A Unifying Principle for Economics?

Commenter Dan thinks economics has not yet found its watershed moment:

Think about Biology before DNA was discovered or Geology before plate tectonics was understood, both disciplines had learned a lot but they still lacked a comprehensive model that made everything fit into place.

I am sympathetic with this viewpoint. Heterodox criticisms come at economists thick and fast – personally, I think most of these criticisms are valid and very little of neoclassical economics should be left. Yet neoclassical economics persists.

However, in my opinion this isn’t because economics lacks a unifying theory; it’s the exact opposite. Economists already think they have found a unifying concept: namely, the optimising agent. Consumers maximise utility; producers maximise profits; politicians maximise their own interests/their ability to get reelected. Sure, there are a few constraints on this behaviour, but overall it is the best starting point. It all blends together into a coherent theory that can tell a plausible story about the economy. I find economists are resistant to any theory that doesn’t follow this methodology.

I have gone over my problems with this approach many times, so I shan’t repeat myself. The important question is what an alternative theory would look like.

The typical definition of economics is the study of how resources are allocated. Hence, a unifying theory should empirically and logically do a satisfactory job of explaining prices, production and distribution. Such a theory would be able to underlie virtually any economic model in some form, whether being the wider context of a microeconomic phenomenon, or the basis of macroeconomic phenomenon. No easy task, then, but luckily many approaches of this nature already exist.

Alternative Theories of Behaviour

If we want to stick with agent-based explanations of the economy, there are any number of alternatives to the ‘optimising’ agent. Among these are:

I consider all of these approaches useful, but none of them sufficient for the task at hand.

In the case of the first two, replacing ‘optimising’ agents with ‘satisficing’ agents isn’t exactly revolutionary. Maslow’s hierarchy can, in fact, work as a utility function. In both cases, we still run into similar problems of aggregation and of reductionism. And we end up trying to shoehorn every decision into a particular approach. The simple truth is that agents have a lot of different motivations for their actions and sometimes these aren’t always clear, even to them.

My main issue with these, and any agent based approach, is that they aren’t necessarily relevant for the wider question of resource allocation in society. Individualist-based neoclassical economics has to reduce things down to a  few agents with only a few goods in order to have any conclusions whatsoever; I can’t help but feel similar problems would emerge here. Class struggle may determine distribution but it doesn’t tell us much about what is produced and at what price it is sold. In order to understand how production takes place and prices are determined, we will have to look elsewhere.

A Theory of Value

The value approach has a lot of pluses. A theory of value underpins the explanation of relative prices, and also has normative implications that recognize the inevitable value judgments in economics. The only problem I have here is that I’ve yet to find a convincing theory of value – the two most widely known are the neoclassical/Austrian subjective theory of value and the Labour Theory of Value (LTV).

I object to the idea that prices merely reflect subjective valuations for the basic reason of circularity: prices must be calculated before subjective valuation takes place, so they cannot purely reflect subjective values.

I have more sympathy with the LTV (mostly because its proponents seem to have coherent responses to every criticism thrown at it), but I remain unconvinced. The defences of the labour theory of value tend to rest on appeals to ‘the long run’ and ‘averages” of socially necessary labour time. These may be useful, but, like the neoclassical ‘long run’ approach they seem to leave open the immediate question of what’s going on in the economy and what we can do about it.

In my opinion, these approaches both contain some validity, and are not mutually exclusive. I tend to agree with Richard Wolff, who asserts that suggesting one has refuted the other is like saying knives & forks have refuted chopsticks. Both are useful; neither are all-encompassing theories. I also believe both are compatible, to some degree, with my favoured approach:

The ‘Reproduction and Surplus’ Theory

This approach is the one emphasised by Sraffians and Classical Economists. It starts from the basic observation that society must reproduce itself to survive, and that generally society manages this, plus a surplus. The reproductive approach emphasises what I believe to be an important aspect of capitalism, and perhaps all systems: the collective nature of production. Industries are interdependent; people work in teams; various institutions, often state-backed or provided, underlie all of this. Hence, no special moral status is accorded to prices or the allocation of surplus, except that prices must be appropriate for the continued existence of industries and society as a whole.

On first inspection the ‘insight’ that society must reproduce itself might be considered trivial, but following through its implications can yield interesting and useful conclusions. The framework can be used to determine prices technically, independently of either preferences or values. It emphasises the interdependent nature of the economy: if one industry or input fails, it has severe knock on effects. For this reason, it would do a great job of explaining both the oil shocks and resultant stagflation of the 1970s and the 2008 financial crisis, something modern macroeconomics cannot manage.

On top of this, the model is versatile: it can interact with its institutional environment, which determines key variables exogenously (e.g. the monetary system determines interest rates, political power determines distribution). The classical approach is, for example, compatible with class theories of income distribution, post-Keynesian theories of endogenous money and mark-up pricing, and even neoclassical utility maximising individuals! Probably the most promising and complete framework out of them all – I look forward to further developments of this approach.

It is feasible that the task of finding a watershed moment is not possible in the fuzzy world of social sciences. Psychology and sociology are both characterised by competing approaches; psychology in particular has improved since the neoclassicals Freudians were dethroned. If neoclassical economics has taught us nothing else, it’s the importance of not being trapped by particular theories for want of elegance, which is why there is a lot to commend in the institutional school of economics.

