Economic model

From Wikipedia, the free encyclopedia

https://en.wikipedia.org/wiki/Economic_model

A diagram of the IS/LM model

An economic model is a theoretical construct representing economic processes by a set of variables and a set of logical and/or quantitative relationships between them. The economic model is a simplified, often mathematical, framework designed to illustrate complex processes. Frequently, economic models posit structural parameters. A model may have various exogenous variables, and those variables may change to create various responses by economic variables. Methodological uses of models include investigation, theorizing, and fitting theories to the world.

Overview

In general terms, economic models have two functions: first as a simplification of and abstraction from observed data, and second as a means of selection of data based on a paradigm of econometric study.

Simplification is particularly important for economics given the enormous complexity of economic processes. This complexity can be attributed to the diversity of factors that determine economic activity; these factors include: individual and cooperative decision processes, resource limitations, environmental and geographical constraints, institutional and legal requirements and purely random fluctuations. Economists therefore must make a reasoned choice of which variables and which relationships between these variables are relevant and which ways of analyzing and presenting this information are useful.

Selection is important because the nature of an economic model will often determine what facts will be looked at and how they will be compiled. For example, inflation is a general economic concept, but to measure inflation requires a model of behavior, so that an economist can differentiate between changes in relative prices and changes in price that are to be attributed to inflation.

In addition to their professional academic interest, uses of models include:

• Forecasting economic activity in a way in which conclusions are logically related to assumptions;
• Proposing economic policy to modify future economic activity;
• Presenting reasoned arguments to politically justify economic policy at the national level, to explain and influence company strategy at the level of the firm, or to provide intelligent advice for household economic decisions at the level of households.
• Planning and allocation, in the case of centrally planned economies, and on a smaller scale in logistics and management of businesses.
• In finance, predictive models have been used since the 1980s for trading (investment and speculation). For example, emerging market bonds were often traded based on economic models predicting the growth of the developing nation issuing them. Since the 1990s many long-term risk management models have incorporated economic relationships between simulated variables in an attempt to detect high-exposure future scenarios (often through a Monte Carlo method).

A model establishes an argumentative framework for applying logic and mathematics that can be independently discussed and tested and that can be applied in various instances. Policies and arguments that rely on economic models have a clear basis for soundness, namely the validity of the supporting model.

Economic models in current use do not pretend to be theories of everything economic; any such pretensions would immediately be thwarted by computational infeasibility and the incompleteness or lack of theories for various types of economic behavior. Therefore, conclusions drawn from models will be approximate representations of economic facts. However, properly constructed models can remove extraneous information and isolate useful approximations of key relationships. In this way more can be understood about the relationships in question than by trying to understand the entire economic process.

The details of model construction vary with type of model and its application, but a generic process can be identified. Generally, any modelling process has two steps: generating a model, then checking the model for accuracy (sometimes called diagnostics). The diagnostic step is important because a model is only useful to the extent that it accurately mirrors the relationships that it purports to describe. Creating and diagnosing a model is frequently an iterative process in which the model is modified (and hopefully improved) with each iteration of diagnosis and respecification. Once a satisfactory model is found, it should be double checked by applying it to a different data set.

Types of models

According to whether all the model variables are deterministic, economic models can be classified as stochastic or non-stochastic models; according to whether all the variables are quantitative, economic models are classified as discrete or continuous choice model; according to the model's intended purpose/function, it can be classified as quantitative or qualitative; according to the model's ambit, it can be classified as a general equilibrium model, a partial equilibrium model, or even a non-equilibrium model; according to the economic agent's characteristics, models can be classified as rational agent models, representative agent models etc.

• Stochastic models are formulated using stochastic processes. They model economically observable values over time. Most of econometrics is based on statistics to formulate and test hypotheses about these processes or estimate parameters for them. A widely used bargaining class of simple econometric models popularized by Tinbergen and later Wold are autoregressive models, in which the stochastic process satisfies some relation between current and past values. Examples of these are autoregressive moving average models and related ones such as autoregressive conditional heteroskedasticity (ARCH) and GARCH models for the modelling of heteroskedasticity.
• Non-stochastic models may be purely qualitative (for example, relating to social choice theory) or quantitative (involving rationalization of financial variables, for example with hyperbolic coordinates, and/or specific forms of functional relationships between variables). In some cases economic predictions in a coincidence of a model merely assert the direction of movement of economic variables, and so the functional relationships are used only stoical in a qualitative sense: for example, if the price of an item increases, then the demand for that item will decrease. For such models, economists often use two-dimensional graphs instead of functions.
• Qualitative models – although almost all economic models involve some form of mathematical or quantitative analysis, qualitative models are occasionally used. One example is qualitative scenario planning in which possible future events are played out. Another example is non-numerical decision tree analysis. Qualitative models often suffer from lack of precision.

At a more practical level, quantitative modelling is applied to many areas of economics and several methodologies have evolved more or less independently of each other. As a result, no overall model taxonomy is naturally available. We can nonetheless provide a few examples that illustrate some particularly relevant points of model construction.

• An accounting model is one based on the premise that for every credit there is a debit. More symbolically, an accounting model expresses some principle of conservation in the form

algebraic sum of inflows = sinks − sources

This principle is certainly true for money and it is the basis for national income accounting. Accounting models are true by convention, that is any experimental failure to confirm them, would be attributed to fraud, arithmetic error or an extraneous injection (or destruction) of cash, which we would interpret as showing the experiment was conducted improperly.

• Optimality and constrained optimization models – Other examples of quantitative models are based on principles such as profit or utility maximization. An example of such a model is given by the comparative statics of taxation on the profit-maximizing firm. The profit of a firm is given by

${\displaystyle \pi (x,t)=xp(x)-C(x)-tx}$

where ${\displaystyle p(x)}$ is the price that a product commands in the market if it is supplied at the rate ${\displaystyle x}$, ${\displaystyle xp(x)}$ is the revenue obtained from selling the product, ${\displaystyle C(x)}$ is the cost of bringing the product to market at the rate ${\displaystyle x}$, and ${\displaystyle t}$ is the tax that the firm must pay per unit of the product sold.

The profit maximization assumption states that a firm will produce at the output rate x if that rate maximizes the firm's profit. Using differential calculus we can obtain conditions on x under which this holds. The first order maximization condition for x is

${\displaystyle \frac{\mathrm{\partial }\pi (x,t)}{\mathrm{\partial }x}=\frac{\mathrm{\partial }(xp(x)-C(x))}{\mathrm{\partial }x}-t=0}$

Regarding x as an implicitly defined function of t by this equation (see implicit function theorem), one concludes that the derivative of x with respect to t has the same sign as

${\displaystyle \frac{{\mathrm{\partial }}^2(xp(x)-C(x))}{{\mathrm{\partial }}^{2}x}=\frac{{\mathrm{\partial }}^2\pi (x,t)}{\mathrm{\partial }{x}^2},}$

which is negative if the second order conditions for a local maximum are satisfied.

Thus the profit maximization model predicts something about the effect of taxation on output, namely that output decreases with increased taxation. If the predictions of the model fail, we conclude that the profit maximization hypothesis was false; this should lead to alternate theories of the firm, for example based on bounded rationality.

Borrowing a notion apparently first used in economics by Paul Samuelson, this model of taxation and the predicted dependency of output on the tax rate, illustrates an operationally meaningful theorem; that is one requiring some economically meaningful assumption that is falsifiable under certain conditions.

• Aggregate models. Macroeconomics needs to deal with aggregate quantities such as output, the price level, the interest rate and so on. Now real output is actually a vector of goods and services, such as cars, passenger airplanes, computers, food items, secretarial services, home repair services etc. Similarly price is the vector of individual prices of goods and services. Models in which the vector nature of the quantities is maintained are used in practice, for example Leontief input–output models are of this kind. However, for the most part, these models are computationally much harder to deal with and harder to use as tools for qualitative analysis. For this reason, macroeconomic models usually lump together different variables into a single quantity such as output or price. Moreover, quantitative relationships between these aggregate variables are often parts of important macroeconomic theories. This process of aggregation and functional dependency between various aggregates usually is interpreted statistically and validated by econometrics. For instance, one ingredient of the Keynesian model is a functional relationship between consumption and national income: C = C(Y). This relationship plays an important role in Keynesian analysis.

