Economics as science in the world of great power politics (1800-present)

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from Robert Locke

Recently there has been a spate of postings and comments in the rwer blog about economics as science; they invariably deal with the relative degree of autism of orthodox economics along the lines that originally spawned the post-autistic economics movement, the rwer and the blog. The subject debated is the relative failure of an economics discipline based on the behavior of individuals in markets to guide policy formulation in the real world.

For historians the birth of classical economics emerged from the great London-centered international trade emporium that developed between 1750-1875.  Without the emporium classical economics would not have come into existence or have made a major contribution itself to the development of the emporium. But, as I wrote in an essay published in the rwer (2012),

“If the historian’s attention shifts from the British Imperial emporium to late eighteenth and early nineteenth century central Europe, he/she finds people preoccupied with a different set of problems that developed into different types of economic postulates from those that preoccupied classical economists as they set economics off on its long journey.  The era of the French Revolution and Napoleon amounted to thirty years of upheaval that brought kingdoms and empires low, and abolished principalities and city states.  Survival of political entities became the problematic.”

The question I raise concerns the ability of a science that stemmed from the British Imperial emporium to explain the economic basis of great power politics, which has been a principal preoccupation of people since 1800.  

List and Clausewitz in the Age of classical economics and power politics

That classical economics could not help explain the rise and fall of nation states in international competition, Frederich List (1789-1846) clearly states in his voluminous writings of the post Napoleon era.  (See the definitive coverage of List in Daastøl, and Levy-Faur’s essay))

List affirmed that classical economics is itself not a science but the intellectual superstructure whose principles supported the hegemony of the London based emporium, promoting its economic dominance over other nations. Moreover, for List classical economics through its definition of capital and how it is accumulates justified the predominance of the capitalist within the income and wealth structure of the London hegemon.  Daastøl points out that in the world of classical economics, the engine of growth is capital investment, which means that capital accumulation is the prerequisite for a steady advance in technology. But capital accumulation, which depends on net income (defined as the surplus above the cost of maintaining the labor force at a subsistence level) stagnates Ricardo argues, if the surplus above the cost of keeping workers alive at subsistence level falls to zero.  The postulates of classical economics holds out a dismal prospect for working people because they justify setting their incomes at subsistence levels in order to augment the saving needed for investment that assures growth.

Although List agreed with Adam Smith that division of labor is an important cause for increased productivity, he thought that the union of labor – “the confederation of labour” – was just as important a factor. He severely criticized Smith for dealing too shortly with the opposite side of the coin, namely for devising an economics that neglected the confederation of labor: ‘The cause of the productiveness of these operations is not merely that division [of labour]’, he wrote, ‘but essentially this union.’ Daastøl, 239-44.

Accordingly, he did not believe that capital enhancement came principally through increased division of labor, but through improvements in the situation of working people as collective mental capital. He advocated training and education programs that improved practical skills and pushed fiscal reforms that would help the poor. In other words, List did not look at the economic process in terms of the individual’s action in the market place, but in terms of the mental capital accumulation within countries, expressed in social economic networking involved in mental capital formation. List reasoned sociologically and culturally; he opened the door to comparative analysis necessary to judge the relative power of nations. In this respect, his writing is a forerunner of habitat analysis, which has become essential to understanding modern economic clustering. (See, Locke and  Schöne (2004), Ch I.)

In my article about Clausewitz, I conclude that he like List, although excluded from the ranks of classical economists, should be included among economists preoccupied with great power rivalry, since he lived most of his adult life in an era of continuous war, wrote about it (his unfinished classic, Vom Krieg (1832) is arguably the most famous work on the subject like Smith’s The Wealth of Nations is in economics), took the state as the basic analytical unit in war but also in economics and in this respect differs fundamentally from Smith and his disciples who concentrated on the individual actor competing in the market place.  Although Clausewitz was as much aware of the importance of physical capital’s contribution to the prowess of states and organizations as any classical economist, he shared List’s vision about the importance of mental capital formation and how it is institutionalized in order to project power.  In war and economics, Clausewitzians understood the important of esprit de corps in competitive economic and military situations, the significance of charisma to a leaders success, and the unpredictability of its appearance in the form of a Napoleon Bonaparte or a Steve Jobs, and worked out practical steps to deal with the unexpected by systematizing through educational networking close coordination of staff and operations, which are the hallmark of well functioning large organizations today.

