Posts Tagged ‘classical’

political-22

To judge by Christopher Snyder’s attempt to defend contemporary economists, the answer is clear: nothing!

Yes, Snyder is right, economists have expanded their domain, to analyze such issues as art auctions and corruption. But then he goes off the rails.

That’s because the only kind of economics Snyder appears to know about and give credence to is mainstream economics—in terms of what he argues are the “core concepts” that underlie what he presumes to be all economists’ thinking.

What are those core concepts, around which all of us supposedly organize our theories and models?

For starters, Snyder thinks the most important one is “scarcity”:

Devoting resources to one project—say, preventing diabetes—means some other worthy project—curing cancer—goes unserved. So, in determining whether a choice should be undertaken, one of the functions of economics is to argue that its benefits should not be considered in isolation but weighed against its costs. Costs put a dollar value on what has to be given up when one choice is made over another.

But he never even considers the possibility that scarcity is institutionally created, not a given. And different economies are characterized by different kinds of scarcities, which are endogenously produced and reproduced. Thus, capitalism both creates and is characterized different scarcities from other economic systems, such as slavery and feudalism. Where is that in Snyder’s definition of what economists do and the core concepts they supposedly hold.

And then there’s “value,” which for Snyder “is the result of the interaction of several impersonal market forces,” illustrated in the usual fashion:

Figure-2-Snyder-768x671

But there’s no mention of long-run “natural” prices (of the sort classical economists such as David Ricardo or, more recently, Piero Sraffa focused on) or a class theory of value (emphasizing surplus labor, which Karl Marx developed in his critique of political economy)—or any one of a large number of other ways value can be, has been, and is being analyzed within economics.

Finally, Snyder, discusses “modern empirical research” and the attempt to uncover “true causal relationships rather than overinterpreting apparent correlations as causation.”

Uncovering causal relationships is difficult in economics. Opportunities to run experiments are limited by the expense and ethics involved in controlled interventions in markets (although these opportunities are growing, owing to an explosion of interest in laboratory and field experiments).

Once again, Snyder overlooks the many alternative approaches—concerning both “facts” and “causation”—within economics.

Sure, mainstream economists might claim they’ve finally solved the problem of “causal identification” (as they’ve claimed so many other times in the past). But they still fail to acknowledge the possibility that different economic theories produce different sets of facts. Nor do they consider the idea that economists actually use different notions of causation: some limit themselves to essentialist, one-way causation (from given causes to effects), while others, criticize essentialism and look at mutual effectivity (in which everything is seen to be both cause and effect).

The existence of different notions of scarcity, value, and causation within economics doesn’t prove that mainstream economists are wrong. It merely shows that reducing economics to a set of core concepts that pertain only to what mainstream economists do is wrong.

The problem, of course, is that’s the only set of concepts to which generations of students, who have been taught by mainstream economists, have been exposed. And Snyder just continues that tradition.

In the end, mainstream economists are good for nothing precisely because they exclude all other ways of thinking about and doing economics.

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I’m always pleased when Marx’s critique of political economy and the theory of value are topics of discussion, especially since students are rarely exposed to those ideas in their usual mainstream economics courses. Their professors generally don’t know about any theory of value other than the neoclassical economics they learned and preach—and, as a consequence, students aren’t taught that there is a fundamental critique of the neoclassical theory of value that stems from Marx’s work.

The result is, in fact, quite embarrassing. When I ask students to compare Marx’s theory of profits with the neoclassical theory of profits, they have no idea what I’m talking about. The way they learn economics from my neoclassical colleagues, profits are competed away. “So,” I ask them, “what you have is a theory of capitalism according to which there are no profits”? Then, of course, I have to start all over, teach them the neoclassical theory of profits (as the normal return to capital, rK, where r is the profit rate and K the amount of capital) and only then explain to them the Marxian critique of neoclassical profits (based on s, the amount of surplus-value that arises through exploitation). I am forced to make up for mainstream economists’ poor understanding and explanation of their own theory.

So, good, we now have a new discussion of Marx’s approach—first in the form of Branko Milanovic’s “primer” and then in Fred Moseley’s response to Milanovic. Both are well worth reading in their entirety—and I agree with many of the ideas they put forward.