Problems with economic models

Most economic models rest on a number of assumptions that are not entirely realistic. For example, agents are often assumed to have perfect information, and markets are often assumed to clear without friction. Or, the model may omit issues that are important to the question being considered, such as externalities. Any analysis of the results of an economic model must therefore consider the extent to which these results may be compromised by inaccuracies in these assumptions, and a large literature has grown up discussing problems with economic models, or at least asserting that their results are unreliable.

History

One of the major problems addressed by economic models has been understanding economic growth. An early attempt to provide a technique to approach this came from the French physiocratic school in the eighteenth century. Among these economists, François Quesnay was known particularly for his development and use of tables he called Tableaux économiques. These tables have in fact been interpreted in more modern terminology as a Leontiev model, see the Phillips reference below.

All through the 18th century (that is, well before the founding of modern political economy, conventionally marked by Adam Smith's 1776 Wealth of Nations), simple probabilistic models were used to understand the economics of insurance. This was a natural extrapolation of the theory of gambling, and played an important role both in the development of probability theory itself and in the development of actuarial science. Many of the giants of 18th century mathematics contributed to this field. Around 1730, De Moivre addressed some of these problems in the 3rd edition of The Doctrine of Chances. Even earlier (1709), Nicolas Bernoulli studies problems related to savings and interest in the Ars Conjectandi. In 1730, Daniel Bernoulli studied "moral probability" in his book Mensura Sortis, where he introduced what would today be called "logarithmic utility of money" and applied it to gambling and insurance problems, including a solution of the paradoxical Saint Petersburg problem. All of these developments were summarized by Laplace in his Analytical Theory of Probabilities (1812). Thus, by the time David Ricardo came along he had a well-established mathematical basis to draw from.

Tests of macroeconomic predictions

In the late 1980s, the Brookings Institution compared 12 leading macroeconomic models available at the time. They compared the models' predictions for how the economy would respond to specific economic shocks (allowing the models to control for all the variability in the real world; this was a test of model vs. model, not a test against the actual outcome). Although the models simplified the world and started from a stable, known common parameters the various models gave significantly different answers. For instance, in calculating the impact of a monetary loosening on output some models estimated a 3% change in GDP after one year, and one gave almost no change, with the rest spread between.

Partly as a result of such experiments, modern central bankers no longer have as much confidence that it is possible to 'fine-tune' the economy as they had in the 1960s and early 1970s. Modern policy makers tend to use a less activist approach, explicitly because they lack confidence that their models will actually predict where the economy is going, or the effect of any shock upon it. The new, more humble, approach sees danger in dramatic policy changes based on model predictions, because of several practical and theoretical limitations in current macroeconomic models; in addition to the theoretical pitfalls, (listed above) some problems specific to aggregate modelling are:

• Limitations in model construction caused by difficulties in understanding the underlying mechanisms of the real economy. (Hence the profusion of separate models.)
• The law of unintended consequences, on elements of the real economy not yet included in the model.
• The time lag in both receiving data and the reaction of economic variables to policy makers attempts to 'steer' them (mostly through monetary policy) in the direction that central bankers want them to move. Milton Friedman has vigorously argued that these lags are so long and unpredictably variable that effective management of the macroeconomy is impossible.
• The difficulty in correctly specifying all of the parameters (through econometric measurements) even if the structural model and data were perfect.
• The fact that all the model's relationships and coefficients are stochastic, so that the error term becomes very large quickly, and the available snapshot of the input parameters is already out of date.
• Modern economic models incorporate the reaction of the public and market to the policy maker's actions (through game theory), and this feedback is included in modern models (following the rational expectations revolution and Robert Lucas, Jr.'s Lucas critique of non-microfounded models). If the response to the decision maker's actions (and their credibility) must be included in the model then it becomes much harder to influence some of the variables simulated.

Comparison with models in other sciences

Complex systems specialist and mathematician David Orrell wrote on this issue in his book Apollo's Arrow and explained that the weather, human health and economics use similar methods of prediction (mathematical models). Their systems—the atmosphere, the human body and the economy—also have similar levels of complexity. He found that forecasts fail because the models suffer from two problems: (i) they cannot capture the full detail of the underlying system, so rely on approximate equations; (ii) they are sensitive to small changes in the exact form of these equations. This is because complex systems like the economy or the climate consist of a delicate balance of opposing forces, so a slight imbalance in their representation has big effects. Thus, predictions of things like economic recessions are still highly inaccurate, despite the use of enormous models running on fast computers. See Unreasonable ineffectiveness of mathematics § Economics and finance.

Effects of deterministic chaos on economic models

Economic and meteorological simulations may share a fundamental limit to their predictive powers: chaos. Although the modern mathematical work on chaotic systems began in the 1970s the danger of chaos had been identified and defined in Econometrica as early as 1958:

"Good theorising consists to a large extent in avoiding assumptions ... [with the property that] a small change in what is posited will seriously affect the conclusions."

(William Baumol, Econometrica, 26 see: Economics on the Edge of Chaos).

It is straightforward to design economic models susceptible to butterfly effects of initial-condition sensitivity.

However, the econometric research program to identify which variables are chaotic (if any) has largely concluded that aggregate macroeconomic variables probably do not behave chaotically. This would mean that refinements to the models could ultimately produce reliable long-term forecasts. However, the validity of this conclusion has generated two challenges:

• In 2004 Philip Mirowski challenged this view and those who hold it, saying that chaos in economics is suffering from a biased "crusade" against it by neo-classical economics in order to preserve their mathematical models.
• The variables in finance may well be subject to chaos. Also in 2004, the University of Canterbury study Economics on the Edge of Chaos concludes that after noise is removed from S&P 500 returns, evidence of deterministic chaos is found.

More recently, chaos (or the butterfly effect) has been identified as less significant than previously thought to explain prediction errors. Rather, the predictive power of economics and meteorology would mostly be limited by the models themselves and the nature of their underlying systems (see Comparison with models in other sciences above).

Critique of hubris in planning

A key strand of free market economic thinking is that the market's invisible hand guides an economy to prosperity more efficiently than central planning using an economic model. One reason, emphasized by Friedrich Hayek, is the claim that many of the true forces shaping the economy can never be captured in a single plan. This is an argument that cannot be made through a conventional (mathematical) economic model because it says that there are critical systemic-elements that will always be omitted from any top-down analysis of the economy.

Examples of economic models

• Cobb–Douglas model of production
• Solow–Swan model of economic growth
• Lucas islands model of money supply
• Heckscher–Ohlin model of international trade
• Black–Scholes model of option pricing
• AD–AS model a macroeconomic model of aggregate demand– and supply
• IS–LM model the relationship between interest rates and assets markets
• Ramsey–Cass–Koopmans model of economic growth
• Gordon–Loeb model for cyber security investments

Real prices and ideal prices

From Wikipedia, the free encyclopedia
https://en.wikipedia.org/wiki/Real_prices_and_ideal_prices

The distinction between real prices and ideal prices is a distinction between actual prices paid for products, services, assets and labour (the net amount of money that actually changes hands), and computed prices which are not actually charged or paid in market trade, although they may facilitate trade. The difference is between actual prices paid, and information about possible, potential or likely prices, or "average" price levels. This distinction should not be confused with the difference between "nominal prices" (current-value) and "real prices" (adjusted for price inflation, and/or tax and/or ancillary charges). It is more similar to, though not identical with, the distinction between "theoretical value" and "market price" in financial economics.

