An Anarchist FAQ — Section C Contents Section C: What are the myths of capitalist economics? 4 C.1 What is wrong with economics? 11 C.1.1 Is economics really value free? ............................ 20 C.1.2 Is economics a science? ................................ 29 C.1.3 Can you have an economics based on individualism? . 33 C.1.4 What is wrong with equilibrium analysis? ..................... 39 C.1.5 Does economics really reflect the reality of capitalism? . 44 C.1.6 Is it possible to have non-equilibrium based capitalist economics? . 52 C.2 Why is capitalism exploitative? 61 C.2.1 What is "surplus value"? ................................ 64 C.2.2 How does exploitation happen? ........................... 68 C.2.3 Is owning capital sufficient reason to justify profits? . 72 C.2.4 Is profit the reward for the productivity of capital? . 77 C.2.5 Do profits represent the contribution of capital to production? . 82 C.2.6 Does interest represent the "time value" of money? . 88 C.2.7 Are interest and profit not the reward for waiting? . 95 C.2.8 Are profits the result of entrepreneurial activity and innovation? . 103 C.2.9 Do profits reflect a reward for risk? . 111 C.3 What determines the distribution between labour and capital? 118 C.4 Why does the market become dominated by Big Business? 124 C.4.1 How extensive is Big Business? . 127 C.4.2 What are the effects of Big Business on society? . 129 C.4.3 What does the existence of Big Business mean for economic theory and wage labour? ......................................... 132 C.5 Why does Big Business get a bigger slice of profits? 137 C.5.1 Aren't the super-profits of Big Business due to its higher efficiency? . 140 C.6 Can market dominance by Big Business change? 145 C.7 What causes the capitalist business cycle? 148 C.7.1 What role does class struggle play in the business cycle? . 151 C.7.2 What role does the market play in the business cycle? . 156 C.7.3 What role does investment play in the business cycle? . 160 2 C.8 Is state control of money the cause of the business cycle? 167 C.8.1 Does this mean that Keynesianism works? . 178 C.8.2 What happened to Keynesianism in the 1970s? . 181 C.8.3 How did capitalism adjust to the crisis in Keynesianism? . 186 C.9 Would laissez-faire capitalism reduce unemployment? 194 C.9.1 Would cutting wages reduce unemployment? . 203 C.9.2 Is unemployment caused by wages being too high? . 213 C.9.3 Are "flexible" labour markets the answer to unemployment? . 220 C.9.4 Is unemployment voluntary? ............................. 230 C.10 Is ”free market” capitalism the best way to reduce poverty? 234 C.10.1 Hasn't neo-liberalism benefited the world's poor? . 240 C.10.2 Does "free trade" benefit everyone? . 247 C.10.3 Does "free market" capitalism benefit everyone, especially working class people? 252 C.10.4 Does growth automatically mean people are better off? . 257 C.11 Doesn’t neo-liberalism in Chile prove that the free market benefits everyone? 266 C.11.1 Who benefited from Chile's "economic miracle"? . 272 C.11.2 What about Chile's economic growth and low inflation? . 276 C.11.3 Did neo-liberal Chile confirm capitalist economics? . 278 C.12 Doesn’t Hong Kong show the potentials of ”free market” capitalism? 284 3 Section C: What are the myths of capitalist economics? Within capitalism, economics plays an important ideological role. Economics has been used to construct a theory from which exploitation and oppression are excluded, by definition. We will attempt here to explain why capitalism is deeply exploitative. Elsewhere, in section B, we have indicated why capitalism is oppressive and will not repeat ourselves here. In many ways economics plays the role within capitalism that religion played in the Middle Ages, namely to provide justification for the dominant social system and hierarchies. "The priest keeps you docile and subjected," argued Malatesta, "telling you everything is God's will; the economist say it's the law of nature." They "end up saying that no one is responsible for poverty, so there's no point rebelling against it." [Fra Contadini, p. 21] Even worse, they usually argue that collective action by working class people is counterproductive and, like the priest, urge us to tolerate cur- rent oppression and exploitation with promises of a better future (in heaven for the priest, for the economist it is an unspecified "long run"). It would be no generalisation to state that ifyou want to find someone to rationalise and justify an obvious injustice or form of oppression then you should turn to an economist (preferably a "free market" one). That is not the only similarity between the "science" of economics and religion. Like religion,its basis in science is usually lacking and