But I do have a few major disagreements with their treatments. Milanovic, for example, insists that Marx develops his theory through three kinds of production: non-capitalism, “petty commodity production,” and capitalism. I read Marx differently. My view is that Marx starts with the commodity and then proceeds to develop, step by step (across volumes 1, 2, and 3 of Capital), the conditions of existence of capitalist commodity production, which is the goal of the analysis. These are not different historical stages or kinds of production but, rather, different levels of abstraction. So, conceptually, Marx starts from one proposition (that the value and exchange-value of commodities are equal to the amount of socially necessary abstract labor-time embodied in their production), then proceeds to another (where the value and exchange-value of commodities are equal to the value of capital, both variable and constant, and surplus-value embodied in the commodity during the course of production), and finally to a third level (where value and exchange-value can’t be equal, since the price of production, p, now includes an average rate of return on capital).

My other two concerns pertain to both authors. Milanovic and Moseley assert that Marx’s focus was mainly at the macro level, “the determination of the total profit (or surplus-value) produced in the capitalist economy as a whole.” I didn’t understand that idea back in 2013 and I remain unconvinced today. As I see it, Marx focused on both the micro and macro level and in fact worked to make his theory consistent at the two levels. Starting with the value of individual commodities (as I explained above), Marx concluded that, at the aggregate level, two identities needed to hold: the total value of commodities equaled the sum of their prices, and total surplus-value equalled total profits. That’s both a micro theory and a macro theory, a theory of value, price, and profit at both levels.*

The second, and perhaps most important, idea missing from Milanovic’s and Moseley’s interpretations of Marx’s approach is critique. Both authors proceed as if Marx developed his own theory of labor value, instead of seeing it as a critique of the classicals’ theory of value (which, we must remember, is the sub-title of Capital, “A Critique of Political Economy”). In my view, Marx begins where the classicals leave off (with an “immense accumulation of commodities,” Adam Smith’s wealth of nations) and then shows how the production of wealth in a capitalist society involves the performance, appropriation, and distribution of surplus labor.

That’s Marx’s class critique of political economy, which pertains as much to the mainstream economics of our time as to his.

 

*I don’t have the space here to explain how, for any individual commodity, the amount of value embodied during the course of its production won’t generally be equal to the amount of value for which the commodity exchanges. It is conceptually important that individual commodities have both numbers—value and exchange-value—attached to them, especially when they are not quantitatively equal at the micro level. It speaks to the fact that surplus-value is both appropriated (by capitalists from workers, through exploitation) and redistributed (among capitalists, within and across industries).

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Mark Tansey, “Invisible Hand” (2011)

Yesterday, I explained that the 2016 Nobel Prize in Economics Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel was awarded to Oliver Hart and Bengt Holmstrom because, through their neoclassical version of contract theory, they “proved” that capitalist firms—employers hiring labor to produce commodities in privately owned corporations—were the most natural, efficient way of organizing production.

It should come as no surprise, then, that mainstream economists—initially in tweets, then in full blog posts—have heaped praise on this year’s award.

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Paul Krugman couldn’t believe Hart and Holmstrom hadn’t won the prize already, while Justin Wolfers considered them “an unarguably splendid pick.”

Tyler Cowen also expressed his conviction that the new Nobel laureates are “well-deserving economists at the top of the field.” (He then explains, in separate posts, the significance for neoclassical theory of Hart’s and Holmstrom’s research on the theory of the firm.) The other member of the Marginal Revolution team, Alex Tabarrock, follows up by criticizing the one instance in Hart’s work in which he actually criticizes private enterprise. Hart (in a piece with two other economists) argues one of the downsides of private prisons is that they sacrifice quality for cost—but, according to Tabarrock, “private prisons appear to be cheaper than public prisons but they are not significantly cheaper and the quality of private prisons is comparable to that of public prisons and maybe a little bit higher.”

And then there’s Noah Smith, who follows suit by praising “the new exciting tools that have been developed in the micro world,” including by the new Nobel laureates. He refers to that work in microeconomics as the “real engineering”—as against macroeconomics, “whose scientific value is still being debated.”

The fact is, the value of both areas of mainstream economics is still being debated, as it has been from the very beginning. There is nothing settled (except, perhaps, in the minds of mainstream economists) about either the theory of the firm or the causes of recessions and depressions, the determinants of a commodity’s value or the prospects for long-term capitalist growth, whether the labor market or the economy as a whole is in any kind of equilibrium.

Smith overlooks or ignores those debates, most of which occur between mainstream economists and other, nonmainstream heterodox economists. But then, in attempting to explain why this year’s prize went to microeconomists, Smith displays his real misunderstanding of the history of economics—arguing that “macro developed first.”