Characteristics

Ideal prices, expressed in money-units, can be "estimated", "theorized" or "imputed" for accounting, trading, marketing or calculation purposes, for example using the law of averages. Often the actual prices of real transactions are combined with assumed prices, for the purpose of a price calculation or estimate. Even if such prices therefore may not directly correspond to transactions involving actually traded products, assets or services, they can nevertheless provide "price signals" which influence economic behavior.

For example, if statisticians publish aggregated price estimates about the economy as a whole, market actors are likely to respond to this price information, even if it is far from exact, if it is based on a very large number of assumptions, and if it is later revised. The release of new GDP data, for instance, often has an immediate effect on stock market activity, insofar as it is interpreted as an indicator of whether and how fast the market – and consequently the incomes generated by it – is growing or declining.

Ideal prices are typically prices that would apply in trade, if certain assumed conditions apply (and they may not). The number of ideal prices used for calculations or signalling in the world vastly exceeds the number of real prices fetched. At any point in time, most economic goods and services in society are being owned or used, but not traded; nevertheless people are constantly extrapolating prices which would apply if they were traded in markets or if they had to be replaced. Such price information is essential to estimate the possible incomes, budgetary implications or expenditures associated with a transaction.

The distinction is currently best known in the profession of auditing. It also has enormous significance for economic theory, and more specifically for econometric measurement and price theory; the main reason is that price data is very often the basis for making economic and policy decisions.

Differences between real and ideal prices

A distinction between real (or actual) prices and ideal prices, was introduced in Marx's Grundrisse notebooks. In A Contribution to the Critique of Political Economy (1859), Marx already criticizes James Steuart and John Gray because they fudged the distinction between actual prices and ideal prices. In chapter 3 of the first volume of Das Kapital, Marx states:

Every trader knows, that he is far from having turned his goods into money, when he has expressed their value in a price or in imaginary money, and that it does not require the least bit of real gold, to estimate in that metal millions of pounds' worth of goods. When, therefore, money serves as a measure of value, it is employed only as imaginary or ideal money. This circumstance has given rise to the wildest theories. But, although the money that performs the functions of a measure of value is only ideal money, price depends entirely upon the actual substance that is money. (...) The possibility... of quantitative incongruity between price and magnitude of value, or the deviation of the former from the latter, is inherent in the price-form itself. This is no defect, but, on the contrary, admirably adapts the price-form to a mode of production whose inherent laws impose themselves only as the mean of apparently lawless irregularities that compensate one another. The price-form, however, is not only compatible with the possibility of a quantitative incongruity between magnitude of value and price, i.e., between the former and its expression in money, but it may also conceal a qualitative inconsistency, so much so, that, although money is nothing but the value-form of commodities, price ceases altogether to express value.

The activity of pricing goods, services and assets, facilitating transactions, communicating prices and keeping track of them in fact consumes a very large amount of human labour-time, irrespective of whether it happens to occur in a centralized or decentralized way. Millions of workers are professionally specialized in such activities, whether as clerks, tellers, buyers, retail assistants, accountants, financial advisors, bank workers, or economists etc. If that work is not done, price information would not be available, with the result that the trading process would become difficult or impossible to operate. Whether or not this is considered "bureaucratic", it therefore remains an essential administrative service. People cannot "choose between prices" if they don't even know what those prices are; and, normally, they cannot just "make up" any kind of price they like, because costing, budgets and incomes depend precisely on what price is charged.

The creation of price information is a production process – its output is worth money, because it is vital for the purpose of trade, and without it the circulation of goods and services could not occur. Price information can therefore be bought and sold as a commodity as well. But the production process of prices themselves is often hidden from view and hardly noticeable. Therefore, people often take the existence of price information for granted and as obvious, meriting no further inquiry. "A mysterious certainty dominates our lives in late capitalist modernity: the price. Not a single day passes without learning, making, and taking it. Yet despite prices' widespread presence around us, we do not know much about them." A price may also be attached in the course of another activity, or the pricing procedure may be a closely guarded secret rather than accessible in an open market because if competitors knew about it, this could adversely affect business income. But if pricing processes are viewed as production processes, it turns out that much more is involved than the observation of a price-tag or number might suggest.

For most of the history of economics, economic theorists were not primarily concerned with explaining the actual, real price-levels. Instead their theorizing was concerned with theoretical (ideal) prices. Simon Clarke explains for example:

The marginalists were no more concerned with the determination of the actual prices that ruled on the market than were the classical economists. All the innovators emphasised the abstract character of pure economic theory, in which the intervention of chance and uncertainty, of specific historical institutions or political interventions, could all be ignored and their consideration deferred to subordinate empirical and policy studies. Pure theory was not concerned with the determination of actual prices but with their determination in an ideal world of perfect knowledge, perfect foresight, perfect competition and pure rationality. It is against this ideal world that the real world, and proposed reforms in the real world, are to be measured. The questions that gave rise to a demand for a pure theory of price were questions about the proper prices of commodities. Jevons, for example, was especially concerned with the problem of scarcity (in particular the scarcity of coal) and with the role of prices in allocating resources. The problem he posed was that of determining what prices would achieve the optimal allocation of resources. The solutions that were reached would then serve as the basis of policy prescriptions about the proper role of state intervention in the formation of prices in order to achieve such an allocation.

It is only relatively recently that economists have tried to create generalizations about the actual pricing procedures used by business enterprises, based on information about what business people actually do (instead of an abstract mathematical model).

Illustrations of ideal prices

• An example would be an equilibrium price calculated by an economist. This is a price which a type of product or asset would theoretically have, if supply and demand were balanced. This price does not exist in actual trading processes except in special and rare cases; it is only an ideal or theoretical price level, which at best is only approximated in the real world.
• In accounting practice, ideal prices are used all the time. For example, when accountants have to value a stock of assets, or a set of transactions across an interval of time (for tax, commercial or audit purposes), they apply rules and criteria to arrive at a price reflecting the cost or market-value of the stock or flow of transactions. In grossing and netting, they apply certain rules of inclusion and exclusion to obtain the desired measure. But the valuation obtained following a standard procedure is in truth only hypothetical, because it represents a price which the assets or flows would have if they were traded or exchanged under assumed (stylized or standardized) conditions, or if they were replaced at a certain point in time. In principle, they need not refer to any real transaction flows at all, being only an imputation. Yet, the ideal price obtained may nevertheless influence very many transactions based on it, to the extent that it provides information and a measure of how a related market process is thought to be evolving.
• Ideal prices are often used in price negotiations, bidding, price estimation and insurance. These are calculated prices for things being traded, or the compensation which would be given, if certain conditions apply. Business deals can become very complex, and may involve numerous price assumptions. For example, the contract may be that if an average price trend occurs, then a certain amount of money will be paid out. Thus, the actual amount of money that changes hands may be conditional on a variety of price estimates.

Actual and potential prices

When goods are produced for sale, they may be priced, but those prices are initially only potential prices. There may not be any certainty about whether they will all fetch exactly the sum of money stated by those prices when they are actually sold, or whether they will be sold at all. In retrospect, the final value of an output, activity or asset may turn out to have been higher or lower than previously anticipated, because for various reasons prices and demand changed in the meantime. Thus, price negotiations, trading circumstances and the time factor may change actual prices realized from the prices originally set, and if price inflation occurs there is in addition a difference between the nominal prices and the inflation-adjusted price. The price of a stock or a debt security, expressed in a given currency, may be highly variable, and their variable yields may in turn revalue or devalue the prices of related assets.

Thus, the "price mechanism" is often not simply a function of supply and demand for a tradable object, but of a structure of related and co-existing prices, where fluctuations in one group of prices impact on another group of prices, perhaps quite contrary to the wishes of buyers and sellers. In this sense, the concept of a "price shock" refers to a drastic change in the price of a good which is widely used, and which therefore suddenly changes many related prices.

The sale price may be modified also by the difference in time between purchase and payment. For example, someone may opt to buy a product on credit, and pay interest in addition to the asking price for the product. The interest charge may vary during the interval in which the principal is paid off. Or, the price may change because of price inflation or because it is renegotiated. If it is not possible to pay for something within the previously expected time interval, that may also change prices.

