Principles of Microeconomics Scarcity and Social Provisioning Chapter 8 Challenging the Role of Utilitarianism

CHAPTER . CHALLENGING THE ROLE OF UTILITARIANISM THE ROLE OF VALUE ( IN THE ECONOMICS DISCIPLINE CHAPTER OBJECT ES In this chapter , you will learn about Value Theory in Economics Value as it is Defined by Orthodox Economics The Relationship between Utilitarian Philosophy and the Economics discipline . Critique of the Utilitarian Approach . The Application in Economics of Philosophies other than Utilitarianism .

ECONOMICS AND VALUE LEARNING OBJECTIVES By the end of this section , you will be able to Define the term value . Identify different interpretations of the term value . he term value and the concept of value theory have taken on two distinct definitions in tion to economic theory . The first definition of the term value pertains to the role of normative analysis within economic theory . As discussed in chapter , for orthodox economic thinkers there is little room for normative thinking in the rigorous world of scientific economics . Subjective or moral judgments are discouraged in favor of utilizing a positive , approach that is not a statement of anyone value judgment or subjective feelings , but rather of what By the standard orthodox textbook definition , the term value relates to personal biases and subjective beliefs . Also , recall from Chapter , the positive versus normative conflict presented by orthodox economics resents a false dichotomy . As has been discussed by economic theorists , subjective tend to be present in all economic paradigms and are unavoidable . The second definition of value that is common in economics is the one most people think of when they think of the term For most people when they think of the value of something , such as a product , they are simultaneously thinking of the price of that product . Therefore , the term value and the term price tend to be used interchangeably . As a result , for many economists it is important to develop a theory of value because the theory of value provides the theorist with a sense of the origin of prices . After all , if an economist can identify the root source of value , then the same economist will also understand the root origin of prices . Since prices are incredibly important informational signals , being able to explain from where prices originate adds an important depth to economic theory . On the surface both of the term value , as described above , appear to be mutually exclusive . However , closer inspection reveals two interrelated issues . Scientists , economists included , already tend to , whether knowingly or unknowingly , assert subjective values within their theories . Values not only generate a necessary entanglement of facts and values , but they then become present throughout the very act of theorizing . In the case of economics , this means that the economic ideas that theorists present will include elements of their basic worldview or , as some would say , their philosophy . The remainder of this chapter is laid out in such a manner as to explore the role of philosophy in economics . First , the philosophical foundation of orthodox economics , and its history , is explored . As will be shown , orthodox economics relies upon utilitarian philosophy for its

246 ERIK DEAN , JUSTIN , MITCH GREEN , BENJAMIN WILSON , AND SEBASTIAN BERGER standing of human action and motivation . As such , orthodox economics believes that the concept of utility holds the key to understanding the origin of prices . Additionally , utilitarianism forms the basis for the ethical perspective presented by orthodox economics . Upon closely examining the orthodox story of utility , the chapter moves on to identify important limitations that develop as a result of the use of utility . The chapter then moves on to provide alternative examples from heterodox economics , pointing out philosophical outside of utilitarianism that can form the basis of economic thought . Importantly , the alternative approaches presented do not suffer the pitfalls that are present within the orthodox , utilitarian approach .

LEARNING By the end of this section , you will be able to Identify the history of utility and its relationship to economic ideas . Define Contrast Adam Smith with regard to their View of utility . Contrast cardinal and ordinal utility Define revealed preference theory or those interested in the study of economics the concept of utility has a long history . Going back to the time of antiquity , great thinkers such as Aristotle made reference to the importance of the creation of . From an Aristotelian standpoint is the idea that human material production ought to be directed toward the creation of things that benefit human beings . Aristotle prioritized usefulness and discouraged wastefulness . The role of the utility theory of value as a central component of the preferred ideological vision of orthodox economists of today , in some ways dates back to the time of Adam Smith . Smith , ing the Aristotelian line of thinking , also saw significance in the concept of . The idea that the value of an object is based on how useful the product is to the consumer . Products have an intrinsic value to their consumers . For Smith though , represented the perceived benefit that people would derive from sumption . For Smith , consumers would be more apt to buy products that they perceived as useful as opposed to products that they believed are not useful . Still , Smith analysis remains a long way from how utility is utilized by orthodox economists . Although Smith does not go into much further development beyond his acknowledgement that attach some kind of to useful items , it is clear that Smith opens the door to the potential development of the idea that utility plays a role in determining the prices of products . sider , if utility , or , is important to consumers , then , presumably , utility must play a role in determining consumers interest in purchasing a product . Because consumer demand is a tion of consumer purchasing interests , consumer demand will be essential to the determination of the prices of products . It is with the evolution of economic ideas in the century that the relationship between utility and prices is cemented within orthodox economic thought . In order to understand the role of utility in contemporary orthodox economics , the place to begin is

