Given the limitations and challenges associated with utilitarianism, many students of economics seek out alternative approaches for measuring economic well-being and interpreting the societal implications of economic outcomes.  The following describes, two alternative, heterodox, approaches for interpreting economic conditions.

Two Normative Examples from Heterodox Economics

Abandoning Utility: The Capabilities Approach and the Ethical Considerations of Amartya Sen

Where do the seeds of discontent sprout?  In 1998 Amartya Sen was awarded the Nobel Prize in economics.  Sen is a fascinating case study as he provides an example of an economist who is not a utilitarian.  Early in his career Sen had abandoned utilitarianism.  What prompted Sen to abandon utility as a first principle?  The answer to this question can be found at the beginning of Sen’s career when Sen encountered a utilitarian tradition in economics that had shed nearly all the conventional characteristics of ethical analysis.  While the early 19th century utilitarian thinkers such as Bentham had identified and described some of the ethical issues surrounding the idea of diminishing marginal utility, by the late 20th century utilitarianism in economics had been reduced to revealed preference theory.  For Sen, utilitarianism provides entirely too-narrow an assessment of what it means to be a person.  The result is that there are far too many limits associated with utilitarianism for the utilitarian to be able to make effective, and informed, moral evaluations.

Taken further, Sen also recognizes the link between the moral vacuum produced by utilitarian philosophy and the neoclassical application of the Pareto criterion.  For Sen, utilitarianism and the Pareto criterion are like a form of normative handcuffs.  Neither the distribution of income nor initial utilities factor in to the choice making, exchange story, promoted by orthodox economics.  By ignoring the initial endowments of income or utility, Sen argues that a condition of Pareto optimal may also be one of deep inequality and hardship.  Those without property and with little income often times find themselves without property and little income even though they have engaged in market exchange.

Admittedly, a person’s actual freedom to exchange may provide a person with a degree of additional utility.  Clearly being free to make choices is empowering and valuable to individuals.  However, one’s freedom to act does not mean that a person is in a remotely decent position in the market.  The fact is, a market outcome can be Pareto optimal and still be less than socially optimal.  For example, instead of demanding change people in poor situations often simply adjust to their negative circumstances. The deprived find some area of existence that gives them pleasure and make do.  The result is a disadvantaged yet acquiescent populace that not only continues to function, but may be falsely perceived as happy or not too sad.  In this example, utilitarianism generates a persistently unfair outcome within a population of people ill-equipped to effectively do anything to alter that outcome.  This utilitarian picture highlights a tendency to under-estimate the plight of people in negative circumstances and causes Sen to conclude that neoclassical welfare economics is incapable of addressing the ethical issues that accompany the existence of poverty and oppression.

In terms of the problems associated with the distribution of utilities, Sen criticizes the utilitarian notion that every action in life is based on pleasure or happiness.  There is no equality to be found in adding up everyone’s utility to find a sum of total utility.  It is possible for a maximum of total social utility to be generated under a circumstance in which one person receives the largest share of the available utility while many others receive very little.  Further, it is not feasible to correct for an unequal distribution of utilities generated by market outcomes.  The only way to rectify the impasse requires that the theorist be able to engage in interpersonal comparisons of well-being.  In other words, people need to be able to compare how well off they are relative to other people.  Relative comparisons are not something to which utility is adept at explaining.  Given all of the problems Sen identifies, he departs from utilitarian precepts and develops an alternative measure of economic well-being.

The Capabilities Approach

The capabilities approach represents Sen’s alternative to the neoclassical welfare model.  The capabilities approach is a theoretical device that allows for interpersonal welfare comparisons, while also maintaining the ability and freedom of people to make choices.  For Sen, the interpersonal comparisons of well-being should be based on a group of what Sen calls “functionings.”

Functionings – Represents a state of being for an individual as well as the collection of all things an individual can be doing.  Functionings can be as basic as being well-nourished and properly sheltered to as challenging as flying an airplane.

In turn, the measure of social welfare is the “capability” of people to access and develop their “functionings.”

Capability – Is the availability of functionings coupled with the ability of the individual to achieve a combination of functionings. 

The combination of functionings that are available and the ability of an individual to achieve a combination of functionings is the measure of an individuals well-being.  Consider the following table.

Based on the capabilities approach, having many options available, such as states of being or activities to pursue, and then having the freedom to pursue those options is the ideal.  The highest social welfare is achieved when a society produces an environment that meets basic needs while also provide people with ample opportunities to pursue challenging and life enriching activities.  To the contrary, having limited access to functionings, and limited freedom in the pursuit of those functionings is the least advantageous position.  In the case of moderate welfare outcomes, either individuals have many possible functionings available, but a limited freedom to pursue those functionings, or a limited set of available functionings but substantial freedom to pursue those goals.

The Marxian Approach and the Labor Theory of Value

Another approach to applying normative reasoning toward economic phenomena is the Marxian labor theory of value.  In stark contrast to the utility theory of value, the preanalytic vision associated with the labor theory of value produces a view of humanity and human need that is virtually antithetical to the utilitarian depiction.  Rather than experiencing social interaction through exchange, within the labor theory of value human beings are presented as engaged in the act of production.

