(Final chapter of "Spectres of Capitalism")
Pure Economics, or the Contemporary World’s Witchcraft
In all the universities of the contemporary world an odd sort of subject is
taught called economic science, or simply economics, as one might say
"physics." It would take as its field of study the economic life of a
society, with the aspiration of scientifically explaining its crucial
magnitudes such as prices, wages, incomes, rates of interest, foreign
exchange rates, and total unemployment.
However, and this fact is strange indeed, while scientific research takes
reality as its point of departure, economics is based on a resolutely
anti-realistic founding principle. This principle, called "methodological
individualism," treats society as nothing more than the aggregate of its
component individuals, each of which, as 'Homo oeconomicus', is in turn
defined in terms of laws expressing what, for it, would be rational
behavior. It is left rather unclear whether, in the outlook of this
"science," the mental structure built on the basis of interaction among
these behaviors is supposed to give us a picture approximating social
reality, or whether it is put forward normatively, as a model of an ideal
social order.
It is a platitude, undeniable as such, that individuals are the basic
elements of any society. But what reason is there not to take into account
that real society, far from being built up out of direct encounters among
individual behaviors, is an infinitely more complex structure combining
social classes, nations, states, big businesses, collective projects, and
political and ideological forces. Economists take no notice of these
obvious realities, because they are hindrances to constructing a "pure
economics" and revealing its fundamental laws, meaning the laws which would
follow from an economic structure stripped of any social dimension except
the interaction of purely individual projects and activities. It might at
best, perhaps, be an enjoyable mental game to make up this pure economics,
but is it at all related to reality? Luckily for our health, doctors have
not made up a "pure medicine" after the fashion of pure economics." Can one
imagine a medical science which models the workings of the human body on
the exclusive basis of cells, taken to be the only fundamental elements of
the human body, while deliberately taking no notice of bodily organs like
the heart or liver? It is about as likely that the most complex model, if
restricted to interactions among cells, would produce anything resembling a
human body as it is that the random pecking of a pigeon at a keyboard would
produce the complete works of Shakespeare! The same goes for the likelihood
of reaching a general equilibrium—and an optimal one no less—by virtue of
market encounters among five billion human beings.
Taking this absurd starting point as a legitimate one leads to bizarre
paraphilosophical effusions. Friedrich Von Hayek, who our neoliberal
economists take as their guru, could not refuse to admit the existence of
nations, national states, social classes, and a few other aspects of
reality, but he was quite content to dismiss them as "irrational" residues.
He thus was glad to set up a mythical rationality in place of the search
for rational explication of reality.
A human being certainly belongs to the class of rational animals, and its
behaviors, even the oddest among them, can probably be comprehended. But
only on the condition that the particular rational processes motivating
human actions be placed in an appropriate framework to specify contextually
their scope and their mechanisms. In other words, a holistic stance, which
bases its reasoning on real totalities (firms, classes, states), is the
only attitude from which science can proceed. Classical political economy
(and the adjective "political" was not there by chance) as practiced by
Smith, Ricardo, Marx, and Keynes, adopted this scientific attitude as a
matter of course.
Furthermore, as an intelligent animal, a human being modifies its behavior
to take account of the responses it expects from others. Accordingly, the
models of pure economics ought to be based on the rationality requirements
not of a simple-minded and immediate response (price comes down—I buy
more), but of a response mediated by expectations of other people’s
responses (I’ll postpone my purchases if I think the price will go down
even further). Is a model comprising all these individual subjective data
even possible? And if so, would it go to the heart of the problem or would
it be beside the point?
Pure economics starts off with musings about the behavior of Robinson
Crusoe on his island, choosing between consuming now and storing up for the
future. But its "Robinsonisms" go further. So these economists picture the
world as made up of five billion Crusoes. Their textbooks start with a
bizarre opening chapter in which these five billion elemental units are
presented as "pure consumers," each initially endowed with its own "asset
basket," each resorting to a perfectly competitive market to get things it
wishes to have in exchange for possessions superfluous to its needs.
This style is manifestly that of a fable, attributing to its animal
characters a humanly plausible pattern of behavior in order to reach a
typified outcome, the "moral of the story." Our pure economics is like
that. At each stage in the unfolding of its narrative it resorts to
whatever plausible assumption about behavior will lead to its predetermined
conclusion.
The conundrum ensuing directly from the choice of methodological
individualism is this: how can it be proven that interaction among the
rational behaviors of many individuals, each of which involves expectations
about all other behaviors, will lead to a determinate equilibrium—i.e., a
system characterized by one, and only one, set of prices, incomes, and
unemployment and growth rates? Obviously, this is a matter for mathematical
techniques.
But this is precisely what mathematics proves is not, in general, the case.