Mike Beggs explains why credit instruments complicate the distinction between actual and ideal prices:

...the essence of monetary relations is that exchange often is, and has been, mediated by credit relations rather than through the actual circulation of money. This is undeniably true: credit relationships transform exchange so that payments do not coincide with transactions and reciprocal relationships may mean that some debts balance without ever needing to be cleared by monetary payment.

The effect of credit instruments is, that actual payments are removed in space and time from the trade in debt obligations, and indeed the trade in debt can occur without necessarily involving any transactions with real money. In turn, this blurs the distinction between actual money (i.e. hard cash) and ideal money, or between real and ideal prices. In developed economies, cash in circulation normally ranges from 6% to 8% of GDP, but the debts of private banks alone are already a multiple of GDP (in the EU area, about 3.5x the total GDP).

Valuation criteria in pricing

Consequently, what the "real" price of a thing is, might be a topic of dispute, because it may involve conditions and valuation criteria which some would not accept, because they apply different valuation criteria, different conditions or have a different purpose. For example, an asset or product may be valued by accountants and statisticians at:

• its historic cost
• its book value
• its accounting value
• its market value
• its nominal value
• its accrual value
• its promotional value
• its value for legal purposes
• its gross or net value
• its replacement value
• its trading value
• its FOB value
• its value before and after transport costs
• its transfer pricing value
• its value in terms of its future earnings potential
• its insurance value
• its pre-tax or post-tax value
• its depreciated value
• its inflation-adjusted value
• its value in a foreign currency
• its value at purchasing power parity
• its final (sold) value

A price can be computed for each of these valuations, depending on the purpose. Often the purpose is assumed to be self-evident, being related to a specific transaction, and so the price of something is taken as obvious.

Price abstraction

The price resulting from a calculation may be regarded as symbolizing (representing) one transaction, or many transactions at once, but the validity of this "price abstraction" all depends on whether the computational procedure and valuation method are accepted. The use of ideal prices for the purpose of accounting, estimation and theorising has become so habitual and ingrained in modern society, that they are frequently confused with the real prices actually realised in trade. Prices may be viewed only as a kind of data, information, or a type of knowledge, or the information available about a money quantity may be equated with the "real thing".

The concept of price is often used in a very loose sense to refer to all kinds of transactional possibilities. That can lead to theoretical errors. The notion of "the price of something" is often applied to sums of money denoting various quite different financial categories (e.g. a purchase or sale cost, the amount of a liability, the amount of a compensation, an asset value, an asset yield, an interest rate etc.).

For example, an interest rate can be defined as the "price" of borrowing money for a period of time. Here, the concept of price is used in the loose sense of "a cost" or "a compensation." This loose sense means that the distinction between actual prices and ideal prices is lost. In turn, that means that the concept of price then stands for any kind of commercial valuation we care to make. Any activity, thing or transaction has its "price-tag", so to speak. It can be difficult to work out, even for an economist, what a price really means, and price information can be deceptive.

Ideal prices are typically prices that would apply in trade, if certain assumed conditions apply (and they may not). Hence ideal prices are typically not observable, but instead inferences from observables. Transactions are registered in accounts, the accounting information is aggregated up to compute price data, and this data is in turn used to estimate price trends. In the process of so doing, there is a transition from observable price magnitudes to inferred price magnitudes. At best one could say, that the inferred price magnitudes are based on observable price magnitudes, but the link between them can be rather tenuous, since specific valuation assumptions may be introduced, so that the calculation procedure goes far beyond a simple arithmetical aggregation. Purely theoretical prices used for analytical purposes may have no correlate in the real world, or how exactly they relate to the real world may be unknown.

The knowledge of prices may have an effect influencing trading possibilities, which in turn changes the knowledge of prices. Consequently, such knowledge is often kept confidential or is a business secret (see also information security and sociological aspects of secrecy). A price system is therefore not necessarily transparent at all, quite apart from disputes over how a price is calculated, estimated or derived.

Are prices exact?

Money-prices are numbers, and numbers can be computed with exactitude. This seems to make accounting and economics exact sciences. But in the real world, prices can change quickly, due to innumerable conditions and it may be that prices can only be estimated for budgetary or contractual purposes. In aggregating them, a judgement is made about the meaning of the transactions involved, and boundaries are defined for where they begin and end. Consequently, in calculating price quantities, valuation principles of some sort is usually applied, regardless of whether this is made explicit or not. And, typically, this value theory refers to prices which would apply under certain assumed (theoretical) conditions, moving between real prices and ideal prices.

In an interview, the late Benoît Mandelbrot cited Louis Bachelier's thesis that prices have only one parameter defining their variability: they "can only go up or down" – and that, then, seems to provide a robust logical foundation for the mathematical modelling of price movements. But this sidesteps the qualitative problem that many different prices can be calculated for the same good, for all kinds of different purposes, using different valuation assumptions or transaction conditions. Bachelier's idea already assumes that we have a standard way to measure prices. Given that standard, one can then perform all kinds of mathematical operations on price distributions. Yet tradeable objects can also be combined and repackaged in numerous different ways, in which case the referent price may not simply go up or down, but instead refers to a different kind of deal. This issue is well known to official statisticians and economic historians, because they face the problem that the very objects whose price movements they aim to track change qualitatively across time, which may necessitate adjustments of the classification systems used to provide standard measures. A good example of that is the regimen of the consumer price index, which is periodically revised. But in times of rapid social change, the problem of devising a standard measure may be much more pervasive.

The mathematician John Allen Paulos stated that:

A well-known quotation, usually attributed to Einstein, is "Not everything that can be counted counts, and not everything that counts can be counted." I'd amend it to a less eloquent, more prosaic statement: unless we know how things are counted, we don't know if it's wise to count on the numbers. The problem isn't with statistical tests themselves but with what we do before and after we run them. First, we count if we can, but counting depends a great deal on previous assumptions about categorization. (...) Second, after we've gathered some numbers relating to a phenomenon, we must reasonably aggregate them into some sort of recommendation or ranking. This is not easy. By appropriate choices of criteria, measurement protocols and weights, almost any desired outcome can be reached.

It may of course be that not "almost any desired outcome can be reached" in price calculations, insofar as one would have to deny relevant evidence. Nevertheless, it may be that several different outcomes are possible, or that the presence of biases in interpreting price information can make a significant quantitative difference to the result. Insofar as economic actors have a vested self-interest in a particular quantitative result, because their income is at stake, then there is the possibility that they will prefer "one sort of calculation" to another, because it yields a financial result that favours their own position.

That financial result may be reasonably "credible" or "plausible" for the purpose of trading - if it was way out of kilter, trading partners would reject it - but it could involve a margin of distortion of the true situation. The small discrepancies would ordinarily not matter so much in individual transactions, but if a very large number of transactions is added up, the distortion might represent a substantial income for someone. For example, on 27 June 2012, Barclays Bank was fined $200m by the Commodity Futures Trading Commission, $150m by the United States Department of Justice and £59.5m by the Financial Services Authority for attempted manipulation of the Libor and Euribor rates (see Libor scandal).

FASB and the epistemology of prices

The Financial Accounting Standards Board makes it very explicit that accounting measures for price information may not be completely exact or fully accurate, and that they may not be completely verifiable or absolutely authoritative. They may only be an approximation or estimate of a state of affairs. A price aggregate may be made up from a very large number of transactions and prices, which cannot all be individually checked, and the monetary value of which may involve a certain amount of interpretation. For example, a price may be set but we may not know for sure whether a good or asset actually traded at this price, or how far exactly the actual price paid diverged from the ordinary set price. However, the Board argues that, within certain acceptable limits of error, this is not a problem, so long as we bear in mind the practical purpose of the measures:

In summary, verifiability [in financial accounting] means no more than that several measurers are likely to obtain the same measure. It is primarily a means of attempting to cope with measurement problems stemming from the uncertainty that surrounds accounting measures and is more successful in coping with some measurement problems than others. Verification of accounting information does not guarantee that the information has a high degree of representational faithfulness, and a measure with a high degree of verifiability is not necessarily relevant to the decision for which it is intended to be useful.

