2.

1 Normative Principles on Value Theory, Just

Price and Exchange-Value Determination

2.2 Ethics and Economics and the History of

Economic Thought
2.1.1 VALUE THEORY (EXCHANGE-VALUE
DETERMINATION) AND THE JUST PRICE

2.1.2. IMPLICATIONS OF VALUE THEORY TO

LABOR AND THE ROLE OF HUMAN CAPITAL

2.1.3. GENERAL EQUILIBRIUM AND THE ROLE OF

PARTICIPATION
 VALUE THEORY. Refers to that factor which
any good can command when exchanged in
the market place. It is therefore an
exchange-value determination when we
view the value of a good in economic
theory.
 It is the price or valuation of a good
derived from any form of exchange.
Commutative justice
 Price is a value that reflects the significance
attached to the good desired in relation to
all other uses of the money in the buyer’s
assessment. In short, price makes possible
the articulation of the ineffable subjective
evaluations in tangible terms. Price makes
subjective evaluations publicly accessible.
 In the absence of the price mechanism, as in
barter, some other measure of value is
employed. The cost of inputs or tools
employed in acquiring or producing a good
plus the labor invested in that activity is
perhaps a good substitute for price in barter
situations. But the main consideration is a
subjective evaluation based on the needs of
each of the parties in the exchange. Such a
valuation includes very subjective factors such
as risk and other costs borne by the valuing
party.
 Objective valuation: labor and other inputs
 Subjective valuation: reflects the
significance attached to the good desired in
relation to all other uses of the money in the
buyer’s assessment. Opportunity cost. Risk.
 Adam Smith, however, was just interpreting the added
value to a good brought about by labor expended on it.
 St. Thomas, through a study of his writings, has denoted
how just price can be conceptualized. His concept of the
exchange value of a good is that price or valuation mutually
achieved by contracting parties, valued from the utilization
of tangible measures such as labor and expenses, within a
framework of subjective economic value and ruled by
commutative justice. This concept of valuation of a good
allows a market or economic exchange to occur even in the
absence of prices. Thus, Aquinas discussed exchange value
in the context of commutative justice so as to show
analytically how price is determined. (Zuñiga, 1997)
 JUST PRICE. The heart of scholastic teaching
on exchange-value determination is its notion
of the just price. The demands of justice in
exchange are satisfied when the contracted
price is equal to the true economic value of the
goods and services traded. Different types of
goods are traded in proportional
reciprocation, that is, in proportion to their
economic value. The difficult task, is finding
out what constitutes this true economic value.
 Just price as cost of production
 Early scholarship links Aquinas’s just price with the
cost of production. This cost of production is in turn
embedded within the larger setting of a hierarchical
medieval social order that has to maintained and
preserved for the sake of the common good. It
would be appropriate to describe it as the social-
status theory of the just price.
 Just price as the market price
 Aquinas and Albert the Great go further by adding a
second set of factors that Aristotle never considers:
labor. In fact, Aquinas views just price as the
market price instead of the cost of production.
 However, Aquinas’s just price should not be
equated with the liberal, laissez-faire
competitive price because his acceptance of
the market price is conditional. The
requirements of the common good,
prudence and many other human virtues
and values impose limits on this price
 EXCHANGE-VALUE DETERMINATION IN MODERN
CATHOLIC SOCIAL THOUGHT. Modern Catholic
social teaching (CST) uses two foundational
notions to arrive at the key principle it deems
essential to setting exchange value. First, it
views the telos or end of all economic activity
as the critical starting point in specifying the
functional role of human work. Second, it
distinguishes the two facets of work, defines
their role and explains their hierarchical
ordering. From these, a cardinal principle is
derived for ensuring a just exchange value.
 Work and Livelihood
 Principal purpose of the economic order is to
provide for the needs of the human person.
(Gaudium et Spes (GS) #67).
 Individual access to these needed goods is
dependent on how much people can produce
and at what price they can trade their output in
the marketplace. Thus, productivity and
market price are two critical variables to
consider.
 Two Dimensions of Work
 Laborem Exercens (LE) highlights the difference
between the objective and subjective dimensions of
work. The objective character of the work
encompasses all the concrete manifestations of the
work process such as the type and difficulty of
effort, the factor inputs employed, the working
conditions, the resulting product(s) or services(s),
the production cost, and the technology employed.
The term “objective” is used in the broadest sense
of the word (LE #19). On the other hand, work has
a subjective character because it is a human person
that organizes and puts together all the aforesaid
objective elements of work.
 Subjective nature of work
 Take into consideration the human input
 It is the human element that bears ultimate
accountability for the conduct and outcome of such
activity. Consequently, whether in the form of
brain power or brute muscle, the worker enjoys a
preeminent position over all the elements of
production such as capital, machinery, and
materials. These objective factors of production
should, therefore, be viewed merely as
instrumental, secondary and subordinate to the
human worker. It is incorrect to refer to the worker
as factor of production; “subject of work” is more
appropriate (LE #27).
 Guiding Principle of Exchange-Value
Determination
 The subjective dimension is both the fundamental
and ultimate basis for the value of work.
 The provision of a living wage to the worker has been
a perennial teaching of the modern Catholic social
documents. While scholastic just price concentrates
on fairness in exchange in the product market, this
