Axiology is the study of value theory. More specifically, Merriam-Webster defines it as “the study of the nature, types, and criteria of values and of value judgments, especially in ethics.” Axiology is not generally  recognized as a primary concern of orthodox economists. This is largely due to a group of nineteenth-century economists arguing that they solved the problem of value by understanding it as a question about prices. Unfortunately, this foundational concept or the idea that price equals value remains generally unchallenged, not just in orthodox economics but popular culture as well. Therefore, accompanied by Albert Einstein, we continue along our path of investigating and challenging foundational concepts. We do so in this section by presenting two of the principal approaches to value theory in the history of political economy: the exchange theory of value and the labor theory of value. Again, we will see that the selection of our ontological foundation is deeply connected to the epistemological study of that reality and the “nature types, and criteria of values and value judgments” that structure the study of economics.

The final leg of our journey across the three meta-theoretical concepts that ground economics starts with a classic paradox. The ‘diamonds and water paradox’ introduces the exchange theory of value in many orthodox texts. This paradox and the calculus of marginal analysis help to define the exchange theory of value, as well as to situate it within the historical context of political economy. For many scholars, this “marginalist revolution” establishes neoclassical economics as the dominant school of thought and allows the discipline to drop “political” from its title and move forward as the “hard” natural science of economics.

For others, however, the exchange theory of value does not end the value debate. The “political” in political economy is foundational to heterodox economics, and the labor theory of value and the surplus approach generate alternatives to the price equals value narrative. From this critical perspective, we evaluate whether or not the underlying code or programming language of orthodox economics allows them to maintain their distance from the subject matter as dispassionate observers. If it does not, then are the issues raised in this critique simple bugs in the system that can be sorted out by building better models, collecting more data, or using updated mathematical techniques, or is the programming language itself “not fit for purpose?”  If the latter is the case, then heterodox economics affords an alternative and potentially more fruitful meta-theoretical grounding and understanding our economies. Making this distinction is up to you, the reader, and future scholar of economics.

On Diamonds and Water

If we think about the turn of the 20th Century, we can imagine a time of great upheaval and social change. The United States is barely a generation away from the end of the Civil War and the turbulent years of Reconstruction.. The U.S. is the throes of a new and expanding class war. During this period, often referred to as the gilded age, a robber baron economy is expanding industrial production, the intercontinental railroad system, and mass media. Under these tensions and uncertainty about the future, one group of economists attempted to bring clarity through calculus.

The early neoclassical economists, scholars such as William Stanly Jevons, Karl Menger, and Leon Walrus wanted to bring order and rigor to the chaotic world around them through a formalized approach to economic analysis. One space that is particularly messy in political economy is value theory. While the exchange theory of value had been around since the writings of Adam Smith and possesses lineage back to John Locke and the Enlightenment, Karl Marx and other scholars had leveled significant critiques. These critiques gave rise to the First International Labor movement and were foundational in the struggle for abolition. To counter these social forces and re-establish the exchange theory of value in political economy, neoclassical economists would return to Adam Smith and a paradox described in Book 1 Chapter 4 of the Wealth of Nations. Here it is worth quoting Smith at length:

The word VALUE, it is to be observed, has two different meanings, and sometimes expresses the utility of some particular object, and sometimes the power of purchasing other goods which the possession of the object conveys. The one may be called “value in use”; the other “value in exchange.” The things which have the greatest value in use have frequently no value in exchange: and, on the contrary, those which have the greatest value in exchange have frequently little or no value in use.

Smith continues,

Nothing is more useful than water; but it will scarce purchase anything; scarce anything can be exchanged for it. A diamond, on the contrary has scarce any value in use; but a very great quantity of other goods may frequently be had in exchange for it.

Two problems are raised by Smith’s account, first: why is water cheap and diamonds so expensive? Second, can it really be acceptable from an axiological standpoint to have two categories of value for economics as a discipline?

To settle these inquiries, neoclassical economists argued we must approach the problem of value from the margin. A marginal analysis examines what occurs when the next unit is added to the market, a consumer basket, or the production process. Earlier in the chapter we discussed the utility or amount of satisfaction a consumer achieves from selecting the optimal basket of goods. The consumer’s marginal utility is the amount of satisfaction achieved by adding one more unit of consumption. Another way to describe the margin is mathematically. Marginal changes are the derivatives or rates of change in satisfaction from a change in the quantity consumed.

When economists marginalize economic decisions, they emphasize scarcity and their ontological position that the whole is equal to the sum of its parts. For if we introduce an additional unit of diamonds, when they are rare or scarce, that additional unit at the margin is quite valuable. In contrast, the additional unit of water in a space of abundance is not going to be exchangeable for very much in this system. Thus, the story continues, to find the value of a good or service, we must trade it. When trading occurs, and the extent or the size of the market expands, we gain greater information about the value of those goods and services in the market. This is why in many orthodox models, prices give all participants in the market perfect information about those goods and services.