243 ERIK DEAN , JUSTIN , MITCH GREEN , BENJAMIN WILSON , AND SEBASTIAN BERGER with the early century philosopher and political economist Jeremy . possibly had the most prominent on the philosophical development of utility . perspective is known as utilitarianism . describes utility as the cornerstone of the Greatest Happiness In usage , utility evolves beyond a description of usefulness into the ment of happiness . Utilitarianism espouses the belief that people are pleasure and pain . Therefore , any action that a person engages in must be driven by the desire either to gain happiness or to reduce pain . Taken to the field of economics , in view , people desire products because those products bring the person happiness . Clearly , perspective had a profound effect on orthodox economics , given the many references that this textbook has made in Chapters and to consumers being driven to maximize their utility . story , for all of its applicability to contemporary orthodox economics , is still only a partial analysis . One area in which argument is incomplete is in his treatment of the measurability of utility . When describing how a consumer may assign utility to a product , freely employed both cardinal and ordinal measures of utility . Cardinal utility Is the idea that the utility a consumer assigns to a product is objective and , therefore , measurable . Ordinal utility Is the idea that the utility that a consumer assigns to a product is subjective , in the mind of the consumer , and is , therefore , not directly quantifiably measurable . As a rule seemed to generally acknowledge ordinal utility as being conceptually sound in comparison to cardinal utility . understood that cardinal utility can not be objectively , a person can not be attached to a device that measures units of happy ( There are , ever , indirect measures that can allude to cardinal utility , such as the order in which consumers purchase products . Given two products with an identical price , if a consumer purchases one of the products prior to the other , it stands to reason that the first product purchased retain greater utility than the second product . Regardless , in absolute terms , how much utility a consumer actually assigns to a product can not be empirically measured , rendering it subjective to the consumer . Limitations aside , frequently developed examples that required cardinal measures of utility . Another area in which analysis was incomplete pertained to the relationship between ity and the origins of prices of products . Recall the principle of diminishing marginal utility described in Chapter . anticipates the idea of diminishing marginal utility by describing instances in which a person can acquire more of something but feel less satisfaction from the additional unit than they received from earlier units . depiction , however , remains abstract rather than ing scientifically concrete . Resolving some of the incomplete features of story are the of the . pendent of one another , a group of thinkers triggered what is now referred to as the . The famously apply differential calculus to utility analysis . Differential calculus focuses on rates of change between two variables . In the case of utility , differential calculus can be used to tell a story about how , as a consumer consumes more of a product , the happiness derived from that product will change . The attempted to demonstrate , in a more concrete way , the idea that as more of something is consumed , the satisfaction or utility per unit would decline . By applying calculus , and drawing pictures to reflect the conclusions drawn from the mathematical , the create the appearance of a scientific advancement in the study of utility in

PRINCIPLES OF ECONOMICS 249 Figure . Portrait of Jeremy ( Source Wellcome Images , economics . In terms of legacy , the use of calculus is a hallmark of modern orthodox nomic theory . As much as the the apparatus of modern orthodox economics , their analysis still remained incomplete in that the do not resolve the issue of ordinal versus cardinal utility . It is not until the century that orthodox economic theorists settle on the use of ordinal utility as the foundation of their measurement of utility . The thinker most responsible for solidifying ordinal utility place within economics is Paul . Paul develops a theory known as Revealed Preference . On the surface , revealed preference theory articulates the idea that the amount of utility that any one person derives from the consumption of a product is purely subjective to the consumer in question . However , once a consumer identifies that which brings them the greater happiness , the consumer then reveals their preferences to everyone by consuming the product that they desire . In this respect , revealed preference theory seeks to quantify utility by identifying utility as a consequence of a consumer actions . THE APPLICATION OF UTILITARIAN WITHIN ORTHODOX ECONOMICS AND ITS IMPLICATIONS Whether an unwitting or a conscious choice , utility continues to be the preferred philosophical ing point for contemporary orthodox economists . Utility also carries with it a specific interpretation of human actions and interactions . Recall , for orthodox economics , the human being is a hedonist continually in search of greater pleasure or diminished pain . Any socially determined tics are given ( not analyzed , merely accepted ) yielding an isolated utility maximizer . Also , recall , that this notion of a hedonistic person is deeply controversial with respect to its application in . There simply does not exist irrefutable evidence that individuals only pursue products because

