About a century ago, most economists had already understood that the theory that explains the value of economic goods (the value of railways, oil, wood, or computer games) cannot be based on the amount of labor invested in making them.
First of all, there is the objection that comes from the usual experience most of us have of having worked many hours on some useless piece of trash of no value at all. To avoid this objection the labor theory of value must be supported with some props that deviate it from its simple formulation. But there are more objections, and more props have to be added, until we realize that the theory does not help to explain anything, and only those who have invested many useless academic years in defending it would insist in adding more props, ad-hoc limitations, and caveats to salvage it. In many respects, their efforts can be compared to those of Ptolemy astronomers, who tried to shield their cherished theory from the criticism of Copernicus by adding more celestial spheres and epicycles to explain away the facts that contradicted it.
Karl Marx was the last of those Ptolemy economists. He still adhered to the old theory he had learned from classic English economists and never realized that, by the end of his life, younger generations of economists were making their own Copernican revolution. Theirs is called sometimes "the marginalist revolution", though that name points out to only one of their innovations.
These newer generations of economists argued that the value of goods cannot be deduced from any of their physical characteristics, or from labor invested in them, but from the utility they provide to a particular man, in specific circumstances, at a determined time. That change of perspective, from the goods themselves to the individuals, allowed the new economists to see what was wrong in many questions that had puzzled people for centuries. For instance, they realized that it was misleading to ask why is it that gold is more valuable than water when it is clear that we can survive without gold, but not without water. They said: don’t argue in the abstract, don’t ponder about the goods in themselves; instead, consider individual circumstances in full context, without leaving out time, place, and resources, and you will see that for men with plenty of water at their disposal (as most of us are), another glass of water may have very little value. In those circumstances, gold may reasonably have more value than water.
Moreover, they said that we have to consider each man’s own valuation of that good, not our own. Not value as seen by an economist, a philanthropist, or a central planner, but by each man and woman that decides that some good is useful to them. Of course, we might see no value in many of the goods that crowds of people buy eagerly. But then it is nevertheless certain that such trash will sell for a good price. That is what counts for the economist.
I won’t dwell more deeply on these new economic theories (that is, “new” more than a century ago), which form today the basics of economics. For those who want to learn more about them, I recommend the books of Carl Menger, Eugene Böhm-Bawerk, and Ludwig von Mises (in my view, Menger and Böhm-Bawerk are still today the clearest expositors of that conceptual revolution). What I want to point out is that these new views, by focusing on each man’s valuation –and not on a supposedly objective value determined by some expert- made them friends of free markets and led them to discover new objections to central planning. Indeed, the Austrian von Mises and the Norwegian Trigve pushed these ideas to their logical consequence, and showed that without the price system that results from individual’s free choices, central planners have no way of making economic calculations. They can play with statistics, with tons and kilowatts, but they cannot make calculations with them. You need a unit. You cannot multiply numbers of kilowatts by numbers of penicillin doses, and substract hours of packaging work. Only prices provide a way to do it. An entrepreneur takes into account the prices of raw materials, wages, etc. But planners fix all prices, so prices provide no data to them.
Another Austrian, Friederich von Hayek, explained that market prices work as signals that provide people with information about each other’s needs and valuations. When planners try to replace the market with their decrees, they cut out these channels of information. Of course, some entrepreneurs may be stupid and fail to pay attention to prices (at their peril). Some may fail to hear the signals prices convey. But without a market, planners have no way of getting such information, they have no signals. Certainly they can put prices to goods as they please, but then they will always hear their own echo.
In this way, the change a new generation of economists thought necessary in one of the most basic economic concepts –the concept of value-, led them to appreciate the importance of free markets. That put them at odds with the tendencies that prevailed among politicians and the public (and indeed, among most of their colleagues) during the last decades of the XIX and the beginning of the XX centuries. By that time, most people were being converted to the ideal of central planning.
On the other hand, that same change in the concept of value seemed to place these economists closer to a tendency that was becoming popular among the intellectual elites. That was moral relativism, or perhaps we could say, moral irrationalism.
Against the wisdom of all previous ages, philosophers had started to argue that moral principles have no rational basis. They taught that all moral choices are ultimately irrational. Slowly permeating to the public at large, that new view led to horrible consequences. People started to get used to the notion that the essence of politics was struggle, and not rational debate. It was significant that new parties started to call their followers “militants”.
I think that the first of those two intellectual links, the one with free markets, is correct and logical (the expression “free market” is, of course, a redundancy, like “free exchange of ideas”). But I think that the second link, the one with moral irrationalism, is wrong because it does not really derive from the new ideas about value introduced by economists. Unfortunately some among them, most notably Mises, seem to believe the contrary.
Subjective economic value and a non sequitur
The expression “subjective value”, so much in use in economic theory, is very apt to lead to confusion. It would be better to call it “individual value”, or “personal value”. Certainly “subjective” value is opposed to “objective” value such as labor-value. But this is only because “labor” value is not linked to any person’s values, neither rational and sound nor irrational and stupid. It was a value deduced from hours of work. That was a mistake corrected by the conceptual revolution in economic thought that took place at the end of the XIX century. But from that –which was right- some have thought it necessary to derive another conclusion: that we cannot distinguish between sound and stupid preferences. That was wrong, a non sequitur, i.e. a conclusion that does not follow from the premises.
Of course, one might try other arguments in order to show that values are irrational, and that they cannot be defended and rejected by objective reasons. But then one should look for arguments elsewhere: modern economic theory provides no basis for it.
