Essays in Social Value Theory: A Neoinstitutionalist Contribution

A Neoinstitutionalist Contribution

Marc R. Tool

• Publisher: Routledge
• Year: 2019
• eBook ISBN: 9781315494593
• Topic: Economics
• Subtopic: Business General
• Index: Economics

This is a collection of Marc Tool's essays on instituitional econonics, written over the 1980s.

III
INSTRUMENTAL VERSUS NONINSTRUMENTAL VALUE THEORY

4

The Social Value Theory of Neoclassical Orthodoxy: A Review and Critique

The meaning and validity of economic theory has customarily been pursued and demonstrated in the context of its use in the identification, analysis, and intended resolution of economic problems. The creation of theory has routinely been prompted and warranted by its relevance (immediate or ultimate) to the formation of economic policy—policy intended to improve existing conditions.¹

This is so notwithstanding the recent minor surge in orthodox theory building under the caption of the “new classical economics” or “rational expectations,” inferences which suggest that public policy, such as fiscal demand management, though well-intentioned, will likely aggravate and worsen macro-conditions rather than improve them. Accordingly, a new campaign for avoiding policy interventions, latter-day laissez-faire, is spawned.²

Such a view is ahistorical, innocently unaware of the flawed postulates on which it rests, and is thus of doubtful relevance and realism. Consider elements of a familiar history of economic ideas: Much of what is now known as mercantilist literature originated as monographic appeals for policy shifts in international trading prescriptions or proscriptions.³ The physiocrat Francois Quesnay’s Tableau Economique, evidently the first approximation of an input-output matrix, was generated by inquiry addressed to the need for extensive reform of French agriculture, especially tax reform.⁴ David Ricardo’s strategic policy interests were currency reform and the repeal of the Corn Laws which placed tariffs on the importation of wheat in England, allegedly keeping wage goods and wages high and profits low.⁵ Thorstein Veblen’s advocacy (in substance or in jest?) that engineers assume direction of the economy was doubtless fueled by his profound disenchantment with “industrial sabotage,” a “conscientious withdrawal of efficiency,” by the “captains of industry.”⁶ Many of the social policy initiatives of the second and third decades of this century were expressions of theoretical contributions and experimental policy initiatives, in Wisconsin and at the national level, of John R. Commons, his students, and others similarly oriented.⁷ The late Arthur Okun’s analysis of inflation led him to advocate the use of tax powers to constrain administered pricing and its contribution to price level increases.⁸

Accordingly, orthodox and heterodox economic inquiry historically has been directed to both positive analysis (what is) and to normative concerns (what policy ought to be), even though, incongruently, from John Stuart Mill and Nassau Senior in the mid-nineteenth century and after, mainstream neoclassical theorists have sought and claimed the posture and position of positivism.⁹

To reiterate then, normative principles and standards that permit the identification and determination of what ought to be, that constitute criteria with which choices among alternatives may be made, are regarded here as value principles in the philosophical sense and usage. In social (including economic) analysis, the choices must be made from among institutional structures, that is, prescriptive and proscriptive organizational arrangements for correlating behavior. Accordingly, the criteria for social choice are principles of social value. The identification of a problem and the choice of policies as institutional adjustments to resolve it require recourse to social value principles.

The essential point may be put categorically. An inquirer cannot logically or empirically distinguish between what is and what ought to be without applying a criterion of judgment, a social value principle. If there is general agreement with the foregoing that economic theory building is purposively addressed to problem solving, then such inquiry must implicitly or explicitly include normative as well as positive premises and constructs. The philosophical dilemma for traditional neoclassical economists has often appeared to be the simultaneous and contradictory claims to positivism and to problem solving relevance—the concern to eschew value judgments and yet to advise on economic policy which compels the use of value principles. The confusion generated by this dilemma as it appears in conventional texts and elsewhere is one reason for developing this review and critique of neo-classical social value theory.¹⁰

A related and more important reason is the prevailing dominion of ethical relativism, which asserts that value principles and criteria are relative to individuals or cultures holding them. Values are noncognitive, subjective, and given.¹¹ As noted earlier, Clarence Ayres characterized this dominion as “the pestilence of moral agnosticism.”¹² Contemporary neoclassicism’s affirmation of ethical relativism has been challenged, but it remains substantially intact.¹³ This affirmation is manifested, for example, in the largely uncritical acceptance of “wants as given” in traditional demand analysis, the ambivalence of “better off” and “worse off” in the Paretian optimum, the uncertainty of meaning of “costs” and “benefits” in cost-benefit analysis, and in the deference to ordered, but unexamined, preferences in indifference analysis. One of the consequences of such affirmation is to advocate or tolerate the removal from inquiry of any serious or credible concern with social value theory. This essay is intended to help demonstrate that the views concerning social value of mainstream theorists are inadmissible on philosophical grounds and inapplicable on pragmatic grounds, and that a more warrantable social value theory must be used if headway is to be made in resolving major economic problems that are now producing agonizing, divisive, and destructive consequences.

From the perspective of neoinstitutionalism,¹⁴ then, we offer a review and critique of the social value position of orthodoxy. Orthodoxy here refers to the contributions of, among others, the neoclassical Marshallian utilitarian theorists and their intellectual progeny, as well as the Paretian and Hicksian revisionists, including axiomatic theorists. The value positions of these constituents of orthodoxy are considered and appraised in the following sections.

Utilitarianism

In the classical and much of the neoclassical tradition in economics, the maximal satisfaction of wants, notably consumer wants, has been and remains the basic criterion of judgment, the standard of value, the basis on which to distinguish between good and bad, proper and improper, and desirable and undesirable. Utility, the ability or capacity of goods and services to satisfy human wants, has been and continues to be the value referent. Maximizing utility is the ultimate and continuing purpose or goal of individuals; this goal is thought to be most fully realized in a free enterprise economy.

