Tuesday, February 3, 2015

Wicksell and the "Paradox".


Decades after the so-called 1870s Marginal Revolution, Knut Wicksell (1851-1926) was one of the early neoclassical economists who sharply criticized Adam Smith for not reaching the pre-determined conclusion neoclassical economists preferred:
"At the very beginning of the history of economic science, attention was directed to this distinction [i.e. value in exchange vs value in use]. One of the best-known passages in Adam Smith is that in which he explains that the word 'value' has two meanings, so that at one time it expresses the usefulness of an object (or what he calls its value in use) and at another its purchasing power over other utilities (i.e. its exchange value). Adam Smith also pointed out that those things which have the greatest value in use often have little or no exchange value-for example, water; and, on the other hand, the things which have the greatest exchange value frequently have little or no value in use, e.g. diamonds. But he stopped at this point. He speaks afterwards only of exchange value and never returns to the concept of value in use. And at this point science stood still, one may say, for almost a hundred years without it being noticed that Adam Smith's statement was really a striking paradox and involved a problem which necessarily demanded a solution." (Wicksell 1934, pp. 17-8)
Note that Wicksell starts by acknowledging the meaning of the "value in use" vs "value in exchange" distinction. He doesn't like many things in that "best-known passage", but he doesn't seem to have any difficulty understanding the distinction itself and that the passage is meant to explain it [$]. We shall return to it later, when discussing Joan Robinson's appraisal of Smith.

As other tormentors of Smith (and debunkers of the labour theory of value), Wicksell, too, adds his own personal touches to the urban legend. For him, Smith's personal neglect of use in value made "science stood still… for almost a hundred years".

Funnily enough, other authors, equally critical of Smith and the LTV, but apparently better acquainted with older literature, see the "paradox" making cameo appearances all over the place … and solved without marginal utility and without stopping the triumphant march of economics:
"Locke, Law, and Harris had contrasted the value of water with that of diamonds to show that relative scarcity governs [exchange] value irrespective of the usefulness of an article". (Blaug, 1985, p. 40)
Alfred Marshall in the preface to the first edition of "Principles of Economics" (1890):
"Some of the best work of the present generation has indeed appeared at first sight to be antagonistic to that of earlier writers; but when it has had time to settle down into its proper place, and its rough edges have been worn away, it has been found to involve no real breach of continuity in the development of the science. The new doctrines have supplemented the older, have extended, developed, and sometimes corrected them, and often have given them a different tone by a new distribution of emphasis; but very seldom have subverted them." (Marshall, 1920)
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In the preface to the second edition of his "Lectures", Wicksell calls for a dispassionate, hard-nosed study of economics, very much in the spirit of "positive economics". Keep these words in mind in what follows:
"It will not do to treat questions relating to economic policy, to trade and industry, and especially to population, as if they were metaphysical speculations in which each person can adopt the point of view which appeals most to his temperament -- and still more frequently, perhaps, to his private interests." (op. cit. p. xxii)
It's, therefore, instructive to consider Wicksell's own ideas about what the correct approach looks like. On describing it, Wicksell first invites readers to "a thorough examination of the theory of value, though only in general outline" (op. cit. pp. 14-5).

Without using the term, Wicksell starts by studying exchange in abstract.

Let's see what this means by considering his first move: whatever else they are, goods, commodities, and services are "utilities" (op. cit. p. 15). Their physical properties, how they are obtained, how much they cost, all that is irrelevant. What matters is their utility, to the point that the term "utility" is the genus, "good", "commodity" and "service" are the species. [&]

Wicksell never used the word "assumption", but that's an assumption and it's introduced unexamined and unannounced, almost surreptitiously, before explaining his theory of value.

What is "utility", anyway? Well, it's "related to useful, a term which has many meanings". In essence, that's it: "[T]here does not appear to have been any serious ambiguity or misunderstanding in economic science concerning the various meanings of the terms 'use' or 'utility'." (op. cit. p. 16). No more details are given. What for, it's clear enough, yes?