modern tradition devotes much attention to fairness
in the exchange value of inputs, that is, the labor
market. It is a shift from a just price for the work
output to a just price for the work effort. The latter is
aptly described as a valuation by the subject of work.
CONTRASTING MODERN CATHOLIC SOCIAL TEACHING WITH
ECONOMIC THOUGHT
Consumer-Utility Approach (The sentences and phrases in italics are my
comments)
Modern Catholic social thought is highly critical of the marginalist theory
of factor payments where:
Wage level = {price of output} x {marginal
product of labor}
= value of marginal product of
labor
Under perfect competition, the resulting income distribution ensures that
each factor input receives a return to the value of its marginal product.
This, it is argued, is an ethical outcome because the reward to each
factor of production corresponds to its contribution to the social
product.
 There are numerous objections to this claim.
 First, this conclusion is contingent on
perfectly competitive conditions. Hence, for
this to be truly operative, there must be at
least complete information, frictionless
mobility both for economic agents and
resources, and no monopoly power. These
requirements are not satisfied in practice,
especially in situations where a market failure
happens.
 Second, the price of output is determined by
how much satisfaction consumers get for
the product.
 Hence, remuneration for the worker’s effort is
ultimately dependent on the utility derived by
consumers. In effect, consumer utility becomes a
decisive criterion in judging the contribution of a
factor input to the social product. CST disagrees
with this because there may in fact be a gap
between real contributions to the good of society
and the monetary reward accorded by consumer
satisfaction.
 We have to keep in mind that this approach is
based on the assumption of competitive of
markets. When the price mechanism fails,
the marginal social rate of transformation
may not equal the marginal private rate of
transformation, and, the marginal social
rate of substitution may not equal the private
rate of substitution. In simpler terms, private
returns may not equal social returns, and,
private costs may not equal social costs.
 Third, the marginal productivity theory of
factor payments treats labor no differently from
inanimate, material factor inputs. It does not
distinguish the primary efficient cause (the
human person) from the instrumental cause (all
other elements of production) (Gaudium et Spes
(GS) #67). Consequently, it disregards the
preeminence of the subjective dimension over
the objective content of work for purposes of
remunerating the various elements of the
production process.
 Fourth, should factor contribution be the only
consideration? CST affirms the wisdom of
linking factor payments to productivity. In fact,
it asserts the importance and the need to weigh
the productivity and contribution of workers in
setting wage levels (GS #67; Mater et Magistra
(MM) #71). However, the distributional
outcomes arising from this criterion alone need
not be automatically fair, not even under perfect
competition. After all, there is no guarantee
that the workers’ remuneration will indeed be a
living wage.
 The ethical standard is not simply whether
the factor gets its due reward in return for
its contribution, but more importantly, it
must also consider whether labor gets paid
enough to support a family. Distributive
justice takes precedence over commutative
justice; the latter gives way to the more
urgent consideration of ensuring the
physical well-being of workers and their
dependents
 Fifth, the productivity of workers is a
function of many factors such as the type of
equipment used, the quality of technology
employed, and the entrepreneurial
competence available. Laborers should not
be deprived of a living wage simply on
account of management’s failure to provide
the proper conditions for a level of
productivity that leads to the payment of
adequate wages (QA #72).
 Finally, the underlying dynamic behind the
marginal productivity theory of factor
payments is the maximization of profits.
 This runs against CST’s view that the
primary end of economic activity is the
promotion of both public and individual
welfare by providing the necessary means
for the proper growth and development of
the human person
 This is not to say that profits are unimportant.
Profit is important, and CST acknowledges
this (Centesimus Annus (CA) #35c). However,
it cannot be the sole consideration. Special
attention must be given to workers when it
comes to dividing output from the common
productive effort; unlike the objective
elements of production, laborers need to lead
a full life.
 Summary
 The attention accorded to commutative
justice in scholastic just price has shifted
to a modern concern over distributive
justice
 The object of the scholastics is to identify
the bounds of commutative justice that
make for a fair exchange.
 Summary
 Modern Catholic social thought is
concerned with providing an adequate
livelihood for workers. As noted earlier,
people are price takers in a modern
competitive economy; the risk of fraud
where the seller takes advantage of the
buyer is minimized given the inability of
atomistic economic actors to influence
the price
 Summary
 Shift can be observed in the allocative and
enforcement mechanisms of the economy from
feudal to industrial to the modern knowledge
economy
 In an industrial society characterized by larger
economic units and more complex production
processes, the distribution of factor payments can no
longer be based on sociocultural ties as in the feudal
era. The modern economy has devised new
mechanisms of distribution such as the wage-labor
market and the marginalist approach to factor
payments
 Summary
 Mutual advantage role in the market
exchange
 Emphasis on the living wage
 Equivalence in the market exchange assumes
that all agents are aware of the risks involved,
no one has monopoly over any information. If
a market is risky, then the agents assume or
shoulder the risks. But this is not true in
practice because information asymmetry
exists.
 Matrix Plot of HDI2010 vs LIFEEXP, 2008GNICAPPPP$, LIFESATTOT
0 40000 80000
1.0