Nevertheless, I think there is scope for exploring unifying principles. Progress in neurology may provide such a foundation for psychology; similarly, ideas such as societal reproduction could equally be applied to sociological concepts such as the role of beliefs, class, sports or what have you. As far as economics goes, such a substantial step forward could be what’s required to displace neoclassical economics, whose staying power, in my opinion, cannot be accorded to either its empirical relevance or its internal consistency. Perhaps neoclassical economics persists simply because its building blocks are so well defined that other approaches seem too incomplete to offer their opponents sure footing.

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  1. #1 by Robert Nielsen on March 10, 2013 - 4:22 pm

    Is there anything to be said for a theory of power? Perhaps prices are set as a result of relative bargaining positions, with producers trying to charge as much as possible and consumers to pay as little. Likewise for wages. This removes the moral judgement of a correct or equilibrium balance. Advertising could be seen as an attempt to control the market and gain power over consumers. It does leave a lot of wiggle room and values up in the air, but I don’t think there is any hard and fast rule about prices or wages. At least from my point of view, I don’t see any “right” price.

    • #2 by Cameron Murray (@Rumplestatskin) on March 10, 2013 - 11:40 pm

      I would tend to agree. Power could unify. Why do interest groups form? Where do prices come from (for example the bargaining power between owners of resources and consumers)? What is value? How do markets work?

      I actually tend to think that prices and the economy as seen through neo-classical goggles are seeing the action but missing the big picture. Like watching a soccer match and analysing the shape of the ball after it is kicked and who kicks it next. We can get competitive markets (lots of players near the ball), or monopolies (a lone player) and we think that the players are all selfish (kicking the crap out of the ball), and that the ball is selfish (wants to get away from being kicked). But if you look up you might see a whole lot of coordination taking place in order to gain power over a game that you didn’t know existed.

      Another great post by the way.

      • #3 by Unlearningecon on March 11, 2013 - 7:06 pm

        See my comment in response to Robert about why I don’t think power, though important, is sufficient for an epistemological starting point.

        And yes, it is true that economics often misses the big picture, unlike Sraffa, who sees everything as linked together. E.g. Walrasian equilibrium just takes every important variable as exogenous without even trying to explain them or justify its approach.

    • #4 by Unlearningecon on March 11, 2013 - 6:48 pm

      Power is highly important but I don’t think it is necessarily a unifying principle. Consider the following scenarios:

      “We have a theory of how sparrows evolved, obviously it must be buildable from know genetic processes.”

      “We have a theory of the macroeconomy, obviously it must be consistent with the ability of society to sustain itself.”

      “We have a theory of economics, obviously it must be consistent with power relations.”

      This may sound partially like an argument from personal incredulity, but personally I don’t see how power relations are a baseline framework into which we can feed variables and other concepts; they seem more like a concept that would be fed into a baseline framework.

    • #5 by Oscar Cox on March 11, 2013 - 9:34 pm

      There’s a French sociologist who writes a lot about that. His name is Paul Jorion. Quite interesting, actually.

  2. #6 by K. Michael Wilson (@kmichaelwilson) on March 10, 2013 - 5:17 pm

    + 1 Nielsen, except I’d add that I don’t think a LTV is mutually inconsistent with a relative power theory of value, or with the surplus/ reproduction approach for that matter. Greater power of labor corresponds with greater share of surplus value, whether in the form of surplus time (shorter worker hours), more commodities (purchasable with greater wages, i.e. more representations of value or surplus value), or more rights broadly construed (access to healthcare, education, geographical mobility, freedom to choose various things like one’s occupation, etc.)

    As something of an aside, I wouldn’t be so quick to dismiss Freudianism, as I’m much more suspicious (perhaps I should write ‘critical’) of modern ‘advances’ in psychology. I suspect that Freudianism has been more suppressed than dethroned.

    I think we should also consider whether a dualistic approach might prove fruitful. Think destruction/ creation, productivity/ waste, preservation/ degradation, exploitation… what’s the opposite of exploitation? Cooperation?

    Anyway, another great post!

    • #7 by moiracathleen (@moiracathleen) on March 10, 2013 - 7:04 pm

      Is the dualistic approach just a way of dealing with incommensurable values? Economics seems to resist the idea that there is more than one way to organize a society.

      • #8 by K. Michael Wilson (@kmichaelwilson) on March 10, 2013 - 7:37 pm

        Yeah, I agree. I’d add that the search for one value, rather than many values, relates to the desire of economists to associate with the ‘hard’ sciences rather than the ‘soft’ ones (note the psychological/ sexual undertones.)

        The concern over predictive power is similarly wrapped up in historical and psychological contingencies. It’s perhaps embarrassing to economists that they can’t predict people’s behavior in the same way physicists can predict the movement of billiard balls.

        That space of unpredictability is also the space in which people live their lives, as people, not as slaves or machines. Graeber somewhere in his writing makes the point that science and violence at times appear a bit too chummy. His example is that people are complicated, their emotions and behavior are generally unpredictable, but if one inflicts violence upon them, suddenly, presto, one can predict their reactions (‘ouch,’ and the subsequent fight or flight.)

        But I think you might be thinking of more than a dualistic approach, maybe like a pluralistic approach. My suggestion of dualism is more old school, perhaps, in that I’m thinking of how profit-making relates to profiteering, how, e.g., one can theoretically make a profit by increasingly efficiency in production, or just by gaming the system, by stealing and by exploiting. I think this latter ‘negative profit’ is much more predominant in world history, and that the capitalism phase proper is almost an aberration, a kind of fortuitous mistake. The problem is that capitalism never really eliminated the ‘purely negative’ elements, and that the division between worker and owner of capital was mostly continuous with the old class divisions.

