Some economists think the 1871 revolution was a big mistake, and led economics down the wrong path. They take their inspiration from pre-1871 economics, especially Ricardo and Marx, and proceed from there. Many of them are very smart and knowledgeable people. They think that most academic economists ignore them and know little or nothing about their work. I think they are right about that. And I think that many of them get frustrated because they think they've got something important to say and the people who most need to hear it don't listen or don't even know they exist and so continue down their wrong path in blissful or even willful ignorance.
One of the problems in the economics of search is that you need to form some sort of estimate of the probability that search will be successful. And how can you know that probability before you've done a thorough search and found out what proportion of rocks contain gold? It's a bit like that in deciding what to read. You won't know if it was worth reading until after you've read it. But there are far more things that might be worth reading than you can possibly read. So you follow various rules of thumb that seem to have worked for you in the past. You read a new book by an author whose previous books you had read and liked. You follow the recommendations of other readers who have read and liked the same books as you. But rules of thumb like this can be self-replicating. You can get stuck in a genre. There must be some very good authors out there that nobody reads simply because nobody reads them. And different circles read different authors simply because different circles read different authors. Search equilibria may be path-dependent.
I didn't take a gap year between school and university. I took a gap year in the middle of my PhD program, when I should have been writing my thesis. I didn't tell anyone I was taking a gap year. It's hard to monitor what PhD students are doing when they have finished their courses.
Probably like most, my gap year was a wasted year, when looked at ex-post, and even ex-ante, from the perspective of what was good for my career. I should have spent the time sticking to my knitting and banging out three money/macro essays for a quick thesis. But I needed to do it.
When I told Ian Steedman (he was visiting Carleton in the 1980's) how I had spent my gap year he could articulate my reasons and how I felt at the time better than I could. It was partly just sheer curiosity and looking for something new, because maybe the economics I had learned might not be the whole story, even in broad outline, and had probably left a lot of interesting stuff out. And it was partly inspired by taking David Laidler's History of Thought class. But it was also an almost existential self-doubt, when you wonder if everything you think you know and identify yourself as believing might be totally wrong. And I had vaguely heard about those economists who thought that economics had taken the wrong path in 1871. And they weren't just saying that post 1871 economics needed improvement, or wasn't a perfect fit empirically (so what else is new?); they were saying that post-1871 economics was logically flawed. That was an existential challenge.
So I gathered up my courage and started reading, more or less at random. It had to be more or less at random, because the very nature of the problem was that I might be stuck in a path-dependent search equilibrium reading the same genre as all the people I knew, and I couldn't trust any guide, even if I knew one.
Eventually I abandoned my search and went back to writing my thesis. I didn't abandon my search because I became certain that the critics were wrong, though my search did eventually increase my subjective probability they were following a path that would lead nowhere very interesting. There was always the possibility that I would find gold if I just looked under the next rock, or dug deeper under a rock I had already looked at. But I was running into diminishing expected returns, and there was an opportunity cost to my search as well. Not just writing my thesis, but spending the time reading about asymmetric information or thinking about doing macroeconomics with imperfect competition seemed more valuable alternative uses. Time spent searching in one area has an opportunity cost. It wasn't a waste of time, because I did learn stuff. And it forced me to think through stuff that I thought I understood so I could understand it better than I did before. But it didn't seem worthwhile on the margin to continue any further.
The 1871 revolution in economics (Jevons, Menger, Walras,.. and Marshall, when classical economics became neoclassical economics) is usually called the marginal revolution. Which makes it sound rather trivial. Calculus wasn't exactly new in 1871, and if someone is choosing something to maximise something then looking at first derivatives (which is what things like marginal utility and marginal product are) seems sort of obvious. What was revolutionary about 1871 was the subjectivist revolution. Thinking about margins mattered only because thinking about margins made it possible to think about goods having subjective value. Otherwise you are stuck wondering why water should be worth less per gram than diamonds, when we would prefer living with no diamonds than dieing of thirst wearing diamonds. Water has higher total utility but lower marginal utility.
Goods don't have value; people value goods. It doesn't matter how much labour or other resources were used in the past to produce this good; if nobody wants it now or is expected to want it in future, it has no value. Why is the labour of a skilled soccer player worth more than the labour of a skilled cricket player, when both had to practice equally hard to create those rare skills? Because people prefer watching soccer to watching cricket. You cannot separate the theory of distribution from the theory of value, and both value and distribution depend on preferences. Is labour even a cost of production? Not if that labour is spent doing something that, at the margin, I find enjoyable, like fixing my car. Thinking about economics like that was a revolution.
If people were all converted by some millennial cult and suddenly stopped caring about the future, and only cared about the present, then the prices of all assets, both real and financial, that could not be physically converted into goods that created immediate pleasure, would immediately drop to zero. Nobody would pay anything for any future benefits those assets might create. Both saving and investment would go as far negative as is physically possible. You simply cannot talk about capital and interest without talking about people's subjective preferences for future goods.
