Postmodernism and the Social Theory of Value

Author(s): Philip Mirowski

Source: Journal of Post Keynesian Economics, Vol. 13, No. 4 (Summer, 1991), pp. 565-582
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PHILIPMIROWSKI

Postmodernism and the

social theory of value

While the other contributorsto this symposium have focused upon

issues of epistemology, canon creation in the history of economic
thought,andthe metaphorsgoverningourculturalimages of ownership
andcontrol,I shouldlike to proposethatthe implicationsof the cultural
changes that travel underthe rubricof "postmodernism"could poten-
tially transcend a critique of orthodox economics, to the point of
initiating an alternativeto the neoclassical theory of value. If it is a
hallmarkof postmodernismto deny the text has a single fixed andstable
referent,then what if the "economy"were treatedin a similarmanner?
And, indeed, what if this reconceptualizationwent beyond discussions
of methodology to actuallyframe an altemativemathematicalformal-
ization of the notion of value?
I have arguedelsewhere (Mirowski, 1989, 1990a) that,farfromthere
being a surfeit of theories of value to choose from in the history of
economic thought, from the quantitative/analyticpoint of view there
reallyhave only beentwo: the "substancetheoryof value,"exemplified
by such particularinstances as the physiocraticcom theory and the
classical labor-embodiedtheory of value; and the "field theory of
value,"best exemplified by the neoclassicaltheoryof utility. Therehas
also been a third subterranean(and relativelyineffectual) currentthat
denies the existenceof thephenomenonof value altogether,exemplified
The authoris CarlKoch Professorof Economics andthe Historyand Philosophyof
Science at the Universityof Notre Dame, Notre Dame, Indiana.He would like to
thankDavid Ellermanfor helpful commentsanddiscussion, withoutimplicatinghim
in any of the author'sown errors;he is also not responsiblefor any uses to which his
own work has been put in this paper.Variousaudienceshave played a partin shap-
ing this outcome, including the Seminarin InstitutionalistEconomics at the Univer-
siy of Tennessee and the auditorsof Economics 785b at Yale University.The
literary"dual"to the presentmathematicalargumentmay be found in Mirowski,
1990a.

Journal of Post KeynesianEconomics/ Summer1991,Vol. 13,No. 4 565

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566 JOURNALOF POSTKEYNESIAN
ECONOMICS

by the writings of Samuel Bailey and William Thornton.The pitfalls

and attractionsof this radical abjurationof "value" have also been
discussed elsewhere (Mirowski, 1991).
The primary reason for such slim pickings can be traced to the
Durkheim-Mauss-Douglas thesis (Mirowski, 1988, p. 109), which
predictsthat the social categoriesemployed to organizeour discourse
would be reflections of the categories we use to discuss the natural
world. The structureof the classical substanceand of the neoclassical
field theories were both largely projectionsof mathematicalmodels of
the physical world dominantin those respectiveeras. In other words,
the social structuresof the economywere investedwith the detenninacy
andlawlike characterof things.I wouldclaim that(withvery few partial
exceptions, such as the Americaninstitutionalists)therehas neverbeen
a serious explorationof the logical structureof a thoroughgoingsocial
theory of value. It would be explicitly "social," and perhaps even
"postmodern,"because it would refrainfrom groundingany aspect of
value eitherin the "natural"attributesof the commodities(thesubstance
theories), or in the supposedinherentpsychological regularitiesof the
individualmind (neoclassicalfield theory).Instead,it would opt for the
third modality of rooting the structureof value in contingent social
institutions. As Mary Douglas (1986) has explained, institutions are
foundedupon analogyandprovidethe conceptualidentityfor phenom-
ena. While Douglas most likely did not intendthe technicalmathemat-
ical definition of "identity"(i.e., one of the requirementsin abstract
algebrafor the existence of a group),I do.

I. Four central issues in value theory

The full justificationof the quantificationof prices is profoundlymore

complicated than the rather cursory discussion found in Mirowski
(1986). Thereseem to be foursomewhatseparableissues, each demand-
ing the use of a different mathematicalformalism to be expressed
properly.The first is the problemof the constitutionof the identity of
the commodity, which would be the province of measurementtheory.
The second is the problem of conceptualizing trade as an ongoing
network of permitted and blocked exchanges of idealized classes of
goods between individualhumanbeings. This question would be the
province of graph theory.The thirdis the descriptionof the institution
of "value"as distinctfrom,yet predicatedupon,the previoustwo issues.
This would largely be a questionof abstractalgebra. The social theory

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 AND SOCIALTHEORY
POSTMODERNISM OF VALUE 567

of value would be consolidatedby a concatenationofthe abovedevices.

