Our Unconscious Economic Theories
False Assumptions Widely Held
Ian Lambert discusses unconscious assumptions held by many people, assumptions that make it difficult to understand a fresh economic paradigm such as the Georgist viewpoint.
We are reprinting Lambert’s important presentation on this subject in weekly installments.
PART TWO Part One
by Ian Lambert
3. The Social Contract
Closely allied with the idea of moral populism is the concept of the social contract. The analogy is drawn with a club or association. When you join a club or association you agree to be bound by its rules and the rules will invariably provide for their amendment from time to time by a majority of the members. Refusal to comply with the original rules in force when you joined is immoral because you agreed to follow them. Refusal to comply in the future with the rules as amended is similarly immoral because you agreed to be bound by the majority vote. Society, we are told, is just like such an association or club.
There are two main flaws in such an argument: first, you only become a member of the association or club by voluntary act, by agreeing to become a member; secondly, you can usually resign at any time. The analogy may be valid in the case of churches; it may even have been valid in the case of tribes where there was a realistic option to leave. It is not appropriate to society, not where our planet has now been divided up into sovereign states. To say that the individual can choose to emigrate, if he wants to, is like telling a member of a club that he can only resign if he joins another club; what if he does not want to join a club at all? Why can he not be left in peace? Moreover, such an analogy takes no account of the fact that a member of a club becomes a member by voluntarily agreeing to do so, whereas a member of society becomes so automatically on birth.
The idea of the social contract, as put forward by Rousseau, is that society exists as the result of people voluntarily associating together and agreeing to be governed. There may be some historical truth in this when one looks, for instance, at the constitution of the United States; but while those who took part in the establishment of self-government may have agreed to be bound, this cannot be said of future members of society, who become members automatically.
The social contract is a myth; it is a mythological way of justifying the existence of the state. It acts as a buttress to moral populism, for it seeks to justify the principle of moral populism by maintaining that members of society have impliedly agreed to be bound by it.
Underlying the sanctity of the social contract is the cardinal principle of pacta sund servanda”, the sanctity of contract itself. But the essence of a contract is an agreement freely negotiated and entered into by both parties; there is no such thing as an “automatic” contract. But, while a member of society may be said (unrealistically) to have the option of leaving, does society have the right to refuse to admit a member? No. No society has the right to refuse admission to members at will. Indeed it is argued in relation to governments in countries like South Africa that there is no moral basis on which people can be excluded from participation as full members of society.
Much as Rousseau may have detested the power of the state, the theory of the social contract does nothing to diminish its power in democratic societies. It has been used there, most of all, to justify coercion by the state, which is like a vast corporation, formed originally by the voluntary association of individuals but which now has a quite separate and independent existence. Why else do we refer to politicians as our “political masters” – are they not meant to be our servants?
The theory of the social contract as such does not feature significantly in George’s works. However, the thrust of his work would seem to be opposed to it; for in his view society was not a single man-made construction but an organism which grew all the time. The Leviathan which Hobbes had referred to, which had responsibility for government, the administration of justice and the issuance of money, was not the cause of but arose out of the Greater Leviathan of the economy as a whole. People do not trade because the government allows them to; trade is fundamental, the primary of the two; people traded long before governments were even thought of. It is as trade grows and wealth is amassed that people need the organs of good government. The highly developed state of the English law of contract is not so much the cause as the result of the great growth in world trade by the British during and after the Industrial Revolution.
“Now, as the relations of the citizen proceed essentially from the relation of each citizen to a whole – the body politic, or Leviathan, of which he is a part – is it not clear, when we consider it, that the relations of the civilized man proceed from his relations to what I have called the body economic, or Greater Leviathan? It is this body economic, or body industrial, which grows up in the cooperation of men to supply their wants and satisfy their desires, that is the real thing constituting civilization …. …. This body economic, or Greater Leviathan, always precedes and always underlies the body politic or Leviathan. The body politic or state is really an outgrowth of the body economic, in fact one of its organs, the need for which and appearance of which arises from and with its own appearance and growth. And from this relation of dependence upon the body economic, the body politic can never become exempt.” – Henry George (SPE).
It is perhaps not surprising that the school of economic thought which has endured through the twentieth century and flourishes now is the so-called “Austrian” School, one of whose tenets is the subjective theory of value to which Henry George was firmly opposed.
The term “value” is much mis-used and misunderstood. One often hears of “value free” science. Exactly when this phrase was first coined is not clear, but the concept relates back to the Renaissance, and to the attempts of Descartes and Galileo to free science from theological constraints, and hence theological interference. Their conception of science was that its truths must be objective and free from the personal choices, prejudices and whims of the scientist or observer.
