Wednesday, July 13, 2011

Röpke and the price of things

At Crisis Magazine John Zmirak, author of Wilhelm Ropke: Swiss Localist, Global Economist [Röpke was an economist of the Austrian school and one of the architects of West German economic recovery after World War II], offers a mini-tutorial about how the economic value of things is determined, his primary illustration of which is the purchase and consumption of bourbon [you have to read the essay]. Zmirak:
.... There is no better way to sum up the life work of Wilhelm Röpke, whose encyclopedic knowledge of European history and profound commitment to human dignity made him the best expositor of economic science in the 20th century. No other theorist understood so deeply the complexity and fragility of Western civilization, which alone made possible the invention of political liberty and a free economy. No other defender of Western values had such a clear empirical and theoretical account of what recent thinkers had learned about how men pool their labor and work to steward the goods of the earth.....

Röpke was at once a social conservative and an Austrian economist. It’s worth taking the time to unpack the latter unfamiliar epithet. Austrian economics was born as a brave dissent against the deterministic, materialistic theories of human work that arose in the 18th and 19th centuries, with their roots in Hegel, Marx, or a number of radical nationalists. While its insightful analyses of how men work together to build wealth for their families in many ways echoed the “classical” economics of Adam Smith and Frederic Bastiat — which social Darwinists had shorn of its moral content and made into something monstrous — the new economics was a vast improvement over its ancestor in that it rejected a key intellectual error that had beguiled previous thinkers: the labor theory of value. Given that prices are the essential “data” by which consumers inform producers how much of something to make, they are at the very heart of human cooperation. It’s critical to understand why some things cost more than others. Since man’s work and thought are what transform things like inedible wheat into fettucine alfredo, it seemed only natural to thinkers like Ricardo and later Marx that we should value objects based on how much of this work and thought had gone into them — as if work were the gold content that was added to an otherwise valueless coin.

However, this theory did a poor job of explaining the actual prices that emerge in an open market; some items that required comparatively little effort (let’s say, suddenly fashionable hats) in fact command higher prices than the fruit of enormous labor (for instance, brilliant but difficult novels). .... While those of us on the outside may detect an apparent injustice here, in fact such outcomes are merely the fruit of adults making their own decisions about which products they really want.

In other words, economic value is subjective — it’s determined by each of us, as free and morally responsible subjects. This fact is one of many that Marx overlooked or would not accept. Because he believed that the value of a product was objective, and could be quantified by adding up the labor of those who’d helped to make it, when the real market prices didn’t match up with what the workers deserved, Marx considered this an injustice. Still worse were the profits that entrepreneurs collected on top of what it cost them to pay the workers and keep the lights on at the factory; whatever business owners gained beyond that he dubbed “exploitation.” In a socialist economy, he promised, such exploitation would end. The workers would control the means of production and reap all the profits, and prices would be set by the state to properly reward human efforts.

.... Instead of looking at the economy as a vast, mysterious machine intended to build up the wealth of an abstraction (like the race or the nation), the Austrians started small — with the factors that influence each one of us in his daily decisions of how and where to work, which products to buy, how much to save or invest. Even though human behavior can often prove irrational, such decisions can be analyzed and to a large degree understood, because there is indeed (as the great philosophers taught) a stable human nature, with a hierarchy of needs and wants, and broadly predictable patterns of behavior. ....

[....]

Indeed, in a little irony, the Austrian school tends to be rather dogmatic about insisting that its tenets are logically provable. In other words, the fact that prices reflect our subjective choices is objectively true, whether Marxists like it or not. An economic system that refuses to acknowledge how human beings express their moment-to-moment preferences will massively fail to help them achieve their goals. Applied consistently, it will yield only famines and tyranny; cobbled together piecemeal, as in the programs of European socialists and American liberals, such a system grows an ever-larger apparatus of government, hiring ever more managers to tamp down the chaos created by its irrationality and waste. The more holes you drill in the bottom of the boat, the more sailors you need to bail. [more]
Why Things Cost Money | Crisis Magazine