This essay is written in the spirit of
an old saying in 1956 by the Chinese revolutionary, Mao Zedung that, "It
is time to let a hundred flowers bloom."
By this he meant that, after three decades of dominating political
discussion and practices in China, the communist revolutionaries were seeking
the views of everyone else. The analogy
to our essay is that the discussion about the economy in the capitalist world
has long been dominated by one line of thinking, which below we will define as
the “mainstream” of economics. During
this time, various alternative ways of thinking about capitalism emerged, but
they have gradually fallen from favor in mainstream economics and most students
taking economics courses in the U.S. today will not hear about them.
A good part of what follows here seeks to explain
different approaches to studying the economy, as well as their consequences for
the overall success of economists to produce useful information. Concerning mainstream economics, as one of
these approaches, we must first of all emphasize that like all social theory,
the mainstream school constitutes a broad spectrum of ideas, as often as not
conflicting ones. Actual practicing
economists, like all real people, are never on a particular point of any
spectrum, but closer to one part of it than to others. Economists from every school borrow,
consciously or otherwise, from all the others because there is such a wide and
open diffusion of economic ideas in the modern world. Thus, when we refer to “mainstream economists” we are necessarily
lumping them into a single category that is an obvious distortion, and it is
not altogether satisfactory to us.
Therefore,
at the outset we want to emphasize that our critique in this essay refers
mostly—but not exclusively--to the kind of economic analysis typified by economic
models that (1) are narrowly conceived, (2) quantitative and expressed in
complicated mathematical terms, and (3) depend upon certain, restrictive
assumptions about how people behave, always have behaved, and always will. Without question, there are mainstream
economists who engage in lively debates on virtually all of the topics we take
up in this essay. Many of them move
beyond the strict confines of models and assumptions to examine institutional
aspects of the economy. And many
investigate empirically with statistics, and in other ways, the actual behavior
of people, instead of assuming that they all behave in the same, predictable
way.
Why, then, do we focus on those mainstream
economists who most narrowly conceive the subject? There are two parts to our answer, the first that this subset of
economists dominates contemporary economics, and it exercises its dominance
primarily through its almost exclusive control over graduate training in
economics and the most prestigious economics journals. Reflecting any even broader influence, it is
also the subset that has produced all but one or two of the economists who have
received the Nobel Prize for economics.
The second reason for our focus is that, of all schools of economic
thought we know about, this one is less likely to produce results useful to the
public than all the others are. In this
way, a genuinely interesting irony underlies what we write about in this essay:
the very “best” economists, in the view of this dominating subset, produce the least
useful kind of economics. Aside from
the irony, given the difficulty of defining our terms we can only hope that by
the time our readers will have finished this essay, our lumping distortion will
have some justification and not preclude a consideration of what we argue.
Having made this disclaimer about our use of terms,
there remains a critical distinction between all versions of mainstream economics and what we will call
political economy below. This
distinction is a matter of what economists call “methodology,” meaning simply
“method of analysis.” Mainstream
economists are trained to limit the scope of their analyses—meaning the breadth
of knowledge they bring to bear on an issue--compared to that of political
economists. Moreover, in choosing a
relatively narrow focus, almost all mainstream economists have gradually and
systematically excluded from their studies the political economy point of
view. It is not likely that many
mainstream economists realize how difficult it is for political economists
gracefully to accept the attention given in mainstream economics to, say, the
theory of consumer demand, when ordinarily none is given such ideas as Veblen’s
notion of “conspicuous consumption,” and Marx’s theory of “surplus value.”
To sum this up, the political economy critique here
is both a general critique of the mainstream methodology, and it is a more
specific critique of the subset of mainstream economics that is most narrow in
its approach. And, before we go on with
more of these relatively abstract comments about our definition of terms, and
of methodology, we will turn to a more concrete discussion of them.
We will use the term “political economy” to refer
to the major schools of economic thought that have developed alongside and in
opposition to mainstream economics, and now have been purged from it. What do we mean by the “political economy”
view? Consider an example that
demonstrates generally the wide chasm between mainstream economics and Marxist
economics, a principal kind of political economy, in terms of how each views
the role of business profits in a capitalist system. A mainstream economist might put it
something like this:
Profits
are the payoff to private individuals for “entrepreneurship,” for having saved,
or borrowed, funds to invest in productive inputs, for having the foresight to
know what goods or services to have produced with these inputs and the talent
to manage how the inputs are used and the goods marketed. As such, profit-making is the central
vehicle by which capitalism is energized because: (1) by investing the funds,
producing the goods, and making the profits, the enterprising capitalist will
have given jobs to people who are not capitalists themselves and who need those
jobs in order to live; (2) the capitalist will make the highest profits only by
producing goods and services most demanded by consumers; and (3) it is the
competitive quest for profits that gives capitalism its extraordinary dynamism
and proven ability to drive from the field all competing economic systems.
On
the other hand, in the Marxist view, profit is looked upon in this different
sort of way:
Over
the past 400 years, through its drive to accumulate profits, the capitalist
class, often by foresight and hard work, but as often by pillage (such as the
enclosure movements), murder (wars and systematic impoverishment of Third World
Nations), and domination (of workers, consumers, and politicians), has come to
own the resources, factories, and other capital equipment needed to produce
goods and services needed by all.
Everyone else--most of them at one time peasants who owned the capital
goods—in order to live must now work for the profit-seeking capitalists. In order to get a job, workers must produce
a (surplus) value greater than their wage.
Thus, the owner seizes a substantial portion of the value created by
labor, which is then the owner’s profits. Further, competitive pressures (1)
force the capitalists to treat their workers as things, commodities to be bought and sold like steel ingots or
sheets of plywood, and (2) shape many capitalists into predators working
against the best interests of the larger society.
The
difference here is almost as if two different species of beings were talking
about two different worlds. How can
such great divisions of opinion exist between economists when they take a look
at something as central to capitalism as the profits that fuel it?
