GLOBAL RESEARCH
There is now a widespread consensus that mainstream/neoclassical
economists failed miserably to either predict the coming of the 2008
financial implosion, or provide a reasonable explanation when it
actually arrived. Not surprisingly, many critics have argued that
neoclassical economics has created more confusion than clarification,
more obfuscation than elucidation. Economic “science” has, indeed,
become “an ideological construct which serves to camouflage and justify
the New World Order” [1].
Also not surprisingly, an increasing number of students who take
classes and/or major in economics are complaining about the abstract and
irrelevant nature of the discipline. For example, a group of French
graduate students in economics recently wrote an open letter, akin to a
manifesto, critical of their academic education in economics as
“autistic” and “pathologically distant from the problems of real markets
and real people”:
“We wish to escape from imaginary worlds! Most of us have
chosen to study economics so as to acquire a deep understanding of the
economic phenomena with which the citizens of today are confronted. But
the teaching that is offered . . . does not generally answer this
expectation. . . . This gap in the teaching, this disregard for concrete
realities, poses an enormous problem for those who would like to render
themselves useful to economic and social actors” [2].
The word “autistic” may be offensive and politically incorrect, but
it certainly provides an apt description of mainstream economics.
Interestingly, most economists do not deny the abstract and
irrelevance feature or property of their discipline; but argue that the
internal consistency of a theory—in the sense that the findings or
conclusions of the theory follow logically from its premises or
assumptions—is more important than its relevance (or irrelevance) to the
real world. Nobel Laureate economist William Vickery, for example,
maintains:
“Economic theory proper, indeed, is nothing more than a
system of logical relations between certain sets of assumptions and the
conclusions derived from them. . . . The validity of a theory proper
does not depend on the correspondence or lack of it between the
assumptions of the theory or its conclusions and observations in the
real world. . . . In any pure theory, all propositions are essentially
tautological, in the sense that the results are implicit in the
assumptions made” [3].
Paul Samuelson, another Nobel Laureate in Economics, likewise writes,
“In pointing out the consequences of a set of abstract assumptions, one
need not be committed unduly as to the relation between reality and
these assumptions.”
How or why did economics as a crucially important subject of inquiry
into an understanding of social structures evolve in this fashion, that
is, as an apparently rigorous and technically elaborate discipline
without much usefulness in the way of understanding or solving economic
problems?
Perhaps a logical way to answer this question is to look into the
origins of the neoclassical economics, and how it supplanted the
classical economics that prevailed from the early stages of capitalism
until the second half of the 19th century—supplanted not as an extension
or elaboration of that earlier school of economic thought but as a
deviation from, or antithesis, to it.
Well-known classical economists like Adam Smith, David Ricardo, John
Stuart Mill and Karl Marx sought to understand capitalism in fundamental
ways: they studied the substance of wages and prices beyond supply and
demand; they also examined the foundations of economic growth and
accumulation—that is, the sources of the “wealth of nations,” as Smith
put it, or “the laws of motion of capitalist production,” as Marx put
it. They further sought to understand the basis or logic of the
distribution of economic surplus, that is, the origins of the various
types of income: wages/salaries, interest income, rental income, and
profits.
To this end, they distinguished two major types of work or economic
activity: productive and unproductive, that is, productive labor and
productive enterprise (manufacturing) versus unproductive labor and
unproductive enterprises (buying and selling, or speculation).
Accordingly, they saw the capitalist social structure as consisting of
different classes of conflicting or antagonistic interests: capitalists,
workers, landlords, tenants/renters, and the poor.
These classical economists wrote in an era that could still be
considered a time of transition: transition from feudalism to
capitalism. Although feudalism was in decline, the powerful interests
vested in that older mode of production and social structure still
fiercely resisted the rising new mode of production, the modern
industrial capitalism, and its champions, called the “bourgeoisie.”
In the second half of the 18th and first half of 19th centuries, the
conflicting interests of these two rival factions of the ruling elites
served as powerful economic grounds for a fierce political/ideological
struggle between the partisans of the two sides. Whereas the elites of
the old system viewed the rising bourgeoisie as undermining their
traditional rights and privileges, the modern capitalist elites viewed
the old establishment as hindering rapid industrialization,
“proletarianization” and urbanization.
In the ensuing ideological battle between the
champions of the old and new orders, the writings of classical
economists such as Smith, Ricardo and Mill proved quite helpful to the
proponents or partisans of the new order. As influential intellectuals
who were concerned that the hindering influences and extractive
businesses of the old establishment may hamper a clean break from
pre-capitalist modes of economic activity, they wrote passionately about
what created real values and/or “wealth of nations,” and what was
wasteful and a drain on economic resources. To this end, their writings
included lengthy discussions of the labor theory of value—the theory
that human labor constitutes the essence of value—and related notions of
productive and unproductive activities.
Accordingly, they characterized the propertied classes that reaped
income by virtue of controlling the assets (that the economy needed in
order to function) as the “rentier,” “unproductive” or “parasitic”
classes. Rentier classes collect their unearned proceeds from ownership
“without working, risking, or economizing”, wrote John Stuart Mill of
the landlords and money-lenders of his day, arguing that “they grow
richer, as it were in their sleep” [4].
