Posts Tagged ‘economics’

General views of Seattle-based grafitti artists Jonathan Matas and Zach Rockstad's mural called "Up and Down" depicting Karl Marx and Adam Smith located on Mott Street just north of Houston Street in

Mainstream economists refer to it as price theory, everyone else value theory. But whatever it’s called, it’s at the center of economists’ differing explanations of what happens in (and alongside) markets.

As I see it, price/value theory serves as the framework to explain a wide range of phenomena, from how and for how much commodities are exchanged in markets through the determinants of the distribution of incomes to the outcomes—for the economy and society as a whole—of the allocation of resources and commodities through markets.

And each price/value theory has a utopian dimension. It’s not just an accounting for and an explanation of the conditions and consequences of commodity exchange; it’s also a way of thinking about the fairness and justice of markets. It therefore informs (and is informed by) a utopian horizon within and beyond markets.

Let me explain. Mainstream economists today generally rely on a price theory that has been produced, disseminated, and revised by neoclassical economists in a tradition that dates from the late-nineteenth century. Students know it as what they learn in the typical microeconomics course, the rest of us by the celebration of free markets in mainstream theory and policy.*

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The starting point of neoclassical value theory is that commodities exchange on markets at a price (p*) that is determined by supply and demand.** But that’s only the beginning. According to neoclassical economists, supply and demand are ultimately determined by human nature—a combination of tastes and preferences (utility), know-how (technology), and resources (factor endowments)—which are taken as given or exogenous.

And that leads to one of the major conclusions of neoclassical theory: the prices of goods and services, as well as the distribution of income, are ultimately determined by—and therefore reflect—human nature. That’s important because, if for whatever reason you don’t like the existing set of prices of commodities or the distribution of income, you face the formidable task of changing human nature.

Other significant conclusions also follow from neoclassical price theory, including:

  • Everyone gets what they pay for (since price is equal to the ratio of marginal utilities).
  • Everyone is equal (since, via the invisible hand, everyone’s marginal rate of substitution is equal to that of everyone else).
  • Everyone benefits from markets (since utility-maximation and profit-maximization lead to Pareto efficiency, i.e., a situation in which no one can be made better off without making someone worse off).

That’s an extraordinary set of conclusions—about commodities, markets, and capitalism—which is why, as I explain to my students, so much theoretical work has to be done to go from the initial assumptions to the final results.

That set of conclusions is the basis of the utopianism of neoclassical price theory.  According to neoclassical economists, the capitalist distribution of income is fundamentally fair. If every factor of production (e.g., capital and labor) is remunerated according to its marginal contribution to production, and each individual sells to firms the amount of each factor they desire (because of utility-maximization), the resulting distribution represents “just deserts.” It’s fair on an individual level and it represents justice for society as a whole. Let free markets operate, without any external intervention (e.g., by the state), and the result will be both fair and just.

It’s that powerful conclusion that serves as the starting point for value theory, the critique of the core of mainstream economics—with, of course, very different results.

Take the case of Marxian value theory. Marxian economists accept the notions of fairness and justice, a standard upheld by mainstream economists, and then shows that commodities and markets can’t but fail to achieve those goals. They do this, first, by showing that every commodity has two numbers attached to it—exchange-value and value—not just the one—price—and showing how those two numbers are equal only under a very particular set of assumptions. Then, second, they demonstrate that, even if the two numbers are equal (such that the form of value in exchange equals the value of commodities in production), the production of commodities is based on a “social theft,” that is, the exploitation of workers.

Here’s the idea: assume that all commodities exchange at their values (that is, the kind of world—of free markets, private property, perfect information, and so on—presumed by mainstream economists). Labor power, too, is allowed to be bought and sold at its value. But after the value of labor power is realized in exchange and is set to work, more value is extracted than it costs employers to purchase it. In other words, an extra value—a surplus-value—is created by laborers (during the course of production) and appropriated by capitalists (and then realized, when the finished commodities are sold, in exchange).

My view is that the critique of capitalist class exploitation forms the utopian horizon of Marxian value theory. Since exploitation violates the social norms of fairness and justice (of “just deserts,” i.e., that everyone within capitalism gets what they deserve), it points in a quite different direction: the possibility of creating the economic and social conditions whereby exploitation is eliminated.