Both List and Clausewitz, then, in the age of classical economics (Clausewitz died in 1831, List in 1846), made major contributions to our understanding of the factors involved in fostering mental capital formation essential to the underpinning of state power. 

Neoclassical economics in an age preoccupied with the transformation of great power relations (1850-1914)

Fullbrook describes how the architects of neoclassical economics matched their new discipline isomorphically with Newtonian mechanics:

In Neoclassical economics, ‘bodies’ translates ‘individuals’ or agents’, ‘motions’ translates ‘exchange of goods’, ‘forces’ translates ‘desires’ or ‘preferences’, which when summed become ‘supply and demand, ‘mechanical equilibrium’ becomes ‘market equilibrium’, this being when the difference between supply and demand is zero, and ‘physical systems’ translates ‘markets.’…All exchanges were said to magically take place at the prices that equated demand and supply. (Fullbrook, 2006, 2)

No viable science would mean much unless expressed mathematically. That was the glory of Newtonian mechanics. In the second half of the 19th century Léon Walras, preceded by some French economic-engineers (Locke, 1989, 124-26), mathematized neoclassical economics. With this achievement he stated in his Elements of Pure Economics, economics has become a “science, which resembles the physico-mathematical.”

Advocates of physico-mathematical formulation of economics tried to brush aside institutional-historical economics as “unscientific,” in the famous 19^th century Methodenstreit.  It is, if the yardstick of judgment is physico-mathematical. The problem is that, despite Walras’ claim, no triumph of a physico-mathematical based economics as a prescriptive science occurred, because of the mathematical inadequacies of neoclassical economics.  John von Neumann and Oskar Morgenstern pointed this out seventy years after Walras’ “achievement.” In the foreword to Theory of Games and Economic Behavior (1944), they wrote: ‘The concepts of economics are fuzzy but even in those parts of economics where the descriptive problem has been handled more satisfactorily, mathematical tools have seldom been used appropriately. Mathematical economics has not achieved very much.’ (p. 8)

Neoclassical economics not only failed as a prescriptive science in its own physico-mathematical terms,  as the Neumann and Morgenstern 1944 quote illustrates, but its method were no more suited to comparative analysis of great power rivalry, which is the focus here, than those of classical economics.

Consider the specific issue with which late 19^th century Europeans grappled: the relative decline of France and Victorian Britain, and the rise of a united Germany as great powers and what the second industrial revolution, with its new science based industries, in which Germany led in Europe, had to do with these changing power relationships.

In order for economics to have much to say on the subject it has to be treated in institutional-cultural terms that afford international comparisons.  Maria Alejandra Madi in her September 20 2017 posting, “The institutional approach to labor economics” reminds us of our heritage, but she stymies comparability by restricting her comments to Americans. In his essay “Technik comes to America: Changing Meanings of Technology before 1930,” Eric Schatzberg provides one.  He points out how the American concept of technology came to incorporate ideas about Technik formulated in Imperial Germany (1871-1918).  In Germany the idea of Technik [the combination of Können (practical skills and industrial arts) and Wissen (knowledge)] and the networking of technical and commercial schools, trade schools, apprenticeship programs into the fabric of production provided a basis for understanding the shift in great power relations c. 1914, because Technik amounted to a new civilization based on different definitions of science.

Francis X. Hezel, SJ, observed that in The Wealth and Poverty of Nations, the economic historian David Landes “concludes that the success of national economies is driven by cultural factors more than anything else. In his view, Max Weber was right after all in suggesting that social attitudes and values have the decisive say on what economies will succeed and which will fail.” (Cited in “The Role of Culture in Economic Development.”)

