Actividades primarias

Classical economic doctrine was demoted from the pinnacle of the eco- nomic mainstream by the introduction of a new price theory in the 1870s that appeared to immunise economics from having to theorise economic excep- tionalism. The new breed of economists, starting with Carl Wenger, Friedrich von Wieser and William Stanley Jevons, argued that prices are not determined by costs but utility, not supply but demand, and therefore are not objective but subjective. Two innovations in particular threaten the theory of economic exceptionalism inherited from classical theory. First, since prices are deter- mined by utility according to neoclassical economics, there can be no distinc- tion between natural and unnatural prices, as Smith understood those terms, and therefore the existence of ‘fancy prices’ or ‘monopoly prices’ appears not to be exceptional but standard. Second, the objective measure of value that is the basis of the standard price from which exceptional goods deviate, namely the labour theory of value, is replaced with a dynamic and incremental theory of price, known as marginalism, in which there is no standard price and there- fore no exceptional price. The result is that neoclassical economists do not theorise economic exceptionalism; if art remains economically exceptional within neoclassicism itself, a new absent theory will have to be constructed from the material that excludes it.

Neoclassical economics is built around the principle of diminishing mar- ginal utility, which was formulated by Friedrich von Wieser as follows:

The value of commodities is derived wholly from their utility, but the util- ity they afford is not wholly convertible into value. . . . Nor ought it to be; the value should express, not the total utility, but only a part of it, ‘the final degree of utility’, as Jevons said, the ‘marginal utility’ (Grenznutzen) as we say.1

The value of a commodity, therefore, is determined by the benefit a consumer perceives to obtain from the last unit consumed. Alfred Marshall explains the principle behind marginal economics with a Pre-Raphaelite illustration:

The simplest case of balance or equilibrium between desire and effort is found when a person satisfies one of his wants by his own direct work. When a boy picks blackberries for his own eating, the action of picking is probably itself pleasurable for a while; and for some time longer the pleasure of eating is more than enough to repay the trouble of picking. But after he has eaten a good deal, the desire for more diminishes . . .2 What is illustrated in this image is the constantly shifting and individual or subjective basis of value. This is summarised in Gossen’s ‘First Law’ that states that an increase in the same kind of consumption yields pleasure continu- ously diminishing up to the point of satiety. Marginal utility initially increases in increments of diminishing magnitude and then, in principle, eventually decreases in increments of increasing magnitude. Wieser explains this curve of utility as follows:

Assume that a man owns one good, and that the employment of it gives a utility equal to 10; and suppose that his holding gradually increases up to 11 goods, in the course of which the marginal utility decreases propor- tionally down to 0. The value of the stock at each point will be as follows:

Goods 1 2 3 4 5 6 7 8 9 10 11 1×10 2×9 3×8 4×7 5×6 6×5 7×4 8×3 9×2 10×1 11×0 Utility 10 18 24 28 30 30 28 24 18 10 0

Here a regular decrease of the marginal utility, and, therefore, of the value of the single good, is seen to take place along with an increase of the supply, and further explanation is unnecessary. Each additional good brings with it a diminished increment of utility and must, therefore, bring only a dimin- ished increment of value.3

2  Marshall 1997, p. 147. De Quincey uses a similar example to illustrate a different theoreti- cal point: ‘In the vast forests of Canada, at intervals, wild strawberries may be gratuitously gathered by the ship-loads; yet such is the exhaustion of a stooping posture, and of a labour so monotonous, that everybody is soon glad to resign the service into mercenary hands’ (De Quincey, 1863, p. 249).

The commodity is only worth what the customer will pay to obtain one more increment of it, and therefore according to neoclassical theory prices are related not to some fixed measure of value but a changing scale of perceived utility.

