Commentary on Political Economy

Sunday 4 September 2011

The Society of Capital - from Krugman to Wittgenstein

Paul Krugman in a post last week ridiculed bourgeois economists with Keynes's reproach that their theories ignore the gigantic waves generated in the oceans by hurrianes and tsunamis because "eventually the sea level will return to its equilibrium". As you can see, Krugman and Keynes do not criticise bourgeois theory because of its assumption that an economic equilibrium exists! They criticise orthodox economics because it fails to take into account "exceptional circumstances" or "crises" in the operation of the capitalist economy that require "urgent and exceptional remedies". In other words, neither economist does away with the notion of "equilibrium" except perhaps to imply that without urgent remedies, "crises" may well destroy the capitalist economy altogether! But there is no theory about how and why "crises" originate or why they are indeed implicit in the assumptions of a capitalist economy.

Those assumptions are that social resources are "privately owned" and that the legal rules that guarantee private property are to be upheld at all costs - because those "rules" guarantee the efficient wealth-maximising operation of the capitalist economy. This notion of "a set of rules" that establish legal institutions that can guarantee the wealth-maximising operation of the economy is the central hypothesis of Ordo-liberalism, a theory of the "social market economy" first developed in Germany (with the help of figures like Hayek) and that has since formed the intellectual foundation of "the New Institutional Economics" that started in the 1930s with the work of Ronald Coase on "the theory of the firm" and then continued with people like Demsetz, Douglass North, and more recently Oliver Williamson (the last two and Coase have been awarded Nobel Prizes for Economics). It is quite legitimate to include Krugman's own prize-winning work on international economics (economies of scale in clusters) as part of this NIE framework.

The obvious difficulty with this "theory" is that "private ownership" means that the owners of social resources are entitled to pursue their "self-interest" even to the point that they become so "powerful" through their ownership of social resources that it no longer makes sense to talk of "legal rules" to guarantee the operation of the capitalist market economy! In other words, if the aim of "competition" is to defeat the competition, it is absolutely inevitable that "competition" will end up destroying itself! Nor can it be said that "competition" ends in "monopoly" - because "monopoly" still implies the "possibility of competition" (this argument was advanced by Schumpeter in Capitalism, Socialism and Democracy) - when in fact our point is that "competition and monopoly as well as the market" are irrelevant and erroneous frameworks to analyse the capitalist economy!

These "ideas" are harmful because they fail to recognise that human lives are inextricably "social" and that therefore what capitalism does is to place the control of social resources "undemocratically" in the hands of a few people whose primary and sole aim as "capitalists" is to command as much living labour as possible through the use of "dead objectified labour". Wittgenstein reminded us that "ideas are like spectacles: everything we see through them depends on what spectacles we wear" (words to that effect). And that is why some sections of the bourgeoisie, accustomed to seeing reality through their "spectacles", have difficulty now taking action to protect not just their "possessions" but the entirety of our "society" with it! We will return to the view of "profit", "productivity and labour" soon.

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