This was a conception of science with which George (and later Einstein) wholly agreed. George’s science of political economy is “value free” in this sense. However, just as relativity has become confused with relativism, so too has the conception of a “value free” science of political economy became confused with an economics which has no theory of economic value at all!
It is difficult to chart precisely when the theory of economic value was abandoned, but the process was nearing completion by the turn of the century. (As an illustration: value barely enters into Keynes’ writings.) The demise probably started with the misgivings that surrounded the labor theory of value in the form championed by Karl Marx. According to this theory, the value of a commodity was derived from the amount of labor it had taken to produce it (more productive forms of labor being viewed as multiples of units of simple labor).
This theory served Marx well in providing a justification for his contention that the capitalists expropriated what really belonged to the laborers. However, it had several flaws: first, it did not explain how land could have value; one solution to this in communist countries was to reject the idea that land could have any value; it is perhaps not surprising, therefore, that the Eastern block countries in this century have had a worse record in terms of environmental pollution and destruction than those in the capitalist West – to them land was literally valueless; secondly, it provided no mechanism for determining the multiples of units of simple labor that were supposed to be embodied in more productive forms of labor; and thirdly, it provided no explanation of how commodities such as antiques and works of art, could greatly increase in value with time, far in excess of the rate of inflation, unless value was something wholly independent of price – in which case how was it to be measured?
Marx probably understood the shortcomings of his labor theory of value better than many of his followers, although he was slow to reject it publicly. It only became apparent as yet another reason for what Edmund Wilson considered a reluctance of Marx to finish any of his works:
“The problems they raised, I believe, were always too much for him to grapple with …. This is why the first volume of Das Kapital, the only part that Marx published, now stands as a kind of swindle. He leaves the proletarian confronting the capitalist on the verge of a ruthless class war over the issue of labor value. The question of the value created by the many middle men is left at the point at which the manuscript breaks off. But the contagious indignation of the first volume of Das Kapital is what has aroused revolutionaries ever since the book was published.” – Edmund Wilson (To The Finland Station).
George could be equally dismissive of Marx, on occasion:
“The German mind, learned, bureaucratic and incomprehen- sible, put this in the form of what passed for a system in Karl Marx’s ponderous two volumes entitled “Capital”… Without distinguishing between products of nature and the products of man, Marx holds that there are two kinds of value – use value and exchange value – and that through some alchemy of buying and selling the capitalist who hires men to turn material into products gets a larger value than he gives. Upon this economic proposition of Marx (it can hardly be called a theory), or others similar to it, political schemes with slight variations have been promulgated after the manner of political platforms.” Henry George (SPE).
As so often, the reaction by economists was to throw the baby out with the bath water: to reject not only the labor theory of value but the very idea that there could be a theory of value; and to embrace the “subjective” theory of value, which in truth holds that there is no objective value, that value is a term synonymous with human desire – fickle, ephemeral, immeasurable. But Henry George came not to reject the law, but to fulfil it.
George accepted the distinction first expressed by Adam Smith in “The Wealth of Nations”: that between use value and value in exchange. Value in exchange fell within the province of political economy; use value did not. (The term “value” as hereinafter used is used to connote value in exchange only.) To George it was absolutely vital to the very existence of a science of political economy to establish an objective theory of value, for political economy was the science that treated of the production and distribution of wealth.
Wealth was another term which towards the end of the nineteenth century still had no commonly accepted meaning; it was George’s contention that what did not have value could not be wealth. (In “The Science of Political Economy” he based his conception of wealth on his conception of value, although he did claim that it was “possible to fix the meaning of the term wealth without first fixing the meaning of the term value”, as he had done in Progress and Poverty.)
George’s labor theory of value can be put very simply: the value of a thing is its ability to command labor; something is valuable not because labor has been bestowed upon it but because men will give their labor (or the produce of their labor) to acquire it. This “command” theory was first put forward in exactly this form by Adam Smith in “The Wealth of Nations”, but in “The Science of Political Economy” George further subdivided value into two main categories: value from production; and value through obligation. Something may have value because it saves the owner from producing it for himself (value from production), or because ownership of it carries the right to the labor (or produce of the labor) of another (value through obligation) – how such obligation arises is quite another matter. (The distinction has parallels in the legal distinction between choses in possession (chattels) and choses in action (debts, bonds etc.).)
George’s labor theory of value provided answers to the three problems which had undermined Marx’s theory: land had value because it had value through obligation; it had no value from production because it had not been produced, it was naturally occurring; more productive labor was not merely multiples of units of simple labor, and in any event their comparative worth or value could be measured directly in the labor market – indeed, in order to measure the value of anything it was absolutely vital that there be a market; and antiques and works of art rose in value with time simply because purchasers were prepared to give more for them.
