Theories of prices and alternative economic paradigms
For some heterodox economics schools values are different from prices, while
others regard such distinction as metaphysical. This difference of approach is related to
different opinions on what function(s) the price system takes on in a capitalist economy -
allocative, distributive, and informative. The literature on the theory of value and prices
is vast and ever expanding, and no attempt is made to provide a comprehensive review
of it.
Value and price
Since the Middle Ages, scholars have recognized two different aspects of an
object’s ability to meet some human desire: one, a property of the object; and the
other, an idiosyncratic feeling of the individual. With respect to both, we shall refer to
this ability as the object’s value in use. As is well known, mainstream economics
assumes that such property is quantifiable through a cardinal or ordinal utility function.
In turn, value in use is assumed to directly or indirectly determine a second sort of
value, referred to as value in exchange. Such exchange value is the degree to which a
commodity performs a second function, that is, it can be given or taken in exchange for
something else. The notion that value in use measures or causes value in exchange will
be referred to here as the subjective approach to value, because it postulates that
value derives from introspection.
By contrast, the British classical political economists, and most heterodox
economists after them, consider the existence of some value in use as a simple
precondition for the object to have some value in exchange. But value in use is not
generally considered as a measure of value in exchange and/or it does not exert a
quantifiable influence on it.
The cause or measure of value in exchange must be sought elsewhere, in
variables external to the individual; that may be objectively determined. These variables
pertain to the technology, distribution of income, and institutions of a certain
society. Thus, this approach will be referred to here as the objective approach to
value.
Now, what is the real determinant of the value in exchange of a commodity?
Since money itself was either a commodity, such as gold and silver, or its value was
directly proportional to the quantity of a commodity, it was obvious that money
was not an adequate unit of measurement because its own value was subject to
change. Petty put forward a theory of natural prices based on production costs (often
simplified as a labor theory of value. The British classical political economists almost
unanimously employed a labor theory of value, alternatively based on the notions of
labor commanded or labor employed. Within contemporary heterodoxy, different schools
have developed different concepts and analyses of prices and values, while most
heterodox schools agree on employing some form of the objective approach.
In the subjective approach, an object’s value in exchange is its price. Each agent
has a reservation price, that is the maximum value that a buyer is willing to pay in
order to obtain it, or the minimum value that a seller is willing to accept in order to part
with it. The market price is the equilibrium value that does not induce any buyer or
seller to change his/her behavior.
Market price represents the abstract, social characteristics of an object’s
value in exchange. Price theory encompasses both value theory and the analysis of
the relation between values and market prices.
Market-system view
In the market-system view, the notion of market clearing is absent and prices
play a completely different role—that is, coordinating capitalist production by distributing
the resources necessary for the continuation of production and the surplus among
industries and between social classes. Here, the schematic idea is that production in a
capitalist society requires the prior expenditure of money to buy the means of
production and to pay for workers’ wages (constituting ‘capital’); capitalists advance
money capital with the view of gaining it back with a profit through sales (the ‘realization’
of capital).
Prices determine the aggregate value of the means of production and the
revenues, and the purchasing power of wages, profits, and rents. Since both exchanges
among productive units (and between workers and firms) and exchanges of final
consumption goods take place in markets, any transfer of purchasing power must take
place through exchange-values.
