Thursday, 29 May 2014

Economic Equilibrium and Politics



B. The Extrinsication of the Mechanical Equilibrium Schema into Political Market Process: Competition, Profit, Innovation

 

1. Equilibrium, Mechanics and Dynamics

 

Walras … would have said (and, as a matter of fact, he did say it to me the only time that I had the opportunity to converse with him) that of course economic life is essentially passive and merely adapts itself to the natural and social influences which may be acting on it, so that the theory of a stationary process constitutes really the whole of theoretical economics and that as economic theorists we cannot say much about the factors that account for historical change, but must simply register them. … I felt very strongly that this was wrong….
I was trying…. to answer the question of how the economic system generates the force which incessantly transforms it…. a source of energy within the economic system which would of itself disrupt any equilibrium that might be attained. If this is so, then there must be a purely economic theory of economic change which does not merely rely on external factors propelling the economic system from one equilibrium to another. It is such a theory that I have tried to build …
It was not clear to me at the outset what to the reader will perhaps be obvious at once, namely, that this idea and this aim are exactly the same as the idea and the aim which underlie the economic teaching of Karl Marx. In fact, what distinguishes him from the economists of his own time and those who preceded him, was precisely a vision of economic evolution as a distinct process generated by the economic system itself.” (Schumpeter 1937/1989, p. 166)” (Preface to Japanese edition of “Theorie”, quoted in N. Rosenberg, ‘Endogeneity’, p.7.)


The contradiction in Schumpeter’s well-known exposition of his theory of economic development is absolutely evident: If indeed “the economic system” can be “propelled from one equilibrium to another”, then for him the notion of “economic equilibrium” must be theoretically valid. Yet if indeed there exists

“a distinct process generated by the economic system itself…[through a] force or source of energy that incessantly transforms it…, which would of itself disrupt any equilibrium that might be attained”,

then it is obvious that no such “equilibrium” exists or can exist, for the precise reason that “the economic system” is at all times – “incessantly”! – being trans-formed. It is the very trans-formation, the meta-morphosis, the trans-crescence of the economic system that precludes any “equi-librium”, any “equi-valence” of its internal values. An economic system that is able internally (“from within”) to undergo the “incessant transformation” that Schumpeter intends to theorize is quite simply conceptually incapable of being in “equilibrium” because equilibrium can be predicated only of economic systems based on “equal exchange”, that is, the exchange of equivalents. But Schumpeter’s “dynamic process” is one in which the values produced by the economic system are incessantly and qualitatively changing because of political forces that turn market prices into something entirely different from “equilibrium prices”, because they reflect a political reality rather than a reality of “pure competitive exchange” on the basis of marginal utility. This means that Schumpeter’s dynamic process, the Dynamik, is categorically different from the static economy, the Statik, intended by equilibrium theory. Schumpeter’s dynamic economy is one in which “equilibrium”, if attributed to it, is a contradictio in adjecto!

Schumpeter himself explicitly states in the Theorie that “dynamic equilibrium” is impossible because it is a contradiction in terms, an oxymoron: yet he does not seem to realize that for that very reason it is also impossible for the “distinct process” of Entwicklung to lead “from one equilibrium to another”! When speaking of Entwicklung, Schumpeter rightly treats equilibrium as a stationary state in which all “exchange values” or “market prices” are fixed in accordance with the utility schedules of market participants taken as individuals. But then, he fails to notice that for the “economic system” to move “from equilibrium to equilibrium”, those “exchange values” or “market prices” can no longer be fixed, first, in a regime of “pure competition”, and second, according to utility schedules, - because the very reality of Entwicklung, the “dynamic process”, determines values and prices not according to the pure economic laws of equilibrium theory with its axiomatic utility schedules, but rather according to the very “impure” practico-political processes that allow the economic system to be “trans-formed” and to mutate!

Schumpeter’s clear attempt here to reconcile Marx’s critique of political economy with Walras’s axiomatic schema of Neoclassical equilibrium theory by reconciling whilst maintaining the “distinct” character of the Statik and the Dynamik founders on the evident logical impossibility of the attempt – that is, of theorizing the capitalist economy on these two “distinct processes”: – that of Neoclassical stationary equilibrium which describes an economy of pure equal exchange based on marginal utility, and that of the Marxian critique of political economy based on the political antagonism of capitalist accumulation. This is so because a theory based on pure exchange leading to equilibrium views the economic system as one in which “prices” – the rate of exchange of goods, where supply meets demand – reflect the equi-valence of the determinant of prices, whether this be marginal utility or labour-power, whereas a theory based on political antagonism cannot regard prices as signifying the “equivalent values”, either objective quantities (labour-power measured by time) or rates of change of subjective estimations (marginal utilities), prescribed by the Law of Value of both Classical and Neoclassical Political Economy.

