Bernard Shaw's Remarkable Religion: A Faith That Fits the Facts

Ethics, Economics, and Government 157
abjuring idealism. The theory of surplus value appeals to socialists because
it seems to provide a factual basis for the “sentimental dogma.” It purports
to show that the difference between the subsistence wage of labor necessary
to produce an item and its actual price naturally “belongs” to the
worker and is “stolen” by the capitalist. Unfortunately, the labor theory of
value is false.
A disciple of Adam Smith, Ricardo helped establish economics as the
“dismal” science, particularly with his “iron law of wages.” The “iron law”
followed Thomas Malthus in proposing that wages must stay at subsistence
level because any rise in wages increased the population of the poor,
glutting the labor market and bringing wages down again. This “law” is
the foundation for Ricardo’s labor theory of value, which holds that the
value of an item is the cost of its production, which in most cases is the cost
of the labor necessary to manufacture it: subsistence wages. Karl Marx
reasoned that while value is created by labor, the actual price received in
exchange was always higher than the subsistence wage provided the
worker. The difference was surplus value, which belongs to the worker because
it was created by his labor but is stolen by the capitalist. The fallacy
in this theory, as Shaw often pointed out, is that value is independent of
labor; it is simply the result of people’s desire for something. Defective
goods will be worthless regardless of the labor that went into their manufacture,
whereas a diamond casually picked out of a crevice could be worth
millions. The truth is that value causes labor, not the other way round.
Margins of Utility and Production
Shaw rejected the value theories of Ricardo and Marx, accepting instead
Stanley Jevons’s theory of marginal utility, which modern economists still
regard as valid in outline. Utility, although an extremely important economic
concept, is not familiar to most people. 2 They have heard about Supply
and Demand and know that together they determine the price, or “exchange
value,” of things. They probably know that when Demand goes up
or Supply goes down then Value goes up. (Capital letters in this section
merely signify that the word is being used in a special, technical sense that
might be quite different from its everyday meaning). It may seem intuitively
obvious that high demand would produce high prices and an increase
in supply would bring prices down, and most people never go any
deeper into the matter than that. Utility is an attempt to analyze the foundation
of demand by giving a measurement to what might be called “intrinsic
value,” as opposed to the Exchange Value. In simple terms, Utility is