Farfrombeing a pipe dream,the way forwardhas alreadybeen indicated
by Ellerman(1984, 1988) using the formalismof directedgraphs under
the rubric of "arbitragetheory." Fourth, the irreducibly contingent
characterof value would be expressedby linkingthe above formnalisms
to the structuresof probabilitytheory,by revealingthat probabilityis
itself a special case of arbitragetheory.
It is importantat this point to be self-consciously skepticalaboutthis
or any other program that imports still more relatively unfamiliar
mathematicaldevices into a situationwhere the profession is already
rife with superfluousand ill-consideredabstractmathematicalformal-
isms (Mirowski,1986, 1991).Inorthodoxneoclassicaleconomics,there
is no serious intellectualjustification for this escalation of technique,
otherthan to disguise furtherits origins in nineteenth-centuryphysics,
or to provide a pecking order within the discipline and perhaps to
exclude the curious layman. Here the role of mathematics will be
different. The formalisms sketched out in these notes are required
because it is a historicalfact that modem marketactorspredicatetheir
economic interactionsupon prices and quantitiesexpressed as rational
numbers. This central fact of markets must have an explanation
groundedin the theory of social institutions.But more significantly,
mathematicsis a superiormethod of the translationof metaphorsbe-
tween disciplines (Mirowski, 1988, ch. 8); and a major problem of a
social theory of value is to reorientthe culture away from its failed
naturalism.Hence, it will be no accident that most of the formalisms
proposedhere are not generallyfound in physics.

H. The identity of the commodity

This firstproblemhas almostnever been dispassionatelyentertainedin

the economics literature,since it has simply been assumed that the
categorical identity of any commodity was immediatelytransparently
obvious to everyone and determinedby external natural attributes.
However, as arguedin Mirowski (1986), not all apples are alike; not
even all Macintoshes are identical. The very idea that identity is un-
problematicallydeterminateviolates the purportedmethodologicalin-
dividualismof neoclassical theory:has anyone ever asked you if you
thought all bottled water was "alike"?The question then arises: why
would a marketsystem be drivento standardizecommoditiesandmake
them interchangeablein the social sphere(if not for each individual)?

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568 JOURNALOF POSTKEYNESIAN
ECONOMICS

The way commodities have been measured for purposes of trade

has avery strangehistory (Kula, 1986). Briefly, commodity identities
seem to have evolved from definitions tied to individualpersonalities
(e.g., the feudal lord defined a bushel of grain differently for each
person), to more relatively impersonal measures, culminating in the
metric system in the French Revolution. This history can be seen as
one chapterin a progressive attemptsocially to constitutethe identity
of the commodity, and more precisely to remove it from the sphere
of the personal and idiosyncratic. Such abstractionfrom the realm of
the personal is an absolute prerequisite to rendering market trade
quantitative.
There is no one "correct"way for a society to measurea commodity,
and the way its measurementis institutedhas importantconsequences
for its subsequent manipulation in various formal mathematical
schemes. It may be representedon aninterval,ordinal,ratio,or absolute
scale (Roberts, 1979); the attributechosen to groundthe measurement
may be continuousor discrete;it may be reversibleor irreversible.All
of these considerationsare the subject of a mathematicaldiscipline
called measurementtheory(Roberts, 1979; Osborne, 1978). Measure-
ment theoryhas appearedin a fringe literaturein economics (de Jong,
1967; Luce andNarens, 1987), but almostexclusively in the context of
trying to characterizeutility; and thereforethis literaturehas seemed
somewhat superfluous.Instead, our proposed social theory of value
would use it to highlight the difficulty in getting a society to measure
somethingconsistently, and to establishthat this standardizationis an
importantaspect of the spreadof the market,rangingfrom the imposi-
tion of a metric system to the persistentdrive down to the presentday
to standardizecommodityidentitiesthroughmass production,advertis-
ing, andthe eliminationof thecraftcharacterof precapitalistproduction.
On a more pragmaticnote, measurementtheorywould also be used to
check thatequationsin the social theoryof value are alwaysdimension-
ally conformable. (This would prevent such travesties as Y= (KL).)
Finally, in a worldwhere,becauseof theircontingenthistoricalcharac-
ter, measurementscales are arbitrarilymixed, suchjustificationsof the
fonnal basis of economics such as that of GerardDebreu would be
barredas simply fallacious:

Havingchosena unitof measurement for eachone of them[thecom-

modities],anda signconventionto distinguishinputsfromoutputs,one
candescribetheactionof aneconomicagentby a vectorin thecommod-

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 OF VALUE 569
AND SOCIALTHEORY
POSTMODERNISM

ity spaceR1.Thefactthatthecommodityspacehasthestructureof a real

vectorspaceis a basicreasonfor thesuccessof the mathematicization
of economictheory.[Debreu,1984,pp.267-268]

