Friday, February 17, 2012

Fairness and value

In his essay, The Income Gap: Is the Distribution of Money Fair?, Mark Thoma finds that the present unfair distribution of income is in at least some sense "unfair", and attributes the cause to failures of perfect competition. Thoma believes that unlike Marx's labor theory of value, the more modern marginal utility theory of value provides a satisfactory account that everyone — capitalists, landlords, and entrepreneurs as well as laborers — gets their fair share of economic activity. However, we can be assured of a fair distribution only if the assumptions of perfect competition actually obtain in real life, and Thoma believes that the real world does not even come close to embodying these assumptions. The cure, presumably, is an expanded role of government to enforce perfect competition and thus ensure fairness of outcome.

Thoma begins his article by drawing a sharp contrast between Marx's labor theory of value and the marginal subjective utility theory of value. I do not believe the contrast can be drawn so sharply: rather than contradicting one another, the marginal utility theory complements and expands the labor theory of value: The marginal utility just makes more explicit Marx's notion of socially necessary labor time*. The marginal utility theory is a theory about demand; we still talk about the supply in terms of total embodied labor**, some discounted from a previous accounting period. Even marginal utility theory still concludes that there is some specific amount of socially necessary labor time necessary to produce a commodity at equilibrium, where rising marginal cost of supply (in actual labor time) equals falling marginal utility of demand. Since these numbers are, by definition, equal at equilibrium, we can represent the not-directly-measurable subjective demand in terms of the directly measurable labor time that constitutes the actual cost of supply.

In Capital, Marx is not, I think, interested in giving a rigorous account of exactly what the socially necessary labor time actually is. It's going to be something and it's going to be measured in actual labor costs. What Marx considers important is that all commodities, including and especially labor power, will trade at this cost.

**Technically
abstract labor time, which accounts for varying disutility of specific kinds of work and work environments: an hour spent in a sewer is, ceteris pariubus worse than an hour spent in an air-conditioned office.

Thoma does not want to talk about fairness per se — economics is descriptive, n'est pas, not normative — but he asserts that perfect competition leads to at least one kind of fairness: under perfect competition, everyone gets out of the national economy what they put in. It's important to understand, however, that under the marginal utility theory of value, this conclusion is at best true by definition. A central assumption of marginal utility theories of value is that value cannot be measured directly; we can draw conclusions about value only from the behavior of the market. If apples trade for $2.99/lb., then that's the only measurement we can ever have about the value of an apple... or at least the marginal value of the last apple sold. Likewise, we can measure the value of what a person puts into the economy only by measuring how much money they receive for doing whatever it is that they do: laboring, owning capital or land, or being all entrepreneur-y. And of course what a person gets out of the economy is defined directly by how much money they have received. We cannot idependently determine whether or not perfect competition is actually fair; perfect competition in a free market is essentially one definition of fairness.

But Thoma seems wants to have his cake and eat it too. If perfect competition in a free market is an accurate and complete description of economics, then it is true whether we like it or not. If it is inaccurate or incomplete, then deciding whether or not to implement it is a normative question, not a descriptive question. If perfect competition is really true, then the distribution of income is perfectly fair right now; indeed any distribution of income is fair by definition. If perfect competition is not true, then Thoma is making a purely normative argument: we ought to create an economic system that either actually is or acts like perfect competition. But that would beg the obvious meta-ethical question: why should we implement perfect competition as a definition of "fairness"?

There are, I think, a lot of parallels between the discourse on economics and the discourse on religion. One prominent theme in religion is the debate — a legitimate debate between rational people of good will — over religious "moderates". Both sides oppose religious "fundamentalists". On one side are those who say that because religious moderates are indeed moderate, we should except their religion from sharp criticism: if our goal is moderation, then it doesn't matter how anyone gets there. On the other side — the side I prefer — are those who say that because both religious moderates and religious fundamentalists both use religion to justify their positions, and there is no rational, empirical way to judge between their differing uses of religion, the moderates in a sense philosophically support the fundamentalists. (It gets worse: granting foundational authority to the literal meaning of scripture, the fundamentalists seem to have a better case than the moderates.)

Similarly, the debate between "moderate" capitalist economists such as Thoma and capitalist "fundamentalists" turns in no small part on the non-empirical exegesis of classical economics. There's a lot more going on in economics, of course, than an intellectually honest examination of the foundations of capitalism. But the parallel still holds: capitalism, like any other social endeavor, has underlying ethical norms. At some point, distorting these ethical norms to the reality of modern society becomes untenable, and we must fundamentally rebuild them.

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