The differences between neoclassical price theory and Marxian value theory couldn’t be more stark. The differences are even more dramatic when we compare their utopian horizons. Whereas neoclassical price theory leads to a utopian celebration of capitalist markets, Marxian value theory both informs and is informed by a utopian critique of capitalist exploitation—and therefore a movement beyond capitalism.

In both cases—neoclassical price and Marxian value theory—the story about commodity exchange, and therefore the analysis of the form that wealth takes under capitalism, has a utopian dimension. The two theories have that in common. Where they differ is the form that utopian dimension takes. Neoclassical price theory is guided by a utopianism according to which free markets and private property represent the best possible way of organizing an economy—and therefore should be created and defended by any means necessary. Marxian value theory, as I interpret it, serves as a critique of all such utopianisms. It marks their failure, on their own terms, and points in a different direction—toward the possibility (but certainly not the necessity) of eliminating the exploitation that serves as the basis of capitalist wealth, and therefore of creating a different standard of fairness and justice.

As is well known, for generations of Marxian economists that utopian horizon has been summarized as “from each according to their ability, to each according to their needs.”

 

*To be clear, modern neoclassical price theory extends some important aspects of the theory originally elaborated by Adam Smith—such as the focus on individuals and the general praise for free markets—but it also represents a fundamental break from Smith’s theory—especially from the classical labor theory of value Smith and other classical economists (such as David Ricardo) utilized.

**It’s actually a pretty complicated set of steps, which most students are never taught. The key is that p*, the equilibrium price, is determined not just by supply and demand, but by the imposition of a third condition—a market-clearing equation—such that the quantity supplied is arbitrarily assumed to be equal to the quantity demanded.

 

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John Baldessari, “Man Running/Men Carrying Box” (1988-1990)

It was Paul Samuelson who, in 1997, declared with morbid optimism that “Funeral by funeral, economics does make progress.”*

What Samuelson presumed is that, over time, wrong ideas would be killed and laid to rest and better ideas would flourish, thus creating the foundation for progress in economic thought.

That’s what I consider to be the epistemological utopianism of mainstream economic thought: using the correct scientific methods, the work that economists do gets closer and closer to the Truth—the singular, incontestable, capital-t truth. It used to be the case (for Samuelson and many others, such as fellow Nobel laureates Kenneth Arrow, Gerard Debreu, and Paul Krugman) that mathematical models represented the best way of making progress (inspired by a particular conception of nineteenth-century physics).** The current fad is to rely on randomized experiments and big data as evidence that economics is finally becoming a real, empirical science (akin to biology and medicine).

In the first case, rationalism is the reigning theory of knowledge; in the second case, it’s empiricism. However, both theories represent two sides of the same epistemological coin, defined by a radical separation between theory and reality and some sort of correspondence between them. In other words, both rationalism and empiricism are foundationalist theories of knowledge according to which the gap between theory and reality is eventually—”funeral by funeral”—closed.

It’s a utopianism that serves as both the premise and promise of mainstream economists’ practice. And we know something about the consequences of that epistemological utopianism—for example, the combination of ignorance and arrogance when it comes to the work of nonmainstream economists (who stand accused of not doing science and therefore of not contributing to the progress of economics), noneconomists (whose methods are neither mathematically nor empirically rigorous enough), and everyday economists (who either produce cultural representations that accord with the lessons of mainstream economics, in which case they be invoked as illustrations, or whose work is dismissed and needs to be attacked and eradicated, because it runs counter to mainstream economics). Not to mention the idea that, in the midst of the worst economic crises since the first Great Depression, mainstream economists could blithely assert that their theories had done just fine; the only problem was the fact that policymakers hadn’t adequately listened to or followed the advice of mainstream economists. Finally, of course, there’s the closing-off of publishing venues (like the leading journals), research funding (especially the National Science Foundation), teaching positions (especially in research universities), and so on—all in the name of a singular scientific method and conception of truth.

As I have shown (e.g., here and here), mainstream liberals today are also obsessed with the defense of science and capital-t Truth. In their zeal to attack Donald Trump and the right-wing media’s defense of his administration’s outlandish claims about a wide variety of issues—from climate change to the Mueller investigation—they increasingly invoke and rely on an absolutist theory of knowledge. And then, of course, claim for themselves the correct side in the current debates. They, too, are guided by the utopianism of essentialist theories of knowledge.