Differently put, equilibrium theory deals with equivalent values (whatever it is that is being “priced” for “exchange”) whose underlying “sub-stance” is “utility” because its “prices” are all relative to the utilities exchanged within the equilibrium system of exchange as defined, and cannot be determined until all exchanges have been completed. Furthermore, the axiomatic condition of perfect or pure competition prevents individual market participants from entering combinations or from changing production functions so as to obtain an advantage over other market participants. In complete contrast, Marxian theory treats the economic system as one in which political antagonism determines prices and therefore no independent market mechanism can fix prices as the exchange rates of equivalent values. Neoclassical equilibrium theory and the Marxian critique of political economy cannot be regarded as “distinct processes” except in the sense that they deal with subject-matters that are categorically different and therefore incommensurable and incomparable.

The all-important point that is being made here is that once we exit the axiomatic conditions of equilibrium theory and we allow market participants (a) to effect changes to production functions and (b) to co-operate selectively to the detriment of others, then market prices are no longer determinable in accordance with the given utility schedules of market participants because these no longer act as “equals” in terms of their production functions and their market power. In neoclassical equilibrium theory it is the axiomatic “goal” of equilibrium that determines “prices” – so that these “prices” are necessarily “relative” to the constraint of equilibrium axioms that ensure the formal equality of market participants. (Tony Lawson, in the essay cited above, makes this perceptive point.) But once the axioms of the “atomicity” and formal equality of market participants are removed, then the determination of market prices is no longer possible because there can no longer be an “equilibrium” in what has become an economic system whose “prices” are affected by political conditions and antagonisms that are not amenable to “measurement”.

Yet, whilst he clearly contends here that the “economic system” already contains the internal “force” or “source of energy” that will “disrupt any equilibrium that might [temporarily] be attained” and degenerate into periods of profound instability and crisis, Schumpeter is also equally adamant that it is possible to theorize positions of “equilibrium” or “tranquility” (Joan Robinson’s preferred term, in The Accumulation of Capital) during which the behavior of “the economic system” is scientifically predictable or stable and can even be said to be “in harmony”. Whilst he wishes to construct “a purely economic theory of economic change” that relies on “endogenous” rather than “external factors”, Schumpeter still insists on the need to differentiate this “purely economic theory” from the more “static” theory of economic equilibrium as a “distinct process”, even though the two “processes” are quite evidently not only “distinct” but also in fact categorically inconsistent!

 

Schumpeter therefore bases himself on a dual typology of “economic science”: a “Statik” science represented by orthodox Neoclassical Theory as the “scientific” attempt to systematize empirical observations about “the economic system” founded exclusively on the empirical reality of “market exchange and pricing” that must lead to a state of equilibrium – which is why he insists that the economy moves from equilibrium to equilibrium; and a “Dynamik” science capable of being “a purely economic theory of economic change” founded on the fact that the capitalist economy seems to be able to trans-form itself and, in so doing, go through a wave-like or “cyclical” motion or “evolution” that propel[s] the economic system from one equilibrium to another”, - a “propulsion” not due to “external factors” unconnected with the scientific operation of the economic system, but much rather to the fact that

 

the economic system [itself] generates the force which incessantly transforms it….a source of energy within the economic system which would of itself disrupt any equilibrium that might be attained

 

Apart from the fact that “external influences” could be hypothetically the ultimate cause of capitalist “disturbances”, it remains true for Schumpeter that

 

practically all the phenomena, difficulties, and problems of economic life in capitalist society… as well as the extreme sensitiveness of capitalism to disturbance, would be absent if productive resources flowed every year through substantially the same channels toward substantially the same goals, or were prevented from doing so only by external influences, [Business Cycles, p.83]

 

It follows therefore that any economic theory that limits itself to the task of describing or classifying or merely analyzing this “circular flow” (Kreislauf) of economic activity would not only fail to account for the “disturbances” (Storungen) and for “all the phenomena, difficulties, and problems of economic life in capitalist society”, but it would also fail to account for the actual combined “quantitative growth [Wachstum] and qualitative development [Entwicklung]” of the capitalist economy and society, that is to say, it would not account for capitalist accumulation. Both Classical and Neo-classical equilibria represent only a “circular flow” (Kreislauf) of goods exchanged, because in a state of “pure competition” (reinen Wettbewerbs) market exchange leads eventually to the exhaustion of any “profits” or “surpluses”, and therefore of any “growth” or “development” or “evolution” or indeed even “crisis”, that may exist initially when the economy is in dis-equilibrium.