The pointof departureof a social theoryof value shouldbe: commod-

ities must be renderedsocially "measurable,"preferablyon some inter-
val scale, in order for trade to be quantifiedand value to be defined.
Because of the heterogeneityof individualperceptions,of scales andof
their conventions, commodities do not genuinely span a real vector
space at any specific historicalnexus. And, in any event, the notion of
an independentnaturalmetric in "commodityspace" is meaningless.
Hence, value cannotbe groundedin or deducedfrom the natureof the
commodity itself: it cannot be collapsed to a problem of arbitrarily
picking a numeraire. Commodities are renderedquantitativein the
marketplaceas partof the constructionof standardizedproductionand
marketing,or, in other words, as part and parcel of the fabricationof
value.

IH. The network of trade

There is a sporadic and underdevelopedliteratureon the "dual coin-

cidence of wants" and the problems of getting the trading activities
of numerous individual actors to mesh. Contrary to the claims of
neoclassical theory to base itself on individual behavior and the
coordination activities of a market, it has had little to say about this
problem (Clower, 1984; Ostroyand Starr,1974; Eckalbar,1984). The
reason for this neglect is that the enumerationof the permutationsof
the possible channels of trade is itself another issue that should be
fonnalized prior to the inscription of value theory. The problem of
who may deal with whom on a social basis is qualitatively different
from the "effective demand" problem of who has the resources to
engage in exchange.
In order to guaranteethat we don't lose sight of the people in the
economy, let us begin by defining a "6socialtraffic"matrix z where
the rows i = 1, . .. , M index the people in our marketand the columns
j = 1, . . . , N index the variousclasses of commoditiesthat have been
subjected to the local process of standardizationand measurement
describedin the section above. Withthe following sign convention,the
variousentriesin this matrixtell us who standswilling andable to trade
each commodity.Let

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S70 JOURNAL OF POST KEYNESIANECONOMICS

[1 if person i will sell good j in trade;

zi;= -1 if person i will buy good 'in trade;
0Oif personi will not tradegood j.

It is well known in the specialist neoclassical literaturethat certain

configurations of the z matrix-namely those where the dual coinci-
dence of wants is frustrated-would stymie exchange, even in the
presence of an "equilibrium"vector of Walrasianprices.' A simple
example is provided by the following three-person,three-good ma-
trix, z :

Z*= _1 0 11
0 1 -1

Here,person 1 wouldlike to sell good one andbuy good two, butneither

of the otherparticipantscan both take good one off his hands and give
him something he wants in return,even in any pairwise sequence of
exchanges. The existing literaturehas triedto get aroundthis problem
in one of three ways: (a) by simply presumingthat everyone startsout
with sufficient stocks of all commodities and/oreffectively wants ev-
erythingall the time; (b) by positing the existence of a tradecoordina-
tor(s) who stands ready to buy and sell unlimited amounts of a
designated set of commodities; or (c) by positing the existence of a
commodity that everyone stands ready to buy and sell at all times
(makingeveryone a tradecoordinator).I find none of these expedients
historicallyplausible or especially theoreticallyinteresting,especially
given that the posited trade coordinatorlooks a bit too much like the
inexplicably benevolent and other-worldlyWalrasianauctioneer,and
the universally acceptablecommoditydoes not captureall the signifi-
1 For instance,Eckalbar(1984), and Davidson (1978, ch. 6). Further,since Ostroy
and Starr(1974) take prices as given exogenously and all equal to unity, abjuringall
discussions of utility, theirmatricesall qualify as social trafficmatrices;therefore,
many of theirresultsmay be absorbedinto the social theoryof value with little or no
alteration.For instance,they demonstratethatsimple coordinationrequireseither(a)
the existence of a commoditythateveryone is willing to buy and sell andkeep appre-
ciable stocks for tradingpurposes;or (b) the existence of a tradecoordinatorwho is
willing to buy or sell unlmited quantitiesof most goods. Since neithersituationoc-
curs "naturally"(or, as they phraseit, decentralizationis impossible in a pure barter
economy), the moralof theirwork is thatone cannottake a "connected"tradingsys-
tem for granted;rather,institutionsmust be createdin orderto guaranteeits existence.

