Economic Value and the Definition of Economics

Claudio Gutierrez

One of the deepest conflicts in economic methodology can be clarified by the distinction of levels referred to in the last chapter. It is the issue as to what we talk about when we speak of preferences, prices, profit, usefulness, etc. All those terms designate a quality attributed to things in relation to attitudes of people toward them. This is, of course, the issue of what economic value is and its discussion has received considerable attention from economic thinking. The very posing of the problem–with no distinction of levels implied–in terms of things and our (subjective) attitudes toward them, readily suggests two immediate and opposite solutions. One will point to objective characteristics in things as the source of value. The other will rather posit subjective considerations as the required source. Thus, some authors directly postulate an objective theory of value, in terms of the hours of labor that it takes to produce a thing. And some others maintain rather a subjective theory of value, in terms of the utility or satisfaction that it is possible to derive from the thing. NOTE 1 It is interesting to note that, as far as this writer knows, there has never been a clear attempt of an intermediate solution to this problem. Perhaps it is impossible to have one within the terms in which the problem is usually posed.

Closely connected with the issue of the theory of value, one finds in the literature the ever open question as to the definition of economic science and to the character and nature of its subject-matter. In this particular discussion, positions are found parallel to those which occur in regard to the theory of value. Thus, objectivism will tend to define economics in "departmental terms," as the science which studies a physically discernible sector of reality- usually, the production of the means of subsistence. The subjectivist, on the other hand, will tend to define economics in "analytical terms," as the science which studies reality, the whole of it, from a definite point of view. NOTE 2 Contrariwise to what is the case in the theory-of-value domain, however, here in the definition-of-economics domain one does find intermediate positions. Writers there are who have attempted to find a third road combining the two approaches in a single definition, partly departmental and partly analytical. A. Lowe, for instance, without explicitly renouncing the analytical definition and thus retaining the basis for utility-theory analysis, adds nevertheless in the definition of economics the differentia specifica of a given relation to "material means" (LOWE 65, p.10). Now, it is the case with Lowe, perhaps due to the close connection of the problem of definition with that of the theory of value, that his position comes apart very quickly into its disparate components. This can best be seen in the fact that, in spite of his retention of utility theory, he postulates an epistemology of economics which completely reduces economic problems to technological ones (LOWE 65, Chapter 1).

In what is to follow I am going to attempt neither the building of an intermediate theory of value not the invention of a new definition of economics. Rather, I will try to show that the nature of economic theory is on a par with the nature of all scientific theory. Any reasonable sound definition of economics or reasonably sound theory of value may be reinterpreted within a general methodological conception. The nature of economic theory is such that the terms "objective" or "subjective" do not describe it accurately. "Objective" does not because any scientific theory in order to be theory at all must have some formal terms not reducible to empirical observation. So does economic theory. "Subjective" does not, because two levels must be distinguished in all theory and, as we have seen, subjectivity in the ordinary sense–subjectivity₁–can be dispensed with at the operational or formal level. It is evident to me that "satisfaction," being as it is an abstract term, has as much delight in it as "labor" has sweat, in the utility and objective theories of value respectively. These are theoretical terms. They are formal in the sense of being tokens for non formal assumptions, making for logical closure of the scientific system. They are not amenable to straight empirical or intuitive validation. In particular, the use of the term "satisfaction" in utility theory is an insufficient ground for considering the theory as subjective. Of course, all theory is, in the last analysis, subjective, as has been shown before, and in the sense in which Parsons says that a frame of reference is subjective (PARSONS 37, p. 733). The problem is that in social science the frame of reference is not only used but also studied, and this situation gives rise to the specific temptation of the social-science methodologist, namely: to think that subjectivity₁ can take the place of subjectivity₂ at the formal level of theory articulation.

I want to suggest the idea that economic theory be regarded neither as objective nor as subjective but simply as formal, in our sense. NOTE 3 According to this, one ought to regard "satisfaction" as expressing a dimension of economic theory that belongs in the realm of unformalizable assumptions. These assumptions, no doubt, must be represented within the formal context, as we have seen, by theoretical notions, in this case the concept of "equilibrium". This concept means that the system of economic quantities and operations has to be determined, one way or another. But the operational content of "value" is best rendered by the joined relationships of substitution which exist among the elements of the economic system whose determination or solution the equilibrium point is. Thus, economic theory can be viewed as the attempt to organize and analyze the facts of wanting and producing in as much as they form equilibrium systems according to relations of substitutability.