        Interestingly, the context in which the dominant classes in the ancient world started caring about their subordinates was usually war. The hegemons from one area feared defeat at the hands of opposing hegemons; subordinates had to be treated all right so that they wouldn’t flee to the other side. The ‘price battles’ between economic hegemons stems directly from this original context, that of literal warfare.

      • #9 by Unlearningecon on March 11, 2013 - 6:57 pm

        Interesting comment!

        Indeed economists, and their libertarian counterparts, seem resistant to the idea that profits and the actions of business can be anything more than beneficial (unless, of course, the g’damn gummut interferes).

        Interestingly, the context in which the dominant classes in the ancient world started caring about their subordinates was usually war. The hegemons from one area feared defeat at the hands of opposing hegemons; subordinates had to be treated all right so that they wouldn’t flee to the other side. The ‘price battles’ between economic hegemons stems directly from this original context, that of literal warfare.

        These days, wars are so detached and the USA’s power so absolute that this doesn’t seem like a possibility.

    • #10 by Unlearningecon on March 11, 2013 - 6:51 pm

      Yeah, a lot of the approaches I – and commenters – outline are not mutually exclusive.

      As something of an aside, I wouldn’t be so quick to dismiss Freudianism, as I’m much more suspicious (perhaps I should write ‘critical’) of modern ‘advances’ in psychology. I suspect that Freudianism has been more suppressed than dethroned.

      Ignore the ‘improved;’ I was being provocative/imperious/ignorant (delete according to preference). My point was that psychology has been characterised by the pluralistic approach since the Freudians were dethroned, for better or for worse.

      • #11 by Dan on March 13, 2013 - 11:10 pm

        I would say from my education in psychology that its not so much that Freudianism has been suppressed or dethroned as much as we have found better explanations for many phenomena. For example, very few mental illnesses are explained in a purely Freudian context anymore but that doesn’t mean its been all out rejected. Freudian child development is still important in many ways (well, any idiot could tell you that someone with a traumatic childhood could have mental illness later in life), but advances in neurology have shown us that experiences actually rework our neurological circuitry and the way we think, and that childhood is an especially impressionable time. Obviously this fits in right with Freudian theory of childhood being very important, but, the neurological explanation is a much more scientifically “hygenic” one than classic Freudian psychosexual stage development. Other aspects of Freudianism like the idea that Schizophrenia is caused by the way the mother raises the child rather than genetics have been completely debunked. Its a complicated relationship, but as a whole no self respecting psychologist is explaining human psychology and mental illness in a Freudian context anymore.

  3. #12 by Hedlund on March 10, 2013 - 6:18 pm

    Reproduction is definitely a fine starting point. It seems to be the least controversial of any of the analytical lenses to have come from the Classicals, and it is most certainly compatible with the other theories you mention. As you have noted, though, this compatibility is in no small part due to the skeletal nature of the idea. I would submit that value theory is the beating heart beneath, which itself transitions seamlessly into, e.g., class theories of distribution, or an explanation of the necessity of expanded reproduction under capitalism. (But then, you probably guessed I’d say as much!)

    To wit: One addresses physical conditions, the other, social. Robots can’t do it all, and even as they handle more of the load, there are presumably some tasks for which we’ll always depend on humans. Thus we can say that there is this much human labor needed for reproduction and expansion, and sooner or later it’s got to be determined who is performing how much of it. Thus, the fundamental object of the class struggle is revealed to be time, itself — our most scarce and precious resource — wherein one’s labor becomes another’s leisure.

    The point that ‘averages’ place emphasis on the long-term over the short is well taken. These concepts are often meant more to indicate a directionality — a law of motion, if you will — than any sort of equilibrium picture per se, and these movements of value extend down to the lowest and most immediate venues of economic activity: competing firms, the effects of supply and demand, and so on. I have even seen one or two scholars note (though the specific references elude me at the moment) that in Capital vol. III there are passages that seem to indicate the emergence of a view of supply and demand not simply as ‘forces,’ but as schedules — almost an anticipation of Marshall. I would actually be rather excited to see more people try to apply such more-recent tools to a Marxian LTV, especially in view of his own nascent willingness to engage with such ideas. Perhaps this value-theoretic ‘foundation’ is a better way around the circularities highlighted over the last century. From your Wolff reference, I don’t think I’m alone in wondering.

    Of course, I recognize that my hearkening back to Capital may still ring of a fundamentally hermeneutic approach, as though thought has not progressed significantly since then. I happen to think Post-Keynesian/Institutionalist/Structuralist/Sraffian traditions have been extremely fertile. Those who draw largely from Marx could stand to learn a lot from more recent scholarship, such as endogenous money theory and their more sophisticated views of banking and credit. My thoughts lately have been drifting towards a reconciliation of these perspectives with Marx’s theory of money (which does not seem out of the question, since we’re talking about a dude who basically argued that commodity money is endogenous). As far as ‘marrying’ these ideas goes, I sometimes return to Steve Keen’s A Marx for Post Keynesians. It seems like a fine foundation for such a broader effort: start with the many interesting parallels he draws, then address the weaknesses in his critiques of the LTV, as previously discussed, so as not to be throwing out the baby with the bathwater.

    Finally, regarding the “moral status” or “normative” implications of value theory: section II of William Baumol’s Marx and the Iron Law of Wages provides textual support for the proposition, as Vienneau puts it, that “account of the derivation of the returns to capital from the exploitation of labor is intended to be descriptive.” Obviously, it’s not hard to pull a prescriptive position from it, but I just figured it was worth a mention.

    As always, thanks for your time, and keep up the superb blogging!

    • #13 by Unlearningecon on March 11, 2013 - 7:35 pm

      Interesting comment.