For our definition of political
economy—and we say “our definition” because there are other ones that refer to
schools of thought within the mainstream framework--we will repeat the one we
used in our brief preface to this book:
Political
economy…is more concerned [than mainstream economics] with the relationships of
the economic system and its institutions to the rest of society and social
development. It is sensitive to the
influence of non-economic factors such as political and social institutions,
morality, and ideology in determining economic events. It thus has a much broader focus than [mainstream] economics. (Riddell, Shackelford, and Stamos, Economics: A Tool for Critically
Understanding Society, 5th Edition, 1998. Emphasis supplied.)
Two
aspects of this definition merit special emphasis. The first is that, as we mentioned above, political economy has a
“much broader focus” in the sense that political economists are willing, as one
writer put it, “to let more things into the analysis." Second, as we are using the term, it refers
rather specifically to the schools of thought that followed in the wake of Karl
Marx, Thorstein Veblen, and John Maynard Keynes. The wide influence of their ideas on successive generations
explains why we have separate essays on them in this book.
We are able to talk in the same breath
about differing schools of thought in political economy, even though there are important distinctions
between them, because they share the following critical judgments about
mainstream economics:
1. The claim by the mainstream that it is doing
“economic science” is not justified in terms of its ability to explain and
predict actual events in the real world.
2. A principal reason for this inability to
explain real events is the key assumption of “economic man” in mainstream
economics, along with a parallel assumption that human beings by nature have
“unlimited wants for consumer goods.”
3. Mainstream models are typically not
presented in the historical context that shapes all human events; and, further,
virtually all mainstream economists are ignorant of the history of economic
ideas, thus unaware that the principal assumptions of their analyses have been
under challenge by political economists for over two centuries.
4. Mainstream economists typically presume a
separation between economic activity and political power.
5. Graduate economic programs are largely
confined to mainstream instruction, and a particularly narrow version of that
school of thought.
The debate about methodology between the mainstream
and political economists has been going on for a long time, but it has mostly
been an academic affair. However,
sometimes it gets aired in public, as happened in a recent article by the
principal New York Times economics
writer, Louis Uchitelle. We insert that
article here in a slightly abridged form because Uchitelle neatly summarizes
the overall issues we want to discuss.
(And you might note that Uchitelle tends to lump all economists into two
or three broad groups. As you read the
article, try to keep in mind our earlier discussion of the implicit problems of
doing this.)
Robert L. Heilbroner, [whose] 1953 book, "The
Worldly Philosophers,” has sold nearly four million copies [and] is a
"Profiles in Courage" of the great thinkers who shaped modern
economics…is at one end of a growing debate over whether economics, as
practiced today, is effective. Sure,
economists do a lot of good research, Mr. Heilbroner, now 79, acknowledges. Some of it yields important insights. But their models are too simplistic. They
overlook factors that shape the economic and social system and in doing so
forfeit the deep understanding achieved by an Adam Smith or a John Maynard
Keynes, two of his worldly philosophers.
"The worldly philosophers thought their task
was to model all the complexities of an economic system -- the political, the
sociological, the psychological, the moral, the historical," Mr.
Heilbroner said. "And modern
economists, au contraire, do not want so complex a vision. They favor two-dimensional models that in
trying to be scientific leave out too much and leave modern economists without
a true understanding of how the system works…"
The shift from this way of thinking came after
World War II, when economics gradually ceased to be a social science and took
on the techniques of a natural science.
Mathematics became the language of economics, and computer models of the
economy became the chief research tool.
These models require assumptions about the way markets and people
behave, assumptions that are often unrealistic, although in recent years
economists have fed more and more actual data into their equations in an
attempt to approximate the real world…
That still falls short of what Mr. Heilbroner has
in mind. The modern economists separated out the subjective, often intuitive
judgments that earlier economists had considered so important. These were considered not susceptible to
scientific inquiry, not measurable.
In
the process, economists also squeezed out the word capitalism, the once traditional
name for the market system, with its subjective connotation of class struggle
between owners or managers and workers and with its suggestion of the
privileges that go with various levels of wealth…
[But] Paul Romer, a 43-year-old Stanford University
economist, would classify [these suggestive judgments] as political or public
policy issues but not part of a scientific explanation of the workings of the
economic system…He likens an economist's role to that of a doctor who explains
what will happen if a cancer patient is taken off an aggressive program of
chemotherapy and radiation. "You
can let the pastor, the legislator, the family and the philosopher struggle
with the moral question of whether to actually stop the treatment," Mr.
Romer said, "but what you want from a doctor is correct scientific
statements about what will happen if."
Keynes made no such distinctions. Drawing on intuition, observation and his
own broad experience, he concluded that the United States and other nations
found themselves stuck in the 1930's Depression in large part because business
refused to invest, although the nation offered plenty of savings to finance
investment. Keynes' sweeping insight
forever changed the way economists think about the way capitalist systems function.
And Keynes, having found the problem, saw no reason to be shy about solutions,
calling for enormous Government spending to offset the decline in business
investment. "Keynes certainly had
a view of what was a good society," said Robert M. Solow, a Nobel laureate
in economics at the Massachusetts Institute of Technology. .."And he tried
to save society from itself"…
Leaving
Politics to the Politicians
[S]cience does not take you far enough, says Mr.
Heilbroner, an economic historian at the New School for Social Research. "You have to ask [for example] what is
the correlation between high levels of education and high levels of
wealth," he said. "Is education
in our system a privilege of wealth and a function of the class
structure?"
These are questions that science cannot address but
economics must, says Mark Blaug, an economics historian. Otherwise, the findings are skewed. "There are so many things going on in
the economics world at the same time," he said. "Not just standard economic forces, but all the other
elements that shape an economy -- politics, morals, psychology, sociology --
and therefore economics will always be vague and imprecise, more like history
than math." Going beyond science
sits easier with older economists like Mr. Heilbroner or Mr. Blaug, who is 71,
or Mr. Solow, who is 74 and, like Mr. Heilbroner and Mr. Blaug, came of age as
an economist in the 1950's, while Keynesianism was still in its heyday and the
cold war had not yet helped squeeze value judgments out of economics.
