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An Agent-Based Approach to Value Theory and Wealth Distribution in Economics

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An Agent-Based Approach to Value Theory and Wealth Distribution in Economics An Agent-Based Approach to Value Theory and Wealth Distribution in Economics 1Brett Parris 1Department of Econometrics & Business Statistics, Monash University. E-Mail: [email protected] Keywords: value; distribution; price theory; agent-based modelling; ethics. EXTENDED ABSTRACT firms’ pricing decisions, ignoring money and credit, and perfectly rational agents with infinite Any attempt to model an economy requires computational capacity. Two critical areas include foundational assumptions about the relations firstly, the underappreciated Sonnenschein-Mantel- between prices, values and the distribution of Debreu results which showed that the foundational wealth. These assumptions exert a profound assumptions of the Walrasian general-equilibrium influence over the results of any model. model imply arbitrary excess demand functions Unfortunately, there are few areas in economics as and therefore arbitrary equilibrium price sets. vexed as the theory of value. I argue in this paper Secondly, in real economies, there is no that the fundamental problem with past theories of equilibrium, only continuous change. Equilibrium value is that it is simply not possible to model the is never reached because of constant changes in determination of value, the formation of prices and preferences and tastes; technological and the distribution of income in a real economy with organisational innovations; discoveries of new analytic mathematical models. All such attempts resources and new markets; inaccurate and leave out crucial processes or make unrealistic evolving expectations of businesses, consumers, assumptions which significantly affect the results. governments and speculators; changing demand for credit; the entry and exit of firms; the birth, There have been two primary approaches to the learning, and death of citizens; changes in laws theory of value. The first, associated with classical and government policies; imperfect information; economists such as Ricardo and Marx were generalized increasing returns to scale; random substance theories of value, which view value as a acts of impulse; weather and climate events; substance inherent in an object and which is changes in disease patterns, and so on. conserved in exchange. For Marxists, the value of a commodity derives solely from the value of the The problem is not the use of mathematical labour power used to produce it - and therefore any modelling, but the kind of mathematical modelling profit is due to the exploitation of the workers. The used. Agent-based models (ABMs), object- labour theory of value has been discredited oriented programming and greatly increased because of its assumption that labour was the only computer power however, are opening up a new ‘factor’ that contributed to the creation of value, frontier. Here a dynamic bargaining ABM is and because of its fundamentally circular outlined as a basis for an alternative theory of argument. Neoclassical theorists argued that price value. A large but finite number of heterogeneous was identical with value and was determined commodities and agents with differing degrees of purely by the interaction of supply and demand. market power are set in a spatial network. Returns Value then, was completely subjective. Returns to to buyers and sellers are decided at each step in the labour (wages) and capital (profits) were value chain, and in each factor market, through the determined solely by their marginal contribution to process of bargaining. Market power and its production, so that each factor received its just potential abuse against the poor and vulnerable are reward by definition. Problems with the fundamental to how the bargaining dynamics play neoclassical approach include assumptions out. Ethics therefore lie at the very heart of concerning representative agents, perfect economic analysis, the determination of prices and competition, perfect and costless information and the distribution of wealth. The neoclassicals are contract enforcement, complete markets for credit right then that price is the enumeration of value at and risk, aggregate production functions and a particular time and place, but wrong to downplay infinite, smooth substitution between factors, the critical roles of bargaining, power and ethics in distribution according to marginal products, firms determining those same prices. always on the production possibility frontier and 1077 INTRODUCTION profit is due to the exploitation of the workers, who were not given the full reward for their Any attempt to model an economy requires labour. The labour theory of value has been foundational assumptions about the relations discredited because of its assumption that labour between prices, values and the distribution of was the only ‘factor’ that contributed to the wealth. These assumptions are often made at the creation of value, and because of its fundamentally beginning of the modelling exercise, with little circular argument: How is the ‘true’ value of thought to their import, yet they exert a profound labour determined? By the value of production. influence over the results of any model. And what is the ‘true’ value of production? The Unfortunately, there are few areas in economics as value of the labour ‘embodied’ in the product. vexed as the theory of value. The titanic struggles between schools of thought descending from Neoclassical theorists took a completely different Smith, Ricardo, Marx, Keynes, Sraffa and modern approach, arguing that price was identical with neoclassicals, all revolved, to a greater or lesser value (unlike substance theories where price could extent, around the problems of the theory of value. diverge from ‘true’ value). Price moreover was determined purely by the interaction of supply and The economic literature is replete with analytic demand. Value then, was completely subjective, models from the different traditions which tweak existing only in the eye of the consumer. Returns one or two assumptions of the dominant model, to labour (wages) and capital (profits) were and then show that these changes can significantly determined solely by their marginal contribution to alter the model’s predictions. If however, the goal production, so that each factor received its just is to produce an economy-wide model which, as reward by definition. So the identity Y = wL + rK, far as humanly possible, corresponds to the real where Y = total value of production, L = total economy, a key objective must be to replace any labour and K = total capital, assumed w, the wage ∂ ∂ ∂ ∂ grossly unrealistic assumptions which significantly rate = Y/ L and r, the profit rate = Y/ K. affect the results, with ones that more closely reflect what we know of the economic system. Problems with the neoclassical approach include Replacing all of the most ‘unrealistic’ foundational assumptions concerning representative agents assumptions in an analytic model at once though, (Kirman, 1992), perfect competition, perfect and is impossible, because the model usually becomes costless information and contract enforcement and completely intractable. I argue in this paper complete markets for credit and risk (Greenwald & therefore that the fundamental problem with past Stiglitz, 1986; Stiglitz 2002); aggregate production theories of value is that it is simply not possible to functions and infinite, smooth substitution between model the determination of value, the formation of factors (Felipe & Fisher, 2003); distribution prices and the distribution of income in a real according to marginal products (Pasinetti, 2000); economy with analytic mathematical models. All firms always on the production possibility frontier such attempts leave out crucial processes or make and firms’ pricing decisions (Blinder et al. 1998; unrealistic assumptions which significantly affect Lee, 1996); ignoring money and credit (Dillard, the models’ results. These irreducible difficulties 1988); and perfectly rational agents with infinite with traditional analytic mathematical economic computational capacity (Radner, 1968; Conlisk modelling, suggest that agent-based simulation 1996). The list could go on (see Lee & Keen, 2004 models offer the most promising way forward. for an overview), but here I will concentrate on just two areas. 1. CONTROVERSIES IN THEORIES OF First, one of the most important results to emerge VALUE AND DISTRIBUTION from the detailed study of the Arrow-Debreu general equilibrium model, was the discovery by There have been two primary approaches to the Sonnenschein (1972, 1973), Mantel (1974, 1976) theory of value, neither of which is entirely and Debreu (1974), of some deeply worrying satisfactory. The first broadly labeled, substance properties of aggregate excess demand functions – theories of value, view value as a ‘thing’, a termed the SMD results after the authors. Kirman substance inherent in an object which is conserved and Koch (1986), Kirman (1989), Mirowski in exchange (Mirowski, 1989a). Manifestations of (1989a), Rizvi (1994) and Saari (1995) discuss the the substance theory appear in various cost of SMD results in detail, showing that the production theories, where price reflects the cost of foundational assumptions of the Walrasian production, to the labour theory of value, codified general-equilibrium model imply arbitrary excess by David Ricardo and used by Karl Marx as the demand functions and therefore arbitrary lynch-pin of his system. For Marxists, the value of equilibrium price sets. a commodity derives solely from the value of the labour power
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