Wicksell also abstracts from production: utilities exist as costless, initial endowments to be exchanged, anywhere, any time. He doesn't say it expressly, but that seems to be an important virtue for neoclassical economists: this is the law applying to every economy, from the Cro-Magnon in the Altamira caves 43,000 years ago, in their "early and rude state of society", to Isaac Asimov's Galactic Empire, 34,500 years into the future and everything in between. In other words:


An aside: a young male critic a few years ago faulted Marx's own version of the LTV for its inability to explain his own preferences on women -- sorry, ladies, that most eligible bachelor doesn't like redheads much. As Marxists cannot promise an answer to that crucial question, he was bitter: the LTV is not the answer to everything.

Anyway, it's worth the effort to imagine Wicksell's exchange (i.e. the Marshallian "market period"): somehow, you got "nourishment" (say, 75 kg of manna from Mount Sinai) to barter for "transportation" (say, a 2x1.5 metres magic carpet) in the Kasbah. You want that because, for you, "transportation" has more total utility than "nourishment": you gain with the swap. Your counterpart sees things in the exact opposite way, that's why she agrees to the barter: she gains, too. Both are right. The conservation laws of chemistry and physics do not apply to utilities: both sides end up with more than they started. Exchange itself creates utility, out of thin air.

It may sound like magic, like, well, "metaphysical speculation", but it isn't … by unstated, stealthily introduced, unacknowledged assumption … only.

Who needs old-fashioned, messy production?

Incidentally, note the word "barter" above. Although in page 14 Wicksell mentioned "money and credit", here he is talking of barter. His money appears to be another utility ("commodity money": a legitimate argument of utility functions), as opposed to the "fiat money" Post-Keynesians often talk about (an illegitimate argument of utility functions).

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After that preamble, Wicksell seems ready to get to the point:
"The problem of the theory of value is to explain why one commodity has, either permanently or temporarily, one price and another commodity (or service) quite a different one." (op. cit. p. 16)
Before proceeding, note that Wicksell is defining what a theory of value is supposed to do: to explain value in exchange only (still, in page 18 he fulminates Smith for explaining value in exchange only, leaving value in use out).  He doesn't like labour theories of value and he aims to support a better theory of value, but he doesn't find anything particularly mystical, ideological or metaphysical in the label "theory of value" itself. We, too, shall go back to this when dealing with Joan Robinson.

However, we'll need to wait some more for his theory of value (he'll finally get to it in page 29); Wicksell stalls once more, introducing this:
"At first sight it might appear that this valuation must be due to differences of utility -- so that exchange value and usefulness would be one and the same thing -- or a least proportional to each other. And, in fact, it frequently is the case that exchange value stands in a more or less direct relation to usefulness. …"  (op. cit. p. 17)
For the second time Wicksell, by a sleight of hand, irritatingly indicates the answer he expects from Smith: he assumes (total) utility is equivalent to usefulness/use in value, suggesting Smith should have done the same (even if by doing so Smith would have exposed himself to criticism like Friedman's). Smith should have forgotten labour times/production costs/relative scarcity, and instead stuck to total utility, which for Wicksell is not "metaphysical speculation".

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As Raghunathan put it in his popular exposition [*]: "Adam Smith's resolution of the paradox is inelegant for a modern economist" (Raghunathan, 2010, p. 173). Note carefully: there was a resolution; only it's not acceptable to modern economists.

One rapidly comes to suspect that any answer different from the one the "modern economist" approves of is "inelegant", which is just another way of saying "unacceptable" and is synonymous with "metaphysical", "mystical", "unsatisfactory".

At any event, this raises two questions: What is so special about the solution Wicksell constantly promises but keeps postponing? Why is Smith's resolution unacceptable?

