Research Findings

Finance, class, and the category of value: The marginalist revolution revisited


April 30, 2019

In contemporary economic textbooks, the value of any good is nothing more than its prevailing market price. This definition seems self-evident, but it stands in sharp contrast to the classical political economy of Adam Smith and David Ricardo, who located value in objective factors of production which remain hidden beneath the surface of market prices.

It was only in the late nineteenth century, when the notion of marginal utility was first introduced into economics, that value became tied to the preferences of consumers as reflected in market prices.

While economic categories such as “value”, “market” or “price” are often taken for granted, sociologists have long recognized that they are neither eternal nor natural. As Marx never tired of emphasizing, economic categories are “theoretical expressions” of concrete social and economic conditions, and they “show the historic foundation from which they are abstracted.”

What remains less clear is how these categories ‘show’ their historic foundations. How are changes in these foundations – in terms of the economic structure of society and the specific social location from which they are perceived – registered in the dominant categories of economic thought?

Economic categories as a terrain of class struggle

In a recent study I address these questions by revisiting the marginalist revolution, which marks the birth of what we know today as neoclassical economics. The beginning of this transformation is dated to the early 1870s, with publications by three economists working separately: William Stanley Jevons (England), Carl Menger (Austria), and Leon Walras (France). Although they knew nothing of each other’s work, all three offered a very similar idea.

The utility a person derives from a good, they argued, diminishes as the quantity of the good increases. The utility of the last unit of the good, later labeled “marginal utility,” determines its value, which is reflected in its price.

Jevons, Menger, and Walras used this idea to criticize classical theories of value, based on labor or cost of production, and offer a new theory based on subjective preferences. This also meant a transformation in the category of market, which only then came to be understood as an abstract ‘resource allocation’ or ‘price discovery’ mechanism, as opposed to a physical marketplace or geographical area.

My study suggests that this transformation in economic thought was driven by three economic developments in the second half of the nineteenth century. First, sharp price fluctuations due to gold discoveries in Australia and America re-ignited the discussion on the relationship between value and prices, which John Stuart Mill had declared in 1848 to be a closed matter.

Second, the fast growth of international trade following the abolition of the English Corn Laws undermined the classical theories of value, which were better suited for a closed economy where prices are more correlated with production costs.

Third, the growing size and importance of financial markets provided economists with new models for theorizing the economy, with the stock exchange serving as an “ideal type” of the market. The importance of finance is also evident in the assumptions made in the marginalist theory of value, which presupposes the existence of a developed financial system through which capital can flow freely. This aspect did not escape the eyes of keen observers like Thorstein Veblen and Walter Bagehot.

However, my study also shows that the way these developments were understood by the marginalist economists was strongly shaped by their own social background. Jevons, Menger, Walras and their successors all belonged to the bourgeoise liberal classes that supported free markets and were concerned about the rising power of trade unions and the labor movement.

The labor theory of value provided workers with a theoretical justification for their demands. The marginalist response turned this theory on its head. Instead of labor determining the value of the good and hence its price, the marginalist economists insisted that it was the good’s price of the good – now equated with its value – that determines the value of labor, and hence also wages.

Thus, these economists concluded that employers are not at liberty to meet the demands of workers, since the level of wages is determined by market forces outside of their control.

The impact of the marginalist revolution supports this class analysis. It was most influential in England, where the bourgeois-liberals took political control early in the century, and in Austria, where bourgeois-liberals were on the rise following the Austro-Hungarian Compromise of 1867. At the same time, it had little effect on the French Empire of Napoleon III or the newly united Germany, where conservative forces were still very much in control.

Insights into the political power of economic ideas

The current study offers several contributions to the sociology of economic knowledge. It challenges existing explanations of the birth of neoclassical economics, and outlines a cultural-materialist framework that can be used to explore the cultural dimension of economic knowledge in different historical settings.

Beyond the historical development of economic categories, the current study also provides important insights regarding the political power of economic ideas, a topic that has been the focus of a long-standing scholarship in sociology and political science. Previous studies locate the real-word power of economic ideas in their institutional embeddedness or in the dominant position economists hold in national and international organizations.

The case of the marginalist revolution shows that this power must also be understood in relation to broader conflicts between classes and social groups. This does not mean that economic categories can be simply reduced to class interest, but it does suggest that their development is a complex process that is shaped by powerful pressures operating on political, economic, and cultural dimensions.

The ruling ideas of any period might not always be the ideas of the ruling class, but economic categories are unlikely to be widely adopted unless they have the support, in one way or another, of the dominant classes and powerful economic actors.

Read More

Yair Kaldor, “The cultural foundations of economic categories: finance and class in the marginalist revolution,” Socio-Economic Review 2019

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