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 POSTMODERNISM
AND SOCIALTHEORY
OF VALUE 571

cant functions of money. The social traffic matrixdoes keep us aware

thatmoney can reducethe numberof pairwisetradesnecessaryto arrive
at any particularcommodity;but it will also serve to demonstratethat
all the problemsof marketcoordinationarenot thereindissolved, as we
shall witness below in section VI.
Another aspect of the social traffic matrixcritical for the subject of
section V below is the existenceof "circuits"in the matrices.A "circuit"
would describethe abilityto arrangea sequence of tradesin a circle in
order to arriveback at exactly the same commodity and person from
whence the sequence originated,withouttradingthe same commodity
twice or"visiting"the sametradermorethanonce. While this may seem
a little strange, it begins to express the ability of a marketsystem to
combine minimized "shoe leather" with minimum restriction upon
permittedtrades.Further,it is of paramountmathematicalimportance
for providingthe identityof a tradingsystem, and is a prerequisitefor
thedefinitionof value. Withoutthiscondition,a system of traderscannot
themselves constitute a stable value index, because in any other case
theirtradingactivities will be thwartedby the existence of culs-de-sac
thatterminatesequences of trade.

IV. Money as the abstract algebra of value

A social theoryof value would demonstratethateven withthe existence

of socially specified commodity identities, and the institution of a
connected social trading network, the problem of value is still not
resolved.Forinstance,in OstroyandStarr(1974),thereis still no ability
to discuss "price,"and the mere introductionof debt underminesall of
their results. In a social theory of value, it would be recognized that a
distinct algebraof value is requiredthatcannotdepend for its identity
upon the characteristics of any particular commodity (Mirowski,
1986). Another way of putting this is: why must any particular
bilateral trade have any significant implications for any subsequent
bilateral trade?How can any tradersgauge their overall gain or loss?
To put it just a tiny bit more formally, why should it ever be the case
that Pab X Pbc X Pcd X pd, = pae? This question is the province of
abstract algebra.
In a purebartereconomy, any arbitrarytradehas no significance for
any subsequenttrade,mainly because thereis no stablenaturalidentity
or benchmark against which all trades may be compared. What is
requiredis a transpersonaltranstemporalindex of gain and loss, which

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572 JOURNALOF POSTKEYNESIAN
ECONOMICS

also provides the identityelement in the algebraof exchange. Money,

by its very nature a social institution, renders the price system an
algebraic"field"(Durbin, 1985, ch. 5): namely, the set of (all prices)
and two operations, addition (with identity zero) and multiplication
(with identityunity,the monetaryunit). Whatthis guaranteesis that(a)
pricesof differentgoods may be addedandsubtracted-a conditionthat
is not guaranteedby their own measurementschemes (see section
II)-and (b) tradeis treatedas if it were a reversibleprocess. This ideal
of reversibilityprovides the benchmarkof gain and loss. An analogy
could be drawn here with thermodynamics,where ideal reversible
processes provide the benchmarkfor real-worldirreversibleprocesses
(Ellennan, 1984, p. 246).
Hence, in a very narrowlydefined sense, in a social theory of value
money is value; but precisely because it is socially constituted, its
invariance is not guaranteedby any "natural"ground, and must be
continuallymaintainedby furthersocial institutions,such as the devel-
opment of double-entryaccountingand financial institutionssuch as
banks. (This sets the social theory of value apartfrom all previous
theories of value, which parlay a skepticism over invariance of the
monetaryunit into an exile of money from the theory of value. See
Mirowski, 1989.) The possibility of mutualgain outside of a zero-sum
game in a marketeconomy is to be ultimatelyattributedto the expansion
of the monetaryunit,especially throughdebtcreation,which gives rise
to irreversibletradingschemes throughtime. However, from the van-
tage point of the participants,the proximate cause of profit is the
attributionof propertyrightsto the proliferationof newly createdassets
andliabilitiesin theirown balancesheets.This stresson the importance
of the legal settingof the algebraof double-entryaccountingis derived
fromEllerman(1986), althoughit canbe tracedbackto the workof John
R. Commonsin the 1930s. Whatwas missing fromthe olderinstitution-
alist tradition,however, was a model thatexpressedhow this expansion
of value at the individuallevel is constrainedby the social structuresat
the level of the marketsystem.

V. Market graphs and the value system

In orderto develop the ideas broachedin the previoussection, we shall

draw upon the work of Ellerman(1984, 1988) in formalizingwhat he
calls "marketgraphs."A directed graph C= {(, C, t, h} is a set of
Conodes numbered1, ... , N, a set C,of "arcs"or "arrows"numbered

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 OF VALUE 573
AND SOCIALTHEORY
POSTMODERNISM

