Commentary on Political Economy

Friday 19 April 2013

The Reinhart-Rogoff Controversy

This is a comment on the Reinhart-Rogoff controversy about the statistical relationship between government debt and GDP "growth discussed by Gavyn Davies here

I believe that the point Gavyn Davies is making - far from being obvious or irrelevant - opens the door to a much broader debate that is central to the critique of bourgeois "economic science". Essentially, Davies has discovered a kind of Einsteinian "cosmological principle", to wit, that the universe is the same regardless of which point you are at when you observe it. Bourgeois economic "science" does and must believe in the existence of an "Archimidean point" - that is to say, a point from which the cosmos can be observed "objectively". We know that such a point does not exist because the observer is part of the observed cosmos (this is the crux of Heisenberg's Indeterminacy Principle).

But what does this mean? Reinhart and Rogoff were looking for an "Archimedean point" when they falsely believed that a simple statistical relationship between data could reveal a "truth" about social relations of production. Davies has discovered that social reality is far more complex - far more political! - than that. So what was the "point" to the entire millenary holy-grail search for a "cipher", a "number" that could provide the "key" or guide or pointer to socio-economic policy? Is bourgeois economic "science" just an absurd game of hypostasis, of reification?

My own blog has been devoted almost exclusively to understanding the "effectuality" of "ciphers" in bourgeois economic "science" - what I call "mathesis". The entire process of how a cipher can be used as a "talisman", as a phantomatic "Archimedean point" that can guide the actions of the bourgeoisie as a dominant class - this entire process was outlined by Nietzsche in what I have called "Nietzsche's Invariance". In a nutshell, bourgeois economic "science" does not and cannot describe an "objective reality", but seeks rather to provide "pointers", abstract numerical figures or "ciphers" that are then used to guide political action ("policies", if you like) in a determinate direction. What makes Nietzsche's Invariance possible is precisely the fact that all social life ultimately comes down to relations of power - and most certainly not to "economic laws" or "quantitative relations". It is to these relations of power, rather than to "economic laws" that our attention should turn.

Saturday 13 April 2013

The Minsky Moment: How Paul Krugman Fell Into His Own Liquidity Trap (Revised)

This is a revised version of various interventions on Paul Krugman's political economy that have now jumped to the top of the Google Search charts.

This paper by Krugman and Eggertsson (both of Princeton University - though the latter currently at the NY Fed) offers a clear illustration of what we have been arguing here is the utter and complete stupidity of even the most enlightened bourgeois economists. We have already examined Eggertsson's "Paradox of Toil" (search this site), so we will not trouble with that particular specimen of exemplary idiocy.

Just take a look  at this, friends, and tell us if Paul Krugman is not the greatest imbecile south of the Hudson River!

Here is the paper:

And here is the incriminating evidence.

Krugman (and Eggertsson, who is the junior clown in this comedy sketch) starts with a "general equilibrium model" (which we will call "the Muddle") in which in an economy at equilibrium there are two kinds of producers, "the impatient" and "the patient" producers. Now, anyone will tell you that what Krugman means is that "the impatient producer" is really "the greedier" capitalist who wants to make more "profits" by "borrowing" social resources (it should be "money", but Krugman is still fumbling with "natural interest rates"!! So this is a barter economy after all!) from the "patient" capitalist, who is either less greedy or less a speculator than the "impatient" one. Here is Krugman:

1.Debt and interest in an endowment economy

Imagine a pure endowment economy in which no aggregate saving or investment is possible, but in which individuals can lend to or borrow from each other. Suppose, also, that while individuals all receive the same endowments, they differ in their rates of time preference. In that case, "impatient" individuals will borrow from "patient" individuals. We will assume, however, that there is a limit on the amount of debt any individual can run up. Implicitly, we think of this limit as being the result of some kind of incentive constraint; however, for the purposes of this paper we take the debt limit as exogenous.

Note how Krugman substitutes "individual" for "capitalist" - this tendency is precisely what we have been exposing in our series on "Origins of Bourgeois Individualism". So in other words for Krugman the "motive" for capitalist investment is not the political need of capitalists to retain and expand command over the living labour of workers - that is, to accumulate capital - but rather a simple matter of "difference in patience"! Well done, Paul! I always thought you were a great friend of workers!

The second thing to notice (most important) is that Krugman takes "the debt limit" for the "impatient capitalist" as "exogenous". In other words, Krugman cannot see a "limit" to the amount of debt that "impatient" capitalists can "borrow" from the "patient" ones - for the simple reason that his "economy" is an unreal one in which "debt" is quite simply a "quantity" that can expand indefinitely and infinitely on a nominal basis depending on the "patience" of individual capitalists! If indeed "debt" is only a matter of more or less "patience", then (just as with Keynes's "animal spirits") there is indeed no "limit" (political or material) to the amount of "debt" that capitalists can "lend " or "borrow" to one another!!

And that is why Krugman simply "must" make "the debt limit...exogenous" because his general equilibrium economy is one that is built on psychology and not on the real needs of real workers and capitalists confronting one another over the use of social resources!

Now, because the debt limit is "exogenous" - because "debt" for Krugman is merely a psychological matter as vapid and imaginary as Keynes's "animal spirits" - it follows that this "debt leveraging" could proceed forever ad infinitum were it not for....(you guessed it!) an equally exogenous "deleveraging shock"!!! A "Minsky Moment" in which both the lender ("patient capitalist") and the borrower ("impatient capitalist") finally realise that theirs is sheer "speculation" and that the "profits" they anticipated from production are not going to materialise because there is only so much that you can squeeze out of living labour and then turn into more political command (what we call "value")!! Here is Krugman again!

2. The effects of a deleveraging shock

We have not tried to model the sources of the debt limit, nor will we try to in this paper. Clearly, however, we should think of this limit as a proxy for general views about what level of leverage on the part of borrowers is "safe", posing an acceptable risk either of unintentional default or of creating some kind of moral hazard.

