Tuesday, January 14, 2014

George Stigler and the labor theory of value

George Stigler, author of the famous The Theory of Price, winner of the Sveriges Riksbank Prize (aka the Nobel) and Friedman's best friend at Chicago, suggested  long ago that: "the professional study of economics makes one politically conservative." His reasons for that particular view are extensive, but one factor was associated with the decline of the dominance of the labor theory of value and the rise of the supply and demand (marginalist) approach, that he embraced. In his words:
"It could be argued that there is one powerful factor making for conservatism: the inability of a very radical young economist to get a desirable university post. It is indeed true that a believer in the labor theory of value could not get a professorship at a major American university, although the reason would be that the professors could not bring themselves to believe that he was both honest and intelligent, and I hope they are not improper in their demand that a professor be at least tolerably honest and presumptively intelligent."
Funny thing is that the following year a little monograph was published that demonstrated that the basic propositions of the labor theory of value could be retained. By using the device of the standard commodity, Sraffa reveals that the profit rate can be determined as a physical ratio independently from relative prices, and that the rate of profit is determined by the objective conditions of production and the need of reproducing the system (for more on the standard commodity go here).

Also, the capital debates led to the conclusion (admitted by Samuelson) that the neoclassical (marginalist) theory was unable to show that relative scarcity determined relative prices and income distribution. In other words, while it is possible to hold a version of the labor theory of value, at least the Smithian labor commanded (in terms of the standard commodity, as suggested by Sraffa), it is not possible to say that supply and demand explain value and distribution.

So Stigler got it all backwards. We are left with the alternative that radical young economists have a hard time finding desirable university posts for purely ideological reasons. Actually lack of honesty and/or intelligence might be an asset rather than a handicap in the economic profession.

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