Mr. Solow, however, is a pillar of mainstream
economics. His economic growth theory, in which he explained the interactions
of capital, labor and technology in generating economic expansion, is a model
of economics practiced as a science. He
would never, he said, "advise a student to go to work on the nature of the
class structure…You are condemning him to failure," he continued. "We do not know if there are applicable
rules." And yet in an
autobiographical sketch, he argued against thinking of economics as science
with a capital S. "That is
perfectly consistent," he wrote, "with a strong belief that economics
should try very hard to be scientific with a small s. By that I mean only that we should think logically and respect
fact." Fact, he said, should be
enlarged "to include, say, the opinions and casual generalizations of
experts and market participants, attitudinal surveys, institutional
regularities, even our judgments of plausibility. My preferred image is the vacuum cleaner, not the microscope."
[Gradually] economics is moving this way…[and the]
new approach was on display at the recent annual meeting of the American
Economics Association, where economists at one session reviewed their research
into today's unusual spectacle of an unemployment rate and an inflation rate
falling together instead of moving in opposite directions, as economic theory
dictates and as they once did. Drawing
on psychology, the researchers have even tried to quantify how people actually
behave or feel about work. "Our
modeling now is much more flexible," said Lawrence Katz, a Harvard labor
economist. "I really think we are
seeing a blossoming of a broader social science field, where the core research
techniques are maintained but are supplemented with findings from other fields
that were once quite separate."
Judging
Numbers, Not Just Calculating
And Mr. Heilbroner applauds. But it is not, in his view, enough. The questions that absorb the younger
economists are too narrow, he says.
From Adam Smith's day, economics has always been an inquiry into the
nature of capitalism in its various forms, an inquiry that requires as much
history, sociology and ethics as it does science, Mr. Heilbroner says.
Economists, for example, cannot just chronicle the
rise of output as an economy grows.
There must also be a judgment about the quality of that output: Does it
show up as more school construction or warmer clothing in winter or as more
channels of bad television programs and higher pay for chief executives. That is how the worldly philosophers would
have thought, Mr. Heilbroner suggests in a new chapter added to the seventh
edition of "The Worldly Philosophers," to be published in the spring
by Simon & Schuster.
"Economics will not, and should not, become a
political torch that lights our way into the future," he writes, "but
it can and should become the source of an awareness of ways by which a
capitalist structure can broaden its motivations, increase its flexibility and
develop its social morale."
To summarize this debate, we have Professor
Heilbroner expressing the political economy view by arguing that the most
serious shortcoming in mainstream economics is its use of “simplistic models,”
and that “trying to be scientific…leaves modern economists without a true understanding
of how the system works.” And, on the
other side of the debate—the version of mainstream economics that is our
focus--Professor Romer argues that we want from economists “correct scientific
statements about what will happen if.” In a middle ground is mainstream economist
Robert Solow, who prefers economics “as a vacuum cleaner, rather than a
microscope,” and wants economics to be a “science with a small s.”
But, then, Solow adds a telling point by saying he
would not advise his students to study the "class structure" of
capitalism because there are no "applicable rules to study it." In making this comment, Solow points to a
dimension of mainstream economics that sharply distinguishes it from political
economy and that greatly limits it as a potential source of useful
knowledge. This dimension is its
steadfast refusal to include social class as a legitimate category of study,
despite the obvious and enormously important fact that we are all fundamentally
shaped by the economic class in which we originate, and that most of us will
end up in the same class where we started.
In eliminating the class system from their analytical purview,
mainstream economists bring to the table an exceedingly odd dish.
The history of this dispute among economists about
economic methodology is a complicated story, only part of which is told in
Uchitelle's article, and we need to add a few details. Uchitelle tells us that the shift toward
mainstream thinking came following WW II, "when economics gradually ceased
to be a social science and took on the techniques of a natural science…and
mathematics became the language of economics, and computer models the chief
research tool." However, the story
starts at least as early as the 15th and 16th century in Europe, when
essentially religious explanations of the universe gradually gave way to
scientific ones, and with stupendous effects on the world. Columbus's voyage to the New World, Galileo's
telescope, Harvey's findings about blood circulation, and Newton's discovery of
certain laws of gravity--along with many other similarly astounding discoveries
in the 17th and 18th centuries--made inevitable the declining influence of
non-scientific explanations of the world.
This scientific assault on alternative explanations of human beings and
their universe continued, and of course, continues now.
The horrific conditions for many workers crowding
into European cities from the early 18th century led to the
development of a new practical science, public health. The public health “movement” led governments
to promote the habits of healthier living and, especially, to construct systems
to protect publicly used water from sewage.
This movement was complemented greatly by the discoveries in the 19th
century of Louis Pasteur and others unveiling the role of invisible bacteria in
the spread of disease. Together, public
health and biological science led to the enormous consequence of increasing
dramatically the life span in industrializing nations after the late 19th
century. The average life expectancy in
the U.S. in 1776 was about 35 years, about 50 years in 1900, and is now about
75 years. Research done by the Museum
of Natural History suggests that, "From 1900 to 1990 we have gained about
25 years of life expectancy; nearly equal to what had been obtained in the
preceding 5000 years of human history!" (See MNH web site, www.amnh.org.)
Not surprisingly, the success of the natural and
physical scientists in actually giving more life to people in industrial
countries led others to try to duplicate their methods of making assumptions,
especially about things that were regular and could be measured, drawing
hypotheses, and testing these hypotheses "in the field." It is true that in the case of the two most
influential economists of the 18th and 19th centuries, Adam Smith and Karl
Marx, the former wrote without mathematics, and Marx confined his quantitative
analysis to a few simple algebraic notations.
However, by the late 19th century most economists had adopted some
version of the "scientific method" as their approach and, in doing
so, marshaled the economics profession toward mathematics and statistics.
About this time economists adopted the idea of
"equilibrium," borrowed from physics, and it became integral to their
analyses. In doing so, economists made
an extraordinary leap of faith about their ability to study and predict human
activity. When social theorists use the
idea of equilibrium in model building they are implying that patterns of human
life in a fundamental way are analogous to (say) the equilibrating balance of
forces in our solar system that keeps Mars, not to speak of monstrous Jupiter,
from ramming us, head on. That is, this
idea presumes that the economy is typically stable,
but when buffeted away from stability, will always return on its own. A critical implication here is that, if the
economy is assumed to be stable and self-correcting, it was thought to be
better to allow it to function on its own, without extensive government
interference." These equilibrating
systems, whether among the planets or in people's activity, suggested to Adam
Smith and to many economists after him, that they were "natural," and
this meant to them they were the work of a "Beneficent Providence." Smith also believed that individuals
possessed a natural self-interest that would lead to "the best of all
possible worlds," an idea whose modern embodiment we will take up in
detail later on.
