A pensioner's capitalism

Peter Drucker argued in Post-Capitalist Society (1993) that Western economies are no longer capitalist because ownership of the means of production is largely in pension funds, and the pension funds are owned by the workers, not the capitalists.

However, capitalism does not necessarily involve two mutually exclusive social classes, where each individual can be unambiguously assigned to one social class or another. For example, some theorists in the 'agorist' tradition like Samuel Konkin argue that each person is a worker-capitalist-entreprenuer. But in Konkin's conception, there are in fact three mutually exclusive social classes - statist capitalists, non-statist capitalists, and entrepreneurs. Workers simply do not exist in this theoretical framework are considered a "relic from a previous Age". As for the 'non-statist capitalists' Konkin considers them as "relatively neutral drone-like non-innovators." This is partly how Konkin distinguishes the "new libertarian left" from the "Marxoid" theories.

However, whether capitalism can unambiguously assign individuals to one of two (or three, or four, or possibly zero) social classes or not, it is evident that capitalism is an economic structure with two important sources of income: one from the ownership of the means of production, and the other from employment for a wage salary. These two categories can be conflated, and this leads theorists like Drucker to say that capitalism is now in the hands of "the people", a kind of utopian Thatcherite vision that has long existed in the US and UK.

But it has always been possible in principle for individuals to receive income from both of these sources. I can grow my own vegetables and sell them, whilst taking a wage salary from a grocery store to supplement my income. I am suddenly a capitalist, a worker, and an entrepreneur all at once. This does not mean I live in a post-capitalist society, and does not imply that the contradictions of capitalism have been supplanted. Still, if I receive a substantial income from both selling vegetables and working at the grocery store, then this may put difficulties in the way of attaching the single label "capitalist" or "worker" or "entrepreneur" to me, although these difficulties are only misunderstandings.

But even still, if I am a pensioner this does not even qualify me as a capitalist. Typically, pension funds are not even under the direct control of their owners, nor subject to their free disposal. The argument that pension funds have "democratized" the stock market is completely false, by disallowing worker control or decision making. Besides that, most people derive the majority of their income from wages and not from stock options or pensions, and the rich minorities still derive substantial income and power from property outside of pension funds altogether. A pension is just like any other investment in the stock market, only most of them are held in the tight hands of fund managers.

Saving income has always been a necessary tool for surviving under capitalist conditions. There is nothing particularly revolutionary about this, only that it allows skilled workers to be further divided from unskilled workers, and younger workers from older ones. But if the stock market crashes, pensioners find their futures at risk, just like the capitalists who own the production, thus intertwining their interests and upending the potential for radical change.

Modern Etymology of "Competition"

It was Antoine Augustin Cournot who first had mentioned the number of rivals involved in competition. Competition, which once meant the way in which merchants and traders took account of how their rivals respond to their actions etc., now meant little more than the slope of the average revenue curve.

And it was Francis Ysidro Edgeworth who developed the modern idea of "perfect competition", where the number of sellers is so great that they have no empirical affect on price. At least, this is the way it is conceived of in microeconomics textbooks.

But it was Alfred Marshall's "marginal utility revolution" where the use of the phrase "free competition" was much more closely related to Adam Smith's simple system of natural liberty.

This behavioral concept of competition, which Mark Blaug calls process competition (I like this distinction), was eventually superseded by the end-state competition conception by 1933. I have no idea why Blaug chooses 1933 as the date other that it also being the darkest year of the Great Depression in the United States. (Not just in theory did everything seem "static" in those years.)

But "competition" in modern economics today is generally thought of as either perfect, where no sellers have the ability to change the price, or imperfect, the binary opposite whereby competitive performance is affected by various structures and conduct. The difference is that perfect competition does not in fact exist anywhere in observable market realities whereas imperfect competition is observable everywhere. This distinction never ceases to amuse the student of economics.

The Simple System of Natural Liberty

Mark Blaug, an important British author on the history of economics, argues in an essay titled Is Competition a Good Thing? that Adam Smith meant something quite different by "competition" than what economists mean by it today. The clue, Blaug says, is in the articles. "a competition between capitals"; "the competition with private traders", and so forth. Economists today see generally competition as an end-state, as evidenced by the use of comparative statics and general equilibrium theory. For Smith and most of the other classicals, however, competition is a process or a behavioral activity.

Blaug says what we call "competition" today was for a Smith "the obvious and simple system of natural liberty", meaning no more than a 'self-evident' relationship between buyers and sellers given that a marketplace exists. Smith says in The Wealth of Nations that it would be absurd to attempt to prove this "common sense" relationship. Here, Blaug is saying our "competition" is Smith's "simple system of natural liberty".

In The Wealth of Nations what Smith calls the "system of natural liberty" is set in opposition to the mercantile system of trade, whereby the terms of trade are already highly fixed. The terms of trade are not simple. The natural system, on the other hand, is more like what happens between Friday and Crusoe on a deserted island; the mercantile system is what happens when kings and states hoard gold and pillage the wealth of other nations. Mercantilism is highly developed, complex, and the status quo for Smith; the natural system is somewhat like a state-of-nature situation.

Blaug, on the other hand, sets Smith's natural system of liberty in opposition to monopoly market structure. This is misleading because Blaug wants to publish on the differences between static and dynamic efficiency, and he's drawing on Smith to prove his point. But perhaps the only conceived monopolies in The Wealth of Nations was that of the state-owned monopoly in the mercantile system, or just where the demand for goods is inelastic. Blaug also includes in his definition of competition free entry into industries and occupations, which I also think is problematic. The number of sellers in a market does affect both the end-state conception of competition and the more behavioral aspect of competition that Smith talks about.

Analytically, if the number of sellers can be a factor in determining dynamic efficiency, which Blaug wants to eventually say, then the behavioral competition that exists has to be affected by the number of sellers in the market. Sellers behave differently when there are fewer of them. They raise prices, for example. Blaug, I think, is confusing the difference between the system of natural liberty and competition. The natural system is a simple conception of the possibilities of trade in a free market. Competition is an ongoing series of behavioral events and strategies which can be affected and influenced by a number of things that Adam Smith alludes to. The competition between capitals is different than the competition between private traders, for example.

There is a big difference here, so when Blaug says that for Smith "neither competition nor monopoly was a matter of the number of sellers in a market", he is confusing these two different ideas found in Smith.

The Neoclassical Paradigm and Propositional Attitudes

When sociology majors scoff at the philosophical economist's reference to an "invisible hand" approach, they are clearly not understanding the point of the argument, or the reason as to why it explains anything at all. I single-out sociology majors since they are usually not taught what mainstream economists say about free-market approaches, and to them this "market magic" sounds like superstition or an empty statement with no explanatory power. Those who share the concern that the hand is a more or less defunct metaphor, are only entertaining the kinds of impressions the sociology student has when he or she reflects on the dismal science from his or her distant perspective. It's a reflection about the things on the surface. Or perhaps it's a statement about the burden of proof in this situation. But I don't give it this much credit. It is only a reflection about a metaphor used in economics at its face value. And that is, after all, the best way to describe everything this sort of sociology student can understand about economics--whatever can be obtained at "face value".

Capitalism Now!

"I want to give you an argument," Saskia Sassen told a large audience of German intellectuals at the Grosses Haus in Freiburg. She leaned forward complacently and made some kind of gesture that reminded me of Hugo Chavez's speech to the UN last September. She looked up and said, "The WTO and the IMF have done their jobs!" The global power structures have de-nationalized zones around the world which adhere to their own kind of "private law". This de-nationalization of what was once the nation-state is important to her argument. But we lack the kind of vocabulary to describe this privatization of the rule of law, yet it exists and those for whom it exists are the organizations who seek to destroy lesser-developed economies and dominate global politics from a distance. Although the imperative of her diatribe was never made explicit terms, it is something like multinational corporations must be punished for their crimes, and that the nation-state is the most important structure yet the corporations are using them to gain illegitimate power.

But what is illegitimate power? I agree with Sassen on the urgency of her thesis, that there is something illegitimate about the power making its way to the corporate sphere. But I would like to give you an argument too. And I'm going to call this a teleological reply to Sassen's noticeably anti-capitalist argument. "The corporation" is certainly a failed enterprise. But it is not the corporation which is to blame for the emergence of this illegitimate power. Corporate power is simply an effect: it is rather the concept of the nation-state itself which is to blame for all of this. Sassen applauds the "important lawsuits" in the last three years against the 200 largest multi-national corporations. This is really important work, she says. We should not be convinced. This is misguided work. Real work would decentralize state-power, the crux of the problem. Strong states, that is, states with a tremendous amount of executive and distributive power, have not only a huge burden and responsibility, but also have an incredible incentive towards corruption. All the post-communist countries with lingering statists in power have exorbitant levels of corruption deep within the state apparatus. And this is the source of socialist inequality. I mean that: socialist inequality--that is, inequality under the law which is promulgated by a powerful, lopsided state.