Figure1 A pathfromj = 1 toj = n

j=1
y=i j j=2
=2
> > =3^ A j= 4

j=n< :
j=5

2 Anelementof a market
Figure graph
Rate rk

Arck

1,... , L, andheadandtail functionswhichindicatethatarck is directed

from its tail node, t (j), to its head node, h (J) (Wilson, 1985; Roberts,
1978;Rockafellar,1984).It will be assumedbelow(forthe economic
reasonthatvirtualself-exchange hasno rolein a socialtheory)thatno
arc is a loop at a node, thatis, h(j) t(j). A pathfromnodej = 1 to
j = n is a sequenceof arcs connectedat theirheadsor tailsthatreach
fromnodej= 1 to nodej= n (seeFigure1).
A graphis called"connected" if a pathexistsbetweenanytwonodes.
The graphin Figure1 is connected,as one can see by inspection.A
closed circularpathwhereno arcoccursmorethanonce is called a
"circuit." Figure1 doesnotcontaina circuit.
Inorderto endowgraphswitheconomicsignificance,we shallasso-
ciate each generic commodity(alreadyindexedj = 1,... , N as above)
witha node,andassociateeacharcwitha possibleexchange.Inorder
to discussthepricemechanism, we shallassociateeacharck = 1,...., L
witha nonzerorationalnumber,r, calleda "rate."Givenanyarck, one
unitof the commodityatthetailnodecanbe exchangedfor rkunitsof
the commodityat the headnode.At this stage,we haveno reasonto
believe thatcommoditiesare intrinsicallycomparable,so thatthe rk
valuesshouldbe regardedas merelynotionalandspeculative(whois
doingthespeculatingwill be clarifiedshortly).(SeeFigure2.)
It is theobjectof thissectionto showthattheintroduction of money
in conjunctionwiththepresenceof otherspecificsocialarrangements
rendersthissystemof "rates"analgebraicgroup,or,morespecifically,
amultiplicative groupof thenonzerorational numbers. Moreover,it will

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 ECONOMICS
574 JOURNALOF POSTKEYNESIAN

only be because of money thateach ratewill be regardedas reversible:

that is, if a path traversesan arc in the opposite directionof the arrow,
the ratewill be treatedas the reciprocallirk.
Let us define an ideal situation(i.e., in the presenceof money) as one
where one can define a composite rateover a pathas the productof the
relevantratesoverthepath,r[a] = Ia rk. In sucha situation,it will be
possible to associate a number,p, called a price with each of the
nodes/commodities,derived from the set of rates associated with the
graph.This triple {C,r, p) is what we shall call a "'marketgraph."The
importantconditions for the existence of such a marketgraphare that:
(1) there are no loops at any node, which means that virtual self-
exchange of any commodity is prohibited(this is motivated by the
discussionin section ITabove);(2) the graphCmustbe connected,which
means thatone can always get to a specific commodity startingat any
other (the subject of section III above and some furthercomments
below); and(3) any circuitof exchangethatbegins andends at the same
commodityresultsin a compositerater[a] = 1. Underthese conditions,
Ellerman(1984) proves what he calls the "Coumot-Kirchoffarbitrage
theorem"for marketgraphs:

Cournot-Kirchoffarbitragetheorem:Let { ,r, p} be a marketgraph

with r[cL]:tl ->T taking values in any group T. Then the following
conditionsareequivalent:

1. There is a price system P derivedfromthe ratesystem r;

2. Theratesystemr is path-independent;
and
3. The rate system r is arbitrage-free.

This is the fundamentaltheoremof the social theoryof value becauseit

summarizestheconditionsunderwhichamarketmaybe consideredaprice
systemas opposedto a disparatemotleyof unconnectedbarteractivities.
Only when it is always the case that any arbitraryratioof exchange is
consistentwith any ratioreferringto the same genericcommoditiesbut
derivedfromotherdistinctexchangeratios,canwe saythateveryexchange
has calculableimplicationsfor every other exchange.This conditionis
isomorphicto the conditionthatno arbitrageopportunitiesarepresentdue
to mismatchesin the systemof prices.Anotherway of statingthiscondition
is to assertthatvalueis conservedin the exchangeprocess.2
2
In Mirowski(1989) 1 assertedthatsuch conservationprinciplesare centralto the un-
derstandingof the historyof Westem economic thought.This link to the Cournot-
Kirchoff theoremcould be consideredone more installmentin thatargument.

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 AND SOCIALTHIEORY
POSTMODERNISM OF VALUE 57S

Figure3 An arbitrage-free
marketgraph
p =4
P1l- A P22 rB-3 rc

rA-1/2 C
rp-1/12 p3=6
E ~~~3D rD=4/3
P6=12 rE P53

The relationshipbetweenthe Coumot-Kirchofftheoremandthe price

system may be renderedmore transparentby linking the graphfornal-
ism to its matrix representation.3Let us define a node-arc incidence
matrixS of the graph (Co, 1,r} as follows:

[rk if arc k - nodej;

S1k=
-k if arc k - node j;
l 0 otherwise.