      I find myself more and more drawn to the LTV, though I do not know it well enough to consider myself an adherent, yet. Certainly Keen’s critique seemed to miss the mark.

      I suppose any system, including Sraffa’s can only predict long run prices, rather than day to day fluctuations, which is surely not possible. However I do worry that the fact that surplus value is often (always?) derived from global ‘averages’ means that we would not be able to study, say, a single industry with the LTV.

  4. #14 by tim on March 10, 2013 - 9:57 pm

    Economics might end up being partitioned into microscopic and macroscopic characteristics along the lines of statistical mechanics. Microscopic effects would then capture the effects of the semi-rational emotional agent and emergent phenomena of large group dynamics could be expressed as averages just as thermodynamics are a large scale average averages of bulk behavior. See for example sugarscape (http://en.wikipedia.org/wiki/Sugarscape).

    Then again, a true theory which is testable in its predictions such as biology vs intelligent design, may never emerge.

    • #15 by Unlearningecon on March 11, 2013 - 7:25 pm

      Yes, keeping micro and macro as separate as quantum mechanics and general relativity might help us, at least in the short term – part of what’s wrong with economics at the moment is that micro has effectively taken over macro.

      Testing predictions is indeed incredibly difficult in economics, though in many respects it’s similar to (macro)biology in that we can only take what the world offers up as evidence.

  5. #16 by Daniel De Voss on March 11, 2013 - 2:49 am

    One excellent offering of a unified alternative has been provided. Jason Potts’ The New Evolutionary Microeconomics (2000) provides a very fine critique of the mainstream, as well as a coherent alternative framework, both constructed on the basis of graph theory. It is the best, most hopeful book on economics I have yet read.

    Potts contends that neowalrasian (neoclassical) economics is based on the real field, Rn, in which ‘everything depends on everything else.’ The elements in this rendition (atomistic consumers, firms, markets) take centre stage, for in the arithmetic of a field, each element is implicitly connected to and affected by each of the others (cf. an electromagnetic field). The essence of a graph, by contrast, is the incompleteness of its connections; in graph theory, elements and connections must assume equal importance.

    Potts’ grand synthesis is to suggest that all heterodox approaches, however disparate they seem (especially to each other), can be unified using graph theory. It’s a work of marvellous craftsmanship, as Potts makes explicit the graph-theoretic foundations of all but the mainstream approach. Agent-based computational methods are suggested to realise the unified research programme. I can’t recommend it highly enough! For a better synopsis and more considered praise, see the link below:

    http://www.e-elgar.co.uk/bookentry_main.lasso?id=2258

    From a first-time commenter and committed unlearner. Regardless of how you prefer to price it, you’re doing valuable work!

    • #17 by Unlearningecon on March 11, 2013 - 7:16 pm

      I will look at that book, thanks.

  6. #18 by Roman P. on March 11, 2013 - 6:47 am

    Production of commodities by the means of commodities is the most robust approach; after all, we KNOW that’s how everything is produced or used. In comparison, subjective or labour theories of value are too abstract and sometimes dissociated from the distinct facts of the economical life. Yet, Sraffian theory is incomplete because for every movement of commodities there is a corresponding counterflow of money or credit. Since we know that money is not neutral, this movement is of great importance. The unifying theory would have to account both for the processes of physical production and reproduction and for the stocks and flows of money and money-like things.

    I believe that economics as a science shan’t overreach. It is fruitless to derive sophisticated models of individual behavior because the real world is just so random. This line of research only ends in tautological theories that state that people choose what they choose or something like that. Ultimately, the facts of how the price of a good is set all boil down to something like ‘Manager Steve decided to set the price thus’ or ‘There were more people trying to sell rather than buy today’ – and this does not tell us much about the causes of anything. Better to stick to the accounting facts, institutional structures of the economies and the interrelation of stocks and flows of goods.

    • #19 by Unlearningecon on March 11, 2013 - 7:12 pm

      I’d love to see some Godley/Keen type models combined with Sraffa’s approach.

      This line of research only ends in tautological theories that state that people choose what they choose or something like that.

      Exactly. Who on earth cares what happens in Walrasian equilibrium or what happens if consumer A has utility function u(x, y)=2x+(y^2)?

      Better to stick to the accounting facts, institutional structures of the economies and the interrelation of stocks and flows of goods.

      At this stage it seems crazy to me that economists would do anything else.

  7. #20 by docrichard on March 11, 2013 - 10:20 am

    Economics, the ordering of our living space, should be founded on ecology, the study of our living space, because we cannot order a thing without understanding it. This insight has a massive impact on economics, because it brings with it three axioms: it is impossible to expand forever into a finite space, it is impossible to take forever from a finite resource, and everything in the biosphere tends to be interrelated. These axioms in turn have a revolutionary impact on economics, not least by blowing the economics of growth out of the water. The steady state economy becomes the destination. Work becomes re-evaluated in terms of its ability to restore order into our world http://www.greenhealth.org.uk/PhilosWork.htm. The overarching need to stabilise our being-in-the-world transcends the anthropocentric quarrel as to whether the collective or the individual should have primacy.

    Ecology has a lot going for it as a principle that can unify economics.

    • #21 by Unlearningecon on March 11, 2013 - 7:14 pm

      I completely agree with your approach; unfortunately I do not know anything about the environment so I don’t post abut it.

      I also don’t think it is incompatible with Sraffa’s approach. Why not, instead of merely society reproducing itself, have the entire ecosystem reproducing itself with society embedded inside it?

