Desai: Building with straws

• Meghnad Desai – Building with straws – Financial Express

Though this article suffers from the Ricardian-Marxian cost-of-production fallacy in trying to separate ‘price’ from ‘value’ (see below), it is otherwise a sound analysis of our present situation – and this from a Labourite, no less!

The key to correcting my noble Lord’s failings is to take the observation he makes in the penultimate paragraph – “Through the long expansion, western economies invested in activities by looking at the market bubble. Now they have few productive investments that can allow them to compete. In Keynesian economics, it does not make a difference if you dig ditches and fill them up again as long as wages are paid and spent on consumption goods. But at the end of the day, you have not added to the wealth of the economy…” – and simply recognise that what this implies is a classic case of wrong signalling caused by unbacked credit expansion in an unsound banking system which has led to massive malinvestment, as per the Austrian model.

Once we make this amendment, we can accept the whole of the piece, without too much further quibble, as a surprisingly-sourced vindication of our own case.

NB: The value of a house is clearly NOT its cost. If I, as a terrible example of a project manager, pay my workers too much, allow them take too longer over the job, use gold-plated trowels for laying bricks made from the most expensive ceramics and still do such a shoddy job that no-one wants to buy it, what is the ‘value’ of the project? All the money I shelled out – or the big, fat zero which the absence of any willing buyer seems to suggest?

Furthermore, the distinction between ‘price’ and ‘value’ is far more subtle than the one our author attempts to draw.

Economists tend to assume the zero-sum nature of exchange at the transacted price because they cannot capture (or perhaps even conceive of!) the fundamentally incommensurable, ordinal, subjective value rankings between the two counterparties.  In less abstract terms, when you sell me a shirt, I clearly value it more highly than the money I surrender and you, just as patently, do the converse.

So, rather than some equal-and-opposite zero, should we not rather say that my subjective win is additive to yours, even though we dealt at a single price? Even so, we still cannot say by how much I gained compared to you – whether my satisfaction was of the same order, lower, or higher – and we certainly can not add these together and then combine them with all the other billions of different transactions taking place between different individuals under differing circumstances, as the macro-economists try to do in order to make them into mathematically tractable inputs to their models.