250 ERIK DEAN , JUSTIN , MITCH GREEN , BENJAMIN WILSON , AND SEBASTIAN BERGER those products provide the individual with pleasure . Human motive can be defined in many ways with hedonism being just one of many interpretations . Regardless of its accuracy or inaccuracy , orthodox economists perceive that , for individuals , utility is maximized through the act of exchange . At any particular point in time , an individual , possessing an initial endowment ( income ) begins engaging in the act of exchange with some other individual nomic agent . As all exchanges are assumed to be voluntary , any exchange that two parties are ing to engage in must be an exchange that will make both parties better off , otherwise neither party would engage in the exchange . Because being made better off means , according to orthodox nomic theory , acquiring more utility , the act of exchanging is the act increasing one holdings of ity . Any and all exchanges then must be increasing individual , and subsequently , society total utility . Presumably , once some kind of round of exchanges is complete , any and all parties that engaged in exchanges are now better off because now they have more utility as a result of their exchanges . Of course , no one really knows whether or not the result of these exchanges really has made the better off or worse off because there is no device that measures utility . Utility is purely and , which means that the revealed preference argument yields an outcome in which it must be assumed that all exchange participants are made better , otherwise they would not have participated in the exchange . Assuming people are better off does not mean that people are ally better off . use the idea that the value of an object is based on how useful the product is to the consumer . have an intrinsic value to their consumers cardinal utility the idea that the utility a consumer assigns to a product is objective and , therefore , quantifiably measurable ordinal utility the idea that the utility that a consumer assigns to a product is subjective , in the mind of the , and is , therefore , not directly quantifiably measurable

UTILITY AND THE ORTHODOX ECONOMIC VIEW OF SOCIAL WELFARE LEARNING By the end of this section , you will be able to Define Explain how orthodox determines the conditions for societal to be maximized . Analyze the ethical issues surrounding . or orthodox economists the ideal outcome for an economy is an outcome in which is achieved . The concept of owes its origins to a century Italian mathematician . Stated simply , the criterion for determining whether an economy has produced the best or ideal outcome is fulfilled when economic outcomes are such that there is no way to make any one or many people better off without making any one person or many worse off . On its own the criterion for social is an attractive proposition . After all if someone is harmed in order to improve the plight of someone else or many others , then it appears obvious that someone is being granted preferential treatment at the expense of someone else or many others . The granting of preferential treatment hardly seems fair or equitable . In this context , the utilization of the criterion eliminates the need to make those choices . Additionally , the granting of preferential treatment opens the door to a long series of ethical questions that can be avoided by applying the criterion . On what basis is the decision to harm or benefit being made ?

How or when are interventions that inflict harm or bestow benefits decided ?

If an does take place , who is making the decision to harm or bestow benefits ?

What is the degree of harm or benefit triggered by an intervention ?

What is the ethical basis for intervening ?

In many ways , whenever a government must make budgetary decisions , it is asking and answering these questions . For example , perhaps government would like to expand the size of the military . Expanding the size of the military requires that the government finance the expansion of the military . Financing military expansion may require that other government spending programs be reduced . Alternatively , perhaps taxes will be raised to pay for the military expansion . Either way , whomever is responsible for financing the military expansion is directly paying for someone else to benefit . In defense of expanding the military , may have to justify to the public why the public will , presumably , benefit from the expansion of the military . The criterion appears to clearly answer these questions . If a society knows when it is in a position of maximum benefit , then ,