Recall Jeremy Bentham’s concern as a classicist to identify a scientific ethic. “Nature,” he argued,

has placed mankind under the goverance of two sovereign masters, pain and pleasure. It is for them alone to point out what we ought to do as well as to determine what we shall do. … They govern us in all we do, in all we say, in all we think. … The principle of utility recognizes this subjection. … By the principle of utility is meant that principle which approves or disapproves of every action whatsoever, according to the tendency which it appears to have to augment or diminish the happiness of the party whose interest is in question. … By utility is meant that property in any object, whereby it tends to produce benefit, advantage, pleasure, good, or happiness … or … to prevent the happening of mischief, pain, evil, or unhappiness.¹⁵

Bentham’s “hedonistic calculus” would compel the determination of worth or value from a quantitative balancing of pleasure and pain, of utility and disutility. Utility is embedded in the product or service. The utility derived varies with the intensity, duration, certainty, and propinquity of the pleasure experienced. In such fashion, Bentham most extensively and conspicuously, if not persuasively, postulated a theory of human nature and gave explicit formulation to the utilitarian value principle as a basic premise of orthodox economics.¹⁶

The utilitarian premise is also firmly embedded in mainstream neoclassicism, but with Alfred Marshall, utility becomes a subjective estimate of desire. Utility does not reside in the good or service itself; it is a derivative feeling state which price measures. Said Marshall: “Utility is taken to be correlative to Desire or Want … desires cannot be measured directly but only indirectly by the outward phenomena to which they give rise; and … in those cases with which economics is chiefly concerned the measure is found in the price which a person is willing to pay for the fulfillment or satisfaction of his desire.”¹⁷

Dennis Robertson elaborated the theme: “We shall not go far wrong, so runs the [Marshall-Pigou] theory, if we assume that the normal consumer, in disposing of his income, seeks to maximize something which we can call indifferently his satisfaction, his utility, or his economic welfare. He does this in the light of his knowledge of a law of the diminishing increments of utility to be gained from successive increments of expenditure in any one direction—a knowledge which assists him so to distribute his expenditure that the marginal utility of the several goods he purchases is proportional to their market price.”¹⁸

For the Marshallian utilitarians, utility is the referent for social value, and price is its measure. As the remarks of Marshall and Robertson quoted above affirm, prices people pay purport to record the fact of their efforts to satisfy desires, wants, and tastes and to measure the intensity of such wants and tastes by the character and extent of their purchases. Prices become the “objective” data with which to measure the depth and magnitude of “subjective” desires. Indeed, as most will acknowledge, so accepted is the foregoing, that “price” is frequently taken as a synonym for “value.” A historian of economic thought could mark the shift from classical to neoclassical thought, not with a change from utility as the meaning of social value, but with a change from embodied labor to price as the measure of social value.

The identification of price with social value usually runs from value to price (not the reverse). Accordingly, price is held to represent real worth, which is utility. Thus price becomes a criterion of judgment in consumer and other economic choices. It serves as an evidential surrogate for a nonevidential feeling state. For this reason, among others, these orthodox theorists have long looked upon the analysis of price as their main object of inquiry. A general theory of price would, in fact, constitute a general theory of the economic process.¹⁹ “Ah, sweet mystery of price,” observed Clarence Ayres; it is thought to be the central reality to be explained in economics.

The Inadequacy of Utility Theory

The effort to use utility as the criterion of judgment in economics and social analysis is fatally flawed for three interrelated reasons. It is inadmissible as a principle of social value because it is tautological, because it is relativistic, and because it is inapplicable. Tautology describes a circularity in reasoning; relativism imposes an ambivalence that renders the criterion inoperative; inapplicability arises from the conceptual sterility of a concept and its consequent inability to function in the role assigned, that is, as a criterion of judgment in choosing among institutional alternatives.

The tautological deficiency of utility was suggested some years ago by Joan Robinson: “Utility,” she observed, “is a metaphysical concept of impregnable circularity; utility is the quality in commodities that makes individuals want to buy them, and the fact that individuals want to buy commodities shows that they have utility.”²⁰ The alleged subjective quest to satisfy wants is not demonstrated by the objective fact of market activity; it is a tautological affirmation and attribution for which demonstration is impossible. Whatever occurs as market involvement is assumed to reflect a utility maximizing judgment of the participant. On this small conjectural block is erected the edifice of utility value theory.

Consider this point further. If we assume that all economic behavior is intended either to maximize utility or minimize disutility, we appear to have a universal explanation for economic activity. Recall that in orthodox thinking there is no analytic interest in the character of wants, no discrimination between or among tastes and desires. They are whatever they are.²¹ The purpose of the market is to satisfy such wants and tastes. There is no interest in the origin of wants and tastes; they derive from whatever source. The position is ahistorical and acultural.

But orthodoxy does not provide an explanation of economic behavior. To say that rational people maximize utility is to say nothing analytically informative. At most, it can only suggest that people are motivated in some way. The utility maximization principle is conjectural assertion; its referential content is illusive; it does not provide accounting or explanation. Explanation hinges on the ability to establish linkages or connections between or among items, the identities or meanings of which are knowable. Inquiry involves the quest for causal connections, for observable ...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Dedication
• Table of Contents
• Foreword
• Preface
• I Introduction
• II Instrumental Value Theory
• III Instrumental Versus Noninstrumental Value Theory
• IV The Power of Ideas
• About the Author