A British economist named Alfred Marshall was
particularly important in this evolution from imprecise economic language to
the precision of quantitative models that incorporated the idea of
equilibrium. Though Marshall warned,
"economics cannot be compared with the exact physical sciences,” he still
believed that economics was specially "advantaged" over the other
social sciences because:
…a
person's motives--not the motives themselves--can be approximately measured by
the sum of money, which he will just give up in order to secure a desired
satisfaction; or again by the sum which is just required to induce him to
undergo a certain fatigue. (As quoted in Riddell, Stamos, and Shackelford, p.8)
This
means that the prices we pay for products, the amount we invest to try to make
profits, and the wage that will just induce one of us to go to work, are all numbers, that is quantities that can be everlastingly manipulated by mathematics and
analyzed by economists. Marshall and
most economists of his time thought that the focus of economists should be the
prices that emerge in what he called "the ordinary business of life,"
such as how the prices for products, for labor, and for money (interest rates)
are formed by self-interested individuals in competitive markets. Marshall and his contemporaries recognized
the aggregate economy as cyclical, however they also thought it was actually
formed by all the individual markets all added together, and behaved no
differently than would any of them alone.
Competitive markets were thought to
work with equilibrating precision, and in the hands of Marshall supply and
demand acting as if “two blades of the same pair of scissors” were taken as the
prime determinants of market price.
Complementing Marshall’s system, and developing along with it, was the
work of economists who saw markets as driven by “marginal" decisions made
by producers, consumers, and workers.
In this theoretical world, capitalists formed decisions by projections
of the revenue and cost of the next (marginal) unit to be produced, and
consumers behaved in terms of the marginal satisfaction anticipated from a
product measured against its marginal cost.
Some practitioners of this sort of analysis, who were called
“marginalists,” could even imagine a system of mathematical notations
encompassing the marginal decisions of all the economic actors into one giant
quantitative model.
The marginalists, in focusing a
microscope on the margin of economic actions, were especially important in
prompting economists to think narrowly.
Implied by their method was the fateful idea that the institutional
structure of capitalism outside individual markets, such as its system of
social classes and the distribution of income and power, lay outside the
confines of economics. Marginal analysis
also implied an extremely limited role for government. Because the system was the outcome of a
limitless number of individual, marginal decisions, made in self-regulating
markets, how, then, could the thick fist of the government be expected to solve
any “economic” problem?
In 1879, Professor Marshall published
the prototype for the modern economics textbook, which he called Industry and Trade. By 1890, he was calling his book, Principles of Economics, and in this
version the geometric models of supply and demand that all principles students
must now learn appeared as footnotes.
Though Marshall kept the diagrams in his footnotes, those that followed
with their own principles texts gradually moved the diagrams from the footnotes
up to the text where ultimately they would dominate. Thus began the joyful birth, or sad demise, depending on your
view, of 20th century economics.
Further leading to quantification of economics was
the theorizing of the British economist, John Maynard Keynes. In his revolutionizing book, The General Theory of Employment, Interest,
and Money (1936), Keynes used geometry, mathematics, and compelling and
elegant prose to revolutionize the way that modern economists think about the
business cycle. Keynes' work, which our
readers will take up, or will have taken up in another essay and in economic
principles courses, gradually won over most economists in the capitalist
world. Actually, Keynes preferred a
dense prose to mathematics or geometry as a way to express his economic theories. Nevertheless, his followers constructed
diagrams and formulae to carry these theories forward, and these
"macroeconomic" models, like the market analysis of Alfred Marshall
and the marginalists, successfully lured more and more economists into the
encapsulating, and, no doubt many economics beginners would say, suffocating,
webs of a geometric world.
In 1948, Paul Samuelson of MIT, using his own
two-volume mathematical expression of mainstream economics as a model, wrote
the first popular economics textbook.
He combined Marshallian analysis, by then called “microeconomics,” and
Keynesian macroeconomics and called his book, Economics. This title was,
of course, greatly misleading given all the kinds of economic analysis, most
especially political economy, which he simply ignored. Samuelson has, in updating his book over the
years, gradually added considerable non-quantitative materials, but remaining
central to the intellectual core of the book are the geometric models and other
quantitative materials that make up the theoretical core of mainstream
economics. Samuelson’s amalgamation of
microeconomic and macroeconomics has come to be called "neoclassical”
economics, and within the economics profession that is the common way to
describe mainstream economics.
We all know the old saying, “the proof of the
pudding is in the eating,” a metaphor so compelling it has for a long time
become part of the language. It is in
the terms of this metaphor that mainstream economists answer such critics as Robert
Heilbroner, to whom they say: “Our assumptions might be unrealistic, and our
models might be narrowly conceived, but they work better to predict economic behavior than the theories of
our competitors.” That is, “the proof
of models is how well they work.”
This
aspiration to "correct scientific statements," as Paul Romer puts it,
implies that mainstream economists are doing science like natural or physical
scientists do it. Yet, in comparison,
consider the example of physicists. It
is beyond dispute that they know some things, such as the law of gravitational
pull, more or less for sure. And, in
the case of medical doctors, though often differing on particular diagnoses,
they also know countless things with a degree of certainty, such as certain physiological
dimensions of, and limitations of, the human body. On the basis of these highly predictable outcomes, physicists and
other real scientists have enabled human beings to reach the moon and head for
the stars, live longer and while alive to transform utterly their natural
habitat. However, there is nothing in
the annals of economics, and there can never be, a set of principles, models,
theories, conclusions, or predictions comparable to those in the physical
sciences from whom economists borrowed their methods of inquiry. To be sure, we are not questioning whether
mainstream economist work diligently and honestly, as do the real scientists,
and often with quite useful results.
