Money and Value

34ba56eOne interesting question I was asked at my recent presentation was along the lines of: ‘It’s all very interesting what you say about money, but what is your theory of value? Do you, for example, subscribe to the labour theory of value?’

On the labour theory of value I worship at the gate of Joan Robinson, as indeed I do on most things: The word ‘value’ is really just a placeholder for old-fashioned considerations about the Just Price. Independent of such considerations, she says, it ‘has no operational content. It is just a word.’ (Economic Philosophy, p.47). Propound a theory that labour-hours or something else make up value, and you have not yet told us anything. What we want to know is what we should do. Does saying that labour-hours are real value mean that we, as a society, should aim to make prices proportionate to labour-hours? Then you might as well just make the final injunction; the detour through the concept of value is superfluous. When Marx talks about capitalists extracting surplus value, he is really just talking about exploitation, and Robinson, in the preface to the second edition of her Essay on Marxian Economics, showed how at least most of what Marx has to say about exploitation can be stated without invoking value at all.

There was nevertheless something in the question, especially as applied to political economy. One reason the absurd rhetoric about government deficits and ‘spending within our means’ retains so much mesmeric power is that it at least allows us some way, even a very confused way, to weigh up costs and benefits associated with various governments. In the UK the Coalition government boasts that it has created 2 million jobs in manufacturing. The opposition retorts that it has also driven more children into poverty; an exact figure is hard to calculate, but even if we had one, what could we do with it? How many manufacturing jobs equal one child in poverty?

Money appears to give us an easy way out of such puzzles. What the government spends is benefit to us; taxes are the cost we bear. Thus governments boast about how much they have spent on certain programmes and also about how little they have had to tax us. This is how we can measure one against another with a single unit of measure. How much did they spend on us? How much did they tax from us?

Yet deficits defile the clear lines of this analysis. Deficits seem to allow governments to cheat: providing the benefit without imposing the cost. Thus we figure that the cost must come later – in the debt the government ‘leaves to our children’, as though citizens of the future will have to transfer funds through a time-tunnel to the bondholders of the present. This is bare nonsense. But once we try to use money as the unit for reducing political economy to cost-benefit analysis we have to fit deficits in somewhere, and this seems to be the only place they can fit.

This is one example of the sort of nonsense you will generate if you try to think of money as a measure of value. My questioner was quite right that money cannot serve this function; awareness of this fact was, of course, what pushed Ricardo and Marx towards the labour theory of value. But Robinson is quite right that the only purpose of such a theory is to ground injunctions about what we should do. I don’t know what to say about value. But here is what I think about money.

The Austrian school of economics, although wrong about much else (notwithstanding Schumpeter’s wonderful theory of production), seem to have gotten this just about right. Money is a signaling device. With prices, measured in terms of money, we communicate across the economy about our needs and desires. This, for the liberal-minded Austrians, made the question of value itself irrelevant. The prices we pay for things are a function of the capacity of producers to produce them and of our desire to have them; everybody’s input is accepted into the system. The system takes stock of how much we value everything, so who cares what value itself is? Of course in the real world there are individuals and organizations with disproportionate power over prices, but the principle by which the nature of value is excluded from theoretical concern holds as soon as we regard prices as signals and money as the means by which those signals are given.


We can then see money as ‘soft infrastructure’ – a piece of communication technology. The government, as the issuer of currency, has the responsibility of maintaining the range and the integrity of this soft infrastructure.

This allows for a (possibly) helpful metaphor for thinking about how much money the government should issue, in other words, what size deficit it should run. Imagine you are wiring together various nodes, which are to communicate electronic signals to each other. If you don’t use enough wire, you won’t connect all the nodes. If you use too much wire, you’ll weaken the signal by adding too much resistance. What you want is enough wire to connect each node to every other by the shortest possible path, and no more.

Likewise with money. To complete the metaphor: Unemployment is like leaving some nodes unwired – a deficiency in ‘effective’ demand amounts to wants that can’t be signaled in the market. Inflation is like over-wiring, reducing the signal: price-volatility garbles the messages carried by prices. Of course you can have both evils at once, though usually in different parts of the network.

Money cannot be sensibly used as a measure of how much benefit the government has provided to us and how much it is costing us. That, we saw, drives us rapidly into a sea of nonsense. The question is how much money the government should issue, to build the soft infrastructure through which price-signaling occurs.

I know why this grates on people of a more conservative mindset. Those who love the free market as a system for coordinating human interests wish that the government could be included within that system. Then we could collectively control our government through the same price signals by which we (in theory) induce producers to provide what we want in the quantities we want. This is where we get this absurd stuff from politicians about ‘how the market will respond’ to their decisions.

But it just cannot work that way. The government is not one of the nodes; it is the operator rigging the wire. We need to communicate with the government some other way than via market signals. That’s what democracy is for.


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