Subjectivism and Economic Analysis: Essays in memory of Ludwig ...
Subjectivism and Economic Analysis: Essays in memory of Ludwig ...
Subjectivism and Economic Analysis: Essays in memory of Ludwig ...
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SUBJECTIVISM IN ECONOMICS AND THE ECONOMYprice system, <strong>and</strong> thus help to co-ord<strong>in</strong>ate specialised activities, wasextremely convenient; but we should not forget that the signals onwhich Smith relied to stimulate movement <strong>in</strong> the direction <strong>of</strong> coord<strong>in</strong>ationthrough a competitive process which should not beconfused with perfect competition, were market prices that were out<strong>of</strong> l<strong>in</strong>e with natural prices. Smith thus had what we would now callboth a theory <strong>of</strong> equilibrium <strong>and</strong> a theory <strong>of</strong> equilibration, acomb<strong>in</strong>ation that has proved beyond the grasp <strong>of</strong> neoclassicaleconomists.The logical flaw <strong>in</strong> Smith’s value system is that the process thatgenerates <strong>in</strong>creas<strong>in</strong>g wealth does so by chang<strong>in</strong>g the costs <strong>of</strong>production by which this <strong>in</strong>crease is to be measured. But thisdifficulty is relatively m<strong>in</strong>or compared with that <strong>of</strong> bas<strong>in</strong>g any k<strong>in</strong>d<strong>of</strong> natural value <strong>in</strong> an evolv<strong>in</strong>g system upon marg<strong>in</strong>al utility, foreconomic progress extends consumption to lower-rated uses. Theeventual solution was found by postulat<strong>in</strong>g a general equilibrium <strong>in</strong>which price measured not only the marg<strong>in</strong>al utility <strong>of</strong> everycommodity but also its marg<strong>in</strong>al cost, which was itself a precisemeasure <strong>of</strong> the marg<strong>in</strong>al utility forgone by not divert<strong>in</strong>g an<strong>in</strong>crement <strong>of</strong> resources to the best alternative use. It will be observedthat this precise measure requires not only general equilibrium, butperfect competition, together with such other well-knownconditions as the absence <strong>of</strong> public goods.This was not good enough for Marshall, who saw that welfaredepended on what happened <strong>in</strong>side the marg<strong>in</strong>; so he adaptedRicardo’s concept <strong>of</strong> rent to devise a general measure <strong>of</strong> bothproducers’ <strong>and</strong> consumers’ surplus. In pr<strong>in</strong>ciple, such measurescould provide rank<strong>in</strong>gs which might be very different from thosebased on equilibrium values alone, but their validity depended onequilibrium. Although Marshall did not expect that his measureswould be adequate for anyth<strong>in</strong>g more than estimates <strong>of</strong> themagnitude <strong>of</strong> changes <strong>in</strong> welfare as a result <strong>of</strong> changes with<strong>in</strong>particular <strong>in</strong>dustries, even that proved to be an extravagant hope;but it is noteworthy that the measurements employed <strong>in</strong> cost-benefitanalysis rely on Marshall’s ideas, <strong>and</strong> on the conception <strong>of</strong>equilibrium that underlies them. If the validity <strong>of</strong> such <strong>in</strong>crementalmeasurement is doubtful, what are we to make <strong>of</strong> measures <strong>of</strong>national <strong>in</strong>come that depend on a set <strong>of</strong> assumptions that are alwaysviolated, <strong>and</strong> <strong>of</strong>ten grossly violated, by the economies to whichthose measures are applied?It is easy to underst<strong>and</strong> why some economists are not satisfiedwith such a basis <strong>of</strong> valuation, but it is not so easy to agree that17