      • #22 by docrichard on March 12, 2013 - 12:07 pm

        I dont think you need a degree in environmental sciences before thinking in an ecological way. You just need to have spent a day in a tent to realise that you need water, food, shelter, warmth and somewhere to take a dump without fouling the water supply and making the place smelly. Simple. That’s the basics. Build out from that into distribution, transport, administration and finally – the icing on the cake – financial services. Voila – you have (a) built an ecological economy (b) turned economics on its head and (c) saved both mankind and the environment on which our life depends.

  8. #23 by Magpie on March 12, 2013 - 10:47 am

    I am far from being an expert on Sraffa, but it is my understanding that notions Sraffians use, like “reproduction”, are taken directly from Marx.

    As a matter of fact, as I see it and judging by some Sraffians (like Robert Vienneau, mentioned above) the main claim made by Sraffa himself is to have solved the so-called transformation problem:

    “Sraffa Solves Marx’s Transformation Problem”

    http://robertvienneau.blogspot.com.au/2012/08/sraffa-solves-marx-transformation.html

    With this I am not necessarily adopting a position about the claim itself (meaning: I neither reject or accept it, yet)

    • #24 by Unlearningecon on March 12, 2013 - 4:47 pm

      I believe Marx’s ‘transformation problem’ only appeared due to people misinterpreting his methodology. It arises in a simultaneously determined systems like Sraffa and neoclassical economics, but once you add a temporal aspect it disappears. This is what Alan Kliman does, and though I have not read read him, I have seen nothing but praise for his work.

      • #25 by Magpie on March 13, 2013 - 8:48 am

        I myself have seen many good things said about Prof. Kliman and I am inclined to accept them.

        And, you are right, Prof. Kliman argues that the transformation problem is due to a misunderstanding of Marx.

        However, until I’ve read all the arguments in favor and against the main Marxist schools, I prefer to remain noncommittal.

        This, of course, is my personal position only.

  9. #26 by Dan on March 12, 2013 - 12:54 pm

    Well first of all, I am honored and delighted that you referenced my comment and that it was provoking enough for you to base a post on. And because of that I do feel obliged to comment about it.

    While I generally agree with your points on behavior, theory of value and surplus, I am a little disappointed that you didn’t include capital in your list. In fact I was surprised you didn’t since you seem to have an interest in Sraffa and have written about the CCC before. To me the theory of capital is the weakest part of neoclassical economics, we have gotten this far and we still really don’t even have a good solid definition of what capital even is. The CCC exposed that, but it seems to have been more or less shrugged off by mainstream economists, and even the Post-Keynesians and Sraffians really don’t know what to do with it.

    To me capital may be where the “missing link” in economic thought exists. By understanding it we not only understand the ebbs and flows of production and distribution, but also the potential for production. I feel that by confining capital only to profit-motivated activity economists have made a run around on the topic that has enabled them to adequately analyze business, its great for understanding the “balance sheet” economy, but in terms of a deeper understanding of human economic behavior it still leaves much to be desired. For example, a car is not a capital good, but if I decide to open up a pizza delivery business then all of a sudden it more or less can be treated as one. What about employees who use their private cars to get to work? Sure its not on the balance sheets of their employer, but looking objectively at it the cars of the employees certainly play some role in the overall production that is taking place. What about not for profit activity like raising an army? A government’s ability to conscript people into service? Surely there are elements to that which function like capital but are not named as such. The point I’m getting at, is that behind all of the social economic behavior is a force that makes it all work out. There is something which prevents humans from acting solely in the moment and solely for ourselves, which allows us to form relationships and connections and trust that those relationships will work out. There is also the real economic potential which is often times not reflected on the balance sheets. Perhaps behind all of it is a “deep capital” of sorts, something that occurs when people create expectations based on potential and the relationships that form around those expectations of potential. This is just me musing, but it is something to think about.

    And in some ways I think that the root cause of the business cycle may lie in the fact that we have used money as representation of capital, and the limitations and contradictions of using money can create situations which arbitrarily limit our productive capacity. The balance sheet economy lets us down when the balance sheets cause a financial meltdown with no physical constraints to explain it. I truly feel that a greater understanding of this force may connect the dots between behavior, value and surplus in a way which allows us to break free from the trap of modelling and perhaps create something that can truly guage human potential. If some kind of way of accounting for this can be developed it could be huge.

    • #27 by Unlearningecon on March 12, 2013 - 4:39 pm

      You raise some good enough points for me to consider making another post about them!

      The CCC exposed that, but it seems to have been more or less shrugged off by mainstream economists, and even the Post-Keynesians and Sraffians really don’t know what to do with it.

      This is true. See, for example, Steve Keen’s model, which uses capital stock k measured in $ (though in fairness he doesn’t use marginal productivity).

      Don’t forget, Marx is the one who came up with the term capital, as well as the term ‘capitalism.’ Marx defined capital by its relationship to the worker.: if sometime as sued to extract surplus value, it was capital. This fits in well with your discussion of the car. In fact your entire comment sounds very Marxist – capital would cease to exist in the world of socialism and hence cease to interrupt our relationships and, perhaps, cause business cycles.

      • #28 by Dan on March 13, 2013 - 2:10 pm

        Well I do like Marx’s definition of capital better than many other economists who seem to fragment capital into a bunch of different kinds of capital (capital goods, financial capital, labor capital, etc.) which only seems to cloud it up. Marx’s definition seemed more simple and straight forward. But even Marx only confines capital to profit motivated ventures, and I guess what I am getting at is that even in the biggest capitalist economies on earth there are tremendous amounts of resources which go to activities which are not profit oriented or are just a monetary loss on paper. Yet the fact of their existence proves economic sustainability is more dynamic than mere income from the act itself. There are enormous amounts of pipelines in our economy which go into activities that will never generate a monetary return to the producer. And the neoclassical mainframe tends to ignore this which in some ways doesn’t give you the full picture of where economic potential of a society lies.

