From Peter Radford Let’s start with a different approach: Reality suggests there are many ways in which resources are allocated within an economy, not just one. Economics, as it now exists in its mainstream or standard form, has withered to study just one: that which takes place in markets — where markets are strictly defined in such a way as to guarantee outcomes compatible with a certain ideological perspective. As we have discussed before this trajectory for the discipline was deemed essential for the mainstream to construct a logical defense against the mid-1800s criticism of early industrial capitalism. It continues to act as a defense against more contemporary critiques as well. In so doing it adopted a hostile and denigrating stance to alternatives. “Markets good, all
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from Peter Radford
Let’s start with a different approach:
Reality suggests there are many ways in which resources are allocated within an economy, not just one. Economics, as it now exists in its mainstream or standard form, has withered to study just one: that which takes place in markets — where markets are strictly defined in such a way as to guarantee outcomes compatible with a certain ideological perspective. As we have discussed before this trajectory for the discipline was deemed essential for the mainstream to construct a logical defense against the mid-1800s criticism of early industrial capitalism. It continues to act as a defense against more contemporary critiques as well. In so doing it adopted a hostile and denigrating stance to alternatives. “Markets good, all else bad” subsequently became a standard mantra, which is why mainstream economics is inherently anti-democratic. It has no tolerance for anything other than its preferred market mechanisms, and, by obliterating non-market forces from its purview, has steadily retreated from being a “social science” into becoming more of a “pseudo science”.
As a result, there is a clash between an economy as it exists in practice, which is riven through with non-market forces, and an economy as it exists in theoretical principle, in which such difficult things are absent. This brings to mind a quote I came across whilst reading the philosopher Daniel Dennett, unfortunately he doesn’t give us an attribution, but to paraphrase for our purposes:
“An economist is the one who’s says: We know what exists in practice, we are trying to find out if it exists in principle.”
This obsession with principle rather than reality bedevils economics, and often renders it irrelevant as an explanatory system for what we see around us, but it does give convenient cover for economists who want to avoid the non-market methods of allocation available to society. It also allows them to criticize such methods where they dominate market forces. They scoff at efforts to alter the result of market-based allocation through redistribution as a well-meant, but foolish, attempts to muck with fundamental forces. Economists like to think in terms of “the laws of economics” rather than the “social constructs of economics”. The discovery of laws dignifies economics as a science. That there are social constructs would relegate it and put it on a par, at best, with sociology and political theory, which would offend the feeling of superiority rife amongst most economists.
Uncomfortably for economics those social constructs do exist. After all a market, no matter how purified it becomes in theory, is simply a group of people behaving in certain ways and towards certain ends. A group of people is sometimes called a society or a collective. And societies and collectives are breeding grounds for politics.
The introduction of the social and political implies the introduction of power. It brings into sharp focus the struggle over the distribution of wealth and incomes; and it ought to make us think about the historical development of modern politics. Unfortunately, though, history is another taboo in mainstream economics.
History teaches us that the predation of capital owners, when left unfettered, is antithetical to any vision of even the lumpiest of equal citizenship. Money will concentrate and, thus, so will power. The pretense that market processes will magically prevent inequality is proven absurd. On the contrary, inequality entrenches power, and power entrenches inequality. Markets are used as engines by the powerful to empower themselves. That represents such a challenge to mainstream theorists that they have abandoned any discussion of inequality. Indeed they demean efforts to suggest that inequality is a topic worthy of serious discussion.
Despite that, the challenge of inequality exists.
Here’s a quote to make the challenge stark:
” There can be no permanence in a situation in which we abandon production to capitalism, and yet give the workers the political power to enforce demands on the national income which capitalism has neither the ability nor the incentive to supply.”
That quote is taken from a book, “The Decay of Capitalist Civilization”, written in 1923 by Beatrice and Sydney Webb, the British socialists.
First, at the time it was written economics was in turmoil and economies were heading towards disaster. Capitalism as we now know it was young — a hundred years old or so — and thus there was no long term perspective. The social upheaval of the first stage of industrial capitalism had not yet been met with a suitable, or effective, counter. The Marxist critique, with all its grim and apocalyptic language, had accurately described the consequences of that original upheaval, and it was still possible to couch economic discussion within its ambit. So defining society as a stark confrontation between capitalists and workers, without a middling sort, was perfectly acceptable.
Second, the Webbs clearly did not expect that giving workers the power to enforce political demands on the national income would ameliorate or reduce the starkness of their depiction. They fully understood that workers want to co-opt the wealth capitalism produces. What they didn’t see is that this can be accomplished by forcing politics to become more democratic. The Webbs were stuck in a misunderstanding of the way in which power can be shared. They still saw things in the stark terms of the Marxist critique. They can be forgiven for this, of course, since they were writing when capitalism appeared about to collapse and at a time when the Marxist experiment in the Soviet Union had not revealed itself as being an exercise in tyranny rather than in liberty. We now know better.
Thirdly, and more abstractly, it accepts that mainstream theory’s factors of production are correct. John Bates Clark had stated the case for the mainstream most clearly back in 1899 when he argued that in a competitive market equilibrium the two factors of production, capital and labor, would be paid their marginal product. This “marginalist” explanation of the results of allocation remains the foundation for purist economists seeking to avoid having to deal with non-market forces; but power relations do indeed exist as an economic factor: it is how the pie actually gets carved up. Marginalism is a failed attempt to expunge power and to create a mathematically fine way of getting around power relations. Clark thinks we get what we deserve. The Webb’s think we get what we seize. It is a clash of extreme moral views, with each side expressing itself in its chosen methodology.
Neither is correct. The actual factors of production are: energy, natural resources, and knowledge/information. Capital and labor are terms defining a socially determined power relationship that sits above the factors of production in order to allocate the wealth created below. The use of the capital-labor duality as fundamental inputs into economic theory harks back to the days of political economy, before marginalism attempted to expunge power. It is odd that economics carried this duality forward without attempting to get at the deeper reality — especially given its obsession with discovering “laws”.
And the historical process set in motion by the upheaval Marx described so well has also not ended. It is still in motion, just as capitalism itself still evolves. Modern social democracy has been the solution most industrial societies adopted to solve the Webbs’ conundrum. Workers have the vote and hence the power to enforce their demands on the capital owning class. The balance is between democracy and capitalism. It is that balance we need to get right. We do not need to cast the conversation or argument in apocalyptic terms.
To deal with inequality, we do not need to rid ourselves of capitalism, we need to restore our democracy. Our current difficulties, both political and economic derive from the imbalance created by neoliberalism, which, in turn, is given its intellectual credibility by the neoclassical version of mainstream economics. Thus the irony of mainstream economics is revealed: by denying the impact of power relationships in the allocative process, it has allowed capital to take too dominant a position. It has played a role in politics. It has facilitated a power grab. Or, perhaps, this is not an ironic and unintended consequence. Perhaps it was intended. The libertarian founders of both neoliberalism and mainstream economics detested democracy as something far too close to socialism. To them democracy was a step on the road to serfdom and the so-called laws of economics stood as an insurmountable barrier defeating any wishy-washy well meaning efforts by democrats to soften the edges of red-blooded market forces.
Yet, to repeat, power exists. The arbitration of the outcomes of allocation is a tussle taking within place both the economic and socio-political domains. As family members, citizens, and consumers we can affect both. We express power through what we buy and through how we vote. In other words, how we exercise our power is what drives and defines the basic relationships within a modern political economy. No analysis of an economy can be complete without recognizing that allocation or distribution has many sources, not just one.