Economists Argue About Value Because Nobody Is Allowed to Negotiate It

For as long as there has been economics, economists have argued about where the value of a product comes from. Labour theories, utility theories, marginal theories, theories that split the word into "value" and "price" and then argue about the relation between the two. It is one of the oldest disputes in the field and it has never been settled.

I want to make an unusual claim about that dispute: it has never been settled because settling it would make no difference, and the reason it would make no difference is political.

What the Sensible Theories Agree On

Strip the argument to what the reasonable positions share.

A product that leaves a factory carries value that came from somewhere. Some of it came from the workers who made it. Some of it came from the organisation: the management that coordinated them, the equipment, the buildings, the fact that a worker inside a firm can concentrate on the one thing he does well while someone else handles everything else. Nobody serious denies either contribution. A worker with no factory produces little; a factory with no workers produces nothing.

So the value is jointly produced. That much is close to consensus, once the ideological positions are set aside.

The Question Nobody Answers

Now notice what none of the theories does. Not one of them proposes a method for dividing the returns between the worker and the organisation. Not one of them even seriously tries.

This is strange, if you take the theories at their word. If you have a theory of where value comes from, the natural next question is how the proceeds should be split among the sources. That is the question a worker cares about, and a shareholder, and anyone who has ever wondered whether they are paid what their work is worth. The theories walk right up to it and stop.

Why They Stop

They stop because the answer would have no effect.

Wages today are not the result of a negotiation between the contributors about what each contributed. They are the result of supply and demand for labour, which is a different thing entirely. A worker is paid roughly what it would cost to replace him, and that number has almost no relation to the profit the product generates for the firm. A product can be enormously profitable and the people who make it can be paid the minimum, if there are enough of them available. A product can lose money and its makers can be paid handsomely, if they are scarce.

Given that, a rational theory of the split is idle. Suppose an economist proved, to everyone's satisfaction, that the workers contributed sixty per cent of the value of a given product. Nothing would happen. No mechanism exists to act on the finding. The wage would still be set by the labour market the following morning, and the sixty per cent would remain a number in a journal.

The dispute about value is unsettled not because it is hard but because it is pointless, and it is pointless because the economy contains no forum in which the answer could be applied. Economists, being sensible people, do not build tools that cannot be used.

What Would Make It Matter

The only thing that would give the question teeth is a mechanism by which the parties who produce value could actually negotiate its division, on grounds other than how easily each can be replaced.

That does not exist inside a firm, where the hierarchy sets the wage. It does not exist in the labour market, which sets it by scarcity. And it does not exist in representative government, for reasons I have set out elsewhere: a legislature is more responsive to concentrated interests than to diffuse ones, and the concentrated interest in any question of distribution is the party currently doing well out of it. I have also argued that we have no system for distributing wealth that anyone can defend from first principles, and that we cannot admit it. This is a specific instance.

A public that decided questions directly would be the first body in which the division of jointly produced value could be argued and settled by the people who produce it, rather than by the market's answer to how replaceable they are. Whether it would settle it well is a fair question. But it would at least be a room in which the question could be asked, and at that point the economists' theories would stop being idle. Someone would finally need them.

The Inversion

Which gives an odd conclusion. We usually think of economics as the science that tells politics what is possible. Here the relation runs the other way. The political arrangement determines which economic questions are worth answering, and under the current arrangement, the oldest question in the discipline is not one of them. That is a fact about the arrangement, not about the question.