The fanatical Marxist may interrupt here to say that George’s theory of value through obligation really only expresses Marx’s idea of “surplus value”; but Marx treated all “surplus value” as an immoral expropriation from the laborer. George passed no such judgement on “value through obligation”; in some cases it was entirely moral (e.g. debts, bonds etc.); in other cases it was immoral (e.g. slavery); to regard it always as an expropriation was to jump to conclusions.
George’s “command” labor theory of value has never been refuted. It has been rejected, however, because of its “absolutist” origins; it breaks the new commandment of relativism which brooks no opposition. (“It is not the immorality of relativism that I find appalling. What is astounding and degrading is the dogmatism with which we accept such relativism, and our easygoing lack of concern about what that means for our lives.” – Allan Bloom.)
Consistent with his “absolutist” views, George was concerned not merely to promulgate a theory of value which he could prove to be correct, but to refute all others. In some cases, he demonstrated that there really was no disagreement, the apparent dichotomy of views resulting from the fact that the other was not using the term “value” in the sense of value in exchange only. In other cases, his criticism was brilliantly aphoristic; in relation to the subjective and marginal utility theory of value he made two comments: first, people’s desires and internal sense of moral values were, although of supreme importance, not part of the subject matter of political economy as such; political economy is the study of the production and distribution of wealth, the study of how we produce what we desire, not why we desire it; in any event, it is quite impossible to measure such desires and moral values, except at the point where the individual demonstrates his willingness to give goods or labor in exchange for goods or labor.
Secondly, people are not prepared to pay more for anything than they have to. So, for example, I may prefer tonight to go to the cinema rather than the opera, being able to afford both; but even though I would rather go to the cinema that does not necessarily mean I am prepared to pay more for a cinema ticket than for an opera ticket; moreover, for me to adopt such a position would not be to act irrationally.
The concept of value is crucial to political economy. Production is that which creates or adds value; consumption is that which destroys or reduces value. Distribution is the apportionment of the product (or its proceeds of sale) among the factors of production. The law has consistently distinguished between arrangements that create or add value (and contribute to production) and those that do not. Contracts of the former kind are generally enforceable; contracts of the latter kind often are not. So, for example, a contract for the purchase of a meal at a restaurant is enforceable, but my promise to give you a lift to the restaurant is not.
It should be noted that the law does not view my agreement to give you a lift as meaningless or a nullity. It views it merely as a private arrangement and one on which the irretrievable expense of the administration of justice should not be wasted judges are not paid by litigants, nor do litigants pay rent for the use of courts to hear their case. The court may also take the view that we really did not intend to create a legally binding contract (which may be the truth) but, even if we did, the law does not view my promise to give you a lift as legally enforceable because there is no consideration for it; it lacks the essential element of a bargain or exchange – mutuality.
Even so, the law may refuse to enforce a contract where there is mutuality and an intention to create a legally binding contract. Prostitution contracts are not legally enforceable, even though they are a contract for services and even though (in England) they are not a criminal offence; thus, if I pay a prostitute for her services I have no right to reclaim those monies since the law will recognize the agreement (it would be a different matter if she stole the money); it just refuses to enforce it.
Another important example of an unenforceable contract is a gambling contract. The law has always distinguished between contracts of insurance and gambling contracts. A professional insurer and a professional gambler both assume (economic) risks and charge for their services; but the key distinction is that the risk assumed under an insurance contract exists prior to and independently of the contract – an insured must have an insurable risk and can only claim the amount of his loss – whereas the risk assumed under a gambling contract is created by the contract. The difference therefore lies in the position of the consumer; both the professional gambler and the professional insurer may consider that they are providing services for reward; that may be true, but it is beside the point. The law is reluctant to waste its time and energy on enforcing contracts that are fundamentally unproductive.
The reason for this may be that, as already explained, there is irretrievable community expense in the administration of justice. Production creates wealth for individuals and society. It is from production that government generates its tax revenues. Thus it can be seen that, just as taxation on the consequent increase in value of adjacent sites may help to pay for the construction of a road, so too a system of administration of justice which properly enforces productive contracts contributes to overall production and thereby to the very revenues which help to pay for it.
Ian Lambert is a globetrotting man of many talents. This presentation was originally made at the 10th Annual Conference Of The Council of Georgist Organizations, Santa Fe, New Mexico, July, 1990.
NEXT WEEK — MORE UNCONSCIOUS ASSUMPTIONS ANALYZED Part Three
Last week — Part One
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