The situation of capitalism is perilous. A professor of sociology with academic posts at Princeton, London and Chicago flies to Freiburg to warn the audience of how dangerous corporate extensions of state power are in the United States. But offers no compelling argument as to why the state apparatus deserves its own special status, as if it were an 'enlightened' institution. The IMF and the World Bank are an extension of the US executive branch legally. The organizations she blames for the disintegration of Latin American states wouldn't have existed without the state-sponsorship of Washington. And if Latin American states weren't so strong or so statist they wouldn't have been able to bargain with the IMF and the World Bank. This nasty power can be traced all the way back to the state every situation, invariably.

Sassen commented that people tell her she thinks "like a European", much to her flattery. In fact she spent part of her youth in Italy. Her cosmopolitanism can be attributed to the fact she was born at The Hague where her father, Willem Sassen, wrote articles as a Dutch-collaborator and Nazi journalist. While not a Nazi, she is indeed a super-statist. However, isn't it more apparent that she thinks like a Latin American? After all, she spent the other half of her youth in Beunos Aires, and she remembers the collapse caused by the IMF and the World Bank first hand. Hugo Chavez helped Argentina pay down its debt, she recalls, but the IMF encouraged Argentina not to accept it "because then they'd be out of work." The audience snickers. Oh capitalism.

Another one of her ideas: "Global capitalism needs the nation state to survive." I paused for a moment--she is so close to the idea and yet so removed from it! Of course, heavy state power becomes increasingly powerful when its corporations benefit it, bribe it, corrupt it, manipulate it. What if there was nothing to be manipulated in the first place? A minimal state and a vigil polis can achieve this. But as the ultimate arbiter of these matters, the nation-state is incredibly irresponsible. There are many problems with the contemporary conception of "the corporation", and these all come from the states which assign them a special status. The state has the power to enact, the power to penalize, the power to subsidize, is the object of immense lobbying, has the power to distribute wealth from the citizen to the corporation, the authority to govern belligerently, the power to puff-up its military defense, power to create spaces, power to engage in warfare, power to annex territory, power to manipulate trade, finance, media, courts, etc., the power to imprison, and the willingness to act unjustly and without good governance. This is late capitalism--state-sponsored capitalism.

In Robert Nozick's article Why Do Intellectuals Oppose Capitalism he outlines Sassen's academically anti-capitalist disposition to a point. The opposition of what he calls "wordsmith intellectuals" to capitalism is a fact of social significance. They shape our ideas and images of society; they state the policy alternatives bureaucracies consider. From treatises to slogans, they give us the sentences to express ourselves. Their opposition matters, especially in a society that depends increasingly upon the explicit formulation and dissemination of information. I don't doubt Prof. Sassen is an intelligent person. The intellectual stance against capitalism, however, seems to be highly misguided. If statism is the problem, as I believe, the anti-capitalism of intellectuals like Sassen is a serious threat to global civil society and its development. Academic intellectuals, who have spent their entire lives in formal institutions, come to believe that these state tools and easily-manipulable offices are the answer to all civil problems when if they had studied the problems of capitalism more closely, more teleologically, they might have found a more tenable conclusion: the intellectual arguments about the ills of corporate power have invariably taken for granted the strength of the state.

The "Family" Exploits of Capitalism

A central problem which is already implicit in Chapter One of Das Kapital, is that fact that the concepts of value, surplus value and exploitation, all of which are central to Marx's analysis, presuppose the notion of abstract labor, which in turn presupposes commodity production, a market, competition, and equilibrium of the price system by the capitalists' search for the greatest return on invested capital. Socialist feminist theorists have tried to show that there's an unequal exchange taking place in the modern family and that the role of the family structure in the capitalist mode of production exploits women as the labor base of the family.

The exchanges within the family, i.e. labor and what Ann Ferguson calls the "products of sex/affective production," take place outside the market. There is no equilibgrium prices, or commodity production, etc. Although we might wish intuitively to label some of the exchanges as exploitative, they don't readily conform to the Marxist idea of exploitation as the abstraction of surplus value. That's not to say that it just isn't quantifiable. So it means that there is no good Marxist way to integrate a theory of intrafamily exchanges with the labor exchanges on which capitalism rests.

One would have to be prepared to argue that women who enter into marriage contracts freely are exploited because their "use value" in the marriage is "exchanged" for a greater value than she was honored for. How exactly does this take place? Perhaps because the man uses her cooking labor to then exchange his own labor for greater value--which he wouldn't have been able to do without a servant of some kind, or a wife.

Perhaps these marriages aren't a good idea in the first place. Why enter into a marriage that simply exploited your labor, if that's what the feminists see it as, even though there doesn't seem to be any real Marxist foundation for this. The great thing about capitalism as a mode of production is that the women don't need the men in order to produce and earn income.

In fact, who needed marriages anyway? I sympathize with the feminists in their radical rejection of contemporary family values and conservative marriage norms. What good is a marriage. It isn't necessarily exploitative, but it isn't necessary to be married either. I disagree with feminists in their diagnosis of flawed marriages as somehow rooted in capitalism, however.

A.W. Phillips and His Staggering Curves

New Zealand Economist first came up with the Phillips curve which notes the negative relationship between unemployment and inflation. The modern Phillips curve substitutes price inflation for wage inflation. This difference is not really that crucial, because price and wage inflations are closely related anyway. For example, when wages are rising quickly, prices are rising quickly as well. Milton Friedman and Edmund Phelps added expected inflation to the model while developing models of imperfect informations in the 60s. They stressed the importance of expectations when it came to aggregate supply. During the 70s people began to notice how the curve was affected by changes in the oil supply due to OPEC.

But now it seems economists are losing faith in the solid relationship between inflation and unemployment that the curve suggests. In the 80s and 90s, contrary to the curve, the US economy experienced low inflation and low unemployment. And growth! For many, all those studies by Phillips seemed to confirm that there was a link between growth and inflation. Soon, economists started to say that the job of a central bank was to maintain the lowest level of unemployment that doesn't spark inflation: the so-called non-accelerating inflation rate of unemployment, or NAIRU.

But actually it seems price inflation fooled businesses into thinking the demand for their product was going up. So they hired more people. That's why there seemed to be a link. This idea, Friedman's, explained a key fact about the inflation-unemployment relation: Inflation tends to precede drops in unemployment, not follow.

At some point, business leaders would wise up, figure out that the reason the prices they can charge are getting higher is because of inflation, not an increase in real demand. When that happened the link between inflation and unemployment would break.

Stagflation in the 70s confirmed Friedman's work--and that's why he got his Nobel Prize in economics. There's no question now that inflation is a monetary phenomenon. It happens when the central bank lets the money supply grow too fast, and there are "too many dollars chasing too few goods." Economic growth doesn't cause inflation. If anything it helps reduce it. When there's more goods out there competing for those dollars, it offsets growth in the money supply.

Classical Tenets of Capitalism

I have compiled a list of seven classical tenets of capitalism, to be used for later reference. The ideas and terms stated below are to be understood as the classical tenets, i.e., the tenets of Adam Smith and David Ricardo. Some would consider John Stuart Mill classical. But Mill came later and even though he still accepted the basic tenets, I wouldn't consider Mill classical.


1) Private Property

Most legal systems distinguish between different types (immovable property, estate in land, real estate, real property) of property, especially between land and all other forms of property. They also often distinguish between tangible and intangible property as well.

In common law, property is divided into:

1. real property - (immovable property) interests in land and improvements thereto
2. personal property - interests in anything other than real property

Personal property in turn is divided into tangible property (such as cars, clothing, animals) and intangible or abstract property (e.g. financial instruments such as stocks and bonds, etc.), which includes intellectual property (patents, copyrights, trademarks).

The two major justifications of original property, or homesteading, are effort and scarcity. John Locke emphasized effort, "mixing your labor" with an object, or clearing and cultivating virgin land. Benjamin Tucker preferred to look at the telos of property. He asked "What is the purpose of property?" His answer: to solve the scarcity problem. Only when items are relatively scarce with respect to people's desires do they become property.

2) Self Interest

There are many types of "egoism". Psychological egoism says that individuals are motivated by self-interest. Ethical egoism says individuals ought to do what is in their self-interest. And rational egoism says that it is rational to act in one's self-interest. Adam Smith, writing the Wealth of Nations, espoused a psychological egoism. But he argued further that this was a good thing, because:

By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.

~WON ch.2

The concept of the "invisible hand" is nearly always generalized beyond Smith's original discussion of domestic versus foreign trade. Smith himself participated in this generalization, as is already evident in his allusion to "many other cases", quoted above. And the invisible hand is a natural inclination, not yet a social mechanism as it will be after Leon Walras and Vilfredo Pareto.

3) Competition.

Seen as the most important pillar of capitalism by many people in that it may stimulate innovation, encourage efficiency, or drive down prices, competition is touted as the foundation upon which capitalism is erected. According to micro-economic theory, no system of resource allocation is more efficient than pure competition. Competition, according to the theory, causes commercial firms to develop new products, services, and technologies. This gives consumers larger selection and better products. The greater selection typically causes lower prices for the products compared to what the price would be if there was no competition (monopoly) or little competition (oligopoly).

4) Market-based.

How are goods and services going to be allocated? A market-based economy is one where the price of each item or service is arranged by the agreement between sellers and buyers; the opposite is a command economy, where supply and price are set by committee or a body. However, while a purely free market necessitates that government does not dictate prices, it also requires the traders themselves do not coerce or defraud each other, and that all trades are morally voluntary.