The central idea of debt-centered accounts of economic instability, however, is that views about safe levels of leverage are subject to change over time. An extended period of steady economic growth and/or rising asset prices will encourage relaxed attitudes toward leverage. But at some point this attitude is likely to change, perhaps abruptly – an event known variously as the Wile E. Coyote moment or the Minksy moment.

In our model, we can represent a Minsky moment as a fall in the debt limit from D
high to some lower level Dlow, which we can think of as corresponding to a sudden realization that assets were overvalued and that peoples’ collateral constraints were too lax. In our flexible-price economy, this downward revision of the debt limit will lead to a temporary fall in the real interest rate, which corresponds to the natural rate of interest in the more general economy we’ll consider shortly.

But rather than a "Minsky Moment", Krugman is having a "dumb episode" because nowhere does he explain why our dear capitalists should have...."a sudden realisation that assets were overvalued"!!!!!

A sudden realisation!!! HHHeeellloooo Paul! You are a patented MORON! No! YOU are the "Wile E. Coyote" in this caricature of intellectual rigor that you have engaged in here!! Of course, Krugman, like the perfect bourgeois economist he is, has not even realised that he has fallen into the most abysmal trap or bottomless canyon (like Wile E. Coyote) simply by admitting that the mysterious "sudden realisation" is based on the "fact" that "assets were OVER-VALUED"!!

But Paul, WHAT DOES "OVER-VALUED" MEAN?? It means that the whole business of "borrowing" and "lending" has NOTHING to do with "patience and impatience" and EVERYTHING to do with VALUE, with PROFIT!! Bur value and profit represent precisely the "command" of capital over living labour - which is what you wish to avoid talking about!!

Addendum to Krugman on Minsky Moment

Now that our review of Krugman's treatment of "the Minsky Moment" has jumped to the top of the "Google Search" list, let us reflect a moment on the significance of Krugman's monumental lapse of reasoning skills. You will recall that Krugman begins his article with an "endowment economy". An "endowment economy" is the basis and foundation - the very raison d'etre - of all bourgeois economics because it "assumes" that "individuals" in a society "start" operating in that economy with a "given" set of "endowments". This means that bourgeois economics takes for granted what any "economic science" even remotely worthy of the name should explain!! And that is how and why the "economy" that it analyses reaches the stage where individuals have "endowments" and how and why these "endowments" are measured. If one begins with the assumption that Steve Jobs was endowed with "genius", it follows that everything he did in his rotten life was..."genial"! Bourgeois economics assumes what it needs to explain: and that is - how and why certain "individuals" in the economy it analyses have acquired their endowments!!

In this regard, one must immediately acknowledge the heuristic superiority of the New Institutional Economics (from Coase to Williamson through Douglass North and Demsetz - also reviewed on this site - just search using "search" facility) because at least it acknowledges that capitalist "endowments" have a lot to do with "the institutions of private property of capitalism", which allows to inquire about how, when and why "individuals" came to be either "capitalists" or "workers" and not just "individuals"!

But Krugman has not even reached this "critical" point. His "goody-goody", "conscience-of-a-liberal" type of "humanism" has not reached that far. Instead, he starts with "individuals" who are either "patient" (lenders) or "impatient" (borrowers). But the question we must ask is: - "patient" or "impatient" for what??!! WHAT IS IT that these "individuals" are striving for? WHY do they "lend and borrow"? WHAT do they "lend and borrow"? And then it turns out that they are "patient or impatient"....TO MAKE PROFITS!!

So. WHAT these "individuals" lend and borrow is....CAPITAL! Capital that is "invested" in the hope that it will realise "profits" out of which both the patient lender and the impatient borrower will be able to accumulate more value or capital - which is the entire aim of the game!! And more "value or capital" means more political control and command over living labour and over social resources!!!

This is the bit that Paul Krugman does not wish to admit or acknowledge - unless we "extract" it from his mouth just like a dentist would extract one of his teeth! (You see, all these Princeton professors like to sound "enlightened", and so they throw us "rabble" some crumbs of wisdom while they indulge in their "enlightened divine serenity"! - Well, we say "Pikes to that!") But Krugman simply "has" to confront this problem - and he does, as we saw, when he acknowledges that "debt-deleveraging" (or Fisherian debt-deflationary) "shocks" occur when our dear "patient and impatient" capitalists "suddenly realise" (shock and awe!!) that the assets they have been investing in - and therefore the capital they have lent and borrowed, respectively - are....(wait for it!)....OVER-VALUED!! OVER-VALUED!! (This is the so-called "Minsky Moment" or "Wile E. Coyote Moment". For the incorrectness and self-contradictory nature of Minsky's underconsumptionist approach, search our site for "Minsky".)

But hang on a minute, Paul!! Professor!! Nobel Prize "genius"!! What is this new "thing" you mention: VALUE??!! Our answer is what Krugman will never admit or allow: Value is political command and control (historically and institutionally acquired - not "endowed"!!) on the part of capitalists over social resources that allow them to reproduce and expand their political command over the living labour of yours truly, US WORKERS!!

In our next intervention we will look at how this "endowment economics" is presented to us as a "science of choice" in the "society of capital".

Capital And Technology - Toward an Alternative Individuality


As we just saw in our fierce but devastating short critique of Krugman and Eggertsson below, bourgeois economics simply does not allow us even to mention the notion of "profit" or (worse still) "value". Because in bourgeois economic "science" there is no concept, let alone explanation, of "value and profit", even "progressive economists" such as Paul Krugman have to present capitalist crises as the result of "exogenous shocks". In other words, the present crisis of the capitalist "system" is not and cannot be due to the social antagonism intrinsic to the wage relation and therefore "endogenous" (indeed at the very "core and centre") of capitalism. Instead, any "crises" must be the result of "disturbances" that are external to the "market mechanism" because this mechanism is seen as a simple "distributive device" for the pure exchange of "endowments" that "individuals" possess at the start of the "exchange". Note here how bourgeois economics pre-supposes the existence of "endowments" prior (!) to the beginning of the market exchange that will determine and fix the relative "prices" of the goods to be exchanged on the market in accordance with the "free choice" of the "individual consumers".