The matrix S has dimensions N x L, with the rows representingthe

nodes/commodities, and the columns representingthe arcs/exchange
possibilities. If the matrixis descriptiveof a marketgraphmeeting all
the conditionsfor the Coumot-Kirchofftheorem,thenthe rankofS will
be equal to N - 1. (This is a quickprocedureto check for the arbitrage-
free condition.)Moreover,let us define a price vectorp = {p1, .... PN}
where pricepj is associated with the commoditynode indexedj. Then
the arbitrage-freesystem of prices can be solved as follows:

pS =pi *r-p= O.

Of course,thezeropricevectoris alwaysa trivialsolutionto thisproblem,

butit shouldbe rejectedas the case wherea relativepricesystemdoes not
exist. If theproductof thepricevectorandthe incidencematrixis nonzero,
then those amountsrepresentthe "arbitrage profit"in money tenns from
makinga circuitof exchangesbeginningandendingatthatparticular node.
3 Anotheradvantageof the incidencematrixapproachis thatit allows the incorpora-
tion of certainresults from partsof advancedSrafflananalysis withoutadoptingthe
conventionalinterpretationsof the "standardcommodity,"etc. (Krause,1982). For in-
stance, one can show that the Sraffianrequirementthatthe input/outputmatrixbe in-
decomposableis primarilydictatedby the fact thata fully connectedincidence
matrixis the primaryprerequisiteof a successful tradingsystem.

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S76 JOURNALOF POSTKEYNESIAN
ECONOMICS

Perhapsa numericalexamplewill help demonstratethe intimaterela-

tionshipbetweenarbitragetheory,directedgraphs,andthe linearalgebra.
In Figure 3 we have the graph-theoretic representation of a very simple
six-commodity maiket. The nodes are differentcommodities numbered
fromone to six, andlabeledwiththeirattachedprices.Eacharcis labeled
with a letterfromA to F andwith its attendantrateof exchangebetween
the relevantnodes.Frominspection,one can see the entiregraphconsists
of a single circuit;also by inspectionone can tell it is arbitrage-freesince
the compositionof ratesaroundthe entirecircuitmultipliesto unit,thatis:
r[a] = (1/2) (1/3) (3/2) (4/3)(1/4) (12) = 1.
The entire structureof the graphcan be expressedin its corresponding
node-arc incidence matrix:

A B C D E F c=k
1 -1 0 0 0 0 -1
2 1/2 3 0 0 0 0
3 0 -1 -1 0 0 0
4 0 0 3/2 -1 0 0
5 0 0 0 4/3 4 0
6 0 0 0 0 -1 1/12

Solving forpS =0, we arriveat the price vector,

p= [1, 2, 6,4, 3, 12],

which correspondsto the prices attachedto each of the nodes.

What sort of economy is described by this formalism? Prices are
adjustedthroughsystem bids andoffers in orderto attemptto achieve
a system of reversible, arbitrage-freeexchange with a positive price
vector p*, which can be found by solving p*S = 0. Traders do not
engage in this activity out of benevolence, but ratherin self-interested
(but not maximizing!)pursuitof arbitrageprofits.
Far from being a simple mechanical calculation, the persistent
attempt to reconcile money prices with ratios of commodity quanti-
ties and to attain the "tarbitrage-free" state is the very core of an
institutionalist value theory. This model describes a system that is
both "intentional,"in the sense thatnumeroussocial institutionsfrom

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 POSTMODERIVISM
AND SOCIALTHEORY
OF VALWE 577

the standardizedweights and measures to the monetary authorityall

strive to structurethe value unit, and also "unintentional,"in that the
mathematicalstructureof the value system falls out of the persistent
individualattemptsto make arbitragegains in trade.The arbitrage-free
statethus arrivedat embodieswhatclassical economiststriedto express
as the conservationof value in exchange.These conservationprinciples
arebuiltin at the very foundationsof double-entryaccountingpractices;
hence, the approachof actualexchange relationshipsto the accounting
system is the very definitionof a stable unit of value.
VI. Against equilibrium
Giventhe almostneuroticconcernof orthodoxmathematicaleconomics
with the physicalmetaphorof "equilibrium,"it may be appropriatehere
to insist thatin no case shouldthe vector p* be regardedas an equilib-
rium price vector in this theory.4While absence of furtherarbitrage
opportunitieswould signal a fully path-independentsystem within its
own tenns, real-time approachto that state would inevitably alter the
underlyingrkvalues, andconsequentlythe resultingp*. The "lawof one
price"has never made much sense in a dynamic context in orthodox
theory, andmuch the same situationholds here (Bausor, 1986).
Itmay help to recallwho is responsibleforthe rkvalues,whichprovide
the rawmaterialfor the Coumot-Kirchofftheorem.Fromone potential
point of view, the rkis the only psychological tenn in the entiretheory,
representingthe conjecturesof individualswith regardsto the exchange
ratios they might achieve within the limited ambit of their "social
traffic."If this indeedwere so, thenthe full social theoryof value would
require concatenationof the social traffic matrix with the node-arc
incidence matrix,along the lines of the matrixQ:

z1 s1

Z2 S2

Zm s"