        Thats why I would propose redefining capital or creating a new kind of concept for capital which includes not-for-profit making activity since so much of human resource distribution has nothing to do with profit return. Marx understood this with his LTV which looks the economic importance of labor and production beyond just mere profitability, but I think that the LTV fails in several ways, one is that it sees capital and labor as 2 different things (why? it all is part of the greater production function), it also seems to assume economic equilibrium in his models of capitalism and that labor is all the same and can be measured in “labor units” rather than acknowledging that some kinds of labor may be of greater value than other kinds, which I think may be a better explanation for wage disparity of professions rather than pure exploitation like Marx claims. There is also something odd about viewing all forms of wealth just in terms of labor, its true that human labor is what has created all the wealth we have today and is ultimately responsible for economic growth, but people don’t look at it that way in economic decisions. We don’t look at a 200 year old building and evaluate it in terms of labor units from builders and remodelers over the year in determining its worth, we look at it in terms of what its present use value or utility. Now this is similar to the concept of “dated labor” that Sraffa talked about in the CCC, and it seems Marx’s LTV seems to fall victim to the same problems that neoclassical capital theory does since the “lumpiness” of preferences make it impossible to accurately use LTV for gauging the value of a certain activity.

        But all of this centers around capital and the way we use it in monetary calculations, and to me the problem is the focus on profit oriented enterprises rather than all resource use and distribution. It makes me think that using money and profit to assess value, sustainability and economic potential may actually distort important signals which leads to malinvestment and the business cycle. Neoclassical economics is based on the assumption that a perfectly functioning monetary market economy should be giving us perfect signalling, and that only exogenous forces of interference lead to market distortions. But this is the same school of thought that says that a shovel is a durable good excluded from economic calculations when used in someone’s private garden, but magically becomes capital if that person decides to sell the vegetables he grows in it. And what if a person grows a garden and originally doesn’t intend on selling any vegetables but decides to sell some after they are grown? Obviously economic potential is being distorted here if ability to produce income is the difference between included in a calculation or not. And so when a government leader asks an economist what potential policies could be, those using the neoclassical model may be looking at total potential in a horribly limited manner.

        My theory would be that there is a “deep capital” that exists driving all forms of economic behavior and labor, including unprofitable ones like charity, public services and household chores. Surely this was not something that emerged only in market economies, the forces which got people to build the pyramids and stonehenge were probably more than just compulsion and exploitation. I guess even using the word “capital” is misleading since capital by its very nature is only associated with profitable activities, but I can’t really think of anything else that accurately creates a picture of what I’m talking about. It would essentially be a factor of production that plays a similar role to traditional capital but in not-for-profit activity, and rather than saying that there are two kinds of capital, who is to say that it is part of a deeper capital that includes both not-for-profit capital and traditional capital. And if that does exist, then that would mean our entire system of accounting is only looking at one part of the picture and the full driving mechanism isn’t being understood.

        Now I’m not saying that people should get into some business of creating “deep capital units” and applying them to the world in some tautological way, theres already enough of that nonsense going around. But that doesn’t mean that this isn’t something that can be explored by empirical and statistical means in the same way that psychological phenomena are rigorously explored and statistically measured without having to resort to creating fictitious “units of thought” to explain cognition. Even Freud would be laughing in your face if you came up to him and suggested some theory of thought units to him.

      • #29 by Unlearningecon on March 16, 2013 - 11:48 am

        When economists speak of ‘organisational capital’ ‘human capital’ ‘knowledge capital’ and other immeasurable nonsense, I am inclined to comment that they can drop the ‘capital.’

        But even Marx only confines capital to profit motivated ventures

        Is this necessarily true? Seems the act of exploitation can take place in a non-profit organisation, too.

        Anyway, interesting comment. Economists do sometimes estimate the ‘value’ of household and non profit work, though perhaps using their methodology is missing the point. In terms of societal reproduction, the household is surely far more important than most workplaces, which are superfluous.

      • #30 by Dan on March 16, 2013 - 5:09 pm

        I’m not sure if exploitation is an even useful way to look at it. To me capital is what creates the surplus. I think it works the same way the fractional reserve system operates, people save money for the future and create excess reserves, so they take their excess reserves and put it into present day projects with an expected return. Its almost like a multiplier effect but one that is endogenously created. Then you have things like charity and welfare programs which aren’t included in most definitions of capital because they don’t generate a return in capital to the people who put money in. Neoclassical economics tells us this is done for “pleasure”, but thats far too vague, sex is done for pleasure too but it does have a greater purpose which furthers the sustainability of our species. Seeing as how things like welfare and helping the poor are found in EVERY society and are highly valued it tells me that its not just pleasure, these are investments which help create the surplus just like capitalism does. Its just that the returns generated by charity are seen elsewhere, unlike traditional capital in which the returns go right back to the “lender” in the fractional reserve system.

    • #31 by Cameron Murray (@Rumplestatskin) on March 16, 2013 - 11:09 am

      I’m going to also agree here that a coherent theory of capital would be useful, especially for a profession who studies mostly capitalist economies.

  10. #32 by Draco T Bastard (@DracoTBastard) on March 15, 2013 - 6:44 am

    The typical definition of economics is the study of how resources are allocated.