The more items that are traded and the more frequently those trades occur, the greater the information we all possess about those goods and services, and the more confident we can be that the price of those goods and services is the equilibrium or efficient price that clears those markets. This last sentence has a great deal of information to unpack, and we will do so in subsequent chapters, however, for the time being, the system of equations and the mathematical techniques utilized by the neoclassical economists provided a positivist approach to studying economics that separated the economists from the space of value judgments and ethics . This separation is possible because value emerges from the market and the aggregation of free and equal exchanges between participants.

Armed with the calculus of Newtonian Physics, Jevons, Walras, Menger, and their neoclassical colleagues separate economic choice and activity from the confusion and unrest of their day’s politics. This elegant mathematical solution disembeds the economy and delivers a controlled space for conducting economic analysis, specifically how the natural movements of supply and demand inevitably lead markets to their equilibrium position. From this lofty theoretical perch, politics and specifically the state becomes an outside intruder that disturbs and disrupts efficient market solutions. Hence, the study of the economy is no longer political, but simply the analysis of the allocation of scarce resources among competing ends or economics.

Labor, wages and bargaining power: the surplus approach

 While the exchange theory of value presents some alluring benefits, not least of which is the position that an economist is conducting “value-free” science. There are many who are not convinced that telling the old Enlightenment story of exchange with the tools of physics makes the new story any more scientific, much less does it free economics from politics or discussions of value. To summarize and clarify the heterodox approach to value, we outline a basic critique of the exchange theory of value using the surplus approach. Wage negotiations frame this critique. The surplus approach presents a simple model that opens up substantial space for understanding why heterodox economics is the study of the social provisioning process where an understanding of the development of economies is rooted in social, political, natural, and cultural processes.

Concern about the validity of the exchange theory of value is not unique to heterodox scholars. In fact, many of the founders of the orthodox school of thought raised concerns about assuming equity in exchange across too many aspects of the economy. Sir Alfred Marshall, for instance, of Marshallian Demand acclaim was concerned that employers might use their inequitable position of power to pay workers unfair wages to expand their profits. It’s worth examining Marshall’s words at length:

Similarly, a fair employer, when arranging for the pay of a carpenter, does not try to beat him down offers… at once whatever he knows to be the ‘normal’ rate of pay for that man’s work … On the other hand he acts unfairly if he endeavors to make his profits, not so much by able and energetic management of his business, as by paying for labour at a lower rate than his competitors; if he takes advantage of the necessities of individual workmen and perhaps of their ignorance of what is going on elsewhere; if he screws a little here and a little there; and perhaps in the course of doing this makes it more difficult for other employers in the same trade to go on paying straight-forwardly the full rates. It is this unfairness of bad masters which makes trades unions necessary and gives them their chief force: were there no bad masters, many of the ablest members of trades unions would be glad, not indeed entirely to forgo their organization, but to dispense with those parts of it which are most combative in spirit.  (Quoted in Henry 1990 p. 219)

The idea of a “bad master” taking advantage of employees if “he screws a little here and a little there” making it more challenging for other employers to compete on price is well documented in today’s employment environment. Amazon, for instance, is widely criticized for its treatment of workers, but by dominating the retail market, large retailers like Amazon and Walmart become the only option for many workers.  This power imbalance disrupts the elegance of the neoclassical model and generates real political struggles between workers and their employers.

This is noted in the response by Marshall, who continues that such imbalances are what “makes trades unions necessary.” This is a startling admission. Labor markets cannot be organized under the premise of the exchange theory of value as the benefits for both parties are not equally or fairly structured. It is not enough to simply hope that employers will not be “bad masters” under the pressures of competition. It is necessary for workers to be able to collectively negotiate in order to match the power of the employer in reaching an exchange agreement in which both parties benefit.

Marshall’s recognition of asymmetric power touches on one of the primary insights of the surplus approach. In chapter “Macroeconomic Viability and the Corn Model“, we outline the historical and mathematical dimensions of the surplus approach in great detail. Here we narrow our focus on a basic examination of what surplus production is and how it might emerge.

So let’s for a moment imagine a small agricultural community. During the course of the year, they work to produce enough food and other resources required to survive and do it all again the next year. At the end of the year, if they harvest more than enough food than is necessary to sustain themselves and do it all again, they have produced a surplus. Now the question becomes, what do they do with it? This issue, in essence, is at the heart of political economy. How do we organize and decide how surplus production should be distributed if the “invisible hand” is simply a figment of our imagination?

Historically humanity has dealt with this problem in a variety of ways. Some ancient religions practiced sacrificing a portion of the surplus to the Gods, in the hope of gaining favor and a strong harvest for the next year . In modern economies, surplus value is often described as profits or the return over and above the costs of production. This surplus is subjected to collective decisions structured by property rights, taxes, dividend payments, and options to reinvest and expand production. These options all carry different institutional structures that distribute the power needed to appropriate the surplus. Corporations structure surplus value distribution using a board of directors and input from their shareholders. A worker-owned enterprise might also have a board of directors but would prioritize worker input over that of shareholders for surplus distribution.

