SOCIAL LIMITS TO ECONOMIC THEORY
Economics seems incapable of providing an adequate description of the economic world, let alone dealing with such pressing social problems as widespread poverty and the destruction of the environment. Social Limits to Economic Theory critically examines the current asocial nature of economic theory. As an alternative it considers the prospects for a new, progressive political economy based on notions of community and justice, and incorporating environmental and ethical considerations. In demonstrating that modern economics is far from being a value-free science, Social Limits to Economic Theory sheds much light on the hidden history of economics. It thus serves as an excellent introduction to critical non-orthodox economics. Particular attention is focused on the Austrian and Institutional schools as well as on the philosophy of economics and the green social and political economy. This book will be of interest to anyone concerned with critiques of economics or with its ethical and environmental dimension. Jon Mulberg currently lectures in government at the University of Ulster. Previously he lectured in sociology at the Universities of Bath and Plymouth. He was a finalist in the International Sociological Association’s second worldwide competition and has published in Political Studies and other journals. He has been involved in the green movement for many years and has stood in several local elections. SOCIAL LIMITS TO ECONOMIC THEORY
Jon Mulberg
London and New York First published 1995 by Routledge 11 New Fetter Lane, London EC4P 4EE This edition published in the Taylor & Francis e-Library, 2005. “To purchase your own copy of this or any of Taylor & Francis or Routledge’s collection of thousands of eBooks please go to www.eBookstore.tandf.co.uk.” Simultaneously published in the USA and Canada by Routledge 29 West 35th Street, New York, NY 10001 Jon Mulberg has asserted his moral right to be identified as the author of this work. © 1995 Jon Mulberg All rights reserved. No part of this book may be reprinted or reproduced or utilized in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library. Library of Congress Cataloging in Publication Data A catalogue record for this book has been requested
ISBN 0-203-98405-6 Master e-book ISBN
ISBN 0-415-092981-1 (hbk) ISBN 0-415-12386-0 (pbk) To my parents, who have waited CONTENTS
Preface and acknowledgements vii
INTRODUCTION AND OVERVIEW 1 1 THE POLITICS OF POSITIVE ECONOMICS 11 Positive science 11 Positive economics 16 Social theory of positivism 30 2 FROM UTILITY TOW ELFARE THE TRAJECTORY OF 39 ORTHODOX ECONOMICS Utilitarianism 40 Bentham 40 Jevons 42 Edgeworth 47 Neo-classics 49 Marshall 49 Pigou 58 Ordinalists 62 Pareto 62 Robbins 65 Hicks 66 Samuelson 67 Welfare economics 70 3 1930s’ MARKET SOCIALISM 77 Market socialism 77 vi
Austrian critique 84 Normative theory 96 4 AMERICAN INSTITUTIONALISM 103 Determinist theories 104 Veblen 104 Mitchell 113 Ayres 119 Purposive theories 124 Commons 124 5 NEW INSTITUTIONALISM 131 Game theory 134 Transaction-cost analysis 136 Evolutionary theories of the firm 139 Critique 140 6 NEW SOCIAL MOVEMENTS 149 The green movement 150 Hirsch 150 Environmental economics 154 New market socialists 160 Positive freedom 160 Market limitations 163 Participation 167 Summary and condusion 173
Notes 179 References 189 Index 201 PREFACE AND ACKNOWLEDGEMENTS
I now view this book as part of an ongoing project retaliating to the ideas of the Right, which have informed the rhetoric if not the policies of governments worldwide throughout the last twenty years, and which have caused misery and untold damage not only to my country but throughout the world. However the project did not start out as that. It actually started as a Ph.D. dissertation in 1984 on the definition of economics, which was in turn influenced by an earlier interest in the environment. Both issues quickly snowballed into wide-ranging questions of the legitimacy of economics and the possibility of a green political economy. Then, as now, answers led to more questions. In 1984 there was very little interest in many of the questions of environment and market socialism which I posed, certainly little interest within British academia. The fact that these are now on the agenda is due to the dedication of many writers and activists, and I have a great deal for which to thank my colleagues in the green movement. Much of the material used in the second half of this book did not exist in 1984, and the project has been something of a voyage of discovery for me. I hope the reader also gets some of the sense of adventure that I felt. One of the problems with producing a book of any length is that inevitably much will have been published during the period of writing. I am aware that this is the case here, and have also found several instances where an author I have cited has recently changed his or her mind. I cannot guarantee to have found out about all of these, and apologise to any authors unfairly slighted. An author engaged on a ten-year project incurs too many debts of gratitude to mention them all, but I would like to single out a few people. Simon Clarke, Tony Elger and Ken Penney helped with the doctoral thesis. The participants at a number of conferences, including the EAEPE and IRNES conferences, were helpful. My colleagues at the University of Bath provided a pleasant working atmosphere. Tony Ashford gave me some vital references on the Coase theory. Sue, Ann and Max made life bearable in Plymouth. The late Mary Farmer read the book on behalf of the publishers and made many helpful suggestions; her death is a loss to us all. viii