 

 

Following Marx in opposition to Walras, Schumpeter maintains that the economic system is characterized by two “distinct processes” that generate opposing forces, one of which guides it toward equilibrium (what Marx called “simple reproduction”) and one that pushes it out of that position (Marx’s “expanded reproduction”). In these premises, the Law of Value shared by both Neoclassical equilibrium theory and  Classical Political Economy necessarily entails, at least theoretically, the inevitability of economic “stagnation” – the former because aggregate supply must equal demand until no further profitable exchange is possible (this is the outcome of Walrasian tatonnement), and the latter because competition among capitalists and competition for higher wages from workers will eliminate all possibility of profit arising from the exploitation of workers - as Schumpeter consistently and validly argues throughout his work. (This point is discussed at length in the next section.)

 

 


No doubt, the fact that Schumpeter is able to mention Walras and Marx without pointing out the categorical incompatibility of the two approaches (the “distinct processes”) to economic theory testifies to Schumpeter’s own lack of dialectical comprehension of the fundamental politico-philosophical and even onto-epistemological concepts involved. Even so, however, there can be little doubt that Schumpeter had some idea of the difficult issues that capitalist accumulation posed for the development of a “purely economic theory of economic change”, as his attempts at conceptualizing these issues show quite clearly. Let us look closely at how Schumpeter engages in this difficult conceptual exercise.



The first fundamental issue that Schumpeter addresses for his entire monumental theoretical effort in economic and social theory is contained in this question:

[H]ow does an economy make the transition from one level - which itself was viewed as the final point and point of equilibrium - to another level? This question takes us to the very essence of economic development.[468]

To this fundamental question, Schumpeter gives the following answer – an answer consistent with and borne out in all of his subsequent work:

[469] This [present work, the Theorie] is an attempt to present a theoretical analysis of development, of its mechanism, in the form of a scheme to which the facts of development would generally conform. We look first at a general cause for the changes in the fundamental structure, i.e. in the level of the circular flow. We locate this cause in the fact that - as we expressed it - new combinations get driven through. We saw that when new combinations are carried through this can be attributed to the actions of a particular type of economic agent whom we called an "entrepreneur".

Now, let us sift carefully through this statement and state exactly how and where Schumpeter has gone wrong in seeking to tie the two “distinct processes” in economic analysis. First, Schumpeter clearly assumes that there is such a thing as “a state or level of equilibrium”. His question then is how to account for changes in the “level” of equilibrium. And Schumpeter claims to have found the cause for this change in “levels” of equilibrium in
                                                                                                                                         
the actions of a particular type of economic agent whom we called an ‘entrepreneur’ [who is responsible for]… the new combinations [that] cause…the changes…in the level of [equilibrium or] circular flow.

But the difficulty with this reasoning is that the notion of equilibrium applies to a theory of the economic system in which any “changes” in “combinations”, any “new combinations”, are instantly “semaphored” or communicated to all other economic agents because these “changes” are not changes occurring in time but are rather changes in the logical structure of the equilibrium level! In equilibrium theory the “economic agents” do not make any “changes” at all because all market participants are absolutely axiomatically, formally and logico-mathematically “equal” due to the axiomatic conditions of “pure competition” in which “equilibrium prices” are fixed and determined by the theory! What Schumpeter is proposing here, instead, is a theory (one of economic change) in which prices are no longer determined by the formal, axiomatic, logico-mathematical “equality” of market participants, but rather by one specific market participant capable of causing or “carrying out new combinations” or “innovations” – Schumpeter’s entrepreneur.

But in this case the fundamental condition of equilibrium theory – the condition of “pure competition” – no longer obtains! Schumpeter has introduced into the analysis, entirely illicitly, a new condition that allows the entrepreneur to change autonomously and independently “the rules of exchange”. But if this is the case, the “prices” that now obtain in “the market” as a result of the entrepreneur’s actions can no longer be “equilibrium prices” and indeed can never be “equilibrium prices” because the economic system can never be said to be in “equilibrium” for the simple reason that “market prices” are now determined not through “pure exchange” or “pure competition” but rather by the political conditions that allow entrepreneurs to change “the rules of competition” independently of other market participants!

Please note that here we speak of “political conditions” and not, as the critics of equilibrium theory from Sraffa to Joan Robinson and beyond do, of “imperfect competition” because (a) such an expression suggests that “perfect or pure competition” is possible and indeed conceivable (!), and (b) because the “imperfection” is not due to “transaction costs or frictions” but rather to the ability of market participants to combine politically to affect prices. As we are about to show, not only is pure competition not possible – it is indeed also inconceivable because it is an aporetic or antinomic notion that contains in itself the seeds of its own destruction.

