Commentary on Political Economy

Sunday 2 June 2013

Keynes and Einstein: Relativity and Uncertainty in the General Theory

The Great War of 1914 to 1918 shatters the illusions of the European Enlightenment: it is not simply the ability of human beings to behave “rationally”, according to the methods and laws of science, that is called into question; it is not merely the belief in a steady “progress” of humanity toward “peace and prosperity” (it is the motto of the Habsburg Austro-Hungarian Empire shortly before its collapse) - again in the footsteps of science and technology - that is tragically confuted; it is above all the very content of “scientific rationality” that is called into question – nowhere more so than in the sphere of economics. Alfred Marshall may have exemplified the faith reposed in the practical unity of science and progress before the War:
From Metaphysics I went to Ethics, and thought that the justification of the existing condition of society was not easy. A friend, who had read a great deal of what are now called the Moral Sciences, constantly said: "Ah! If you understood Political Economy you would not say that." So I read Mill's Political Economy and got much excited about it. I had doubts as to the propriety of inequalities of opportunity, rather than of material comfort. Then, in my vacations I visited the poorest quarters of several cities and walked through one street after another, looking at the faces of the poorest people. Next, I resolved to make as thorough a study as I could of Political Economy. (Marshall quoted in Keynes, ‘EinB’, p137)

It is the notion of Scientific Truth and its implicit concept of Progress that the capitalist crisis of 1905, the subsequent Great War of 1914-18 and the eventual collapse of the Versailles Treaty after the Great Crash of 1929 together with the abandonment of the Gold Standard – it is the literal implosion of all these tenets of the bourgeois world order that signal an epochal crisis (cf. Husserl’s “The Crisis of European Science”) not only in the bourgeois “application” of normal scientific methods, but also and above all in the bourgeois self-understanding of its “science” itself and of its claim to Truth! The peculiar genius of Keynes’s “general theory” consists precisely in its signalling the impossibility of establishing a “general theory of economics” independent of the particular historical and social formation under scrutiny. It is Keynes’s devastating critique of “the long run” of both Classical and Neo-classical economics, his peremptory refutation of the “scientific” ability of the capitalist mode of production to regulate itself “automatically” around a scientifically-determinable “objective Value”, without “interference” from the State, from the Political, - it is this series of novel realizations by Keynes that represents the most significant advance of bourgeois theory between Einstein’s relativity and Heidegger’s Da-sein, all of which emerged as a response to the life-threatening “crisis” of bourgeois capitalist society in the period between the two World Wars.

Nothing epitomized the Panglossian “optimism” of pre-War Europe more than the existence of the Gold Standard as a seemingly “automatic” regulation of global trade and industry. Here was sparkling proof of the harmonious convergence of scientific rigor and welfare maximization. Here was evidence of the “automatic” functioning of the self-regulating market mechanism that could reconcile in Say’s Law both the labour theory of value of Classical Political Economy and the marginal utility theory of the Neoclassics. The general equilibrium mathematically identified by Walras uniquely brought together for economic analysis the “form” of mathematical scientific precision with the “content” of utility maximization for each individual economic agent.

Already, Schumpeter had questioned the “Statik” of bourgeois economic science and the need to develop a “Dynamik” analysis of capitalist industrial societies as a result of the Great Crisis of 1905. For his part, Keynes perceived from the end of the Great War that the peace and prosperity of the Golden Age had been built on very shaky foundations: shakier still and ominously dangerous for him is the insensate credence of the victorious powers at the Paris Conference of 1919 in their ability to return to the old pre-War “equilibria” of the Gold Standard and the League of Nations. To be sure, the “elements” of his economic analysis – to poke irony at his derogatory critique of the “axiomatic” character of neoclassical theory – remain steadfastly neoclassical. But one “historical reality”, an imponent presence upsets all the “equilibria” of the marginalist revolution for Keynes: the extreme implausibility of the equilibrium of savings and investment as a “spontaneous self-regulation” of the market mechanism – the Invisible Hand that decrees that “supply creates its own demand”. Not for nothing Schumpeter – who had championed the role of the “entrepreneur” in stirring capitalist industry from its tendency to equilibrium – will lael Keynes “the economist of stagnation”. As we saw in a separate study, however, Schumpeter privileged the “innovative” aspects of capitalist enterprise, but failed to capture the need for the bourgeoisie “to govern”, to command and direct this “innovative entrepreneurship” in a manner that avoided the destructive aspects of capitalist innovation that inevitably threatened capitalist society itself!