The most fundamental and imprescindible condition for the existence of capitalist social relations of production, of the capitalist "system", is that there be workers that provide the living labour for the capitalist to exploit and that these workers be absolutely "free from" (!) any social or other "bond or link" from either the means of production or the pro-duct of living labour itself. Note how this "freedom" is defined in purely "negative" terms: the workers are "free from" all links and bonds and "rights" that may interfere with their "alienating" or "selling" their living labour - their "positively free living activity", which is the birthright of every human being - to the capitalist "individually" (not as a "class" or in union with other workers through "social labour"). That is why capital understands "freedom" in this purely "negative" sense - as utter destitution, as absolute poverty -, and also "individualism" in this purely formal sense, of the human being totally separated and alienated both from the means of production ("endowments" he does not possess) and from the pro-ducts of his living labour - which he can only purchase as a "free consumer" on the "free market".

But how "free" is the worker as a "consumer" in choosing to re-purchase from the capitalist the pro-duct of his own living labour which now, in the form of a "money wage" paid to him, stand in opposition to him as an alien power that is "dead, objectified labour"? Let us recall that the worker is not "free" to decide what he produces in the labour process or when or how. This is because "before" the worker gets to re-purchase the pro-ducts of his living labour it is the capitalist (!) who decides what the worker can "consume" (the product) and how he produces it (what means of production in the shape of machinery and technology are utilised in the production process) and how the worker "consumes" the product of the worker's living labour. (That utter beast that went by the name of Steve Jobs is perhaps the most illustrious and horrid recent example of how the capitalist completely arrogates to himself the right to make all these decisions - all the while exploiting millions of workers in China and winning accolades for being such a "genius" in the process!)

So, not only is the not worker "free" to decide "what" he produces; he is not therefore "free" to decide "how" he produces! And that is because (remember) the means of production - the machinery and technologies and materials used in production - are all "owned and designed" by the capitalist!! This is a point of paramount importance! The whole notion of "the captain of industry", of the "entrepreneurial spirit", of "capitalist innovation" from Schumpeter onwards depends on this! The reason why the capitalist - the entrepreneur - must retain control over the process of production is that the ability of capital to retain its violent command and usurpation over living labour depends on what is produced and how and where and when it is produced!!!

Put differently, the process of production, which includes both the "technologies" and the "products" that are ultimately produced for the "free choice of consumption" of the worker, must be controlled by the capitalist because they are of fundamental importance in determining the degree of control and command that the capitalist has and retains over the living labour of the worker!! Clearly, therefore, the entire concept of "innovation", of "creative destruction" developed by Joseph Schumpeter occupies a central role in the delineation and specification of a "Will to Power" on the part of capitalists against workers and - more precisely - in the "isolation" of living labour as the aggregate of "individual labours". It stands to reason that technologies and products that tend to emancipate living labour (workers) from the command and control of the capitalist - through the labour process and the "mode of consumption" - will be utterly deleterious to the reproduction of the capitalist's command over workers, in the workplace and in society at large!!

This thoroughly political and antagonistic aspect of capitalist industry is something that bourgeois economists wish to hide and to mystify with their dual trickstery in terms of, first, presenting the capitalist production as a "system" that equates mathematically or homogenises "quantities" or "existing realities" with one another; and, second, presenting the decision-making process of production as a function of subjective, individualistic "consumer choice" freely expressed in the marketplace, as if these decisions and choices that are ineluctably incommensurable could ever allow us to quantify (through “market pricing”) those “existing realities” that are in fact heterogeneous and incommensurable! What is in-com-mensurable (subjective choices) can never be used as a “measure” of anything else! The “quantities” of “economic science” are never “physical quantities”: they are “prices”! But “prices” apply only to “subjective choices” (the market mechanism) and can never “measure” the use or distribution of “physical quantities”!

One of the salient points we must make in this presentation is that the capitalist must always present the decision-making unit of the wage relation not as a "group of capitalists" utilising the full power and violence of State machinery against "individual workers", but rather - because of the essential need of capital "to isolate" workers individually - as decisions made also by "individual capitalists". The obsession of capitalist society, of the bourgeoisie, with the deification of "the free individual", of "the personality" - from Steve Jobs to Lady Gaga - lies entirely in this essential need. Were the bourgeoisie to encourage any form of social solidarity, any form of alternative "individuality", it would be digging its own grave because it would undermine the ground on which the wage relation stands!

In an imminent intervention we will seek to inquire into the possible "alternative individualities" that we can develop to oppose the rule of capital and to dissolve the wage relation.

Let Us Give Margaret Thatcher A send-Off She Will Hear Even From Her Pit In Hell!!!

Thursday 11 April 2013

Neruda, Pinochet and the Bitch (Margaret Thatcher)

