Fair is fair

Posted: 15 February 2012 in Uncategorized
Tags: , , , , , , , ,

Let’s give Mark Thoma credit for raising the issue of fairness. But, fair is fair, he gets a lot wrong in the process.*

Thoma’s basic premise is that, while from a neoclassical perspective the distribution of income is fair under the assumption of perfect competition, “when there are important deviations from the purely competitive markets” government intervention may be warranted.

That’s right as far as it goes. Within neoclassical theory, the only reason for intervention into markets is if there are market imperfections. Conservative neoclassical economists argue that market imperfections are few and far between and markets should be allowed to operate freely, while liberal neoclassical economics argue market imperfections are more significant and governments should intervene to fix the problems. That’s the essence of the debate between conservative and liberal neoclassical economists.

But Thoma gets a great deal else wrong. First, he asserts that neoclassical economists provide “a much better explanation of prices” than do Marxists. But he provides no evidence or argument for this claim; not even a reference to anyone who’s made that claim. I’ll grant him that neoclassical economists have a different explanation of prices, based on a given concept of human nature (defined by preferences, technology, and resources), but there’s nothing better about that explanation over a Marxist theory of prices, based on the amount of labor value for which a commodity exchanges even at the point where the quantity supplied equals the quantity demanded. As Marx himself wrote (Value, Price and Profit, written in 1865 and first published in 1898),

You would be altogether mistaken in fancying that the value of labour power or any other commodity whatever is ultimately fixed by supply and demand. Supply and demand regulate nothing but the temporary fluctuations of market prices. They will explain to you why the market price of a commodity rises above or sinks below its value, but they can never account for the value itself. Suppose supply and demand to equilibrate, or, as the economists call it, to cover each other. Why, the very moment these opposite forces become equal they paralyze each other, and cease to work in the one or other direction. At the moment when supply and demand equilibrate each other, and therefore cease to act, the market price of a commodity coincides with its real value, with the standard price round which its market prices oscillate. In inquiring into the nature of that VALUE, we have therefore nothing at all to do with the temporary effects on market prices of supply and demand. The same holds true of wages and of the prices of all other commodities.

Second, Thoma accepts the neoclassical fantasy that there’s a strict divide between positive and normative economics, and thus that the neoclassical theory of prices is divorced from any notion of fairness. Every economic theory is based on some notion of fairness, and neoclassical economics is no exception. When neoclassical economists conclude that the factors of production receive, in the form of income, their marginal contributions to production, and when individuals or households receive incomes equal to the factor services they sell to firms, that’s an argument that the distribution of income within capitalism—based on private property and free markets—is such that everyone gets what they deserve. The capitalist distribution of income is, in other words, fair.

Economists do not have a way of judging fairness. Such judgments involve moral questions that are best left to society as a whole. But if we adopt the simple notion that every person has a right to a share of output equivalent to their contribution to it (net of costs such as taxes for the roads, bridges, schools and the like needed to support these activities), then a competitive economic system does produce a justifiable outcome, at least in theory.

Now, the Marxist argument about the unfairness of the capitalist distribution of income is actually stronger than Thoma’s. While his argument relies on exceptions to perfect competition, Marx, in criticizing the classicals, started by allowing them their strongest case: private property, free markets, perfect competition, market equilibrium, and so on. On that basis, Marx showed that capitalist commodity exchange was such that, even when all commodities were bought and sold at their values, there would be an extra value, a surplus-value, that capitalist were able to appropriate for doing nothing. That’s the essence of Marx’s notion of class exploitation, a ripping-off of the laborers who produce the surplus.

In other words, Marx showed that capitalist production, under the best of circumstances—under the ideal assumptions of classical political economy (which are continued within contemporary neoclassical theory)—violates the bourgeois notion of fairness, the idea that everyone gets what they deserve. Assuming that everyone gets what they deserve within capitalist commodity exchange—when all commodities, including the commodity labor power, exchange at their values, and thus there is no “cheating”—the conclusion is that not everyone gets what they deserve—since, within capitalist commodity production, capitalists exploit the direct producers and thus appropriate the surplus-value they played no role in creating.

Once that conclusion is reached, it’s possible then to consider all the various extensions and exceptions to a system of equal exchange, including imperfect competition. But that’s a very different approach from the one adopted by Thoma, who is willing to accept the neoclassical notion of fairness but then raises an objection about the assumption of perfect competition.

Fair is fair, especially when debating the fundamental unfairness of the capitalist distribution of income.

* And have we descended so far that he has to to provide a warning that “Marx is mentioned” in his essay?

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  1. Magpie says:

    Prof. Ruccio,

    Congratulations. This is one of your best posts, if not the best.

    For me, the most insightful part was this: “In other words, Marx showed that capitalist production, under the best of circumstances, under the ideal assumptions of classical political economy (which are continued within contemporary neoclassical theory), violated the bourgeois notion of fairness, the idea that everyone gets what they deserve.”

    Regarding your last remark: “And have we descended so far that he has to to provide a warning that ‘Marx is mentioned’ in his essay?”.

    My answer is: probably yes.

  2. David F. Ruccio says:

    Thanks, Magpie. I appreciate such generous comments from such a regular reader. As I told a friend earlier today, I haven’t been teaching and conducting research on both neoclassical and Marxian economics for almost 30 years for nothing. . .

  3. “Regarding your last remark: ‘And have we descended so far that he has to to provide a warning that ‘Marx is mentioned’ in his essay?’.

    My answer is: probably yes.”

    Actually, I think we’ve improved slightly, to the point where Marx can be mentioned at all.

  4. [...] David Ruc­cio and “Larry, the Bare­foot Bum” also have com­ments about Mark Thoma’s edi­to­r­ial. I’ve pre­vi­ously noted that Marx­ist exploita­tion is com­pat­i­ble with per­fect com­pe­ti­tion and every fac­tor receiv­ing the full value of their mar­ginal prod­uct. I’ve also pre­vi­ously expressed my opin­ion that Marx­ist exploita­tion is not about describ­ing an injus­tice when cap­i­tal­ism is viewed under the aspect of eternity. 23 February 2012 – 8:50 am | By Benjamin Daniels | Posted in Economics, Philosophy | Comments (0) ← A (Pyhrric?) Victory at Foxconn /* [...]

  5. Magpie says:

    Prof. Ruccio

    I am chronicling a current affairs story from Australia highlighting one aspect of this issue:

    Inequality and Technology

    Highly skilled/highly productive workers replacing low skill/less productive workers in Australian mines. Will they be paid higher wages? Make a guess.

    Contains links to press release and TV report.

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