This sort of system of simultaneous equations (and we are dealing here with
hundreds of billions of equations) tends strongly, a priori, to be
inconsistent—thus, yielding no solution. With a sufficiently large number
of additional assumptions it may, just possibly, become consistent but
indeterminate (yielding an infinite number of solutions), and with a yet
much larger number of additional assumptions might be made determinate
(yielding but one solution).
Practitioners of pure economics, accordingly, have the task of finding just
the right set of assumptions to reach their goal. With that criterion in
mind, they decide that some functions aggregating behaviors display as
convex curves and others as concave, that some production functions exhibit
diminishing returns and others constant or increasing returns. And each
step in their demonstration will be bolstered by a suitable fable.
The Arrow-Debreu model, that feather in the cap of pure economics, does
indeed prove that, once all the needed assumptions have been made—and,
moreover, the system as a whole has been assumed to be perfectly
competitive—there exists at least one solution yielding general
equilibrium. However, system-wide perfect competition notoriously presumes
the existence of a universal auctioneer to consolidate and publicize all
offers to buy and to sell. Thus, oddly enough, this model demonstrates that
a central planner, with perfect knowledge of the behavioral possibilities
of each of his five billion clients, would make all the decisions needed to
produce the sought-after equilibrium! The model does not demonstrate that
really existing free markets can produce it. At least we can get a moment’s
amusement from the fact that the pure economics favored by neoliberal
extremists must fall back on Big Brother to solve its problems! Obviously,
absent the auctioneer, the system is constantly changing in accord with the
results of the real behavior of individuals in the course of their
marketplace transactions. Equilibrium, if it were ever to be reached, would
be as much the result of trial and error, of gropings—a matter of chance—as
of rational factors in the behavior of those active in the marketplace.
Such an equilibrium will never, in all probability, exist. Moreover,
Sonnenschein’s theorem proves the impossibility of deducing the form of
supply and demand functions from functions specifying the maximizing
behavior of the individuals. But what does it matter to pure economics that
serious mathematicians prove it to be stuck in a blind alley? As we will
see, a very different question is at issue.
Moreover, even assuming the miracle that it would take for general
equilibrium to result from marketplace encounters among buyers and sellers,
such an equilibrium would lack essential characteristics—it would specify
no particular rate of unemployment, no particular growth rate for output.
True enough, unemployment is no concern of pure economics, which presumes a
world in which all unemployment is voluntary! This definitional presumption
being obviously false, conventional economists accompany their absurd
discourse about the achievement of equilibrium merely through the workings
of (supposedly self-regulating) markets with another dose of nonsense about
unemployment, which they arbitrarily, and with trite reactionary prejudice,
attribute to wages being "too high." In doing so they arrogantly close
their eyes not only to the fact that demand depends to a substantial degree
on wages, but also to the very logic of their own system, in which any
change in wages alters all the data relevant to the system of general
equilibrium.
Next comes the claim that such a general equilibrium would also represent a
"social optimum." This affirmation is the second of pure economics’s great
propositions. But in this case the "proof’ rests on a meaningless
definition of optimality—as the quality of an equilibrium none of whose
parameters can be changed, even in the slightest, without making at least
one individual worse off. In other words, an equilibrium condemning four
billion to stagnant poverty would still be "optimal," so long as it could
not be altered without costing even a penny to the richest billionaire
among the five billion inhabitants of our planet!
This splendid structure of pure economics, first envisioned— obviously in
response to Marxist analysis—toward the close of the nineteenth century,
systematically disregarded money, which was regarded as merely a veil
obscuring the real economy. But since, all the same, money does exist, the
time came when it had to be given a place in that structure. The only
acceptable way was to adopt the most simple-minded form of the quantity
theory. In the wake of this move, monetarism—the latest style in pure
economics—by decreeing that money was just one more commodity, authorized
the addition of five billion individuals’ demand schedules for money to
their supply and demand schedules for other commodities. As for the money
supply, it is to be treated as an exogenous variable determined by a
central bank. An elementary scientific analysis of money creation proves
that money is not a commodity like the others, because its supply is
determined by the demand for it, which in turn depends partly on interest
rates and partly on the level of business activity. Moreover, central
banks, which are supposed to administer the money supply, which they have
magical powers to set, in a neutral and independent (of whom?) fashion, do
not, because they cannot, accomplish any such thing. Their action merely
has a partial and indirect effect on the demand for money through their
choices about interest rates.
But what is left out is that these choices react back upon the level of
business activity (through the timing of investment and consumption
decisions) and thus alter all the data affecting equilibrium levels. By
rejecting any holistic analysis, and thus ignoring the distinction, useful
in this context, between the logic of purely financial strategies and the
logic of productive investment strategies, monetarist pure economics finds
itself barred from investigating the real causes and factors determining
interest rates.