Amongst the worthwhile indictments of that femme bestiale (bestial female), this one from the New Yorker deserves reprinting here for the benefit of our friends. It is a poignant account of how that rotten piece of human filth protected one of the worst murderous dictators of the last century. Lest we forget! Incidentally, Pablo Neruda's 'Residencia en la Tierra' (Residency on Earth) and his 'Canto General' remain two of my favourite poems. Here is the link:
It’s curious, historically speaking, that Margaret Thatcher died on the same day that forensic specialists, in Chile, exhumed the remains of the late, great Chilean poet Pablo Neruda. The author of the epic “Twenty Love Poems and a Song of Despair” and the winner of the 1971 Nobel Prize in Literature, Neruda died at the age of sixty-nine, supposedly of prostate cancer, just twelve days after the violent September 11, 1973, military coup launched by army chief Augusto Pinochet against the country’s elected Socialist President, Salvador Allende. Warplanes had strafed the Presidential palace, and Allende had bravely held out, but committed suicide with a rifle given to him by Cuba’s President Fidel Castro as Pinochet’s goons stormed into the Presidential palace. Neruda was a close friend and supporter of Allende’s; he was ill, but in the midst of planning to leave the country for Mexico, where he had been invited to go into exile. When he was on his deathbed in a clinic, his home had been broken into by soldiers and trashed.
At his funeral, a large crowd of mourners marched through the streets of Santiago—a grim city that was otherwise empty except for military vehicles. At his gravesite, in one of the only known acts of public defiance in the wake of the coup, the mourners sang the “Internationale” and saluted Neruda and also Allende. As they did, the regime’s men were going around the city, burning the books of authors it didn’t like, while hunting down those it could find to torture or kill.
A couple of years ago, Neruda’s former driver came forth to express his suspicion that Neruda had been poisoned, saying that he’d heard from the poet that doctors gave him an injection and that, immediately afterward, Neruda’s condition had worsened drastically. There are other tidbits of evidence that bolster his theory, but nothing conclusive. Forensic science, in the end, may provide the answer to a nagging historic question.
Why bring Maggie Thatcher into it? In a tribute Monday, President Barack Obama said she had been “one of the great champions of freedom and liberty.” Actually, she hadn’t. Thatcher was a fierce Cold Warrior, and when it came to Chile never mustered quite the appropriate amount of compassion for the people Pinochet killed in the name of anti-Communism. She preferred talking about his much-vaunted “Chilean economic miracle.”
And kill he did. Pinochet’s soldiers rounded up thousands in the capital’s sports stadiums and, then and there, suspects were marched into the locker rooms and corridors and bleachers and tortured and shot dead. Hundreds died in such a fashion. One was the revered Chilean singer Víctor Jara, who was beaten, his hands and ribs broken, and then machine-gunned, his body dumped like trash on a back street of the capital—along with many others. The killing went on even after Pinochet and his military had a firm hold on power; it was just carried out with greater secrecy, in military barracks, in police buildings, and in the countryside. Critics and opponents of the new regime were murdered in other countries, too. In 1976, Pinochet’s intelligence agency planned and carried out a car bombing in Washington, D.C., that murdered Allende’s exiled former Ambassador to the United States, Orlando Letelier, as well as Ronni Moffitt, his American aide. Britain regarded Pinochet’s killing spree as unseemly, and sanctioned his regime by refusing to supply it with weapons—that is, until Margaret Thatcher became Prime Minister.
In 1980, the year after Thatcher took office, she lifted the arms embargo against Pinochet; he was soon buying armaments from the United Kingdom. In 1982, during Britain’s Falklands War against Argentina, Pinochet helped Thatcher’s government with intelligence on Argentina. Thereafter, the relationship became downright cozy, so much so that the Pinochets and his family began making an annual private pilgrimage to London. During those visits, they and the Thatchers got together for meals and drams of whiskey. In 1998, when I was writing a Profile of Pinochet for The New Yorker, Pinochet’s daughter Lucia described Mrs. Thatcher in reverential terms, but confided that the Prime Minister’s husband, Dennis Thatcher, was something of an embarrassment, and habitually got drunk at their get-togethers. The last time I met with Pinochet himself in London, in October, 1998, he told me he was about to call “La Señora” Thatcher in the hopes she could find time to meet him for tea. A couple of weeks later, Pinochet, still in London, found himself under arrest, on the orders of Spanish judge Baltasar Garzón. During Pinochet’s prolonged quasi-detention thereafter, in a comfortable home in the London suburb of Virginia Water, Thatcher showed her solidarity by visiting him. There, and in front of the television cameras, she expressed her sense of Britain’s debt to his regime: “I know how much we owe to you”—for “your help during the Falklands campaign.” She also said, “It was you who brought democracy to Chile.”
This, of course, was a misstatement of such gargantuan proportions that it cannot be dismissed as the overzealousness of a loyal friend.
Pinochet himself finally died in 2006, under house arrest and facing over three hundred criminal charges for human rights abuses, tax evasion, and embezzlement. By then, he was alleged to have over twenty-eight million dollars stashed in secret bank accounts in various countries, with no sign that it had been legally earned. At the end, Pinochet’s only defense was a humiliating claim of dementia—that he couldn’t remember his crimes. His final heart attack came before he could ever be convicted.
During the years of what could be called Chile’s return to democracy, after 1990—when Pinochet was forced to step down from the Presidency he had seized following a referendum on his rule, which he lost—little was done to truly exorcise Chile’s demons, much less judge them. Pinochet retained the command of the armed forces, and when he stepped down from that role, in 1998, he retained a senatorship-for-life, which gave him immunity from prosecution. Until his detention in Britain, the Presidents who ruled “democratic” Chile continued to tiptoe around the fact that the country’s chief former tormenter continued to dictate the terms of the national discussion about the recent past. Following his return home, after sixteen months, however, Pinochet was stripped of his parliamentary immunity, criminally indicted for some of his coup-era crimes, and spent much of the remainder of his life under house arrest. But it took Michelle Bachelet, Chile’s President from 2006 to 2010—the daughter of a general who opposed the coup and was tortured until he died of a heart attack in detention—to end the tradition of deference.
In a country where, for decades, history was buried, it is fitting for Chileans to dig up Neruda to find out the truth of what happened to him. In a sense, Neruda was Chile’s Lorca, the Spanish poet who was murdered in the first weeks of Francisco Franco’s Fascist coup of Spain in 1936, and whose blood has been a stain on the conscience of his country ever since.
Chile now has a chance to do the right thing by its poet. Neruda’s beach home, at Isla Negra, some miles from Santiago on the coast, is a lovely, modest villa on a rocky beach, with windows that look out to sea and the poet’s lyrical collection of old ship mermaids as decorations. He and his widow, Matilde Urrutia, were buried there, and that is where the investigators went to look for the truth of what happened. In the end, even if Neruda died of cancer, as was said at the time, his exhumation is an opportunity to reinforce the message to authoritarians everywhere that a poet’s words will always outlast theirs, and the blind praise of their powerful friends

Keynes and the General Theory 1

Really and truly I do not know how to thank the many friends who continue to visit this humble site. At the risk of having the 'Krisis' book pillaged (only joking!) and seeing how popular the discussions of Keynes and Schumpeter have proved (but believe me, friends - Nietzsche may be a lot more difficult, yet he is far more significant in terms of reaching a critique of the bourgeois Rationalisierung), I am consolidating here my notes on 'Keynes and the Neo-Classics', between the October Revolution and the New Deal. Fascinating stuff, I hope you agree.