The economic calculation problem and prices

In the classic socialist calculation debate, economic calculation was a problem for centrally planned economies. Necessarily the central planners had to engage in price accounting, and had to use price information, but the volume and complexity of transactions was so great, that genuine central planning of the economy was often not really feasible in practice; often the state authority could only enforce the conditions of access to resources with the aid of extensive policing. An additional problem was, that much of the price information was actually false or inaccurate, because economic actors had no interest in providing truthful information, because the nominal price of goods did not reflect their value, or because goods changed hands informally in ways which could not be formally recorded and known. The effect was that the computed accounting information was often a mixture of fact and fiction.

Pricing issues

Market economies often suffer from similar defects, in the sense that commercial price information is in practice deficient, false, distorted or inaccurate. This is not necessarily because trading parties intend to deceive - generally speaking, deception is bad for business reputations, at least in the long run - but simply because it is technically impossible to provide fully exact price information. Official price estimates can be inaccurate, rely on dubious valuation assumptions contrary to reality, or fail to be verified thoroughly, among other things because they rely on sample survey techniques or partial and infrequent information. Business price signals are not intrinsically always clear; they can be deceptive, understating or overstating the real situation, or present a completely false picture of transactions and values. Jean-Claude Trichet for example remarked in 2008 about the global financial crisis that:

The root cause of the crisis was a widespread undervaluation of risk. This included an underpricing of the unit of risk and an underassessment of the quantity of risk that financial operators took upon themselves.

Trichet's suggestion is that completely wrong pricing occurred, with devastating results. A "unit of risk" does not really exist, but this category can nevertheless be thought of as the quantity of money which represents a "possible" financial loss. Risk-pricing is intrinsically a problem-fraught process, since it relies on assumptions about unknowns, in advance of actual events, and these unknowns may include factors that were not previously anticipated or included in the mathematical models.

Price discovery and information asymmetry

Commenting on the information problems associated with prices, Randall S. Kroszner, a Governor of the Federal Reserve Bank of the United States, theorizes:

When a product's track record is not well established, there should be a strong market demand for information in order to facilitate price discovery. Price discovery is the process by which buyers' and sellers' preferences, as well as any other available market information, result in the "discovery" of a price that will balance supply and demand, and provide signals to market participants about how most efficiently to allocate resources. This market-determined price will, of course, be subject to change as new information becomes available, as preferences evolve, as expectations are revised, and as costs of production change. In order for this process to work most effectively, market participants must utilize information relevant to value that product. Of course, searching out and using relevant sources of information – as well as determining what information is relevant – has its own costs. To underscore the last point, with new [financial] instruments, it may not even be clear exactly what information is needed for price discovery – that is, some market participants may not know what they do not know and they may therefore terminate the information-gathering stage prematurely, unwittingly bearing the risks and costs of incomplete information.

In addition to the discrepancies between real prices and ideal prices, it may in fact be impossible at any one time to know what the "correct" price of something ought to be, even although it is being traded anyway, for an actual price. The "correct" price level is only an ideal price, namely a price at which supply and demand would tend towards balance. But because of inadequate information, that price may never be reached; supply and demand may only haphazardly adjust to each other using inadequate information. Just before the financial crisis of 2007–08, the Wall Street Journal reported that "Today, 'way less than half' of all securities trade on exchanges with readily available price information, according to Goldman Sachs Group Inc. analyst Daniel Harris. More and more securities are priced by dealers who don't publish quotes. As a result, money managers can no longer gauge with certainty the value of some assets in mutual funds, hedge funds and other investment vehicles..." The reassurance of a self-balancing market does not matter much when people are making money, but when they do not, they become very concerned with market imbalances (mismatch of supply and demand). When the information needed to calculate prices is inadequate for any reason, it becomes susceptible to swindles, confidence tricks and fraud which may be difficult to detect or combat, insofar as the trading parties have to make assumptions in interpreting price information where any "misunderstanding" is their own responsibility. The risks and risk-bearers may not be fully specifiable. In this context, the Stanford Encyclopedia of Philosophy states:

When there is a risk, there must be something that is unknown or that has an unknown outcome. Therefore, knowledge about risk is knowledge about lack of knowledge. This combination of knowledge and lack thereof contributes to making issues of risk complicated from an epistemological point of view.

This problem is compounded if various extrapolated ideal prices used to guide economic actors rely on observed trends in real prices which fluctuate a great deal in ways that are difficult to predict, and if the predictions made themselves influence price levels. It plays an important role in the theory of information asymmetry to which Joseph Stiglitz has made important contributions.

Price information is likely to be reliable,

• if market actors have a self-interest in providing true information,
• if it is technically possible to obtain true and accurate information, and
• if there are comprehensive legal sanctions (penalties) for false price information.

But additionally, any market cannot function unless participants show trust and cooperation, and are motivated to do so.

Commodity fetishism

From Wikipedia, the free encyclopedia

https://en.wikipedia.org/wiki/Commodity_fetishism

Commodity fetishism: In the economics of the marketplace, the producers and the consumers of goods and services perceive each other as the money and merchandise they exchange.

In Marxist philosophy, the term commodity fetishism describes the economic relationships of production and exchange as being social relationships that exist among things (money and merchandise) and not as relationships that exist among people. As a form of reification, commodity fetishism presents economic value as inherent to the commodities, and not as arising from the workforce, from the human relations that produced the commodity, the goods and the services.

Concept

In the first chapter of Capital: A Critique of Political Economy (1867), commodity fetishism is used to explain how the social organization of labour manifests in the buying and selling of commodities (goods and services). In the marketplace, social relations among people—who makes what, who works for whom, the production-time for a commodity, etc.—are represented as social relations among objects.

In the process of commercial exchange, commodities appear in a depersonalized form, obscuring the social relations inherent to their production. Marx explained the sociology of commodity fetishism:

As against this, the commodity-form, and the value-relation of the products of labour, within which it appears, have absolutely no connection with the physical nature of the commodity and the material relations arising out of this. It is nothing but the definite social relation, between men, themselves, which assumes here, for them, the fantastic form of a relation between things. In order, therefore, to find an analogy, we must take flight into the misty realm of religion. There the products of the human brain appear as autonomous figures endowed with a life of their own, which enter into relations, both with each other and with the human race. So it is in the world of commodities with the products of men's hands. I call this the fetishism which attaches itself to the products of labour as soon as they are produced as commodities, and is, therefore, inseparable from the production of commodities.

According to Marx, the operation of commodity fetishism requires the owners of capital to actively ignore or maintain an indifference to the relational whole that produces a commodity.

Development

A South African fetish figurine whose supernatural powers protect the owner and kin in the natural world (c. 1900)

A political poster shows gold coin as the basis of prosperity (c. 1896)

The theory of commodity fetishism (German: Warenfetischismus) originated from Karl Marx's references to fetishes and fetishism in his analyses of religious superstition, and in the criticism of the beliefs of political economists. Marx borrowed the concept of "fetishism" from The Cult of Fetish Gods (1760) by Charles de Brosses, which proposed a materialist theory of the origin of religion. Moreover, in the 1840s, the philosophic discussion of fetishism by Auguste Comte, and Ludwig Feuerbach's psychological interpretation of religion also influenced Marx's development of commodity fetishism.

Marx's first mention of fetishism appeared in 1842, in his response to a newspaper article by Karl Heinrich Hermes, which defended Germany on religious grounds. Hermes agreed with the German philosopher Hegel in regarding fetishism as the crudest form of religion. Marx dismissed that argument and Hermes's definition of religion as that which elevates man "above sensuous appetites". Instead, Marx said that fetishism is "the religion of sensuous appetites", and that the fantasy of the appetites tricks the fetish worshipper into believing that an inanimate object will yield its natural character to gratify the desires of the worshipper. Therefore, the crude appetite of the fetish worshipper smashes the fetish when it ceases to be of service.