The ideal of a free market is voluntary exchange. If an exchange takes place under coercion or fraud, then that exchange is not considered a free exchange.

5) Economic Freedom

Economic freedom is different from market freedom. The tenet of economic freedom applies to individual economic agents, and is more like a "Free to Choose" principle, which is in essence what capitalist economics is all about. Some have even called 'economics' the study of choice, because what decisions entities make are important to economists. Modern economics studies Rational choice theory which assumes human behavior is guided by instrumental reason. Accordingly, individuals always choose what they believe to be the best means to achieve their given ends.

In Adam Smith's day, however, this had a much more basic notion. The idea was that economic agents were free to choose where to put their investments, what to consume, and what to do. This free exchange and free choice principle allows the capitalist economy to allocate resources as the consumer chooses.

6) Consumer Sovereignty

Those with money and other assets are able to use their purchasing power to tell producers of goods and services what to produce (and how much). Customers do not necessarily have to buy and, if dissatisfied, can take their business elsewhere, while the profit-seeking sellers find that they can make the greatest profit by trying to provide the best possible products for the price (or the lowest possible price for a given product). In the language of cliché, "he who pays the piper calls the tune."

To most neoclassicals, consumer sovereignty is an ideal rather than a reality because of the existence -- or even the ubiquity -- of market failure. Some economists of the Chicago School and the Austrian school see consumer sovereignty as a reality in a free market economy without interference from government or other non-market institutions, or anti-market institutions such as monopolies or cartels. That is, alleged market failures are seen as being a result of non-market forces. However, it has also been argued (e.g., by Goutam U. Jois) that even a "pure" market system violates the consumer sovereignty norm.

Does the doctrine of consumer sovereignty imply that the consumers of labor (the employers) are the sovereigns over the time supplied by workers? The neoclassical school, would argue no since workers can choose which employer to work for (as long as the employer will have them).

Since the demand for labor is a 'derived demand' what workers produce and how they do it is a direct result of the demand for products, and thus they are sovereigns, albeit at secondhand. Conversely, the Marxian school argues that the concentration of purchasing power in the hands of a small minority (the capitalist) means that the bourgeoisie is the sovereign in both product and labor markets. This is reinforced by the normal existence of the "reserve army of labor" which restricts workers' ability to choose between jobs.

7) Laissez Faire

short for "laissez faire, laissez aller, laissez passer," meaning "let do, let go, let pass." From the French diction first used by the eighteenth century Physiocrats as an injunction against government interference with trade, it became used as a synonym for strict free market economics during the early and mid-19th century.

The laissez-faire school of economic thought holds a pure or economically liberal market view: that the free market is best left to its own devices, and that it will dispense with inefficiencies in a more deliberate and quick manner than any legislating body could. The basic idea is that less government interference in private economic decisions such as pricing, production, consumption, and distribution of goods and services makes for a better (more efficient) economy.

As said before, Adam Smith in Wealth of Nations argued that the invisible hand of the market would guide people to act in the public interest by following their own self-interest, since the only way to make money would be through voluntary exchange, and thus the only way to get the people's money was to give the people what they want. Smith said you do not get what you need by appealing to the "love" of the butcher, the farmer or the baker. Instead you appeal to their "self interest", and pay them to exchange their products for yours.

The Eclipse of Modernism and the Rise of Methodological Rhetoric

[An essay on D. McCloskey’s rhetorical analyzes of the economic science, why it matters that economics is rhetorical, why methodology is not over, and some lingering problems. ]

It is not easy to think of a proposition in economics that all reasonable economists agree to have been falsified by the evidence. It seems that no theory has ever been certified as dead. Yet many economists continue to believe that they are marching under the Popperian flag, and many of them wave the Friedman banner of predictive success. Of course most economists don’t worry about the scientific status of economics and think they could do economics without a methodological fuss. Does it matter that when asked what economists are doing or reflecting on that they come up with unsatisfactory answers? D. McCloskey believes that it does, and I think he is largely right about the reasons why.

McCloskey has no difficulty in showing that economic discourse is primarily “rhetorical” and not “scientific” in the Popperian sense. (The same is certainly true in “science”.) For instance he gives convincing demonstration that the use of literary devices in what appear to be formal arguments by Gerard Debreu, he documents the metaphorical nature of well-known propositions of Friedman, he shows the use of tropes by Solow and of quite straightforward rhetoric by various other economists (i). For good measure he gives his readers practical advice on rhetorical analysis in his essay How to do a Rhetorical Analysis and Why. In this and other works the aim is not to show that the economists are wrong altogether but rather that they were doing something other than what they believed themselves to be doing.

They emerge not as hard-nosed positivist scientists but as persuaders who, often, have all the tools requisite to persuade successfully. McCloskey believes that recognition of the fact that this is what economists are about would not only have the virtue of honesty but also the merit that fruitful debates could take place. People who believe themselves possessed of scientific truths or to be searching for such truths are disinclined to take note of the disciplines which are not regarded as “scientific.” McCloskey believes that for instance literary criticism and linguistics have been neglected by economists at some cost. More serious, it seems to me, is the neglect of history and the absence of any sense of history. The project of a history-free understanding of the economic world is not self-evidently plausible.

To McCloskey, the perceived methodology of economists is “modernist,” by which he means an amalgamation of positivist scientific thinking, behaviorism, operationalism, and hypothetico-deductive models of science. He traces all this back to the Cartesian dogma that “only the indubitable is true” (ii) Modernism’s application to economics is even more problematic than its application to other sciences. But economists only perceive they are modernists, while in truth they are rhetoricians. In fact the philosophers have moved on, and the economists are still carrying around their “methodological necrophilia.” When modernism collapses, this supposedly entails the end of methodology. Bruce Caldwell argues that McCloskey is arguing for the end of methodology (iii). But McCloskey argues that “Rhetoric” replaces modernism. Economists already have replaced modernism with rhetoric. To turn a phrase from Nietzsche, “The will to overcome methodology is ultimately the will of one methodology over another.”

Rhetoric is the ‘art of argument’ in the classical sense, reminiscent of Aristotle, Cicero and Quintillian, and was eventually “crucified” by Descartes. The best way to define rhetoric in the sense that McCloskey means is the study of the ways interlocutors accomplish things with language. It is critical inquiry. This “disciplined conversation” in economics is a literary matter, heavily metaphorical, and uses a kind of Aristotelian poetics when talking about economics.

The purpose of McCloskey’s own rhetoric is to persuade the reader to accept McCloskey’s view of economic scholarship, both in respect to what it is in practice and what it could be if economists paid more attention to rhetoric in their professional practice. “The subject is scholarship. It is not the economy, or the adequacy of economic theory as a description of the economy, or even mainly the economist’s role in the economy. The subject is the conversion economists have among themselves, for purposes of persuading each other” (iv). ‘Conversion among economists’ and ‘economics as rhetoric’ sounds slightly religious. I am reminded of St. Augustine’s conversion from Manichaeism to Christianity which began after his study of rhetoric. He writes in Confessions that he could not separate the substance of Christianity from its rhetoric in the form of St. Ambrose’s preaching. In that sense, we have an idea of what good classical rhetoric is, that is, the inseparability of rhetoric from substance.

McCloskey never explicitly says what good rhetoric ought to look like, but it’s clear from his prose that his own essays are in fact just that: The Rhetoric of Economics is an example of good rhetoric in the sense that it uses language very well in presenting interesting arguments. But how good his rhetoric is in the sense of being persuasive and thus likely to cause major changes in the beliefs and scholarly behavior of economists, I would not dare to predict after being persuaded by McCloskey that economists are not much good at prediction. Impossible! McCloskey’s articles are written with an elegance which is rare of other authors of contemporary economic thought. So one reads his articles with enjoyment and also is easier to assent to many of his arguments. But one is also left with many doubts.

It is clear that the simple positivism of the postwar years will not suffice either as a description of what we do or as an aim for what we should do. Econometrics at best has turned out to be a useful “filing cabinet” but has not been able to deliver the goods as a tool for the falsification of theories. In any case it has been known for a long time that one of the primary roles of economic theory is to provide a means for organizing our thoughts about a vastly complex world and to provide a means by which economists can discuss their scholarship, that is, understand each other. It is a lack of comprehension of this important role of scholarship which has led some to write off General Equilibrium Theory as useless while others have taken it as a sufficiently accurate description of, say, the present American economy. Rosenberg charges that economic theory is nothing but applied mathematics (v). McCloskey argues that this charge applies only to general equilibrium theory, mathematical economics and armchair discussions of philosophers who fail to see the economic science. Reading McCloskey should help to expose and dispel some of the reasons for these misunderstandings.

However, great care must be taken not to go to the extreme of “insights,” “intuition” and all economics as poetry. Without some rules a chasm opens for cranks and madmen to frolic in. Without rules one can only hope that intuition of economists will keep back the madmen. It is no surprise then that McCloskey, who has an aversion to epistemology and follows Rorty with a kind of “no-nonsense” pragmatism, has practically nothing to say on this matter (vi). Indeed he reminds me of some evangelicals who believe that society’s problems can be solved by enjoining everyone to just love everyone else. Just so, McCloskey urges us to engage in honest and open-minded conversation but on the grammar of this conversion he has little to say.