For Keynes, instead, Say’s Law would hold in the “special case” in which supply (investment) and demand (consumption) could adjust instantly and seamlessly to variations in their respective schedules. In such a case, there would be not so much an “equilibrium” of “quantities” as rather a “harmony” of “information” because the “equilibrium” would consist in the “perfect matching” of “demands” (the informational equivalent of “consumption”) and “expectations” (the mental equivalent of “investment”). In such an “economy” all “information” relevant to production and consumption schedules would be immediately and omnisciently available to all market participants in such a way that no “discrepancy” could arise between supply and demand: supply would adjust to known demand and demand would adjust to available supply. This attack against neo-classical equilibrium theory, as expounded particularly by Leon Walras, had already been launched devastatingly by Friedrich Hayek in the 1920s.

For the Bursar of King’s College (as indeed for Hayek), here the neoclassical school had “illicitly” (ch.2, GT) allowed the “form” of the science to rationalize the “content” of capitalist “economic society”, to justify its conduct, to certify its legitimacy. The error of all previous theories is that they fail to distinguish between form and content: the form serves merely as a warranty of the optimality of capitalist activity, of the reality of bourgeois society! Just as did Hegel, for whom the philosophy of history is the history of philosophy because “whatever is real is rational and what is rational is real”, so has economic science illicitly become the scientific certification of present “economic conduct and practice”! It is not so much that the capitalist economy requires “different scientific categories” for its analysis! Keynes insists that the “tools” of analysis are the same as those that can be used for “any” economic society. But the “actual workings” of the capitalist society are different from those of other societies in the sense that “the basic factors of production and distribution” (“Value and Production”) work differently in this society. Keynes distinguishes between the “tools” of economic analysis and the fabric of society: the same scientific tools can be applied to different historical economic societies that are made “different” by their institutional frameworks. This is the challenge that Keynes throws against “the postulates of the Classical Economics”:

Most treatises on the theory of Value and Production are primarily concerned with the distribution of a given volume of employed resources between different uses and with the conditions which, assuming the employment of this quantity of resources, determine their relative rewards and the relative values of their products. (Ch.2)

The question, also, of the volume of the available resources, in the sense of the size of the employable population, the extent of natural wealth and the accumulated capital equipment, has often been treated descriptively. But the pure theory of what determines the actual employment of the available resources has seldom been examined in great detail…. I mean, not that the topic has been overlooked, but that the fundamental theory [p.5] underlying it has been deemed so simple and obvious that it has received, at the most, a bare mention.
That is the “destiny” of mathesis: - to be its own fulfillment. If one defines, as did Robbins and Hayek with their “Science of Choice”, the “available resources” as “given” and therefore “fully employed”, then it follows that economic analysis boils down to the mere mathematical selection of the method of allocation and distribution of these resources consistent with the maximization of human welfare. But the problem, as Keynes points out, is that the “actual employment” may well not be “full” – that there may be “involuntary unemployment” of the available resources not because of some interference or disturbance or shock “external” or “exogenous” to a historical economic society, but rather because of its very modus operandi, because of the real institutional “content” of its behaviour!

The task of economic analysis then cannot be to devise a mathematical description of an ideal reality, a perfect state, a “general equilibrium”, and then to attribute all the evident flaws of this reality to some “disturbance” or “exogenous shock”! The task of scientific analysis is to register these “shocks” as part and parcel of the economic system under consideration and then to suggest changes to the current institutional asset to prevent these “shocks” from destroying the “peace and prosperity”, the “equilibrium” of the economic society in question. As Keynes puts it with a half-derisive tilt at “economic science”:

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.

