1. Introduction (cont'd)
1.2 The Just Price
The question of the ‘just price’ is as old as Western civilization and of continuing relevance and concern to it.
In ancient Greece, Aristotle considered it;
in medieval Europe, St. Thomas Aquinas and his fellow Scholastics pondered its mysteries;
in the age of conquest, Mercantilist economists re-considered it as New World gold and plunder poured into the coffers of European kings and queens;
at the dawn of the Industrial Revolution, Classical economists from Adam Smith to John Stuart Mill struggled to answer it;
Karl Marx re-established its moral imperative in the exploitation of labour;
at the height of the Industrial Revolution (about 1900), Alfred Marshall and the Neo-Classical School seemingly resolved it through interaction of supply and demand in a perfectly competitive marketplace;
in the pre-dawn of the Atomic Age, Keynes shifted the question from individual markets to the economy as a whole; and,
today, in a post-modern ‘knowledge-based economy’ we continue to seek an answer, for example, in view of Microsoft successfully building an economic empire by initially, in effect, giving away a product (e.g. Windows '95) that cost hundreds of millions of dollar to develop and then, once the costumer base was secured, converting the product (Windows XP) into a subscription service expected to earn micro-royalties from millions and millions of consumers – individual and institutional.
I will try to sum up the origin and evolution of the question. I will do so with broad brush strokes covering three and half millennia of human thought. In the process, and inevitably, ‘finer’ points made by thinkers much deeper than myself will be lost.
In economics the question is addressed in two ways: either as 'price' theory or 'value' theory. The difference is not trivial and yet not material in modern and post-modern times during which they have tended to become one and the same excepting various potent strains of religious fundamentalism apparent around the world including Christian, Hindu, Judaic and Moslem fundamentalism. This merging of price and value, at least in the secular humanist tradition, reflects the triumph of 'materialism' expressed in both Markets and Marxism. In fact, as we shall see, the theoretic underpinnings of Market Materialism are, in many ways, much more severe than the historical materialism of the Hegelian Marx.
'Price' implies extrinsic measurement of worth; 'value' implies either extrinsic and/or intrinsic worth. And extrinsic measurement requires external judgement; intrinsic implies internal - to a subject and/or an object - judgement. Many of the highest 'values' of humanity can only be assessed internally. An expression that catches some sense of such internal assessment yet with an external reference point, is: An obligation not felt is not an obligation. This Japanese-type phrase illustrates the 'animistic' character of Japanese culture in general and Shintoism in particular - a sword or a book is not a 'thing' but rather the embodiment of a creator's personality or soul. Today, we retain the slightest hint of this 'animist' tradition in concepts of intellectual property especially copyright:
… intellectual property is, after all, the only absolute
possession in the world... The man who brings out of nothingness some child
of his thought has rights therein which cannot belong to any other sort of
property… (Chaffe 1945).
In effect the debate involves the perceived deviation between what the Ancient, pre- and Classical economists called 'the natural price' or what today we call 'the competitive price' and 'the 'market price'. In the ongoing debate four primary sources of value have been identified:
Does the value of a good or service emerge from its cost of production? And if so, what factors of production should legitimately be included in the calculation of cost? Should only the cost of labour be included? Or, for example, should the costs of a trader or distributor be included or the interest costs of capital associated with production and distribution be included?
Is the value of a commodity determined simply in exchange, that is, the market price or whatever the market will bear?
Is the value of a good or service simply a function of scarcity, for example, water is usually abundant and therefore cheap but diamonds are scarce and therefore expensive?
Is value simply a function of usefulness or 'utility' to the consumer?
To Aristotle, value was a essentially function of use and exchange. To the Scholastics of the Middle Ages, it was essentially a function of production and distribution costs. To the Mercantilists, it was based on utility, that is, perceived value to the consumer. To Adam Smith (see Adam Smith, 3. The Analysis of Value) and the Classical Economists including Marx, it was a function of cost specifically, labour costs. To Marshall and the Neo-Classical Economists is was the resolution of 'the willingness to pay' and the 'willingness to supply' (see. 2. The Approach to the Analysis of Price). However, 'the willingness to pay' or demand was rooted in the Benthamite calculus of utility based on a physical unit of pleasure/pain called the 'utile' (see The Triumph of Materialism, below). To Keynes, once we rise above individual markets to the economy as a whole, value depends on money as the link between present and future (see Keynes, The Theory of Prices).
Economics, as a discipline of thought or "a recognized field of tooled knowledge" (Schumpeter 1949: 143) emerged in the late 18th century at about the same time as political rights of the individual became a reality with the American and then the French Revolutions. Adam Smith, writing just as the flood tide of revolution began to inundate the Old Order of Privilege and Preference, demonstrated a strong awareness of the cultural matrix of economic phenomena (Smith 1776). Two of his successors, however, stripped economics of its cultural context -- Jeremy Bentham and Karl Marx.
