The Value of One’s Contribution

In asking this question, one could be asking what Marxists call the qualita­tive question or the quantitative question. The former is really an ontologi­cal question: What is the nature of economic value? or What sort of thing is economic value? For present purposes, this question need not be answered; whatever economic value is, the important question for a theory of economic exploitation is what determines the magnitude of economic value of an exchangeable good or service.

The standard answer to this quantitative question given by contemporary subjective value theory is that the value of something is determined by what­ever someone would be willing to pay (exchange) for it. Notice that this pre­supposes an exchange economy. In a centrally planned economy with no market prices (a least in producer goods), it is hard to make sense out of the willingness to pay, except on the black market or in terms of bribes. In such economies, those who use producer goods are simply authorized to requisi­tion them. Thus, the transactions between suppliers and the production units (firms) they supply are not exchanges. Without exchanges, there can be no markets in these producer goods; without markets, it is difficult to determine the values of these goods, according to subjective value theory. Indeed, this very point is central to Mises’s critique of central planning, which was dis­cussed in chapter 2. However, the question of how to determine the economic value of something in a centrally planned economy need not detain us here because the systems to be compared in this book are market socialist and free enterprise systems, both of which are types of market economies.

That complication to one side, there are nonetheless some difficulties in understanding the value of someone’s contribution in a market economy as simply whatever someone would be willing to pay for it. One is a kind of inde­terminacy. Who is the someone? For any particular item offered for sale, there might be numerous buyers willing to pay widely different prices. Which buyer’s price is the relevant one? Two alternative answers immediately come to mind: one is that the item has as many different values as there are offers or potential offers; the other is that the value of the thing is determined by whoever ends up buying it. Each of these alternatives is plagued by essen­tially the same problem: aside from the fact that some items with economic value are never actually purchased, each of these alternatives imply that in no market system does someone ever get more or less than the value of what he is exchanging. Not only does this seem to be an intrinsically implausible and indeed an odd thing to say, but it also implies that no one is ever eco­nomically exploited in a market economy, even a little. The reasoning for this is straightforward: in an exploitative exchange, the exploiter receives more than the value of his or her contribution (i.e., what the exploiter is giving up in the exchange) and the exploited receives less than the value of his or her contribution (i.e., what the exploited is giving up). If the economic value of a person’s contribution is whatever he or she actually receives in an exchange, then no one ever gets more or less than the value of the contribution; thus reciprocity always holds.

This is implausible on its face and is something almost no one wants to accept. Even those who favor a free enterprise system do not maintain—or, at least, should not maintain—that it is literally impossible for people not to get the economic value of what they contribute in a voluntary exchange and, by implication, that it is impossible for people to be economically exploited. When the subject is real-world economic systems, claims of perfection should always be viewed with the highest degree of suspicion. More realistically, those who favor a free enterprise system want to say that it is something about how markets actually function in such a system that it usually or almost always works out that people get the value of what they contribute. On the other view, nothing about how markets actually function is brought in to explain how or why people always get the economic value of what they con­tribute. The issue is effectively decided by the definition of value.

Intuitively, the problem with these proposals is that they do not take into account the various defects and limitations—in a word the imperfections— of real-world markets for the goods and services that are the objects of exchange. To solve this problem, perhaps the value of what someone is exchanging should be understood as what he or she would get if the market were an ideal market in the sense defined by standard neoclassical welfare economics. An ideal market is defined by the following very strong assump­tions: all participants in that market are rational and fully informed as to prices and the characteristics of the good in question, goods from different suppliers are qualitatively homogeneous, the costs of enforcing property rights (contracts) is zero, all firms are price takers (i.e., no firm can raise or lower prices without lowering net revenue), and there are no barriers to entry into the market.

The value of something, according to this proposal, is what it would fetch in an ideal market. The advantage of this way of understanding the value of someone’s contribution is that it connects economic value to the judgments that people would make about the relative importance of that person’s contribution to their well-being in ideal circumstances. In particular, these value judgments are as well informed as they could be in that (1) the buyer of the good or service knows everything there is to know about the product and (2) there is no better price for either the buyer or the seller. In a perfectly competitive market, if a buyer lowers his offer, he finds no sell­ers, and if a seller raises her price, she finds no buyers. That is a conse­quence of each firm or individual’s being a price taker. Given the current state of natural resources, technology, and human and nonhuman capital— in short, given the current state of the rest of the economy—there is no way for either participant in this exchange to do better. The exchange rate that would be found in an ideal market, on this proposal, is the “true” value of the object in question.

