Heteconomist Holiday Amusement 2 – Idle Thoughts on Utility and Labor Time

This is surely a time of year when we can take a step back to ponder any crazy thought that might enter our heads. Nothing – in the theoretical realm – should be considered unthinkable. Some may be tempted to disagree, a few paragraphs along, but that could only add to the fun. Hopefully I will not be permanently banished from the internet for expressing such idle curiosities. If this is the price that must be paid, it won’t be pleasant, but so be it.

A strange thought occurred while relaxing on Christmas Day. If the adoption by early neoclassical economists of a simultaneous equilibrium framework was partly motivated by a desire to extinguish TIME as a possible basis of value theory (and in the process to extinguish Smith, Ricardo and especially Marx from theoretical relevance on the question), did this choice end up biting them – theoretically speaking – on their own collective backside? In the same way that key results of Marx’s theory of value can be replicated from explicitly stated premises if we are prepared to view his theory in temporal, non-equilibrium terms, is it possible that most, if not all, of the logical problems in neoclassical theory might be resolvable if that theory was also re-conceptualized as a temporal, non-equilibrium theory?

The neoclassical dilemma of how to measure aggregate capital prior to knowledge of the rate of profit when the rate of profit itself depends on the value of capital seems to cause many of the logical difficulties. In a temporal approach, perhaps the value of capital could be taken as a datum at time t, measured at period t prices, and the rate of profit defined as profit generated from time t to time t+1 divided by the value of capital at time t. The circularity present in a simultaneous setting would be removed. It might then follow in a more or less straightforward fashion that, in neoclassical theory, a rise in the value of capital is inversely related to the rate of profit.

In Marx’s theory, it is just this adoption of a temporal conception of value and price determination that enables the replication of his ‘law’ of the tendency for the rate of profit to fall over an extended phase of capital accumulation. Revival in profitability comes about, in Marx’s theory, through crises and a collapse in capital values.

A critical distinction between the two theoretical approaches, however, is that in neoclassical theory, at least under competitive conditions, the ‘rate of profit’ really means the ‘rate of interest’. Neoclassical economists have asserted (without being able to show) that the value of capital should be inversely related to the rate of interest.

In Marx’s theory, an inverse relation between the value of capital and the rate of profit in no way implies a similar inverse relationship between the value of capital and the rate of interest. For Marx, interest income is simply a share out of surplus value (or gross undistributed profit). There is no reason to expect the interest rate necessarily to rise and fall in line with the rate of profit. Monetary authorities may well serve rentier interests when profitability is strong by raising the policy rate when it is deemed that this can be done without impairing growth. But this is essentially a distributive decision, even if officials typically dress it up in the apologetic garb of ‘inflation targeting’.

Neoclassical theory, as is well known, struggles to explain a persistent rate of profit in excess of the rate of interest under competitive conditions. In this respect, neoclassical theory is perhaps in need of Marx’s theory of value, or at least a theory of value centered on labor time. If surplus labor is the sole source of profit, in real terms, then it stands to reason that it will be difficult to explain profit without an acknowledgment of the significance of labor time to capitalist social relations.

Would a labor-time explanation of profit and commodity value necessarily require a jettisoning of utility theory? Actually, I don’t think so. If utility theory has a benefit, it would seem to be on the demand side. Any significance it might carry would probably have more to do with explaining the composition of demand than relative prices.

Marx’s theory of value (as opposed to price) applies to the supply or cost side. The neoclassical supply-side analysis that relies on a highly dubious assumption of diminishing marginal returns should be dropped. It contradicts the empirical evidence. At least in the dominant manufacturing and services sectors of the economy, production facilities and procedures are designed in such a way as to enable roughly constant variable costs – and so falling unit costs – almost up to full capacity utilization. This appears to be a matter of engineering more than anything else. It is this aspect of production that makes it seem unlikely that utility theory could have much explanatory power when it comes to prices.

This is not at all to deny that demand can impact on prices, as opposed to values. But the way in which demand matters for prices – due to elements of monopoly, economic rent and scarcity – is more likely to operate through class relations, power structures and institutional features of a capitalist economy. The possible relevance of utility theory would be to understanding consumer behavior in response to prices that are determined through cost, power and institutional factors.

Could this possible relevance of utility theory even extend to Marx’s framework? Could there be a benefit, ultimately, in synthesizing not only Marx’s theory with the insights of MMT and related heterodox approaches, but also in integrating two theories of value? The theory pertaining to utility might help to explain the subjective behavior of consumers in response to the objective economic system in which they find themselves. The theory pertaining to labor time would continue to explain not only values and prices but how classes, under capitalist commodity production, play out their conflicts in response to social forces driven largely by value relations. Is the grand task, some time future, to integrate everything of theoretical worth into the one open theoretical framework?

