Commentary on Political Economy

Sunday 25 September 2011

THE STATE OF EQUILIBRIUM: Historical Antecedents of ‘Supply-Side Economics’ in the Austrian School – Part 1

Supply-side economics treats all taxation as a “distortion” of the “free market economy” because they amplify the “re-distributive” role of the State (just as detrimental welfare effects of capitalist industry are seen as “externalities” – instead of “internalities”). Here is the first instalment of a much larger study I am conducting on the Hobbes-Smith-Schopenhauer-BohmBawerk-Nietzsche-Weber-Hayek-Schumpeter theoretical genealogy and, on the other side, on the Rousseau-Ricardo-Hegel-Marx-Lenin-Keynes line. Wish me luck!
In classical and neoclassical economic theory the capitalist economy was seen as founded entirely on the operation of the “self-regulating market”. It was “the market” which, by assuming the formal equality of all economic agents, ensured the orderly, “balanced”, “equilibrium” (also in German, Gleichwichtigkeit – ‘equal-weight’) of the economy by allowing the equi-valence of producers’ supply with consumers’ demand. In this institutional universe, “growth” was seen as a quantitative phenomenon reliant on the horizontal expansion of the market. The factors of “growth” were seen as “external data” or “disturbances” (Storungen) that could jolt the economy out of its “equilibrium” but only temporarily. Implicit in this vision of “equilibrium” was the assumption that the “market price mechanism” would ensure the return of the economy to the pristine “state of equilibrium” with optimal allocation of resources – which is what made the market mechanism “self-regulating”.
Even scientific-technological processes were interpreted as “exogenous” factors, as independent and autonomous “progress” extraneous to the functioning of the capitalist economy and therefore outside the purview of “economic analysis”.
Classical Political Economy had stressed the “quantitative” importance of “wealth-creation” by focusing on the subservience of the market to the process of production and distribution of objective (yet ultimately metaphysical/essentialist) “value” in the classical “labour theory of value”. But the  neoclassical revolution shifted the focus of “economic enquiry” even further away from the sphere of production by substituting “value” with the “subjective” exchange of “endowments” through the “market mechanism” that alone, “by definition” (tautologously, in Hayek’s definitive analysis) ensured the optimal allocation of these “endowment/resources” according to (metaphysical) “marginal utility”.
The formal legal “equality” of market participants and the effectiveness of the market price mechanism to indicate their free consumer choices allowed the “homologation” of the Economic (scientific-technological Zivilisation reflected in the productive process and its “division of labour”) with the Political (the equitable allocation of value-resources through the self-regulating market). This “homologation” was the supreme social synthesis of Political Economy and the equivalence of its “Law of Value” whereby market prices ensured that the “values” produced were “cleared” in the market and allocated optimally to its participants.
It was also the foundation of the political philosophy of liberalism whereby the “neutrality” of the State of Law (Rechtsstaat or ‘night-watchman state’) restricted its political functions to guaranteeing the individual property rights of its “bourgeois” members as the basis of “free competitive exchange in the (therefore) ‘self-regulating’ market” and to preserve the freedom of expression and faith of its “citizens”.
The market was “self-regulating” and therefore in a state of “equilibrium” so long as the property rights or “endowments” of its “free competitive participants” and, as a corollary, “free competition”, were respected and protected for the simple reason that the “market mechanism” with its “free competition” would then ensure the settlement of the exchange of endowments at “market-clearing prices”.
Assumptions: pre-State “legal rights” and apportionment of property rights to new production/contribution. “Citizens” seen as “individuals” both in their psychological “subjectivity” as expressing “free will” (an assumption shaken by psychological and psychoanalytic as well as ethnographic and sociological research) and, more important, in their “productivity” regardless of the obvious fact that these “individuals” are necessarily linked through the “division of labour” (a fact that is pivotal to Marx’s ‘critique’ of Political Economy). (A corollary difficulty is the State’s role in that part of the “division of labour” that provides educational services to “individuals” for the purpose of later joining the “labour market”.)

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