As a sort of closing entry on the whole subject of STV and LTV (although I may come back to it in the future if someone else posts another stupid “refutation” of LTV or something like that), I thought I would take a look at the more credible, academic arguments for STV. So far I have only looked at the ignorant rebuttals of “ancaps” and economics geeks (and a pro wrestler, for some reason), and moving on to more intellectual rebuttals might provide a good counterpoint to this low level of discourse.
The first rebuttal I found was from the classical liberal Frédéric Bastiat.
“It is too bad that Robinson Crusoe does not encounter more obstacles; for, in that case, he would have more outlets for his efforts; he would be richer.
“It is too bad that the sea has cast up on the shore of the Isle of Despair useful articles, boards, provisions, arms, books; for it deprives Robinson Crusoe of an outlet for his efforts; he is poorer.
“It is too bad that Robinson Crusoe has invented nets to catch fish or game; for it lessens by that much the efforts he exerts for a given result; he is less rich.
“It is too bad that Robinson Crusoe is not sick oftener. It would give him the chance to practice medicine on himself, which is a form of labor; and, since all wealth comes from labor, he would be richer.
“It is too bad that Robinson Crusoe succeeded in putting out the fire that endangered his cabin. He has lost an invaluable opportunity for labor; he is less rich.
“It is too bad that the land on the Isle of Despair is not more barren, the spring not farther away, the sun not below the horizon more of the time. Robinson Crusoe would have more trouble providing himself with food, drink, light; he would be richer.”
Never, I say, would people advance such absurd propositions as oracles of truth. It would be too completely evident that wealth does not consist in the amount of effort required for each satisfaction obtained, but that the exact opposite is true. We should understand that value does not consist in the want or the obstacle or the effort, but in the satisfaction…
The Misesians call this argument “scintillating,” but I don’t find it impressive. It suffices for us to keep the distinction between use value and exchange value clear in order to see why: nowhere in his example does Bastiat bring up exchange, therefore his argument tells us absolutely nothing about exchange value, which is the point under contention.
To be clear: no one, not even Marx, disagrees that individuals vary in their evaluation of the utility of a good, i.e. in their evaluation of the use value of a good. It is clear to everyone that Crusoe, unless he has some specific bizarre ideological viewpoint, will positively evaluate the fact that he encounters less obstacles, has immediate access to useful articles, invented nets, is not sick, successfully puts out fires, and has access to fertile land. To him, the use values of his particular piece of land, the salvaged articles, the nets, or the result of putting out fires instead of letting them burn, are all positive.
But neither STV nor LTV contest these facts. What LTV does contest is the assertion that the exchange value of any of these things is somehow derived from use values; well, in this case, we must say “use value” in the singular, since there is only one person. But the fact that there is only one person is precisely the problem. One person alone cannot exchange. There is no indication of exchange value in Bastiat’s argument. Therefore his argument is not a refutation of LTV at all.
What if he did include exchange values? Then we would see that LTV is in fact validated, insofar as Bastiat’s reasoning goes. For even Bastiat would not disagree with the fact that the exchange value of the service of making Crusoe’s salvaged articles is higher than that of the service of simply finding them; or that the exchange value of his fishing services, or even the resulting fish, in a world without nets is higher than in a world where nets are present; or that the exchange value of his medical services would be positive; or that the exchange value of his services in extinguishing fires is positive; or that the exchange value of the services necessary to raise food and drink would be greater on barren land than on fertile land. I doubt anyone of sound mind would dispute these facts, any more than they would dispute the facts about use values.
In short, the value, if understood as exchange value, of all these examples of overcoming obstacles is positive. Therefore Bastiat’s argument is entirely refuted.
The second rebuttal is more of a general argument. People will often say things like “STV explains what the LTV explains, but it also explains more, such as,” and then vague or specific points. I don’t intend to address all such points here, because the list can go on and on forever as long as you can come up with specific concepts related to price and price changes, of which there are plenty. I only want to address the most popular one, which is “STV explains what the LTV explains, but it also explains more, such as the price of Rembrandts, Ferraris, an older bottle of wine,” and so on and so forth.