There are rules of logic and indeed of evidence that are desirable even when they are open to some philosophical doubt. Yes it’s all rhetoric, but it follows certain rules. In any case McCloskey opens the floodgates without telling us what, concretely, to do with the ensuing tide. This is the most serious failing of his article The Rhetoric of Economics. My own view is this: no really drastic changes are needed in the manner in which much of economic research proceeds at present, although it would be a great advantage if it were to encompass a great deal more than it does regarding the social ontology as other disciplines have provided. There is much evidence that does not come from a ‘time series’. But it is highly desirable that we should know what we are doing and what sensibly we can hope to do. On this matter McCloskey is a very good guide.

Inevitably McCloskey’s enterprise on meta-economics dips into every aspect of doing economics. Mainstream economists preach and pretend to practice the research in economics by developing falsifiable hypothesis and confronting the data. Such methodology (modernism, logical positivism, rationalism, all from Cartesian methodology), as advocated by Milton Friedman, McCloskey criticizes as being too narrow and misleading the science. His basic insight is that economic science involves more than the strictures of falsification; more fundamentally, it involves rhetoric, the argument or discourse using facts, logic, metaphor, and storytelling. Economists rely quite heavily on stories to make their points.

The example McCloskey uses is the Keynesian and the Monetarist, where the Keynesian tells the story about how “oil prices went up, which caused inflation” (vii). But the monetarist says the story “ends too soon, halfway through the second act.” The monetarist, McCloskey says, is “not morally satisfied” unless the story reaches some morally reasoned conclusion (that is, the monetarist wants to place blame on the Federal Reserve.) The dramatic departure is the insight that it is the economist, the person, who works out the story morally and therein gains knowledge, thus economic knowledge actually relies on his introspection. An economic argument is not complete without an appeal to rhetoric, which appeals to other economists’ introspection. It is clear how important rhetoric is.

I agree with McCloskey’s general argument on economic modernism. But his argument about prediction is troubling. Before McCloskey makes his argument about prediction and control, he says “Economists agree on more than is commonly understood. The disagreement about prediction and politics give them an unhappy reputation, yet they agree on many things: the index number problem, the law of demand, the logic of entry” (viii). But what is the law of demand if it is not a prediction? And what is it that economists agree on? That price and quantity purchased are, or will be, inversely related? But there are many examples of and explanations for a direct relationship.

Nonetheless, I am in general agreement. We would in my opinion be more honest and useful if we would do more ‘economics as rhetoric’. This would mean simply making good arguments to support what we know about economies and positions. We would say in effect that this is the best case I can make. It is based on this evidence and these arguments. I am not certain an am willing to listen to alternative arguments. The assumption is that the discourse among scholars and practitioners will bring us closer to useful descriptions of what is and what might be. To be avoided is the argument that the conclusion must be correct because it is based upon science or a scientifically verified theory. That is dishonest within the framework of logical positivism or without it.

Finally, I believe McCloskey’s argument would have been more persuasive had he expanded its scope to address some of the implications for the current content of economics. For example, are economic theories a series of metaphors used to support particular ideologies? What is the role of ideology in economic rhetoric? If we are persuaded by McCloskey’s arguments we have a lot of work to do in scholarly discourse answering the question—so what?

====
(i) How to do a Rhetorical Analysis and Why. D. McCloskey. New Directions in Economic Methodology. Routeledge: 1994
(ii) Ibid. (i)
(iii) Comment on McCloskey. Caldwell and Coats. Jstor.
(iv) Ibid. (i)
(v) If Economics Isn’t Science, What Is It? Alexander Rosenberg. The Philosophy of Economics. Cambridge: 1994.
(vi)
a. Modern Epistemology Against Analytic Philosophy: A Reply to Maki. D. McCloskey. Jstor.
b. You Shouldn’t Want a Realism If You Have a Rhetoric. D. McCloskey. Fact and Fiction in Economics. Cambridge: 2002.
(vii) Ibid. (i)
(viii) Ibid. (i)

Information is Asymmetric: market vs government failure

When a market left to itself does not allocate resources efficiently, interventionist politicians usually allege market failure to justify interventions. Neo-Keynesians have identified four main causes of market failure: the abuse of market power, externalities, public goods, and asymmetric information. My concern in this blog is with the fourth reason for market failure, asymmetric information. Perhaps I will be able to discuss the other three some time later.

Information becomes asymmetric when someone knows more than somebody else. But someone always knows more than somebody else. So information is unavoidably asymmetric. But what interests me is that this situation can make it difficult for the two people to do business together, which is why economists (especially those practicing game theory) are interested in it.

Transactions involving asymmetric (or private) information are everywhere. A government selling broadcasting licenses does not know what buyers are prepared to pay for them; a lender does not know how likely a borrower is to repay; a used-car seller knows more about the quality of the car being sold than do potential buyers. This kind of asymmetry can distort people's incentives and result in significant inefficiencies. Some say this is market failure, and therefore grounds for intervention.

Kenneth Arrow, a Nobel Prize-winning economist, said that free-enterprise economies under-invest in research and development because of risk. In the "ideal socialist economy" government would supply such information free of charge, thus separating the use of and the reward for producing such information.

The idea is that we get markets not to fail by government intervention. But this, as has been pointed out by the economist Harold Demetz, is to indulge in what he calls the "Nirvana Fallacy," whereby we compare allegedly imperfect real markets to imaginary governments that lack even the smallest imperfection.

To setup my argument, I think it is important to recall Occam's Razor, which says that "entities should not be multiplied beyond necessity." This heuristic maxim encourages economy, parsimony and simplicity in theories. Economists, of all people, should know most about this. My point is that if markets have imperfections, and are alleged to be corrected by government, then government must have fewer imperfections than markets in order to meet the standards of parsimony. An imperfect government correcting an imperfect market would be multiplying entities beyond necessity, which we want to avoid.

The burden of proof is not upon the free market to prove it doesn't need corrections. The burden is upon the government since it is the entity making the case for correction. If government cannot meet the parsimony standards, then we give our presumption to the free market.

Joseph Stiglitz is probably one of the most prominent proponents of government intervention. In particular, Stiglitz has written many papers on informational problems in markets. He once claimed that markets are "not perfect aggregators of information". From this, he concluded that we need a greater understanding of how central authorities use information before we can tell if they use information better than markets.

Stiglitz arrived at the conclusion that governments can improve upon welfare even when it faces serious informational constraints, because its incentives and other constraints are better than in markets. He notes that, upon embarking on his venture into the public sector, some friends of his suggested that he might return from Washington "a bit more jaundiced about the role of government." This did happen. During his tenure in the Clinton Administration, Stiglitz identified four significant problems with government: commitment problems, bargaining problems, imperfect competition, and last but not least, asymmetric information. Stiglitz now says that these problems prevent the government from implementing efficient policies. He also contends that incentives for secrecy in government are central to these problems.

Governments, not just markets, suffer from imperfections. Stiglitz now has the knowledge of how government uses information--knowledge that he lacked when he worked for the World Bank. He says,

"Making government processes more open, transparent, democratic and more participation and effort at consensus building is likely to result not only in a process that is fairer, but one with outcomes that are more likely to be in accord with the general interests. Perhaps we can bring efficiency to government."

Perhaps. But why should we make this effort? If government has serious failings that prevent its efficient operation, should we not at least consider free market capitalism as an alternative? Or are we for some reasons obligated to bend over backward to make sure government works efficiently?

Objective scholars, if Stiglitz is one, concerned only with economic efficiency, ought to be faithful to just that. Instead, Stiglitz holds out hope that we can improve upon government. Why doesn't he hold out the same hope for free markets? This illustrates his bias.

If we are concerned with the allocation of scarce resources, we are primarily concerned with economic efficiency. Stiglitz has shown that government intervention adds an even further imperfection to the process of allocating scarce resources. The government has the same problem with asymmetric information. It has an incentive for secrecy, just as the competitive firm does. But using a secretive government to correct the secrecy of firms only magnifies the problem and the secrets become much larger. Therefore multiplying inefficient entities does not make them more efficient. As an advocate of consumer awareness, what disturbs me the most is that consumers are hurt most when this happens.

Government's purpose of intervening conditions of asymmetric information was, in the first place, to increase consumer and businesspeoples' awareness, which leads to better allocations. But government is not a necessary entity to ensure this happens. The free market provides this information itself. If the consumer wants information that the seller is not willing to give, she can always consult a consumer report. Even for risky investments in research and development, the market can provide the information in the form of CPI and PPI predictions, "whisper numbers" and other information. Since it is profitable to be in the business of investor and consumer reporting, the problem of asymmetric information corrects itself in the free market and multiplying government simply multiplies inefficiencies.

Technology is Like Keynesian Price-Stickiness

I have been reading much transhumanism lately, as is evident from my blogs. So I began to reflect on the nature of technology in capitalist economies.

Keynes argued that prices in the economy were "sticky" in the sense that they very easily moved upward and very stubbornly moved downward. Petrol prices is the example a popular textbook gives because petrol-pump prices do not change every time oil prices change. Similarly holiday prices and standard hotel rates are fixed for months. Sticky prices are slow to change in response to changes in supply and demand. As a result there is, at least temporarily, a disequilibrium in the market. The causes of stickiness, Keynes argued, included mainly menu costs, imperfect information, consumers' dislike of frequent price changes and long term contracts with fixed prices. The principle behind all this is that "prices change only when the cost of leaving them unchanged exceeds the expense of adjusting them."