I’m not sure. But note that I said open theoretical framework. It would not be one theory of everything, but a framework in which different theories could coexist in a way that facilitated direct dialogue between the proponents of each. For instance, if a place were found for utility theory in such a framework, a Marxist would likely spend a lot more time than a neoclassical economist typically does on studying the class forces shaping the individual consumer. The origin of a consumer’s ‘endowments’, the way and conditions under which these can change over time and the social influences on ‘preferences’ would be key aspects of such analyses. Insights from sociology, social psychology, history and other disciplines would all be relevant, or potentially so, on these questions.

There would be theoretical space for the notion of a hierarchy of needs. There would be space for studying the way in which new consumer “needs” are produced to induce demand for the greater productive potential enabled by technical progress. Technical progress itself is a social process that appears to be driven by autonomous demand, especially by the state as both driver of innovation and largest autonomous spender. (On this latter point, the work of Mariana Mazzucato is especially relevant.) Subsequent adoption of new technology by capitalists is motivated by class conflict. Productivity improvements enable the shedding of workers into unemployment and a weakening of organized labor.

Basically, anything taken as given in utility theory would not be ignored but rather remain entirely open to intensive study. More generally, any variables that are taken as given – whether it be private investment in a short-run Keynesian model or preferences and endowments in utility theory – are in fact theoretically open, and therefore conducive to a wide array of different theoretical treatments from all kinds of different perspectives.

Take the question of social necessity of labor in Marx’s theory. I share the view of those who argue that labor is already abstract in production. A function of exchange, in contrast, is to distribute the value that has already been created prior to entering the marketplace. In aggregate, according to Marx, a given level of employment will always produce the same new value, because an hour of average labor always creates the same value in real terms irrespective of movements in productivity.

But, at the sectoral level, what ends up qualifying as socially necessary labor (i.e. turns out to count as average labor) could be said to depend at least in part on consumer preferences. These preferences will be weighted, of course, by the distribution of ‘endowments’; or, in other words, the distribution of income and wealth. If the pattern of consumer preferences changes significantly, this will affect the quantities each sector could profitably produce and so affect the social necessity, or otherwise, of labor in the various sectors.

Again, all of this has just been intended as some holiday-time thinking out loud. Maybe there would be no coherent way to marry the two conceptions of value into one open theoretical framework in which each could function in a way that contributed to the overall theoretical understanding of the economy.


5 thoughts on “Heteconomist Holiday Amusement 2 – Idle Thoughts on Utility and Labor Time

  1. This is an interesting exercise, Pete, if — for no other reason — because it invites one to open one’s mind to different perspectives and possibilities.

    That’s not to say that I necessarily agree with everything you say.

    Take for instance the subject of utility. Prof. Wolff has had some good things to say about utility and even about Bentham (gaining the knee-jerk opprobrium of some Marxists, in the process).[*]

    And I can understand that at the immediate level of application, the idea of utility seems to be little more than a much more elaborate notion of value in use (to employ Smith’s term).

    However, beyond the empirical problems that utility has (which you mentioned), it’s from a more philosophical point of view that I see difficulties with utility.

    Utility, as mainstreamers think of it, is an unmeasurable psychological phenomenon. Not just that: initially, it was conceived as a cardinal variable, but the ordinalist school won the day. In few words: it’s an idealist notion. A bit of something existing in the minds of mainstream economists, only; useful to explain whatever, because it’s infinitely malleable.

    (Mind you, in all that it’s similar to… yes, you guessed… Animal Spirits. I know, I can be a bit of a pain in the backside with my obsessions :-)).

    Marx’s conception is materialist: tangible things, that can be measured.


    “The neoclassical supply-side analysis that relies on a highly dubious assumption of diminishing marginal returns should be dropped. It contradicts the empirical evidence. At least in the dominant manufacturing and services sectors of the economy, production facilities and procedures are designed, by and large, in such a way as to enable roughly constant variable costs – and so falling or at least constant unit costs – almost up to full capacity utilization. This appears to be a matter of engineering more than anything else.”

    This sounds more promising, although there is at least one very well-known heterodox academic — who shall remain anonymous (I’m not speaking of Austrians or such) — who claims that diminishing marginal returns is the only real law in economics: marginal returns always fall, and if they do not fall immediately, they shall … “eventually” (his word, not mine).

    (I felt tempted to paraphrase Keynes — eventually we will all be dead — in reply to that, but did not).

    Can you give some pointers to empirical research both in support and against diminishing returns?

    [*] Three Cheers for Jeremy Bentham

  2. Thanks for your thoughts, Magpie.

    I’m not aware of any decent evidence in favor of diminishing returns. As far as I’m aware, studies have suggested marginal costs are typically constant or declining.