Jeremy Bentham (1748-1832)
Jeremy Bentham was a lawyer turned reformer. He believed in "La Raison" (Schumpeter 1949: 115) as the ultimate test of value to society. To Bentham, neither God nor some "natural harmony" was at work in human affairs. Furthermore, it was Bentham who introduced the premise that culture, custom and tradition are not relevant to economic analysis:
On the whole the most influential of the immediate successors of Adam Smith was Bentham. He wrote little on economics himself, but he went far towards setting the tone of the rising school of English economists at the beginning of the nineteenth century ...[who] therefore were inclined to think that the influence of custom and sentiment in business affairs was harmful, that in England at least it had diminished, was diminishing, and would soon vanish away: and the disciples of Bentham were not slow to conclude that they need not concern themselves much about custom. It was enough for them to discuss the tendencies of man's action on the supposition that everyone was always on the alert to find out what course would best promote his own interest and was free and quick to follow it (Marshall 1920: 628-9).
As a pragmatic political reformer, the opening terror of the French Revolution, its Napoleonic second act and its denouement -- the reactionary Holy Alliance -- restrained Bentham from advocating the logical political conclusions of his radical egalitarianism, i.e. not only redistribution of wealth but also property.
Another way in which he influenced the young economists around him was through his passionate desire for security. He was indeed an ardent reformer. He was an enemy of all artificial distinctions between different classes of men; he declared with emphasis that any one man's happiness was as important as any other's, and that the aim of all action should be to increase the sum total of happiness, he admitted that other things being equal, this sum total would be greater the more equally wealth was distributed. Nevertheless so full was his mind of the terror of the French Revolution, and so great were the evils which he attributed to the smallest attack on security that, daring analyst as he was, he felt himself and fostered in his disciples an almost superstitious reverence for the existing institutions of private property (Marshall 1920: 628-9).
While the political implications of Bentham's radical egalitarianism were held in check by terror of revolution, it held at least 4 significant implications for economic thought. First, Bentham assumed that all the pleasures and pains of an individual resulted from simple physical sensation and could be measured and added into a quantity called `Happiness'. Assuming the happiness of each individual was weighted equally, individual "happinesses" could, in turn, be summed into a social total which was equal to the common good or welfare of society. Thus the social good was nothing more nor less than the sum of individual sensations of pleasure or pain -- the only ultimate realities (Schumpeter 1949: 131) -- the two sovereign masters of humanity (Clough 1964: 825).
The assumption that pleasure and pain could be measured became reified as money. Lack of money was the source of misery. Enough money was the source of happiness. This led to equating value to society -- of an object, product, process or person -- with its dollar price in the marketplace. This assumption fostered development of an illusory calculus which became the centrepiece for the economic theory of consumer behaviour -- the marginal utility theory of value (Blaug 1968: 304). It also provided Marshall and Pigou with the foundation for contemporary welfare economics.
In the Benthamite tradition, however, maximizing pleasure was restrained by the tenets of Ethical Hedonism, a very Protestant Ethic. This ethic, beyond concern with the moral value of work, also involved social inhibitions against conspicuous consumption (Veblen 1899). Such ethical or moral restrictions were reinforced by the lingering effects of feudal sumptuary legislation which made "status forgeries illegal and created the disincentive of trial and punishment" (McCracken 1988: 33). But, as noted by Daniel Bell (Bell 1976: 20-22), when the Protestant ethic collapsed during the Industrial Revolution, only hedonism remained -- in all its unrestrained, irrational incarnations. Without a generally accepted moral code, the law became the accepted social institution to moderate individual pleasure-seeking. Benthamite traditions concerning crime and punishment in fact continue to guide both the law and economic research, e.g. Bentham's famous and seemingly plausible dictum `the more deficient in certainty a punishment is, the severer it should be' (Becker 1968).
Second, for Bentham culture, custom and tradition were irrelevant to economic analysis because they were irrational and interfered with application of pure reason in the maximumization of Happiness, a neologism coined by Bentham himself (Bell 1976: 224). Yet this radical individualism flies in the face of demonstrable traditional and ideological attachments which shape an individual's actions into collective acts (Bell 1981: 70-72).
Third, in the Benthamite tradition all men were not just equal but also nondescript and malleable (Schumpeter 1949: 132-4). Therefore, tastes were the same, or would become so through another Benthamite policy -compulsory education. Questions of taste and style were, therefore, irrelevant to economic investigation.