It is because utility typically diminishes with increased units of a certain good that marginal theory is careful to link prices to quantities. ‘There are some prices which no seller would accept, some which no one would refuse’, Marshall says, in order to get to the nub of the question, namely that there ‘are other intermediate prices which would be accepted for larger or smaller amounts by many or all of the sellers’.4 The first unit of a particular commodity is said to yield more satisfaction, or utility, than subsequent units of the same commodity, reaching a point at which further units are perceived as worthless or even harmful. Marginal utility depends upon quantities already obtained. Since the utility of a commodity tends to diminish with increasing quantities of it, choices made by consumers are not based entirely on preference but also on relative values between different commodities. Roger Backhouse explains this with another fruit-based illustration:

if an apple costs twice as much as a banana, the pleasure obtained from the last apple purchased must be twice as large as the pleasure of an addi- tional banana. If it were less, the individual would give up an apple to get two extra bananas.5

Smith had illustrated classical price theory with the example of a beaver being worth two deer, saying that hunting beaver requires twice as much time as hunting deer. He says it is ‘natural’ that the produce of two days labour should be worth double that of the produce of one day’s work. What the early marginalists want to add, here, is, first, that a household in possession of a beaver may regard a deer as worth more than an extra half beaver, and sec- ond, that the different consumers’ preference for deer over beaver, perhaps, will increase the price of deer relative to beaver regardless of their respec- tive labour costs. Marginalists object to the classical labour theory of value on the grounds that it is an ‘essential corollary of this concept [that] value is unrelated to the subjective valuations which purchasers put upon a product’.6 Steve Keen says, ‘the neoclassical school argues that value, like beauty, is “in the eye of the beholder” – that utility is subjective, and that the price, even

4  Marshall 1997, p. 148. 5  Backhouse 2002, p. 169. 6  Keen 2011, p. 414.

in equilibrium, has to reflect the subjective value put upon the product by both the buyer and the seller’.7

Subjective value assessed at the margin is not only expressed in terms of quantities but also in terms of choices. Philip Wicksteed imagines a consumer choosing between possessing a book by Darwin or buying a Waterbury watch, or another consumer deciding whether to spend money on a fish supper or a cigar, and yet another asking: ‘Do I prefer to possess a valuable picture or to consume so much a year in places at the opera?’8 Such ‘heterogeneous impulses and objects of desire or aversion which appeal to any individual’,9 he says, can be brought together on ‘a general “scale of preferences” or “relative scale of estimates” on which all objects of desire or pursuit (positive or negative) find their place’.10 Choices made at the margin are taken to be calculations, some- times rough and sometimes irrational (Wicksteed talks about someone being in love with a house and therefore paying over the odds for it), of alternatives. ‘If we secure this, how much of that must we pay for it, or what shall we sac- rifice to it?’ he says. The standard formula is given shortly afterwards: ‘What alternatives shall we forgo?’11 Value is tied up with subjective evaluations, as opposed to costs of production, through the concept of ‘opportunity cost’. The doctrine of opportunity cost asserts that every choice has the hidden cost of opportunities not taken as a result of that choice. ‘By devoting our efforts to any one task, we necessarily give up the opportunity of doing certain other things’.12 These ‘other things’, that is to say opportunities forgone, are the ‘costs’ that result from choices. Costs can be pecuniary or non-pecuniary (spending a day in wage labour has the opportunity cost of spending the day with loved ones, and vice versa), but the doctrine introduces calculations that lead to the norm ‘nothing is free’, since, although it costs you no outlay to stay in bed all day, the opportunity cost is the amount you could have earned if you had cho- sen to work instead. The opportunity cost doctrine asserts that relative prices reflect foregone opportunities.

It is often said that the concept of opportunity cost is implicit within the writing of several early economists such as Johann Heinrich von Thünen,

7  Keen 2011, p. 415. 8  Wicksteed 1888, p. 137. 9  Wicksteed 1957, p. 32. 10  Wicksteed 1957, p. 33. 11  Wicksteed 1957, p. 21. 12  Green 1894, p. 222.