That Schumpeter was aware of these conceptual difficulties afflicting his theory of Entwicklung in its relation to Neoclassical equilibrium theory is made utterly transparent by the following revealing discussion in the Theorie in which Schumpeter comes very close (“almost”!) to identifying the incomparability of the two “distinct processes”:

Pure economic laws describe a particular behavior of economic agents, whose goal is to reach a static equilibrium and to re-establish such a state after each disturbance. Pure economic laws are similar to the laws of mechanics which tell us how bodies with mass behave under the influence of any external "forces", but which do not describe the nature of those "forces". In mechanics it is assumed that bodies [that is, objects without a “self” or” will” or “freedom”] when no force [that is, unless a force] affects them from the outside, do nothing of themselves and do not produce even a single new phenomenon of a mechanical nature. In the same way pure economics provides us with formal laws as to how the economy is [that is, economic agents are] shaped under the influence of conditions coming from the outside. It shows [471] how the economy [that is, economic agents, now only “bodies”] responds to changes in those conditions coming from the outside. Therefore, in such a conception, pure economics almost by definition [axiomatically] excludes the phenomenon of a "development of the economy from within".


No! It is not “almost by definition” that “pure economic laws” exclude “a development of the economy from within”: it is indeed “by definition” (!) that they do so! And this is because the market participants of equilibrium theory, its “self-interested in-dividuals”, are not allowed axiomatically to act as “economic agents”! Schumpeter’s confusion is shown quite clearly when he states above that


[p]ure economic laws describe a particular behavior of economic agents, whose goal is to reach a static equilibrium…

 

Not at all! The “self-interested in-dividuals” of economic theory do not and can never have any “economic goals” of their own and most certainly not the goal of reaching equilibrium (!) because their “economic goals” are fixed axiomatically “from outside” (Schumpeter’s own expression above!) in their “utility schedules” and cannot be changed autonomously if “equilibrium prices” are to have any meaning at all! In equilibrium theory “economic agents” are not “agents” at all because the “goal” of equilibrium is not “theirs” but is rather set “from outside” as an axiomatic condition of the analysis. It is not that economic equilibrium exists because its market participants desire it: it is rather that the desires of market participants, their utility schedules, adjust to the axiomatic condition that there be such an equilibrium! (Again, this is a point that Tony Lawson highlights genially in his work and that Frank Hahn acknowledged.) In reality, the “self-interested” nature of economic agents, hence their self-hood, contradicts their “atomicity” in the sense that an “atom” like a “body” in mechanics cannot have a “self” capable of acting but can only be acted upon because its “free-dom” (its “room to manoeuvre”, as Max Weber called it) is limited and defined by the equal and opposing “free-doms” of all other participants – which is why we have chosen to describe these “freedoms” as “free-doms”, that is, as formal “dom-ains”.

 

As Schumpeter comes very close to perceiving, what makes these self-interested economic agents passive “atoms” or “mechanical bodies” in equilibrium theory - rather than (self-conscious, active) “agents” -, is the fact that their self-interests, their individual “free-doms”, are limited by the equal and opposing “free-doms” of all other agents - so that they are reduced indeed to the unconscious mechanical role of “bodies” as in mechanical physics. The “economic agents” of equilibrium theory are not “agents” at all because they are restrained from inter-acting with one another as a result of the axiomatic definition of “pure competition”! Equilibrium is the state most consistent with the formal pure “equality” of these economic agents: their “free-dom” is in reality only “inertia”, that is, the power to remain in the same state unless acted upon by an external force. In “pure competition” the only state possible is one of equilibrium because the purity of competition means that no advantage can be gained by individual agents through “innovation” either singly or in concert. And therefore there cannot be any profit in the theory of equilibrium:

All the more controversial is the proposition that entrepreneurs' profits and related gains which arise in the disequilibria caused by the impact of innovation are, as far as the business process itself is concerned and apart from consumers' borrowing, the only source of interest payments and the only "cause" of the fact that positive rates of interest rule in the markets of capitalist society. This means that in perfect equilibrium interest would be zero in the sense that it would not be a necessary element of the process of production and distribution, or that pure interest tends to vanish as the system approaches perfect equilibrium. Proof of this proposition is very laborious 39, because it involves showing why all the theories which lead to a different result are logically unsatisfactory, (Business Cycles, p.125. See also CS&D, p.131 on “The Obsolescence of the Entrepreneur”.)

 

 

Equilibrium is a “frozen or stationary state” because by axiom, by definition, no single agent is allowed to act upon or co-operate with other “agents” or the economic system so as to gain an advantage over others. This makes profit and interest impossible. And yet this is exactly what Schumpeter allows his “entrepreneur” to do! But to do this is to move from the theoretical logico-mathematical framework of equilibrium theory to a new political framework of analysis in which “equilibrium prices” are no longer fixed axiomatically as in equilibrium theory but rather “politically”, that is, through the political power possessed by capitalist entrepreneurs to impose their “innovations” or “new combinations” on the rest of society or, if you like, on “the market”.

