from Ernest Mandel’s Marxist Economic Theory 1962

The marginalist theory of value and neo-classical political economy

Eclectic political economy failed, however, to give complete faction either to scholars who continued to try to answer the question which previous generations had bequeathed to them or to the bourgeoisie itself, which found itself constantly exposed to the risk that. starting from the popularisation of Ricardo’s ideas. economists might pursue some point in the direction of socialism (as happened with John Stuart Mill). In order to neutralise the “socialist danger”. which was felt with especial keenness after the revolution of 1848, and above all after the Paris Commune (1871), the entire structure based on the labour theory of value had to be demolished. This was the great turning-point of bourgeois political economy, towards the marginal theory of value, which was prepared so early as 1855, independently of each other,” by Hermann Gossen and Richard Jennings. and which culminated in the British (Jevons, 1871), Viennese (Menger, 1871) and Swiss (Walras, 1874) neo-classical schools.

As compared with the eclectic and vulgar conceptions, the neo-classicists were distinguished by a greater methodological rigour. Like the classical economists they strove not to leave any economic phenomena unelucidated, not to gloss over any question, to provide the material for the building of a coherent structure. The apologetic nature of this structure is shown not so much in the conclusions as in the methodology and the initial hypotheses. The system is coherent, but it is divorced from reality, which it fails either to grasp statistically or a fortiori, to explain in its laws of development.

From Petty to Ricardo and Marx, every theory of value was objective. that is. its ultimate starting-point was production; value was identified with cost of production, or revolved around it. There influence of demand upon value. as an independent variable, was denied; and even when it was indirectly taken into consideration, it appeared only as an indirect function of production itself, since all incomes were regarded as having been created in production. Indeed, the entire classical theory was oriented for this reason towards a synthesis between micro-economic and macro-economic conceptions, a synthesis which Marx alone proved capable of achieving successfully.

The neo-classical school, however. approached. the problem in an altogether different way. It was a school of pure micro-economics. considering that value can and should be determined for each commodity taken separately. It regarded this value no longer as a function of cost of production but as a function of the independent influence of demand upon cost of production. The separation of exchange value from use value, the starting-point of the classical school, was questioned. It was declared, on the contrary, that exchange value is essentially a function of use value, of the utility of the given commodity.

But how is this utility to be measured? The neo-classicists here came up against a difficulty which all their predecessors had encountered, from Aristotle to Jean-Baptiste Say. and including both the French monk Buridan and the encyclopaedist Condillac. If I ask somebody: “What is the utility of this knife to you?” he will reply: “A very great utility”, or “I use it a lot”, or else “I have no need of it at all”. Nobody answers a question like this by stating a quantity, any sort of measure of “use-value”. Resigning themselves to not being able to express use-value quantitatively, the marginalists fell back on a quantitative expression of the needs which use-value has to meet. They laid down individual scales of needs; this is why this school has been correctly described as being subjectivism, since its starting-point is purely arbitrary, subjective. As Rudolf Hilferding put it, whereas Marx and the classical economists start from the social character of the act of exchange, and regard exchange value as an objective link between owners (producers) of different commodities, the marginalists start from the individual character of needs, and regard exchange-value as a subjective link between the individual and the thing.

Nevertheless. the quantitative expression of needs is not enough to overcome the difficulty. A man obviously has more need of bread and water than of a diamond. Yet a diamond has a higher exchange-value than that of bread. A man has even more “need of air, which normally possesses no exchange value. This is why the neo-classical theory states: it is not the intensity of the need in itself, but the intensity of the last fragment of need not satisfied (of the marginal utility) that determines value.

Starting from this general idea, the neoclassical school worked out a series of curves the intersection points of which are supposed to show conditions of equilibrium: curves of supply and demand, determining equilibrium prices; curves of indifference and of prices determining the quantities of commodities demanded at particular levels of income; curves of marginal costs, determining for entrepreneurs the levels of production which will guarantee them the highest profits; a curve of wages offered and of “disutility of labour”, determining the demand for employment, a curve of interest rates offered and profit expected. determining the volume of investment; a curve of the accumulated amount of capital and of the mass of money-capital available, determining the rate of interest; and so on. In the end, the whole system is in perfect static equilibrium, “profit” itself having disappeared, at least in Walras’s work, since under conditions of total competition the value of the marginal product--which determines the value of all production-is dissolved into depreciated capital, wages, interest and round-rent .

“Under conditions of competition, we are told, the entrepreneur increases the employment of each factor of production to the point at which the marginal productivity of this factor (net product obtained thanks to the last unit employed) is equal to the price of this factor on the market, and he increases his production to the point at which the marginal cost of the product (cost of the last unit) is equal to the price of the product.

“In a situation like this, the satisfactions obtained by the consumers are at their highest because any transfer of a factor of production would result in a reduction of the ‘value’ created by this factor. In the case of a worker, for instance, he is producing in an hour, where he is working at this moment, a ‘value’ equal to his wages. If he were to be transferred elsewhere, he would produce a little less, in fact, he would be ‘added’ to a group of ‘workers whose marginal productivity is already equal to their wages, so that his own productivity would necessarily be a little less.”

