according to the subjective valuations of consumers, the price of that commodity will fall, regardless of the amount of labor “objectified” in that commodity. For example, if it takes 2,000 hours of labor to raise a horse capable of transporting an individual from one town to another in six hours but only twelve hours of labor to manufacture a car capable of performing the same task in three hours, the marginal utility of one horse will be less than that of one car, regardless of the greater amount of labor-time objectified in the horse, and the prices of both commodities will be affected accordingly.

Feedback would be much appreciated.

Thanks.

2

Isn’t he flawed from the start in claiming that prices are needed to explain marginal utility? The only assumption required is that humans prefer some things to other things and also that they pursue ends to alleviate discomfort (or as Mises says: uneasiness). Thus if I have 5 of commodity A, the first of A that I spend, is spent on that which is most urgently felt as a discomfort. The second is spent on the second most urgently felt discomfort, and so on.

So the ‘last’ commodity to be spent (in that example) must be spent on that which was least urgent that it was applicable to. Thus its value was lower to the spender than the ‘first’ commodity.

Prices are merely the manifestations, in a market economy, of subjective preferences. How can he criticize STV when he doesn’t know what it is or what it’s for? It doesn’t explain prices, but the explanation of prices is derived from subjective value, and there is a difference.

EDIT: Change, 3rd Paragraph 1st line from “Prices are merely the manifestations of subjective preferences arising from a market economy” to “Prices are merely the manifestations, in a market economy, of subjective preferences”. Didn’t want to imply that market economies cause subjective valuations. Subjective valuations are inherent in human thought.

3

Thanks for the response. I think you’ve got a valid argument. I’m especially in agreement with you that Mattick simply doesn’t understand STV.

I’d like to make an addition to my earlier response to Mattick:

If by “explain” Mattick means “give an account of the origin of,” his criticism is incorrect: Austrian school economists argue that marginal utility gives an account of the origin of prices, but not that prices give an account of the origin of marginal utility. Instead, marginal utility arises from the subjective value scale of a consumer, while price, according to Murray Rothbard, is merely the exchange rate between two commodities “expressed in terms of one of the commidities” (MES, 103).

Thoughts?

4

So isn’t it pretty uncontroversial to say that for most people the marginal utility of the horse will be lower because of the greater labor-time/reward ratio? Not quite sure what you’re trying to say.

And I think your Rothbard quote pretty well nails it. You could maybe then try to explain the bridge between STV and the rate of exchange between two commodities (like money and bread), if you’ve got the patience for marxists :p.

5

For example, if it takes 2,000 hours of labor to raise a horse capable of transporting an individual from one town to another in six hours but only twelve hours of labor to manufacture a car capable of performing the same task in three hours, the marginal utility of one horse will be less than that of one car, regardless of the greater amount of labor-time objectified in the horse, and the prices of both commodities will be affected accordingly.

If the horse was seen to have a separate use-value, then it would be more expensive. But for that purpose, it simply wouldn’t be “produced.” Do you really think someone would pay 2000 hours worth of wages for something and then sell it for less than 12 hours worth of wages? Anyway, the value of a commodity is not determined by the amount of actual labor objectified in it, but by the amount of socially necessary labor objectified in it. So the Marxian view is that if the horse truly had the same use-value as the car, it would have a value of 12 hours of labor, because that’s the socially necessary amount.

The idea that prices of commodities could be determined by demand is perhaps the greatest fallacy of neoclassical economics. Keep in mind that each person has a different subjective valuation of a given commodity and yet in most cases each person pays the same price. Furthermore, an increase in aggregate demand only expresses the economy’s demand as a whole and thus can only determine the value of the aggregate supply, whereas it is the demand of the individual that is needed to determine the price of the individual good.

Say that there are 100 customers purchasing smart phone service each month at a rate of $50 each. Each of these customers can afford to pay no more than $50 a month. The service provider then is making $5000 a month. In addition, there are another 100 people who would like smart phone service but can only each afford to pay $25 a month. The effective demand is $5000.

Now let’s say that the government “prints” $2500 a month and gives $25 a month to each person in the second group. Now those 100 people can afford smart phone service, causing the effective demand to shoot up to $10,000. The only information the service provider receives is increased sales. But neoclassical (and Austrian?) economics seems to suggest that based on this information, the provider will raise the price of each unit sold. So the provider raises the price of monthly service from $50 to $60. But look what happens. No one can afford smart phone service now. The provider goes from making $5000 a month to making nothing. Thus, the increase in aggregate demand does not communicate any useful information for setting the price.