The problems with epistemological utopianism are legion. I’ve mentioned some of the nastier consequences above. But there are other issues. For example, in their defense of absolute truth, they invoke a time—before the current “post-truth” regime—when a set of institutions (such as journalism, science, and the academy) supposedly got it right. Except they can’t ever cite an example of how those institutions successfully adjudicated the facts in play—when, supposedly, there was universal assent to the truth claims, either within the academy or the wider society—and they ignore all the times when they simply got it wrong.

Moreover, they’re willing to admit that the claims to truth are often deflected by lots of other influences—such as narratives, confirmation bias, ethics, and information overload. But the problem is always “out there,” among regular people, and not the scientists themselves (whether in economics or other disciplines). Epistemological utopians simply can’t acknowledge that, in their daily practice, mainstream economists and liberal thinkers are also engaged in story-telling, that they accept evidence that confirms their preconceived notions and assess counter evidence with a critical eye, make ethics-laden decisions based on relations of unequal power, and operate with overconfidence based on the illusion of knowledge.

There are, of course, many alternatives to the utopianism of absolutist epistemology. One of them is what I call “partisan relativism,” associated with the Marxian critique of political economy.

In fact, I (with my friend and frequent coauthor Jack Amariglio) have just published an entry on “epistemology” in the Routledge Handbook of Marxian Economics. There, we discuss many different contributions to Marxian epistemology and highlight the role that postmodernism has played in providing an alternative to and moving beyond the long history of attributing to Marx a modernist project of attempting to delimit the certainly of scientific knowledge from non-science (or ideology). Thus, we write, postmodern Marxists

frequently call attention to the “relativism” that they believe is Marx’s main epistemological message and/or is exemplified in his texts. Marx’s aleatory materialism, for postmodern Marxists, also establishes an under-determination in the realm of knowledge; a discursive whole cannot close itself. Influenced by Jacques Derrida’s conception of “deconstruction,” postmodern Marxists insist that discourse is always marked by slippages, aporia, displacements, and deferments. For them, meaning is overdetermined and uncertain. A certain knower is thus a contradiction in terms.

In addition, if scientific discourse is not the mirror of nature, then there is an “ethical” dimension to all knowledge production. Cornel West, utilizing Richard Rorty among other “pragmatist” philosophers, brings out the enduring, constitutive ethical and political aspects of how and what we know, and what we intend to do with this knowledge.

Thus, we go on to explain, relativist Marxists dispute the claims of a certain knowing subject (indeed, they challenge the very idea that knowledge begins with a knowing subject) and focus instead on how knowledge claims are internal to theoretical frameworks and the manner in which knowledges produce within different theories or discourses have specific—and often quite different—conditions and consequences in the world within which those knowledges are produced.

Thus,

For many Marxist epistemologists, knowledge is active and actionable, and its existence as material image/image of the material is one requisite condition for the revolutionary socioeconomic—especially class—change that Marx vehemently proposed.

And that, in the end, is the utopian moment of Marxian epistemology—not a utopian appeal or aspiration to absolute truth, but instead a practice (one might even call it an ethics) of materialist critique. That critique operates at two different levels: it is a critique of all theoretical claims (such as those made by mainstream economists) that normalize or naturalize the existing economic and social order and a critique of capitalism itself, since from a Marxian perspective capitalist societies are based on and serve to reproduce an exploitative class structure.

It should come as no surprise then that the utopian horizon of Marxian epistemology is summarily rejected by mainstream economists and liberal thinkers—or that the latter’s epistemological utopianism often serves to locate itself within and ultimately to justify, by treating as normal or natural, the existing set of economic and social institutions.

 

*“Credo of a Lucky Textbook Author,” Journal of Economic Perspectives 11 (Spring): 159.

**It’s a particular conception of physics that has been disputed by many others, including Thomas Kuhn (and his theory of “scientific revolutions”), Paul Feyerabend (who argued that there are no useful and exceptionless methodological rules governing the progress of science or the growth of knowledge), Richard Rorty (who criticized the idea of knowledge as representation), and Michel Foucault (who showed that different systems of thought and knowledge—epistemes or discursive formations, in Foucault’s terminology—are governed by different sets of rules). Their criticisms of essentialist epistemologies apply as well to the more recent turn to “empirical” methods as the foundation of economic knowledge.

health-freemarket

The dystopia of the American healthcare system certainly invites a utopian response—a ruthless criticism as well as a vision of an alternative.

