Commentary on Political Economy

Monday 17 October 2011

The Science of Choice and the Veil of Money

It is clear that “economics” as the “science of choice” that Robbins was seeking is as impossible as a “square circle” – it is a contradiction in terms because if economics is to be a “science” of “choice” then it must tell us what our “choice” must be (!) given “scarce resources” to be allocated to “given” alternative uses. Any “economics” that treats “scarce resources” and “alternative uses” – the real elements of “choice” – as “exogenous inputs” is pure and formal mathematics, not “economics”. In other words, it loses all substance and content as a study of human needs and organization – and becomes a set of sterile quantitative equations or a barren “analytical filing system” (see further discussion by Friedman at page with footnote 9). Friedman admits as much in what follows:

The ultimate goal of a positive science is the development of a

"theory" or, "hypothesis" that yields valid and meaningful (i.e., not

truistic) predictions about phenomena not yet observed. Such a theory

is, in general, a complex intermixture of two elements. In part, it is a

"language" designed to promote "systematic and organized methods

of reasoning."5 In part, it is a body of substantive hypotheses

designed to abstract essential features of complex reality.

Viewed as a language, theory has no substantive content; it is a set

of tautologies. Its function is to serve as a filing system for

organizing empirical material and facilitating our understanding of it;

and the criteria by which it is to be judged are those appropriate to a

filing system…..

Conversely, any “economics” that seeks to identify a “mechanism”, such as the “market mechanism” of “supply and demand”, that can identify “scientifically” the way in which a society makes its “choices” to allocate “scarce resources to alternative uses” – any such “economics” will have to admit that the “choices” involved are purely “technical” and therefore are not “choices” at all!

If instead “economics” is supposed to tell us what “alternative uses” are possible given certain “choices” of “scarce resources”, then this economics has to tell us “why” the “existing resources” are “scarce” and what makes them “scarce”! Robbins and Hayek would say that it is the “market mechanism” through its “prices” that tells us what is “scarce” and what is not, and that it is the identification of “the market mechanism” that is the real success and content of “economic science”. This is why Hayek preferred to speak of a “pure logic of choice” and not of a “science of choice”.

But yet again (as we showed in our pieces on Hayek [you can search this site using the facility provided]), there is no way at all for us to tell “why” market prices are an accurate measure of social “choices” about the “scarcity and allocation of resources to alternative uses” – except to say that the market mechanism is correct…because it is a “free market” mechanism! In other words, to know whether prices are an accurate measure of “scarcity”, we need to know that “prices” indicate “scarcity” as decided freely by market agents. But we cannot know whether a “price” correctly indicates “scarcity” as decided by market agents…except by means of the “price”! Simply put, “the market price mechanism” – supply and demand – is “auto-referential” and therefore it is a simple tautology, as Friedman freely admits above.

The only way out of this logical and theoretical impasse is to say that “prices” as determined by “the market price mechanism” correctly predict the “choices” of society as to the allocation of given resources. In other words, we can no longer speak of “scarcity” or of “choices” but rather of simple “regularities and predictabilities” in social behaviour – which is what Friedman means by “Positive Economics” as a science. Here is Friedman again:

The answers to these questions depend partly on logical, partly on

factual, considerations. The canons of formal logic alone can show

whether a particular language is complete and consistent, that is,

whether propositions in the language are "right" or "wrong." Factual

evidence alone can show whether the categories of the "analytical

filing system" have a meaningful empirical counterpart, that is,

whether they are useful in analyzing a particular class of concrete

problems.6 The simple example of "supply" and "demand" illustrates… this point….

[NOTE that Friedman adopts the Machian concept of “simplicity” as the rule of selection for different hypotheses, given equal “fruitfulness” – for a discussion of Nietzsche’s critique of Ernst Mach’s and Scholastic notions of “simplex sigillum veri” just search this site. Here is Friedman on this point:

The choice among alternative hypotheses equally consistent with the available evidence must to some extent be arbitrary, though there is general agreement that relevant considerations are suggested by the criteria "simplicity" and "fruitfulness," themselves notions that defy completely objective specification. A theory is "simpler" the less the initial knowledge needed to make a prediction within a given field of phenomena; it is more "fruitful" the more precise the resulting prediction, the wider the area within which the theory yields predictions, and the more additional lines for further research it suggests.]

But once again, as we saw in our previous Post, this means that “economic science” lives or dies by its ability to predict reliably the future course of “the economy” (by its “fruitfulness”) – and we know very well how disastrous “economic science” has been in that regard! Of course, the reason why “economic science” cannot reliably predict the future is that capitalism is founded on social antagonism, on the wage relation – which means that “economic outcomes” are the result of political struggles between living labour (workers) and dead objectified labour (capitalists who own the means of production and social resources) and not of truly “democratic” decision-making about the allocation of social resources – chief among them “living labour” itself, that is to say, our own living activity which is decided for us by ass-holes like Steve Jobs! (OK, exaggerating a little – but nowhere near as much as these Nobel Prize winner “geniuses”!)

Bourgeois economics sees social antagonism not as such, but rather as “exogenous shocks” or “disturbances”, our needs as “externalities” and its design of domination and destruction of our world as “systemic risks”. And the way capital seeks to chrystallise, to objectify its ability to command and control living labour is through the monetary medium.

Because money (capital expressed as value in liquid form) is the instrument that lies at the interface of the antagonism between living labour and capital – as the wage relation – it is obvious that bourgeois economics has no “theoretical” role left for “money”, - because otherwise it would have to come to grips with the phenomenon of “value”, that is to say, not just “price” (which is the institutional “expression” of antagonism) but as “command over living labour. Friedman himself, in a candid moment, admits as much (see his “Conclusion”,  at p.42 on my copy):

The weakest and least satisfactory part of current economic theory seems to

me to be in the field of monetary dynamics, which is concerned with the

process of adaptation of the economy as a whole to changes in conditions

and so with short-period fluctuations in aggregate activity. In this

field we do not even have a theory that can appropriately be called "the"

existing theory of monetary dynamics.

Between the Idea and the Reality falls the Shadow (to paraphrase T S Eliot): between capitalists and workers lies “money” – “the Veil of Money”. We shall try “to unveil” this relationship soon.

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