Rather, it seems more likely that aggregate demand tells the company to produce more of the commodity at the same price. I haven’t studied the evidence closely, but this seems to go along with what I generally observe in the real world. The demand for the product my company sells certainly has gone down in the past few years, and yet the price hasn’t. Instead, the company has cut back production.

Labor-power is a special commodity since each unit (that is, each person’s labor) is always sold at a negotiated price (i.e. one that takes individual demand into account). This fact would seem to lend some support for the LTV.

6

The horse and its hypothetical cost/benefit scenario is not important. Under conditions with greater capital goods the production cost of horses might be outweighed by the revenue.

What is socially necessity? If something is created only by machines does it not have value?

You’re forgetting that the entrepeneur wants to sell his product as high as possible. The consumer wants to buy as low as possible. If Burger King sold $10 Double cheeseburgers and McDonalds sold $1 double cheeseburgers, would anyone buy Burger Kings double cheeseburgers? And on the other hand, if an entrepeneur charges below the market price for his product, he is likely to consume capital and suffer the consequences. Neoclassical Economics never claimed that demand determines prices. It does claim that supply and demand determine prices.

How do you define aggregate demand? How can one aggregate demand for all different kinds of goods? Society is not made up of one side of ‘demanders’ and one side of ‘suppliers’.

Gives to people in the second group but not the first group? So that second group enriches itself at the expense of the first group? When the second group spends their new money, the sellers acknowledge a decreased demand for cash and adjust prices accordingly. When the spending is over, neither group will be able to afford phones and then the business will have to adjust prices down again, assuming the printing stops. This is not nearly as clean and simple a situation in real life. Also you’re fallaciously negating the passage of time. So when the phone salesmen increases the price to $60 dollars no one will ever buy his phones? Then why do it anyways? As if when someone jacks the price up on something, that no one will ever be able to buy it. They can save. These hypotheticals constantly ignore the passage of time.

How is labor demand sold at a negotiated price in ways that other goods aren’t? How does that assertion lend support for the LTV?

7

Well, he’s probably referring to standard neo-classical price theory with budget lines and utility functions (which is in fact circular). This is more of a problem with standard, mainstream neoclassicism than it is for the STV. Bohm-Bawerk, for example, fully explains the process by which market prices are formed without referring to already established market prices.

The funny thing, though, is the fact that the LTV is circular for this very same reason. The distribution of labor amongst varying productive employments determines their (objective exchange) value and therefore price, but, at the same time, prices determines this distribution of labor. Price → distribution of labor → value → Price…

8

It seems to me that any analysis beginning at equilibrium will appear to be circular. People aren’t really taught how the market reaches equilibrium in school. We’re just given the neoclassical equilibrium and we deal from there.

On a semi-related topic, I recommend this read along with all the linked articles (to the regression theory):

http://mises.org/daily/5598

9

His argument is that the price of peanuts depends on the price of milk, because the more I have to pay for milk, the less I will be willing and able to spend on peanuts. {EDIT: Mises and Rothbard admitted to this when they wrote that, absent money printing, if the price of some commodities go up, the price of others will have to go down].

But the price of milk depends on the price of peanuts, by the exact same line of reasoning. Thus peanut price depends on milk price depends on peanut price. Circular.

I don’t see how that argument has been refuted here.

10

Essay by R P Murphy:

I found it relevant to Mattick’s claim of circular reasoning, though Mattick is mistaking Neoclassical Price Theory for the STV.

11

Jargon: What is socially necessity?

Some people might think that if the value of a commodity is determined by the quantity of labour spent on it, the more idle and unskilful the labourer, the more valuable would his commodity be, because more time would be required in its production. The labour, however, that forms the substance of value, is homogeneous human labour, expenditure of one uniform labour power. The total labour power of society, which is embodied in the sum total of the values of all commodities produced by that society, counts here as one homogeneous mass of human labour power, composed though it be of innumerable individual units. Each of these units is the same as any other, so far as it has the character of the average labour power of society, and takes effect as such; that is, so far as it requires for producing a commodity, no more time than is needed on an average, no more than is socially necessary. The labour time socially necessary is that required to produce an article under the normal conditions of production, and with the average degree of skill and intensity prevalent at the time. The introduction of power-looms into England probably reduced by one-half the labour required to weave a given quantity of yarn into cloth. The hand-loom weavers, as a matter of fact, continued to require the same time as before; but for all that, the product of one hour of their labour represented after the change only half an hour’s social labour, and consequently fell to one-half its former value.