As I showed last week, the left-wing response involves a critique of the conditions and consequences of the capitalist organization of U.S. healthcare and the fashioning of a radical alternative. Single-payer, which uses tax revenues to finance the purchase of adequate healthcare services for everyone, is one possibility. On top of that, it is necessary to expand the diversity of healthcare providers, which would include more democratic, cooperative or worker-owned healthcare enterprises.

That’s how activists, educators, and policymakers informed by heterodox economics can begin to rethink the U.S. healthcare system. What about mainstream economics?

Given the persistent attacks on and attempts to replace Obamacare by Republican legislators—against a “government takeover” of healthcare in the name of “free markets”—one would expect mainstream economists to provide a theoretical justification based on their usual utopianism—of an efficient allocation of scarce resources in an economy characterized by private property and individual decisions in unregulated markets.

However, as it turns out, they can’t. And that’s all because of Kenneth Arrow.

Consider, for example, the 2017 New York Times column by Greg Mankiw.

In Econ 101, students learn that market economies allocate scarce resources based on the forces of supply and demand. In most markets, producers decide how much to offer for sale as they try to maximize profit, and consumers decide how much to buy as they try to achieve the best standard of living they can. Prices adjust to bring supply and demand into balance. Things often work out well, with little role left for government. Hence, Adam Smith’s vaunted “invisible hand.”

Yet the magic of the free market sometimes fails us when it comes to health care.

Mankiw, who is known to celebrate free markets in everything, is forced to allow for an exception when it comes to healthcare. (Fellow mainstream economist John Cochrane, in a sharp riposte, argued that “For once, I think Greg got it wrong.”)

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The reason is because, back in 1963, future Nobel Laureate Arrow published “Uncertainty and the Welfare Economics of Medical Care.” Mankiw’s column (and the longer treatment for his textbook [pdf]) is basically a restatement of the issues raised by Arrow over a half century ago.

According to Arrow, healthcare is characterized by a set of “special features,” all of which stem from the “prevalence of uncertainty.” These include the following:

  • an irregular, unpredictable demand for medical care
  • an element of trust in the relationship between patient and provider
  • considerable uncertainty as to the quality of the healthcare provided as well as asymmetry of knowledge concerning that quality
  • a restricted supply (e.g., because of licensing)
  • a combination of price discrimination (e.g., between the insured and uninsured) and price-fixing

In consequence, the healthcare industry cannot be expected to operate along the lines of, or to deliver the same results as, the canonical neoclassical model of perfect competition.

Thus, Arrow concludes,

It is the general social consensus, clearly, that the laissez-faire solution for medicine is intolerable. . .

The logic and limitations of ideal competitive behavior under uncertainty force us to recognize the incomplete description of reality supplied by the impersonal price system.

Neither Arrow nor Mankiw suggests what the alternative is. But it’s clear that, from the perspective of mainstream economics, healthcare cannot be shoehorned into the neoclassical model of perfect competition they use to analyze all other commodities and markets. What we can say is their theory of the economics of healthcare leaves open the possibility of considerable extra-market intervention and regulation.

Healthcare is where the utopianism of neoclassical economics fails.

But then we can ask, where does that utopianism not fail? Why should it hold any better when it comes to other capitalist commodities, such as labor power, money, and land? And, if it does not, then neither the modes of analysis nor the policy conclusions that are central to mainstream economics retain any validity.

In my opinion, that’s why the issue of utopia and healthcare is so important.

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Special mention

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Donald Trump’s decision to impose import tariffs—on solar panels and washing machines now, and perhaps on steel and aluminum down the line—has once again opened up the war concerning international trade.

It’s not a trade war per se (although Trump’s free-trade opponents have invoked that specter, that the governments of other countries may retaliate with their import duties against U.S.-made products), but a battle over theories of international trade. And those different theories are related to—as they inform and are informed by—different utopian visions.

In one sense, Trump and his supporters are right. Capitalist free trade has destroyed cities, regions, livelihoods, and industries. The international trade deals the United States has signed in recent decades have been rigged for the wealthy and have cheated workers. They are replete with marketing scams, hustles, and shady deals, to the advantage of large corporations and a small group of individuals at the top.