In financial markets, prices move all the time because the cost of quoting the wrong price can be huge. In other industries, the penalty may be much less severe. Small disequilibria, say, the pricing of hotel rooms will not make much difference. Hotel prices are often sticky.

Likewise, technologies are slow to change in response to changes in government policy. This can be thought of as some kind of disequilibrium, if you imagine that on one axis you have government policy and technology on another. They disequilibrate when technology is not in kilter with current government policy. This happens all the time with new patents and copyright protection laws. Script-kiddies and hackers are most certainly going to find their way around the protections, and the policies themselves are irrelevant to the development of these hacks. It actually produces an even greater incentive to develop hacks.

As many libertarian transhumanists have argued, once human-enhancement technology is available on the market, you cannot make it go away. There never was a technology that the human race ever abandoned wholesale, even the hydrogen bomb or other weapons of mass destruction with the power to wipe out all life on Earth. You might eventually be able to ban the production of H-bombs, but it would take a long time to kill everybody who knew how to make one or eliminate all blueprints and specifications for the design. While scientists discussed the possibility of a ban on recombinant DNA research at the Asilomar Conference, they knew it was not going to happen. Even if overt public funding for such research was cut off, covert private funding would continue to flow from various interested parties, as has happened with even disproved technologies like cold fusion.

But prices are often sticky because wages are sticky. That is, when petrol prices increase, and demand remains the same, wages generally increase. But when petrol prices begin to fall, it's difficult for wages to fall as well. So wages stay about the same, and prices stay the same too. Wages are prices trend upward and very seldom trend downward. This is the Keynesian explanation for inflation.

There is something quite like "technology inflation". It's what happens when the general level of technology rises, in the sense of a technological revolution. Unlike price-inflation, rooted in price-stickiness, technology-inflation seems rooted in the nature of the business cycle itself. It's an increase in the ratio between labor and capital. When capital investment increases the demand for labor-saving capital technology becomes sticky. Once we have upgraded our capital equipment why would we want to downgrade? So there is an upward-leaning trend for increasing capital technologies.

But with price-inflation, unless unchecked, eventually goes bust. This could happen with technology as well if technology increases productivity without increasing wages. If wages do not increase as productivity increases, demand slows down, and the capital investment which fueled the technology-inflation goes bust. The economy would come to screeching halt. Or perhaps, as John Stuart Mill suggests, we would land happily into a stationary state.

Scientific Theory as Predictive Machinery

A reply to Milton Friedman's economic methodology...


Milton Friedman’s 1953 paper is an attempt to rescue economics from scientific realism. He argued that the primary criterion of validity for economic models was not the “realism” of the assumptions, but the accuracy and importance of the predictions generated by its implications. Realism has many uses in the language of science. Its primary use, of course, is in the interpretation of “unobservables” in scientific theories, that the success of science involves the status of unobservable entities talked about by scientific theories. If one is a scientific realist she says the unobservable things talked about by science are little different from ordinary observable things (such as tables and chairs). For the realist with respect to economics, these unobservable entities include the assumptions of economic theories, such as that businessmen supply commodities up to the point where marginal cost equals marginal revenue.

Friedman’s paper takes a different position than that of the physical scientist. His paper is methodologically committed to instrumentalism, while being epistemologically pragmatist. The two are closely related. An epistemological pragmatist is oftentimes a methodological instrumentalist, much like John Dewey. It is also clear that Friedman places little confidence in the reasons the realist might proffer for believing significant portions of what a theory says about unobservables, and in other words is an antirealist with respect to the ontological status of the unobservables in economics.

While it was commented that the philosopher might not find any “new” ideas with Friedman paper, the idea of positive economics, as I will argue in this paper, is given new meaning. Friedman is knowingly influenced by Popper (although he is no Popperian, as I shall argue) when he links positive economics to the Popperian ideal of science as conjecture and refutation. In Friedman’s version the conjectures do not necessarily need to be realistic, but only that they give rise to predictions that can be empirically verified. This formula, when substantially followed up by empirical testing, gives the economist a powerful device for developing scientific machinerey with strong predictive records.

“Viewed as a body of substantive hypothesis, theory is to bejudged by its predictive power for the class of phenonmenon which it is intended to ‘explain.’” (Friedman 1953)

Friedman’s instrumentalism fundamentally denies that theories are truth-evaluable, and that they should be treated like a so-called black box into which you feed raw observed data—“brute sensations”—and through which you produce observable predictions. As a study in philosophy, it is apparent that the Friedman method then requires a distinction between theory and observation, and within each type a distinction between terms and statements. This has been covered extensively elsewhere, and for that reason will not be repeated here. But it is interesting to note that the theory-language of Friedman’s methodology, if explicitly developed, would be very close to the theory language developed by the logical positivist school. If Friedman’s methodology were thoroughly exhausted, we might end up with something quite like the protocol sentences and observation sentences found in the positivist literature.

Friedman is curiously obsessed with factual evidence. He espoused the view that “factual evidence can never ‘prove’ a hypothesis; it can only fail to disprove it.” This sounds admirably Popperian. But Friedman’s “fail to disprove” is not synonymous with falsification. With every failed attempt to disprove a theory, one actually lends weight to the confirmation of that theory. (One could arue that was Popper’s project too.) But the theory itself does not depend on being “disproved” by a single shred of evidence, as in Popper. It’s not obvious whether Friedman even encourages the falsifying of theories, but it’s clear that he’s concerned about the verification of certain theories he approved of. On this account, one could simply ask those who are working on problems in support of your ideological position to “please work harder at verifying them.” In contrast, Popper would ask of the same people to “please attempt to falsify your work if you really think you’re on to something.” But Friedman’s verificationist methodology is wrapped neatly in a somewhat naïve account of empiricism.

“The only relevant test of the validity of a hypothesis,” says Friedman, “is comparison of its predictions with experience.”

This sounds, again, admirably Popperian in its repeated stress on testing. But “the only relevant test of validity” is, essentially, verification with the economist’s brute sense experience. (That is, the verification one finds in economic indexes and journals.) This is a very interesting philosophical position indeed because, together with his rejection of realism as a test of theory, meant that the problem of induction was simply done away with. Friedman apparently does not hear David Hume rolling in his grave. The problem of induction is not the most interesting of problems in economics. It is of immense importance, however, to its own philosophically empiricist foundations. The problem classically involved the epistemic disconnect between what was observed in the past and predicting what will be observed in the future. Justifying induction on grounds that it has worked in the past, Hume says, is essentially begging the question—a fallacy students of philosophy are perhaps all-too-familiar with.

Friedman is fundamentally un-Popperian in this sense due to the fact that Friedman is arguing from a naïve inductivist position. His position begs the question of the validity of induction. Popper sought to resolve this problem by placing it within a scientific context: science does not necessarily argue from induction, but rather, science argues by deductive principles. Popper essentially makes “modus tollens”—proof by contrapositive—the centerpiece of his methodology. And on this account, of course, one should pay more attention to that which potentially falsifies the argument rather than what confirms it.
Moreover, according to Popper, the more the theory “exposes its chest” (i.e. the more risk the theory is and the more it tells us) the more vulnerable it is, the more it is likely to be accepted. But with Friedman’s instrumentalism, there is no room for the theory’s neck to stick out. It cannot test its own assumptions. It’s only testable in a non-comparative way. We cannot tell whether one theory’s neck is sticking out further than any other’s, since we have no adequate account of what a realistic/unrealistic assumption is.

Friedman suggests that the testing of assumptions themselves is not important. The assumptions are not the explanandum, (“that which must be explained”) they are the explanans (“that which does the explaining”). Friedman does not care too much about whether that which does the explaining is “realistic”. Its simplicity is to be taken into consideration, he says, but what counts as simple is not adequately elaborated in the paper. In this sense, Friedman’s unobservables are decidedly un-Popperian. They’re strictly axioms and the scientist should not trouble himself with their bothersome philosophical justification. They are, in a word, instruments of science.

We can see how Friedman’s methodology is unlike Karl Popper’s. How, then, is it like the methods espoused by those of the logical postivist school? The simplest answer is that one can see Friedman’s method suffered from the same problems as the positivist school method suffered. In principle, then, Friedman is positivist since his method adds little novelty to the subject, and hence could not solve the problems of earlier methods. Friedman is consciously aware of Popper, and he covers his verificationist residue in language the Popperians would find pleasing. For example, his repeated stress on testing of hypotheses with sense experience. This is not, as I have argued earlier, the same thing as falsificationism.

Friedman’s view is that concepts and theories are merely useful instruments whose worth is measured not by whether the concepts and theories are true or false (or correctly depict reality), but by how effective they are as predictive machinery. In fact, however, it is a positivist account.

Besides their concordance with brute sense experience, theories must also be judged by another criterion: whether the alternatives to the theory are also acceptable. But just as the logical positivists could not choose the better theory between Freudian and Adlerian psychology, Friedman cannot choose the better theories in economics.