The formal aspects of theory function as instruments for such analysis and organization by means of the construction of models. These are ideal systems which reproduce by abstraction the economic phenomena of the world. In such models, the concepts of "money," "purchasing power," or simply "relative prices" are crucial, insofar as they stand for the unifying principle that holds the system together: the principle of substitution. There is room for diverse degrees of substitutability. Thus, one can distinguish between subsystems to some degree cutoff from one another by low indexes of substitutability "across the border". Or one can separate for analysis systems with more or rather less scope than the canonical system. A "less-scope" system is, for example, the economically "productive" system, where some steps connected with distribution are eliminated. A "more-scope" system is the Robinson-Crusoe model, where economic calculations are applicable to decisions of isolated individuals. All of this makes for flexibility in the creation of and operation with models. And all of this is possible thanks to the formalism of the approach.

What I am trying to say is fundamentally this. One can best understand what the economists have proposed as objective or subjective theories of economic valuation and calculation by not paying much attention to their own explanations as to the ultimate nature of value. One should take the formal devices, which tend to coincide in both theories, as heuristic creations of the human mind. One should not look for further explanation NOTE 4 different from the justification of heuristic methods furnished in general for all the sciences by basic epistemology. This is not possible if we do not carefully distinguish two levels of subjectivity, the subjectivity of the explanation–realm of assumptions and of evaluation–and the subjectivity in the subject-matter–realm of model- construction and of logical operations. Under this light, the objective theory appears as an imperfect formal (in my sense) methodological theory–together with a questionable social theory and philosophy of history–which nevertheless contains insights not present in other theories. NOTE 5 On the other hand, the subjective theory appears as a basically-correct formal (in my sense) theory, ignorant however of its own formal nature due to a deficient distinction between two levels of subjectivity. The theorist or the professional economist who subscribes to the subjective theory tends to overlook the fundamental limits, and eventual possibilities, of economic analysis, and to identify it unnecessarily with a conservative political philosophy.

As I will not concern myself in the rest of this study with the objective theory as such, I am going to write a few words to explain my decision to choose the subjective one as the best suited for the dialogue. There are two ways to explain that judgment. First, I believe that, were one to question the subjective theory of value, one would become deprived of a most powerful instrument of analysis, namely the main tools of present-day economists, at least in the so-called free world. Robbins seems to be right when he says that a material consideration of value is unable to account for, among other things, many problems of theory of wages and, of course, the economy of war. (ROBBINS 32, p. 15). The other way of explaining my decision is this. I find that the valid content of the objective theory is a proximate version of corresponding but clearer laws of the subjective theory. Usually the translation to the subjective theory is easily done by means of the analysis of some concepts taken for granted by the objective theory. For instance, the concept of socially necessary labor, NOTE 6 or of useful commodity NOTE 7 can be so treated for the understanding of the labor-theory equivalent of the law of supply and demand.

Before closing my treatment of the objective theory, let us consider briefly the position, objectivist of sorts, of A. Lowe, to which I referred above in relation to the definition of economics. I want to criticize the part of his work that turns out to be genuine objectivism, i.e., his reduction of the economic problem to sheer interaction of technological and psychological considerations. NOTE 8 In particular, I want to challenge this contention:

Given his final and modal goals and his stocks of resources, the core of Crusoe's economic activity is technological . . . (LOWE 65, p. 18).

Such and such are my preferences for such and such level of provision.

Now the concept of "level of provision" must be clarified. I can use, and most of the time have to use, items which, though numerically different, are all of the same kind–they belong in the same class of entities: vessels of water, for example. This is obvious from the very definition of "supply," stock which is "available in specific homogeneous units equally capable of rendering the same service to the actor" (Rothbard, p. 19). It is only in relation to this case that the expression "level of provision" has sense, underlining the importance of the concept of "substitution" for the description of the subject-matter of economics.