The ultimate goal for Keynes is to preserve society – “economic society”, bourgeois society. And it is clear from the very first lines of The General Theory that the major, most imminent threat to the existence of bourgeois society is the “involuntary unemployment” of human resources – of “labour”. It is this “discrepancy” between the “available resources” for employment and the “actual employment” of those “resources” that threatens the stability and the very survival of capitalism and of bourgeois society: the question then is to establish why such a discrepancy exists and how it can be remedied. Existing economics assures us that any “unemployment” of available resources is either “voluntary” or “frictional”, if it is not due to “political interference” with the “self-regulating market mechanism”. But provided this mechanism is allowed to operate “freely”, then full employment will return “in the long run”.

This is precisely the underlying philosophical framework that Keynes challenged finally in The General Theory. Two concepts immediately demanded Keynes’s attention there: one was the notion of “long run”, which requires a certainty verging on faith in the ability of “the market” to steer a society to “peace and prosperity”. And the other was the assumption of the “freedom” of economic agents – of “individuals”. And once again it is the experience of the Great War that confutes both these credos of economic “science”. For the War has destroyed all “certainties”, scientific and moral, all faith in “values” and replaced them with one frightening “certainty”: - the certainty of death. Death with its finality is the only “certainty” and “value” that the War has brutally confirmed. Not only is the future of “the long run” not assured; not only is it “uncertain” – and here “uncertainty” comes to occupy a central role in Keynes’s economic analysis. But also the “freedom of choice” on the part of the “individual” that neoclassical theory and its marginal utility postulate implies a “rationality” on the part of the “individual” in exercising his “choice” or his economic “conduct” – a rational “freedom of choice” that the very absurdity and irrationality of the “European civil war” and its near annihilation of societies and civilization have quite simply demolished! Individuals act neither independently of one another, nor rationally according to the dictates of science: economic analysis itself, in seeking to describe “rigorously” their behaviour and to prescribe their conduct along “scientific-rational” lines, shows conclusively that there is no obvious “objective” definition of “freedom” or indeed of “rationality”! If indeed the “dictates” of science were “true”, then the very ability of human beings to perceive them as such (as “true” instead of “false”) means that acting in accordance with these “dictates” is still “optional” – a fact that undermines and indeed destroys the very “scientificity” of the “dictates” of science or “scientific laws”.

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)

Quite evident here is Keynes’s attempt to replicate with his “general theory” in the sphere of social science the profound trans-formation that Einstein’s “theories of special and general relativity” – elaborated a full twenty years earlier between 1905 and 1917 - operated on the Newtonian understanding of the universe that had prevailed in the physical sciences from the middle of the seventeenth century. Equally, Keynes’s well-known distinction between “uncertainty” and “risk” echoes Heidegger’s notions of Da-sein as, on one hand, unbounded “possibility” leading to the “authenticity” of “freedom before death” and, on the other hand, as “averageness” or “quotidianity” – notions elaborated in his Being and Time, a masterpiece that signals the end of both Wilhelmine civilization and the delusions of the Europe of la belle époque. It is impossible fully to understand the revolutionary character of Keynes’s “general theory” without paying close attention and com-prehending the undeniable parallels between his novel understanding of “society” and Einstein’s equally revolutionary redefinition of the physical universe as well as Heidegger’s De-struktion of Western metaphysics and science.

The decisive difference between the theories of Keynes in economics, Einstein in physics and Heidegger in philosophy as against those of their Classical/Newtonian and Neo-Classical/Machian counterparts is that these last remain profoundly “essentialist”, that is to say, they interpret the world in terms of an “objectively true reality” that is capable of being de-fined by means of com-prehensive theories that link strictly and unequivocally – scientifically and truthfully – the objects of this reality to one another within the dimensions of space and time. Both the Classical/Newtonian and Neo-classical/Machian theories of society and of the physical world maintain, albeit with significant differences, that it is possible to com-prehend the cosmos “coherently” by assigning discrete “ideas” to discrete “things” as well as to their mutual “relations”. This is known as the ordo et connexio rerum et idearum whose “truth” is understood to be the adaequatio rei et intellectus. The idea, the theory, is so strictly con-nected to the “thing” (the objective reality it describes), it is so “adequate to” or “co-herent with” this “reality”, it “ex-plains” this reality so completely, that it is intellectually indistinguishable from it, and therefore “objectively true”.