252 ERIK DEAN , JUSTIN , MITCH GREEN , BENJAMIN WILSON , AND SEBASTIAN BERGER on the basis of the criterion , no justification can be made to either harm or benefit anyone , causing all of the above questions become moot . Something important has now been revealed . The criterion only becomes applicable when there is a measure of what it means for someone , or many , to benefit and for someone , or many , to be harmed . If some kind of metric exists , then , once measured , a society will know when no one person or many can be made better off without someone or many being harmed . Therefore , what is essential to the criterion is the mechanism a theorist uses to measure and determine a society overall well being . For orthodox economists , the measure of individual and social is the amount of utility that individuals and society has derived . UTILITY MAXIMIZATION AND OPT ETHICAL IMPLICATIONS Given the nature of utility maximization , human social interaction is reduced to exchange between individuals . Clearly the utility assumption generates a distinct depiction of human beings , human needs , and human society . The utility maximizing assumption also generates a specific conception of what is an economically just society . In other words , orthodox economics has a specific view of what it believes is the best way for society to be organized economically . The orthodox worldview can be neatly summarized . If people desire utility , then people can acquire utility by exchanging with others . Once people exchange with others , the act of exchanging makes them better off . Once all exchanges are complete , all people are as well off as they can become . If everyone is as well off as they can become , then no one , or many , can be made better off without someone , or many , being made worse off . As far as orthodox economics is concerned , has reached its ideal , optimal , outcome because people were free to make choices within an economy that facilitates exchanges , namely a market based economy . At this point it should be clear that utilitarianism provides the philosophical foundation supporting orthodox economics while represents the final outcome of the orthodox social fare theory . If utility is the initial proposition on which orthodox theory is built , and ity is the culmination of orthodox economic theory , then the utility and must be intrinsically linked . The dilemma for orthodox economics is that by accepting the utility theory of value and adopting the criterion as a social welfare measure , orthodox economics produces a very specific , and limited , framework . For example , by focusing exclusively on the point of exchange , orthodox economics tends to ignore situations in which people are in disagreement with one another , stances of . The reason why is generally ignored is because the conditions of exchange are assumed in advance . For orthodox economics , the institutions of exchange , such as markets , tract law , and contract enforcement , are assumed to be in place prior to economic agents exchanging . Additionally , by assuming that initial endowments are given , orthodox economics assumes the of income on the part of trading parties , but generally fails to recognize where income nates . The trouble for orthodox economics is that it is not hard to imagine a world in which ones income is affected by discriminatory factors such as racism , sexism , sexual orientation or any other divisive perception . In fact , imagination is not necessary , as the real world is filled with examples of and exploitation . Regardless of form , the outcome of discrimination is the same , some are able to exploit others by virtue of their power to discriminate . Or , in another example , it is clear that

PRINCIPLES or ECONOMICS 253 conditions of inequality can empower some relative to others . People that disproportionately benefit from economic outcomes are endowed with more income and have the power to acquire resources . In instances in which the acquisition of resources becomes concentrated in the hands of a small ber of people , those with great wealth or income may have the power to exploit their positions of power at the expense of others . Of course , with exploitation , conditions of inequality may be allowing unequal situations to become further entrenched . Conscientious observers of a capitalist market system , including , are aware that situations of exploitation are not only present , but virtually unavoidable . Given the existence of and inherent disparities of power , it is easy to imagine that someone might want to intervene in economic affairs in order to level the playing field . For example , someone might advocate to pass laws to discriminatory behavior so as to reduce its prevalence , or others might seek to impose taxes on some so as to redistribute income or wealth in the hopes of reducing inequality . The interventions in questions would certainly be designed to make someone , or many , better off at the expense of one else , or many others . As a result , no matter how justified the interventionist actions may be , and they are certainly justifiable in the examples provided above , within the utilitarian and context the interventionist actions can not be supported ! If the significance of utilitarianism and the criterion remains obscure , then perhaps less abstract and much more obvious examples may be useful . The following situations , using subjective measures of utility , are and can not be justified . The defeat of Nazi Germany because Adolf Hitler was made worse off . The end of slavery in the American South because slave owners were made worse off . Clearly , to any reasonable observer the defeat of Nazi Germany and the end of slavery in the American South are justifiable as they ended horrible chapters in human history . However , by following the utilitarian belief and coupling it to the criterion , orthodox economics can not really make any argument to defend the destruction of Nazi Germany and the conclusion of slavery in the American South . Subjectively speaking , Hitler loss of utility may have more than offset the worlds gain in ity and thus made the world worse off . Or , subjectively speaking , the loss of utility to slave owners in the South may have more than offset the gain in utility experienced by the former slaves . After all , if no quantifiable measure is possible it is actually impossible to know whether or not total ity has become larger or smaller so there is no way for a utilitarian to justify an intervention in the above , albeit extreme , cases . Additionally , any intervention in the above cases required someone or many being made worse off in order to make some or many better off . The utilitarian tradition has no adequate way of applying anything more than some kind of hedonistic , happiness seeking , value ment to human action . Obviously , there are serious moral and ethical weaknesses associated with the acceptance of utilitarianism . In summary , the significance and implications of accepting utility , appears to elude most orthodox economists . neoclassical theory price and utility are equalized , specifically price and marginal utility . Therefore , price equals value and this concludes the story . The neoclassical simplification of value theory , which treats value and price as synonyms , fails to recognize that by believing in utility , the orthodox economist is believing in a set of value judgments . The importance of this point can not be overstated . Observe the significance of prices in a capitalist as described in this textbook . Marveling at how consumers and producers respond to price changes in markets the textbook states