The next mention of fetishism was in the 1842 Rheinische Zeitung newspaper articles about the "Debates on the Law on Thefts of Wood", wherein Marx spoke of the Spanish fetishism of gold and the German fetishism of wood as commodities:

The savages of Cuba regarded gold as a fetish of the Spaniards. They celebrated a feast in its honour, sang in a circle around it, and then threw it into the sea. If the Cuban savages had been present at the sitting of the Rhine Province Assembly, would they not have regarded wood as the Rhinelanders' fetish? But a subsequent sitting would have taught them that the worship of animals is connected with this fetishism, and they would have thrown the hares into the sea in order to save the human beings.

In the Economic and Philosophic Manuscripts of 1844, Marx spoke of the European fetish of precious-metal money:

The nations which are still dazzled by the sensuous glitter of precious metals, and are, therefore, still fetish-worshippers of metal money, are not yet fully developed money-nations. [Note the] contrast of France and England. The extent to which the solution of theoretical riddles is the task of practice, and is effected through practice, the extent to which true practice is the condition of a real and positive theory, is shown, for example, in fetishism. The sensuous consciousness of the fetish-worshipper is different from that of the Greek, because his sensuous existence is different. The abstract enmity between sense and spirit is necessary so long as the human feeling for nature, the human sense of nature, and, therefore, also the natural sense of man, are not yet produced by man's own labour.

In the ethnological notebooks, he commented upon the archaeological reportage of The Origin of Civilization and the Primitive Condition of Man: Mental and Social conditions of Savages (1870), by John Lubbock. In the Outlines of the Critique of Political Economy (Grundrisse, 1859), he criticized the liberal arguments of the French economist Frédéric Bastiat; and about fetishes and fetishism Marx said:

In real history, wage labour arises out of the dissolution of slavery and serfdom—or of the decay of communal property, as with Oriental and Slavonic peoples—and, in its adequate, epoch-making form, the form which takes possession of the entire social being of labour, out of the decline and fall of the guild economy, of the system of Estates, of labour and income in kind, of industry carried on as rural subsidiary occupation, of small-scale feudal agriculture, etc. In all these real historic transitions, wage labour appears as the dissolution, the annihilation of relations in which labour was fixed on all sides, in its income, its content, its location, its scope, etc. Hence, as negation of the stability of labour and of its remuneration. The direct transition from the African's fetish to Voltaire's "Supreme Being", or from the hunting gear of a North American savage to the capital of the Bank of England, is not so absurdly contrary to history, as is the transition from Bastiat's fisherman to the wage labourer.

In A Contribution to the Critique of Political Economy (1859), Marx referred to A Discourse on the Rise, Progress, Peculiar Objects, and Importance of Political Economy (1825), by John Ramsay McCulloch, who said that "In its natural state, matter ... is always destitute of value", with which Marx concurred, saying that "this shows how high even a McCulloch stands above the fetishism of German 'thinkers' who assert that 'material', and half a dozen similar irrelevancies are elements of value".

Furthermore, in the manuscript of "Results of the Immediate Process of Production" (c. 1864), an appendix to Capital: Critique of Political Economy, Volume 1 (1867), Marx said that:

... we find in the capitalist process of production [an] indissoluble fusion of use-values in which capital subsists [as] means of production and objects defined as capital, when what we are really faced with is a definite social relationship of production. In consequence, the product embedded in this mode of production is equated with the commodity, by those who have to deal with it. It is this that forms the foundation for the fetishism of the political economists.

Hence did Karl Marx apply the concepts of fetish and fetishism, derived from economic and ethnologic studies, to the development of the theory of commodity fetishism, wherein an economic abstraction (value) is psychologically transformed (reified) into an object, which people choose to believe has an intrinsic value, in and of itself.

Critique

In the critique of political economy

Marx proposed that in a society where independent, private producers trade their products with each other, of their own volition and initiative, and without much coordination of market exchange, the volumes of production and commercial activities are adjusted in accordance with the fluctuating values of the products (goods and services) as they are bought and sold, and in accordance with the fluctuations of supply and demand. Because their social coexistence, and its meaning, is expressed through market exchange (trade and transaction), people have no other relations with each other. Therefore, social relations are continually mediated and expressed with objects (commodities and money). How the traded commodities relate will depend upon the costs of production, which are reducible to quantities of human labour, although the worker has no control over what happens to the commodities that they produce. (See: Entfremdung, Marx's theory of alienation)

Domination of things

The concept of the intrinsic value of commodities (goods and services) determines and dominates the economic (business) relationships among people, to the extent that buyers and sellers continually adjust their beliefs (financial expectations) about the value of things—either consciously or unconsciously—to the proportionate price changes (market-value) of the commodities over which buyers and sellers believe they have no true control. That psychologic perception transforms the trading-value of a commodity into an independent entity (an object), to the degree that the social value of the goods and services appears to be a natural property of the commodity itself. Thence objectified, the market appears as if self-regulated (by fluctuating supply and demand) because, in pursuit of profit, the consumers of the products ceased to perceive the human co-operation among capitalists that is the true engine of the market where commodities are bought and sold; such is the domination of things in the market.

Objectified value

The value of a commodity originates from the human being's intellectual and perceptual capacity to consciously (subjectively) ascribe a relative value (importance) to a commodity, the goods and services manufactured by the labour of a worker. Therefore, in the course of the economic transactions (buying and selling) that constitute market exchange, people ascribe subjective values to the commodities (goods and services), which the buyers and the sellers then perceive as objective values, the market-exchange prices that people will pay for the commodities.

Naturalization of market behaviour

In a capitalist society, the human perception that "the market" is an independent, sentient entity, is how buyers, sellers, and producers naturalize market exchange (the human choices and decisions that constitute commerce) as a series of "natural phenomena ... that ... happen of their own accord". Such were the political-economy arguments of the economists whom Karl Marx criticized when they spoke of the "natural equilibria" of markets, as if the price (value) of a commodity were independent of the volition and initiative of the capitalist producers, buyers, and sellers of commodities.

In the 18th century, the Scottish social philosopher and political economist Adam Smith, in The Wealth of Nations (1776) proposed that the "truck, barter, and exchange" activities of the market were corresponding economic representations of human nature, that is, the buying and selling of commodities were activities intrinsic to the market, and thus are the "natural behaviour" of the market. Hence, Smith proposed that a market economy was a self-regulating entity that "naturally" tended towards economic equilibrium, wherein the relative prices (the value) of a commodity ensured that the buyers and sellers obtained what they wanted for and from their goods and services.

In the 19th century, Karl Marx contradicted the artifice of Adam Smith's "naturalisation of the market's behaviour" as a politico-ideologic apology—by and for the capitalists—which allowed human economic choices and decisions to be misrepresented as fixed "facts of life", rather than as the human actions that resulted from the will of the producers, the buyers, and the sellers of the commodities traded at market. Such "immutable economic laws" are what Capital: Critique of Political Economy (1867) revealed about the functioning of the capitalist mode of production, how goods and services (commodities) are circulated among a society; and thus explain the psychological phenomenon of commodity fetishism, which ascribes an independent, objective value and reality to a thing that has no inherent value—other than the value given to it by the producer, the seller, and the buyer of the commodity.

Masking

In a capitalist economy, a character mask (Charaktermaske) is the functional role with which a person relates and is related to in a society composed of stratified social classes, especially in relationships and market-exchange transactions; thus, in the course of buying and selling, the commodities (goods and services) usually appear other than they are, because they are masked (obscured) by the role-playing of the buyer and the seller. Moreover, because the capitalist economy of a class society is an intrinsically contradictory system, the masking of the true socio-economic character of the transaction is an integral feature of its function and operation as market exchange. In the course of business competition among themselves, buyers, sellers, and producers cannot do business (compete) without obscurity—confidentiality and secrecy—thus the necessity of the character masks that obscure true economic motive.