Eric Roll is right to criticise the mechanistic thesis of Bukharin, according to which the marginalist school reflected the special interests of a new stratum of rentiers which had made its appearance among the bourgeoisie .77 But Bukharin was right when he stressed that the marginalist school adopts the point of view of the rentier, or, more precisely, of the capitalist who has withdrawn from the sphere of enterprise, for this school does start from individual consumption rather than social production, which had been the starting point of the classical economists and of Marx. It is not accidental that the examples used by the founders of the neo-classical school are nearly all drawn from luxury production.

The special nature of the neoclassical school is further emphasised by the fact that it was for a long time unable to determine the marginal value of capital goods. In the end it managed to do this only by introducing, with Böhm-Bawerk, the notion of a “roundaboutness” of production which becomes more and more intensified as capital goods increasingly enter into the process. a “roundaboutness” which has to be “paid for”. It is, moreover, unable to explain how, from the clash of millions of different individual “needs” there emerge not only uniform prices, but prices which remain stable over long periods, even under perfect conditions of free competition. Rather than an explanation of constants, and of the basic evolution of economic life, the “marginal” technique provides at best an explanation of ephemeral, short-term variations. It is significant that in Walras’s fundamental work he starts from the example of sellers and buyers “inclined to go in for bidding”, that is, to stock-exchange speculators.

Today, most economists readily admit that the equilibrium system of the neo-classicists is totally divorced from reality. It does not take into account the particular institutional framework of capitalism, which makes quite absurd the notion that wages are determined by “the product of the last unit of his time that the worker wishes [!] to give up rather than devote it to leisure”. It does not take into account the dynamic character of competition and the continual disturbances of equilibrium. which it causes. It is essentially static and brings dynamics as at most an element disturbing equilibrium, whereas in reality equilibrium is only a transient moment in a spasmodic economic movement which is in ceaseless oscillation. It has no explanation to offer either for periodical crises or for structural crises. Carried to its logical conclusion, it even denies the phenomenon of imperialism, or, more precisely, denies that there is any connection between imperialism and the laws of development of capitalism.

The neo-classical theory is not only divorced from social reality as whole. It is also divorced from the practical reality of everyday life. The labour theory of value can be demonstrated empirically. even if only in the sense that, in the last analysis. all the elements of the cost of production of a commodity tend to. be reduced to labour, and to labour alone, if one goes far enough back in the analysis. Despite all the teachings of the neo-classical school, capitalist businessmen continue to calculate their costs of production on this basis. And whoa they seek to make comparative productivity calculations, they do this using the yardstick of “amount of labour expended”, and using this yardstick only.

The “Keynesian revolution”

The marginalist theory of value and the neo-classical school based upon it dominated bourgeois economic thought for three-quarters of a century. Their objective function was, no doubt, purely apologetic — to justify the capitalist order as more or less inevitable; to justify wages, prices and profits as the result of exchanges carried out on an equal footing. In so far as the capitalist expansion which marked the second half of the nineteenth century and the first decade of the twentieth itself constitutes a much more powerful “argument” in favour of capitalism than any theoretical construction, the bourgeoisie felt no need for a trend of economic thought other than this purely apologetic school.

Several generations of economists, however, showed themselves dissatisfied with the answers given by the neo-classical school, especially to the problems of investment (the rate of interest), money (the quantity theory of money) and periodical crises. The neo-classical school began breaking up on its weakest sides, that is, the difficulties it met in formulating a dynamic theory, a theory of growth, starting from the micro-economic data of marginal value, and the difficulty of reconciling the theory of prices resulting from supply and demand with a theory of prices resulting from the quantity of money in circulation.

[It can be said that the marginalist school was never able to solve the problem of the “marginal value of money”, and that for this reason it remained dualistic, combining a subjective theory of value with an objective theory of money (e.g. the quantity theory). It is clear that an increase in the “stock of currency” does not necessarily reduce the “marginal value” of this stock, as would happen in the case of an increase in a stock of corn, since money can be used to buy, one after another, commodities which correspond to different needs of equal intensity. The dualism of the theory is seen if one imagines an increase in the stock of currency suddenly causing a rise in wages, without any change in the marginal value of the commodities concerned.

The quantity theory of money implies that prices rise or fall depending on whether the quantity of currency in circulation increases or decreases, in relation to a definite level of equilibrium.]

It was in this way that the idea of a rate of interest resulting from the supply and demand of capital, a rate of interest which rises until the demand ceases because it is excessive, was refuted at the beginning of the century by the Swedish economist Wicksell. The latter showed that the rate of interest in equilibrium is determined by the relation between saving and investment; and Gunnar Myrdal, a pupil of Wicksell’s, went still further, explaining that this rate of interest actually depends on the return expected from investments’, that is, on the rate of profit, as Marx says.

While, during the nineteenth century, only critics of capitalism concerned themselves with crisis phenomena. after the end of that century Tugan-Baranovsky began, under the direct influence of Marx, the empirical study of periodical crises, which led to the modern theories of the economic cycle and economic growth. He was inspired, moreover, by all the procedures worked out by Marx, such as the division of social production into two sectors. the question of the periodical renewal of fixed capital, etc. Following Tugan-Baranovsky, Spiethoff, Aftalion, Bounatian. W. C. Mitchell, Schumpeter and others also concerned themselves with studying and trying to explain the empirical data of crises. In 1917 the University of Harvard set up a special institute for the study of cyclical fluctuations (Harvard Committee for Economic Research). But it was only after the great economic crisis of 1929-1933 that official economic theory completed the turn which has come to be known as the “Keynesian revolution”.