254 ERIK DEAN , JUSTIN , MITCH GREEN , BENJAMIN WILSON , AND SEBASTIAN BERGER adjustments in response to price changes happen all of the time in a market economy , often so smoothly and rapidly that we barely notice them . both the economy and the world economy as a whole , markets that is , demand and supply are the primary social mechanism for answering the basic questions about what is produced , how it is produced , and for whom it is ( 71 ) Because prices send the signals that determine the allocation of resources in a market economy , and the allocation of resources has tremendous social ramifications , then the question of whether or not the allocation of resources is socially just must be addressed . Because value theory provides the foundation for which the quantitative origin of prices , it is value theory then that also provides the basis for the normative criterion from which prices and the allocation of resources may be . Clearly , the choice of value theory is extremely important . Unfortunately , for orthodox economics , the normative implications of the utilitarian assumption lay dormant . As economists are well aware , value theory acts as a cohesive , it is the glue that economic theory to a society moral and ethical norms . Any complete theoretical depiction of economic interaction necessarily requires a theory of value . As such , it is important to on what values have been adopted by a theory and how those values impact how economic outcomes are interpreted . Given the importance of value theory , the one dominant proposition presented throughout this paper is that it is absolutely necessary for any economic theorist to anchor their ideas to a theory of value . Within this context , however , the utility theory of value presents orthodox economists with a dual horned dilemma . To accept utility as the basis for their analysis means that orthodox economists are implicitly valuing any and all market driven economic outcomes , regardless of the negative impacts that those outcomes may have on large segments of the society . To the contrary , to argue against any and all market outcomes as just , an economist , orthodox or wise , necessarily must begin their theorizing applying a different set of values outside of the value of endless hedonism that is central to utilitarian beliefs . GLOSSARY ( the criterion ) when economic outcomes are such that there is no way to make any one or many people better off without making any one person or many worse off

ABANDONING THE NORMATIVE CONSTRAINTS OF UTILITARIANISM LEARNING By the end of this section , you will be able to Explain the basic elements of Sen Capabilities approach Define capabilities and Explain the Labor Theory of Value and its implications the limitations and challenges associated with utilitarianism , many students of seek out alternative approaches for measuring economic and interpreting the societal implications of economic outcomes . The following describes , two alternative , approaches for interpreting economic conditions . TWO NORMATIVE EXAMPLES FROM HETERODOX ECONOMICS ABANDONING UTILITY THE CAPABILITIES APPROACH AND THE ETHICAL CONSIDERATIONS OF SEN Where do the seeds of discontent sprout ?

In 1998 Sen was awarded the Nobel Prize in economics . Sen is a fascinating case study as he provides an example of an economist who is not a utilitarian . Early in his career Sen had abandoned utilitarianism . What prompted Sen to abandon utility as a first principle ?

The answer to this question can be found at the beginning of Sen career when Sen encountered a utilitarian tradition in economics that had shed nearly all the conventional characteristics of ethical analysis . While the early century utilitarian thinkers such as had identified and described some of the ethical issues surrounding the idea of diminishing marginal utility , by the late century utilitarianism in economics had been reduced to revealed preference theory . For Sen , utilitarianism provides entirely an assessment of what it means to be a person . The result is that there are far too many limits associated with utilitarianism for the ian to be able to make effective , and informed , moral evaluations . Taken further , Sen also recognizes the link between the moral vacuum produced by utilitarian and the neoclassical application of the criterion . For Sen , utilitarianism and the criterion are like a form of normative handcuffs . Neither the distribution of income nor initial factor in to the choice making , exchange story , promoted by orthodox economics . By ignoring the initial endowments of income or utility , Sen argues that a condition of optimal may also be

