Wednesday, January 11, 2012

Dog Houses, Fallacies, and Elizabeth Warren

“Nobody in this country got rich on his own. Nobody. You built a factory out there good for you, but I want to be clear, you moved your goods to market on the roads the rest of us paid for. You hired workers the rest of us paid to educate. You were safe in your factory because the police forces and the fire forces the rest of us paid for….because of the work the rest of us did”. - Elizabeth Warren 09/2011

Warren’s statement is incorrect and the root fallacy of the argument is worthy of investigation. Let us first visit Robert Higgs:


“….some views expressed by Elizabeth Warren and certain politicos of a previous era to the effect that the government has every right to take at least a big chunk of your earnings and, in some expressions, even your entire earnings for purposes the rulers stipulate.

Nearly ten years ago, the great political philosopher Anthony de Jasay wrote a charming little essay related to this matter called “Your Dog Owns Your House.” There, he spells out some of the ways in which such sweeping claims—by your dog or the rulers—are incoherent, absurd, and indefensible, and he sketches how to think more sensibly about the issue.” Why Your Dog Doesn’t Own Your Entire House, and the Government Doesn’t, Either. - Robert Higgs (1)

Higgs points us to Anthony de Jasay’s essay Your Dog Owns Your House:

“How soon, in reading the above [de Jasay basically states the essence of Warren‘s basic argument (as stated above)], did you spot the underlying, crucial fallacy? Its course is a mixture of the plausible and the preposterous, and any reader who gets a little lost in the backing and filling between such opposites has an excuse of sorts for being bemused. However, clearing away the muddle is fairly straightforward provided we refuse to be impressed by verbiage, but stick doggedly to common sense, hard as that may sometimes be to do in the face of the massive browbeating that seeks to enthrone the verbiage.

There is a minor and a major point to recognize. The minor point is that the "framework" is not a person, natural or legal, to whom a debt can be owed, "institutions" do not act, "society" has no mind, no will, and makes no contributions. Only persons do these things. Imputing responsibility and credit for accumulated wealth, current production and well-being to entities that have no mind and no will is nonsense. It is a variant of the notorious fallacy of composition.

Once this is understood, we can move on to the major point. All contributions of others to the building of your house have been paid for at each link in the chain of production. All current contributions to its maintenance and security are likewise being paid for. Value has been and is being given for value received, even though the "value" is not always money and goods, but may sometimes be affection, loyalty or the discharge of duty. In the exchange relation, a giver is also a recipient, and of course vice versa.” (2)

But what about “…marginal productivity and imputation theory undermines the sort of facile claims made by Elizabeth Warren…”? Here Higgs send us to production and exchange:


Production as Indirect Exchange

In our discussion of the Neoclassical theory of pure exchange, we claimed that in order for a household to demand goods, it must obtain purchasing power by the sale of its endowments of goods. Let us now assume that instead of being endowed with "goods", households possess "factors" which provide "factor services" -- such as labor, capital, land and, perhaps, entrepreneurship.

The initial problem with this for a theory of exchange is that factor services are not demanded by other consumers: capital, land, labor, etc. offer no utility reward by themselves and thus are not "demanded" by other consumers. Imagine placing a land-owner and a laborer together: the laborer demands corn, the land-owner demands shoes. What do they offer in return? The land-owner offers land (which gives no utility and thus is not demanded by the laborer) and the laborer offers labor (which the land-owner has no use for). It seems, then, that when people are endowed with factors, they simply cannot trade with each other.

The problem this poses for the Neoclassical theory of value is immediately evident. Neoclassical theory claims that the value of an object depends on its scarcity. An object is scarce if more of it is desired by consumers than is available in the economy. However, on first approximation to a production economy, we encounter the apparent paradox that nothing seems scarce! Factors are limited in availability, that is true, but as they yield no utility, they are not desired by consumers. In contrast, produced outputs yield utility and thus are desired by consumers, but they are not limited in availability (if an output is in short supply, more can always be produced). Thus, it seems as if neither factors nor outputs are "scarce": what is limited in availability is not desired, what is desired is not limited in availability.

So how do we get out of this dilemma? The answer is quite simple: production. The basic principle is that "[t]he demand for commodities is indirectly a demand for factors of production." (G. Cassel, 1918: p.90). Someone may demand shoes, but, in order to do so, they are effectively demanding the labor of a shoe-maker and the capital services of his shoe-making tools. Therefore, via production, commodity demands translate into factor demands. Equivalently, factors are demanded solely because of the commodities they produce. In other words, factors are demanded not for their intrinsic worthiness to the other consumers, but rather because they can be converted to consumable goods via production, and it is these utility-yielding goods which are desired by consumers.


