Monday, June 20, 2011

The Emergence of Capitalist Economics II

Yanis Varoufakis, Joseph Halevi, Nicholas J. Theocarakis, 2011, Modern Political Economics: making sense of the post-2008 world, London: Routledge.

In Chapter 3 we are treated to an account of the usual Ricardian corn model, regarded by some economists as illustrative of the inner workings of a capitalist economy, upon which the seeds of the profession’s love affair with models were planted in 1817.

YHT also link Adam Smith to the problems with which the corn model is lined up to discuss and which the late 19th-century mathematical school went on to separate economics even further from the real world, leading to the fantasies of General Equilibrium and much of microeconomics as we know it today.

YHT have a habit of using language that belies the assertions they make (some of it not even explained, such as what appears to be of unexplained post-Marxist vintage in regard of commodities).

For example, to Adam Smith is attributed a notion of ‘natural’ prices as the ‘lowest possible per unit cost’, while I consider him to have argued that the ‘natural’ price as one that covers those costs (rent paid to the landowner, wages advanced to labour and revenue to cover the provider of the stock’s outlays (in respect of rent and wages), and his subsistence plus a profit. These natural rates, of rent, wages, and profit, are ‘regulated’ by local circumstances in each ‘neighourhood’ and the ‘circumstances of each society’ (‘their riches or poverty, their advancing, stationary, or declining condition and … particular nature of each commodity’ (WN I.vii.1-2).

It is these ‘ordinary or average rates’ that constitute the ‘natural rates of wages, profit, and rent at the time and place where they commonly prevail’ (WN I.vii.3) and where they ‘prevail’ they are ‘sufficient to pay the rent of the land, the wages of labour, and the profits of the stock’. The commodity then sells for its ‘natural price’, which means it sells ‘precisely for what it is worth’, which is the sellers’ cost-based price, but actual prices are based on the ‘propensity to truck, barter and exchange’, or bargaining, as defined by Smith (WN I.ii.2: 26), in which both the buyer and the seller have roles in determining.

From his receipts the seller recovers his necessary outlays (rents + wages) and he divides his share, depending on his personal degrees of frugal and/or prodigal behaviours (never forget domestic pressures in any age of mankind), between his consumption of necessaries and conveniences (his family’s ‘subsistence, conveniences and amusements’) and the share directed to his next round of investment that replaces used-up capital and that portion directed to growth and new employment of labour). In Smith’s simple growth narrative, prodigality (including business losses and failures) lowers his net, and arithmetically society’s, capital investment and reduces the employment of labour; his frugality raises both and makes a net contribution to the overall growth in the economy.

But in competition his actual (market) selling prices may not be sufficient to cover these outlays - the actual prices at which he sells Smith calls market prices - determined by the ‘effectual demand’ for the quantities bought in markets by all buyers. There could also be competition among consumers, raising market prices, or competition among stock-holders, that lowers market prices. The consequence of these relationships is for market prices to ‘continually’ gravitate around their natural prices’ (WN I.vii.21), an observation by Smith not shown by static Marshallian partial equilibrium models, nor clearly enunciated by Economics 101, except partially in the idea of the cobweb theorem.

In this simple analysis, YHT slide over the roles of people and stick to pure analysis, which leads them to make, if I may so, (and to quote back to them their favourite phrase) an ‘inherent error’ that they ascribe to those economics with whom they have (albeit) legitimate grievances. They trace their version to the ‘inherent error’ of Aristotle, a person not usually taught in standard economic texts or classes.

YHT forget, in these presentations in chapter 3, present the role of people in economies far from what single dimensional variables in an equation dictate what real people do, treating them as if they were automatons programmed to act in a certain way, viz: leading to the assertion that in Smith the ‘natural’ level of prices’ are the ‘lowest possible per unit cost’ (p 38).

Consider what Adam Smith actually said happens in the commercial societies (never called by him ‘capitalism’; the term was first used in English in 1854 by Thackeray in his novel, The Newcomes; incidentally, an entertaining read).

The merchant is not helpless in the real world and at the mercy of the market forces of supply and demand. In the real world, in the 18th century judicial system, he can intervene to ensure that effectual demand does not drive him into market prices below his natural costs, by his taking advantage of various forms of legal monopoly that restrict competition from other merchants (the Town Guilds, Apprenticeship Acts, Settlement Acts, Chartered Trading Companies, Tariffs and Prohibitions, hostile acts against rivals in other countries, and such like, i.e., the very mercantile state that Smith’s Wealth Of Nations focused on, as enacted by national legislators and those who influenced them).

He described WN in his Correspondence (pp 251 and 266) as a ‘very violent attack … upon the whole commercial system of Great Britain’, and made another broadside, added to the 3rd edition of WN, (pp 442-62) to which we can add his trenchant criticism of the ‘merchants and manufacturers’ (the rising ‘bourgeoisie’?) that was unrelenting and in one direction only in exposing their anti-social and uncompetitive behaviours. This does not square with YHT’s image of Smith as a paid mouthpiece for the same ‘bourgeoisie’, or that very awesome Stalinist concept of Smith as ‘objectively’ serving that ilk.

