Mariana Mazzucato - The Value of Everything - Making and Taking in the Global Economy

The next chapter explores how, even as the ink was drying on Marx’s writing in the British Museum Reading Room, the intellectual world of the classical economists was about to be turned upside down.

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Value in the Eye of the Beholder: The Rise of the Marginalists

… the distribution of the income of society is controlled by a natural law … this law, if it worked without friction, would give to every agent of production the amount of wealth which that agent creates.

J. B. Clark, The Distribution of Wealth: A Theory of Wages, Interest and Profits 1

In Marx’s hands, value theory became a powerful tool for analysing society. While Smith had praised the merits of individual pursuit of happiness and profit, and Ricardo had made the capitalist entrepreneur the hero of the economy, Marx was much more critical of both. As the Industrial Revolution progressed and threw masses of labourers in Europe into urban poverty, his labour theory of value was not just a set of abstract ideas, but an active critique of the system that he saw developing around him. If labour produced value, why was labour continuing to live in poverty and misery? If financiers did not create value, how did they become so rich?

However, the labour theory of value’s days were numbered. This chapter is about the emergence of a new set of ideas that inverted the earlier argument that value was nested in objective conditions of production, and that all other economic categories, such as the price of goods and services, were subsumed to it. The classical economists lost their crown to a new dynasty, the neoclassicals.

NEW TIMES, NEW THEORY

Socialist critiques of value theory were multiplying even before Marx wrote Capital . A group called the ‘Ricardian socialists’ used Ricardo’s labour theory of value to demand that workers get better wages. They included the Irishman William Thompson (1775–1833), Thomas Hodgskin (1787–1869) and John Gray (1799–1883), both British, and John Bray (1809–97), who was born in the US but worked for part of his life in Britain. Together, they made the obvious argument that if the value of commodities derives from labour, the revenue from their sale should go to workers. This idea underlay the co-operativism of the textile manufacturer Robert Owen (1771–1858), for whom the solution was that workers should also participate in ownership, of both factories and publicly created infrastructure. Marx and Engels were friendly with some of these groups, but very unfriendly towards others whom they thought had no proper analysis of why things were going wrong. The pair collaborated with the groups to whom they were well disposed to produce critiques of capitalism.

Intellectual opposition to capitalism had its practical counterpart in a growing array of radical and socialist political organizations which connected the often dire conditions of working people with programmes of action to remedy them. In Britain, the Chartists (1837–54) demanded reforms to the political system. Trade unionism began to gain a significant following. The Amalgamated Society of Engineers was formed in 1851 and the Trades Union Congress in 1868. During the recession of the 1880s, socialism became more widespread, culminating in the founding of the Labour Party in 1900. Here, Britain was a relative latecomer: the Socialist Workers’ Party of Germany was founded in 1875 and the Federation of the Socialist Workers of France four years later.

Faced with these threats to the status quo, the powers that be needed a new theory of value that cast them in a more favourable light. Other influences also encouraged the search for a new analysis of how capitalism works and the troubling question of where value comes from. Malthus’s pessimism about the dangers of population growth was an affront to the later-nineteenth-century belief in progress – and the facts did not appear to support him, because the food shortages he predicted had not materialized. Non-conformism offered a moral basis on which to argue that the immiseration of the masses that Marx and others feared was neither inevitable nor desirable. The development of natural sciences and mathematics encouraged attempts to place economics on a similar ‘scientific’ footing, as opposed to what was becoming seen as the more ‘literary’ endeavours of the political economists. Above all, perhaps, the rising power of capitalists in a society long dominated by aristocratic landowners and local gentry meant that a new analysis of capitalism was required to justify their standing.

THE ECLIPSE OF THE CLASSICALS

A series of thinkers and economists who were roughly contemporaneous with Marx began to lay the foundations for what has become modern mainstream economics. Landlords were defended as productive by Lord Lauderdale (1784–1860), a Scottish earl, and profits by Nassau Senior (1790–1864), an English lawyer and economist, as abstinence from consumption. Linking profits to a notion of sacrifice allowed a useful moral justification for the large income inequality between capitalists and workers. 2Furthermore, as scarce capital could be either invested or saved, profits were no longer linked to theories of exploitation but came to be seen as simply a return for saving and not consuming.

But to put the classicals to bed properly, a new theory of value had to be invented. Two of the principal architects of what became known as neoclassical economics were Léon Walras (1834–1910) and William Stanley Jevons (1835–82). Walras was a professor of economics in Lausanne, Switzerland. For him, ‘the characteristic of a science properly speaking is the complete indifference to any consequences, advantageous or undesirable, of its attachment to the pursuit of pure truth’. 3Walras was keen to show that economics was a real science, less fuzzy than sociology or philosophy, so set out to discover ‘pure truths’ in the science of theoretical economics rather than focus on applications. Jevons, a Professor of Political Economy at University College, London, began his 1871 The Theory of Political Economy with the assertion that economics, ‘if it is to be a science at all, must be a mathematical science’. He justified this statement by stating that economics deals with quantities: there were, he continued, ‘laws’ in economics, which could become like other ‘exact’ sciences if sufficient commercial statistics were available. Jevons called his economic theory ‘the mechanics of utility and self-interest’.

Another economist who linked value to utility was Carl Menger (1840–1921), one of the founders of the ‘Austrian school’ of economics. As we shall see later, utility is a broad concept, combining ideas about a product’s efficiency – is the car reliable? – with vaguer notions of satisfaction and even happiness – does the new car impress the neighbours? For Menger, the value arising from utility set the cost of production; the cost of production, including the cost of labour, did not determine value. Although original, Menger’s ideas did not fit comfortably into the new narrative that economics had to be much more abstract, expressed neatly in mathematical equations based on Newtonian physics.

FROM OBJECTIVE TO SUBJECTIVE: A NEW

THEORY OF VALUE BASED ON PREFERENCES

Walras, Jevons and Menger provided a positive and ‘scientific’ view of reproduction, exchange and income distribution. They used the construct which later came to be called ‘marginal utility’, and their propagation of a new view on value theory is now referred to as a ‘marginal revolution’ 4– it was, however, a slow one.

The marginal utility theory of value states that all income is reward for a productive undertaking. Given the large investments being made in factories and the edifices of the Industrial Revolution, it suited the changing circumstances of the second half of the nineteenth century. But it did not come out of nowhere; indeed, it has a long history. In medieval times, thinkers argued that ‘just prices’ were those that reflected an object’s utility. In his Summa Theologica , the thirteenth century philosopher-theologian Thomas Aquinas discussed the concept of the just price in a section of the book called ‘Of Cheating, Which Is Committed in Buying and Selling’. Just price was a normative concept, against what was seen as the wrong price resulting from morally evil greed. The medieval Church inveighed against the sin of greed and avarice, which broadly meant profiteering by middlemen and moneylenders. In Dante’s Inferno , usurers are consigned to the hottest part of hell (circle 7) because they are making money not from the productive sources, which for Dante were Nature or Art, but from speculative changes in interest rates. Indeed, he is so disgusted by usury that he puts usurers just below the circle of hell housing the sodomites.