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An agent-based approach to value theory and wealth distribution in economics

Parris, Brett 2005, An agent-based approach to value theory and wealth distribution in economics, in MODSIM05 : International Congress on Modelling and Simulation : advances and applications for management and decision making, Melbourne, 12-15 December : proceedings, MODSIM, Melbourne, Vic., pp. 1077-1083.

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Title An agent-based approach to value theory and wealth distribution in economics
Author(s) Parris, Brett
Conference name International Congress on Modelling and Simulation (2005 : Melbourne, Vic.)
Conference location Melbourne, Victoria
Conference dates 12-15 December 2005
Title of proceedings MODSIM05 : International Congress on Modelling and Simulation : advances and applications for management and decision making, Melbourne, 12-15 December : proceedings
Editor(s) Zerger, Andre
Argent, Robert M.
Publication date 2005
Conference series International Congress on Modelling and Simulation
Start page 1077
End page 1083
Publisher MODSIM
Place of publication Melbourne, Vic.
Keyword(s) value
price theory
agent-based modelling
Summary Any attempt to model an economy requires foundational assumptions about the relations between prices, values and the distribution of wealth. These assumptions exert a profound influence over the results of any model. Unfortunately, there are few areas in economics as vexed as the theory of value. I argue in this paper that the fundamental problem with past theories of value is that it is simply not possible to model the determination of value, the formation of prices and the distribution of income in a real economy with analytic mathematical models. All such attempts leave out crucial processes or make unrealistic assumptions which significantly affect the results. There have been two primary approaches to the theory of value. The first, associated with classical economists such as Ricardo and Marx were substance theories of value, which view value as a substance inherent in an object and which is conserved in exchange. For Marxists, the value of a commodity derives solely from the value of the labour power used to produce it - and therefore any profit is due to the exploitation of the workers. The labour theory of value has been discredited because of its assumption that labour was the only ‘factor’ that contributed to the creation of value, and because of its fundamentally circular argument. Neoclassical theorists argued that price was identical with value and was determined purely by the interaction of supply and demand. Value then, was completely subjective. Returns to labour (wages) and capital (profits) were determined solely by their marginal contribution to production, so that each factor received its just reward by definition. Problems with the neoclassical approach include assumptions concerning representative agents, perfect competition, perfect and costless information and contract enforcement, complete markets for credit and risk, aggregate production functions and infinite, smooth substitution between factors, distribution according to marginal products, firms always on the production possibility frontier and firms’ pricing decisions, ignoring money and credit, and perfectly rational agents with infinite computational capacity. Two critical areas include firstly, the underappreciated Sonnenschein-Mantel- Debreu results which showed that the foundational assumptions of the Walrasian general-equilibrium model imply arbitrary excess demand functions and therefore arbitrary equilibrium price sets. Secondly, in real economies, there is no equilibrium, only continuous change. Equilibrium is never reached because of constant changes in preferences and tastes; technological and organisational innovations; discoveries of new resources and new markets; inaccurate and evolving expectations of businesses, consumers, governments and speculators; changing demand for credit; the entry and exit of firms; the birth, learning, and death of citizens; changes in laws and government policies; imperfect information; generalized increasing returns to scale; random acts of impulse; weather and climate events; changes in disease patterns, and so on. The problem is not the use of mathematical modelling, but the kind of mathematical modelling used. Agent-based models (ABMs), objectoriented programming and greatly increased computer power however, are opening up a new frontier. Here a dynamic bargaining ABM is outlined as a basis for an alternative theory of value. A large but finite number of heterogeneous commodities and agents with differing degrees of market power are set in a spatial network. Returns to buyers and sellers are decided at each step in the value chain, and in each factor market, through the process of bargaining. Market power and its potential abuse against the poor and vulnerable are fundamental to how the bargaining dynamics play out. Ethics therefore lie at the very heart of economic analysis, the determination of prices and the distribution of wealth. The neoclassicals are right then that price is the enumeration of value at a particular time and place, but wrong to downplay the critical roles of bargaining, power and ethics in determining those same prices.
ISBN 0975840002
Language eng
Field of Research 160805 Social Change
Socio Economic Objective 950407 Social Ethics
HERDC Research category E1.1 Full written paper - refereed
Copyright notice ©2007 Modelling & Simulation Society of Australia & New Zealand Inc.
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Document type: Conference Paper
Collection: School of International and Political Studies
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