Reference no: EM133395895

Question: The core of political economy revolves around two related axes: (1) a theory of value, and (2) a theory of distribution. The first (a theory of value) attempts to explain what determines value and where value comes from. Why does good X have a higher value than good Y and what determines this relationship? How can we take all of the qualitatively different kinds goods produced by society and compare them along a quantitative spectrum? Early economists like Adam Smith and David Ricardo developed a Labor Theory of Value. Their position was that human labor was the source of value. The amount of labor embodied in a particular good determined its value. A good that took more labor hours to produce would be valued more highly than a good that took fewer labor hours to produce (taking account of differences in the skill and intensity of labor). Later, Karl Marx made use of the labor theory of value to argue that capitalist's profits were derived from the exploitation of labor (via unpaid hrs of labor). In an effort to defend the capitalist system from this kind of critique, proponents of the capitalist class sought to remake economic theory on an alternative foundation. The result was a Utility Theory Value and surrounding it the approach known as neoclassical economics. The utility theory of value argues that value is subjective. In other words, value is in the eye of the beholder. It is determined by individual preferences. This is the theory that dominates today and the one we examined last week. By contrast modern heterodox economists follow either a labor theory of value or a variation known as a cost of production theory of value.

Closely related to a theory of value is a theory of distribution. The question of distribution is this: how does the pie of economic output get sliced up and divided amongst different groups in society as shares of income? What rules and norms govern who gets which slices and how much? Rather than explaining the divergent theories on this topic, I want to hear what you think. Nearly everyone has a theory of distribution whether or not they know it. The easiest way to discover your own theory of distribution is to answer the following questions:

(1) Why are there rich people? Why are the rich rich?

(2) Why are there poor people? Why are the poor poor?

(3) What determines how much money someone makes?