Nevertheless, it is not as scientists that economists arrive at useful
information but when, as Keynes suggested, they mix theory, information,
intuition, and common sense to try to describe the processes by which people
make a living. That is why, by the way,
one is as likely to find useful arguments about the economy in thoughtful and
careful journalism as one will find it in economics textbooks.
To make our point in another way, we've constructed
below a partial list of central questions concerning how the capitalist economy
operates, and how it should operate. As
you study economics, no matter what version of it, you will discover that there is not now, nor has there ever been,
anything approaching agreement on the answers to these questions among people
calling themselves economists:
¨ How
should we measure the unemployment rate and what will it be next month?
¨ Will the
aggregate economy go up next month? Or
down?
¨ If the
government cuts taxes next month by $100 billion, will this cause a change in
total spending for goods and services in the economy? And, if so, when?
¨ Why do
people get rich in capitalist societies?
Luckier than others? Greedier
than others? Connections? Hard work and perseverance?
¨ Is
poverty caused by the laziness of the poor, or it is because capitalism is a
system not designed to give everyone a living wage? And, what is a living wage?
¨ Does
free-market capitalism generate the kind of competition that forces firms to
operate in society’s long-run interest, or do firms, unregulated, run roughshod
over small rivals, consumers, and needy politicians, and promote environmental
degradation?
¨ Is
economic power distinct from political power; and if they are not distinct, how
are they meshed; and how do they affect such aspects of the economy as wages,
profits, laws regulating the economy, interest rates, prices, exports and
imports?
¨ Is a
growth in GNP a good thing, or a bad thing?
¨ Is a
certain amount of unemployment a “good thing” for capitalism?
¨ Does
capitalism "provide economic freedom directly [and] also promote political
freedom?" (Milton Friedman, 1962);
¨ Or is
capitalism a system, as Karl Marx argued, that shackles workers to chains that
can only be broken with revolution?
To
summarize our point about this list in another way: if you were to choose at random any professional economist in
the world and ask that person any question on the list above, there is no way to know in advance of asking
what his or her answer will be. If
this were true, for example, of civil engineers, imagine the difficulty of
constructing, say, a bridge across a river, or a house to live in.
From the political economy point of view, a
critical flaw in mainstream economics is its unrealistic treatment of how
people behave in capitalist societies.
The essential assumption in this regard is that people are utterly
selfish, pleasure-maximizing automatons who respond in predictable ways to all
stimuli. This theoretical creature is
called "economic man," or sometimes "rational man," and
this man is not the kind of human being the rest of us would ever know, want to
be, or take home. John K. Galbraith,
probably the most famous contemporary American economist, and long time critic
of mainstream economics, has written that the assumption of economic man as a
rational maximizer:
…requires
that the ultimately valid propositions of economics be essentially given, like
the structure of neutrons, protons, atoms and molecules. Once fully discovered they are known
forever. Unchanging also, it is held,
is human motivation in a competitive market economy. Such fixed and permanent truths allow economists to view their
subject as a science. . .From this closed intellectual exercise, which is
fascinating to its participants, intruders and critics are excluded often by
their own choice, as being technically unqualified. And, a more significant matter, so is the reality of economic
life, which, alas, is not, in its varied disorder, suitable for mathematical
replication. (Economics in Perspective: A
Critical Analysis, 1987, 284-85)
This
quote carries many layers and meanings worth dwelling on. With Galbraith, we are not contesting the
idea that most human beings will try to serve their own long term interests as
well as they can. It is, therefore, not
unreasonable to assume that in capitalist societies most of us will seek some
of our rewards from the marketplace, whatever is our role in it. Yet, this readily observable fact can not
help us to know, simply by looking at another human being, what he or she will
do in the market at the next moment. And, it is the central practice of real
scientists to experiment with the objects of their study until, in their labs,
they come to know with some confidence, what actually will happen to
"y" if they change "x"?
This is not what mainstream economists do, because they must always start their analysis with
something analogous to this: assume "x," and given that assumption,
what happens to "y"? This
means that while the scientists are doing science, economists are, as John
Maynard Keynes argued, engaging in an exercise in logic.
We need to make our point carefully here, so
repetition is in order. We recognize
that there are broad patterns of behavior in capitalist markets that are
broadly predictable. In fact, almost
all of us order our individual worlds in terms of these patterns of
behavior. However, to go from broadly predictable patterns of behavior
to the assumption that all of us, all the time, have the knowledge, time, and
inclination to maximize economic gains, carries us from reasonable observation
to basing economic models on a badly distorted mirror of real human
activity. For example, in order to
predict consumer behavior, neoclassical models usually assume that all people
have perfect information about all of the goods that they might want to buy,
they know all of the prices and qualities involved, they know how much
satisfaction they will receive from each product if they buy it, and they are
completely rational and self-centered.
These assumptions imply that when we shop we are not influenced by store
displays or other impulses that might interfere with the rational calculation
of which good will bring the greatest satisfaction to us per dollar we spend.
This view of how human beings shop in modern capitalist cultures is, to put the
best light on it, magnificently heroic.
More important than what we call it, mainstream economists necessarily
presume it when they talk about "rational" or "economic"
man.
There is a further problem here. In mainstream economics, economic man has
also long been the idea of "man with unlimited wants." William Rohlf, writer of a popular and
typical mainstream introduction, reveals early on a central intellectual
foundation of mainstream thinking with the following extremely crucial
argument:
The
fundamental problem facing individuals and societies alike is the fact that our
wants exceed our capacity for satisfying those wants. (Economic Reasoning, 4th ed., 1999, p. 4)
What
could be wrong with this statement?
Most prominently, it is “outside” history and, as such, it bases the
economic analysis that will follow in Rohlf’s book on a “made-up” human being,
one constructed for the sake of that analysis rather than one inferred from
what human beings have actually done. Thorstein
Veblen saw the assumption of a rational economic man as central to what he
called "the hedonistic approach" to economics, his description of the
central tradition in his own day. In
1919, Veblen described actual human beings as:
[P]roducts
of…hereditary traits and past experience cumulatively wrought out under a given
body of traditions, eventualities, and material circumstances. The economic life history of the individual
is a cumulative process of adaptation of means to ends that cumulatively changes
as the process goes on, both the agency and his environment being at any point
the outcome of the last process. His
methods of life today are enforced upon him by his habits of life carried over
from yesterday and by the circumstances left as the mechanical residue of the
life of yesterday. (The Place of Science
in Modern Civilization, 1919.)