    This is what I was told at uni. I now believe it to be bunk. In fact, I’ve come to the conclusion that mainstream economics is now a justification for the way things are rather than an attempt to explain why it is so. This explains why it can’t predict financial crisis and why it won’t try to do so as crisis proves that it’s wrong and explaining why it’s wrong would show that the present system neither meets the current theory nor distributes resources efficiently.

    After coming to that conclusion I started thinking and came up with two questions:

    1.) What is the economy? (my anti-answer is : Not the financial system)
    2.) What is the purpose of the economy?

    My answer to the second is simple and yet complex but fits well with the The ‘Reproduction and Surplus’ Theory. It is:

    Ensures that nobody within the society is in poverty while keeping within environmental limits.

    IMO, Somewhere in the time ahead we will see the elimination of money and it being replaced by democracy. This is because money and the capitalist system that comes with it is anathema to the survival of society and, in fact, our species.

    • #33 by Dan on March 15, 2013 - 12:08 pm

      “IMO, Somewhere in the time ahead we will see the elimination of money and it being replaced by democracy. This is because money and the capitalist system that comes with it is anathema to the survival of society and, in fact, our species”

      I am starting to believe this more and more each day. I believe that money is merely a means of exchange that is sucessful because it provides us a reliable way to evaluate the availability of resources and an efficient means of allocation. Its a lot like language in that its a great way of transferring signals which allow us to achieve our means. But language has its limits, and sometimes it causes misunderstandings that actually create problems of their own. Don’t get me wrong, language is great, but we only use it because it is better than what we were using before, and as soon as we find a better way to communicate we will drop language like a rock. Money is the same way, it has limitations that distort opportunity costs, we pretend that money is capital just like how we pretend that words on paper are laws or that being married means you have to be monogamous (note, I am not stumping for free love and anarchy, just making a point that money is a fiction). But the monetary system leads us to false valuations which eventually bite us in the ass, the neoclassicals want to pretend it is natural, but its not. Money gives us a false perception of what capital truly is and how much of it is available. The fact that humanity can create a surplus and huge growth with a monetary and fractional reserve system shows that we could be able to do it without it. We could remodel or get rid of money and truly free capital, and I think we are already on our way, look at the huge growth since we got rid of the gold standard and used central banks which constantly inflate money. The neoclassicals are Malthusians when it comes to capital, but the fact is that history has overall been kinder to the Cornucopians like Marx or Julian Simon on the issue of scarcity.

      But we need to be careful, the austerity people are trying to reverse the trend of freeing up capital, this could retard progress immeasurably. In the 12th and 13th century, Britain saw a Market economy start to emerge, and a growing middle class began buying luxury goods which inflated their price. The nobility didn’t like the competition so they petitioned the king to pass laws banning consumption of luxury goods among the “commoners”. This stagnated economic growth and progress for centuries.

      In my view the market revolution was the first step, allowing people to buy, sell and own what they like and for all people to have access to the markets, that was a big step. But the next phase which is occuring is freeing up capital to allow all people to tap into its potential. If we can figure out how to achieve growth without large debt burdens humanity should be able to clear that burden and then the sky is the limit.

    • #34 by Unlearningecon on March 16, 2013 - 11:35 am

      I suppose that, if people are simply making optimising, autonomous choices, then economics does indeed lend itself to justifying how things are now. In fact marginal productivity theory was created during a time of industrial unrest with this in mind.

      As a commenter pointed out, the environment and resource limits are important and should be encompassed in any theory of the economy. This meshes well with the classica/Sraffian idea that we have to sustain ourselves.

    • #35 by JohnB on March 16, 2013 - 4:56 pm

      I’d agree that the idea current economic theory, is merely about how resources are allocated, is bunk.

      The most blindingly obvious example of this right now, is the fact that there is an enormous reserve of unemployed labour right now, whose productive potential is being totally wasted, to the detriment of the unemployed and society as a whole.

      The MMT ‘Job Guarantee’ could easily employ them through utilizing money creation for public purposes, but inflation scaremongering is the first port of call in opposing that; but (and this is very important) minimizing inflation is all about efficient allocation of resources, and avoiding resource bottlenecks, but nobody every mentions that do they?

      People opposed just talk about inflation in abstract terms (in most cases I suspect, without fully understanding it), as if it’s not possible to reallocate resources more efficiently, to avoid the bottlenecks that might cause inflation.

      The current status quo being protected, is exclusive private use of money creation in the banking system (and the usury involved in that).

      • #36 by Dan on March 16, 2013 - 9:25 pm

        I agree exactly, I think that the past 100 years with the rise of fiat currencies and central banking have brought tremendous improvement to the economy and lessened the business cycle. As long as money remains tied up in private hands they can essentially use interest as rent, renting out capital to other people and capturing some of their production. However if we allow public use of money creation we can unlock more human capital while at the same time reducing incentives for rent seeking behavior and more money put to productive use.

        As for the idea of natural resources, I think its important to keep that into consideration. However, I think that the market-pricing mechanism does seem to reinforce ecological sustainability by using price signals to indicate scarcity. Think of a theoretical situation where every human being on earth had the exact same amount of money, what would happen? Would we simply overconsume ourselves into a Malthusian catastrophe? Or would price mechanisms give us a truly efficient allocation of resources that reflects actual need rather than the current system where resources are allocated mainly on purchasing power? Its an interesting question, and if the latter is true it could be a strong argument for market socialism.

      • #37 by JohnB on March 17, 2013 - 1:00 am

        Exactly, yes; my argument stopped short by labeling just private use of money creation as the status-quo being protected, but public use of money creation would be a watershed moment, that fully disarms the conservative economic narrative that is dominant now, and thus (as you say) most rent-seeking behaviour justified under conservative economic narrative (all of which is part of what is being protected).