To be sure, in the quotation above, Keynes jumbles together under the title of “classical theory” what are in fact quite distinct economic theories, Classical Political Economy (Smith, Ricardo and Marx) and Neo-classical Political Economy (Menger, Jevons and Walras) – and he does this all the better to emphasise the “break” with the past that he intends to make just as did Einstein by going beyond the “Classical” physical science of Newton as well as the “Neo-classical” or neo-empiricist one elaborated by Ernst Mach. Contrary to Keynes’s superficial conflation of the two, there are significant dif-ferences between Classical and Neo-classical theories in that the former base their “essentialism” exclusively on an “ob-jective re-ality”, on a cosmos made up of “things” that ec-sist in space and in time, whereas the latter reduce the cosmos to the “interior experience” of inter-subjectively certifiable “facts of experience” that can be “ordered” logico-mathematically in a simplified manner. In this specific regard, Keynes remains tied to the Machian view of science according to which mathematics is the servant of experience and serves only “to simplify” its “facts”. Einstein will demonstrate instead that it is possible for mathematics to replace human experience altogether. Simplex sigillum veri (simplicity is the hallmark of truth). Schopenhauer’s rejection of the Kantian distinction between idea and “object of the idea” had entailed the “interiorisation” of experience, so that now even dreams were distinct from “waking life” not in reality but only in consistency or regularity, not in substance but in form: dreams and reality, appearance and reality are like pages of the same book – so that what matters is the internal connection of ideas understood in a “cinematic” or “pictographic” sense, ordered in a manner capable of mathematical simplification and predictability. As “images” or phenomena linked only by the “principle of sufficient reason”, the “simplistic” empiricism of this perspective on “knowledge” remains tightly related to the Newtonian view, not challenging in the least the Kantian synthetic a priori derivation of physical Naturgesetzen (natural laws) from observable regularities or patterns of events.

The epochal reversal that Einstein’s physics performs on the Galileian-Newtonian view of the cosmos based on Euclidean geometry is that, in the theory of relativity, space and time become a function of mass and energy – that is, of the “thing”! Indeed, mass and energy become interchangeable (subject to the law of entropy) through the one universal constant independent of the initial inertial system of observation that is represented by the speed of light. (In the famous formula E=mc2, c is the “constant” for the speed of light.) In the “special” theory of relativity, the speed of light is established as the one “universal constant” independent of the inertial system considered. The “general” theory of relativity explains how this apparent paradox – that light still travels away at a constant speed even from an observer in motion - is possible by hypothesizing that it is the “mass” of “things” that “warps” space and time along non-Euclidean geometries – so much so that space and time are fused into one, into “space-time”.

The “thing” or “mass” is now so central to the Einsteinian view of the world that even light itself may be “bent” by, and indeed may even not be able to escape from a very “massive” body with a sufficiently strong gravitational pull (a black hole). As a result, “simultaneous events” are no longer possible in Einsteinian physics as they were in Newtonian mechanics because “things” or “bodies” no longer “sit” inertly in space and time independently of one another! Their “relative” locations can no longer be expressed in “absolute dimensions” of space and time, but rather each “thing” has a unique location in “space-time”. There are no universal Cartesian “co-ordinates” in the Einsteinian cosmos; the geometry of the cosmos in not linear-Euclidean: each “thing” is a “mass” with its own “space-time”.

