Wednesday, March 4, 2015

The Abstinence Theory of Value

"Exactly a year before Nassau W. Senior discovered at Manchester, that the profit (including interest) of capital is the product of the last hour of the twelve, he had announced to the world another discovery. 'I substitute,' he proudly says, 'for the word capital, considered as an instrument of production, the word abstinence.' It has never occurred to the vulgar economist to make the simple reflexion, [Marx continued n a footnote:] that every human action may be viewed, as 'abstinence' from its opposite. Eating is abstinence from fasting, walking, abstinence from standing still, working, abstinence from idling, idling, abstinence from working, &c."
Some hundred and twenty years later, in The Anti-Capitalist Mentality, Ludwig von Mises was still beating that hollow "abstinence" drum, crediting what he termed "the three progressive classes" of savers, inventors and entrepreneurs with sole responsibility for driving social evolution from savage cave dwellers to modern industry. 

In what von Mises described as a monumental work, the wily Eugen von Böhm-Bawerk, concocter of the supposed "transformation problem," dispatched Senior's abstinence theory in 1884, albeit with abundant regard toward its supposed excellence and deep insight. I suppose some double counting is cleverer than others. After exposing the fallacy of Senior's abstinence theory, von Böhm-Bawerk risked being more than a little tedious in substituting an even neater sophism in which "pain cost" and "opportunity cost" perform a rather unlikely pas de deux:
If I lay out a sum of money, say £30, for any one useful end, my sacrifice is calculated simply by the gratification which I might have got by spending the £30 in other ways, and which I must now do without.

It is otherwise with the sacrifice of labour. Labour presents two sides to economical consideration. On the one hand it is, in the experience of most men, an effort connected with an amount of positive pain, and on the other, it is a mean to the attainment of many kinds of enjoyment. Therefore the man who expends labour for a definite useful end makes on the one hand the positive sacrifice of pain, and on the other, the negative sacrifice of the other kinds of enjoyment that might have been obtained as results of the same labour. The question now is, Which is the correct way, in this case, of calculating the sacrifice made for the concrete useful end?
Herr von Böhm-Bawerk solved his own transformation problem adeptly with an example in which the pain cost of work was 10, the opportunity cost of the fish that might have been caught was 15, but the opportunity cost of shooting three hares was only 12  And voila! Here is the rabbit (or hare? or fish?) that nimble Eugen pulled out of his sportsman's cap:
What our fish really cost us now is not the positive labour-pain expressed by the number 10—for this we should have undergone at any rate—but the negative loss of an enjoyment which we might have had, indicated by the number 12.
Ten units of what?, you may wonder. Don't ask. All one needs to keep in mind is the non-equivalence between the pain cost of the labour and the opportunity cost of the enjoyment of the results of the labour and therein lies the secret and source of the potentially infinite expansion over time of the opportunity cost of postponing consumption.

No double counting here! "But of course we must never calculate the want of enjoyment and the pain of labour cumulatively..." But of course! Who needs to double count if we can count labour in units of pain and the results of labour in a different number of different units?

I'll give you a million for that.

A million what?

Never mind what, a million is a big number.