 

In summary, Schumpeter’s attempt to derive “a purely economic theory of economic change” has led him to refute the theoretical legitimacy of equilibrium theory, because of its axiomatic inability to change, and also of his own “pure theory of economic change”, because it shows that economic change cannot be explained by a “purely economic theory”. The Law of Value has finally been exposed for what it is – one of the biggest intellectual frauds in the history of humanity!

 

Both in the Statik and in the Dynamik economic agents are motivated by self-interest bounded only by the self-interests of all other economic agents. But only in the Dynamik does this profit-seeking intention become the reality of profit-making. The Statik therefore resembles a schema entirely analogous to the laws of mechanics in the sense that its atomistic “self-interested individuals” are restrained from acting upon “the laws of economics” by the equally self-interested actions of other market participants. Consequently, the economic agents of the Statik resemble entirely the “bodies” of mechanical physics in that they are “acted upon” by the axiomatic laws of economics but do not themselves act or initiate anything of their own free will (Wille) or volition (Willkur). Least of all are they allowed to act in concert or to do anything that may gain them an “advantage” over other competitors because this would infringe against the axiom of pure competition.

 

In other words, the economic agents of the Statik are not “agents” at all because they merely react to the “external forces” exerted by the equal self-interests of all other economic agents which must, by definition and axiomatically, result in “economic equilibrium”! Because of its “in-dividuality” or “a-tomicity”, the “self-hood” of the Statik economic agent is reduced to sheer mechanical automaticity by the equal and opposing self-interests of all other individuals. The “freedom” (of will and of choice) of the individual in the Statik is curtailed and determined or confined or limited by the equal and opposing “freedoms” of other economic agents. Thus, the individual freedom of the “self” becomes a mere mechanical “free-dom”, a mechanical inertia, that is to say, the power to move subject to the dom-ains (free-doms) of all other economic individuals. The mechanical interaction of the self-interests of economic agents in the Statik reduces each selfish individual to the status of a mere “body”, that is, to the opposite of an “agent”!

Saturday, 10 May 2014

Equilibrium and History: Conceptual and Political Aspects of Bourgeois Economic Theory

This is the first part of my Schumpeter-buch, a book dedicated to Schumpeter's attempt to integrate equilibrium theory and capitalist economic history. I believe that something like this ought to be required reading in all economics faculties. I hope you agree.

Thus, development and equilibrium in the sense that we have given these terms are therefore opposites, the one excludes the other. Neither is the static economy being characterized by a

static equilibrium, nor is the dynamic economy characterized by a dynamic equilibrium; an equilibrium can only exist at all in the one sense mentioned before. The equilibrium of the economy is essentially a static one.`19

 

 

With this we really get closer to reality. In particular, we win a clearer insight into that peculiar jumble of conditioning and freedom, which economic life shows us. The static circular flow and the static phenomena of adaptation are dominated by a logic of things, while it is completely irrelevant for the general problem of freedom of will, nevertheless in practice - with fixed given social relationships - it leaves as good as no manoeuvering room for individual freedom of will. This can be demonstrated and yet it was always a point of criticism, since the creative work of the individual was so obviously visible. We know now that the latter observation is correct. Yet, this observation does not contradict the theorems of statics. We can precisely describe the place and function of this work. Of course, in development the logic of things is not missing; and just as one cannot demonstrate with the static conception the case for philosophical determinism, one cannot maintain the case against it with the dynamic conception. But despite this we have shown that an element is present in the economy, which cannot be explained by objective conditions and we have put it in a precise relationship to those objective conditions.23 (Theorie, ch.7)

 

 

A. Equilibrium and History: Conceptual and Political Aspects of Bourgeois Economic Theory

 

Classical and Neoclassical Political Economy from Adam Smith to Leon Walras is founded on the axiomatic static equilibrium of the marketplace economic system. Yet this clashes most violently with the empirically evident instability of the capitalist economy and its equally violent convulsions and, worse still, its transformations intended not just in the sense of quantitative growth (Wachstum) but actual qualitative evolution (Entwicklung), with its meta-morphoses and mutations, with its trans-crescence and crises. The static-stationary, axiomatic-analytical, anatomical and objective schema of bourgeois equilibrium economic theory is evidently and empirically shattered then by the dynamic-historical, metabolic and subjective unfolding or evolution of its real operation. The end of history that the bourgeoisie always desperately seeks has been “greatly exaggerated” yet again. The question here is: can history be reduced to science? And then again, is it indeed science or logic that is opposed to history in the bourgeois interpretation of economic systems?