Economists saw big, important phenomena like growth, recessions and poverty happening around them, and they wrote down simple theories to explain what they saw. The theories started out literary, and became more mathematical and formal as time went on. But they had a few big things in common. They assumed the people and the companies in the economy were each very tiny and insignificant, like particles in a chemical solution. And they typically assumed that everyone follows very simple rules — companies maximize profits, consumers maximize the utility they get from consuming things. Pour all of these tiny simple companies and people into a test tube called “the market,” shake them up, and poof — an economy pops out.

Here’s the problem: macroeconomics didn’t develop first. Indeed, it wasn’t invented until the 1930s, when John Maynard Keynes published The General Theory of Employment, Interest, and Money. This should not be surprising, given the fact that the world was in the midst of the Great Depression, with at least 25 percent unemployment, after neoclassical microeconomists (following their classical predecessors, Adam Smith, David Ricardo, and Jean-Baptiste Say) had attempted to prove that markets would always be in equilibrium, which of course ruled out economic depressions and massive unemployment. Oops!

Since then, we’ve seen a mainstream tradition that combines (in different, shifting ways) neoclassical microeconomics and Keynesian macroeconomics—a tradition that failed miserably both in the lead-up to and following on the second Great Depression.

But no matter, at least from the perspective of mainstream economics, because its leading practitioners—sometimes from the macro side, this year from the micro side—continue, as if by contract, to be awarded Nobel prizes.

Chicago-born-and-raised composer-instrumentalist and veteran of the collective The Association for the Advancement of Creative Musicians (AACM), Henry Threadgill was awarded the Pulitzer Prize for his 2015 album In for a Penny, In for a Pound (listen to the opening track here).

Prior to Monday, the only jazz performers to win a Pulitzer prize for music (while still alive) were Wynton Marsalis and Ornette Coleman. A few other greats, such as Thelonious Monk, had been honored posthumously – but denied the increased standing and support that might have been valuable when they were still creating art.

So-called classical compositions and performances have dominated, with few exceptions, the Pulitzer music prizes. According to Howard Reich,

Why would one genre dominate the prize for more than half a century?

Perhaps no one summed up the answer better than Duke Ellington, who had been recommended for a Pulitzer by the jury in 1965 but was rejected by the board.

“I’m hardly surprised that my kind of music is still without, let us say, official honor at home,” Ellington told writer Nat Hentoff in a 1965 New York Times magazine piece titled “This Cat Needs No Pulitzer Prize.”

“Most Americans,” added Ellington, “still take it for granted that European music – classical music, if you will – is the only really respectable kind. I remember, for example, that when Franklin Roosevelt died, practically no American music was played on the air in tribute to him … by and large, then as now, jazz was like the kind of man you wouldn’t want your daughter to associate with.”

Emperors-New-Clothes-2

The following post was contributed by Richard McIntyre, in response to Alan Blinder’s review of Jeff Madrick’s book, Seven Bad Ideas: How Mainstream Economists Have Damaged America and the World, in the New York Review of Books.*

Alan Blinder is certainly correct that politicians generally use economic research findings for support not illumination. After that, his critique of Jeff Madrick’s Seven Bad Ideas is not so accurate.

Three examples: (1) Blinder defends the “invisible hand” as one of the “great thoughts of the human mind” and attributes it to Adam Smith. It is neither. Smith uses the term precisely once in The Wealth of Nations and does not use it to mean that free competitive markets produce efficiency. Paul Samuelson invented the modern version of the “invisible hand” in his famous 1948 textbook.1 That book was deliberately written to please free-market advocates given the red-baiting that had doomed a similar and failed textbook by Laurie Tarshis.2 In most economics texts, the treatment of market failure comes long after the celebration of market virtues, and with much less conviction, and usually by the point in the semester where most students are just trying to survive the course.

(2) The Chicago School is fully incorporated into mainstream macroeconomic models. Blinder wants to portray the Chicago school as somehow marginal to the mainstream but nearly all the intermediate textbooks portray the macroeconomic debate as between Classical and “Keynesian,” and then New Classical and New Keynesian models. (The Keynesian models have little to do with what Keynes actually wrote but that is another story.) The Keynesian “defense” against the Chicago school attack beginning in the 1970s was basically to accommodate it. This is best seen in the professional transition of Larry Summers from antipathy to grudging respect to ungrudging admiration for Milton Friedman.3

(3) Efficient-market theory was something more than a prop for right-wing politicians. As Donald Mackenzie has demonstrated, these models actually changed the way finance works. Fama and other efficient-market theorists provided tools that led to the creation of derivatives markets and a powerful ideological defense of them.4

I could go on. There may be problems with Madrick’s book but they are not the ones Blinder identifies, nor are economists quite so powerless as Blinder makes them out to be. Liberals like Alan Blinder and Paul Krugman are willing to criticize parts of the orthodoxy but not orthodoxy itself, perhaps because they and their colleagues at elite schools benefit enormously from the influence they have as players within that orthodoxy.

