Modern Political Economics: Chapter 6

I continue to read “Modern Political Economy: Making sense of the post-2008 world” by Yanis Varoufakis, Joseph Halevi and Nicholas Theocarakis, published in 2011 by Routledge. Here I discuss Chapter 6.

Chapter 6 is a very critical assessment of marginalism and neo-classical economics that came forth from the marginalist “revolution” in economic theorizing in the 1870s. The marginalists (Jevans, Menger and Walras) deviced a subjective theory of value. This approach argues that the value of a commodity is the outcome of interaction between demand and supply for that commodity in a perfectly competitive market. This reasoning was extended into a broader theory referred to as neo-classical economics and, ultimately, into a general theory of market systems, which can be referred to as the neo-Walrasian paradigm in economics.

The authors mainly criticise marginalism from their perspective on the “inherent error”. The critique mainly focusses on the inherent problem that a subjective theory of value does not allow the development of a proper theory of growth.

No mention here of a “lost truth”, even though marginalism itself has morphed into the neo-Walrasian paradigm and more recently into a broad theory of subjective interactive decision making, called game theory, that now extends these fundamental subjective principles to all decision making processes. (Think “Freakonomics” here.)

In my opinion this chapter shows how limited the critical perspective of the authors is. It mainly restricts itself to a very classical viewpoint on what economics should be and is, therefore, very Marxian in nature. I think that marginalism’s main construction error is the required commodification of all economic interaction and the exclusion of value-generating interaction (such as most services) from its perspective. Using marginal valuation, requires that the traded substance is in principle measurable using a continuous scale. Most things that we do in our real lives are not subject to such simplistic measurement; they are naturally “discrete”.