I want to stress that Friedman is a relativist with respect to the unobservables in the theory. Since these unobservables could, in fact, be wildly diverse and Friedman has no adequate method with respect to the reality of the unobservables themselves. The method says that whatever does have the strongest predictive record is in some sense worthy of the title “scientific theory”. But on this account one could have a theory of rational behavior interpreted instead through, say, a Christian account of sinful nature. Friedman says choose the theory which predicts most and puts to use the least unrealistic assumptions. But this does not solve the theory choice problem, since we cannot test whether one is putting to use more or less unrealistic assumptions. Moreover, on this account, the scientists cannot even tell us what a realistic assumption looks like. Friedman simply plays on our intuitions as to what a “realistic” and “unrealistic” assumptions looks like. We somehow know this already, and thus Friedman again begs the question. And in the last analysis, all Friedman arguments against what he railed most, Paternalism, is merely an elaborate “intuition pump” as Daniel Dennet says. The entire argument is built into the assumptions.

Further, what would Friedman be able to say about the demarcation problem between science and non-science? His theory does not adequately guard against pseudoscience, as Popper noted of the logical positivists. If a non-science model could arrive at higher predictive records, then Friedman has nothing to demarcate between the two. In fact, he ought to prefer the non-science model since it has a better predictive record.

As a final note, Friedman and the positivists share essentially the same notion of what the job of the philosopher is. This is particularly interesting to me, as one who studies philosophy. Hands writes in Reflections that the logical positivist movement redefined the job of the philosopher as turning philosophy into a kind of “conceptual cleanup operation.” The philosopher is to point out to the aspiring scientific community what was (and was not) meaningful discourse. Likewise, Friedman redefines the job of the philosopher in a similar fashion. Formal logic, Friedman says, is a tautology, and these philosophical tools are “aids in checking the correctness of reasoning, discovering the implications of hypotheses.” (P186.) This should come as no surprise, as I have argued that Friedman’s methodology is simply a lapse into positivism. The philosopher’s duties once again include janitorial duties like sorting out all this brute empirical data and storing it in some vast “analytical filing system.” The philosopher, then, is once again a discourse-Nazi and a merely the secretary of science.

What Friedman was trying to establish was a framework in which economic knowledge could not be attacked at the foundations. It could not be attacked on the basis of realism (its most-feared opponent) because the task of economic model-building is not to aim the predictive machinery towards cranking out realistic assumptions. The Friedman case for an instrumentalist methodology is built into the argument presuppositionality, and thus should be refuted before it can get off its feet. It comes as no surprise to Popper that this method should be tautologically irrefutable, but this lends far less credibility than is often believed.

The Economic Noumenon and the Innocuous Empiric

According to Lawson’s critical realist view, the central aim of economic theory is to provide explanations in terms of hidden generative structures. Despite Lawson’s clarity of style and painstaking efforts to explain his view—a process involving a good deal of repetition—his essays are not easy to read. His criticisms of mainstream economics seem familiar and are widely held in circles of critical realists. They include: excessive reliance on deductivist methodology, uncritical enthusiasm for formalism, an unwarranted faith in “event regularities” in economic and social life, a mistaken belief in the scope for strong conditional predictions in economics despite repeated failures, and confusion with respect to methodology. A fundamental reorientation of the discipline is needed to remedy this sorry state of affairs, including a radical transformation of its accepted objectives. This would bring about the effective demise of economic orthodoxy.

While the main thrust of Lawson’s argument is decidedly anti-positivist and anti-empiric it is not, by most standards, avant garde. Lawson explicitly dissociates himself from the views of subjectivists and the hermeneuticists. He maintains that economics can be scientific in precisely the same sense as physics. Where the critical realist approach differs is in saying that economics ought to embrace “social ontology”, which a strict attention to the empirical reality is not presently able to include. (1)

The main project is that of ontological inquiry, for Lawson argues that the abandonment of ontological reasoning is the basic error underlying the now discredited positivist conception of science. According to the transcendental realist (in a semi-Kantian sense) there are three distinct domains of reality: the empirical (characterized by event regularities), the actual (events and states of affairs in addition to the empirical), and the real (structures, powers, mechanisms, and tendencies in addition to actual events and experiences.) The three levels of reality are “out of phase” with each other (2). The real world the scientist examines is the empirical. This is limited, Lawson argues, because empirical realists presume that the objects of inquiry are solely empirical regularities, with no substance, no underlying causes. Or at least, these underlying causes are not taken seriously by mainstream economists.
Transcendental realism views the third domain, the real, as the focus of science, whereas positivists adopt the erroneous view that ontological matters can always be translated into epistemological terms.

According to Lawson, transcendental realism is the general theory of science which is combined with a specific theory of ontology to form critical realism. Enduring social structures are distinguishable from purely natural ones by their dependence on human agency, and the task of social research, including economics, is to uncover such social structures as exist—for example, rules, relationships, and positions. Contrary to the methodological individualists’ claim, such as the Austrians, these social structures are not reducible to individual human actions. The positivists’ basic error is the failure to examine explicitly the “intransitive objects of social science.” (3)

Most mainstream economists take it for granted that their theories, procedures, and techniques are appropriate for the investigation of social life, but this is not the case. The result is a conservative ideology which serves to rationalize contemporary practice.

Lawson’s consideration of competing explanatory theories is central to an understanding of his contribution to economic methodology. Contrary to the orthodox economists’ positivistic claims, strict event regularities cannot be found in the social realm (and, indeed, only rarely in the natural world, and even then only under strictly controlled experimental conditions.) Hence, the economist is forced to reply on partial event regularities (or demi-regs). The result is that economic analysis is usually a “complicated and messy affair.” (4)
The methodological position that Blaug adopts is, roughly, logical empiricism as propounded by Karl Popper and his followers. Blaug is a “shout-it-from-the-rooftops empiricist” with an unqualified commitment to the methodologies of Popper and Lakatos. He is for prescriptive methodology and is against the postmodernist tendency towards hermeneutics and rhetorical analysis. “Methdological pluralism” is a sham—an excuse for making final judgments about competing theories (5).

And where some blame the absence of judgment on the failures of econometrics, Blaug calls for “more and better econometrics” (6). For an unrepentant neoclassical, he is surprising sympathetic to Marx and to radicals.

In Blaug’s account, Popper and Lakatos seem to be indistinguishable, although he does say that Lakatos is “softer on science” than Popper (7). Lakatos is, however, much “harder” than Kuhn and more inclined to criticize bad science. He seems to reduce Lakatos’ methodology to (i) theories should be progressive in that they predict something beyond the facts used to construct them; and (ii) theories should be confronted with experience. To an empiricist, these are unexceptionable statements. But perhaps that is Blaug’s point: are we all Lakatosians now?

Blaug is a Popperian methodological falsificationist, and as such, he is unhappy with the present state of affairs in economics. However, Blaug is not upset with the lack of transcendental wishy-washiness, but rather the lack of hardcore Popperian falsificationism. The problem is plain to see: though economists have learned to preach the rhetoric of falisificationism, they have not yet learned to practice it, preferring instead verificationism, or “innocuous falsificationism”. Testing ought to give way to testability as a demarcation criterion.

Both Lawson and Blaug see ugly currents in modern economics. But the ugly is more consistent from Lawson’s point of view. Perhaps this can be attributed to its vagueness, but at least it is consistently vague. Blaug makes interesting arguments, and his essays are better written than Lawson’s. But his criticism of critical realism, if applied, could not possibly be relevant, whereas Lawsons’ criticism of Blaug, if applied, is better understood. Lawson may be considered an innocuous falsificationist in his empirical economics. But if the critical realist project is seen as a research program, it cannot be thrown out as being a degenerative one. Its hardcore is sustained by the economists busy bouncing negative heuristics off the protective belt. It is thus a progressive research program. Blaug tries to blend the Lakatosian and the Popperian together, but overlooks the more relativistic notions that Lakatos introduces. Thus it does seem that with Lakatos falsification no longer matters where progressiveness is the standard for research evaluation.

The critical realist position, broadly, is not relativistic. It can give an account of ugly economics with an ability to criticize not just falsificationism, but all of modern economics, for not having any explanatory power with regards to underlying causes. Perhaps it cannot give an adequate of account of what proper social ontology ought to be, but it is defensible in the sense that it is consistently arguing for a proper place in economics of the causal explanandum.



Works Cited:

(1) Review: Economics and Reality. A.W. Coats. Jstor.org :1997
(2) A Realist Theory For Economics. Tony Lawson. New Directions in Economic Methodology: 1994. P 260
(3) ibid. P 265
(4) Why I am Not a Constructivist. Mark Blaug. New Directions in Economic Methodology. 1994: p 116
(5) ibid. P 363
(6) Pluralism in Economics. Andrea Salanti. Jstor.org 1998
(7) Paradigms versus Research Programs. Mark Blaug. Anthology. P 353

Hegel gets credit for Fukuyama's End of History

Francis Fukuyama wrote an essay back in the 80s titled "The End of History" for the neoconservative journal The National Interest. In it he claimed that democracy has won over other forms of governments. But as he puts it, "Liberal Democracy may constitute the endpoint of mankind's ideological evolution."