In Cartesian scholasticism, the “res” (the thing) is “extensa” (extended) – in other words, “things” can exist only inside space. It is the “temporal” dimension that pre-supposes the existence of the “res cogitans”. Descartes first, then Kant, perceived that the reduction of time to simple dis-placement would indeed make time indistinguishable from space. The “duration” of a spatial displacement can be gauged only subjectively (cf. Bergson, L’Evolution Creatrice, and Husserl’s notion of “in-tention” or epoche’). In the words of Kant’s preface to the Critique of Practical Reason, the cosmos is divided into “the starry skies above me” (objective space), and “the moral law inside me” (subjective time). This is the meta-physical presupposition of Euclidean geometry that is at the very basis of Galilean-Newtonian mechanics. First, the “dimensions” of the “thing” (space and time) come before the thing itself: they represent the necessary “dimensions” or “co-ordinates” without which the “thing” would have no ec-sistence or locus or meaning whatsoever. If the “thing-in-itself” can be given a meaning at all, it is only as the ob-ject of human perception under the “regular” guidance of the human senses and of the human intellect (or “understanding”, Verstand). The ec-sistence of the “dimensions” of the cosmos and their “ordering” according to human concepts (Begriffe) is one and the same thing. The cosmos cannot ec-sist , it cannot be “grasped”, with-out this con-ceptual (Lt. cepere, to grasp) ordering by the human intellect. As Kant concluded, intuition without concepts is blind, concepts without intuition are empty. In other words, for the human intellect, the “laws of physics” arise simultaneously with the “things” that constitute the universe: the “thing” is a function of its dimensions in space and time. Furthermore, the “things” that populate the cosmos are “bodies” or “missiles” that are totally independent of one another. That is why Newtonian space can observe but simply cannot explain gravity; nor could it even yet know or divine the complexities of nuclear physics.

The cosmic space and time of Galileo and Newton is filled with “individual bodies” whose relation to one another is comparable to a “mechanism” – that is to say, it is “regular and predictable” like the behaviour of a “machine”. But it is essential to remember that this “mechanism” of bodily relations is neither “dead” nor “alive”. A “mechanism” need not be “in-animate”: even a living body can be a “mechanism” so long as it responds to “the laws of nature”. What distinguishes a “mechanism”, then, is the predictability of its behaviour in accordance with “laws of nature” that indeed exhibit a “divine” or “natural order” in the cosmos (the very Greek word “cosmos” refers to a space subject to “laws””, to a “nomos”). (On these themes, Carl Schmitt’s The Leviathan and Ernst Cassirer’s Individual and Cosmos are essential references. The idea of “the machine” as more than a “neutral” instrument but rather as a “political tendency” of given social institutions is to be found already in Marx, then in Nietzsche and Weber and finally, in his critique of Technik, in Heidegger.)

If “the economy” is a “mechanism” that connects 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 occur obviously by eliminating or avoiding any “disturbances” (external shocks) or “interferences” (political measures and institutions) that may influence or disrupt 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 itself, 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 line with the liberal circle. 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 (Ricardian and Marxist) 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 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”.

Just like the Euclidean “space” of Galilean-Newtonian mechanics, 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”. This “common utility” is the economic equivalent of the Galilean-Newtonian “dimensions” of space and time in which all “individuals” move and that makes their movement relative to one another “calculable” by the “laws of mechanics”. In other words, the “utility” of individuals is the common element, the “ether” that provides the “space” in which these “bodies” can interact as a “mechanism”, in accordance with the “laws of mechanics”. Furthermore, these “individuals”, like the “bodies” of Galilean-Newtonian physics, are entirely “independent” of one another – and what makes them “independent”, what allows them to be so, is precisely the fact that they share a common “space”, which is the “space” of “utility”. Were “individuals” to lose this common property of “utility”, it would be impossible to locate a “space” in which these “individuals” could ever behave according to properties that can be “regulated” mathematically, that is, according to “the laws of economics”.

But the possibility of such “economic laws” militates against the very “individuality” of the “individuals” that make up the economic space permeated (like the “ether” of physics) by “utility”. For, 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 “laws of economics”, such that “the market” for the exchange of “utilities” can be truly “self-regulating” and “automatic” and “regular and predictable” – or “scientific”. Such “agreement”, however, is antithetical to the notion of “individuality”. Keynes’s great discovery, like that of Einstein, was that it is not “individuals” that are subject to “economic laws”, but rather the other way round: the so-called “laws” of economics must necessarily “bend” to or be “warped” by the specific political entities that shape the “space” of economic analysis.

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