Incidentally, we are now close to the 100,000th visit! Small wonder we have shot up to the top of most Google Searches on "Economics” and social theory! Ciao a tutti.

In a recent intervention, Kenneth Rogoff has opined that the historically low levels of interest rates seen since "the Great Moderation" were probably due all along more to central-bank policies than to what Bernanke called "the savings glut" from so-called emerging markets. A related talking point is provided by Lawrence Khoo, who claims that the transmission mechanism between monetary policy and investment and its effects on asset prices bears little relation to what "normal economic science" suggests.
All throughout, what we are witnessing is a growing need to devote less attention to what Marshall called "the universal truths" of Political Economy (Classical and Neo-Classical) and more to "the concrete truths" of bourgeois capitalist institutional practice. (The New Institutional Economics, from Coase to Williamson is a very flawed first attempt to do just this.) For this purpose, I have collated some of my commentary (both here and at Martin Wolf Exchange) in a two-part blog called "Keynes and the General Theory". One of the interesting conclusions that I suggest is that Keynes never intended to write a "General Theory" and that indeed the entire thrust of that work (contrary to the "Treatise on Money") is precisely to argue the opposite - and that is, that a "general" theory of economics is impossible and that we must pay close attention to the institutional reality of each "stage of capitalism" (something that people like Schumpeter and Minsky were eager to do).

1. – Theoretical Origins of the Crisis-State

The most important distinguishing mark of neoclassical economic theory is its pure “subjectivism”. Under the pretext of championing “individualism” and contrasting “collectivism”, the Neoclassical Revolution is an intransigent and powerful reaction to the rising tide of working-class movements in Europe that contrast the rule of the bourgeoisie under the banner of Socialism. The life-and-death problem for European bourgeoisies still tied to feudal and dynastic aristocratic traditions of government is how “to include” the mass of industrial proletarian workers that the First Industrial Revolution has spawned and concentrated “dangerously”  in urban industrial centres in which the interdependence of “social labour” requires a level and intensity of political co-ordination that the old laissez-faire attitude theorized by Adam Smith and the Anglo-Saxon liberalists simply cannot supply. The threat of socialist revolution is present and growing by the hour. Imponent mass parties representing the rights of “labour” are surging in every nation and demanding “representation”, even the opportunity to govern in their own right (!) in the old “parliaments” that were previously the preserve of the nobles and notables.

The French and American Revolutions have made a return to the old aristocratic order envisaged by the Congress of Vienna absolutely untenable. When Napoleon declared to the ageing Goethe that “Nowadays, fate is Politics”, what he meant was that the only way to prevent revolutions and to preserve bourgeois public order is to integrate these vast “labouring and dangerous classes” under the political banner of nationalism. The old European state armies cobbled together and then disbanded at the whim of local “princes” will count for nothing and be ignominiously and definitively defeated and smashed by the new Napoleonic Grande Armee fighting with fervor and fierce conviction for the ideals of “Liberte’, Egalite’, Fraternite’”.

The Neoclassical Revolution stubbornly and cynically refuses to accept this new reality of the Political. Not the Political of the old Classical Political Economy and of Liberalism in which the “equilibrium” of the “self-regulating market” ensures simultaneously the ever-growing rational “growth” of “the wealth of nations”, of their “common-wealths”, and at the same time preserve a “public sphere” in which individuals may express their “free political and religious and moral opinions” so long as these do not interfere with the “operation of the free market” now elevated to a “science” governed by the “economic laws” mathematically formalized with increasing accuracy and rigor by the neoclassical school from Gossen through to Menger and Jevons, and then to the opposing extremes of mathematical formalism with Walras and of institutional practice with Marshall.

Just as the real subsumption of the production process by the bourgeoisie requires the accumulation of value the better to be able to combat the antagonism of workers to the wage relation, so this growing “intensification” of the labour process to maximize profit entails the “rationalization” of every aspect of social life – at first only those aspects connected with the process of production inside the workplace, but later also those aspects of social conduct that have to do with consumption and distribution and also with the supply of resources horizontally and vertically for production. This process of “rationalization” proceeds with the “quantification” and “measurement” of every aspect of individual and social life. Because the satisfaction of the growing needs of the workforce is seen as the increase of “wealth” due to rationalization, both Classical Political Economy and the Neoclassics see the discovery of mathematical relationships between production and distribution of the product as vital to determining the most efficient methods of production consistent with the most equitable distribution of the product. The question for economics is to define “wealth”, to describe its efficient distribution in proportion to the contribution of the various factors of production.

In the best of his “Essays In Biography”, Keynes describes with a brilliant simile the peculiarity of Marshall’s approach to the mathematical methods to be applied to economics:

Jevons saw the kettle boil and cried out with the delighted voice of a child; Marshall too had seen the kettle boil and sat down silently to build an engine. (pp.155-6)

For Marshall, Jevons has merely suggested a formal mathematical framework of interpretation of a given social reality – a “concrete truth”. But this “framework” must in no guise be mistaken for a “universal truth”: it is merely an “economic dogma” because, as Marshall well knew, “utility” itself is a purely “subjective” notion and, as such, far form leading to “concrete truths”, it may well represent the height of irrationalism, it may amount to nothing more than sheer “metaphysical dogma”. All one can do is to construct “an engine”, a “tool” or instrument for the discovery of those “regularities” of social behaviour that can guide enlightened public policy.

While attributing high and transcendent universality to the central scheme of economic reasoning, I do not assign any universality to economic dogmas. It is not a body of concrete truth, but an engine for the discovery of concrete truth. (p171)

(Keynes himself in the General Theory will not renounce the reactionary irrationalism of marginal utility theory: instead, he will compound it with his own brand of mysticism dragged to the cynical depths of “animal spirits” and “uncertainty” – and indeed of “black magic” as in his strangely sympathetic portrait of Newton’s arcane experimental practices in these ‘Essays’.)