 

The con-fusion of science and logic in the sphere of economic analysis was evident already in Adam Smith’s theorization of market capitalism. Smith’s “invisible hand” was a necessary Eskamotage or deus absconditus (hidden god) because the circularity of his reasoning reduced science to logic - to a tautology in fact: prices are determined by value which is determined by the quantity of labour, whose price is determined by the market which determines prices. The problem lies in the definition of “market”: if indeed the “market” is made up of entirely self-interested atomistic individuals, then it is impossible to see how such in-dividuals could ever reach the “agreement” that is indispensable to determine “prices”! In other words, “the rules of market competition” have to be set or agreed upon by market agents even before market competition takes place. But this is impossible by definition, because any restriction on the “self-interest” of market agents turns the entire exercise into a meaningless and purposeless tautology!

 

G. Myrdal insightfully seized on this point, in The Political Element in the Development of Economic Theory. Myrdal, however, like all economics theoreticians after him, totally failed to see the “purpose” or “political element” behind the tautology of equilibrium theory – a political element that was to be the very object of his study!

 

Thus, just like equilibrium analysis, Smith’s theorization of market capitalism left no space at all for the “co-ordination” of the actions of are axiomatically atomic in-dividual market agents – which is why, just as Leibniz needed a divine “pre-established harmony” to co-ordinate his “windowless monads”, so did Smith need his “invisible hand” to co-ordinate the actions of his “windowless”, “monadic” market agents.  General equilibrium analysis, too, will later dispense with this requirement, without thereby resolving it, by postulating the “syn-chronicity” of all “actions” in market exchange. But the formal equivalence of all axiomatic market agents in both theories means that they are left without a “purpose” once the “frozen” state of equilibrium is reached. In other words, equilibrium is a state of complete in-action, given that at equilibrium market agents no longer have any need or space to change their decisions. At equilibrium there is and there can be no “market”.

 

Arrow and Hahn were demonstrably right to insist, pace Lawson in “The Confused State of Equilibrium Analysis”, that Adam Smith is the father of equilibrium analysis [in General Competitive Analysis]. The fact that, as Lawson argues, Smith constructed his theory from historical and sociological observations does not cure its “closedness” or tautological nature. Hypocrisy was written all over the author of The Theory of Moral Sentiments – something that Mandeville delighted in exposing: his penchant for sociological observation, based mostly on Adam Ferguson’s An Essay on Civil Society, only served to disguise the aporetic and apologetic character of his economic theory. Incidentally, Lawson’s definition of a “closed system” as one that can be reduced to the proposition “whenever x, then y” is manifestly wrong because this kind of proposition is essential to the testing of scientific hypotheses in both natural and social science (one need only read any book on the philosophy of science to understand this point). Quite contrary to Lawson’s contention, a “closed system” must be of the type “whenever x, then y, where x is a function of y”: it is the classic circulus vitiosus or tautology, - nothing more nothing less.

 

The problem with equilibrium analysis is that it reduces economic “science” to “logic” – literally, to ana-lysis (retrospective examination or autopsy or anatomy), that is to say, to the formal mathematical equivalence of all its elements, which leads to the meaningless paralysis of tautology. The essential aim of any economic theory worthy of the name must be to explain how economic actions can be co-ordinated and to point to the “what”, the “thing”, the common substance or “value” that allows this “co-ordination” to take place. Co-ordination is not meant here as “static exchange” and is not meant to be confined to “quantitative values”. If we read Walrasian equilibrium, which is made up of a series of simultaneous equations, as a simple functional plan or classification of an economy, then it is not tautological but purely classificatory or illustrative. If instead it is intended to show how a real economy functions, that is to say, how the independent decisions of individual market agents can be co-ordinated by “the market”, then it is entirely tautological because, as Hayek showed, “its conclusions are implicit in its assumptions”.

 

As I have suggested elsewhere in this volume,2 the tautological method which is appropriate and indispensable for the analysis of individual action seems in this instance to have been illegitimately extended to problems in which we have to deal with a social process in which the decisions of many individuals influence one another and necessarily succeed one another in time. The economic calculus (or the Pure Logic of Choice) which deals with the first kind of problem consists of an apparatus of classification of possible human attitudes and provides us with a technique for describing the interrelations of the different parts of a single plan. Its conclusions are implicit in its assumptions: the desires and the knowledge of the facts, which are assumed to be simultaneously present to a single mind, determine a unique solution. The relations discussed in this type of analysis are logical relations, concerned solely with the conclusions which follow for the mind of the planning individual from the given premises. (Individualism and Economic Order, p.93.)