Capital Vol.1, Ch. 1

If something is created only by machines does it not have value?

According to Marx, the machine would gradually transfer its value into its products.

You’re forgetting that the entrepeneur wants to sell his product as high as possible. The consumer wants to buy as low as possible. If Burger King sold $10 Double cheeseburgers and McDonalds sold $1 double cheeseburgers, would anyone buy Burger Kings double cheeseburgers? And on the other hand, if an entrepeneur charges below the market price for his product, he is likely to consume capital and suffer the consequences. Neoclassical Economics never claimed that demand determines prices. It does claim that supply and demand determine prices.

You’re just comparing prices with each other. But what determines those prices in the first place? When I said demand determines prices, I was assuming supply remained constant.

How do you define aggregate demand? How can one aggregate demand for all different kinds of goods? Society is not made up of one side of ‘demanders’ and one side of ‘suppliers’.

I may have used the wrong term. I meant the total demand for a given type of good.

Gives to people in the second group but not the first group? So that second group enriches itself at the expense of the first group?

Yes.

When the second group spends their new money, the sellers acknowledge a decreased demand for cash and adjust prices accordingly. When the spending is over, neither group will be able to afford phones and then the business will have to adjust prices down again, assuming the printing stops.

Wait, how will either group be able to afford phones if the price goes up?

Also you’re fallaciously negating the passage of time. So when the phone salesmen increases the price to $60 dollars no one will ever buy his phones?

I’m not negating the passage of time. The $60 is the monthly service fee. If one only makes $50 a month, one could not afford it. Sure, they could save a month’s worth of wages and then be able to afford it next month. But then they’ll have to cancel the month after that.

Then why do it anyways?

Exactly. This is in fact why businesses don’t adjust their prices as a result of changes in supply and demand.

How is labor demand sold at a negotiated price in ways that other goods aren’t? How does that assertion lend support for the LTV?

Laborers don’t simply assign a price to their labor and then sell it to the first person who buys it. Employers essentially bid on the price of each worker. Consumers don’t bid on the price of each cheeseburger.

12

Esuric: The distribution of labor amongst varying productive employments determines their (objective exchange) value…

I’m not sure I understand. How does the distribution of labor determine value under the LTV?

For anyone, what is the difference between Neoclassical Price Theory and the STV?

13

My cell phone scenario could also be reversed.

Let’s assume 100 customers each paying $50/month. Now let’s suppose 50 of those customers would spend $60/month if they had to. But the other 50 couldn’t spend more than $50/month. Now say that the government taxes the second group at $25/month and simply removes the money from circulation. The service provider finds itself with 50% less sales. If supply and demand determine prices, the company will lower its prices. However, it has to lower them all the way to $25 in order to get back the old customers. It would then be making the same amount as if it did nothing with the price, and if it did nothing it would only have to supply half of the commodity. On the other hand, if it raised the price of the service to $60, it would increase its revenue, which wouldn’t have been true before the government intervention and diminution of the money supply. So a decrease in demand says nothing about what a company should do with its prices either.

14

So if grant a machine which halves labor time required. Before that machine existed, 5 pairs of pants were made and sold at $500. Now that the machine exists 5 pair of pants are sold for $250. Suppose now that I burn 3 of those 5 pairs. Do the two remaining still sell for $50?

I don’t understand. Gradually? So if a machine makes 1000 basketballs, is the first one worthless but the last one valuable?

Subjective valuations of goods. Prices are just ratio’s, and ultimately ratio’s of goods. So when I work an hour, get paid $5 and then buy a $5 sandwich, the exchange looks like this G:Labour → Money → G:Sandwich. The sandwich in money terms is worth an hour of labor.