Unsurprisingly, during the early stages of industrial revolution,
when the old establishment still posed serious challenges to the
relatively new and evolving capitalist mode of production, the view of
human labor as the source of real values, expounded by Karl Marx and
other classical economists, provided a strong theoretical case for
industrial expansion and/or capitalist development. “In its earliest
formulations, the labor theory of value reflected the perspective of,
and was serviceable in the fulfillment of the objective needs of, the
industrial capitalist class” [5].
Although the rising capitalist class found the labor theory of value
(and its logical implications for class conflicts) potentially
“disconcerting,” that concern was temporarily pushed to the backburner,
as the main threat at this stage of capitalist development came from the
landowning/rentier classes, not the working class. Indeed, history
shows that in nearly all the so-called “bourgeois-democratic”
revolutions, signifying the historical transition from pre-capitalist to
capitalist formations, the burgeoning working class, the newly
proletarianized peasants, sided with the bourgeoisie against its
pre-capitalist nemesis.
By the mid-19th century, however, this pattern of social structure
and/or class alliances was drastically changed. Concentration of capital
and the rise of corporation had by the last third of the 19th century
gradually overshadowed the role of individual manufacturers as the
drivers of the industrial development. In place of owners/managers, more
and more “corporate managers were hired to direct and oversee
industrial enterprises and to channel profits automatically as part of a
perpetual accumulation process. . . . Increasingly, profits and
interest came to be the result of passive ownership,” similar to
absentee landownership of the feudal days [6].
Along with agricultural production on an
increasingly capitalistic basis, these developments meant a radical
reconfiguration of social and/or class alliances: the industrial
bourgeoisie and the landowners were no longer adversaries, as they were
all now capitalists and allies; and the working class, which had earlier
supported the bourgeoisie against the landed aristocracy, was their
class enemy. What added to the fears of the capitalist class of the
growing and relatively militant working class was the spread of Marx’s
theory of “labor as the essence of value and economic surplus,” which
was by the mid- to late-19th century frequently discussed among the
leading circles of industrial workers.
These changes in the actual social and economic developments, in
turn, prompted changes in the ruling class’s preferences regarding
theories of capitalist production and/or market mechanism. Industrial
capitalists who had earlier used the labor theory of value to their
advantage in their struggle against the old, pre-capitalist
establishment were now quite fearful of and hostile to that theory.
Instead, “the theoretical and ideological needs of the owners of
industrial capital became identical with those of the landlords and
merchant capitalists. They all needed a theory that sanctioned their
ownership” [7]; a theory that obfuscated, instead of clarifying, the
origins of real values and the sources of wealth and/or income—hence,
the shift from classical to neoclassical economics.
The formal theoretical shift from classicism to neoclassicism was
pioneered (in the last three decades of the 19th century) by three
economists: William Stanley Jevons, Carl Menger and Leon Walras. A
detailed discussion of these pioneers of neoclassical economics is
beyond the purview of this essay. Suffice it to say that all three
categorically shunned the labor theory of value in favor of utility
theory of value, that is, “value depends entirely upon utility,” as
Jevons put it.
At the heart of the theoretical/philosophical shift was, therefore,
the move from labor to utility as the source of value: a commodity’s
value no longer came from its labor content, as classical economists had
argued, but from its utility to consumers. The new paradigm thus
shifted the focus of economic inquiry from the factory and production to
the market and circulation, or exchange.
By the same token as the new school of economic thought abandoned the
classicals’ labor theory of value in favor of the utility theory of
value, it also discarded the concept of value, which comes from human
labor, in favor of price, which is formed (in the sphere of circulation
or market) by supply and demand interactions. Henceforth, there was no
difference between value and price; the two have since been used
interchangeably or synonymously in the neoclassical economics.
Once the focus of inquiry was thus shifted from how commodities are
produced to how they are bought and sold, the distinction between
workers and capitalists, between producers and appropriators, became
invisible. In the marketplace all people appear as essentially
identical: they are all households, consumers or “economic agents” who
derive utility from consuming commodities, and who pay for those
commodities “according to the amount of the utility/pleasure they derive
from their consumption.” They are also identical in the neoclassical
sense that they are all “rational,” “calculating,” and utility
“maximizing” market players.
An obvious implication (and a major advantage
to the capitalist class) of this new perspective was that in the
marketplace social harmony and “brotherhood,” not class conflict, was
the prevailing mode of social structure. “The supposed conflict of labor
with capital is a delusion,” Jevons asserted, arguing that
“We ought not look at such subjects from a
class point of view,” because “in economics at any rate [we] should
regard all men as brothers” [8].
It should be pointed out (in passing) that the utility theory of
value did not start with Jevons. The theory had already been spelled out
in the late 18th and early 19th centuries by earlier economists such as
Jeremy Bentham, Jean-Baptiste Say, Thomas Malthus and Claude Frédéric
Bastiat. However, Jevons and his utilitarian contemporaries of the
second half of the 19th century added a new concept to the received
theory: the concept of marginal utility or, more specifically,
diminishing marginal utility. According to this concept, the utility
derived from the use or consumption of a commodity diminishes with every
additional unit consumed.
