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Monday, April 1, 2013

Aristotle: exchange and value

Aristotle's difficult but influential discussion of exchange suffered grievously from his persistent tendency to confuse analysis with instant moral judgement. As in the case of charging interest, Aristotle did not remain content to complete a study of why exchanges take place in real life before leaping in with moral pronouncements. In analysing exchanges, Aristotle declares that these mutually beneficial transactions imply a ‘proportional reciprocity’, but it is characteristically ambivalent in Aristotle whether all exchanges are by nature marked by reciprocity, or whether only proportionately reciprocal exchanges are truly ‘just’. And of course Aristotle was never one to raise the question: why do people voluntarily engage in ‘unjust’ exchanges? In the same way, why should people voluntarily pay interest charges if they are really ‘unjust’?
To muddle matters further, Aristotle, under the influence of the Pythagorean number-mystics, introduced obscure and obfuscating mathematical terms into what could have been a straightforward analysis. The only dubious benefit of this contribution was to give many happy hours to historians of economic thought attempting to read sophisticated modern analysis into Aristotle. This problem has been aggravated by an unfortunate tendency among historians of thought to regard great thinkers of the past as necessarily consistent and coherent. That of course is a grievous historiographic error; however great they may have been, any thinkers can slip into error and inconsistency, and even write gibberish on occasion. Many historians of thought do not seem able to recognize that simple fact.
Aristotle's famous discussion of reciprocity in exchange in Book V of his Nichomachean Ethics is a prime example of descent into gibberish. Aristotle talks of a builder exchanging a house for the shoes produced by a shoemaker. He then writes: ‘The number of shoes exchanged for a house must therefore correspond to the ratio of builder to shoemaker. For if this be not so, there will be no exchange and no intercourse’. Eh? How can there possibly be a ratio of ‘builder’ to ‘shoemaker’? Much less an equating of that ratio to shoes/houses? In what units can men like builders and shoemakers be expressed?
The correct answer is that there is no meaning, and that this particular exercise should be dismissed as an unfortunate example of Pythagorean quantophrenia. And yet various distinguished historians have read tortured constructions of this passage to make Aristotle appear to be a forerunner of the labour theory of value, of W. Stanley Jevons, or of Alfred Marshall. The labour theory is read into the unsupportable assumption that Aristotle ‘must have meant’ labour hours put in by the builder or shoemaker, while Josef Soudek somehow sees here the respective skills of these producers, skills which are then measured by their products. Soudek eventually emerges with Aristotle as an ancestor of Jevons. In the face of all this elaborate wild goose chase, it is a pleasure to see the verdict of gibberish supported by the economic historian of ancient Greece, Moses I. Finley, and by the distinguished Aristotelian scholar H.H. Joachim, who has the courage to write, ‘How exactly the values of the producers are to be determined, and what the ratio between them can mean is, I must confess, in the end unintelligible to me’.1
Another grave fallacy in the same paragraph in the Ethics did incalculable damage to future centuries of economic thought. There Aristotle says that in order for an exchange (any exchange? a just exchange?) to take place, the diverse goods and services ‘must be equated’, a phrase Aristotle emphasizes several times. It is this necessary ‘equation’ that led Aristotle to bring in the mathematics and the equal signs. His reasoning was that for A and B to exchange two products, the value of both products must be equal, otherwise an exchange would not take place. The diverse goods being exchanged for one another must be made equal because only things of equal value will be traded.
The Aristotelian concept of equal value in exchange is just plain wrong, as the Austrian School was to point out in the late nineteenth century. If A trades shoes for sacks of wheat owned by B, A does so because he prefers the wheat to the shoes, while B‘s preferences are precisely the opposite. If an exchange takes place, this implies not an equality of values, but rather a reverse inequality of values in the two parties making the exchange. If I buy a newspaper for 30¢ I do so because I prefer the acquisition of the newspaper to keeping the 30 cents, whereas the newsagent prefers getting the money to keeping the newspaper. This double inequality of subjective valuations sets the necessary precondition for any exchange.
If the equation of ratio of builder to labourer is best forgotten, other parts of Aristotle's analysis have been seen by some historians as predating parts of the economics of the Austrian School. Aristotle clearly states that money represents human need or demand, which provides the motivation for exchange, and ‘which holds all things together’. Demand is governed by the use-value or desirability of a good. Aristotle follows Democritus in pointing out that after the quantity of a good reaches a certain limit, after there is ‘too much’, the use value will plummet and become worthless. But Aristotle goes beyond Democritus in pointing out the other side of the coin: that when a good becomes scarcer, it will become subjectively more useful or valuable. He states in the Rhetoric that ‘what is rare is a greater good than what is plentiful. Thus gold is a better thing than iron, though less useful’. These statements provide an intimation of the correct influence of different levels of supply on the value of a good, and at least a hint of the later fully formed Austrian marginal utility theory of value, and its solution of the ‘paradox’ of value.
These are interesting allusions and suggestions; but a few fragmentary sentences scattered throughout different books hardly constitute a fully fledged precursor of the Austrian School. But a more interesting harbinger of Austrianism has only come to the attention of historians in recent years: the groundwork for the Austrian theory of marginal productivity – the process by which the value of final products is imputed to the means, or factors, of production.
In his little-known work, the Topics, as well as in his later Rhetoric, Aristotle engaged in a philosophical analysis of the relationship between human ends and the means by which people pursue them. These means, or ‘instruments of production’, necessarily derive their value from the final products useful to man, ‘the instruments of action’. The greater the desirability, or subjective value, of a good, the greater the desirability, or value of the means to arrive at that product. More important, Aristotle introduces the marginal element into this imputation by arguing that if the acquisition or addition of a good A to an already desirable good C creates a more desirable result than the addition of good B, then A is more highly valued than B. Or, as Aristotle put it: ‘judge by means of an addition, and see if the addition of A to the same thing as B makes the whole more desirable than the addition of B’. Aristotle also introduces an even more specifically pre-Austrian, or pre-Böhm-Bawerkian, concept by stressing the differential value of the loss, rather than the addition of a good. Good A will be more valuable than B, if the loss of A is considered to be worse than the loss of B. As Aristotle clearly phrased it: ‘That is the greater good whose contrary is the greater evil, and whose loss affects us more.’
Aristotle also took note of the importance of the complementarity of economic factors of production in imputing their value. A saw, he pointed out, is more valuable than a sickle in the art of carpentry, but it is not more valuable everywhere and in all pursuits. He also pointed out that a good with many potential uses will be more desirable, or valuable, than a good with only one use.
Critics of the economic importance of Aristotle's analysis charge that, with the exception of the saw-and-sickle passage, Aristotle made no economic application of his broad philosophical treatment of imputation. But this charge misses the crucial Austrian point – made with particular force and elaboration by the twentieth century Austrian economist Ludwig von Mises – that economic theory is but a part, a subset, of a broader, ‘praxeological’ analysis of human action. By analysing the logical implications of the employment of means to the pursuit of ends in all human action, Aristotle brilliantly began to lay the groundwork for the Austrian theory of imputation and marginal productivity over two millennia later.

Austrian Perspective on the History of Economic Thought (2 volume set)

1 comment:

  1. Do you really not get this? Is it not clear to you that for a shoemaker to buy a house the shoemaker must generate sufficient value from shoes to buy the house? Which means that the house builder in turn depends on the shoemaker to be able to do this (once we take account of the fact that in a larger society there are many trades and operations). The type and possibility of house depends on what the shoemaker can afford (and the house builder build). There is a value relationship and so 'ratio'.