By subjective value theory, no one means to say that if I valued the Mona Lisa at $10 dollars I could buy it as such because value is subjective. What they do mean to say is that a good is priced by the subjective values of all that participate in its exchange to the extent that its exchange will support its own production. Actually I’m not sure if that’s right. Anyone care to weigh in on that statement (FotH included).

Because you gave new money to B?

Yes.

No one would expect a business to change his price so that he operated at a loss for any significant period of time. No one would expect a business to raise his price so as to be routed by competitors for any significant period of time either.

So when someone is able to produce more of a good than his competitors, he does not reduce the price?

When someone buys a cheeseburger from McD and not BK, they are not bidding up McD? and not not bidding up BK? Do you think that, as a trend, people buy more the more expensive A or the less expensive B, despite same quality?

15

So if grant a machine which halves labor time required. Before that machine existed, 5 pairs of pants were made and sold at $500. Now that the machine exists 5 pair of pants are sold for $250. Suppose now that I burn 3 of those 5 pairs. Do the two remaining still sell for $50?

Yes, provided that competitors have the same machine and are selling pants for $50. If you have a monopoly on the machine, then you could sell them at anything up to the old labor time (I’m not entirely sure if this is because the socially necessary labor time hasn’t decreased or because prices don’t necessarily equal values).

I don’t understand. Gradually? So if a machine makes 1000 basketballs, is the first one worthless but the last one valuable?

If the machine makes 1000 basketballs over the course of its lifetime, it would transfer 0.1% of its value to each one.

Subjective valuations of goods. Prices are just ratio’s, and ultimately ratio’s of goods. So when I work an hour, get paid $5 and then buy a $5 sandwich, the exchange looks like this G:Labour → Money → G:Sandwich. The sandwich in money terms is worth an hour of labor.

By subjective value theory, no one means to say that if I valued the Mona Lisa at $10 dollars I could buy it as such because value is subjective. What they do mean to say is that a good is priced by the subjective values of all that participate in its exchange to the extent that its exchange will support its own production. Actually I’m not sure if that’s right. Anyone care to weigh in on that statement (FotH included).

That actually don’t sound all that far off from the LTV. It seems like we are always comparing things to labor time. We way the choice of buying things against the choice of building them ourselves.

Because you gave new money to B?

But each one only gets $100 a month when the service already costs that. If it goes up, they can’t afford it. People won’t save up for something they know they will have to cancel the following month. Even if they did, the cell phone’s sales would drop to 0 for the first month that it raised prices. According to supply/demand price theory, the company would then lower its prices again. Then everyone could afford it. But then the prices would go up again and everyone would have to cancel. Such a cycle doesn’t sound like very good business.

So when someone is able to produce more of a good than his competitors, he does not reduce the price?

No. He reduces his prices if he can produce each good at a lower cost–regardless of how many he produces.

When someone buys a cheeseburger from McD and not BK, they are not bidding up McD? and not not bidding up BK? Do you think that, as a trend, people buy more the more expensive A or the less expensive B, despite same quality?

No, how could you bid up the price of something you already bought? Are you saying that if I buy a McD burger for $1, the person that goes to buy one after me will necessarily be willing to spend more than $1 on it?

You only bid on something when you communicate how much you’re willing to spend before you buy it.

16

Value, and therefore objective exchange values, are determined by SNLT (socially necessary labor time) according to Marx.

Well, the term “neoclassical” is fairly problematic, but neo-walrasian price theory i.e., consumer choice, employs a mathematical method (constrained maximization) and refers to already established market prices (the budget line/price ratio) and preferences (utility functions/indifference curves). The “goal” for the consumer is to be on the highest possible indifference curve (I’m a bit rusty with intermediate microecon).

Austrian price theory (which is neoclassical in a sense) rejects the notion of indifference curves as nonsensical (impossible to act when you’re indifferent) and doesn’t refer to already established market prices. Grayson has an excellent post on Austrian price theory on the front page of the Mises institute.

17

Why does the price of any given cell phone model drop over time?

18

Why does the price of any given cell phone model drop over time?

Provided that it is still being produced, it is because the socially labor necessary time required to produce it decreases.

19

So the price goes down because the price (measured in wages) goes down? Circularity much?

20

So the price goes down because the price (measured in wages) goes down? Circularity much?

No, that’s not circular. The wages don’t go down because the price of the product goes down. The wages (in totality) go down because the productivity of labor goes up.