But Trump, like all right-wing populists, as I explained recently, offers a utopian vision that looks backward, conjuring up and then offering a return to a time that is conceived to be better. For Trump, that time is the 1950s, when a much larger share of U.S. workers was employed in manufacturing and American industry successfully competed against businesses in other countries. The turn to import tariffs is a way of invoking that nostalgia, the selective vision of a utopia that was exceptional, in terms of both U.S. and world history, and that conveniently conceals or overlooks many other aspects of that lost time, such as worker exploitation, Jim Crow racism, and widespread patriarchy inside and outside households.

It should come as no surprise that mainstream economists, today and in a tradition that goes back to Adam Smith and David Ricardo, oppose Trump’s tariffs and hold firmly to the gospel of free international trade. Once again, Gregory Mankiw has stepped forward to articulate the neoclassical view (buttressed by classical antecedents) that everyone benefits from free international trade:

Ricardo used England and Portugal as an example. Even if Portugal was better than England at producing both wine and cloth, if Portugal had a larger advantage in wine production, Portugal should export wine and import cloth. Both nations would end up better off.

The same principle applies to people. Given his athletic prowess, Roger Federer may be able to mow his lawn faster than anyone else. But that does not mean he should mow his own lawn. The advantage he has playing tennis is far greater than he has mowing lawns. So, according to Ricardo (and common sense), Mr. Federer should hire a lawn service and spend more time on the court.

That’s the basis of neoclassical utopianism—the gains from trade: when international trade is unregulated, and every country specializes according to its comparative advantage, more commodities can be produced at a lower cost and as a result average living standards around the world are improved.

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Like Mankiw, most mainstream economists, who are the only ones represented in the IGM Economic Experts panel, oppose import tariffs (as seen in the chart above) and celebrate the utopianism of free international trade.

That’s true even among mainstream economists who have argued that, in reality, the causes and consequences of international trade may not coincide with the rosy picture produced within the usual textbook versions of neoclassical economic theory.

For example, Paul Krugman was awarded the Nobel Prize in economics for his work demonstrating that the relative advantages most neoclassical economists take as given are in fact products of history. Thus, it is possible for countries to enhance their trade advantages (through creating internal economies of scale) by regulating international trade. But Krugman was also quick to belittle “a steady drumbeat of warnings about the threat that low-wage imports pose to U.S. living standards” and, then, in his first New York Times column, to denounce the critics of the World Trade Organization.

A few years later Paul Samuelson, widely recognized as the dean of modern mainstream economics, published an article in the Journal of Economic Perspectives in which he challenged the presumed universal benefits of free trade. It is quite possible, Samuelson argued, that if enough higher-paying jobs were lost by American workers to outsourcing, then the gains from the cheaper prices may not compensate for the losses in U.S. purchasing power. In other words, the low wages at the big-box stores do not necessarily make up for their bargain prices. And then Samuelson was immediately taken to task by other mainstream economists, most notably Jagdish Bhagwati (along with his coauthors, Arvind Panagariya and T.N. Srinivasan [pdf]), who argued that “that outsourcing is fundamentally just a trade phenomenon [and] leads to gains from trade.”

Finally, Dani Rodrick, the mainstream economist who has been most critical of the role his colleagues have played as “cheerleaders” for capitalist globalization, still defends the standard models of international trade:

It has long been an unspoken rule of public engagement for economists that they should champion trade and not dwell too much on the fine print. This has produced a curious situation. The standard models of trade with which economists work typically yield sharp distributional effects: income losses by certain groups of producers or worker categories are the flip side of the “gains from trade.” And economists have long known that market failures – including poorly functioning labor markets, credit market imperfections, knowledge or environmental externalities, and monopolies – can interfere with reaping those gains.

But Rodrick, like Krugman, Samuelson, and other mainstream economists who have identified problems with the story told by Mankiw, Bhagwati, and other free-traders—who have “consistently minimized distributional concerns” and “overstated the magnitude of aggregate gains from trade deals”—still holds to the neoclassical utopianism that, with “all of the necessary distinctions and caveats,” more international trade can and should be promoted. Thus, as Rodrick argued just last week,

If our economic rules empower corporations and financial interests excessively, then the correct response is to rewrite those rules — at home as well as abroad. If trade agreements serve mainly to reshuffle income to capital and corporations, the answer is to rebalance them to make them friendlier to labor and society at large.