Fukuyama cited Hegel, for whom the concept of an "End of History" derives. History had to have an end-purpose, Hegel believed, or it lead to what he called a "bad infinity." But Fukuyama took his view from a Russian philosopher named Alexandre Kojevi, who called himself a "Marxist of the Right." So this is Hegel as filtered through Fukuyama, through Kojevi, through Marx.

Democracy may be the Hegelian End of History, but some have made Hegel the cause of both Marxism and Fascism.

He's also been called a metaphysician, a pantheiest, a post-minor-Spinozist, a precursor to existentialism, a gnostic, a closet-atheist pandering as a Lutheran professor, the first holistic philosopher, a forerunner to Marx--and worst--Karl Popper said that his philosophy was bombastic and mystified Kant. Bertrand Russel said he was the hardest to understand among the great philosophers.

Hegel's contemporary, Schopenhauer, said, "The height of audacity in serving up pure nonsense and streaming together senseless and extravagant words, such as only previously known only in madhouses, was finally reached in Hegel." (He might have been jealous: Hegel was a popular professor, Schopenhauer was not.)

His former friend, Friedrich Schelling, said after his death that his philosophy was shallow and superficial. (Schelling also harbored resentment towards Hegel, whose reputation far surpassed his own.) Schelling students, by the way, included Friedrich Engels, Soren Kierkegaard, and the Russian anarchist Mikhail Bakhunin--all of whom came up with their own views on Hegel.

After he died, Hegel's followers split into two basic camps: the Left Hegelians (the "Young Hegelians", and atheists) and the Right Hegelians (the "Old Hegelians," Xian fundamentalists, and statists.) Hegel is like the elephant being described by the blind man: how could one philosopher mean so many things to so many people?

Well, for one, Hegel was the exact opposite of tabula rasa. He wrote a lot of words, in other words, basically trying to come up with a theory for everything--in prose that was both opaque and obscure. In fact, there are dozens of competing Hegel glossaries out there, which are necessary, it seems, for the reader to relate to his work.

One of his concepts, for example, is aulfhaven. In English, sublation. To sublate is to simultaneously supercede and preserve something. Don't we see how tricky Hegel is? He used it to explain how once an old idea is refuted, it is still contained in the new idea.

Maybe that's what happens with Hegel: his readers cherrypick what they want from him, declare that the cherry is now an apple, and then either ignore the rest of the fruit or question the motives of those who pick it.

But for the rest of us to know what Hegel really thought that would require, you know, reading him.

All of him.

With the glossaries.

In German.

The ‘Man From Mars’ and His View of Business Enterprise

Integral to Veblen’s rejection of conventional economics was his claim that it was basically the ideological expression of the dominant capitalist values. Veblen regarded this as understandable in that the point of view of economists has always been in large part the point of view of the enlightened common sense of their time.

However, this didn’t inhibit Veblen from criticizing those whom he admired yet judged to be unscientific apologists for the existing capitalist system, such as Alfred Marshall and the social-Darwinist Herbert Spencer. In Veblenian language, the essential problem of capitalism was not only that it was rooted in the relatively ephemeral instincts of predatory businessmen, but that the habits and institutions that were an outgrowth of this self-regarding propensity operated (most profoundly in his own era) to the detriment of technological progress, and therefore the community as a whole, even though it seemed to be flourishing rather than wilting.

In the Marxian theory of capitalism technological development is motivated and controlled by capital accumulation process. The engineers and technicians in this model are basically agents of the capitalist. But the crucial difference between Veblen and Marx is the distinction Veblen makes between business and industry—the realm of pecuniary values on the one hand and material production on the other.

In Veblen’s account, the engineers and technicians are the ones working with the funding and doing the creative work, while the capitalists are more like “absentee owners”, whose relation to industry is mostly destructive, and is only non-destructive when it is permissive. In this model, the absentee owners operate exclusively in the realm of business. What follows is that the absentee owners play a negative role in the development of the “industrial arts.”

Nonetheless, the industrial arts develop, unavoidably so (BE p. 34). Veblen called this development the “machine process,” which gives rise to large-scale production and, subsequently, corporate organizations, advertisers, securities markets, loan-writers, joint-stock companies, and eventually monopolies. Veblen was very doubtful of any “successful business ventures from which the monopoly element was wholly absent” (BE p. 54).

This later stage in capitalism (n.b. Veblen wouldn’t use the language of dialectical teleology) developed from an earlier stage where the economy was centered around trading but not necessarily for pecuniary gain. The machine process was still in its infancy, having not yet extended the sprawling standardization of that was so prominent in his era and our own. He considered the classical era to have been “stagnant” in the sense that it hadn’t been corrupted by the standardizing aims and practices of the business enterprise.

Once the economy was in the hands the business class as such, their survival operated on the gain in profit, which was reached by the distortions of the economy. It was in the interest of the business class to create distortions, create “large and frequent” shortages, and create needs, in order to gain profit (BE p. 29).

Thus once the industrial arts begun developing, it was easy to understand the plight of industry. Capitalism in its earlier form was concerned with serviceability value, that is, the conditions under which a product was considered useful. With the whole entourage of businessmen, advertisers and underwriters comes the concept of vendibility value.

The value created by the advertisers especially has only in unintentional cases any actual utility for the buyer; it only serves to increase the cost of production. “Its ubiquitous presence” in the realm of business enterprise is a “cost incurred with a view to vendibility, not with a view to serviceability of the goods for human use.” (BE p. 59)

All this marks a decisive change from the small-scale production and the individual owner-entrepreneur of early capitalism, which Veblen considered to be the beginning of “the decay at the top.” The center of attention of businessmen shifts progressively from the production of useful goods and services to the sale and manipulation of corporate securities which in turn represent essentially the capitalized earning power of the underlying firms. It is in this context that the effects of continuous technological advancements must be assessed.

As Veblen saw it, the primary effect of this was a continuous lowering of production costs. With new more efficient technologies, the result would be a steady undermining of existing capital, which would cause an incessant depressing effect on business enterprise in general. Here we may discern a basic similarity in the theories of Veblen and Marx: in the final analysis, both believed that the fate of capitalism would depend on the course and outcomes of the struggle between capital and labor.

But the tension Marx saw was found in the realm of class interest and labor-exploitation having been created by the capitalist class, whereas Veblen saw the tension as having been conditioned by the machine process itself. Industry and its instrumental values leads technicians and engineers to join institutions like trade unions; finance and pecuniary gain leads businessmen to oppose them. The opposition grows. However, Veblen did not purport that the machine process would inevitably lead to a socialist revolution, unlike Marx, since not only the workers but the business class would defend their interests too.

However, Marx offered a positive theory of action, whereas Veblen worked incessantly to curb any action taken under the guise of his theories. Various solutions were proffered to amend the Veblenian problem, all of which, in Veblen’s eyes, failed to do any justice. Educational institutions could not solve the plight of industry since it only existed to further the ideology of the business class. Neither could a free press solve the problem since it reinforces the consumer and cultural ideas under the guise of distributing information .

Using national politics as a way of replacing old leadership with new leadership was seen as futile since it could not address fundamental issues. Lastly, militaristic-imperialist adventures which were the solutions the Japanese and German governments used would keep the existing technology but simply devolve the institutions to earlier, more primitive, eras.

It is important to note that Veblen was not interested in policymaking, but rather mere observing and predicting. He did not want his observations to be taken by policymakers as gospel truths; he thought of himself not as a Marxist per se; not as a technocrat or technological-determinist, nor even a postmodernist. He was, as various writers saw it, something of a man from mars.

Utopian and Dystopian Portraits of the Stationary State in Classical Economics

Adam Smith’s model of economic growth remained an influential model throughout classical economics. While Smith alluded to a period of zero economic growth—which was seen as an historical inevitability of economic growth even to non-Marxists of the classical period—it was Ricardo and Mill who expounded the analytical arguments for this so-called “stationary state.” I will argue that Ricardo’s portrait of the stationary state is a dismal and gloomy one, whereas John Stuart Mill’s “happy-face” portrait of the long-run economy is a splendid society.

David Ricardo modified the growth model by including diminishing returns to land. The basic idea is that output growth requires growth of factor inputs, but, unlike labor, land is “variable in quality and fixed in supply”. This means that as growth proceeds, more land must be taken into cultivation, but land cannot be “created”. This has two effects for growth: firstly, increasing landowner's rents over time (due to the limited supply of fertile land) cut into the profits of capitalists from above; secondly, wage goods (from agriculture) will be rising in price over time and this then cuts into profits from below as workers require higher wages. Growth is, however, primarily due to the saving and investment of the capitalist class since the other classes (laborers and landlords) are said not to increase the nation’s capital stock of investment. For Ricardo, the profit of the capitalists is crucial. With Mill, as shall soon see, it is the institutions which are crucial.

The Ricardian model for economic growth, which Mill largely accepts, proceeds as follows. (1) The economic growth caused by investment leads to an increased demand for laborers.

(2) Wages then rise above the subsistence level. This will cause

(3) a Malthusian increase in population (increasing geometrically) which then causes

(4) and increase in the demand for agricultural foodstuffs (increasing arithmetically), which can only be met by

(5) an increase cost of production and hence

(6) a rise in the price of food. Due to the Iron Law of Wages, higher food prices lead to

(7) higher wages which ultimately

(8) equilibrate with the profits of the capitalist class.