 

Even so, Hayek’s analysis of general equilibrium is still incorrect because for “a single mind” Walrasian equilibrium is merely “classificatory” but not “tautological”. Even for a single mind no decisions can be made in equilibrium analysis because simultaneous equations involve a “semaphoric”, logical “re-classification” of information that is independent of “time” as a concept. Walrasian equilibrium is tautological only if it pretends to explain, as it does, how “many minds” can co-ordinate their economic decisions. Where a single mind is concerned, however, equilibrium theory does not involve a “single plan” or any “plan” at all (!) because that would imply the possibility of decision! But the point to a “classificatory” or “semaphoric” (or functional or illustrative or anatomical) schema is that no “decision” is involved because there is and there can be no “time” involved in such an ana-lytical “sketch” or “blueprint” or “map”. A map is “timeless”: it is not a “plan” in the sense of “a sequence of decisions”!

 

But Hayek and all equilibrium theoreticians after him, have shifted the subject-matter, the ground, the sub-stance, the substratum and quidditas, the “whatness” of economics from “prices and quantities”, which involve those material human interests that are and must be the indispensable foundation of all theories that even pretend to be “economic”, to the mere “semaphoric” world of “information” and “co-ordination”! In the words of Brian Loasby,

 

The co-ordination of economic activities, of course, is what economics is overwhelmingly about, (Equilibrium and Evolution, p.9).

 

The problem with this is that economics can never be reduced to a simple matter of “co-ordination” because it must always explain the real material object of “co-ordination”, what makes it “economic co-ordination”! And the “economic” here stands for pro-duction, the actual creation of “goods and services” which ultimately involve human living labour and therefore social relations of production that relate to the interaction of human beings amongst themselves as well as with their living environment!

 

Hayek correctly captures the point that Walrasian equilibrium cannot “co-ordinate” a “market” in which different individuals decide; the market action of that “single mind” would still depend on the decisions of at least one other “single mind” to make an “economic decision”. For the single mind to make an economic decision and to evade tautology, it needs to be confronted with the independent plan of “another mind”, which is what general equilibrium is constitutionally incapable of doing because “its conclusions are [logico-mathematically] implicit in its assumptions” and no “time” can logico-conceptually be present! This explains the retreat of equilibrium theoreticians like Frank Hahn from the sphere of “prices and quantities” of real goods and services performed by human living labour to the semaphoric or semiotic sphere of “ideas and actions”. For Hahn,

 

an economy is in equilibrium when it generates messages which do not cause [its] agents to change the theories which they hold or the policies which they pursue, (quoted in Loasby, op.cit. at pp.13-4).

 

But here the legerdemain, the subtle trick that Hahn has performed becomes absolutely evident – because Hahn has not specified a decision but rather an in-decision, a “not-changing of theories and policies”! In other words, not only does equilibrium now exclude even the most phantomatic exchange of “goods and services”, which require human living labour, but it even requires the ultimate in-action and in-decision: equilibrium finally assumes the stagnant and stationary position not just of tautology but of the most unthinkable rigor mortis – sheer death! For the modern bourgeoisie and its idiotic charlatans, economic equilibrium is the most perfect Nirvana in which absolutely Nothing happens!

 

To be perfectly histrionically brutal, recent equilibrium theory has surged to the intellectual status of a “Seinfeld” episode – that is, a comedy series “about nothing” in which “absolutely nothing happens”! Indeed, once economic theory has become so detached from any real material human activity of production in which human beings interact not only with one another but also with their environment, bourgeois economic theory can easily conceive of an economic system in perfect equilibrium, perfectly “co-ordinated”, that has completely destroyed its living environment! This insidious danger was already implicit in Adam Smith’s theorization of “the wealth of nations” as a perfect logico-mathematical “exchange” that because of its very “perfection” no longer had anything to do with “wealth” itself! Not until Alec Pigou theorized the problem of “externalities” (in The Economics of Welfare) did this aspect of capitalist production enter the sphere of bourgeois economic analysis, and then only as “externality”, that is, as something “external” to the presumed “purity” of the capitalist economic system. Contrary to the stooges of equilibrium analysis, Pigou never forgot that "[e]conomic welfare...is the subject-matter of economic science," (bid., p.9).

 

Up until Adam Smith set out to formalize the operation or functioning of “the market”, economics had not existed as a “science” separate from theories of society or indeed of “the body politic”. Yet in this very separation of “economic science” from other aspects of social life and from its history lies the fatal flaw of this “science”, because once its methodology leads it to exclude non-economic social forces as “exogenous factors” or as “externalities”, then it becomes a “closed system” of pure logico-mathematical formulae in which “economic facts” are completely deprived of all sociological and environmental content. Consequently, “economic science” is incapable of explaining historical change, including the transformation of economic reality itself, totally extruding thus the very “positive empirical experience” on which so-called “economic science” is supposedly founded.

