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.