256 ERIK DEAN , JUSTIN , MITCH GREEN , BENJAMIN WILSON , AND SEBASTIAN BERGER one of deep inequality and hardship . Those without property and with little income often times find themselves without property and little income even though they have engaged in market exchange . Admittedly , a persons actual freedom to exchange may provide a person with a degree of additional utility . Clearly being free to make choices is empowering and valuable to individuals . However , one freedom to act does not mean that a person is in a remotely decent position in the market . The fact is , a market outcome can be optimal and still be less than socially optimal . For example , instead of demanding change people in poor situations often simply adjust to their negative circumstances . The deprived find some area of existence that gives them pleasure and make do . The result is a yet acquiescent populace that not only continues to function , but may be falsely perceived as happy or not too sad . In this example , utilitarianism generates a persistently unfair outcome within a population of people to effectively do anything to alter that outcome . This ian picture highlights a tendency to the plight of people in negative circumstances and causes Sen to conclude that neoclassical welfare economics is incapable of addressing the ethical issues that accompany the existence of poverty and oppression . In terms of the problems associated with the distribution of utilities , Sen criticizes the utilitarian notion that every action in life is based on pleasure or happiness . There is no equality to be found in adding up everyone utility to find a sum of total utility . It is possible for a maximum of total social utility to be generated under a circumstance in which one person receives the largest share of the available utility while many others receive very little . Further , it is not feasible to correct for an unequal distribution of utilities generated by market outcomes . The only way to rectify the impasse requires that the theorist be able to engage in interpersonal comparisons of . In other words , people need to be able to compare how well off they are relative to other people . Relative comparisons are not something to which utility is adept at explaining . Given all of the problems Sen identifies , he departs from utilitarian precepts and develops an alternative measure of economic being . THE CAPABILITIES APPROACH The capabilities approach represents Sen alternative to the neoclassical welfare model . The approach is a theoretical device that allows for interpersonal welfare comparisons , while also maintaining the ability and freedom of people to make choices . For Sen , the interpersonal of should be based on a group of what Sen calls Represents a state of an individual as well as the collection ofall things an individual can be doing . can be as basic as being and properly sheltered to as challenging as an airplane . In turn , the measure of social welfare is the capability of people to access and develop their Capability Is the availability coupled with the ability of the individual to achieve a tion . The combination of that are available and the ability of an individual to achieve a bination of is the measure of an individuals . Consider the following table .

PRINCIPLES or ECONOMICS 257 Limited Capabilities Greater Capabilities Limited Low Welfare Moderate Welfare Greater Moderate Welfare High Welfare Based on the capabilities approach , having many options available , such as states of being or activities to pursue , and then having the freedom to pursue those options is the ideal . The highest social welfare is achieved when a society produces an environment that meets basic needs while also provide people with ample opportunities to pursue challenging and life enriching activities . To the contrary , having limited access to , and limited freedom in the pursuit of those is the least advantageous position . In the case of moderate welfare outcomes , either have many available , but a limited freedom to pursue those , or a limited set of available but substantial freedom to pursue those goals . CAPABILITIES AND EXAMPLES OF WELFARE OUTCOMES Limited Limited Capabilities Represents a case in which a person or a group of people are living with clearly definable limits to their as defined by abject poverty , malnourishment starvation and with little to no medical care . In this scenario the person or people are simply seeking to survive from one day to the next , there is little to no long term planning or goals . Possibly the result of social and political unrest such as a civil war ( the current situation in Syria for example ) or a weather calamity such as a drought , or a socioeconomic order such as the slave economy of the War American South . Given the horrendous living conditions and limited functioning , any person living under these conditions would likely attempt make changes in their lives in order to try and reduce their immediate suffering . The ability to make changes , their capabilities , may not be possible as they may be living under conditions of political , military , and economic repression . Absent the freedom to maneuver , the person or people in this circumstance are rendered virtually helpless to the tion in which they have befallen . For example , unless the slave is freed , as property , the slave simply can not pursue other options Limited Greater Capabilities Represents a case in which a person or people are again deeply limited in terms of having basic needs and few wants met . In this instance , however , the person or people in this circumstance have some options to escape their plight . For ple , consider the scenario of political unrest , if greater capabilities are present , the person or people can possibly vacate the region in which the unrest in unfolding . Evacuation of refugees to other more stable regions of the world create for the now displaced residents from a place devoid of to places with both and resources to expand capabilities . Another example could be the freeing of slaves in the American South during the War period . Greater Limited Capabilities Represents a case in which a person or people have their basic needs and wants met , while enjoying the luxury of having many other possible available within the society such as educational , health care , and employment . In this instance , however , the person or people in this circumstance do not have options available to access the abundance of . For example , consider the scenario of repressive political forces that are the result of situations of patriarchal social structures , or general totalitarian principles . A society characterized by repressive political regimes will restrict the freedom of its populace to enjoy the varied that exist . A historic example would be thejewish population that was subjected to the ruling principles of Nazi Germany . Greater Greater Capabilities Represents a case in which a person or people have their basic needs and wants met , while enjoying the luxury of having many other possible available within the society such as educational , health care , and employment

