By: Shahab Sabahi, Policy Analyst in Energy Security and Policy Research Group
What Heart-Brain may say
Before
getting through my argument, let me set a line of enquiry for this essay, a
question that I was asked a couple of days ago:
“One quests a new or an alternative wealth theory which
could explain the value of intangible wealth; such as skill and happiness;
since the one reads flaws and shortcomings in the existing theory of wealth
which formulated in economics.”
What is wealth in economic jargon? How can one value the
wealth? Is wealth an absolute term or relative? Is wealth identified with its
value (I mean if one cannot measure values of wealth by scientific ways, the
wealth is not worth!!)?
Introduction
The early theory of wealth emerged in order to answer this question:
“What is the source of incomes? How are capital surplus of goods formed? It was
not a question about “value”. It was an enquiry to find an absolute and
continuous source of income not measuring it. For the sake of saving your
precious time, please let me explain this part in brief and in the form of
bullets as follows- In France, Francoise Quesney argued that the source of income and surplus is the sun. He developed the first analytical model about wealth (Tableau Economique). He saw farmers as the transformers of wealth and producers of surplus
- Adam Smith who went to France to study out there, disagreed with his teachers. He came from industrialized England where labor and capital generated incomes even far above the farmers. Smith proposed that surplus arose from the division of labors, which large-scale manufacturers (capital) allowed. In nutshell, Smith talked about productivity and the role of capital in generating it and how this process led to wealth accumulation
- Marx refined Smith focus on labor to say that labor alone was the source of surplus. However Marx’s initial – not his final – argument was that surplus came from labor and there was a gap between the cost of labor and its productivity. This led to what became known as the "transformation problem”, which locked a century of Marxists into an attempt to reconcile Marx’s arguments with linear algebra.
- The dominant neoclassical theory argued that was
impossible to favor one input over the other: both labor and capital
contributed to output, and could be smoothly substituted for each other in what
they called a "production function”. The problem for neoclassical model
(developed by Robert Solow)was that changes in the amount of labor and capital
in Solow’s model accounted for less than 50 per cent of recorded growth: the
gap, which became known as "Solow’s Residual”, was
attributed to technological change – for which neoclassical economics had no
theory.
The
above historical event explanation reveals how the main issue, searching for
source of wealth, disappeared in modern neoclassical economics as the word
'value' was reduced simply to a question of relative prices. But the new
problem arises “how relative prices are set” or “How values measure for different
types of wealth which differ in their natures”.
Economists
define the term of value as functionality of wealth, and scarcity and
durability of wealth; by these two definitions they brush away the question on
diversity of wealth and reduce the value of wealth to a measureable scale,
price / money. Further, they put market mechanism as the medium for determining
relative prices where demand and supply face each other.
From
an economic point of view, the value of intangible wealth; skills,
knowledge, happiness; can be measured by; the balance between demand-supply of
skills, functionality and applicability of knowledge in the markets, and the
price of insurance policies for managing risks and consequently remain happy!!
In
this sense, wealth maximization is achievable when goods and resources (they
assume unlimited resources!!!) are in the hands of those who value them the
most; it means someone values a good more, ONLY if he is both WILLING and ABLE
to pay more MONEY (or in the equivalent of money) to have it [Dworkin, R. M.; Is Wealth a Value?].
If
you disgust with this viewpoint, you are right. One expects theories answer
questions not changing questions to fit answers.
To
be blunt, my human nature has not been convinced with the existing economic
theory for scaling wealth. The theory is far weak to become an ideal model to
describe wealth and consequently lead to a robust value assessment method.
Years
back, I tried to build a theory upon the theory had proposed earlier by Robert
Ayres. The core of my idea was to put energy as an independent factor of
production in the neoclassical production function (in addition to capital,
labor and technology) in order to enter the limitations which imposed by the second
law of thermodynamics in the production model. My intention was to measure a
real value for all the production factors (labor, capital, technology).
Although
my idea was not welcomed and received with cold shoulders in the course of
reviewing my working paper, I learnt that the real value of wealth could not
simply be measured by relative prices. There were a few limitations imposed by
the law of nature and social behavior of humans.
My
point is that the functionality of wealth may vary in its definition in different
societies and over the course of time, though the absolute value of wealth can
be measured only based on the limitations that the nature puts forward.
The
notion of relative price in economics fails to see the whole picture and
misleading.
Conclusions
Our
understanding about “social interactions” has locked into perspectives which proposed
by the economic theories. Without a multidisciplinary and holistic approach, we
cannot expect to find a better theory to explain some truths about the role of
wealth in socio-economic-environmental interactions.
Unfortunately,
the main stream economists are reluctant to accept non-economic factors entered
in to their models. Perhaps they are afraid of complexity or they love status
of quo in markets for the sake of easy short anticipations.
