How not to understand the Labour Theory of Value

Solow on “Adam’s Fallacy”

Dipankar Basu

Soon after its publication by the Harvard University Press (1), well-known economist and Nobel laureate Robert Solow reviewed “Adam’s Fallacy” for the New York Review of Books (“How to Understand the Economy”, Robert M. Solow, Nov. 16, 2006). It is difficult to read through the review and escape the conclusion that Solow’s main purpose was to write a tirade against the labour theory of value rather than to review the book by Foley. For instance, Solow never even attempts to indicate, let alone summarize, the main argument of the book; if all one did was to read the review by Solow, the reader would have to come away without even knowing what it is that Foley refers to as “Adam’s fallacy”. This is strange because Foley introduces the reader to what he means by this important phrase right in the preface, even before the main text of the book begins.

Adam’s fallacy, according to Foley, “lies in the idea that it is possible to separate an economic sphere of life, in which the pursuit of self-interest is guided by objective laws to a socially beneficent outcome, from the rest of social life, in which the pursuit of self-interest is morally problematic and has to be weighed against other ends.”(2) In other words, Foley is arguing against dualism in economic theory, against the attempt to separate normative from positive economics, against the ill-conceived attempt to construct a “scientific” discipline by purging value judgments and ethical considerations from its precincts. Solow does not refer to this argument even once in the whole review!

Solow’s oversight, if at all it is an oversight, is all the more surprising in light of mainstream economics’ recent acceptance of the necessity of bringing in ethical issues back into economic theory. For instance, the presidential address at the 2007 American Economic Association (AEA) meeting by Nobel laureate George Akerlof made a forceful case for the inclusion of value judgements in macroeconomics. His paper, “The Missing Motivation in Macroeceonomics” shows why inclusion of norms – should questions – is important, why inclusion of such norms makes the Keynesian story consistent with optimizing behaviour and why the celebrated neutralities of recent macroeconomic thinking is thereby invalidated.(3)

Though this is a much more restricted vision than Foley’s, nonetheless it seems to be in line with his conclusion “from surveying the high peaks of political economy” that dualisms in political economy – normative vs. positive economics, value-free scientific analysis vs. value-laden policy analysis – are useless, if not misleading. The great political economists never pretended that such a separation exists in reality or even adopted it as a useful analytical tool. “The attitudes promulgated by the great political economists toward capitalism and its social logic cannot plausibly be separated from their analysis of its workings.”(4)

Having read the book, one is therefore forced to conclude that Solow’s main motivation in writing the review was to repeat some well-known criticisms of the labour theory of value and not to discuss the implications of “Adam’s fallacy”; most of these criticisms, as we will see, do not hold under scrutiny. It is of course not the case that Solow, or mainstream economists more generally, are alone in criticizing the labour theory of value. Several radical political economists have pointed out the inadequacies of the labour theory of value and have instead adopted alternative perspectives to understand the current world around us; some of these alternative perspectives have been informed by recent developments in economics, sociology, and political science.(5) One can, therefore, have problems with the labour theory of value without agreeing at all with Solow. But what, after all, is Solow’s criticism of the labour theory of value?

Solow criticizes the labour theory of value because it is concerned about “values” whereas real life, according to him, is about ordinary, observable, market prices. This oft-repeated criticism is the result of serious misunderstandings about the role of unobservables in theory.(6) For instance, neoclassical economics also posits unobservables – consumer preferences or utility functions – to explain observable phenomenon like prices of commodities. Would Solow be willing to criticize neoclassical economics solely because it concerns itself with unobservable “utility” maximization whereas real life is about observable market prices? If not, then Marxian political economy cannot be criticized for positing a different unobservable: value. The real question is whether positing this or that unobservable within a theoretical edifice can better help in understanding the observable world.

But here we must immediately confront a related question: which aspects of the observable world do we want to understand? Different theories, to my mind, are differentially suited to explain different aspects of the same observable world. This is important because it relates to Solow’s second criticism of the labour theory of value. He repeatedly complains that the labour theory of value is not about the economics of everyday life, that it is rather about supporting a particular attitude towards capitalism. Perhaps Solow does not realize, but this does not amount to any criticism at all. Why? Because aspects of daily life which are important for Solow and which, he thinks, need explaining, are probably not the ones that the labour theory of value attempts to explain in the first place.