The essential point to grasp here is that both theories of economics – the neoclassical and the socialist - take “the factors of production” as given: they differ only in how the actual “output” ought to be distributed (socialism) and about the effects of “political intervention” on the operation of the market (neoclassic). In both cases “the economy” is seen as a “given” set of technologies and a “given” set of “inputs” that can only result in a “given amount of output”. In this way, the early reflection on “economic science” is “locked out of the factory”, as it were; it does not scrutinize the process of production; like Marshall, the economic “socialists” (who form in fact the vast majority of “economists”) are concerned not so much with the inequality of income but rather with the inequality of opportunities. In other words, it is the “interference” with the proper operation of “the economy” – the production of goods and services and its “fair” sale on the market – that concerns economists: there is no notion on either the socialist or the “liberal” side that “the economy” itself, the process of production, involves an “impossible exchange”!

The economy therefore is seen as a “mechanism” that functions “objectively” in terms of “inputs” and “outputs” whose “quantity” can be determined “mathematically”. The economy can function “automatically” like a machine; it cab be operated “scientifically”, as in a laboratory experiment, for the greatest good of the greatest possible number. The “utility” of the individual matches therefore the implicit utilitarianism and egalitarianism of the Sozialismus: it is under this deception that the workers’ movement will labour from its inception to the present day. Yet it is quite evident that “the economy” does not operate automatically because it is subject to violent fluctuations and investment cycles that shake society from booms of full employment and prosperity to busts of high unemployment and depression. It is equally obvious that these “deviations” from what ought to be an “objective mechanism” manageable “scientifically” must be caused by some “interference” that relates not to the process of production itself but rather to the “distribution” of the “industrial output”.

The “hiatus”, the “gap”, lies between the moment goods are produced and the moment they are purchased: the process of production itself is not even remotely put in question either by the promoters of Socialism or by their “bourgeois” counterparts. The fact that the means of technology utilized in production and the “goods” produced for consumption (and therefore also the “materials” used for their production) may be the result of political antagonism, that they may “embody” the antagonism of the wage relation, does not in the least surface among the considerations of “economic analysis” either Classical or Neo-classical. But this “hiatus” that leads to the frequent “observable crises”, to the cycle of boom and bust of capitalist industry, and so of output and employment – this “hiatus” has to do either with the excess of consumption on the part of workers whose wages are excessive or else it is caused by the excess of investment on the part of capitalists whose unusual “profits” lead straight to “overproduction” or “underconsumption” on the part of workers whose money wages are insufficient to consume the product. In either case it is the presence of “money” that clearly causes the distortions, the “discrepancies” between production and consumption that cause “the economy” to sway from excessive production to excessive consumption, with corresponding falls in profitability, investment and employment.

In this framework of analysis of capitalist production and society, whether it is the Socialists who condemn capitalism for its “anarchical”, “unplanned” excesses that cause misery for the unemployed, or whether it is the laissez-faire liberals who blame “political interference” and the misguided attempts by “Socialist” governments to interfere with the free market operation – in both cases all “economists” can agree that it is the presence of “money” as the “veil”, the “intermediary” between production and consumption, that is – as it always was from the dawn of Christianity – “the root of all evil”.

Two central features emerge then from the peculiar Weltanschauung that both Socialism and Liberalism come to share at the end of the nineteenth century and at the beginning of the last one: the first is that “the economy” is a sphere of social activity that can function “automatically” and that is governed by “objective economic laws” provided that these are allowed to operate freely; the second is that the objective operation of the economy must be managed and planned scientifically by the State, for the Socialists, or, for the Liberals, it must be allowed to work through the self-regulation of the market without interference from the State. The role of the State “to regulate” the economy is achieved therefore through the monetary medium, either through the control of the monetary mass and the interest rate, or else through social policy that redistributes income between the social classes, or else still through direct intervention by the State in the economy through policies aimed at “buffering” the extreme swings of the market economy.

Neither in the Socialist vision of Economics, nor in the Liberal one is there any room for the State as a rightful “factor” in economic analysis: for both political positions, the State remains “external” to the operation of what is seen as a “market economy” whose only “disturbances” or “crises” are derived not internally from production but externally through distribution – distribution that boils down ultimately to “monetary” factors, whether in terms of monetary magnitudes or of monetary redistribution of income through fiscal intervention by the State. The idea of the State as an essential and necessary component of the economy was as foreign to laissez-faire liberalism as it was to the most revolutionary members of the Linkskommunismus. True it is that the Leninist faction of the Second International advocates a “dictatorship of the proletariat”. But this “dictatorship” is the equivalent of changing the drivers of the same vehicle: the idea that subtends all Socialist dogma from Proudhon to Social Democracy and Bolshevism is that the proletariat will take over the capitalist machinery of production to run it in its own interests. There is no suggestion that the social relations of production and, with them, both the means of production and the products and the methods of consumption and distribution will change as well! Even Lenin’s extensive pronouncements on the strategy and tactics of the revolutionary party will limit themselves precisely to these “strategies” in favour of the “skilled workers” who are being “supplanted by machines” and whose “artisanal skills” are lost to the universal alienation of Taylorism (lampooned by Charlie Chaplin in ‘Modern Times’) and loss of “totality” in the labour process that only the proletariat as “the individual subject-object of history” can restore! (Lukacs) It was Lenin after all, and now the fact should not seem so surprising, who stated that “Politics is a concentrate of Economics”.

Lenin has no doubts that his Bolshevik Revolution represents a leap too far – such is the “backwardness” of Russian capitalism that its “economy” will have to be “upgraded” to the level of technical and managerial leadership of German industry (see his ‘The Development of Capitalism in Russia’). But the October Revolution of 1917 will offer Keynes as early as the Versailles Treaty conference (cf. his explicit reference to Lenin in ‘Economic Consequences of the Peace’) with the “challenge” that Leninism represents for Western capitalism: here is the first and most troubling epoch-making historical and social evidence of the fact that “the economy” cannot be separated from “society” and that the Political in the final instance can destroy what had seemed until then to be “the economic laws” of any social organization. (Absurd must have seemed to Keynes the farcical attempts of Von Mises and Hayek “to prove the impossibility of a socialist economy” (!) in response to Bolshevism, written as early as the late 1920s –cf. Mises’s book, Socialism and introduction by Hayek.)