The Germans who proselytized the idea of Technik were historical economists (e.g., Gustav Schmoller, Max Weber, and Werner Sombart) and the analytical tradition they followed in their work was Listian and Clausewitzian.  Moreover, the Americans involved in the transfer of the concept of Technik to America were institutional economists, primus among whom stood Thorstein Veblen. They dominated the debate c. 1900, in a way that made analysis of the economic basis of changing great power relations possible. The precepts of a physico-mathematical neoclassical economics provided little insight into such comparative cultural matters, except from a Listian perspective.

The era of neoclassical dominance in economics and Making America Great Again (1970-present)

Neoclassical economics came to dominate discourse in departments of economics and business schools after the extensive educational reforms carried out in the 1960s (Khurana) during the period of American political and economic hegemony, 1945-1980.  As they took over, the neoclassical economists eliminated institutionalist from the club, meaning in this context that they got rid of the economists whose work fostered comparative work on national systems.  Their disappearance did not matter much during the three decades after the war, for in the capitalist world there was only one model, the American; few questioned its superiority.  Alfred D Chandler Jr. who won a Pulitzer Prize in history (1977) for his studies about the rise of the Visible Hand of US corporate management believed that countries that did not follow the American way would become hopelessly outmoded.

America exported its business culture and management knowhow, in the productivity councils it helped establish in Europe before and during the Marshall plan, in the transplanting of its management school culture abroad, e. g., the reform of France’s schools of commerce in the 1960s and 1970 (under the auspicious of FNEGE, the French foundation for management education), the establishment of business schools in London and Manchester that were quickly replicated in other UK venues, the work of foundation that spread the ethos of American management culture in place like or similar to the European Institute for Advanced Studies in Management, Brussels.

After 1980 two events occurred that ended the reign of convergence management studies on the US model.   One was what I called the Collapse of the American Management Mystique that accompanied the downfall of US mass production industries (steel, rubber, electronic, automobile, etc) successfully supplanted by new Japanese firms in the 1980s and 1990s and, paradoxically perhaps, the second event, the reassertion of American entrepreneurial prowess during the digital revolution in high tech economic development clusters, a la Silicon Valley networks, which nation states that did not want to be left behind, wished to emulate.

Comparative analysis of national and regional development returned amid this general concern about competitiveness of nations.  See for examples Hofstede, d’Iribarne, Locke 1977, 1984, 1989, 1999, Locke & Schöne 2004, Johnson,  Johnson & Bröms, Deming, Saxenian, Lee et al, and the numerous citations about national and regional work cultures given in these books and others that could be listed.

Physico-mathematical economists ignore this literature and, therefore, make little contribution to the discussion about national or regional competitive advantages.  Real world economists, although keen about describing the prescriptive deficiencies of physico-mathematical economics, neglect the literature as well, even though it would behoove them not to do so, since comparative work culture analysis  should be at the heart of the critique of neoliberal, financialized US capitalism. (Locke 2014)

H Thomas Johnson, made this clear when he described the work culture introduced into firms as a result of the neoclassical educational takeover of business school education.

“[B]y the 1970s managers came primarily from the ranks of accountants and controllers, rather than from the ranks of engineers, designers, and marketers. [This new managerial class] moved frequently among companies without regard to the industry or markets they served.… A synergistic relationship developed between the management accounting taught in MBA programs and the practices emanating from corporate controllers’ offices, imparting to management accounting a life of its own and shaping the way managers ran businesses.” (Johnson and Bröms, 2000, 57)

Johnson despised these lifeless pyramidal structures imposed on work processes and managed by computer-oriented-production-control experts:

“At first the abstract information compiled and transmitted by these computer systems merely supplemented the perspectives of managers who were already familiar with concrete details of the operations they managed, no matter how complicated and confused those operations became. Such individuals, prevalent in top management ranks before 1970 had a clear sense of the difference between ‘the map’ created by abstract computer calculations and ‘the territory’ that people inhabited in the workplace. Increasingly after 1970, however, managers lacking in shop floor experience or in engineering training, often trained in graduate business schools, came to dominate American and European manufacturing establishments. In their hands the ‘map was the territory’. “

In other words, the study of comparative management cultures enables economists to understand the role their educational culture, the result of neoclassical takeover of management schools, played in the decline of US manufacturing by comparing it, as Johnson and others have done, with the work culture specifically of the Toyota Kata, and generally with Japanese, German, and other systems.

