The Poverty of Marginal Utility

"Ricardo, the head of the school which determines value by labor time, and Lauderdale, one of the most uncompromising defenders of the determination of value by supply and demand. Both have expounded the same proposition..." -- Karl Marx, The Poverty of Philosophy

The proposition was that machinery which displaces labor does so by diminishing the value (per given quantity) of the commodities produced. The proposition itself may seem unremarkable but what is intriguing is its uniform derivation by two presumably contentious schools of thought. Here is what Lord Lauderdale wrote about the idea of using labour as a measure of value:

The opinions [regarding supply and demand], that are here stated, concerning the nature and the causes of the variation of value, are nowise new. They have been hinted at by many; and by some they have been long ago explained with tolerable accuracy. They do not, however, appear to have been so clearly understood as to destroy the idea of any thing possessing a real and fixed value, so as to qualify it to form a measure of value. After this philosopher's stone, many have been in search; and not a few, distinguished for their knowledge and their talents, have imagined that in Labour they had discovered what constituted a real measure of value.

If labour does not possess a "real and fixed value," how is it that one can conclude that introducing labour-saving machinery will diminish the value of the commodities produced? My explanation for this uncanny convergence is no doubt too "simple" and too "obvious" to be believed. A proper exposition would lead the reader on a suspenseful and convoluted excursion to interrogate all the historical opinions, detours, evasions and possible objections,

But why bother? It is this simple: marginal utility theory of value is an embodied-labour theory of value in disguise. The disguise consists of not stating the obvious assumption and getting away with it because the assumption is so obvious as to be taken for granted.

The assumption is that the two parties to an exchange have a legitimate right to conduct that transaction.

I said it was simple but the legitimacy of the transaction is perhaps a bit more difficult than it may seem at first. For two parties to legitimately exchange goods, it is necessary for those goods to be their property. But as John Locke pointed out, the private ownership of property poses "a very great difficulty" given that God "hath given the world to men in common."

Fortunately for us, Locke resolved that difficulty by concluding that 1. "every man has a property in his own person..." 2. "The labour of his body, and the work of his hands, we may say, are properly his..." and 3. "Whatsoever then he removes out of the state that nature hath provided, and left it in, he hath mixed his labour with, and joined to it something that is his own, and thereby makes it his property."

Voila! The labour theory of property! Of course there are a few further steps to get from Locke's legitimation of the private ownership of property to the constitution of labour as a measure of value -- from the qualitative to the quantitative. But the rationale is also there in Locke's chapter, "Of Property," having to do with limited capabilities and appetites (e.g., "no man's labour could subdue, or appropriate all; nor could his enjoyment consume more than a small part...") and the injunction against spoiling ("He was only to look, that he used them before they spoiled, else he took more than his share, and robbed others. And indeed it was a foolish thing, as well as dishonest, to hoard up more than he could make use of."). For Locke, the legitimacy of private property was explicitly constrained by its measure, which was -- directly or indirectly -- derived from the expenditure of labour.

So "the school which determines value by labor time" and the "defenders of the determination of value by supply and demand" expound "the same proposition" in more ways than one! One group imagines they have discovered the philosopher's stone, the other pretends they can perform the transmutation out of thin air -- as long as no one peeks at the elixir of life concealed behind the curtain.

Roll over Böhm-Bawerk and tell Carl Menger the news!