I would also like to thank the medical staff at Edgware General and Harefield Hospitals, in particular Mr Maiwand, for keeping me alive. In addition, my parents have given support and practical help throughout, in sickness and in health. Their telephone number is more like a helpline for many people. This book is dedicated to them. INTRODUCTION AND OVERVIEW
Hutchison: What alarms me is that we are not building on the advances of the 1930s. In some respects, we are going back to the 1930s. The barbarians really were at the gates then, and in some ways they still are… Caldwell: Who are the barbarians?… Hutchison: The barbarians in the 1930s that I was concerned about were the Nazis. They had a pseudo race science which I saw taught in German universities. Today there are dogmatists of a different sort… Caldwell: My point is that the criterion you used against the Nazis can also be used against much of economic theory as well… Hutchison: Then let it be so used. Caldwell: But do you simply apply it less harshly against theories you happen to like? I’d like to see the criterion employed more equitably, and then there’d not be much of economics left. Hutchison: I wouldn’t say that. But if a lot has to go, then let it go. (DeMarchi 1988, p. 36)
Twenty-four years ago, one of the world’s leading economists made a stunning public criticism of his own profession. Making his presidential address to the American Economic Association in 1970, Wassily Leontief claimed not only that in economics
Much of current academic teaching and research has been criticised for its lack of relevance. but also that this criticism is not entirely unfounded: The uneasiness…is caused not by the irrelevance of the practical problems to which present day economists address their efforts, but rather by the palpable inadequacy of the scientific means with which they try to solve them. (Leontief 1971 p. 1; emphasis in original) 2 INTRODUCTION AND OVERVIEW
This is a strong rebuke. The president of one of the leading professional associations is claiming that economics is palpably inadequate (my emphasis) to deal with relevant practical problems. Neither did it end there. The whole question of the value of economics in the understanding of contemporary problems was raised again the following year by Phelps-Brown in his presidential address to the Royal Economic Association:
My starting point is the smallness of the contribution that the most conspicuous developments of economics in the last quarter of a century have made to the solution of the most pressing problems of the times. (Phelps-Brown 1972p. 1)
So a year after the president of the leading American association claimed that economics was inadequate to solve practical problems, the president of the leading British association also claimed that economics was useless for policy advice. Even stronger criticism was to come. In the same year that PhelpsBrown delivered his admonition of the economics profession, Worswick claimed in his presidential address to the British Association that much economics has no empirical reference at all:
Anyone who has attempted to keep pace with even some small part of the enormous output of theoretical literature must have asked himself at times, what is it actually about?
He continues:
Facts hardly ever occur in this literature: the nearest we get is what Professor Kaldor has called stylized facts, which sometimes means no more than conventional assumptions without which determinate solutions of theoretical problems could not be obtained. (Worswick 1972 p. 77; emphasis in original)
When even the leading practitioners of economics attack their own profession, it might be thought that economists would take notice. But twenty years on nothing much seems to have changed. In a recent address to the British Association, Paul Ormerod claimed that economics is unable to provide satisfactory explanations even for simple everyday economic behaviour:
why are people operating in, say, financial markets, paid far more than, say, school teachers or academic economists? There are answers to this question, but none of them involves the ‘fundamental’ principle of supply and demand. Indeed, orthodox economics is quite unable to answer a INTRODUCTION AND OVERVIEW 3
simple question such as this, except by resorting to definitions of supply, demand and price that degenerate into meaningless tautology. (Ormerod 1992a p. 12)
Economics is not only charged by Ormerod with being unable to offer explanations for commonplace behaviour. He also claims that the ability of economists to predict economic variables, which must surely be the main justification for the pervasive influence of economics upon public policy, has been thrown into serious doubt. According to Ormerod ‘the forecasting record of (economic) models, never brilliant, has deteriorated since the mid 1980s’ and ‘in virtually every western country, serious errors have been made in forecasts’ (Ormerod 1992a p. 12). The discipline of economics has therefore been subject to constant censure not only from outside the discipline, but also by economists themselves. It would seem that economics can neither explain nor predict. Yet these criticisms are now over twenty years old. Why has nothing changed? It could be suggested that one of the reasons that these criticisms of economics have had little effect is because the complainants themselves continue to practise what they are preaching against. There is actually little difference between the economics of Phelps-Brown or Worswick and that of the rest of the profession. The pleas for more realism in the models and theories are largely ignored by those doing the pleading. However, this is not simply a matter of hypocrisy or of leading economists preaching counsels of