The goal is to make sure everyone, not just “corporations and financial interests,” benefits from international trade.

But recent criticisms of trade deals from within mainstream economics still don’t include the possibility that capitalism itself, with or without free international trade and multinational trade agreements, however the rules are written, privileges one class over another. Capital gains at the expense of workers because it is able to extract a surplus for literally doing nothing. That kind of social theft occurs—both when international trade is regulated and controlled and when it is allowed to operate free of any such interventions.

That’s why Karl Marx ironically came out in support of free trade in his famous speech to the Democratic Association of Brussels at its public meeting of 9 January 1848:

If the free-traders cannot understand how one nation can grow rich at the expense of another, we need not wonder, since these same gentlemen also refuse to understand how within one country one class can enrich itself at the expense of another.

Do not imagine, gentlemen, that in criticizing freedom of trade we have the least intention of defending the system of protection.

One may declare oneself an enemy of the constitutional regime without declaring oneself a friend of the ancient regime.

Moreover, the protectionist system is nothing but a means of establishing large-scale industry in any given country, that is to say, of making it dependent upon the world market, and from the moment that dependence upon the world market is established, there is already more or less dependence upon free trade. Besides this, the protective system helps to develop free trade competition within a country. Hence we see that in countries where the bourgeoisie is beginning to make itself felt as a class, in Germany for example, it makes great efforts to obtain protective duties. They serve the bourgeoisie as weapons against feudalism and absolute government, as a means for the concentration of its own powers and for the realization of free trade within the same country.

But, in general, the protective system of our day is conservative, while the free trade system is destructive. It breaks up old nationalities and pushes the antagonism of the proletariat and the bourgeoisie to the extreme point. In a word, the free trade system hastens the social revolution. It is in this revolutionary sense alone, gentlemen, that I vote in favor of free trade.

That’s because Marx’s critique of political economy embodied a utopian horizon radically different from the utopianism of classical and neoclassical economics. He sought to transform economic and social institutions in order to eliminate capitalist exploitation. And if free trade was the quickest way of getting to the point when workers revolted and changed the system, then he would vote against protectionism and in favor of free trade.

As it turns out, as Friedrich Engels explained forty years later, both protectionism and free trade serve, in different ways, to produce more capitalist producers and thus to produce more wage-laborers. In our own time, Trump’s protective tariffs may do that in the United States, just as free trade has accomplished that in other countries that have increased their exports to the United States.

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But neither protectionism nor free trade can succeed in undoing the “elephant curve” of global inequality, which in recent decades has shifted the fortunes of workers in the United States and Western Europe and those in “emerging” countries and still left all of them falling further and further behind the top 1 percent in their own countries and globally.

Reversing that trend is a goal, a utopian horizon, worth fighting for.

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Economic inequality is arguably the crucial issue facing contemporary capitalism—especially in the United States but also across the entire world economy.

Over the course of the last four decades, income inequality has soared in the United States, as the share of pre-tax national income captured by the top 1 percent (the red line in the chart above) has risen from 10.4 percent in 1976 to 20.2 percent in 2014. For the world economy as a whole, the top 1-percent share (the green line), which was already 15.6 percent in 1982, has continued to rise, reaching 20.4 percent in 2016. Even in countries with less inequality—such as France, Germany, China, and the United Kingdom—the top 1-percent share has been rising in recent decades.

Clearly, many people are worried about the obscene levels of inequality in the world today.

In a famous study, which I wrote about back in 2010, Dan Ariely and Michael I. Norton showed that Americans both underestimate the current level of inequality in the United States and prefer a much more equal distribution than currently exists.*

In other words, the amount of inequality favored by Americans—their ideal or utopian horizon—hovers somewhere between the level of inequality that obtains in modern-day Sweden and perfect equality.

What about contemporary economists? What is their utopian horizon when it comes to the distribution of income?

Not surprisingly, economists are fundamentally divided. They hold radically different views about the distribution of income, which both inform and informed by their different utopian visions.

For example, neoclassical economists, the predominant group in U.S. colleges and universities, analyze the distribution of income in terms of marginal productivity theory. Within their framework of analysis, each factor of production (labor, capital, and land) receives a portion of total output in the form of income (wages, profits, or rent) within perfectly competitive markets according to its marginal contributions to production. In this sense, neoclassical economics represents a confirmation and celebration of capitalism’s “just deserts,” that is, everyone gets what they deserve.