The formulation of a modal goal requires a separation of units within each supply to make the ranking according to preferences possible. But the separation that is required need not be physical; it can be rather mental or subjective (in the sense of subjectivity₂). I do not need to actually pour water in different vessels in order to make up my scale of preferences. To the extent that the calculation does not use the means of actual pouring of water, at least to that extent, the operation may not be totally considered as technological but must be considered also as economical (because making essential use of subjectivity₂ in the guise of "purpose," "end in view," or some similar theoretical term). NOTE 9 This is so not just because the operation is not physical but only imaginary, but because it fulfills the requirements of a social-science subject-matter, specifically of an economic subject-matter (as described by the principle of substitution). Thus the economic subject-matter is always a collection of items that can be considered as homogeneous; the items are capable of separation from one another (principle of divisibility) and also, and what is most important, capable of taking the place of one another in the event of destruction or deficient provision. As can be seen, the items are not physically different (except numerically) but are different because (mentally) conceived as different, in relation to some purpose. But they are also interchangeable, i.e., they can abandon their former (programmed) goals and come to the rescue, as it were, of more important goals. Note in this context that economic plans are not simply blueprints. They are expressible in terms of curves. And curves are central to economic analysis precisely because they are the preferred representation form of substitution relationships.

That substitution is central in the description of economic tools of analysis has been shown before, for instance, by F. Knight. NOTE 10 The idea is also latent in any consideration of the economic problem as implying plurality of ends and of means. Let us linger on this matter for a while, so as to make clear what I mean by saying that substitution is central, and how is this centrality of substitution related to the requirement of a determination for the system.

Let us take first the case of one single means capable of directly satisfying different ultimate wants, e.g., a given quantity of water, useful both for drinking and for personal hygiene. If there is clear medical advice as to what the minima for survival are in both accounts, and further the water barely suffices to cover those minima, then, I claim there is still no economic problem involved. When the supply is somehow above this survival level, still, I think we do not have an economic problem: the possibility of comparison between two quite dissimilar purposes, cleaning and drinking, being lacking, there is no criterion of allocation even for the single actor. The "equilibrium" in this situation will be only a matter of arbitrarily hitting upon some combination which, by definition, will be the one the actor finds "most satisfactory." NOTE 11 So, where we should expect "satisfaction" the most illuminating–means being immediate to ultimate ends–economic theory cannot even begin to operate as an explanatory principle.

Let us further take the case of more than one means contributing to the production of a third, in its turn directly satisfying more than one ultimate end. The possibility now arises of different combinations of the resources so as to maximize the quantity of the third good. With the advent of quantification, the principle of substitution–and economic theory itself–does begin to operate. Satisfaction, a non formal context, is here represented by the formal notion of sheer maximum, a strictly syntactical requirement; what brings about this maximum is, of course, substitution of units of one resource for units of the other. The requirement of minimization of expenditure is implicit, since it is only a mirror image of the requirement of maximization of product, and is also amenable to strict syntactical treatment. When more than one product can be originated by the alternative combination of resources, all the complications of equilibrium analysis do finally appear. In this situation it is the notion of "equilibrium" which takes the place of sheer maximization, representing the needed solution for the system. Equilibrium here corresponds to the maximizing point in simpler problems and can be viewed as the "determinateness requirement" for problems of composed substitution (substitution of higher degrees). It is of course this notion which "closes" the system and acts as the theoretical token of the non formal assumptions of the economic framework–those represented by the contextual terms "value," or "satisfaction."

Let us now revert to the main line of our argument. Let us repeat that there is a fundamental connection between the problems of economic value and of definition of economics. An objective theory of value will tend to associate itself with a departmental or classificatory definition, whereas a subjective theory of value will rather be related to an analytical definition. Intermediate positions do not seem to be either possible or stable, that is, to the extent that they stand within the intellectual context which makes possible the alternative objective-subjective. A stable intermediate position can be reached if substitution systems, which constitute the subject-matter proper of economics, are recognized as capable of formal interpretation. The next chapter contains an elaboration of this idea.