253 ERIK DEAN , JUSTIN , MITCH GREEN , BENJAMIN WILSON , AND SEBASTIAN BERGER ties . In this instance , however , the person or people in this circumstance also have a great many options available to access the abundance of . For example , consider the example of the majority of people living in economies as advanced developed economies with largely democratic political institutions . Certainly there remain conditions of repression such as discrimination , sexism , racism , and any number of limiting conditions . However , given democratic political structures and civil society outlets , people are able to continue to press for capabilities . The capabilities approach then is not just a story of the freedom to pursue , such as is the case in the story by orthodox economics . Instead , the capabilities approach is asking questions about initial endowments , available , as well as the distributional outcomes associated with the pursuit of those . Given the approach , the social welfare analysis of economics is no longer reduced to the action of choice making , but rather to both the conditions preceding choice as well as the outcomes associated with choices . While can vary for people across social circumstances , as well as time and place , so long as people have the ability to obtain the outlined then they have an opportunity to elevate their . Clearly , the capabilities approach represents for Sen , and others , a framework capable of generating more ethically pleasing results than that of the criterion . In conclusion , Sen has managed to escape the ethical handcuffs of utilitarianism . The capabilities approach offers Sen , and other economists interested in exploring the capabilities approach , a new ethical theory . Sen has clearly avoided the fate of many neoclassical economists , being able study economics absent ethics . THE APPROACH AND THE LABOR THEORY OF VALUE Another approach to applying normative reasoning toward economic phenomena is the labor theory of value . In stark contrast to the utility theory of value , the vision associated with the labor theory of value produces a View of humanity and human need that is virtually ical to the utilitarian depiction . Rather than experiencing social interaction through exchange , within the labor theory of value human beings are presented as engaged in the act of production . The basic proposition on which the labor theory of value is constructed is the idea that before thing can be exchanged it must be produced . As a result , the value of products is generated at the point of production , where the products are created . At the point of production , labor is the essential component of production processes . While machines can enhance the productivity of human labor , machines only exist as a result of the collective accumulation of human labor over time . Importantly , machines themselves do not create labor . After all , a nail can not hammer itself . The implication is that the process of production has always required human labor power as even the most sophisticated machines require human operators . Additionally , production has always been a social endeavor as human beings work with one another to produce those things that satisfy the material wants of people . Consider , for example , a loaf of bread that you see on a grocery store shelf . The production and distribution process necessary to bring the loaf of bread to the grocery store shelf is extensive , requiring the contribution of a great many people . For starters , the agricultural process that provides the wheat , or oats , or grains that are the primary ingredients for making bread have to be grown by farmers . The number of farmers involved may number in the hundreds or thousands . Additionally , the farmers will use tools and other inputs provided to them by other producers . Those producer , the producers of farm equipment , will also bring together laborers and equipment in a manufacturing process that will build farm equipment . By continuation , the tools and equipment used in the manufacturing process that builds farm