Central to the Marxist critique of political economy is the obscurantism of the juridical labour contract, between the worker and the capitalist, that masks the true, exploitive nature of their economic relationship—that the worker does not sell his and her labour, but that the worker sells individual labour power, the human capacity to perform work and manufacture commodities (goods and services) that yield a profit to the producer. The work contract is the mask that obscures the economic exploitation of the difference between the wages paid for the labour of the worker, and the new value created by the labour of the worker.

Marx thus established that in a capitalist society the creation of wealth is based upon "the paid and unpaid portions of labour [that] are inseparably mixed up with each other, and the nature of the whole transaction is completely masked by the intervention of a contract, and the pay received at the end of the week"; and that:

Vulgar economics actually does nothing more than to interpret, to systematize and turn into apologetics—in a doctrinaire way—the ideas of the agents who are trapped within bourgeois relations of production. So it should not surprise us that, precisely within the estranged form of appearance of economic relations in which these prima facie absurd and complete contradictions occur—and all science would be superfluous if the form of appearance of things directly coincided with their essence—that precisely here vulgar economics feels completely at home, and that these relationships appear all the more self-evident to it, the more their inner interconnection remains hidden to it, even though these relationships are comprehensible to the popular mind.

— Capital, Volume III.

Opacity of economic relations

The primary valuation of the trading-value of goods and services (commodities) is expressed as money-prices. The buyers and the sellers determine and establish the economic and financial relationships; and afterwards compare the prices in and the price trends of the market. Moreover, because of the masking of true economic motive, neither the buyer, nor the seller, nor the producer perceive and understand every human labour-activity required to deliver the commodities (goods and services), nor do they perceive the workers whose labour facilitated the purchase of commodities. The economic results of such collective human labour are expressed as the values and the prices of the commodities; the value-relations between the amount of human labour and the value of the supplied commodity.

Capitalism as religion

In the essay "Capitalism as Religion" (1921), Walter Benjamin said that whether or not people treat capitalism as a religion was a moot subject, because "One can behold in capitalism a religion, that is to say, capitalism essentially serves to satisfy the same worries, anguish, and disquiet formerly answered by so-called religion." That the religion of capitalism is manifest in four tenets:

(i) "Capitalism is a purely cultic religion, perhaps the most extreme that ever existed"

(ii) "The permanence of the cult"

(iii) "Capitalism is probably the first instance of a cult that creates guilt, not atonement"

(iv) "God must be hidden from it, and may be addressed only when guilt is at its zenith".

Applications

Cultural theory

The Hungarian philosopher György Lukács developed Karl Marx's theory of commodity fetishism to develop reification theory.

Thorstein Veblen proposed the conspicuous consumption of commodities as the pursuit of social prestige.

Since the 19th century, when Karl Marx presented the theory of commodity fetishism, in Section 4, "The Fetishism of Commodities and the Secret thereof", of the first chapter of Capital: Critique of Political Economy (1867), the constituent concepts of the theory, and their sociologic and economic explanations, have proved intellectually fertile propositions that permit the application of the theory (interpretation, development, adaptation) to the study, examination, and analysis of other cultural aspects of the political economy of capitalism, such as:

Sublimated sexuality

The theory of sexual fetishism, which Alfred Binet presented in the essay Le fétichisme dans l'amour: la vie psychique des micro-organismes, l'intensité des images mentales, etc. (Fetishism in Love: the Psychic Life of Micro-organisms, the Intensity of Mental Images, etc., 1887), was applied to interpret commodity fetishism as types of sexually-charged economic relationships, between a person and a commodity (goods and services), as in the case of advertising, which is a commercial enterprise that ascribes human qualities (values) to a commodity, to persuade the buyer to purchase the advertised goods and services. However, Marx focused on the exchange value of the commodity -- its price -- when considering commodity fetishism and its hiding of the complex social relationships involved in producing and exchanging a product under capitalism. He was not discussing the symbolic meanings of the commodity for the consumer, or what he called its "use value." Hence, sexual fetishism and commodity fetishism are largely unconnected concepts.

Social prestige

In the 19th and in the 21st centuries, Thorstein Veblen (The Theory of the Leisure Class: An Economic Study of Institutions, 1899) and Alain de Botton (Status Anxiety, 2004) respectively developed the social status (prestige) relationship between the producer of consumer goods and the aspirations to prestige of the consumer. To avoid the status anxiety of not being of or belonging to "the right social class", the consumer establishes a personal identity (social, economic, cultural) that is defined and expressed by the commodities (goods and services) that they buy, own, and use; the domination of things that communicate the "correct signals" of social prestige, of belonging. (See: Conspicuous consumption.)

Reification

In History and Class Consciousness (1923), György Lukács started from the theory of commodity fetishism for his development of reification (the psychological transformation of an abstraction into a concrete object) as the principal obstacle to class consciousness. About which Lukács said: "Just as the capitalist system continuously produces and reproduces itself economically on higher levels, the structure of reification progressively sinks more deeply, more fatefully, and more definitively into the consciousness of Man"—hence, commodification pervaded every conscious human activity, as the growth of capitalism commodified every sphere of human activity into a product that can be bought and sold in the market. (See: Verdinglichung, Marx's theory of reification.)

Industrialized culture

Commodity fetishism is theoretically central to the Frankfurt School philosophy, especially in the work of the sociologist Theodor W. Adorno, which describes how the forms of commerce invade the human psyche; how commerce casts a person into a role not of his or her making; and how commercial forces affect the development of the psyche. In the book Dialectic of Enlightenment (1944), Adorno and Max Horkheimer presented the Theory of the Culture Industry to describe how the human imagination (artistic, spiritual, intellectual activity) becomes commodified when subordinated to the "natural commercial laws" of the market.

To the consumer, the cultural goods and services sold in the market appear to offer the promise of a richly developed and creative individuality, yet the inherent commodification severely restricts and stunts the human psyche, so that the man and the woman consumer has little "time for myself", because of the continual personification of cultural roles over which he and she exercise little control. In personifying such cultural identities, the person is a passive consumer, not the active creator, of his or her life; the promised life of individualistic creativity is incompatible with the collectivist, commercial norms of bourgeois culture.

Commodity narcissism

In the study From Commodity Fetishism to Commodity Narcissism (2012) the investigators applied the Marxist theory of commodity fetishism to psychologically analyse the economic behaviour (buying and selling) of the contemporary consumer. With the concept of commodity narcissism, the psychologists Stephen Dunne and Robert Cluley proposed that consumers who claim to be ethically concerned about the manufacturing origin of commodities, nonetheless behaved as if ignorant of the exploitative labour conditions under which the workers produced the goods and services, bought by the "concerned consumer"; that, within the culture of consumerism, narcissistic men and women have established shopping (economic consumption) as a socially acceptable way to express aggression. Researchers find no evidence that a greater manufacturing base can spur economic growth, while improving government effectiveness and regulation quality are more promising for facilitating economic growth.