What,
then, do we think human beings are for the purposes of studying their economic
behavior? For an answer from political
economy, we extend these comments from Veblen by buttressing them with some
evidence from history.
One of the most renowned economists of the
twentieth century, Joseph Schumpeter, proclaimed, in his History of Economic Analysis, that:
What
distinguishes the ‘scientific’ economist from all other people who think, talk,
and write about economic topics is a command of techniques that we class under
three heads: history, statistics, and ‘theory. . . . Of these fundamental fields, economic history—which issues into
and includes present-day facts—is by far the most important. . . . if starting my work in economics afresh, I
were told that I could study only one of these three but could have my choice,
it would be economic history that I should choose. (Schumpeter, 1954, p.
12.)
History
was an essential part of economic analysis, according to Schumpeter, for three
reasons. First, a grounding in economic
history allowed the analyst to understand the economy as a process unfolding in
historic time. In other words, to
understand the present, Schumpeter argued, we need first to understand the
past. Second, historical analysis
incorporates the important institutional “data” that are often excluded from
mainstream economic analysis. Finally,
Schumpeter argued that those who fail to examine the historical record are
likely to commit “fundamental errors of analysis.”
As we have said, one of the more
"fundamental errors" of mainstream economics has been to insist that
the "hedonistic" tendencies of human beings were present from the
dawn of time. In fact, these habits
have been accumulated by people in the relatively short era of world history
that is capitalism, mostly those living after 1500 A.D. in Western Europe and
North America. Adam Smith argued
persuasively that self-interest and the human propensity to barter and trade
were natural (i.e., genetic) traits of human beings. Smith reached his conclusions by observing people in his own time
making exchanges based on self-interested behavior, and he subsequently decided
that the "propensity to truck, barter and exchange"--to offer a good
or service to someone else only in exchange for an equally valued good,
service, or the equivalent in dollars--must be a natural instinct. Moreover, the self-interested trader would
only trade to become better off, due to the ubiquitous profit motive. Hence transactions between humans in the
capitalist age came to be seen as exchanges between two flinty-eyed,
rationally-calculating, self-interested beings who were always looking to
profit on any deal. This model left
little room in human behavior in the market place for altruism or
sentimentality.
Was self-interested exchange a “natural” tendency
of humans? When Smith wrote in 1776, he
was ignorant of, or ignored, the writings of those historians of the ancient
world who had described a very different system of exchange in the ancient
economies of Greece and Rome. In these
ancient civilizations, exchange most often took the form of elaborate systems
of reciprocity or redistribution.
Ancient Babylon and Egypt both operated systems of redistribution,
whereby most of the produce of the nation was collected, recorded, and then
placed in centralized storehouses. In
lean times (to which these primarily agricultural civilizations were especially
susceptible), the stored produce was redistributed to all of the citizens, be
they peasant, weaver, or potter, according to their needs, not sold to the
highest bidder. These economies were
organized along the lines of gigantic households, in which all members of the
society were expected to make their contribution to the household and in turn
to share in the nation’s produce. The
Biblical story of Joseph[1]
(more recently popularized as the guy with the amazing technicolor dreamcoat)
describes just such a redistributive system as well as the rationale for the
redistribution based on collective capacities and collective needs, rather than
individualistic exchange. Recall that
the brothers of Joseph, after selling him into slavery years before, came to
Egypt in hopes of asking for some of the stored grains so that they could
survive the famine in their native land of Canaan. Joseph, in his capacity as manager of the Pharaoh’s stores of
grains, gave generously to his brothers, despite their mistreatment of him so
many years earlier.
Other exchange often took place for honorific or
social purposes, rather than for our economic gain. Another Biblical example describes the honorific exchange between
King Solomon of Israel and King Hiram of Tyre.
Hiram offered Solomon all the cedar and fir trees that he needed for the
temple he planned to build, and in exchange Solomon offered him wheat and
oil. This was not economic exchange but
an exchange of tributes (1 Kings, 5).
Polanyi described many such systems of reciprocity—one of them a system
of exchange based on giving gifts of fruit to kinspersons and receiving in
return gifts of fish—that existed in pre-capitalist societies present and
past. Polanyi argued that this was not
barter and trade, but rather a socially-organized system of reciprocity, based
on sharing with the rest of the community (Polanyi, 49). To sum up, in The Great Transformation, Polanyi argued:
[A]ll
economic systems known to us up to the end of feudalism in Western Europe were
organized either on the principles of reciprocity or redistribution, or
householding, or some combination of the three….In this framework, the orderly
production and distribution of goods was secured through a great variety of
individual motives….Among these motives gain was not prominent. (p. 55).
The
obvious implication of Polanyi's point is that the mainstream argument--that
self-interest and the instinct to barter and trade is a natural trait of human being--is at odds with the historical
evidence. The most we can say is that
self-interested behavior came to be rewarded in pecuniary terms during the
short span of human history occupied by capitalism, and that five hundred years
of capitalism have probably reinforced self-interested behavior in ways that
make it difficult to suppress. But the
latter is a very different proposition than to argue that self-interest is
inherent in human behavior. And, in
some societies dominated by private firms--such as in Sweden--public policy is
nevertheless based upon such human motivation as generosity and reciprocity,
rather than on the assumption that all people are greedy in all their
transactions.
Space does not allow us to tell the stories of how
the first markets emerged and then became the ubiquitous markets of economic
theory, or how the human yearning to be productive and creative came to be
twisted into a labor-leisure tradeoff in modern economics. Suffice to say that a careful study of the
history is an essential part of economic analysis. Keynes argued that “the economist must study the present in
light of the past for the purpose of the future," and to borrow an idea
from philosopher, George Santayana, "economists who ignore history are
doomed grievously to misinterpret it."