As attractive as this proposal is, it nevertheless faces a problem. This prob­lem stems from the very strong conditions of the model of the ideal market. Though some real-world markets may be so close to being ideal that the dif­ference between the ideal and the reality is insignificant, that is simply not the way it is in most cases. Most markets do not have indefinitely many sup­pliers of a homogeneous good; instead, there are usually just a few suppliers of a good, and goods of that general type are, or at least appear to be, highly differentiated. Most market participants are neither completely rational nor

73 perfectly knowledgeable about prices and quality; very often, entry into a market is restricted; and so on.

But why is this a problem? Indeed, critics might use these observations to make the following objection to free enterprise systems: “In the theory of the free enterprise system (i.e., in the models), people generally get the value of what they contribute. However, because reality diverges from the theory so dramatically, in the real world, people do not get the value of their contribu­tions. This gap between theory and reality supports a negative judgment about real-world free enterprise systems on this score. This divergence shows how inefficient free enterprise systems really are; it suggests—though it does not by itself imply—that such systems are plagued with widespread eco­nomic exploitation.” Critics might also point out that neoclassical economics has an ideological role to play in diverting attention from reality to a much more satisfactory ideal, but that is another story.

This criticism proceeds too quickly, however. The fact that very few mar­kets closely approximate the ideal in their structure does not imply that actual prices (i.e., real-world prices) differ significantly from what they would be if those markets did bear a close structural resemblance to the ideal. In the real-world markets that do not closely resemble the ideal mar­ket, there may be offsetting imperfections that cancel each other out, so that the real price and the ideal price are, in fact, approximately the same. More importantly, the competitive process may have worked itself out to the point where the price of an item in a given market is about what it would be if that market had the ideal structure even if, in point of fact, that market bears no structural resemblance whatever to the ideal market. This last point war­rants some elaboration.

The story told at the beginning of chapter 2 explains how the competitive process coordinates production in a market economy. It describes the oper­ation of an adjustment process by which supply and demand are brought into balance in a given market by the successful entrepreneurial actions of firms and/or individuals.

equilibrium—has been achieved. Under these circumstances, the price of the product is about what it would be if the market were ideal in terms of its structure, since in both the real case and the ideal case, there are no pure profits. All income from sales goes to those who provide factors of produc­tion approximately in accordance with the marginal value of what they are selling.⁹ The structure of this market, however, may differ considerably from the structure of an ideal market.

What has been described in the preceding paragraph is not a process that occurs in a model, that is, in an ideal market. Instead, it describes what can and does actually happen in the real world. Let us say that a market in some good or service in which there are no opportunities for pure profit on either the supply or the demand side is a competitively efficient market, and let us call exchanges in such markets F-exchanges. In an F-exchange, both par­ties are price takers; that is, no competitor is in a position to undersell the seller or outbid the buyer.¹⁰ If the seller or one of his competitors were to lower the price of the good being sold, he would have to pay one of his sup­pliers (including himself if he were a supplier of labor or capital) less than the going rate for that factor of production. Similarly, if a buyer were to raise his bid, he would have to charge his customers more than the going rate for his product.

The terms of an F-exchange can be used as the standard to determine the value of someone’s contribution. In an F-exchange, those who are selling something are getting the value of what they are selling (i.e., what the good or service is really worth, so to speak) and those who are buying are getting their money’s worth. In a nutshell, F-exchanges are fair. These exchanges can be rechristened∕αfr exchanges.¹¹ The proposal, then, is that the value of some­one’s contribution is what she would get in a fair exchange. Sometimes, peo­ple get the value of what they offer in an exchange, and sometimes they do not. It all depends on whether or not the market is competitively efficient— or so it is claimed. Actually, at this point all that is on the table is a proposal about how to understand or conceive of the value of someone’s contribution and a Stipulative definition of a fair exchange. Why is it appropriate to say that these so-called fair exchanges determine—or more aptly, reveal—the value of someone’s contribution? A related question concerns the criteria by which these exchanges can be identified. In other words, how are competi­tively efficient markets to be identified? The next section addresses both of these questions and considers some additional complications.