Right now there is a stock of capital goods of many different types. And if markets are competitive those capital goods, like all the different types of labour and different types of land, either individually or in combination with other resources, are earning rents equal to their value marginal products. (Or marginal revenue products if markets are imperfectly competitive.) And people have expectations about the streams of rents those assets will earn in future. And asking how much we value those assets is to ask how much we value those streams of future rents. And the answer, in part, is inherently subjective. How much do we value the expectation of those future streams of goods that the expectation of those future streams of rents will let us buy? And our subjective evaluations of those future goods will in part determine the current price of capital goods, which influences the current production of new capital goods, which will influence the future stocks and the future value marginal products of capital goods. So, if we are rational, our expectations of streams of future rents will take into account the current and likely future production of capital goods.
I just don't see how you can talk about value, capital, and interest, without talking about people's subjective preferences for current and future goods and people's subjective expectations about the future. Far from leading economics down a fundamentally flawed and logically incoherent path, the 1871 subjectivist revolution seems to me to be an essential pre-requisite of any coherent understanding of value, capital, and interest.
How do people form their subjective expectations about the future? Good question. But we can't duck it by ignoring those subjective expectations. They matter. If everybody expected that all capital goods would fall apart tomorrow, or they thought that people would suddenly stop wanting the particular goods those particular capital goods could produce, the current prices of those capital goods would drop to zero. Unless you could eat the capital goods now.
It was over 30 years ago now, my memory is not good, and it was a random search, and so I can't remember what I read and didn't read, or read part of and abandoned. And I didn't understand some of what I tried to read and understand. I abandoned Sraffa's book, which isn't exactly user-friendly, because he just jumps right into the algebra. My attempt to understand his quest for Ricardo's invariable measure of value was a bit like an atheist trying to understand the quest for the Holy Grail. Not just "Why are you looking?", but "If you did find it, how would you know you had found it?" and "what would you do with it if you did find it?"
I'm pretty sure I understand why "The rate of interest is determined by the marginal product of capital" is wrong, except under very special assumptions. But a simple Irving Fisher diagram is sufficient to show that that is wrong. Or a simple model where there is no capital and no investment and only consumption loans tells you it can't be generally right. Or a model where there is only land that produces wheat and wheat is measured in tons and land is measured in acres so the marginal product of land has the units tons per year per acre which can't possibly be equal to the rate of interest, which has the units per year, and how you need to talk about people's preferences between wheat today and the stream of future wheat an acre of land can give you to determine the price of land in terms of wheat and thus the implied rate of return on buying land.
A few years later Luigi Pasinetti lent me one of his papers which, IIRC, had a pure consumption economy with no capital where the rate of interest was determined by people's subjective preferences for future vs current consumption. His paper seemed right to me. It was simple and clear. And it was consistent with my prior beliefs. But it was the only such paper I remember from those who think 1871 was a mistake, and it was a paper that seemed to be saying that 1871 wasn't a mistake, because it showed that subjective preferences matter??
My gap year was a very confusing year. I still can't really figure out what it was all about. Apart from the occasional flashback, I have moved on, because other things seem more worthwhile. But I really did try to listen, and understand.
Addendum: I was reading through the Wikipedia for Luigi Pasinetti, just to refresh my memory and see what I might have missed. It's a very good Wikipedia, which someone has clearly taken the time to do well.
1. There's a typo in equation 1.1 or 1.5. The X should be Y or vice versa. (No big deal. Just to show I was paying attention and understanding what I read.)
2. Consider these two sentences:
"At the same time, prices though of course not equal to, are exactly proportional to the quantity of labour embodied in each commodity. This is a perfectly clear labour theory of value."
The first sentence is missing an absolutely crucial three words, and that omission is the only thing that makes it appear that the second sentence follows from the first. Those three words are :"at the margin". Because it is certainly not true in Ricardo's model that prices are proportional to the average quantities of labour embodied in each commodity. The total exchange value of wheat produced, divided by the total quantity of labour used to produce it, is greater (in Ricardo's model, and as presented in the Wiki) than the total exchange value of gold produced divided by the total quantity of labour used to produce it.
We normally interpret the labour theory of value to be about average, not marginal, quantities of embodied labour. In which case the labour theory of value is false in the Ricardian model.
If instead we interpret the labour theory of value to be a statement about the marginal quantity of labour embodied (the extra amount of labour needed to produce one extra ton of wheat) then the labour theory of value is also true in the neoclassical theory. Because the quantity of socially necessary labour embodied at the margin is just the reciprocal of the marginal product of labour. If that's how you define the labour theory of value, then the labour theory of value is true in neoclassical models. It's true for each and every different type of labour. And the land theory of value is true too. And the oil theory of value is true too. And the screwdriver theory of value is true too.
Gimme a break guys. We figured this all out in 1871.
Then my ADD kicked in again.
The best paper I read in my gap year was Herbert Gintis and Samuel Bowles "Structure and Practice in the Labour Theory of Value" (abstract, full article gated). Two Marxists (at least I thought they were sort of, at the time). They start out by laying out clearly and simply several devastating arguments against the labour theory of value. All the arguments I had previously heard of, and maybe a couple I hadn't. By this time they really had my full attention and massive amounts of credibility. "I have no idea where they are going with this, and how they can possibly escape like Houdini and still say there's some validity to the labour theory of value; but I sure do want to listen to what they say!" And I was handsomely rewarded by a presentation of what would later be called the "efficiency wage theory of unemployment".
There is some gold out there.