John Stuart Mill, Leon Walras and Adam Smith,13 but the doctrine was not explicitly formulated before Friedrich von Wieser theorised ‘alternative cost’ between 1876 and 1914. Prices are nothing but the expression of opportunity costs, according to the Austrian School. Although, in many respects, Wicksteed’s formulation of opportunity cost is less technically robust than Wieser’s, James Buchanan regards it as more modern because it ‘tied opportunity cost quite directly to choice’.14 Between Wicksteed and Lionel Robbins, the most promi- nent advocate of the opportunity cost doctrine was H. Davenport, who formu- lated it in terms of ‘displaced opportunity or foregone fact or sacrifice’.15 So, the ‘costs’ of opportunity cost are not financial in any direct sense. For Wieser and the Austrian School, opportunity cost is not measured in money, but is, in fact, what money represents. This is why the doctrine can also be formulated thus: ‘the unrealized flow of utility from the alternatives a choice displaces’.16 ‘The importance of the alternative cost doctrine to those who espoused it was that it demonstrated the fallacy of the “real cost” theories of value’.17 After several decades of controversy, in which the Austrian subjective theory of cost com- peted with various objective theories of value,18 mainstream economics has learned to incorporate the doctrine of opportunity cost into almost every vari- ant of economic theory.

Despite the absence of an objective costs of production ‘natural price’, Wieser distinguishes between a ‘natural monopoly’ and a ‘Cost Good’, which

13  In a ‘comment’ on an article titled ‘Opportunity Cost of Marriage’ by Gary North, George Stigler states that North wrongly dates ‘the beginning of the alternative cost theory as 1870. This date is wrong by at least a century: Smith used alternative cost routinely in 1776’ (Stigler 1969, p. 863). James Buchanan, who was the greatest advocate of the opportunity cost doctrine in the second half of the twentieth century, confirms this by beginning his discussion of opportunity cost with a reference to Adam Smith’s famous example of rela- tive value (one beaver being exchanged for two deer) – see Buchanan 1999.

14  Buchanan 1969, p. 17. 15  Davenport 1968, p. 61. 16  Novemsky 2009, p. 553. 17  Blaug 1968, p. 492.

18  The dispute between the two schools had two phases, the first consisting of the rivalry between the original members of the Austrian school (Wieser, Böhm-Bawerk, Menger, Walras, Jevons) and the adherents of classical theory (principally Marshall at the time). In 1872 Marshall reviewed Jevons’s book Political Economy in the Academy, in which he chastised the Austrian’s ‘marginal utility’ theory as dressing up a well-known but minor point. This inaugurated a major and long-lasting debate. For an introduction to the issues within the dispute see Backhouse 2002, pp. 166–84. The second phase was played out principally by Gottfried Haberler and Jacob Viner. This dispute is reviewed by Jarolsav Vanek (See Vanek 1959).

divides economically exceptional goods from standard goods. The former includes:

scarce raw materials, land exceptionally situated, the work of one pecu- liarly gifted – particularly an artist or scientific worker of the highest rank, – a secret and at the same time successful process, whereby the persons who have it obtain a preference over others, and, finally, works of human hands, which, on account of their size, or on account of technical difficulties, cannot be repeated.19

Wieser defines the latter as those ‘goods easily accessible and abundant, or goods whose production can be indefinitely increased’.20 Examples of the lat- ter, for Wieser, include ‘unskilled labour, coal, wood, the common metals, and also land devoted to industrial undertakings where there is no question of any particular advantage in situation’.21 Wieser argues that the ‘value of goods pro- duced under monopoly must, by reason of their small available quantity, stand comparatively high’.22 Appearing orthodox, Wieser lays out the basics of clas- sical exceptionalism using arguments familiar since Smith, Say, Ricardo and Senior, but he is not satisfied with the classical price theory.

Monopoly goods have often received a quite peculiar position in theory. Ricardo, for example, teaches that they owe their value altogether to their scarcity, while all other goods receive their value from the labour of producing them. A sufficiently wide consideration, however, shows that monopoly goods come altogether under the ordinary conditions of valuation, and differ from other economic goods only in that they display much more strikingly the character common to all.23

Utility is common to both, according to Wieser. And the difference between exceptional goods and cost goods, he argues, is that in the case of the latter only the marginal value counts, whereas in the former, ‘they must, on any rea- sonable valuation, have ascribed to them the full value of the utility which is expected from them’.24 Hence, he says, a ‘starving man will value his last bite at

19  Wieser 1893, p. 108. 20  Ibid. 21  Ibid. 22  Wieser 1893, p. 109. 23  Wieser 1893, p. 110. 24  Wieser 1893, p. 22.

its full life-saving value’,25 and only a philistine ‘could value the Venus de Milo by the utility of the material of which it is made’.26