Some of these are easier to refute; for instance, I’ve discussed the old wine argument before. Ferraris embody more labor and involve higher production costs than most cars, so it’s not a good argument to use against LTV, although I have seen it used before. The Rembrandt example is more interesting, but it’s ultimately based on a misunderstanding of what is being sold. When people buy a scratch lottery ticket, they are not literally buying a piece of cardboard with latex on it, they are buying entry into a pool within which one can hope to win some great amount of money (or if you want a more drastic example: when you buy a plane ticket, you are buying a plane trip, not a piece of paper). In the same sense, one does not buy a Rembrandt for the painting alone, but for the painting and the prestige associated with it, the latter coming not from the painting itself, but from the social context surrounding it, within which countless hours of labor (although one might argue that art criticism and museum curating are pretty pitiful forms of labor) have been poured.
The last refutation I want to examine is a reductio ad absurdum of LTV which is often used in more sophisticated criticism. Suppose that LTV is true and there are two people who are aware of the ratio of values between goods X and Y. Naturally, any individual will not trade more than he gives up, so the equilibrium ends up being the exact ratio (e.g. if 3 apples are worth 1 pineapple, then the two people will want to trade exactly 3 apples to 1 pineapple). But doing such a trade is pointless, since neither side gains any value in the exchange. Therefore exchange would never occur. But, in the real world, exchange does occur. Therefore, two conclusions are possible: 1. exchanges only happen because people are ignorant of true values or 2. subjectivity, and therefore STV, drives prices, not any exterior measurable standard.
It is not exactly clear to me how this argument is supposed to disprove LTV. Obviously people decide to exchange based on their preferences, no one’s denying that. I will trade my 3 apples for 1 pineapple because to me the use value of the pineapple is higher than that of the apples (because I produce apples, say). The fact that the ration of exchange is not subjective remains uncontested in this hypothetical (indeed, it would be extremely unlikely for two independent subjective valuations of this nature to arrive at the same exact result). Merely because there is a subjective aspect to any exchange, and STV has the word “subjective” in its name, does not mean STV is validated.
What the argument would need to prove is that no such ratio exists. And that would be a very complex argument indeed. Suffice it to say that I have not yet seen a variant of this argument which presents such a proof.
So far on this blog I have discussed the STV/LTV debate from a purely descriptive point of view, with no reference at all to the prescriptive realm (although I have been faulted for confusing them on some occasions, for which I apologize). In fact, I agree that, in the end, the descriptive debate is pretty pointless, since prices are what they are regardless of what we believe about them. It may provide an elegant proof that modern economics is patent nonsense, but little else.
Ultimately, it is ethics which dictates how we see, and interact with, the world, not our opinions about its direct causes. The important debate is in the prescriptive realm: whether the price of commodities should be (forcibly, or through systemic changes such as freeing the markets) better aligned with some specific measure of labor, by removing profits and other forms of usury, by removing or changing the variable price of labor which is currently established by power disparities, and so on, or whether the price of commodities should be established the way it is in our capitalist system. Or to make the question even simpler: should the trading system be structured in order to support an egalitarian economic order, or should it be used to justify the persistence of economic hierarchies and social classes?
The answer to this question is an ethical one, not an economic one. It can only be answered by looking at the individual’s ethical commitments regarding property rights, economic privilege, entrepreneurship, capitalism or anti-capitalism, hierarchies or egalitarianism, and so on. As prescriptive STV is the necessary foundation of capitalism, prescriptive LTV is the necessary foundation of socialism. Certainly I do not deny that it is possible to be a socialist without believing in prescriptive LTV, but I don’t think socialism really makes sense theoretically without at least a partial prior belief in prescriptive LTV (insofar as usury is by definition not labor, and is therefore precluded by prescriptive LTV, for instance). This is why all socialists, I think, should be interested in what prescriptive LTV has to say about how our trading system should be structured.