Despite the fact that Jevons’ addition of the concept of marginal
utility to the received utility theory of value was conceptually very
simple (indeed, the whole concept of utility and the so-called “law of
diminishing marginal utility” are altogether banalities or truisms), it
nonetheless proved to be instrumentally a very important notion in the
neoclassical economics. For, the term “marginal” was soon extended to
other economic categories such as marginal cost, marginal revenue,
marginal propensity to consume, and the like; thereby paving the way for
the application of differential calculus to economics. “By introducing
the notion of marginalism into utilitarian economics, Jevons had found a
way in which the utilitarian view of human beings as rational,
calculating maximizers could be put into mathematical terms” [9].
Whereas the utilitarian views of the earlier economists had been
firmly discredited in the late 18th and early 19th centuries by
proponents of the labor theory of value as truisms that did not explain
much of the real world economic developments, the math-coded
utilitarianism of Jevons (and his fellow neoclassicals since then) has
been shielded from such criticisms by a protective cover of mathematical
veneer. Despite the fact that, aside from the mathematical mask, the
new notion of utility represented no conceptual or theoretical advances
over the earlier version, it was celebrated as a “revolution” in
economic thought, the so-called “neoclassical revolution.” Presenting a
body of largely axiomatic principles, or religious-like normative
guidelines (such as how “rational” consumers should behave), by means of
elaborate and mesmerizing mathematics is like covering weeds with
Astroturf.
Despite its irrelevance and uselessness, neoclassical economics is
neither uninteresting nor illogical. Within its own premises and
presuppositions it is both logical and mathematically rigorous, which
explains why it is packaged as a scientific discipline. But, again, it
falls pitifully short of explaining how real world markets or economies
work, or how economic crises, as inherent occurrences to a capitalist
economy, take place; or what to do to counter such crises that would
help not only the capitalist/financial elites but the society at large.
Although most mainstream economists proudly characterize their
discipline as scientific, adornment of the discipline by a façade of
mathematics does not really make it scientific. In reality, the math
superstructure simply masks the flawed or unreliable theoretical
foundation of the discipline.
It follows from the discussion presented in this essay that a driving
force behind the evolution of economics as a dismal and obscuring
discipline is the role of influential vested interests and/or the
dominant ruling ideology. In a critique of mainstream/neoclassical
economists’ blatant disregard for actual developments in the real world,
economics Professor Michael Hudson writes:
“Such disdain for empirical verification is not found in
the physical sciences. Its popularity in the social sciences is
sponsored by vested interests. There is always self-interest behind
methodological madness. That is because [professional] success requires
heavy subsidies from special interests who benefit from an erroneous,
misleading or deceptive economic logic. Why promote unrealistic
abstractions, after all, if not to distract attention from reforms aimed
at creating rules that oblige people actually to earn their income
rather than simply extracting it from the rest of the economy?” [10].
Why or how is it that most economists are either unaware or pretend
to be unaware of the specious theoretical foundations of their
discipline?
A charitable answer is that perhaps the majority of economists who
teach their discipline or otherwise work as economic professionals are
not necessarily guilty of obfuscation, or deliberately promoting a
faulty paradigm. Many economists sincerely believe in the integrity of
their discipline as they carry out highly specialized research or
produce scholarly publications. Economists’ confidence or faith in their
discipline, however, does not make it any less flawed. They simply
teach or carry out elaborate scholarly research work within a faulty
paradigm without questioning, or even detecting, some of the submerged
defects that makes the discipline not only irrelevant and useless but
indeed harmful, as it tends to create more confusion than illumination
or understanding.
It can also be argued that since most economists are deeply wedded to
their profession, and are dependent on it as the source of both
intellectual and financial survival, they would most likely be in
denial, and would continue working within the only academic tradition or
professional path they know how to navigate, even if they suspected or
realized the esoteric and irrelevant nature of their discipline.
Ismael Hossein-zadeh is Professor Emeritus of Economics (Drake University). He is the author of Beyond Mainstream Explanations of the Financial Crisis (Routledge 2014), The Political Economy of U.S. Militarism (Palgrave–Macmillan 2007), and the Soviet Non-capitalist Development: The Case of Nasser’s Egypt (Praeger Publishers 1989). He is also a contributor to Hopeless: Barack Obama and the Politics of Illusion (AK Press 2012).
Notes
[1] Michel
Chossudovsky and Marshall, G.A. (eds.) The Great Global Economic Crisis,
Montreal, Quebec, Canada: Center for Research on Globalization (2010,
p. xviii).
[3] William Vickery, Microeconomics, New York: Harcourt, Brace, and World, 1964, p. 5.
[5] E. K. Hunt, History of Economic Thought: A Critical Perspective, New York and London, M.E. Sharpe 2002, p. 282.
[6] Ibid., p. 283.
[7] Ibid.
[8] As quoted in ibid., p. 254.
[9] Ibid., p. 252.
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