Whether using the lessons of history in formulating present-day policies
to make a better future, or whether testing the theories of modern economics
against all of the learning of historians, history is indeed an essential part
of the study of economies.
A related drawback to mainstream economics, from
the political economy view, is that it is gradually eliminating from the
discipline the history of economic ideas.
Nothing demonstrates more completely the myopic mainstream vision than
that it has expunged Veblen and Marx, and put Keynes out on the margin, those
economists many 20th century scholars consider three of the most fecund modern
thinkers. There are many costs in doing
this. First of all, economists are
human beings like the rest of us and thus their ability to think clearly about
the world constantly competes with the Byzantine mix of distorted memories,
fantasies and prejudices that constitute the mind of anyone. This is no small matter, because another
aspect of the growing domination of economics by mathematics and abstract
geometry is to create the false impression that the models are somehow above
all the memories, fantasies and prejudices.
Nonetheless, even the most abstract models were imagined and constructed
by human beings, and it is not
humanly possible for a person to think any thought that has not been sullied by
the myriad waves of stuff that swirl through a mind.
Therefore, part of our focus on the economists
themselves is to remind you, and us, that economics is the study of human
culture by human beings who, in a
vastly complicating part of the mix, live in and have attitudes about that
world they are studying. These
prejudices arising from the stuff in our heads, and the fact that we are part
of the world we are trying to study, are further reasons economists always
disagree with each other. They would,
thus, help to explain the story about the alumnus who visits her old economics
professor a decade after graduating.
She notices a final exam on the professor's desk, takes a quick look and
blurts out, "Isn't that the same exam I took?" The professor replies smugly, "Yes, but
that was ten years ago. Now the answers
are different."
Second, we have included these articles on Marx,
Veblen, and Keynes because they stand out among modern economists in producing
political economy of the highest order.
As you read about their fiercely independent ideas, and see them as
grandly confident thinkers, you will likely better understand the wide
influence of the worlds they imagined.
Keynes founded modern macroeconomics and forever changed the way that
economists, and those who listen to them, view the world. Veblen challenged, and his
"institutionalist" followers, including John K. Galbraith, continue
vigorously to challenge, the central notions of mainstream theory, and
particularly its efforts to explain economic activity outside the findings of
the other branches of knowledge. Veblen
continues to have much to tell us about how our economic life is rooted in
behavior, such as "shopping 'til we drop,” that can likely better be
understood in the terms of the categories of anthropology, or abnormal
psychology, than by those of modern economics.
And, of course, Marx remains among the most influential thinkers in the
modern world, even after the fall of the communist states, because his ideas
remain relevant as a critique of capitalism.
In addition to concluding that mainstream economics
has peopled its models with creatures existing in a historical, psychological,
and cultural vacuum, political economists are also highly critical of the
mainstream habit of presuming that “economics” is distinct from “politics” or
“power.” As a typical example from one
economic principles book (an example picked at random from a shelf of them),
there is the following statement:
How
did the very wealthy get that way? Of
the 400 people on the Forbes magazine list of the richest people in America
(with an average wealth of about $500 million each), about one-fourth got rich
through inheritance. The other
three-fourths, such as Bill Gates of Microsoft, got rich through working,
starting their own businesses, inventing new products, and so on. (Alan Stockman, Introduction to Economics, 2nd Edition,
Dryden Press, 1999, p. 425.)
Notice
how Stockman avoids mention of government, the legal system, or any other
institutions related to political power that might have played a role in
helping the Fortune 400 amass their wealth.
And this is true, even though about 100 pages earlier, he actually
mentions monopoly charges brought against Microsoft Corporation by the U.S.
Justice Department. In fact, people
become rich in any society, either from inheritance or some other way, because the laws allow it to happen. For instance, as late as 1959 the highest
(federal) marginal tax rate was 91%! Since then, the laws have been changed, and
now the highest marginal rate--for income over $271,000--is 39.6%. In other words, today's Fortune 400 are
accumulating their wealth faster than in 1959 partly because lawmakers changed
the laws on their behalf. For a
comparison, Sweden's welfare state provides all citizens, among other benefits,
health care and schooling, and to pay for these benefits Swedes pay over half their income in the form of
taxes. In the U.S., this average tax
rate is about 30%, meaning that we have a very different set of rules regarding
how much wealth and income you get to keep for yourself and how much will be
used for broader, social purposes.
As a second example of how government is involved
in this process of wealth creation, journalists Donald Bartlett and James
Steele, in America: Who Pays the Taxes?, 1994,
describe how many of the largest U.S. corporations are subsidized by
governments through low, or no, taxes, or by direct subsidy payments. They discovered innumerable examples of this
process, such as over $100 million a year in total subsidies to McDonalds,
M&M/Mars, and other companies marketing their goods abroad. In 1999,
Time Magazine produced an update on this research, and its reporters
concluded that in 1997 corporations received almost $200 billion in subsidies from state, local, and federal agencies. Most of this huge flow of government
payments exemplifies the power of huge corporations to shape political
decisions in their favor, a power that is denied to virtually all citizens
except very wealthy ones. When did you last press your economic concerns
onto a U.S. Senator, or the U.S. President, as do the owners of large corporations
on a daily basis?
One such effect of the enormous amounts of “soft”
money paid to politicians in the past two decades is a considerably more
relaxed enforcement of anti-monopoly laws by the anti-trust division of the
U.S. Justice Department. Presidents
Reagan, Bush, and Clinton, who in succession have directed anti-trust policy
for the past twenty years, have thus encouraged the merger of mammoth
corporations, such as the $170 billion one between Exxon and one of its major
rivals, Mobil Oil. Mergers of this
order can only mean less competition, higher prices, and a growing challenge to
democratic rights all over the world.
Our point here is important if we are to distinguish adequately between
mainstream economics and political economy.
To the former, political power is most often considered part of the
background institutional structure which is, as they put it, “taken as a given”
and thus is left to political “scientists” or others to worry about. It is this ability to ignore the great concentrations
of economic power in capitalism that allows conservative mainstream economists,
such as Milton Friedman, to argue that capitalism always "promotes
political freedom." For their
part, political economists see capitalism as intrinsically political,
where the capitalist workplace is a rigid hierarchy of control and where the
alleged "neutral" government is disproportionately--as even
reasonably alert children now know-- in the service of the rich and powerful.