0.9

0.8

0.7
HDI2010

0.6

0.5

0.4

0.3

0.2

0.1
40 60 80 4 6 8
LIFEEXP 2008GNICAPPPP$ LIFESATTOT
Matrix Plot of 2008GNICAPPPP$ vs LIFEEXP, MEANYEARSSCH, LIFESATTOT
0 5 10
90000

80000

70000
2008GNICAPPPP$

60000

50000

40000

30000

20000

10000

40 60 80 4 6 8
LIFEEXP MEANYEARSSCH LIFESATTOT
 Table 2. Relative Earnings of the Population with Income from Employment: Males
By Level of Educational attainment for the Population 25 to 64 years of age
(Upper Secondary Education = 100)
Males Lower Males Higher Education Males Higher Education
Country Secondary and Below Non-University University
Australia 87 120 144
Canada 84 109 148
Czeck Republic 75 177 178
Denmark 87 122 148
Finland 94 128 186
France 88 128 178
Germany 77 105 149
Hungary 72 240 218
Ireland 72 100 149
Italy 54
Korea 88 105 143
Netherlands 86 142 138
New Zealand 76
Norway 85 125 133
Portugal 61 149 188
Spain 75 96 178
Sweden 87
Switzerland 81 122 144
United Kingdom 73 126 159
United States 65 119 183
Country Mean 78 130 163
Source: Hanushek, Eric A. (2002). "Publicly Provided Education. " National Bureau of Economic Research. WP 8799.
February. pp. 96-100. Basic Data was sourced from the Organization of Economic Cooperation and Development (OECD),
2001)
 F ig u re 1. P e rce n tag e o f P o p u latio n attain in g U p p e r S e co n d ary
E d u catio n o r M o re (1999)

88
U n ite d S ta te s 87

66
U n ite d K in g d o m 62

89
S w itz e rla n d 82

87
Sw e de n 77

55
S p a in 35

30
P o rtu g a l 21

94
N o rw a y 85

79
N e w Ze a la n d 74

93
K o re a 66

55 S c h o o lin g 2 5 -3 4
Ita ly 42
S c h o o lin g 2 5 -6 4
67
Ire la n d 51

80
H u n g a ry 67

85
G e rm a n y 81

76
F ra n ce 62

86
F in la n d 72

87
D e n m a rk 80

93
C z e ck R e p u b lic 86

87
Ca na da 79

65
A u stra lia 57

0 20 40 60 80 100
 Figure 2. Percentage of Population Attaining Upper Secondary Education or More
(1999)

D e v e l op i ng C ou nt r i e s 42
Mean 32

OEC D M e a n 72
62

Z i m ba bwe 51
29

U r ug ua y 39
32

T un i si a
11
8

Th a i l a n d
23
16

S r i La nk a
46
36 Schooling 25-34

55 Schooling 25-64
P h i l i pp i ne s
44

P er u 58
46

M a l a y si a 50
35

J or da n 55
51

I nd on e si a
33
22

C hi l e
55
43

Br az il
29
24

0 10 20 30 40 50 60 70 80
Table 4. Educational Spending by the Government Relative to
GDP and Percentage of Population aged 25 to 64 Attaining at
Least Upper Secondary Education (1998)
Expenditure Relative to
GDP Schooling 25 to 64
Australia 3.8 57
Canada 4.1 79
Czeck Republic 3.1 86
Denmark 4.3 80
Finland 3.7 72
France 4.4 62
Germany 3.7 81
Hungary 3.1 67
Ireland 3.3 51
Italy 3.5 42
Korea 4 66
New Zealand 74
Norway 4.4 85
Portugal 4.2 21
Spain 3.7 35
Sweden 4.5 77
Switzerland 4.5 82
United Kingdom 62
United States 3.7 87
Note: Expenditure Relative to GDP refers to the expenditure per student in
US dollars converted using PPP.
Source: OECD, 2001 in Hanushek pp. 96 to 100
 Figure 3. Schooling vs. Public School Expenditure

100

90
Attaining Upper Secondary Education or
Percentage of Population Aged 25 to 64

80

70

60
More (1999)

50

40

30

20

10

0
0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5
Percent Expenditure per Student and Spending Relative to GDP (1998)
Table 5. Actual Expenditure per Student on Secondary
Education and Percentage of Population Aged 25 to 64
Attaining at Least Upper Secondary Education (1998)
Secondary Education Schooling 25-64
Australia 5,830 57
Canada 79
Czeck Republic 3,182 86
Denmark 7,200 80
Finland 5,111 72
France 6,605 62
Germany 6,209 81
Hungary 2,140 67
Ireland 3,934 51
Italy 6,458 42
Korea 3,544 66
New Zealand 74
Norway 7,343 85
Portugal 4,636 21
Spain 4,274 35
Sweden 5,648 77
Switzerland 9,348 82
United Kingdom 5,230 62
United States 7,764 87
Note: Expenditure Relative to GDP refers to the expenditure
per student in US dollars converted using PPP.
Source: OECD, 2001 in Hanushek pp. 96 to 100