Even aesthetics were affected, shrinking to analysis of the pleasurable sensations evoked by a work of art. In this aesthetic, a thing is beautiful because it pleases, it does not please because it is `objectively' beautiful (Schumpeter 1949: 126-7). This aesthetic, combined with Benthamite emphasis on functional utility, meant that application of artistic effort to contribute beauty of form to the function was rejected as "irrational". In industrial design and architecture, this aesthetic reached its logical conclusion in the aphorism: form follows function. This contributed to the development of a simplistic and sterile consumer theory of economic behaviour and a theory of production in which design is not, in theory, considered a factor.
Fourth, Bentham's Utilitarianism reshaped not only the definition of means but also the ultimate ends of human activity. As a philosophy of life it ruled out as contrary to reason all that is really important to the individual. The Utilitarians are credited with:
having created something that was new in literature... namely, the shallowest of all conceivable philosophies of life that stands indeed in a position of irreconcilable antagonism to the rest of them (Schumpeter 1949:132-4).
Karl Marx (1818-1883)
While Bentham was restrained by the terror of revolution, Karl Marx saw revolution as the hope for the working man and for the final triumph of human reason in economic and political life. Perhaps this reflects the fact that Marx was born into the romance rather than the terror of revolution. In many ways, however, Marx is the direct heir of Bentham. In a sense, he simply extended Bentham's logic beyond the inhibiting fear of revolution.
By the mid- to late-19th century, political economy had split into two opposing camps reflecting, among other things:
The intensity of this schism became, by the mid-20th century, as potentially apocalyptic as the European Religious Wars of the 16th and 17th centuries. It was, of course, the turmoil of these wars which led to the triumph of secular science. The schism, however, completed the fissioning of the old Moral Philosophy -- the total of all the sciences of mind and society (Schumpeter 1949: 141) -- into sociology, political science, psychology and what is called Market Economics. This further contributed to economics losing its original sense of culture and becoming an abstract discipline which assumes itself unaffected by culture and disembodies the volitional behaviour of labour into a shadow of homogenous units (Boulding 1972: 267).
One of the ironies is that both Marxism and Market Economics conclude that under perfect conditions there is no role for the State. In Marxist thought this is called 'the withering away of the State'; in Market Economics, it is called 'perfect competition'.
Following Bentham, each generation of mainstream economists struggled for release from Utilitarian inhibition. John Stuart Mill tried to modify Benthamite confidence in the calculus of happiness by, among other things, observing "better Socrates dissatisfied than a fool satisfied" to express different orders of pleasure and the importance of qualitative as well as quantitative factors in economic analysis (Barber 1967: 94-5). He also highlighted the cultural factors contributing to the subjugation of women (Mill 1869). Similarly, Marshall attempted a reconciliation of the Benthamite calculus of happiness with the English historical school and its insistence on the cultural and historical context of economic behaviour (Blaug 1968: 305).
Keynes, like Mill and Marshall before him, thought that he and his generation had finally thrown off restrictive Protestant hedonism and escaped the Benthamite tradition (Innis 1951: 79-80):
I do now regard that as the worm which has been gnawing at the insides of modern civilization and is responsible for its present moral decay. We used to regard the Christians as the enemy, because they appeared as the representatives of tradition, convention and hocus-pocus. In truth, it was the Benthamite calculus, based on an over-valuation of the economic criterion, which was destroying the quality of the popular Ideal. Moreover, it was this escape from Bentham, ... which has served to protect the whole lot of us from the final reductio ad absurdum of Benthamism known as Marxism (Keynes 1949: 96-7).
In spite of Keynes' hope, as well as his involvement with Bloomsbury and his role in establishing the Arts Council of Great Britain (Keynes 1975), the impact of Bentham continues. Perhaps this too reflects fear of revolution, fear of Marx's revolution come true in Russia. It places limits on what phenomena are considered legitimate subjects of economic investigation. It continues to blind mainstream economists to the cultural context of economic behaviour. Daniel Bell, quoting the author of the most widely read economics textbook in the history of the world, observed:
Paul Samuelson has noted that many economists would "separate economics from sociology on the basis of rational or irrational behavior, where these terms are defined in the penumbra of utility theory." Utility is defined as egoism, or self-interest, and rationality is defined as consistency - that is, preferences are transitive ....
Yet the crucial question is whether the obverse of the rational is the irrational rather than the non-rational , and whether or not non-rational motivations can provide a valid assumption for an understanding of economic behaviour, i.e. to behavior which seeks to enhance the wealth and welfare of mankind (Bell 1981: 70-72).
