On Wednesay, a comment by Professor John Kay in the FT about the frustration among students of economics called for the profession to address key issues rather than technical models.
But what is the key issue economics should address? Followers of Thomas Piketty argue it’s inequality. The libertarians at the Ludwig Von Mises Institute and other places say no: it’s about the centrality of the individual and the freedom of choice. Keynesians focus on fiscal policy and regulation to counter market failure, some of it due to irrational human behaviour.
Economics2030 argues the top issue is none of the above but the millenia-old debate about value and its relationship with price.
Economics should focus on defining what value is and how it is created. Once that’s settled, then everything else falls into place.
The debate about value can be traced back to Aristotle who questioned whether the price people asked and paid was valid and justifiable. He argued that the righteous and virtuous had to look beyond price to identify what something was really worth.
But was value objectively definable? Some said yes, but others from then until now said, no, it’s subjective.
In 1890, Cambridge University professor Alfred Marshall sublimated the issue by presenting a model where objective and subjective factors were reconciled and price was what mattered. It was a critical conceptual breakthrough. The focus on price made the 20th century possible.
Of course, the theory was open to criticism. The subjectivists said he obscured the fact that value is always subjective and that Marshall’s supply curve, which was shaped by objective factors, was misconceived. People weren’t machines so any attempt to define scientifically a stable relationship between price and demand was also misleading.
Others used the model to develop theories of extensive market failure; the result of bad information, irrational behaviour, collusion, declining long-term average costs, externalities and public goods.
The Marshallian sublimation of 1890 failed to deliver the consensus among economists that Marshall wanted.
The debate still rages. But the rise of services helps us understand that value in the creation of intangibles is exclusively the result of constructive interaction at the level of the individual. It is always intangible and, consequently, immeasurable and incommensurable.
In services, price, the vector driving conventional economic models, doesn’t work and the market doesn’t exist.
Because value is the result of human interaction, what drives its creation is the state of the relationship between individuals involved in each interaction. If they don’t like each other, they won’t interact, no matter what the price. And if they don’t interact, they can’t create value.
This conclusion is intuitively obvious. There are many examples of relationship trumping price. Some people don’t go to pubs selling cheap beer because they don’t like the people that normally go there. Home cooking seems to taste better than restaurant food because the love among those sharing a meal creates an environment conducive to enjoyment. It’s got nothing to do with price.
The conclusion can also be reached through logical deduction, using the same tools economists use to validate diminishing marginal returns and the concept of equimarginal choice.
It’s apparently obvious, but economists for more than a century have failed to notice. That’s because of the focus on the price mechanism and the institutions playing a role in markets.
Economics needs to get back to first principles and ask the question: what is something really worth and how do we as individuals and together create more real value? It would help everyone.
https://edmundosullivan.com/economics2030/the-history-of-price/