We will look in more detail at the effect of the New Deal on Keynes’s General Theory in our next piece. For now, let us end this discussion with the interesting parallel of the effect that the Bolshevik Revolution had on the two highest exponents of bourgeois economics in the 1930s – an effect that was only to be reinforced by the advent of the Rooseveltian New Deal as a portentous capitalist response to the Leninist challenge. Both Keynes and Schumpeter, in fact, who up until that time had confined themselves to critiques of neoclassical theory that were more in the nature of “cosmetic” improvements or corrections and who had shared unquestioningly the schema that we have presented here of a capitalist economic “mechanism” independent of politics and the State, following these two epochal “revolutions” in the institutional asset of the nation-state – one Leninist and the other Rooseveltian – transformed their own theoretical approaches to include precisely the possibility – and indeed the inevitability – of a fundamental role of the State, of the Political, in the essential operation and functioning of any Economy. After the Red October and after the Hundred Days, it seems, the old bourgeois illusion of the epistemological separation of Economics and Politics – of their “homologation” in separate spheres of social reality – becomes absolutely impossible. “Lenin is quoted as saying,” relates Keynes in the ‘Economic Consequences of the Peace’ (but the statement has never been corroborated), “that the best way to undermine a country is to debase its currency.”

References: (Keynes) (This is an almost literatim - but strangely unacknowledged - translation of a brilliant piece on Keynes by Antonio Negri first published in Operai e Stato. The translation and some unauthorised intrusions make the reading sound more "triumphalist" than was even the original. But it is a useful review that some of you may wish to peruse.)



2. Science, Economy and Society

If “the economy” is a “mechanism” that connects automatically a given quantity of “inputs” with a given quantity of “outputs”, it is “axiomatic” that there must be a “scientific and mathematical” way of ensuring that this “economy” functions “automatically” – and that can be obviously by eliminating or avoiding any “disturbances” (external shocks) or “interferences” (political measures and institutions) from influencing or disrupting its operation. “Crises” therefore are not “internal” to the economy, but entirely “external”. Indeed it can be said that if the economic laws of the marketplace economy are kept in place, its reproduction will be in large part “spontaneous” or “automatic”. And it is equally obvious that for a society to reproduce the aggregate “savings” of the society must equal the aggregate “investments”: this, in a nutshell, is the meaning of Say’s Law: it is what must obtain to ensure that the sought-after “equilibrium” of the economy is attained, whether one adopts “socialist” or “liberal” policies. 

Say’s Law is the tangential point that connects the socialist circle with the liberal line. And it is Say’s Law – the fundamental Law of Economics – that makes possible the determination of an “economy” that operates “spontaneously” and “automatically” if the laws of economics are respected, in such a way that civil society, the Economy, can function entirely independently of the Political, of the State, where the State is a “negative State”, like the “economy” a mere “machine” or mechanism, confined to the protection of the self-regulating market and ensuring that “public opinion”, the moral and religious persuasions of “citizens”, do not interfere with the market and are confined to the “public sphere” of debate and deliberation. This homologation of the Political free-dom, which allows “citizens” to exist as moral members of a dialectical “public sphere”, and of the “scientific necessity” of the Economical where the “individual” attends to his “self-interest” according to his needs, as a “bourgeois” – this homologation of the conventional sphere of the Political and the hypothetical mechanism of the Economy is what unites both Classical Political Economy and Neoclassical Political Economy.

In this schema, universally accepted before the Great Depression, the State is seen as a “nightwatchman state” (in Lassalle’s phrase), as a “State of Law”, as the enforcer of laws that protect the homologation achieved by the Political Economy for the efficient operation of the economy in a free society. In this schema, the State plays absolutely no significant part, if it plays any part at all, in the substantive functioning of the economy except as a “guardian”, except as “police”, ensuring that the “self-interests” of the individual “bourgeois” are kept within the ambit of the laws of the market so as to preserve “life, liberty and estate”. But this is precisely where the homologation, the equi-valence of the Political sphere and the Economy breaks down. - Because the “self-interest” of the individual market participants may not necessarily “converge” or be consistent with the “self-interest” of other individuals. As Marshall had warned with regard to Jevons’s mathematical calculations of marginal utility, these assumed that the “utilities” of the “individual” were compatible with those of other “individuals” within the sphere of exchange defined and regulated by the market! Now, this assumption was mere “economic dogma” and could in no guise lead to the certainty of “concrete truth”. The “laws of economics” presuppose axiomatically the existence of a “common utility” between all market agents; they postulate the existence of a Smithian “enlightened self-interest” whereby the self-interest of the single bourgeois is somehow compatible with that of every other bourgeois at least in the sense that they can “co-exist”. Even assuming the existence of “economic laws”, it is evident that the “agreement” by all market participants to abide by them is dependent on the “scientific rationality” of individuals and on the existence of a “civil society” in which there is consensus to be governed by a State, by political institutions, that will enforce the undisturbed operation of the “self-regulating market”.

It is precisely the assumption in both Classical and Neoclassical economics of the axiomatic necessity of the existence and of the spontaneous automatic operation of these “institutions” that Keynes challenges from the very first sentences of the General Theory.