The basic proposition on which the labor theory of value is constructed is the idea that before something can be exchanged it must be produced.  As a result, the value of products is generated at the point of production, where the products are created.  At the point of production, labor is the essential component of production processes.  While machines can enhance the productivity of human labor, machines only exist as a result of the collective accumulation of human labor over time.  Importantly, machines themselves do not create labor.  After all, a nail cannot hammer itself.  The implication is that the process of production has always required human labor power as even the most sophisticated machines require human operators.

Additionally, production has always been a social endeavor as human beings work with one another to produce those things that satisfy the material wants of people.  Consider, for example, a loaf of bread that you see on a grocery store shelf.  The production and distribution process necessary to bring the loaf of bread to the grocery store shelf is extensive, requiring the contribution of a great many people.  For starters, the agricultural process that provides the wheat, and/or oats, and/or grains that are the primary ingredients for making bread have to be grown by farmers.  The number of farmers involved may number in the hundreds or thousands.  Additionally, the farmers will use tools and other inputs provided to them by other producers.  Those producer, the producers of farm equipment, will also bring together laborers and equipment in a manufacturing process that will build farm equipment.  By continuation, the tools and equipment used in the manufacturing process that builds farm equipment will also have to be produced by laborers using other tools and equipment in other production processes, and so on and so forth.  On the other end of the production process, after harvesting, the basic agricultural inputs used in making bread will be transported to processing facilities.  The act of transportation requires that laborers operate transportation equipment like trains and trucks.  Just as was the case with farm equipment, transportation equipment will be made by many laborers that will be utilizing many machines that will have been produced by many other laborers using many other machines, and so on and so forth.  Of course, transportation equipment generally requires fuel.  If the fuel is a petroleum byproduct, then the extraction of petroleum will once again require many laborers using significant amounts of equipment through many stages of production until a fuel is available that will be used to operate the transportation equipment.  Over and over again, each element of production requires many other laborers in many other production processes in a seemingly endless and nearly incomprehensible scale of human interaction.  Clearly, production is an inherently social process that only takes place when human beings apply themselves to a multitude of production processes

Because the sole universally necessary element in the production process is labor, labor becomes the only true and relevant source of value.  Human history demonstrates that human survival necessitates that human beings engage first and foremost in the process of providing for material needs.  If human beings exchange, it is only because they first produced an excess that they are willing to exchange.  Exchange is not a necessary condition for human survival, whereas production is required for human existence.

When juxtaposed, the differences between the vision generated by the utility theory of value and the labor theory of value could not be more visible.  Let’s examine four primary differences.

First, orthodox economics downplays any necessary human social relationships, as individuals are viewed as isolated utility maximizers within orthodox economic thought.  To the contrary, adherents to the labor theory of value see human behavior itself, including exchange relationships, as being the result of social relationships. By continuation, a strong argument can be made that there are also important historical understandings and divisions between the two value theories.  For utility theorists, because human behavior is perceived as a universal constant across time, understanding economic history is not a necessary component of their theory.  Labor theorists, however, must study history closely in order to attempt to understand and identify the important changes in social arrangements that have historically arisen in different socioeconomic systems.

Second, due to the fact that exchange is a voluntary form of social interaction, harmonious outcomes appear normal within utilitarian thinking.  To the contrary, since labor is the source of value and production, if there are class differences in a society, those class differences will inevitably end in conflict.  The result is that conflict, not harmony, is front and center for labor theorists.

Third, while neoclassical economists take as given individual preferences, and by implication assert that the act of choosing is always efficient, labor theorists argue that preferences arise from social relationships and social interactions.  As such, adherents to the labor theory of value do not accept the choice-driven revealed preference argument on social welfare.

Fourth, whereas orthodox economists identify individual incomes as originating through a voluntary process of exchange between individuals whose preferences are given, the labor theorist argues that the income that flows to non-laboring classes is the byproduct of a process of exploitation.

Exploitation – The idea that a producer or producers of a product receive compensation that is less than the value of what the producer or producers contributed to the production process.

Clearly the utility theory of value and the labor theory of value yield two different and competing conceptions of human existence, producing two different normative criteria for evaluating human interaction.

It would appear that the choice of value theory and recognition of its normative impact should be of the utmost importance to a theorist.  This is not always the case.  Perhaps due to the obscure relationship between price and value in neoclassical theory, there are many neoclassical theorists who directly violate the philosophical foundations of their accepted theory of value and do so by attempting to temper the less-than-savory ethical outcomes present in a capitalist market system.  Alternatively, while most heterodox thinkers openly challenge the ethical outcomes of the market system and the conclusions brought about by the use of utility, many very prominent heterodox thinkers also either reject the need for a theory of value or do not explicitly endorse a formal theory of value.  Sen falls under the latter category.  In both instances value theory’s importance is being inadequately recognized.  While continued criticism of neoclassical theory is undoubtedly warranted, heterodox economists, regardless of their lofty accomplishments, prestige, and respectability, should not be absolved of deserved criticism.  Within this premise, an evaluation of the relationship between value theory and Sen’s important contribution to the critique of neoclassical welfare economics will be the focus of the remainder of this paper.

Glossary

functionings

a state of being for an individual as well as the collection of all things an individual can be doing

capability

the availability of functionings coupled with the ability of the individual to achieve a combination of functionings

exploitation

the idea that a producer or producers of a product receive compensation that is less than the value of what the producer or producers contributed to the production process