Each of these considerations and institutional designs are critical for understanding the social provisioning process. From sacrifice to taxes, we are influenced by the historical, social, and environmental contexts from which those decisions are made. One big question that might be considered when we make these distributional decisions is: what is the source of the surplus or profit? If we take Marshall’s concern about “bad masters'” seriously, one is likely to argue that value comes from labor; and if this is the conclusion you are coming to, then you would be joining Adam Smith, David Ricardo, and Karl Marx in a long list of labor theory of value theorists.

If the source of profits is labor, then we can describe profits as generated from the exploitation of labor. This concept is easily understood using Marx’s very simple model of the working day. The “Working Day” is a chapter in Marx’s Capital: A Critique of Political Economy, Volume I, and is a highly recommended reading for all those who appreciate a good metaphor. In this famous chapter, Marx uses the vampire as a metaphor for capital. In this metaphor, human effort in the production process is understood as living labor, while the capital and machines used in that process are dead labor. It is dead in the sense that human beings must use their physical force to turn these machines on and keep them running. Additionally, the machine is constructed and made possible by human labor and effort. Thus, the machines are “embodied labor” that when animated by living labor suck life and vitality from those human beings that give it life.

Marx is writing this in the context of the industrial revolution and the abuse of workers of all ages in factories. Given the images (Figure 2) presented in the art of the time, one can easily imagine why Marx would select the vampire and use language describing the working conditions in such violent terms. While modern Western factories and corporate offices might not be filled with the same fire and brimstone, one can still describe living labor operating dead labor in the form of computers. Computers, like machines, physically change our bodies. Long hours at a computer can cause carpal tunnel syndrome, a pronounced arch in our backs and necks, harm our eyes, as well as alter our mental health as anxiety and depression levels rise across our society.

One might also consider Artificial Intelligence or AI. AI is disrupting labor markets, but just like the machines of Marx’s era, a human created the underlying code and thus the AI is “embodied labor” and ChatGPT needs a human being to turn it on, or to initiate the informational request for its ability to produce. So while these technological advances often feel unique, it is helpful to examine them through the long lens of history and political economy to bring clarity. This can help us understand the dynamics of production and human contributions to the working day.

Figure 1. The Working Day

A—————————B————————–C

During the working day, dead and living labor combine to produce output for the capitalist. Marx divides the working day into two components: necessary labor time and surplus labor time. Necessary labor time is the amount of time the worker must be working in order for them to produce the needed output to cover their wages. Necessary labor time is represented by the segment between A and B in Marx’s model. The second section, because the working day is not over, is from B to C. This segment is what Marx calls surplus labor time. This is time in which the worker is still working, but has already produced enough to cover their wages. Surplus labor time is thus production over and above what the employer is paying for and thus generates profit for the capitalist. If this is indeed an accurate description of where profits come from, then Count Dracula is not just a figment of our imagination, but he resides in C suites all over the globe sucking up profits at the expense of labor.

If labor is the source of value and not exchange, then it is necessary to study and understand the social, political, cultural, and environmental contexts that organize labor and production, as well as, how surplus production in those settings is distributed. This also means that price is likely not a good signal for value. As Oscar Wilde lamented, “Nowadays we know the price of everything and the value of nothing.”

The pursuit of economic knowledge through the study of the social provisioning process means that heterodox economists cannot pretend to be doing “value-free science.” Instead, value and the determination of what has value is a deliberate and socially constructed process that must be studied and understood in its own right.   This invites input from the humanities and other social sciences to collaborate in the study of social provisioning.

Summary

In sum, the differences in these two schools’ approaches to value, like in their selection of methodology, begin with their theory of reality. Orthodox economics begins from the premise that the whole is equal to the sum of its parts. As we have discussed above, this opens the door for the use of several of the powerful tools of knowledge creation in the physical and natural sciences. This starting point is not terribly amenable to value judgments or ethics, because gravity does not hold you to the earth any differently than it does a tree or university buildings. This physics-based framing gives the appearance of being free from judgment or social or human biases.

In contrast, heterodox economics embeds its analysis in all of the human and social messiness the orthodox economists seek to avoid, therefore constant evaluation and consideration of value judgments and ethics are necessary.

So what language or code for science is the best approach? This is largely up to you to determine, and this determination might change as your life experiences either reinforce or contradict the philosophical grounding or worldview you seek to maintain. However, whatever paradigm you select, it remains important that you always subject your meta-theory to critical analysis and question your approach. After all, that is what Albert Einstein would do.

References

Henry, John F. 1990 The Making of Neoclassical Economics. Routledge.