4 Or to addressthose of mathematicalbent directly:thereis no sense in tryingto tum

pS = 0 into some sort of differenceor differentialequation,and then applying
Liapunovtechniques,nonlineardynamics,or any otherfaddishdevice takenover
Eromphysics to it. On this relatedissue, see Mirowski, 1990b.

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 ECONOMICS
578 JOURNALOF POSTKEYNESIAN

where zi representsthe ith row of the matrix z, distributedalong the

diagonal of a square matrix of order N x N with zeroes on the off-
diagonal, and St is the node-arc incidence matrixfor each individual,
indexed 1, . . ., m. One could then applythe Cournot-Kirchofftieorem
to the matrixQ, butit shouldalreadybe apparentthatthereis little reason
to think thatthe priorconditionsof connectivitywould hold, given our
discussionin sectionIII.It wouldbe prudent,rather,to concludethatone
cannotdependupon some mechanicaladjustnentprcedure appliedto
individualpsychologiesto succeedin explainingmarketcoordination.
An altemativeinterpretation of the r, values is to regardthem as the
conjecturesof varioustradecoordinators(as identifiedby theirlocations
in the z matrix)in theirrelationshipswithone another.These coordinators
wouldbe responsiblefor enforcingthe invarianceof pricein theirlocality
with regardto the largerpublic,as well as for forgingthe connectivityof
the maiketgraph(hencethe prevalenceof "sticky"pricebehavioramong
such units). But even in this instancewe shouldnot expect to find true
invariance.The intrinsicfluidityof the systemmilitatesagainstany strict
causaldirectionalityfromthe r, valuesto the reigningprices.
Consequently,the "arbitrage-free" stateis neverrealizedin a capitalist
system. Its existence would demanda stasis not encouragedwithin the
system, andin anyevent wouldimplythatgloballytradewas a zero-sum
game, and thereforewould rule out the existence of profit generatedat
the system level. Instead, the various macro determinantsof system
expansiondiscussed in section IV persistentlyperturbtradeaway from
any approximationto the arbitrage-freestate and feed back upon the
definition of the subsequentstate. Thus, prices never "approach"any
fixed or deterministicpoint, and time series of prices will inevitably
appearstochastic from the perspectiveof both the actors and the eco-
nomic analyst. But does this then imply that the system wandersaim-
lessly? Why have we bothered with the whole fonnalism of market
graphs,social trafficmatrices,and all the rest?
These questionsbringus to the "postmodem"characterof the social
theoryof value. Economistsseem to thinkthat"models"exist to capture
the reality of the situationin which the economic actor finds himself
embedded.This unobtrusivepostulateof a fixed reality,independentof
the interpretativeengagementof humanbeings, has undoubtedlybeen
fosteredby the persistenttendencyof economists to imitatephysicists
andtheirmodels. The role of ourmathematicsis different:it is intended
to describe the interpretativestructuresof modem marketinstitutions
without implying that these structuresare permanent,inevitable, or

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 POSTMODERNISM OF VALUE 579
AND SOCIALTHEORY

detenninistic. This "model"exists to give an impressionof what it is

like to "read"the economy withoutpresumingthereis a single fixed text
to be read,or a single correctinterpretationat which we can arrive.
Hence, the function of the mathematicsof marketgraphs is not to
describe the prices that actually exist, but to explain why prices are
constitutedas a field over the rationalnumbers.The numericalcharacter
of prices is an artifactof the way our society has evolved for "reading"
the consequencesof our actionsin the economic sphere:so I have opted
to purchasethis stereo system? The price system then provides a way
for me to "read"the consequencesof this actionfor any otheractions I
may take. The consequences range from the ratherbanal (with my
salary,I am not able to buy a computerthis month,or even next month)
to some rathersubtlecues. They include:
a. The effect of my purchaseupon the identityof the commodityis
disregardedin the process of exchange.
b. Buying nothingis treatedas costing me nothing.
c. Prices over time and space can be added,but the orderin which
the items are presentedfor purchaseare not treatedas having an
impactupon the sum total paid for them.
d. If it is possible to "retum"the item, then the net result should be
zero.
The assertionis not thatany of these principlesare "true";indeed, for
most people in most instances,they are not. The point is ratherthat in
order to read the consequences of our actions, some forms of change
have to be ignored, or bracketed,or exiled to the margins of the text.
Somethingmust be treatedas effectively invariant,even as we know all
along it is not. In this sense, the price system should be situatedupon
the same epistemic level as double-entrybookkeeping (if indeed they
are not merely two sides of the same historical phenomenon); the
mathematicsmerely makesthis more transparent.

