Terry Peach is certainly correct to note that "utility" meant something very different to the classicals from what it meant to the neoclassical economists who, a century later, formulated and refined the modern supply & demand theory. It most certainly did NOT mean for Smith anything that could be depicted in terms of an indifference map with the properties of completeness, transitivity and convexity--the properties necessary to construct a price-elastic demand function.   

The main point at issue, which prompted Terry's initial comment, is whether Smith should be interpreted as having essentially the same theory of price as the neoclassicals. I don't see how James Ahiakpor's position on this question can be sustained. One looks in vain in the writings of Smith & Ricardo for anything resembling a demand curve or a supply schedule, or the simultaneous determination of quantity and long-period equilibrium price via the interaction of two such functions. Indeed, Ricardo explicitly denied that value was determined by the forces of supply & demand (Principles, Ch. XXX).  

The quotes from Ricardo & Smith that Ahiakpor offers do not at all support his position. Smith is acknowledging that there is a subjective dimension to demand--hardly a controversial point. But it is a tremendous leap to go from this commonplace fact to the claim that what Smith meant by demand is no different from the meaning that modern economists attribute to the concept. Nor is it surprising that Smith,  author of The Theory of Moral Sentiments and a professor of philosophy at a time when that field was conjoined with psychology, should remark upon the connection between human nature and economic behavior.

On Ricardo, Ahiakpor provides a truly tortured reading of the quoted text. In the passage Ahaikpor presents, Ricardo has said merely that a good must posses utility to someone in order for it to have value, i.e. command a price. Again, this is trivially obvious and no one, I think, would find it controversial. But, again, Ricardo emphatically denies that utility regulates the relative prices of commodities that are reproducible. (He makes a well known exception for goods that cannot be reproduced--paintings by the great masters, and so forth. One can argue about whether this is a loophole that constitutes a defect of his theory. I think not, but that is another discussion.) When Ricardo writes "Possessing utility, commodities derive their exchange value from two sources ..." it seems quite clear to me that he is saying, more or less, "Assuming that a good has utility to someone (for otherwise it will have no value and will not be produced and there's be no point in talking about it), here's what regulates its price ...." And "utility" is not on the list.

Marx, by the way, made much the same point as Ricardo on use-value as a precondition for positive exchange value. On Ahiakpor's logic, Marx too would have a utility-based theory of price!

I should add that Ahiakpor's repeated references to "the classicals's explanation of market price" is puzzling in the extreme. (1) Both Smith & Ricardo acknowledge that the relation of demand relative to supply can influence the "market price" of a good, as distinct from the good's natural price (or long-period equilibrium price, as we would call it nowadays). That is to say, fluctuations in demand can play a role in explaining deviations between market price and natural price. (2) But the main object of their investigations of value was to explain not market price (which is ephemeral) but natural price. (3) This leads me to wonder whether Ahiakpor has merely been careless in his exposition (failing to distinguish clearly between natural & market price) or, instead, wishes to argue that the distinction was not important to Smith & Ricardo.

Gary

Gary Mongiovi, Co-Editor
Review of Political Economy
Economics & Finance Department
St John's University
Jamaica, NEW YORK 11439 (USA)

Tel: +1 (718) 990-7380
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________________________________________
From: Societies for the History of Economics [[log in to unmask]] On Behalf Of James C.W. Ahiakpor [[log in to unmask]]
Sent: Friday, October 26, 2012 12:10 AM
To: [log in to unmask]
Subject: Re: [SHOE] finance and a "new" theory of value?

Further in the same paragraph, Smith notes that "The merit of their
[precious metals'] beauty is greatly enhanced by their scarcity.  With
the greater part of rich people, the chief /enjoyment/ of riches
consists in the parade of riches, which in their eye is never so
complete as when they appear to possess those decisive marks of opulence
which nobody can possess but themselves.  In /their eyes/ the merit of
an object which is in any degree either /useful/ or beautiful, is
greatly enhanced by its scarcity ..." (/WN/, Chicago, 1976, 1:192; my
italics).  I can see Smith's understanding of subjective utility in the
demand for precious metals.

David Ricardo follows in Smith's tradition when he argues that "If a
commodity were in no way /useful/ -- in other words, if it could in no
way contribute to our /gratification/ -- it would be destitute of
exchangeable value, however scarce it might be, or whatever quantity of
labour might be necessary to produce it" (/Works/, 1: 11; my italics).
Thus, Ricardo concludes that "Possessing utility, commodities derive
their exchange value from two sources: from their scarcity, and from the
quantity of labour required to obtain them" (1:12).  Utility or
value-in-use is a part of Ricardo's explanation of market price
determination as well.

I think Terry Peach does the classics a disservice with his denial that
they had use for utility or value-in-use in their explanation of market
prices.

James Ahiakpor

Terry Peach wrote:
>
> "It would have been quite useful had Terry Peach explained his
> understanding of what Smith meant by "utility" in the statement, 'The
> demand for those metals arises partly from their utility, and partly
> from their beauty'."
>
> - Well, Smith’s own explanation (in the same paragraph) is that
> considerations other than “beauty” include liability to “rust and
> impurity” and the quality of cleanliness (which “would render a gold
> boiler still better than a silver one”). In other words, “utility”
> (a.k.a. value-in-use) refers (as I put it) to concrete useful
> functions, not to subjective satisfaction.
>
>
> As for Smith’s canonisation as “the author of the self-interest
> axiom”, Smith was by no means the first to acknowledge the
> significance of “self-interested” behaviour, or to trace its
> consequences: the Chinese beat him to it by several thousand years
> (for example).
>
>
> Finally, on the original point of this thread, it is patently true
> that the so-called “classical” economists focused on the determination
> of, and process of “gravitation” towards, (changes in) the
> “natural”/”normal” prices of reproducible commodities (considered by
> Ricardo to be the mass of commodities exchanged regularly on the
> market). This is not to say that they were blind to various empirical
> circumstances that influenced the (market) prices of commodities
> either temporarily or permanently fixed in supply, although they
> (particularly Smith and Ricardo) did not build an elaborate, formal
> model to explain or “determine” such prices. However, one might at
> least wonder if a subjective, utility-based theory of demand/value ,
> as advocated in this thread by Bruce Caldwell, can do anything other
> than provide a formal (and empirically empty) solution to
> price-determination, either of financial assets or, come to that, of
> anything else one might care to mention.
>
>
> Terry Peach
>
> ------------------------------------------------------------------------
>
--
James C.W. Ahiakpor, Ph.D.
Professor
Department of Economics
California State University, East Bay
Hayward, CA 94542

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