        As far as price mechanisms and ecological stability go, I don’t fully agree that market-pricing mechanisms alone will suffice, because of the delayed effects of our actions; as but one example, there may be a significant time-lag between our actions today in burning fossil fuels, and the occurrence of significant global warming in the future.

        The market-pricing mechanism in this case, still lands us into a significant problem; it is reactive to problems, dealing with them when they occur (which in some cases, is far too late), not preventative, as it needs to be in order to prevent eventual catastrophe.

        The same with oil itself: By the time supply shortages occur, causing significant price increases, it is too late to avoid the ensuing economic/social damage, because it will take decades to move infrastructure away from oil (again, reactive, not preventative; we hit the wall head-on, instead of looking ahead and avoiding it, by changing direction).

        I don’t think you need market-socialism to contest with this though, because governments can take a pro-active role in preventing this, both by:
        1: proactively using money creation for public purposes, to research, develop and construct, alternative power sources not dependent upon fossil fuels, as well as supporting infrastructure.
        2: Incentivizing the private marketplace away from fossil fuels, through taxation (e.g. of fossil fuel supplies) and subsidization of alternatives (of both research and construction of alternatives), among other policies.

        I have been following the CASSE steady-state-economics blog recently, which posts about such issues from a very MMT-like perspective (it is not quite MMT, just very similar/intercompatible); worth checking out (for Unlearningecon too, as may make good material for future posts), as it gets into issues which consider ecological issues, and I personally view it as the next logical step after MMT (building upon it):

        http://dalynews.org/learn/blog/

        Herman Daly there, is a particularly good writer, and has done quite a lot of work over many decades, on the topic of steady-state economics.

      • #38 by Unlearningecon on March 18, 2013 - 10:41 am

        The market-pricing mechanism in this case, still lands us into a significant problem; it is reactive to problems, dealing with them when they occur (which in some cases, is far too late), not preventative, as it needs to be in order to prevent eventual catastrophe.

        That’s an interesting point.

        I’ll add that blog to my RSS (what will I do when Google reader is gone?)

      • #39 by Dan on March 18, 2013 - 12:16 pm

        “As far as price mechanisms and ecological stability go, I don’t fully agree that market-pricing mechanisms alone will suffice, because of the delayed effects of our actions; as but one example, there may be a significant time-lag between our actions today in burning fossil fuels, and the occurrence of significant global warming in the future.”

        Yes that is very much true, and perhaps I should have clarified what I was saying a little better. I don’t believe we should just throw all issues to the market pricing mechanism, obviously there are things like anthropogenic climate change, over-hunting and overfishing, racism, etc. that are all beyond the power of the markets to deal with alone. In those instances we need regulation and stimulus for R+D. What I meant was that “within” the constraints of the market, the market pricing mechanism allocates resources efficiently. So we could have a market economy but still impose limitations on burning carbon that incentivize alternative energy (basically using taxes to create artificial scarcity of fossil fuels) and have siginificant money pouring into public projects.

        We probably don’t need all out market socialism either, just a new look on economics. The problem is that our current monetary system distorts the costs of certain activities and makes them appear to not be as important as they really are. I am interested in things like triple bottom line accounting which try to express the hidden costs of our current system. But often times I feel that getting into issues of capitalism vs. socialism can be a side track. Classical economists had a “no bullshit” view of what they were studying in some ways, then Marx came along and this long debate started over two theoretical economies (perfect communism which has never existed versus perfect laissez fairre which has never existed) and in some ways it has side tracked the field. Its one reason why some of the issues talked about in this post were all touched on by classical economists, but then more or less ignored by later economists who were too busy trying to sell laissez fairre or destroy laissez fairre.

      • #40 by JohnB on March 18, 2013 - 2:11 pm

        Ah yes, well I’d fully agree with you there so; the market pricing mechanism is certainly optimal for most purposes in private markets, with government being able to step in for the few things that need a more long-term focus.

        Actually, I agree a lot with market socialism in general (in particular, I would like to see economies with more co-op work-run and/or owned business, and think that will be significant in the future), and think a healthy mix of public, fully-private and co-op business will be optimal, depending upon what markets suit whichever business type;
        the main parts of market socialism I disagree with (or am just not sure on) are those that interfere significantly with the market pricing mechanism (such as central planning), though that still has its purposes as a useful tool, just like everything else.

        You’re right about the current monetary system distorting motives quite a lot, particularly that it’s primarily based upon debt-based money; I wonder if some of the mixed-currencies suggested by Bernard Lietaer could help change that. I think MMT and greater public use of money creation (which doesn’t have to return a profit, like debt-based money), will allow some alleviation of this too.

        Ya the capitalist vs socialist false dichotomy has very much sidetracked the course of economics alright, and it’s taking a long time past the end of the cold war, to move on from that.

      • #41 by JohnB on March 20, 2013 - 3:13 am

        Here is rather good Golem XIV blogpost, much in the vein of your blog here Unlearningecon; it also touches on ecological economics and Herman Daly (and I remember the Steve Keen video it links from long ago; well worth a watch):

        http://www.golemxiv.co.uk/2013/03/the-slippery-grip-of-growth-guest-post-by-hawkeye

        Ties in very well with my previous CASSE link; that Golem XIV blog is also very good in general.

      • #42 by Unlearningecon on March 20, 2013 - 12:40 pm

        I’m familiar with that blog although sadly I’ve been too busy to keep up with as many blogs as I’d like.

        Good post, though.

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