perfection. The contention of this book is that it is impossible for economics as presently constituted to alter its theoretical structure and its applied modelling to take account of the lack of realism which pervades the discipline at present, and also that such realistic theories and models would not solve the majority of the problems which the discipline faces. Indeed, an economics which does contain realistic models would not look anything like economics as currently practised. This book will suggest that the lack of realism in economics is a defensive strategy which has been invoked to avoid the political conclusions to which economic theory would otherwise lead. This has resulted in an orthodox economic theory which is at best useless and at worst vacuous. In this book I will argue that what is regarded as the ‘science’ of economics is in fact a palpably political discipline, and that economic theory must necessarily contain a political theory. I will deny that economics is in any sense a neutral science, and indeed we will see that the very idea of a neutral social science is problematic. We will also see that the economic cannot be separated from the social and the political, and that both economic theory and economic policy are as much political and social as purely ‘economic’. Indeed, this book will deny that there is such a thing as a science of ‘economics’ per se, but will suggest instead that only a social and political economy can be seen to be viable. Questions of economic theory, we will suggest, are really questions within political and social theory. 4 INTRODUCTION AND OVERVIEW
The starting point for our argument is that the usual justification for economics, that it is a ‘positive’, politically neutral, empirical science which enables us to understand and predict economic behaviour, contradicts the actual policy recommendations which economists arrive at. Because, as we shall see, a neutral policy science is impossible; any such science must have an inherent political theory. Unfortunately, the political theory which is implied in the notion of a positive social science is one of economic planning, not laissez-faire or even some sort of mixed-economy, ‘reformed’ laissezfaire. Economists who support laissez-faire have therefore to reconcile their stance with the strictures of a positive, empirical science. We shall see that this cannot be done, and in actual fact economics does not practise positive science at all. The empirical input to the science is negligible, if not nonexistent (the statistical work done by economists seems to draw nothing from, and contribute little to, economic theory). However, any attempt to make economics more ‘realistic’, we will maintain, will require a radical reworking of the entire discipline and will have considerable political consequences. In fact, it is possible to employ positive economic models to show how a centrally planned economy could operate. A number of these models were developed by ‘market socialists’ in the 1930s, and used the same standard assumptions about market behaviour and price feedback to show how the state could employ the sort of objective, empirical knowledge about the economy which positive economics claims to be able to obtain to enable the state to plan economic production and distribution. If economics is neutral and objective, it is far from clear why economic planning cannot ensue. These questions will occupy the first part of the book. A defence of laissez-faire would therefore require a different approach to economics, which is not justified by recourse to positive, empirical science. The most successful approach of this sort, and one which has informed much of the political rhetoric of the last fifteen years, is that of the Austrian school. The Austrians expressly denied the legitimacy of a positive, empirically based social science. Their theory is explicitly political, and the Austrian critique tarred both the market socialists and the orthodox economics from which it was derived with the same brush. We will see that in order to defend laissezfaire, economists have to ditch the idea that economics can yield objective knowledge. However, the price of doing so is high. Economics can no longer be practised in the same way, and indeed, if we deny the idea of an objective science then all the aggregate macroeconomic indicators such as GNP, unemployment or even inflation would also have to be abandoned. Although I will suggest that the Austrian school’s critique of orthodox economics is convincing, this does not mean that we need accept their political and social theory. Given that the critique of objective social science involves the abandonment of objective economic aggregates, we then have to show how economic activity can be optimally organised. The Austrian/libertarian view is that this organisation will occur spontaneously, without any intervention by the INTRODUCTION AND OVERVIEW 5 state. We will be raising criticisms of this view, and will see that deliberate control over the social, legal and political institutions which constitute the economy is both possible and necessary in order for the economy to function. The debate therefore shifts away from the workings of markets, and focuses upon the formation and structure of social and political institutions. These matters will occupy us in the second part of the book. Much of the argument in the initial chapters is concerned with the concept of ‘positive’ science. Although this conception of science is now largely discredited, it remains the popular idea of science, and more to the point it continues to be defended by most orthodox economists. The positive view of science is that scientific knowledge