VII. The fundamentally stochastic character of the economy

How is it possible that marketactorslive a schizophrenicexistence of

treatingvalue as if it were invariant,andyet arealso fully cognizantthat
they cannotdependupon the invariants?This questionleads us into the
realmof probabilitytheory andits intimaterelationshipwith the social
theory of value.
The biggest sourceof disruptionto value invariantsis also the primary
economic motivation in a marketsystem: the pursuitof profit. At the

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580 JOURNALOF POSTKEYNESIAN
ECONOMICS

aggregate level, there is a trade-off between the expansion of value

thomugh debt creationandthe breakdownof the value invariantthrough
inflation; the relationship is socially constructed and therefore non-
mechanical, andthusfurthersocial institutionsarerequiredto intervene
continually to offset one or the other trend. The overriding social
problem of all market-orientedsocieties is to find some means to
maintainthe working fiction of a monetaryinvariantthroughtime, so
that debt contracts(the ultimate locus of value creation, as indicated
above) may be writtenin tenns of the unit at differentdates.
This can be thoughtof as a "homeostaticsystem":fluctuationsin the
underlyingvalue unit are unavoidablein a system of privatecontracts,
both because anyone can charge a "time premium,"and because the
arbitrage-freestate is never attained,so everyone is calculating with
faultyprices.Nevertheless,if debtcreationis kept withincertainlimits,
the system functionsas if a value invariantexists. It is importantto note
that, in this system, any time series of specific prices is inherentlyand
irreduciblystochastic:unlikein neoclassical"efficientmarketstheory,"
the fluctuations are not due to external "noise" superimposedupon
"fundamentals,"butto the intemaloperationof the value system. Such
an alternativemetaphorforwhatthemarketdoes may be moreattractive
in a periodthatacknowledgesthatthe earlierreconciliationof the image
of equilibriumwith stochasticideas has failed (Leroy, 1989).
It is possible to link the social theoryof value to the findingsof Benoit
Mandelbrot(1963a, 1963b) that price distributionsdo not generally
confonn to Gaussian stories of the separationof "noise" from signal
(Mirowski, 1990b). The task of a social theoryof value would then be
to reconcile "arbitragetheory"-that is, the conviction that prices can
be broughtcloser to theirunderlyingdeterminantsor coherencycondi-
tions-with the knowledge that the underlyingdeterminantsare not
given by nature,but are constitutedby the very process of exchange
itself, andthereforeare intrinsicallystochastic.
The crowning achievementof a social theory of value would be to
demonstratethat the very axioms of probabilityare themselves not
innate, but ratherarejointly constructedwith the value system as part
of the operationof marketsdescribedabove. Following a hint in Eller-
man (1984, p. 254), andbuildingfromthe insightsof de Finetti(1974),
we can show thatthe conventionalKolmogorovaxioms of probability
theory(namely,0 &lt; P(x) &lt;
1;P(S) = l; andP(x u y = P(x) + P(y )) can
be derivedfromthe simple requirementof "coherence"in betting:that
is, the "arbitrage-free" conditionextendedto all monetarywagers.Here

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 POSTMODERNISM
AND SOCIALTHEORY
OF VALUE 581

concept(Douglas,1985)inthesensethat
"risk"is a sociallyconstructed
the existenceof an arbitrage-free
valueunitplus the requirement that
actorsnot allow "Dutchbooks"to be madepersistentlyagainstthem
teaches marketparticipantsto behave in the aggregateas if the
Kolmogorovaxiomsdescribedtheworldof uncertainty thattheyface.
Again,this conditionis only approached, andneverattained,whichis
whyso manyneoclassicalresearchers have"discovered" thatindividu-
als in controlsituationsdo not"obey"thelaws of probabilityin a von
Neumann-Morgenstem framework.In an institutionalist theoryof
value,probabilitytheoryis relegatedto the same epistemiclevel as
double-entry bookkeeping: whilenot"true,"it is thepragmaticinstru-
mentalityby whichmarkettransactors reckontheirgains andlosses.
Thus,the laws of probabilityareintimatelyboundup with a money
economy, not because people's neuronscome hard-wiredfor the
Kolmogorovaxioms,butratherbecausetheaxiomsaresimplyonemore
projectionof thearbitrage-freeconditionsin a socialtheoryof value.

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