Karl Marx suggested that the government
in modern capitalist countries is "the executive committee of the
capitalist class,” that is, of the rich and the powerful. As you will likely discover in an economics
principles course, income inequality is now greater in the U.S. than in any
other advanced capitalist society--and it has consistently been among the most
unequal for over two centuries--because our laws make it that way. The political economist might explain why Bill Gates is worth $90 billion, while at the same time 43 million people in the U.S. do not have
health insurance coverage, in this way: powerful people and corporations have
consistently defeated efforts in the U.S. to provide adequate health care to
all citizens, while they have spent lavishly to ensure that lawmakers make rules
of the capitalist game that allow individuals to accumulate vast fortunes.
Since it is probably not by virtue of divine
intervention, and certainly not from success in predicting what will happen in
the world, why does the mainstream version—and in this context we are talking
specifically about the narrow model building we discussed at the beginning of
the essay--dominate economic instruction in the capitalist world? As we have said, the answer lies importantly
in the kind of graduate programs that now train mainstream economists. All but a few of these programs in the U.S.
focus on a narrowly conceived foundation of economic theory, statistics, and mathematics. For example, consider aspects of two such
programs always ranked among the very best, those at M.I.T., which has housed
Paul Samuelson since the 1930s, and Stanford, where Paul Romer teaches. First, Stanford's economics department
describes the desirable academic background for prospective graduate students:
Most
of our recent successful applicants have had scores above the 95th percentile
on the quantitative GRE, and received excellent grades in economics and math
courses. The department requires
competence in the calculus of several variables, linear algebra, and
probability and statistics as they are used in modern economics. Applicants are not required to have been
undergraduate economics majors, but some substantial preparation in economics
is desirable. (Stanford University web site.)
According
to the M.I.T. web site, the "core requirements" for its Ph.D. in
economics include the following courses:
Two courses in microeconomic theory
Two courses of macroeconomic theory
Two courses in mathematics for economists
Two
courses in econometrics (statistical economics)
One course in economic history
Perhaps
most striking about these two programs is not what is included but what is
actually left out. Here's a list of subjects that one does not have to study as a graduate student to
get a "doctor of philosophy" in economics at Stanford or MIT:
Philosophy,
religion, ethics
History
beyond a single course, literature, classics, foreign languages
Art,
art history, and music
Natural
or physical sciences, psychology
Political
Science, sociology, anthropology, international relations
Without question, when Ph.D. students go beyond the
core requirements, and especially when many of them write their theses, they
will do research in other disciplines, particularly the other social sciences and
history. However, the core of the
typical program makes it quite clear that whatever information is taken from
outside economics, it will be filtered through the tiny meshed screen of a
narrow definition of economics, itself already filtered through the even more
narrow screen of mathematics, and statistics.
Thus, we have a situation in which, to get a Ph.D., increasingly
students need not know anything about the economy, but must understand
incredibly complex mathematical manipulations.
If it becomes the case that only mathematical economists get Ph.D.s, and
only Ph.D.s teach economics, the profession will have become self-perpetuating,
no matter its failures at being scientific and its exclusivity. This trend would mean, also, that
increasingly only the math whiz can succeed in economics, and only ones who
feel comfortable working within a theoretical world where it is assumed that
human behavior can be modeled with equations.
David Collander and A.W. Coates, in The Spread of Economic Ideas (1998),
provide the following evidence of how survival in the economics profession has
narrowed the interests of those studying economics:
Economists
readily ferret out the incentive system.
In a [1987] study Arjo Klamer and I did of graduate economics education,
we asked students what would put them on the fast track. Approximately ninety percent said that
knowledge of mathematics and knowledge of modeling was important; only about
three percent said that these were unimportant. Only ten percent said that
knowledge of economic literature was very important and only three percent said
that knowledge of the economy was very important. Sixty-eight percent said knowledge of the economy was
unimportant. In my view, these
answers suggest that something is terribly wrong in the economics profession
and in the incentives that economists perceive. (Emphasis supplied).
Of course, as we have discussed earlier, the
mainstream school is broad enough to include a variety of different approaches,
including some that are also skeptical about the narrow model building. For example, in 1991, the American Economic Review--the most
prestigious mainstream journal--invited twelve eminent economists to become the
Commission on Graduate Education in Economics.
They were asked to study the nature of graduate economics training and
to report their findings. In describing
the contents of their report, John Cassidy, economics editor of the New Yorker, wrote that:
[The
Commission] feared the universities were churning out a generation of
"idiots savants, skilled in technique but innocent of real economic
issues." The commission described
the state of academic economics in damning detail, but five years later little,
if anything has changed. "That
report took a lot of time and energy on the party of everybody involved,"
Stanford professor Anne Krueger, who headed the commission, told me. "Yet, basically, if only the report and
a pin had dropped at the same time, the pin would have sounded noisy." (The New Yorker, December, 1996).
As a final comment on this issue, it is not just
political economists and a few mainstream economists who are unhappy with the
fact that narrowly trained model builders dominate the profession. John Cassidy also quotes two other people
who should know what they're talking about.
One of them, Joseph Stiglitz, an academic economist who became head of
the Council of Economic Advisors to Bill Clinton, told Cassidy that,
"Anybody looking at those [mathematical] models would say they can't
provide a good description of the modern world." The other is Laurence Meyer, an economist and currently a member
of the Federal Reserve Board. Meyer
made the interesting point that the quantitative model builders, who had come
to dominate macroeconomics in the 1970s, actually helped him build an economic
forecasting business that depended on the older, Keynesian models. His firm profited from the fact that more
and more graduating macroeconomists—who could have been his competitors in the
forecasting field--were not trained to build models about the real world and
thus had a declining value to businesses and to governments. Meyer described to John Cassidy the problems
of the mathematical school this way:
When
you close your blinds, you don't look out of your window and you don't care
what's happening out there. You don't
try to build models which are consistent with the real world. With the blinds closed, it's hard to see
anything.