From the perspective of neoclassical economics, inequality is simply not a problem, as long as each factor is rewarded according to its productivity. Since in the real world they see few if any exceptions to perfectly competitive markets, their view is that the distribution of income within contemporary capitalism corresponds to—or at least comes close to matching—their utopian horizon.

Other mainstream economists, especially those on the more liberal wing (such as Paul Krugman, Joseph Stiglitz, and Thomas Piketty), hold the exact same utopian horizon—of just deserts based on marginal productivity theory. However, in their view, the real world falls short, generating a distribution of income in recent years that is more unequal, and therefore less fair, than is predicted within neoclassical theory. So, bothered by the obscene levels of contemporary inequality, they look for exceptions to perfectly competitive markets.

Thus, for example, Stiglitz has focused on what he calls rent-seeking behavior—and therefore on the ways economic agents (such as those in the financial sector or CEOs) often rely on forms of power (political and/or economic) to secure more than their “just deserts.” Thus, for Stiglitz and others, the distribution of income is more unequal than it would be under perfect markets because some agents are able to capture rents that exceed their marginal contributions to production.** If such rents were eliminated—for example, by regulating markets—the distribution of income would match the utopian horizon of neoclassical economics.***

What about Marxian theory? It’s quite a bit different, in the sense that it relies on the assumptions similar to those of neoclassical theory while arriving at conclusions that are diametrically opposed. The implication is that, even if and when markets are perfect (in the way neoclassical economists assume and work to achieve), the capitalist distribution of income violates the idea of “just deserts.” That’s because Marxian economics is informed by a radically different utopian horizon.

Let me explain. Marx started with the presumption that all markets operate much in the way the classical political economists then (and neoclassical economists today) presume. He then showed that even when all commodities exchange at their values and workers receive the value of their labor power (that is, no cheating), capitalists are able to appropriate a surplus-value (that is, there is exploitation). No special modifications of the presumption of perfect markets need to be made. As long as capitalists are able, after the exchange of money for the commodity labor power has taken place, to extract labor from labor power during the course of commodity production, there will be an extra value, a surplus-value, that capitalists are able to appropriate for doing nothing.

The point is, the Marxian theory of the distribution of income identifies an unequal distribution of income that is endemic to capitalism—and thus a fundamental violation of the idea of “just deserts”—even if all markets operate according to the unrealistic assumptions of mainstream economists. And that intrinsically unequal distribution of income within capitalism becomes even more unequal once we consider all the ways the mainstream assumptions about markets are violated on a daily basis within the kinds of capitalism we witness today.

That’s because the Marxian critique of political economy is informed by a radically different utopian horizon: the elimination of exploitation. Marxian economists don’t presume that, under capitalism, the distribution of income will be equal. Nor do they promise that the kinds of noncapitalist economic and social institutions they seek to create will deliver a perfectly equal distribution of income. However, in focusing on class exploitation, they both show how the unequal distribution of income in the world today is affected by and in turn affects the appropriation and distribution of surplus-value and argue that the distribution of income would likely change—in the direction of greater equality—if the conditions of existence of exploitation were dismantled.

In my view, lurking behind the scenes of the contemporary debate over economic inequality is a raging battle between radically different utopian visions of the distribution of income.

 

*The Ariely and Norton research focused on wealth, not income, inequality. I suspect much the same would hold true if Americans were asked about their views concerning the actual and desired degree of inequality in the distribution of income.

**It is important to note that, according to mainstream economics, any economic agent can engage in rent-seeking behavior. In come cases it may be labor, in other cases capital or even land.

***More recently, some mainstream economists (such as Piketty) have started to look outside the economy, at the political sphere. They’ve long held the view that, within a democracy, if voters are dissatisfied with the distribution of income, they will support political candidates and parties that enact a redistribution of income. But that hasn’t been the case in recent decades—not in the United States, the United Kingdom, or France—and the question is why. Here, the utopian horizon concerning the economy is the neoclassical one, or marginal productivity theory, but they imagine a separate democratic politics is able to correct any imbalances generated by the economy. As I see it, this is consistent with the neoclassical tradition, in that neoclassical economists have long taken the distribution of factor endowments as a given, exogenous to the economy and therefore subject to political decisions.