It is easy to understand why even foolish economic decisions count for the science of economics; there is no need to justify that with moral relativism and to deny that indeed people often make very stupid economic decisions. Of course, the entrepreneur must take prices as they are. He may rightly deplore the fact that in some neighborhoods men buy more gin than tea, but he cannot ignore it. The economist is in the same position: no matter how much he abhors videogames, there still will be prices paid for them. Neither the entrepreneur nor the economist can force you not to pay for them. However, that doesn’t mean that they can’t try to convince you.
It is not relativism but true morals that determine that my preferences cannot replace yours. Your choices or my choices may be foolish, and sometimes they are plainly foolish. There is no impediment to acknowledge that. What is wrong, but has been attempted many times, is to force us not to be fools. If we are adults and do not violate the law, then we are free to make our foolish choices. Again, this does not mean that other people can never be certain that we are wrong (as if it were an epistemological impossibility) or that other people must refrain from saying that we are wrong (as a matter of political correctness). Or that each of us can objectively realize that we have made mistakes in our choice of ends.
That a man examines objectively his own actions poses no problems. They begin when he does the same with the actions of others. However, this shows that the problem is moral and political, not epistemological. Of course, when it comes to other people’s decisions, constitutional experience and a long tradition of political thought tell us that we must be very careful. And apart from that, just from the economic point of view, even plain prudence tells one that one often lacks the information -and the wisdom, and the creativity,…and the luck- that one would need if one wanted to replace others in making their personal decisions. Hayek stressed that point. But prudence and relativism are different.
Unfortunately, though he was a great economist and made fundamental contributions to his science, Ludwig von Mises seems to have thought that he had to complement his magnificent economic lessons with moral relativism. He wrote in his rightly celebrated book Human Action, page 721:
“…it is obvious that the appeal to justice in a debate concerning the drafting of new laws is an instance of circular reasoning. Delege ferenda there is no such thing as justice. The notion of justice can logically only be resorted to de lege lata. It makes sense only when approving or disapproving concrete conduct from the point of view of the valid laws of the country…There is no such thing as an absolute notion of justice not referring to a definite system of social organization. It is not justice that determines the decision in favor of a definite social system. It is, on the contrary, the social system which determines what should be deemed right and what wrong”.
The latin expressions he used mean: de lege ferenda = evaluating whether a proposed law is good or bad; de lege lata = evaluating human action according to already enacted laws (without judging whether the law is good or bad). But I think that even without these translations Mises thought is clear: total moral relativism.
Earlier in the same book he had written (page 19):
“Human action is necessarily always rational. The term rational action is therefore pleonastic and must be rejected as such. When applied to the ultimate ends of action, the terms rational and irrational are inappropriate and meaningless. The ultimate end of action is always the satisfaction of some desires of the acting man. Since nobody is in a position to substitute his own value judgments for those of the acting individual, it is vain to pass judgment on other people’s aims and volitions. The critic either tells us what he believes he would aim at if he were in the place of his fellow, or, in dictatorial arrogance blithely disposing of his fellow’s will and aspiration, declares what condition of this other man would better suit himself, the critic.”
But then, how does Mises justify his books –and they are very good indeed- against interventionism and Marxism? He says that he just points out at contradictions between the ends that interventionists and Marxists pursue and the actions they take. He explains that he doesn’t question the ends themselves. But even this justification fails, because he has told us that human action is always rational by definition. Perhaps Mises would say that though he never objects to ends, he might uncover contradictions between declared purposes and the purposes that reveal themselves in actions. For instance, he might discover that if the goal is to annihilate a racial minority at the lowest cost, then it is contradictory to use bullets instead of gas. But then, what is the point of being so testy about that? If I cannot judge, why not leave brutes alone with their bullets versus gas choices, and their regulation versus deregulation preferences?
Confusing the moral with the epistemological
Of course we can pass judgment on other people’s actions. Even relativists do it, if only surreptitiously. Of course we can say that a child is wrong in eating too many sweets and making himself sick. And we can say that a grown-up man is doing even worse if he makes himself sick by drinking too much. There is no epistemological barrier that forbids us to realize that.
It is morals and not epistemology that tells us that we should not force a grown up man to be good and reasonable. There is a long experience and many excellent books that explain why it is so, starting with Humboldt’s The limits of State Action. Of course, I won’t try to sum up these books here.
Mises confusion is very unfortunate because it misleads people into thinking that modern economic theory supports moral relativism. I live in Argentina
Moral relativism is no safeguard against tyrants
The confusion between what we can know and say about morals and what we can impose on other people is very dangerous. Some may conclude, as apparently did Mises, that if we must not impose our convictions on other men, it is only because we have no rational basis for judging their actions. However, from the same confusion others will deduce that, as indeed we may pass judgment on other people, the only objection against directing their actions disappears. Both are wrong. Western civilization learned to distinguish these two questions long ago, and we shouldn’t forget it.
In any case, we shouldn’t assume that relativism is a safeguard against tyrants and busybodies. At the end of the day, all that relativism tells us is that there is no rational basis for moral convictions. It doesn’t deny that people make choices and have preferences. Then, if there are no rational arguments for one or the other, we must look for other means: power struggle by treats and threats.
I have a limited experience with politicians, functionaries, judges, and people in positions of power. But that experience tells me that those who see no role for reason in morals are seldom inclined to allow a free debate about ideas and choices. They say: what basis can that man have for opposing my will? Surely, not reason. When he counters my plans with “objective” arguments he is only trying to pull the wool over my eyes. I know very well that everything is just about national or class interests that can never be called just or unjust. I have read it in the back covers of many famous books.