The important point is that there are no net profits by the time the economy reaches step 8.

All the capitalists can do at this point is maintain the existing level of capital and thus production. It is worth noting that this model introduces a quicker limit to growth than Smith allowed, but Ricardo also claimed (at first) that this decline can be happily checked by technological improvements in machinery (albeit, also with diminishing productivity) and the specialization brought by trade. Ricardo was somewhat ambivalent about technology, however. On the one hand, he recognized that technical improvements would help push the marginal product of land cultivation upwards and thus allow for more growth. He noted that technical progress requires the introduction of labor-saving machinery.

This is costly to purchase and install, and so will reduce the wages fund. In this case, either wages must fall or workers must be fired. Some of these unemployed workers may be mopped up by the greater amount of accumulation that the extra profits will permit, but it might not be enough. A pool of unemployed might remain, placing downward pressure and wages and leading to the general misery of the working classes. This so-called stationary state, for Ricardo, was not a “many-splendored” thing.

However, Ricardo claimed that, in fact, machinery displaces labor and that the labor “set free” might not be reabsorbed elsewhere (because capital is not simultaneously “set free”) and thus merely create downward pressure on wages and thus lower labor income. In order to reabsorb this extra labor without this effect, then the rate of capital accumulation must be increased. But there is no obvious mechanism for this to happen—particularly given the tendency described above for profits and thus savings to decline over time.

Ricardo's portrait of the stationary state is somewhat more dystopian and pessimistic than Smith's. Or to use Carlyle’s word, dismal. The ultimately dismal portrait, however, was painted by Malthus with his famous claim that population growth was not so easily checked and would quickly outstrip growth and cause increasing misery all around—an utterly abject long-run economy.

For John Stuart Mill, salvation lies elsewhere. Mill is alarmed by the “tone and tendency of the speculations” of earlier economists who, like Ricardo, identify all the pleasant aspects of the long-run economy with the progressive state and all the unpleasant aspects with the stationary state. The basic Millian view of the long-run economy is just as Ricardian as the analytic model set forth in the third paragraph, for Mill tacitly consents to this model. Far from being an “end-of-history” approach, Mill contends, however, that since the stationary state is not as subject to wild fluctuations in capital investment and labor demands, the long-run economy reaches a happy and even-paced way of life. It is a more leisurely state, to be sure, one which later Marx will elaborate upon and famously describe a typical day in the commune where we fish in the stream after ploughing the fields. Mill even goes as far as to identify the stationary state with stronger tendencies towards full employment and the potential for reproductive prudence. Mill is not impressed by the political economists of the old school, he says, and he is “inclined to believe that [the stationary state] would be, on the whole, a very considerable improvement on our present condition.”

Mill’s long-run economy is utopian. No longer are human beings struggling to get on, “trampling, crushing, elbowing, and treading on each other’s heals.” We will find a state in which while no one is poor, no one desires to be richer, or suffers fear of being thrust back. Social mobility ceases to be of concern. But utopias have a tendency to be somewhat statist, and Mill certainly nods to paternalism in this sense. If it could be shown that a new laborer could not find employment in the stationary state by means of displacing older laborers, Mill believes that the “combined influences of public opinion might in some measure be relied on for restricting the coming generation within the numbers necessary for replacing the present.”

Not only does government have a larger role in sympathizing with the unemployed, but also a larger role in state intervention in general. Insofar as Mill believes that public opinion might be relied on for the necessary government programs, this relies in turn on the proper moral education of the citizenry and thus the proper institutional arrangements will need to be setup.

To sum up, Mill is disappointed with the conclusions of his predecessors. He sees no reason for associating the stationary state with dismal and unhappy outcomes. It is possible to believe, as do the modern environmentalists and sustainability activists, that the stationary state is more desirable than is often allowed. “I sincerely hope,” says Mill, “for the sake of posterity, that they [the dismal scientists] will be content to be stationary, long before necessity compels them to it.”

The Inexorable Tendencies of Capital and Profit

Perhaps the most important economic prediction of Karl Marx’s theory of capitalism is that the rate of profit would tend to decline over time as a result of what contemporary economics would call technological change. According to Marx’s theory, the rate of profit varies directly with the rate of surplus value and inversely with the composition of capital. Marx argued that both the composition of capital and the rate of surplus would increase as a result of the capitalists’ tendency to accumulate capital, a tendency rooted in the desire to increase short-run profits by replacing wage-earners with labor-saving capital, hence offsetting effects of the rate of profit.

But how does this happen? The answer lies in what happens to the rate of surplus value, which we will examine more closely. The way Marx measures value is labor time, so surplus value is the accumulated product of the unpaid labor time of the producers. The fact that there can be any unpaid labor time is rooted in the fact that labor-power has the power to produce more than is necessary to reproduce itself. From this fact about labor is where Marx thought profits came from. Hence, in bourgeois society, surplus value is acquired by the capitalist in the form of profit: the capitalist owns the means of production as private property, so the proletariat have no choice but to sell their labor-power to the capitalists in order to live. The capitalist then owns not only the means of production, and the workers’ labor-power which he has bought to use in production, but he owns the product as well. After paying wages, the capitalist then becomes the owner of the surplus value, which, all the necessary Marxian conditions having been met, is above the value of the workers’ labor-power.

Now, the “organic composition of capital” is the ratio of the value of the materials and fixed costs (constant capital) embodied in production of a commodity to the value of the labor-power (variable capital) used in making it. This is an important concept, as we shall see.

By variable capital Marx meant that proportion of capital which is invested in wages, in the purchase of labor-power. He calls this capital “variable” because it is this proportion of capital which, if it is used wisely may produce a new, surplus value in the course of the labor process, above the necessary labor time which constitutes the value of labor power.

The constant capital refers to that proportion of capital invested in the materials and components purchased but then embodied in the product when it is sold, and the materials, tools, machinery etc., which are used up, bit by bit in the course of production, and which for all intents in purposes are the same as the materials materially incorporated into the products. These materials must be renewed when they are used up or obsolete.

If a certain quantity of constant capital, c, and variable capital, v, are invested in a productive process, then at the end of a cycle of reproduction these values will have renewed themselves, but in addition, if the labor power of the employees has used to at least the social average of usefulness, there will a surplus-value, s.

This can be expressed this symbolically as: c + v → c + v + s. (iii)

On the basis of this conception, the rate of profit for the individual capitalist who got into the game of profiteering by investing (c + v) at the beginning of the cycle of reproduction, and made a profit of s, the rate of profit is s/(c + v). This rate of profit is the ratio which affects the individual unit of capital, as opposed to the rate of surplus value, s/v, which characterises the proportion of value expropriated by the capitalist class as a whole.

In all societies in which there is a division of labor, there is a social surplus; what is different about bourgeois society is that surplus value takes the form of capital, and surplus value is in fact the essence of production in capitalism. Only productive work, that is, work which creates surplus value, is supported. All “unproductive labor” is eliminated.

Thus, it is now clear that the rate of surplus value expresses the proportion of unpaid labor that workers submit to the capitalist (s) over to the necessary labor time, v, that the workers spend reproducing their own needs, and is paid as wages, or variable capital.

The organic composition of capital, c/v, measures the difference between the rate of surplus value, s/v, and the rate of profit, s/(c + v) – the higher the organic composition of capital, i.e., the more capital-intensive the industry, the lower the rate of profit. We can now see how it is that Marx characterised the process of the decreasing rate of profit as tantamont to an increasing organic composition of capital.

Based on this Marxian analysis, it is also evident that a general rate of profit and a general rate of surplus value may coexist in a given society, despite the fact that the two measures appear incompatible, since the rate of surplus value reflects the proportion of the total social product appropriated by the capitalist class, and the rate of profit reflects the proportion of any given product appropriated by an individual capitalist producer. However, Marx further argued that the composition of capital would increase at a faster rate than the surplus value, so that the net effect would be a decline in the rate of profit.

It seems, however, that the rate of the longrun rate of profit in capitalist society has a tendency to increase. Why would capitalists increase the organic composition of capital if they knew it would bring down their profits? Further, it would appear that the capitalist would want to increase the surplus value. This objection may be only partly true. The capitalists may increase the amount of surplus value extracted from the working class by two means: (1) extending the working day as long as possible, and (2) by cutting wages.

However, as each capitalist employs less labor and spends more on machinery and materials to produce the same value, the rate of surplus value decreases. Further, since employing workers is the only source of profit, Marx believed that the rate of profit would fall. Attempts by individual capitalists to increase their profits by introducing machinery or speeding-up production by technique fail as soon as their competitors copy the new technique and restore their market share. The end effect of these improvements in production may be to increase the productivity of labor, but unless the rate of surplus value is increased proportionately, the rate of profit will actually fall.

Marx’s conclusions, however, were not tentative. Marx believed that this process was an inevitable historic tendency for the rate of profit to fall, having resulted from the growing technology and complexity of the labor process, and the growing productivity of labor. Each capitalist employs less labor and spends more on machinery and materials to produce the same value. Since employing workers is the only source of profit, Marx believed that the rate of profit would eventually fall. This conjures up all the pessimism associated with the Ricardian stationary state, and, by means of revolution, all the optimism associated with a Millian stationary state.