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I have often argued—in lectures, talks, and publications—that every economic theory has a utopian dimension. Economists don’t explicitly talk about utopia but, my argument goes, they can’t do what they do without some utopian horizon.

The issue of utopia is there, at least in the background, in every area of economics—perhaps especially on the topic of control.

Consider, for example, the theory of the firm (which I have written about many times over the years), which is the focus of University of Chicago finance professor Luigi Zingales’s lecture honoring Oliver Hart, winner of the 2016 Nobel Prize for economics, at this year’s Allied Social Science Association meeting.

One of the many merits of Oliver’s contribution is to have brought back the concept of power inside economics. This is a concept pervasive in political science and sociology, and pervasive in Marxian economics, but completely absent from neoclassical economics. In fact, Oliver’s view of the firm is very reminiscent of the Marxian view, but where Marx sees exploitation, Oliver sees an efficient allocation.

Zingales is right: Hart’s neoclassical treatment of control informs a theory of the firm that stands diametrically opposed to a Marxian theory of the firm. And those contrasting theories of the firm are both conditions and consequences of different utopian horizons. Thus, Hart both envisions and looks to move toward an efficient use of control within the firm such that—through a combination of incentives and monitoring—agents (workers) can be made to work hard to fulfill the goal set by the principal (capitalists). Marxists, on the other hand, see the firm as a site of exploitation—capitalists extracting surplus-value from the workers they hire—and look to create the economic and social conditions whereby exploitation is eliminated.

In my view, those are very different utopias—the efficient allocation of resources versus the absence of exploitation—that both inform and are informed by quite different theories of the firm.

As is turns out, the issue of control—and, with it, utopia—comes up in another, quite different context. As George DeMartino and Deidre McCloskey explain, in their rejoinder to Anne Krueger’s attack on their recent edited volume, The Oxford Handbook of Professional Economic Ethics,

When you have influence over others you take on ethical burdens. Think of your responsibilities to, say, your family or friends. And when you fail to confront those burdens openly, honestly, and courageously you are apt to make mistakes. As professional economists we have influence, and we do develop conversations about how we operate. Yet there is no serious, critical, scholarly conversation about professional economic ethics—never has been. That’s not good.

While the DeMartino and McCloskey volume includes contributions from both mainstream and heterodox economists (a point that Krueger overlooks in her review), it is still the case that the discipline of economics, dominated as it has been by mainstream economics, has never had a serious, sustained conversation about ethics.

Consider this: it is possible to get a degree in economics—at any level, undergraduate, Master’s, or doctorate—without a single reading or lecture, much less an entire course, on ethics. And yet economists do exercise a great deal of power over others: over other economists (through hiring, research funding, and publishing venues), their students (in terms of what can and cannot be said, talked about, and theorized in their courses), and the wider society (through the dissemination of particular theories of the economy as well as the policies they advocate to governments and multilateral institutions). In fact, they also exercise power over themselves, in true panopticon fashion, as they seek to adhere to and reinforce certain disciplinary protocols and procedures.

Economics is saturated with power, and thus replete with ethical moments.

Once again, the issue of control is bound up with different utopian horizons. Most economists—certainly most mainstream economists—are not comfortable with and have no use for discussions of ethics. That’s because, in their view, economists adhere to a code of objectivity and scientificity and an epistemology of absolute truth. So, there’s no room for an ethics associated with “influence over others.” That’s their utopia: a free-market of ideas in which the “truth,” of theory and policy, is revealed.

Other economists have a quite different view. They see a world of unequal power, including within the discipline of economics. And the existence of that unequal power demands a conversation about ethics in order to reveal the conditions and especially the consequences of different ways of doing economics. If there is no single-t, absolute truth—and thus no single standard of objectivity and scientificity—within economics, then the use of one theory instead of another has particular effects on the world within which that theorizing takes place. Here, the utopian horizon is not a free market of ideas, but instead a reimagining of the discipline of economics as an agonistic field of incommensurable discourses.

And, from a specifically Marxian perspective, the utopian moment is to create the conditions whereby the critique of political economy renders itself no longer useful. Marxists recognize that they may not be able to control the path to such an outcome but it is their goal—their ethical stance, their utopian horizon.