That such an absurd and sterile exercise as pure economics should be an
object of interest to normally intelligent individuals is something to be
wondered at. If anyone had set out to prove that, in the field of social
thought, a desperate effort to validate vested ideologies, prejudices, and
interests would extinguish any scientific or critical state of mind, he
could have done no better than to invent pure economics.
Pure economics is claimed to be a science on the same level as physics.
That is scarcely the case, because such a claim denies the specific
differentia between social and natural sciences. It is blind to the fact
that society produces itself rather than being manufactured by external
forces. However, it belies its own methodological principles by accepting
the concept of expectations—a concept which proves that the individual,
supposed to be an objective reality, is really itself an active maker of
its own history.
Pure economics is a parascience. It compares to social science as
parapsychology compares to psychology. Like any parascience, it can be used
to demonstrate anything and its opposite. "Tell me what you want, and I
will make you a model to justify it." Be it desired to raise an interest
rate from 6.32 percent to 8.45 percent, to cut it to 4.26 percent, or to
leave it unchanged, at hand will be an ad hoc justification disguised as an
economic model. Therein lies the strength of pure economics: it is a tool
in the hands of the dominant capitalists, a screen behind which they can
hide their actual objectives. Currently, those objectives are to worsen
unemployment and to skew the distribution of incomes still further toward
the rich. Since these real aims are unavowable, it becomes useful to prove
that they are transitional measures leading to economic growth, full
employment, and jam tomorrow, as the Red Queen promised Alice.
Because it is unscientific, economics can enroll amateur mathematicians in
its service just as parapsychology enrolls some psychologists. Because it
doesn’t matter whether or not what it proves to be the case is actually
true—what counts is to validate whatever theory is being put forward—it
likewise doesn’t matter whether or not the "proof’ is mathematically valid.
Indeed, it ought to be considered bizarre that this "science" gives
employment to so many incompetent mathematicians who could never hold down
a job in a physics lab. There are certainly exceptions, like Debreu. But
the exceptions are quick to jump out of this particular frying pan. Leaving
stereotyped pure economics behind, they go on to game theory, which
analyzes encounters among strategies in which the expected reaction of
other participants plays an important role. This theory certainly has
substantial intellectual interest, and it furthermore can lead to progress
in mathematical technique. Still, I find it striking that at every step
game theory progresses further away from social reality. The same goes for
the shift of attention toward chaos theory. In both cases, any social
object of study serves merely as a pretext. The real aim is enrichment of
mathematical theory, which is not only a legitimate objective but, even
more so, is one that is essential for further progress of knowledge in many
fields. Other mathematicians—like Bernard Guerrien and Giorgio Israel—have
performed, precisely because they are not amateurish, the indispensable
service of proving mathematically how absurd and inconsistent is the theory
of pure economics.
In contrast to these exceptions is silhouetted an army of model builders,
usually American college teachers, whose career hopes depend on their
number of published articles which, in general, are both trivial and
meaningless. Within the ruling class, pure economics is flattering to the
natural inclinations of engineers and technocrats who believe, usually
sincerely, that their power is unlimited and that it is their decisions
which produce social reality.
The comparison with magic and witchcraft is inescapable. A wizard,
likewise, dresses up his assertions in a seemingly "scientific"
phraseology. He gains conviction by including some sensible and plausible
things in his discourse, but only to bolster conclusions which follow from
them in no way whatever. In other societies, far removed in time from ours,
the magician-wizard held the spotlight. The foremost wizard was always
intelligent enough to know what the king expected of him, and he delivered
the goods. Pure economics performs similar functions in our economically
alienated society; moreover, it performs them through similar methods,
notably by an esoteric terminology (using mathematical terms to throw dust
in the eyes of non-mathematicians).
Milton Friedman is the wizard-in-chief of our contemporary Oz. He
understood what they wanted to hear: that wages are always too high (even
in Bangladesh), that profits are still not high enough to offer the
affluent sufficient investment incentives, and so on. Hence his success,
despite his muddleheadedness (he might say anything, and then its opposite,
depending on who is listening and when) and his proven intellectual
dishonesty. Those are the very qualities sought in a wizard-in-chief,
worthy of a Nobel Prize.
Moreover, as in witchcraft, cultism flourishes. Lesser wizards cluster
around their pundits, each of whom furthers the careers of his own
devotees. I see a similarity, indicative of this aspect of current
intellectual fashions, between the proliferation of sects among economists
and that among organized cults in parascience-parapsychology.
The great statesman uses "pure" economists for his own purposes, just as a
great king of old chose his own agreeable wizard. Lesser politicians
believe in pure economics, and the most mediocre among them, who often
believe in parapsychology as well, even belong to one of pure economics’
sects.