Put another way, can non-rational motivations provide the foundation of an inclusive or catholic economics to balance the materialistic, protestant, exclusionary rationality of contemporary economics? In this regard, Tibor Scitovsky (1972, 1976, 1989) has gone further than anyone in re-tooling economics to account for 'irrational' behaviour, e.g. cultural activities including the arts. Where Bentham used the associationist psychology of his, day to define pleasure and pain as the ultimate principles of behaviour, Scitovsky, after investigating contemporary clinical psychology, substitutes 'comfort and stimulus'. But the Scitovsky model still uses marginal utility. On the one hand, he argues that the similarity between productive and cultural activities explains why the economist's neglect to include culture explicitly in the model of human behaviour has not detracted from its usefulness. On the other, he notes the ultimate obstacle to greater artistic creation is the Puritan ethic (Scitovsky 1989). He does not accept that a Benthamite cultural bias has become part of the analytic mechanism itself.
To escape Western cultural bias implicit in utility theory, one can envisage a mythic economics based on depth psychology of Carl Jung (Jung 1964), or a multicultural economics that explicitly allows for the effect of culture, custom and tradition on economic behaviour.
Not all schools of Western economics, however, lost sight of the role of culture, custom and tradition. Rooted in the German Historical School of the late 18th and early 19th centuries (Schumpeter 1949: 807-824), one school maintains the linkage - Institutional Economics. This school includes American economists Thorstein Veblen, John R. Commons (Commons 1934), W.C. Mitchell and Clarence Ayres, as well as European economists Max Weber, Sydney and Beatrice Webb, Selig Perlman and especially Joseph Schumpeter whose work stressed the influence of class, technological change and institutional setting on economic behaviour (Schumpeter 1942: 1949).
Like the mainstream, Institutionalists consider the competitive marketplace the most efficient and effective institution ever devised for economic production and consumption. However, they also recognize: the trade union as a legitimate political institution functioning in the economic arena (Commons 1909); the impact of culture, custom and tradition (Veblen 1899); and, the effect of law on the nature and form of economic behaviour (Commons 1926).
Legal and cultural relativism is also part of the legacy of Canadian economist Harold Innis, particularly his work on the economic impact of communications technologies (Innis 1950, 1951). He recognized that all scholarship must be grounded in analysis of the radical particularities of time and place, history and geography (Carey 1981: 79). Through his study of communications media, Innis identified a fundamental relationship between culture and communications. A culture is extensive in time, i.e. it has duration, to the extent its dominant communications medium is durable, e.g. stone, clay or parchment. Alternatively, a culture is extensive in space if its dominant communications medium is easily transported, e.g. papyrus and paper. Using this hypothesis, Innis tried to explain the rise and fall of empires through history.
One of Innis' colleagues, Marshall McLuhan, took this relativism, first to the medium is the message, and then to human consciousness altered by the emergence of new electronic communications media (McLuhan 1978). Elsewhere I have noted the unique nature of contemporary communications media (Chartrand 1987a). In many ways, however, Innis is the Father of the Information Economy (Porat 1977). He was the first to recognize communications media as an economic staple in the Post-Modern Economy.
Thus Institutionalism is characterized by cultural, historical and legal relativism, inductive method and general systems analysis. On the other hand, mainstream economics is characterized by positivism, deductive method and mechanistic systems analysis.
In essence, two questions separate Institutionalists from the mainstream. First, can economic behaviour be simply reduced to quantitative expression? Second, even if in theory this can be done, do we possess, or will we ever possess, the necessary technology of measurement? I think not, in part because "even in the physical sciences, a new notion of quality now emerges at the thermodynamic level - a quality which is irreducible to quantity (Jantsch 1975: 95).
There is at least one ongoing debate between Institutionalists and mainstream economics which takes the guise of Cultural Economics versus the Economics of Culture (Seaman 1981).
Cultural Economics can be defined as the study of the evolutionary influence of cultural differences on economic thought and behaviour. Cultural Economics assumes economic behaviour varies according to cultural context. The seminal and leading exponent of transdisciplinary, relativistic cultural economics is Kenneth Boulding (Boulding 1972; 1973; 1985; 1986].
The Economics of Culture, on the other hand, can be defined as the study of the allocation of scarce resources within the cultural sector. It assumes objective laws apply to economic behaviour regardless of cultural differences. It places emphasis on the scientific nature of economics and application of abstract mathematical techniques. The seminal and leading exponent of the positivist economics of culture is William Baumol (Baumol, Bowen 1966; Baumol 1977; 1984; 1987; Baumol, Baumol 1984).
Between the two is Scitovsky (Scitovsky 1972, 1976, 1989) who, on the one hand, insightfully and explicitly recognizes the impact of culture and, on the other, is attempting to re-tool Benthamite analysis. All three are required for a complete understanding of economic phenomena, if for no other reason than that all three form part of the contemporary economic ethos. But we still must await, it appears, for the emergence of a truly Humane Science to replace the integration of thought embodied in pre-Benthamite Moral Philosophy.