Those of us in the provinces may be freer to notice that the emperor wears very little clothing.

 

1Gavin Kennedy, “Paul Samuelson and the invention of the modern economics of the Invisible Hand,” Journal of the History of Economic Ideas, no. 3 (2010): 105-20.

2Yann Giraud, “The Political Economy of Textbook Writing: Paul Samuelson and the making of the first ten editions of Economics (1945-1976),” THEMA Working Papers, 2011-18; David Colander and Harry Landreth, “Political Influence on the Textbook Keynesian Revolution: God, Man, and Laurie (sic) Tarshis at Yale,” in O. F. Hamouda and B. B. Price, eds., Keynesianism and the Keynesian Revolution in America: A Memorial Volume in Honour of Lorie Tarshis (Cheltenham: Edward Elgar, 1998), pp. 59–72.

3John Cassidy, How Markets Fail: The Logic Of Economic Calamaties (New York: Picardo, 2009), pp. 83-84.

4Donald Mackenzie, An Engine Not A Camera: How Financial Models Shape Markets (Cambridge: MIT Press, 2008).

 

*McIntyre is Professor of Economics and Political Science at the University of Rhode Island. His book, Are Worker Rights Human Rights? was published in 2008 by the University of Michigan Press.

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Mark Thoma has written a very useful column on how distributional issues came to the fore within mainstream economic theory (especially in the work of David Ricardo) and then died out (with the rise of neoclassical economics), only to return in recent times (for example, in Thomas Piketty’s new book).

Branko Milanovic, in response, argues that Thoma “too easily glosses over Marx (one sentence),”

by saying  that Marx believed  that since labor is the only source of value,  the entire net product (after depreciation) should belong to labor. This is not entirely exact, and if it were would imply that both Smith and Ricardo should have (since they held labor theory of value) believed the same. Marx made an important new step by distinguishing between value of labor and value of labor power. The latter is equal to the value  of goods necessary to return  worker to where, in terms of physical and social needs,  he was  before the beginning of the process of production. Basically, it is equal to the subsistence  wage (amount of food, housing, satisfaction of other needs where the relative needs also crept in) that is necessary, after a full working day and worker’s exertion, to restore him/her to the original position. But in addition, Marx argued, labor possesses a unique characteristic that the value created during the process of production (say, during 10h of work) exceeds the value of the labor power, that is value of the  commodities that are included in the subsistence wage (e.g., you need to work 4 hours to get enough to purchase these commodities). The difference (6 hours) is the surplus value received by the capitalist.

It’s all based on the difference between labor power (the ability to expend mental and manual energy in the course of working) and labor (the actual value created by working). Workers, according to Marx, are paid the value of their labor power, not the value of their labor. Hence, surplus-value.

Why, then, Milanovic adds the silly note about Joan Robinson and how the distinction between labor and labor power is just “metaphysics” is beyond me.

You want metaphysics? Then, why not point to neoclassical utility functions and the idea that all factors of production, including labor, receive their marginal contributions to production?

Those are the real metaphysical moves that took distributional issues off the table in the first place. . .

 

For pretty much anyone of my generation Pete Seeger was identified with a long, rich tradition of American protest music—of labor, civil rights, antiwar, and so on. I was fortunate to hear him play and sing on numerous occasions, including a small concert with his family and friends in Connecticut.

But it is also the case that the music of the Left was eventually reduced to folk music and excluded other important traditions, such as classical music. R. D. Davis, in an article published in the journal Rethinking Marxism back in 1988, considered this to be a problem.*

The form of most folk and almost all jazz/pop music does not (cannot) even reflect industrial social relations as we know them, much less make a comment on them. Classical music, or music organized by a trained composer, art music, is more likely to produce an instructional metaphor (and form) with which to examine the foundations of corporate society.

For Davis, Hanns Eisler and Charles Seeger (Pete’s father) represented two radically different approaches to making music for the Left in the 1930s: “intellectual composition versus the folk tradition.” Both were available, both were viable—but the Left (for reasons Davis explores in his article) rejected the former in favor of the latter.

Still, I experienced a moment of national pride when Seeger was joined by Bruce Springsteen to sing all the verses of “This Land Is Your Land,” the Woody Guthrie classic, at Obama’s first inauguration.

 

*R. D. Davis, “Music from the Left,” Rethinking Marxism 1 (Winter 1988): 7-25.