For Solow, the price of a bottle of beer is very important; he feels that economic theory should explain the how and why of this price. Fair enough. But what about other aspects of this same observable world in which the bottle of beer is bought and sold? What about the workers who work in the factories that made the beer? And the capitalists who own those factories and all the rest of society’s productive resources? Is their behaviour, their conditions of work, the conflict of interest between the workers and the owners of the factories not aspects of the same reality? The determination of wages, the allocation of different kinds of labour and capital between industries, the fluctuations of the rate of profit, the difference between productive and unproductive labour, the biased nature of technological change: are these not important aspects of everyday life under capitalism? Do they not need explaining? And if a theory is primarily concerned about explaining such aspects of everyday life, then why should it be criticized for not explaining the fluctuations in the price of alcohol?

It must be recalled that Robert Solow is himself an eminent economist within the mainstream. He, along with his colleague Paul Samuelson, was largely instrumental in establishing the so-called Keynesian synthesis, the orthodoxy in post-war macroeconomics. He is of course better known for his work on neoclassical growth theory (that earned him the Nobel in 1987), which attempts to explain differences in rates of (economic) growth of nations on the basis of differences in the growth of the capital stock, technological change and population growth. Suppose we criticized this theory for not explaining the pattern of international trade among nations? Suppose we criticized this theory for not explaining the fluctuations of real exchange rates in different time periods? That would certainly be considered unfair criticism, and rightly so. In an exactly similar manner Solow’s criticism of the labour theory of value is unfair.

In any case, if Solow had read through Foley’s previous work on the labour theory of value (7), he would have realized that it was a theory about aggregates, a macro and not a micro theory in today’s jargon. It does not attempt to explain the fluctuations of individual prices, but instead attempts to explain how capitalism as a system rests on the exploitation of one class by another, the appropriation of the surplus labour of one class by another. This, it must be admitted, is a common misunderstanding which is shared not only by mainstream economists like Solow and Samuelson but also by several radical political economists, including Marxists. Trying to understand the labour theory as a theory of the determination of individual prices naturally leads to the so-called transformation problem, and Solow does not pass the opportunity to mention it. If he had even glanced through the burgeoning literature on the labour theory of value (8), he would also have come to know that the transformation problem has been “solved” quite some time ago; the solution, proposed independently by Duncan Foley and Gerard Dumenil (9), is neither “mystification” nor “bad algebra”.

Of course Solow is partially correct in pointing out that “the labor theory of value paints a picture of capitalism in fundamentally moral terms”. Foley would probably say that that is exactly what should be done; it is only by consciously emphasizing the ethical aspects of social life that economic theory can deal with its sterility. But Solow is only partially correct because the labour theory of value also has an analytical aspect which attempts to describe and explain how the various institutions of capitalism are primarily about the creation, appropriation and distribution of surplus value; in that sense, the labour theory tries to undergird its ethical stance with concrete historical analysis.

Notes:

(1) Duncan K. Foley, Adam’s Fallacy: A Guide to Economic Theology, The Belknap Press of Harvard University Press, Cambridge, Massachusetts, 2006. Hardcover, 265+xviii pp.

(2) Ibid. (p. xiii)

(3) It is not the case that Akerlof’s paper was presented to the larger public for the first time at the 2007 AEA meeting in Chicago in January; it had been in the public domain for more than a year (the current version that I could find on the web was completed in October 2, 2005) and the author had presented it at various conferences, seminars and talks before the AEA meeting.

(4) Foley, op cit (p. 215)

(5) Among them would be the Analytical Marxists like John Roemer, Jon Elster, Adam Przeworski, and radical political economists like Robin Hahnel and Michael Albert.

(6) Even Joan Robinson, undoubtedly a profound thinker, could not resist the temptation of leveling this charge against Marxism. Most often, this criticism follows from an overly empiricist philosophical leaning.

(7) Duncan K Foley, Understanding Capital: Marx’s Economic Theory, Harvard University Press. 1986.

(8) A nice starting point could be: Duncan K. Foley, “Recent developments in the labor theory of value”,Review of Radical Political Economics, 32(1): 1-39. 2000.

(9)(a) G. Duménil, “Beyond the Transformation Riddle: A Labor Theory of Value”, 1983, Science and Society, Vol. XLVI(2), pp. 427-450. (b) Duncan K Foley, “The value of money, the value of labor power and the Marxian transformation problem”, Review of Radical Political Economy, 14(2): 37-47. 1982.

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