Co-state variables...

Brad De Long delong at econ.Berkeley.EDU
Wed May 13 08:03:03 PDT 1998



>
>Deciphering the fetishism that can declare 'nature and capital scarcity
>are the
>sources of exchange value' is more a task for a cultural anthropologist, say
>Marvin Harris who studied the magic and ritual of the Yanomami, than a
>Marxist.
>

Would you be happier if I said that market prices in a competitive economy (that is, "exchange value") are the values of the co-state variables that appear in the Lagrangian for the economic problem of arranging production and distribution so as to maximize the chosen welfare function?*

*Where the welfare function is "chosen" by the society's

distribution of income and wealth: the greater your income

and wealth, the greater weight your preferences have in

determining the shape of the welfare function that the

competitive market economy tries to maximize. For this

reason most--liberal--economists think that if you take

care of the distribution of income and wealth (and

externalities, and monopoly) that most other economic

good things will take care of themselves.)

Market prices in a competitive economy ("exchange values") *are* indicators of scarcity: they carry information about the money-metric utility of that particular commodity or resource in its most favorable alternative use. This is one of the two key reasons that markets appear to be very flexible and "efficient" mechanisms for allocating production and distribution (but if the distribution of wealth is wrong, or if externalities or monopoly are rife, then they will flexibly and efficiently carry you to the wrong destination).

The second key reason is that the possibility of bankruptcy appears better than alternatives in enforcing "sunset" on inefficient and unproductive organizations. Certainly neither bureaucracy nor politics are very good at closing down organizations that have outlived their usefullness. As former Undersecretary of Commerce Ev Ehrlich once said, "It is a good thing we didn't have the Federal Government around 3,000 years ago. We would still have 4,000 people down on the Mall working in the Department of Hunting and Gathering."

But I digress...

Brad DeLong



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