I have called this book the General Theory of Employment, Interest and Money, placing the emphasis on the prefix general. The object of such a title is to contrast the character of my arguments and conclusions with those of the classical [1] theory of the subject, upon which I was brought up and which dominates the economic thought, both practical and theoretical, of the governing and academic classes of this generation, as it has for a hundred years past. I shall argue that the postulates of the classical theory are applicable to a special case only and not to the general case, the situation which it assumes being a limiting point of the possible positions of equilibrium. Moreover, the characteristics of the special case assumed by the classical theory happen not to be those of the economic society in which we actually live, with the result that its teaching is misleading and disastrous if we attempt to apply it to the facts of experience. (p3)

Rightaway, Keynes invites his readers to reverse the order of analysis of “classical” (orthodox bourgeois) economic science: the “laws” postulated by that “science” apply only as a “limiting point of the possible positions of equilibrium”; they represent only “a special case” whose characteristics “happen not to be those of the economic society in which we actually live”. Gone, therefore, are the “axioms” of “economic dogma”; gone are the postulates of economic science with its neat mathematical equations and its “certainties” of rigorous “existence” of “equilibrium”. The only “existence” that is relevant is not that of mathematical equilibria, but the ec-sistence of this society – “the economic society in which we actually live”! There is no “necessity” to these “characteristics”: they simply “happen” not to be those of the existential reality in which we “actually live”. Life is not mathematics; “concrete truths” are not “universal truth” (Marshall). Beneath the apparent “automatic” functioning of the market laws there lies a social reality that is as complex as human existence, as “meta-physical” as the very “metaphysics” that neoclassical economic science despises!

Just as Einstein had shattered the “uni-versality” of Newtonian physics, just as Nietzsche and Heidegger had “trans-valued” the old values of Western metaphysics – so now does Keynes turn upside down or “reverse” the perspective of Neo-Kantian and Machian economics. Nothing is absolute: everything is relative. To orient ourselves in this society we must ensure that the so-called “laws of economics” that supposedly maximize the “welfare” of the society do not destroy first in the process of their “theoretical” operation the very “society” on which they are founded: “with the result that its teaching [that of orthodox economics] is misleading and disastrous if we attempt to apply it to the facts of experience”.

And “the facts of experience” teach us instead that there are forms of behaviour or “institutions” that are peculiar to “the economic society in which we live”: not all or every (!) “economic society”, then; only the one “in which we live”. And this “economic society” happens to be a capitalist society. Society comes first; economics later. If we wish to preserve “this” (!) society – a “capitalist” one – we must then adapt existing institutions and adopt new ones that will ensure the survival and reproduction of a specifically “capitalist” society: we must prescribe the institutions that can make up a “society of capital”! To insist with abstract “economic laws”, to affirm their “eventual” triumph – “in the long run” – can lead only to the tearing of the fabric of this society on which this “economy” is founded. 

The celebrated optimism of traditional economic theory, which has led to economists being looked upon as Candides, who, having left this world for the cultivation of their gardens, teach that all is for the best in the best of all possible worlds provided we will let well alone, is also to be traced, I think, to their having neglected to take account of the drag on prosperity which can be exercised by an insufficiency of effective demand. For there would obviously be a natural tendency towards the optimum employment of resources in a Society which was functioning after the [p.34] manner of the classical postulates. It may well be that the classical theory represents the way in which we should like our Economy to behave. But to assume that it actually does so is to assume our difficulties away.

Therefore, “in the long run we are all dead” does not mean (as many superficially take it to mean) that “all things must pass”! Keynes is saying instead that if we choose to adopt “the long run” as an inflexible mode of conducting capitalist society – then, in that “long run”, “we as capitalists”, the economic, capitalist society “as we know it”, “in which we actually live”….will die (!), and “we, the capitalists, will die with it”. Keynes is not referring to “mankind” in general: he is addressing his own class and this society, which is the only form of civilized society that he knows, that he can conceive as worthy of inhabiting. That it is the survival of “bourgeois society” that Keynes had in mind, that this was the context in which his famous maxim was uttered, is illustrated clearly and dramatically by Hayek’s direct response to the Keynesian subversion of the nature and content of “economic analysis”, from “science” to virtual “policy”.

I cannot help regarding the increasing concentration on short-run effects—which in this context amounts to the same thing as a concentration on purely monetary factors— not  only as a serious and dangerous intellectual error, but as a betrayal of the main duty of the economist and a grave menace to our civilization….It used, however, to be regarded as the duty and the privilege of the economist to study and to stress the long-run effects which are apt to be hidden to the untrained eye, and to leave the concern about the more immediate effects to the practical man, who in any event would see only the latter and nothing else.3 (Hayek, The Pure Theory of Capital, p,409). (my emphases)

The polemic with Keynes is evident. “In the long run, we are all dead”, of course, but Hayek hankers by “spontaneous”, “long-term” processes (he would refrain from saying “natural”, as in the “natural prices” of long-term equilibrium) - processes that display the “underlying logic of human action”, - an “open-ended” notion, to be sure, but one from which a “pure logic of choice” may be distilled (the word used by Bohm-Bawerk in his tirade against the German Historical School) – a spontaneous order to be protected from the extrinsic “short-term policies” introduced by “interventionist” governments and the “disturbances” that they cause, as displayed by “the trade cycle”. To interfere with this “pure logic of choice” or “science of choice” is not only “an intellectual error”, but a “betrayal and a grave menace” to civilization itself!

“But it is alarming to see that after we have once gone through the process of developing a systematic account of those forces which in the long run determine prices and production, we are now called upon to scrap it, in order to replace it by the short-sighted philosophy of the business man raised to the dignity of a science. Are we not even told that, "since in the long run we are all dead", policy should be guided entirely by short-run considerations? I fear that these believers in the principle of apres nous le deluge may get what they have bargained for sooner than they wish,” (p410, my emphases).

For Hayek, it is the Keynesian urge to interfere with the “spontaneous order” of social life as encapsulated in the tenets of economic “science” that represents a nihilistic betrayal both of science and of civilization. Keynes’s “General Theory” is the abandonment of reason for the very “short-run” preservation of capitalist society – an “interference” with “those forces which in the long run determine prices and production” done in the name of a “short-sighted philosophy” that can only compound and hasten (“sooner than they wish”) the decadence and decay and decline of “civilization”, that is to say, of bourgeois society and its “economy”.

Monday 8 April 2013

The BITCH Is Dead! Long Live the Bitch!!

Margaret Thatcher - ruthless hound-dog of the villainous bourgeoisie - is finally where she belongs, in the history of infamy and brutality. May the Devil welcome her to the murky waters of Acheron. Some say that she suffered from dementia in the last few years - but I think that she suffered from dementia from the day she was born!