Arnold Kling  

Value and Exchange

Join the Party: Why You Should... A Swindle, not a Joke...

Peter Gordon points to an interesting article by Meir Kohn in the Cato Journal

The exchange paradigm has a very different theory of growth. Growth does not mean movement along an equilibrium path but rather the unfolding of a complex process. At any moment the potential of the economy is not completely realized: unexploited opportunities for mutually advantageous exchange abound. Indeed the “potential” of the economy is not defined; it depends on the initiative and ingenuity of individuals. Individuals engaging in trading, innovation, and institutional change generate the process of growth, not only discovering potential but also creating it.

This is a long article that is difficult to summarize. I recommend it for graduate students and professors, as opposed to undergraduates. I think it has a lot of wise things to say about the tie between mathematics and what Kohn calls the value paradigm, in particular that paradigm's focus on a trading equilibrium, in which there are no unexploited profit opportunities.

In the exchange paradigm, in contrast, people are always seeking to exploit profit opportunities. I find that my own evolution in economic thinking corresponds well in Kohn's terminology as a shift from the value paradigm to the exchange paradigm.

For Discussion. The profession has a lot of sunk cost in the "value paradigm." Does this mean that the exchange paradigm is doomed to fail?

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COMMENTS (4 to date)
Brad Hutchings writes:

Here's my one paragraph summary of the first 5 pages. Economics is dominated by Calculus when it really needs to have a graph theory (aka network theory, vertices and edges) component to be explanative and predictive today.

Econ is not the only discipline where graph theory doesn't have enough influence relative to calculus. You can get through a decent undergrad computer science program with a specialization in algorithms and data structure or networking and not ever see any formal graph theory. On several occasions in my career, I've been able to exploit ways of thinking that came from just an introductory graph theory course (upper division difficulty) that looked like magic to everybody else. For econ people scared that if they don't do enough calculus, they will look like poets or story tellers, there is a tremendous amount of formalism to draw upon from graph theory, and I imagine it could yield sufficiently cross-discipline looking papers to raise serious eyebrows.

anon writes:

Ah, the ultimate goal is to exploit profit opportunities.

Reminds me of the kooky essay in Armchair Economist arguing that if there's no market for X, X has no value.

Unrestrained growth is the philosophy of a cancer cell.
Edward Abbey

Bob writes:

When you think value paradigm and exchange paradigm think Newton and Einstein. Newton's theory of gravity works, it just doesn't work as widely as Einstein's general relativity theory. The exchange paradigm is the more complete theory of economics and therefore it will supercede the value paradigm. Sunk costs associated with Newtonian theory didn't doom general relativity theory, nor will sunk costs doom the exchange theory.

Lawrance George Lux writes:

Exchange theory have a problem with Capital accumulation; it basically derives from Capital formation, and cannot establish permanence to the value. Value theory lacks explanation of the propellent behind economic movement.

There should be a pure Market theory, where Value is a function of Market size, while exchange theory explains the motivation of Participants. lgl

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