Comparative analysis also permits students of economics to comprehend  how the finance education neoclassically trained economists developed post WWII in business schools and in which they are ensconced turned the entrepreneurial networking of high tech development  clusters into a culture of billionaires, thereby illustrating how mental capital creation through education can degrade rather than improve the competitiveness of a nation. (Locke 2014)

Daastøl, A. M. (2014).  Friedrich List’s Heart, Wit, and Will:  Mental Capital as the Productive Forces of Progress.  Dissertation Erfurt University. Staatswissenschaftliche Faculty.  Document 24133.  Doctorate awarded 29 Nov. 2011.)

Deming, W. E. (1982).  Quality, Productivity, and Competitive Position.  Boston:  MIT CAES.

Deming, W. E. (1986) Out of the Crises. MIT, CAES.

Fullbrook, Edward (2006). “Economics and Neo-Liberialism,”   After Blair: Politics After the New Labour Decade, editor Gerry Hassan. Lawrence & Wishart.

Hofstede, Geert (1980). Cultures Consequences: International Differences in Work Related Values. London: Sage Publications.

Iribarne, P d’ (1989). La logique de l’honneur: Gestion des enterprises et traditions nationals. Paris: Editions du Seuil.

Johnson, H. T. (ed.). (1992).  Relevance Regained:  From Top-Down Control to Bottom-Up Empowerment. New York:  Free Press.

___________________(2013).  “ Management 410: The Rise of managerialism and the decline of responsible management in American business since 1945.” Course Syllabus, reproduced in R. R. Locke, “Reassessing the basis of corporate business performance.” Real World Economics Review.  Issue 64, 110-124, Annex, 120-24.

Johnson, H. T. and A. Bröms (2000). Profit Beyond Measure:  Extraordinary Results through Attention to Process and People.  Boston:  Nicolas Breakley Publishing.

Khurana, R.  (2007). From Higher Aims to Hired Hands: The Social Transformation of American Business Schools and the Unfulfilled Promise of Management as a Profession. Princeton, NJ: PUP.

Lee, C.-M, W. Miller, M. Gong-Hancock, and S. Rowan (eds) (2000).  The Silicon Valley Edge:  A Habitat for Innovation and Entrepreneurship, Stanford:  Stanford University Press.

Levi-Faur, D. (1997). “Friedrich List and the political economy of the nation-state.”  Review of

International Political Economy 4:1 Spring. 154–178. 

Locke, R (1977) “Industrialisierung und Erziehungssystem in Frankreich und Deutschland vor dem 1. Weltkrieg,” Historische Zeitschrift, 225, 265-96.

_______(1984). The End of the Practical Man. JAI Press.  Republished in 2006.

_______(1989). Management and Higher Education Since 1940. Cambridge  University Press.

_______(1996). The Collapse of the American Management Mystique. Oxford University Press.

_______(2012) “Reassessing economics: from Adam Smith to Carl von Clausewitz,”  rwer, 61, 100-14.

_______(2013) “Reassessing the basis of corporate business performance, rwer, 68, 2 July, 110-24.

______(2014) “Financialization, income distribution and social justice: Recent German and American experience, rwer, 68. 74-89.

______ and K Schöne (2004), The Entrepreneurial Shift, Cambridge University Press.

Saxenian, A  (1994).  Regional Advantages.  Cambridge, Mass.:  Harvard University Press.