    For instance, in a review of Blinder’s (mainstream) book, Asking About Prices, Downward and Lee write:

    over 88% of respondents indicated that ‘marginal’ costs either declined or stayed constant with changes in output (sometimes involving discrete jumps). This behaviour of costs, which lies in contrast to the usual neoclassical assumption is well documented elsewhere in Lee (1986, 1994). The long pedigree of such findings can be illustrated by noting, for example, that in 1952 Eiteman and Guthrie published the results of a large-scale survey similar to Blinders. The results of this survey are consistent with Blinder’s work. More recently, Reid (1987) and Reid et al (1993) specifically note that in the small firms surveyed marginal costs either declined or stayed constant.

    Inside ecological limits, I don’t think diminishing returns come into play even eventually for reproducible commodities. For example, under capitalism, productive capacity will be expanded in response to persistently strong demand. Firms have planned spare capacity to cope with fluctuations in demand. If capacity utilization is maintained for a time at a higher rate than the planned normal rate due to persistently strong demand, it will be profitable to expand operations before the point is reached that diminishing returns become an important factor.

    If the person you are referring to is talking about ultimate ecological limits, I can understand the point.

  3. On different approaches to the “value question”, the following broadly describes my tentative thoughts on the matter. (Thanks very much for the interesting link, by the way.)

    I see the normative question, “how should things be valued?”, as basically amounting to the questions, “how should society’s time and resources be utilized?” and “who should decide what is valuable and under what circumstances?” On the second question, there will be many matters where it seems desirable to allow the individual to decide what s/he values. Here I am focusing on this subset of all matters that need social resolution.

    When it comes to production of goods and services, the first question concerning the use of society’s time and resources can itself be broken down into at least two further, distinct questions: “how should a good be priced?” and “how much of the good should be produced?” For each product, there is a decision to make over price and quantity.

    Most goods and services are readily reproducible. In these cases, I don’t think utility theory can say much about pricing. IMO, the social choice over price might be informed by a combination of labor time required to produce the good (since it requires some of society’s available labor time to produce), the costs in natural resources (ecological and resource-availability considerations) and need (it will often be appropriate to provide necessities at prices below cost and perhaps at zero price). At least for readily reproducible goods and services, I don’t think that a (utility-based) willingness of somebody to pay a higher price than would be arrived at through one of the other normative principles is a good idea. When a product is readily reproducible, there is no need, in most cases, for its price to be affected by the quantity produced. Arguments to the contrary rely on supposed diminishing returns, but these are not an important factor in the production of most goods and services.

    With most prices determined independently of utility considerations, the question will then be: how much of each commodity should be produced? In other words, what should be the composition of output? There are only so many resources and so much time. This is a matter of deciding how to spend our time.

    On this question, there might be a place in theory for a consideration of the role played by subjective preferences. Especially in a society with a fairly equal distribution of income – or at least a society in which income is distributed in a way that is deemed to be legitimate – the subjective decisions of individuals over which products to consume function, in a way, like votes. Because market and market-like mechanisms do not ensure one person, one vote unless there is complete income equality, it would not be desirable to extend such a mechanism into the production of goods and services that should be handled in other ways.

    All in all, I think it is simpler to think of prices as determined by labor time, resource costs and normative considerations. Then, given prices, the composition of demand will determine the relative quantities of a subset of the goods and services produced. Subjective utility, if it has a role in theory, would seem to come in here. Individuals might be conceived as comparing their subjective valuations of the various products on offer to their prices. Their decisions over what to consume would shape demand, to which relative quantities would adjust. The many social factors influencing the formation of preferences would also be important, even if preferences were seen as playing this role.

    The above relates to readily reproducible products. In instances of true scarcity, allowing the good to go to the highest bidder might be one valid mechanism and have a significant influence on price. But, even here, before subjective utility could play a role in price determination, there is a prior social decision to allow this bidding process. And because willingness to pay is not independent of capacity to pay, there is a prior determination of ‘endowments’ that needs to be explained. So, subjective utility could have an influence on prices in instances of true scarcity, but it would not be resolving the prior question of how things should be valued or the prior social formation of endowments and preferences.

  4. Hi Pete,

    “Inside ecological limits”

    I am afraid I don’t understand the reference to ecology.

    Don’t get me wrong, I know human activities have an impact on the ecosystem: negative externalities. That I understand.

    What I do not understand is what relation ecological considerations have to the typical textbook exposition of decreasing marginal returns, a la John Bates Clark: a terrain used for agriculture, increasing size of the workforce, varying crop sizes.

    Clark (and textbooks following him) don’t mention any of that. In the quote you included, there is no reference to ecology (at least, there is no explicit reference).

  5. I take your point, Magpie. I was trying to guess what a heterodox economist would have in mind when saying diminishing returns take hold eventually.

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