Ethical Consumption

Environmentally “conscious” consumers want their purchased products to be environmentally ethical. According to James G. Carrier, on a personal level their purchases can make them feel more positively moral and second they can help put pressure on firms in a competitive market to change the way they do things. Marx’s 1867 notion of commodity fetishism which concerns the idea that ethical consumption is going beyond the two reasons first noted by Carrier. Certain commodities are perceived in a particular way that the consumer ignores or denies the labor time entailed in the process of production or for that matter any detailed background people and process that is viable in creating an ethical product. Capitalists have the intention of selling to an audience with commercial gain - the use of nature as a strategy is vital in urging people to buy their product. Ethical consumption is mostly concerned with the social, political and environmental context of objects - and consumers want a product that meets their moral criteria, something non-exploitative. These baseline concepts need to be visible and eye-catching with recognizable verifications. This is very common in ecotourism who produce eco-friendliness as a reason to buy and visit. Advertising protection and conservation attracts visitors and media attention. These capitalists make no point to vary in their images and photographs or captions - the repetition of nature is always colorful and vibrant, gentle and reserved. They are "fetishizing" nature as a marketing technique. Portraying themselves as a business that protects nature satisfies their clientele so that the consumer cannot see the objects and mechanisms used to actually produce it. Carrier describes how the environment itself is fetishized as a consumable product through parks and other areas of land being used as bodies or images attached to promises of natural experiences or protection efforts in return for money. Carrier also offers the example of fair-trade coffee as a way that commodity fetishism is seen in ethical consumption. If fair-trade coffee promises that it is direct, cooperative supply chain between growers and consumers through images of coffee growers and messaging on the bag of coffee, this becomes more relevant to consumer decision making than the reality that many other “middle-men” were needing in the roasting, packaging, marketing, and transportation of that commodity. 

Ethical consumption is believed by advocates of the theory., to allow people to lead more moral lives as well as affect the world by placing economic pressure on firms to change their production processes and products to become more ethical to remain competitive within the greater market. The fetishization of nature and natural resources often leads through its commodification as a product to be advertised. Conceptual categories need to be “legible, be visible and recognizable” in order to be effective as ethical standards. The advertising on items listed and named as fair trade often misrepresents the actual production process, especially in products requiring extensive and hard labor to produce, such as coffee. It also often becomes exploitative as it uses the images of ethnic small holders rather than the ethnic migrants and wage laborers who do the majority of the work. The use of images not only fetishizes the product, but defines ethicality as a whole. A common narrative now is whether or not ethical consumption is at all possible in a globalized world of highly interconnected capitalism and trade. It relies on ideas of greenwashing in which producers use environmentalism and fair trade ideals to advertise their products without living up to the ideals. The false image of environmentalism disguises the unsustainable practices being utilized. Another critique is the overall effectiveness of individual consumer choices without large-scale systemic change through government regulation. Accessibility is another issue, as ethical products are often more expensive and less accessible to low-income activists.

Social alienation

In The Society of the Spectacle (1967), Guy Debord presented the theory of "le spectacle"—the systematic conflation of advanced capitalism, the mass communications media, and a government amenable to exploiting those factors. The spectacle transforms human relations into objectified relations among images, and vice versa; the exemplar spectacle is television, the communications medium wherein people passively allow (cultural) representations of themselves to become the active agents of their beliefs. The spectacle is the form that society assumes when the Arts, the instruments of cultural production, have been commodified as commercial activities that render an aesthetic value into a commercial value (a commodity). Whereby artistic expression then is shaped by the person's ability to sell it as a commodity, that is, as artistic goods and services.

Capitalism reorganizes personal consumption to conform to the commercial principles of market exchange; commodity fetishism transforms a cultural commodity into a product with an economic "life of its own" that is independent of the volition and initiative of the artist, the producer of the commodity. What Karl Marx critically anticipated in the 19th century, with "The Fetishism of Commodities and the Secret thereof", Guy Debord interpreted and developed for the 20th century—that in modern society, the psychologic intimacies of intersubjectivity and personal self-relation are commodified into discrete "experiences" that can be bought and sold. The Society of the Spectacle is the ultimate form of social alienation that occurs when a person views his or her being (self) as a commodity that can be bought and sold, because they regard every human relation as a (potential) business transaction. (See: Entfremdung, Marx's theory of alienation)

Semiotic sign

Jean Baudrillard applied commodity fetishism to explain the subjective feelings of men and women towards consumer goods in the "realm of circulation"; that is, the cultural mystique (mystification) that advertising ascribed to the commodities (goods and services) in order to encourage the buyer to purchase the goods and services as aids to the construction of his and her cultural identity. In the book For a Critique of the Political Economy of the Sign (1972), Baudrillard developed the semiotic theory of "the Sign" (sign value) as a development of Marx's theory of commodity fetishism and of the exchange value vs. use value dichotomy of capitalism.

Intellectual property

In the 21st century, the political economy of capitalism reified the abstract objects that are information and knowledge into the tangible commodities of intellectual property, which are produced by and derived from the labours of the intellectual and the white collar workers.

Philosophic base

The economist Michael Perelman critically examined the belief systems from which arose intellectual property rights, the field of law that commodified knowledge and information. Samuel Bowles and Herbert Gintis critically reviewed the belief systems of the theory of human capital. Knowledge, as the philosophic means to a better life, is contrasted with capitalist knowledge (as commodity and capital), produced to generate income and profit. Such commodification detaches knowledge and information from the (user) person, because, as intellectual property, they are independent, economic entities.

Knowledge: authentic and counterfeit

In Postmodernism, or, the Cultural Logic of Late Capitalism (1991), the Marxist theorist Fredric Jameson linked the reification of information and knowledge to the post-modern distinction between authentic knowledge (experience) and counterfeit knowledge (vicarious experience), which usually is acquired through the mass communications media. In Critique of Commodity Aesthetics: Appearance, Sexuality and Advertising in Capitalist Society (1986), the philosopher Wolfgang Fritz Haug presents a "critique of commodity aesthetics" that examines how human needs and desires are manipulated and reshaped for commercial gain.

Financial risk management

The sociologists Frank Furedi and Ulrich Beck studied the development of commodified types of knowledge in the business culture of "risk prevention" in the management of money. The Post–World War II economic expansion (c. 1945–1973) created very much money (capital and savings), while the dominant bourgeois ideology of money favoured the risk-management philosophy of the managers of investment funds and financial assets. From such administration of investment money, manipulated to create new capital, arose the preoccupation with risk calculations, which subsequently was followed by the "economic science" of risk prevention management. In light of which, the commodification of money as "financial investment funds" allows an ordinary person to pose as a rich person, as an economic risk-taker able to risk losing money invested to the market. Hence, the fetishization of financial risk as "a sum of money" is a reification that distorts the social perception of the true nature of financial risk, as experienced by ordinary people. Moreover, the valuation of financial risk is susceptible to ideological bias; that contemporary fortunes are achieved from the insight of experts in financial management, who study the relationship between "known" and "unknown" economic factors, by which human fears about money can be manipulated and exploited.

Commodified art

The cultural critics Georg Simmel and Walter Benjamin examined and described the fetishes and fetishism of Art, by means of which "artistic" commodities are produced for sale in the market, and how commodification determines and establishes the value of the artistic commodities (goods and services) derived from legitimate Art; for example, the selling of an artist's personal effects as "artistic fetishes".

Legal traducement

In the field of law, the scholar Evgeny Pashukanis (The General Theory of Law and Marxism, 1924), the Austrian politician Karl Renner, the German political scientist Franz Leopold Neumann, the British socialist writer China Miéville, the labour-law attorney Marc Linder, and the American legal philosopher Duncan Kennedy (The Role of Law in Economic Theory: Essays on the Fetishism of Commodities, 1985) have respectively explored the applications of commodity fetishism in their contemporary legal systems, and reported that the reification of legal forms misrepresents social relations.

Criticism

The Tribuna of the Uffizi (1772–1778) by Johann Zoffany depicts the commodity-fetishism metamorphosis of oil paintings into culture-industry products.

In Portrait of a Marxist as a Young Nun (1988), Professor Helena Sheehan said that the analogy between religious faith and commodity fetishism is a mistaken interpretation, because people do not worship commodities (money and merchandise) by attributing supernatural powers to inanimate objects, to a fetish. That the belief that value-relationships inherent to a commodity described is not religious belief, because value-relations do not possess the psychological characteristics of spiritual beliefs. That interpretation is proved by the possibility of a person's possessing religious faith, whilst being aware of the psychology of commodity fetishism, and thus being critical of the fetishization of money and merchandise, thus, a person's disbelief in the Golden Calf is integral to the person's iconoclasm against the idolatry of money.