classical economic nostalgia

Consider the following three phenomena:

- Farmers' Markets: this petit bourgeois institution recreates a classic market scenario in a number of ways. Intermediaries (Tescos, banks, supply chains etc) are removed, to bring producer and customer into direct contact with each other. External authorities (regulators) are absent, meaning that the market is a form of 'co-opetition', a form of economic competition that is closely moderated and limited by the competitor's themselves. Efficiency is absent as a concern, which explains why these places are a) highly frustrating to anybody who has forgotten to dispense with their consumerist psychology and b) a total rip-off.

- New debates about pay: The economic crisis has served some political function in highlighting the remuneration practices in financial services firms. Although nobody quite knows what to do in response, the notion that a moderately clever, hard-working banker can earn the average UK salary in a week strikes many people as indefensible. The word 'earn' starts to weigh a little more heavily: did you really earn your bonus? Now just imagine the potentially radical implications of requiring all employers to publish all salaries in their organisation. Again the question would rise. Did my manager actually earn twice as much money as me for the day we've just done?

-Fair Trade: What is 'fair' about Fair Trade? The interesting aspect of this is that it is a resolutely pro-market agenda, but an anti-capitalist one. The very notion of fair trade implies that there is a right and a wrong way for price-based exchanges to be carried out. And where Fair Trade is concerned, the norm states that the producer should not be exploited by any intermediary who has not injected their own labour into the product. This is not 'fairness' as 'equity' or 'externality', as economists might suppose; it is fairness within the market exchange itself. In a sense, this is just an international version of the petit bourgeois farmers' market. It's a more rigorous, Braudellian attack on market power, that someone like Phillip Blond appears to hope for from anti-trust.

Each of these examples suggests that there is a correct and an incorrect price for something in a market. The correct price is the one that reflects the material value lodged in whatever is produced. Some labour produces more value than other labour, and prices should be set in correspondance to this. In short, these cases represent a yearning for the labour theory of value that underpinned classical economics (Smith, Ricardo, Marx).

I would go further and suggest that the yearning is born out of exasperation with the psychological theory of value that under-pins neo-classical economics. The only way a price can be 'wrong' from a neo-classical point of view is if a market failure is present (economists: please tear me to pieces on this in the comment field below). With no account of where value comes from, but only of how it is perceived, neo-classical economics introduces the tautology that a banker is 'worth' £28k a week because the 'customer' (i.e. the bank) is prepared to pay him this much. It also introduces the culture of consumption, in which the shopper scans the market, calculating whether a loaf of bread is 'worth' £1 only in terms of how much do I want it.

But eventually and ironically the consumer themselves starts to feel conned. With their desire treated as society's sole barometer of value, they soon find that they are being led into decisions and towards products that satisfy them in some phoney or damaging sense. The barometer itself is being strategically targetted by capital. Behavioural economics (now used by consumer protection authorities) senses the problem, but fails to break out of the solipsism in which value is only subjective. The nostalgia for a labour theory of value is a nostalgia for a world that exists independently of my own stance towards it.

Petit bourgeois critiques of capitalism (which I have much sympathy for, incidentally, Broadway Market not withstanding) are an effort to leap out of consumer solipsism, to remember that value is made and not just encountered. Once the infantile worldview of the price theorist is overcome, then mature political questions arise regarding earnings and exchange.

Just imagine if every employer had to publish every employee's pay. The questions that arose would not be normative in the way that neo-classical economists imagine (e.g. is it fair to pay this man only £10k a year when he has a family?). They would be deeper questions regarding the nature of value or, more accurately, of economic worth. For instance, in the overall ecology of this economic organisation, where effort, hours and commitment are evenly distributed, can Peter be worth two Simons? The answer may be yes, and this socially polluted version of economics may be messier than the consumerism + human capital theory of neo-classical economics. But at least the discussion occurs.

I stress that this is a yearning, a form of nostalgia, not the future. But it indicates something about our contemporary frustrations with capitalism. Unless, of course, you want to go further, and consider that the labour theory of value only fell by the wayside in the first place, because it led directly to a certain theory of surplus value extraction...

Comments

[Josh]

I'm not an economist and I won't tear you apart, but I'll just point out that out of the marginalist revolutionaries, only Jevons (and maybe Walrus?) had psychological underpinnings while Menger made sure to avoid this.

[max]

I'm only half an economist, so a few thoughts in an economistic vein:

1) You say that 'the only way a price can be 'wrong' from a neo-classical point of view is if a market failure is present ... neo-classical economics introduces the tautology that a banker is 'worth' £28k a week because the 'customer' (i.e. the bank) is prepared to pay him this much.'

You're right that most neo-classical economists assume market failures are the exception, not the norm. But as people like Paul Wooley point out, most bankers get paid £28k a week precisely because of the pervasive market failures in both the financial system and - linked to this - in their employers' compensation systems. Shareholders (and taxpayers, in nationalised banks) suspect something is up, but don't have the information to do anything about it. Keynsian economists (and people like Akerlof and Stiglitz) would say that capitalist economies are riven by structural market failures - information asymmetries in particular - so that first-best outcomes are probably the exception, not the norm. Bankers have used the efficient markets hypothesis to suggest their industry operates at close to the neo-classical ideal. We now know have far from the truth that is.

2) Given all of that, most economists would say that making everybody's pay public is a radical move, not a nostalgic one. From a pure efficiency perspective, this massively increases the amount of information we have about what people's work is worth. In that sense it might take us much closer to (ahem) neo-classical labour market equilibrium. Although, er, what about privacy?

3) The Freakonomics guys should do a chapter on farmers' markets. I suspect they would conclude that either that the stallholders have successfully internalised the social externality of feeling massively good about yourself; or that going to Broadway Market is a form of Veblen-style positional good, like riding a fixed-wheel bike or driving a Hummer ...

[Will Davies]

Thanks both. Useful, err, information for me to chew on.

Re the publicising of pay: it is interesting that we have developed norms that make it perfectly acceptable to ask "how much did this artefact cost?" (a vulgar reduction of quality to quantity), but totally unacceptable to ask "how much do you earn", a matter of political-economic seriousness in my view.