There is more to be learned about actual society and its economic structure
in the shabbiest version of functionalist sociology or of vulgar Marxism
than in the whole inventory of models on the shelves of pure economics.
Granted that social theories must continually be kept under a critical
spotlight; that the necessity of attending to what is new in social reality
and to the consequent theoretical revisions is ever-present; that this
discussion must always be open, free, without preconceptions—there is one
thing of which I am sure, namely that anyone who follows the path of pure
economics is headed straight for a dead end. That path is a blind alley
precisely because pure economics is conceived as totally ahistorical, blind
to every past or present dimension of social reality, blind to all
possibilities of future evolution. It recognizes only "the individual," and
as such it is the "pure" fruit of the crudest, most vulgar aspects of
bourgeois ideology. Its preferred fable is of Crusoe on his island—the
timeless, placeless, individual human. It is separated from the scientific
spirit by a full 180 degrees. As to how society reproduces itself and is
the ground for its own changes, it is certainly not by obsession with the
interplay among individuals that better answers to these questions are to
be found.
To the bourgeois economics of his day Marx aptly applied the adjective
"vulgar." It, and, a fortiori, its distillation "pure economics"—which is
wrongfully termed "neoclassical" by its acolytes—is exclusively based on a
single preoccupation, a preoccupation with showing that "the market" rules
with the force of natural law, producing not merely a "general equilibrium"
but the best of all possible equilibria, guaranteeing full employment in
freedom, the "social optimum." And this preoccupation is nothing but the
expression of a fundamental ideological need, the need to legitimize
capitalism by making it synonymous with rationality—which, in conformity
with bourgeois ideology, is seen as nothing more than the use of
technically rational means for the individual pursuit of mercantile profit.
On these dubious footings capitalism can be proclaimed "eternal" and be
portrayed as "the end of history." Of course, economics has not merely
failed to establish its basic propositions with even the most minimal
scientific rigor; it has been proven methodologically incapable of ever
doing so. But what’s the difference? The discourse of pure economics has no
real aim other than to legitimize the unrestricted predations of capital.
In contrast to this unscientific discourse, Marxian political economy, in
its historical materialist method, is free from any preconception requiring
it to justify this real ("real" here is to be taken as synonymous with
"actual," not "rational") capitalist world. It is Marxian political economy
that confronts us with the real questions: How at every moment are the
"equilibria" currently marking the capitalist system determined by the
class struggle— not only the basic class struggle between labor and
capital, but also conflicts within the ruling class that set financial
lenders against productive investors, entrepreneurs against owners, and
oligopolists against each other? How do state interventions in fulfillment
of the political and social logic of the dominant historical coalition
(alliances among hegemonic classes and social compromises), taken together,
determine the conditions of possible equilibria— notably between Department
I (production of means of production) and Department II (production of
means of consumption), or between these two departments and Department III
(surplus-absorption)? How do they determine the level of employment (not
presumed, a priori, to be "full") or the structure of relative prices and
rents? Or the structure of interest rates? Or the pressures from above or
below on the general level of prices? Or the seeming competitive advantages
that govern competitiveness on world markets? Marxism puts forward no prior
assumptions attributing to the system any tendency toward equilibrium. It
does not hold that class struggles upset any really existing equilibrium,
or even a really existing, yet provisional, disequilibrium. In sum, Marxist
political economy is realistic— whereas there is no realism at all about
pure economics, which abstracts from reality (classes, states, the global
system) so that its discourse, emptied of reality, is left a mythical fable.
In the history of social thought, pure economics is seldom to be found
center stage. To the contrary, it is usually confined to a few academic
nuthouses whilst the social and political world disdainfully ignores it
except for occasionally lifting, when that serves their purposes, one or
another of its "conclusions" or "theses." What is required for this
reactionary utopia to be put in front of the footlights, as has happened in
our times, is that a set of exceptional circumstances prevail, and that all
balances of social forces be overturned, leaving capital on top and
unconstrained. This set of extraordinary circumstances must be very
temporary, if only because, contrary to what is claimed by that reactionary
utopianism (a claim that can be summed up in one sentence: maximal,
unrestrained, unlimited free enterprise will, all by itself, guarantee the
most wonderful possible social progress!), the unconstrained domination of
capital can result in nothing but a profound social crisis. Pure economics
may appear to be an excellent tool for crisis management from the
perspective of the capitalist group that gains from prolongation of the
crisis (currently the globalized financial markets), but a way out of the
crisis it certainly is not. If society is ever to emerge from its crisis,
that can only come about through the establishment of a new balance of
social forces—to be produced by the class struggle—in which classes,
nations, nation-states, and firms (in other words, all the realities to
which pure economics is blind) will find their appropriate places. Then
pure economics will be sent back to its academic asylums, not to be heard
from again.
Louis Proyect
Marxism mailing list: http://www.marxmail.org/