Starting on page 18 and ending on page 29, Wicksell embarks on a convoluted and lengthy explanation (at times painfully illogical; at times deliciously ironic [%]) of the dire "consequences which this uncritical reception of Adam Smith's statement occasioned to political economy". [#]

It is, however, near the end of that explanation (op. cit. p. 28) when he finally comes clean:
"In the hands of the Socialists (especially Rodbertus, and Marx still more so) the [labour] theory of value became a terrible weapon against existing order. It almost rendered all other criticism of society superfluous. Labour was conceived by them -- Ricardo never meant or said any such thing -- to be the sole creator of value -- in other words, the source of value; and thus all other factors of production existing in private hands were to be regarded as parasites on production, and their rewards a robbery at the expense of labour, which is alone entitled to remuneration."
For all his conceptual malabarism, it is the political consequences, not the political economy, that really trouble Wicksell. Marginal utility is special because it is not a "terrible weapon against existing order", it has no "terrible" (political) consequences.

A labour-times based criticism -- whose origin Wicksell identifies with Smith -- wasn't the kind of "criticism of society" he wanted to hear. He preferred this kind of criticism:
"Economist Knut Wicksell made his name among the Swedish public with a series of provocative lectures on the causes of prostitution, drunkenness, poverty, and overpopulation. A malthusian, the young Wicksell advocated birth control as the cure for these social ills." (Econlib.org, 2015)
To quote from his own preface: he adopts "the point of view which appeals most to his temperament -- and still more frequently, perhaps, to his private interests".

And because for Wicksell that terrible weapon has its origin in Smith, he wants a blank slate from Smith and up to the 1870s. That's the reason why "almost one hundred years" of economic thought must be disregarded.

It also explains why production, the conservation laws, space and time, money, elemental logic, and intellectual honesty must be "abstracted" in favour of utilities.

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Frankly, I wish I could find a gentle, humorous way to close this post which is already too long. Sadly, I can't.

After reading Wicksell, I'll have to make do with the answer Joseph N. Welch gave on June 9, 1954 to senator Joseph E. McCarthy:

"Have you no sense of decency, sir? At long last, have you left no sense of decency?"


Notes:

[$] A little later (op. cit. p. 29) Wicksell returns to the "paradox", taking back whatever acknowledgement made on pp. 17-8: "Literally interpreted, this thesis appears to be either meaningless or a contradiction in terms". Years later, Robinson will repeat that appraisal almost to the letter, either oblivious to or uninterested on any inconsistency.

[&] Wicksell follows Marshall on this: "Man cannot create material things. In the mental and moral world indeed he may produce new ideas; but when he is said to produce material things, he really only produces utilities" (Principles, book ii, chapter iii). Marshall is aware of the conservation laws: his way around is to shift the focus, from matter/energy, which can be measured, to utility, which cannot.

[*] Raghunathan adds Friedrich von Wieser to the list of "paradox" slayers, which also includes Carl Menger and W. Stanley Jevons. (op. cit. p. 173)

[%] A quick example of the second kind: "By these various simplifying assumptions Ricardo greatly facilitated his analysis. […]  But his conclusions thereby frequently assume an abstract and even unreal character." (op. cit. p. 23). The virtuoso of stealthily introduced abstract assumptions criticizing precisely that!

[#] Technically, Wicksell is appealing to the consequences (see here, for an explanation of the logical fallacy).


References:

Blaug, Mark. 1985. Economic Theory in Retrospect, 4th edition. Cambridge University Press: Cambridge. 1985.

"Knut Wicksell." The Concise Encyclopedia of Economics. David R. Henderson, ed. Liberty Fund, Inc. 2008. Library of Economics and Liberty
[online] Aavailable from http://www.econlib.org/library/Enc/bios/Wicksell.html
[Accessed 1 February 2015].

Marshall, Alfred. 1920. Principles of Economics (8th edition). Macmillan and Co.: London, 1890. Library of Economics and Liberty.
[online] Available at http://www.econlib.org/library/Marshall/marPCover.html
[Accessed 1 February 2015].

Raghunathan, V. 2010. The Corruption Conundrum and Other Paradoxes and Dilemmas. Penguin Books India.

Wicksell, Knut. 1934. Lectures on Political Economy (2nd edition). Augustus M. Kelley Publishers: Fairfield 1977. Vol I: General Theory.

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