Some merchants seek advantages over the rivals with patents (which they protect with intense jealousy) and other secret methods (including fictitious ingredients, special ingredients, and working methods, and real or supposed advantages (today called marketing, advertising, and spin). Smith noted that ‘secrets in manufactures are capable of being longer kept than secrets in trade’ (WN I.vii.29).

YHT assert that Smith wrote”

Miraculously, as if by the providential guidance of some invisible hand (Wealth of Nations, IV.ii.[9], p. 456) which put society on a course of less moralizing, less hunger, less deprivation, and ultimately greater prosperity’ (p 38).

This absurd representation of Smith’s use of the metaphor of the invisible hand caught my attention immediately. It misreads the object of the IH metaphor (all metaphors have their ‘objects’ and using a metaphor enables the author to ‘describe in a more striking and interesting manner’ its object (Adam Smith, Lectures in Rhetoric and Belles Lettres, p. 29 ([1763] 1983). And what was the object of Smith’s use of the IH metaphor? We do not need to invent meanings because Smith identifies its object several times in the very same chapter (paras 1 thru 9) from which YHT draw their repetition of the modern invented assertion, and in the same sentence where he uses the IH metaphor.

He refers to ‘domestick industry’ (the subject of chapter ii) and points out how some merchants, concerned for their ‘own security’ (mentioned twice), avoid foreign trade and invest in ‘domestick industry’ and describes how they are ‘led by an invisible hand’ to so (WN IV.ii.9: p 456).

Their ‘concern for their own security’ is the object of Smith’s use of the IH metaphor, nothing more, nothing less (though some brilliant mathematically trained, but many modern economists did not get the basic points of grammar, as taught in rhetoric classes from classical times). All the rest of the myth of the IH metaphor was invented by modern economists, particularly since 1948 (see Paul Samuelson, Economics: an introductory analysis, p. 36, and in its following 19 editions to 2010, nearly 5 million copies later) though it was part of the oral traditions of Chicago and the two Cambridges) that has perpetrated a calamitous myth about the so-called ‘miraculous’ IH, ‘selfish ends’ and all, working out for the ‘best’ outcomes for society, and laid these ridiculous ideas at Adam Smith’s door.

That YHT join the assault on Adam Smith is understandable in light of what they believe, but nevertheless, it is deplorable scholarship from authors I had hoped were going to correct the mess that passes for the modern profession’s scholarship.

Far from Smith enunciating a ‘great insight’ he is lumbered with their avoidable misunderstanding of elementary grammar. This is underlined by the non-complex observation that he did make, specifically that the insecurity of some merchants led them to invest locally for their own private interests – calming their insecurity – which had unintended beneficial affects for ‘domestick trade’.

Now Smith’s simple point had no complex mathematics attached to it, no notions of Pareto’s welfare theorem, no relationship Debrue’s General Equilibrium (on this last YHT and I agree). Not at all: just the good old arithmetical law that the whole is the sum of its parts – the more parts, the higher the arithmetic total. And the higher the arithmetic total of domestic ‘wealth creation’ – the higher the ‘annual output of the necessaries, conveniences, and amusements’, and the higher domestic ‘revenue and employment’ will contribute to the labouring poor being better off. It’s that simple. Smith also pointed out very forcibly (to put it mildly) that the pursuit of their self-interests by many - if not most - 'merchants and manufacturers' was not the public good at all, but the opposite, far from the invented role of the IH metaphor of 'miraculously' making society 'better off' in some automatic sense (the alibi of corporate greed). It made working parents better off than their grandparents but there remains much else to do to ensure their grandchildren - and those billions not yet much better off than their parents in what was called the 'undeveloped', and mainly the tyrannical, world outside modern society.

Whether they European labourers were poor by today’s Western developed standards and endured on dreadful levels of subsistence, is not in question; of course they were and for innumerable generations before them that was all that the poor ever got in their zero growth per capita GDP societies. Their rulers were ever ‘vile’ (Smith) and for much of the world, they still are. Smith was compassionate as well as historically realistic. As a moral philosopher he observed but did nothing (while Marx saw the philosopher’s role to ‘change the world’, with the results we saw under Soviet socialism, which made the world risk a nuclear exchange). Smith observed that were no realistic alternatives on offer or from philosophers to achieve rising real incomes for the poor, other than the growth of market economies (the 4th Age of Mankind). Which is what happened in Britain from the late 18th century and through the 19th century, and beyond.

YHT do not appear to recognise or acknowledge that historical truth in their narrative so far. However, I shall persevere and not make a final assessment until I reach the end of their remarkably ambitious text.

[Readers are invited to join the discussion, preferably after, or while, reading YHT’s book.]

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