its theories more based upon "leaps of faith" than empirical fact. Indeed, it is hard to find a "science" more unconcerned about empirical evidence or building realistic models than economics. Just looking at the assumptions made in "perfect competition" shows that (see section C.1 for details). This means that economics is immune to such trivialities as evidence and fact, although that does not stop economics being used to rationalise and justify certain of these facts (such as exploitation and inequality). A classic example is the various ways economists have sought to explain what anarchists and other socialists have tended to call "sur- plus value" (i.e. profits, interest and rent). Rather than seek to explain its origin by an empirical study of the society it exists in (capitalism), economists have preferred to invent "just-so" stories, little a-historic parables about a past which never existed is used to illustrate (and sodefend)a present class system and its inequalities and injustices. The lessons of a fairy tale about a society that has never existed are used as a guide for one which does and, by some strange co-incidence, they happen to justify the existing class system and its distribution of income. Hence the love of Robinson Crusoe in economics. Ironically, this favouring of theory (ideology would be a better term) is selective as their expo- sure as fundamentally flawed does not stop them being repeated. As we discuss in section C.2, the neoclassical theory of capital was proven to be incorrect by left-wing economists. This was ad- mitted by their opponents: "The question that confronts us is not whether the Cambridge Criticism is theoretically valid. It is. Rather the question is an empirical or econometric one: is there suffi- cient substitutability within the system to establish neo-classical results?" Yet this did not stop this theory being taught to this day and the successful critique forgotten. Nor has econometrics suc- cessfully refuted the analysis, as capital specified in terms of money cannot reflect a theoretical substance (neo-classical "capital") which could not exist in reality. However, that is unimportant for "[u]ntil the econometricians have the answer for us, placing reliance upon neo-classical economic theory is a matter of faith," which, of course, he had [C. E. Ferguson, The Neo-classical Theory of Production and Distribution, p. 266 and p. xvii] Little wonder that Joan Robinson, one of the left-wing economists who helped exposethe bankruptcy of the neo-classical theory of capital, stated that economics was "back where it was, a branch of theology." [Collected Economic Papers, Vol. 4, p. 127] It remains there more than thirty years later: 5 "Economics is not a science. Many economists – particularly those who believe that decisions on whether to get married can be reduced to an equation – see the world as a complex organism that can be understood using the right differential calculus. Yet everything we know about economics suggests that it is a branch and not a particularly advanced one, of witchcraft." [Larry Elliot and Dan Atkinson, The Age of Insecurity, p. 226] The weakness of economics is even acknowledged by some within the profession itself.Ac- cording to Paul Ormerod, "orthodox economics is in many ways an empty box. Its understanding of the world is similar to that of the physical sciences in the Middle Ages. A few insights have been ob- tained which stand the test of time, but they are very few indeed, and the whole basis of conventional economics is deeply flawed." Moreover, he notes the "overwhelming empirical evidence against the validity of its theories." It is rare to see an economist be so honest. The majority of economists seem happy to go on with their theories, trying to squeeze life into the Procrustean bed of their models. And, like the priests of old, make it hard for non-academics to question their dogmas as "economics is often intimidating. Its practitioners . have erected around the discipline a barrier of jargon and mathematics which makes the subject difficult to penetrate for the non-initiated." [The Death of Economics, p. ix, p. 67 and p. ix] So in this section of our FAQ, we will try to get to the heart of modern capitalism, cutting through the ideological myths that supporters of the system have created around it. This will be a difficult task, as the divergence of the reality of capitalism and the economics thatisusedto explain (justify, more correctly) it is large. For example, the preferred model used in neo-classical economics is that of "perfect competition" which is based on a multitude of small firms producing homogenous products in a market which none of them are big enough to influence (i.e.