Wieser overcomes or suppresses the question of economic exceptionalism precisely by diverting our attention to questions of the relative proportion of value of an article that can be attributed to its different factors. The stan- dard example of the French vineyard is given a completely new treatment by Wieser as a result. ‘What happens’, he asks, ‘when some expedient to reduce cost is introduced into a kind of production incapable of further extension – say, the production of wine in a limited area already cultivated to the utmost extent?’27 It is clear that Wieser frames this question deliberately to sabotage the case for economic exceptionalism, first by introducing the ‘expedient’ of a technological factor that increases the productivity of labour (thereby reduc- ing the proportion of value derived from the factor labour), and then by raising the possibility of the reduction of costs. Since Wieser argues that the value of wine derives from marginal utility, this reduction of cost does not affect the price of wine produced at all, but it has consequences for production gener- ally (these reduced factors – capital and labour – ‘can and will find another employment’).28 Wieser refuses to conclude that the price of the wine might fall as a result of the cost-saving expedient, but also remains silent about the possibility that the price of wine from such a restricted vineyard might be regu- lated differently from goods that can be reproduced in unlimited numbers to meet demand.

Wieser applies the analysis of factors to the high prices of artworks with the example of an artist making a pewter vessel. He supposes that the vessel commands great admiration because of its perfect form and suggests, for the purpose of the illustration, that the producer is the ‘only artist’29 capable of such fine work, which amplifies Say’s theory of the exceptionalism of talented artistic labour. On top of this he adds that this is the only piece of pewter the artist has ever produced, and that no similar vessel has been produced in any other material (gold, silver, wood, clay), simultaneously exaggerating the clas- sical assumption of the absence of competition in supply and reorienting De Quincey’s single snuffbox towards the concept of the unique art object. Based on a typical classical example of economic exceptionalism, Wieser makes a neoclassical observation: under such conditions, Wieser says, it would be

25  Ibid. 26  Ibid.

27  Wieser 1893, p. 106. 28  Ibid.

‘absolutely impossible to distinguish in the value of the vessel between the value of the labour and that of the material’.30 We only value the artist’s labour as high, Wieser points out, because we compare the value of this fine pew- ter vessel with other items made in the same material that ‘have but a trifling value’.31 We conclude, therefore, that the factor of the material contributes only a small portion of the value to the vessel and the artist’s labour contributes the greatest part of its value. He appears to believe that differentiating the fac- tors in it – material and labour – diffuses its apparent uniqueness because this allows us to compare this pewter artwork with more mundane pewter goods. But locating the difference in price between this pewter vessel and a standard pewter mug in the factor of the artist’s labour does not minimise the disparity in prices or explain them.

Neoclassical economists argue that the high prices of artworks are proof that classical economists were wrong about labour being the only source of value. Jevons takes up the classical observation that there are ‘high values’ of certain goods (he makes his own selection from the familiar list: ‘rare ancient books, coins, antiquities, etc.’).32 Like Say and Ricardo, Jevons does not restrict his list of exceptional goods to Smithian natural rarities and includes, among other things, artworks.

There are some commodities the value of which is determined by their scarcity alone. No labour can increase the quantity of such goods, and therefore the value cannot be lowered by an increased supply. Some rare statues and pictures, scarce books and coins, wines of a peculiar quality, which can be made only from grapes grown on a particular soil, of which there is a very limited quantity, are all of this description.33

Rather than follow the established conclusion that such goods are therefore exceptional, he takes these high prices of articles by dead producers as proof that the classical theory was wrong in arguing that ‘value depends on labour’.34 This has since become a standard refutation of both classicism and exception- alism. If value derives from labour, he muses, then why would the absence of labour bring about an escalation in price? Jevons’s critique of the classi- cal labour theory of value is based on a very tendentious reading of it. ‘Some economists’, he says, believe that ‘the labour spent on [gold] is the cause of the

30  Ibid.

31  Wieser 1893, p. 87. 32  Jevons 1888, p. 162. 33  Jevons 1888, pp. 162–3. 34  Jevons 1888, p. 163.

high value’. He proves that this is wrong with the example of the work that goes