To use the felicitous phrase made famous by J. Trout Rader, production is indirect exchange. Our earlier landowner and laborer can exchange their land and labor "indirectly" with each other via the production technology which converts those factors first into corn and shoes. As L�on Walras suggests, one can "abstract from entrepreneurs and simply consider the productive services as being, in a certain sense, exchanged directly for one another instead of being exchanged first against products and then against production services." (Walras, 1874: p.225).


With the exchange problem resolved in this way, the implications for value theory are immediately evident: what is desired (outputs) bears down on something that is limited in availability (factors). Production is the intermediary element: it translates consumers' desires for goods into a desire for factors. But this is only half the story. The other half is that the limited availability of factors makes outputs limited in availability. Thus, production solves both sides of the problem: factors now have value because more of them are desired than are available; outputs have value because they have now become limited in supply.

"Prices are paid for the factors of production in accordance with the general principle of scarcity, because it is necessary to restrict demand for them in such wise that it can be met with the available supplies. The costs of production of a commodity are, from this standpoint, simply an expression of the scarcity of those factors of production required to make it."
(G. Cassel, 1918: p.168).

This idea is so important that we ought to baptize it and restate it as follows:

Neoclassical Principle of Value in Production:
(1) Factors have a price because the goods they produce are demanded by consumers. If a factor produces goods which are not demanded, then that factor will have no price, no matter how rare that factor is.
(2) Produced goods have a price because the factors which go into their production are limited in availability. If the factors which produce a good are infinitely abundant, the resulting good will not have a price no matter how desired that it is.” (3)

Now returning to Higgs:

“Set aside for the moment the not-inconsiderable difficulty that if each has a just claim on everything you earn, all together they have a claim on a large multiple of everything you earn. For present purposes, however, let’s forget about Fido and lump all of the others together, again à la Warren and Co., as the “government,” whose contribution to your earnings is essential and therefore warrants a claim on everything you earn.

Even with this generous concession, a major difficulty remains: absent your effort, your earnings would also have been zero, notwithstanding the government’s contribution of all the infrastructure and protective services emphasized by Warren and others. No work, no product, no earnings. And you did, after all, do the work.

The error here is an old one in economics. It once plagued economists in their attempts to explain the distribution of the social product between suppliers of the various factors of production—land, labor, capital, and so forth, depending on the precise specification of factors. The puzzle was finally solved, more or less, by something known as the marginal productivity theory of distribution.

The operative word is marginal. Here, as in so many other places where erroneous economic reasoning crops up, the mistake comes from all-or-nothing thinking. In our case, no dog, no house; no fire department, no earnings; no police force, no earnings; and so forth, including, please recall, no work, no earnings. To make headway one must recognize that many inputs of services contribute jointly to the production of a good or service. But it is absurd to suppose that because each of them is essential—in the sense that if it were completely withdrawn, no product would be produced—each of them has a valid claim to the entire output.

The marginal productivity theory of distribution maintains that if each factor supplier is paid the value of the marginal product of the factor service provided, each will be rewarded in accordance with a coherent concept of the extent to which his factor supply accounts for the output, and together the rewards received by all factor suppliers will add up to exactly the amount of the output produced by the joint efforts of all. (This theory work perfectly only under the assumption of a particular production technology, known as constant returns to scale, but that difficulty does not invalidate completely the basic idea the theory expresses, especially in regard to marginal productivity as the key concept.)


This sort of explanation is known in economics as imputation theory. Among other things, it explains why factor values depend on (are “imputed” from) consumer valuations of final outputs, not vice versa, as the classical labor theory of value and other theories maintain.

In any event, an understanding of marginal productivity and imputation theory undermines the sort of facile claims made by Elizabeth Warren, leading politicos associated with the New Deal, and all too many others, both inside and outside the political apparatus. Of course, if the rulers can’t claim that they deserve everything you’ve earned by using this sort of bogus reasoning, they’ll surely come up with another equally bogus reason for doing what all rulers and their stooges seek to do—to plunder you to the fullest feasible extent."(4)





(1) Why Your Dog Doesn’t Own Your Entire House, and the Government Doesn’t, Either. - Robert Higgs, 01/06/2012

(2) Your Dog Owns Your House - Anthony de Jasay, 04/22/2002


(4) Why Your Dog Doesn’t Own Your Entire House, and the Government Doesn’t, Either. - Robert Higgs, 01/06/2012








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