PRINCIPLES or ECONOMICS 259 ment will also have to be produced by laborers using other tools and equipment in other production processes , and so on and so forth . On the other end of the production process , after harvesting , the basic agricultural inputs used in making bread will be transported to processing facilities . The act of transportation requires that laborers operate transportation equipment like trains and trucks . Just as was the case with farm equipment , transportation equipment will be made by many laborers that will be utilizing many machines that will have been produced by many other laborers using many other machines , and so on and so forth . Of course , transportation equipment generally requires fuel . If the fuel is a petroleum byproduct , then the extraction of petroleum will once again require many laborers using significant amounts of equipment through many stages of production until a fuel is available that will be used to operate the transportation equipment . Over and over again , each ment of production requires many other laborers in many other production processes in a seemingly endless and nearly incomprehensible scale of human interaction . Clearly , production is an inherently social process that only takes place when human beings apply themselves to a multitude of production processes Because the sole universally necessary element in the production process is labor , labor becomes the only true and relevant source of value . Human history demonstrates that human survival necessitates that human beings engage first and foremost in the process of providing for material needs . If human beings exchange , it is only because they first produced an excess that they are willing to exchange . Exchange is not a necessary condition for human survival , whereas production is required for human existence . When juxtaposed , the differences between the vision generated by the utility theory of value and the labor theory of value could not be more visible . Let examine four primary differences . First , orthodox economics any necessary human social relationships , as individuals are viewed as isolated utility within orthodox economic thought . To the contrary , adherents to the labor theory of value see human behavior itself , including exchange relationships , as being the result of social relationships . By continuation , a strong argument can be made that there are also important historical understandings and divisions between the two value theories . For utility theorists , because human behavior is perceived as a universal constant across time , understanding economic history is not a necessary component of their theory . Labor theorists , however , must study history closely in order to attempt to understand and identify the important changes in social arrangements that have historically arisen in different socioeconomic systems . Second , due to the fact that exchange is a voluntary form of social interaction , harmonious outcomes appear normal within utilitarian thinking . To the contrary , since labor is the source of value and duction , if there are class differences in a society , those class differences will inevitably end in . The result is that , not harmony , is front and center for labor theorists . Third , while neoclassical economists take as given individual preferences , and by implication assert that the act of choosing is always efficient , labor theorists argue that preferences arise from social relationships and social interactions . As such , adherents to the labor theory of value do not accept the revealed preference argument on social welfare . Fourth , whereas orthodox economists identify individual incomes as originating through a voluntary process of exchange between individuals whose preferences are given , the labor theorist argues that the income that to classes is the byproduct of a process of exploitation .

260 ERIK DEAN , JUSTIN , MITCH GREEN , BENJAMIN WILSON , AND SEBASTIAN BERGER Exploitation The idea that a producer or producers of a product receive compensation that is less than the value of what the producer or producers contributed to the production process . Clearly the utility theory of value and the labor theory of value yield two different and competing conceptions of human existence , producing two different normative criteria for evaluating human interaction . It would appear that the choice of value theory and recognition of its normative impact should be of the utmost importance to a theorist . This is not always the case . Perhaps due to the obscure ship between price and value in neoclassical theory , there are many neoclassical theorists who directly violate the philosophical foundations of their accepted theory of value and do so by attempting to temper the ethical outcomes present in a capitalist market system . Alternatively , while most heterodox thinkers openly challenge the ethical outcomes of the market system and the conclusions brought about by the use of utility , many very prominent heterodox thinkers also either reject the need for a theory of value or do not explicitly endorse a formal theory of value . Sen falls under the latter category . In both instances value theory importance is being inadequately . While continued criticism of neoclassical theory is undoubtedly warranted , heterodox mists , regardless of their lofty accomplishments , prestige , and respectability , should not be absolved of deserved criticism . Within this premise , an evaluation of the relationship between value theory and Sen important contribution to the critique of neoclassical welfare economics will be the focus of the remainder of this paper . GLOSSARY a state of being for an individual as well as the collection of all things an individual can be doing capability the availability of coupled with the ability of the individual to achieve a combination of exploitation the idea that a producer or producers of a product receive compensation that is less than the value of what the producer or producers contributed to the production process

CONCLUSION any students of economics are drawn to the discipline out of an interest in understanding the social and moral meaning and significance of economic outcomes . Interpreting the social and moral meaning of economic outcomes , however , requires a set of philosophical beliefs that can be effectively integrated and tied to economic activity . In this chapter We have seen how orthodox economics utilitarian philosophy to economic activity . We have also seen the limitations to the utilitarian approach in that it gives the adherents to this tradition little to no room to challenge the outcomes associated with market economic activity . In this chapter we have also seen how heterodox economists , by not accepting the utilitarian tradition have utilized other philosophical approaches , such as the capabilities approach or the labor theory of value , to interpret economic events . In the case of these alternative philosophical approaches , market outcomes are not assumed to be socially just . For heterodox economists , as a result of alternative philosophical visions , questions of , such as exploitation and discrimination , are directly confronted and possible solutions are provided .