 

In his review of Comte and Mach, in Knowledge and Human Interests, Jurgen Habermas emphasises one aspect of positivism as his crucial objection to it - namely, that positivism as a philosophy of science is incapable of understanding and explaining the “historical evolution” of “science” itself. We partly agree with Habermas; but this can only serve as an “internal” critique of positivism in terms of its internal consistency, whereas as we will discuss more fully below this type of criticism of positivist methods entirely misses the point about their “external” real practical political effectuality! In short, Habermas criticizes positivism in the name of “science”, when in fact bourgeois “science” is a real political practice that cannot be “contradicted” in purely “scientific” terms! “Science” simply  does not have the politically-independent epistemological status that Habermas’s neo-Kantism assigns to it – as Max Weber showed conclusively, although only obliquely (cf. “Science as Vocation”).

 

 

Put in simpler terms, science must be the combination of theory and facts: theory without facts is empty, and facts without theory are blind. But the “facts” that “economic science” pretends to theorise are the very violent reality that the capitalist bourgeoisie has already imposed on human society! Bourgeois economic science therefore pretends merely “to observe empirically” its misdeeds or “facts”, and then to dress them up as “human nature” that gives rise to “natural human rights”. This miserable combination of scientific positivism and ethical jusnaturalism is the very essence of bourgeois economic science!

 

At the hands of positivism and empiricism, the Statik of equilibrium theory contradicts the Dynamik of capitalist reality: hence, equilibrium expels history, stasis stymies metabole, necessity chains freedom. How then to reconcile these irreconcilable opposites? How to evade and escape these antinomies and apories?

 

 

Schumpeter offers a preliminary way out:

 

But despite this we have shown that [a subjective] element is present in the economy, which cannot be explained by objective conditions, and we have put it in a precise relationship to those objective conditions.

 

The task of “science”, then, is not to jettison logic; it is rather to marry logic with nomothetic observations about the operation of “the social process” and then place these “objective conditions….in a precise relationship” with the equally necessary idiographic “leadership” role of human agency. There is no paradox here: the subjective element that leads or initiates the “transformation” of the economic system must act within the boundaries of the objective conditions specified by logic and science: this necessity is what gives the phenomenon of capitalist trans-formation its mechanical or procedural character: it is the “trans-formation mechanism” (Veranderungs-mechanismus) that is the engine or “source of energy” (dynamis) of the Innovations-prozess.

 

The “freedom” of the leader or of the entrepreneur who leads this mechanism and this process is not an abstract concept: individual freedom operates within the objective conditions imposed by the “free-doms” of every other individual agent involved in economic activity. The subjective trans-formation of the capitalist economic system takes place within the boundaries and limits imposed by the specific historical “institutional framework” of this economic system: transformation and mechanism stand in geometric relation to innovation and process.

 

This cardinal quasi-Euclidean axiom of the absolute atomicity or in-dividuality and self-seeking self-interest of human beings is the most indispensable postulate of all bourgeois social, economic and political theories. Fittingly, it was the English translator of Euclid’s Elements, Thomas Hobbes, who first devised this worldview. In this worldview, there is no space for common human interests (inter esse, common being): therefore, the syllogistic conclusion is that “freedom” can be defined and exist not as a common human goal but only as “free-dom”, that is to say, as an equilibrium of opposing, conflicting and irreconcilable individual forces and wills. This equilibrium, the equilibrium of Greek stasis or civil war (bellum civium), can be overcome by political convention (totalitarian, democratic or elitarian) only because the atomized human individuals postulated in Hobbes’s theory know that the only outcome of such static equilibrium, of this stasis, will be the war of all against all (bellum omnium contra omnes) that will lead fatally (fate here turns into death) to the extinction of humanity. Even in its “free-dom” - indeed, as Weber had shown, especially in its “free-dom” – human action and leadership will obey that “conditioning” constituted by the dira necessitas (the dire necessity), the extrema ratio of self-preservation. The ultimate foundation of mechanical rationality both for the Hobbesian political system and for its neoclassical progeny in equilibrium theory is quite simply self-preservation, the “dire necessity” of surviving in the state of nature where homo homini lupus, man is a wolf to man. Free-dom consists not in acting irrationally but in acting rationally: in short, that decision is “free” that is taken rationally, by respecting the “precise relationship” between subjectively intended ideal goals and the objective “con-ditions”, the available means, for the implementation of those goals starting from the axiomatic postulate of the irreconcilable self-interests of individual human beings.

 

This is how Hobbes managed for the rising capitalist bourgeoisie an epistemological feat that has not been equaled since he wrote: - he managed, that is, to combine the positivist scientific hypothesis of Galileo-Newtonian mechanics with the jusnaturalist political convention of innate human rights, and thereby to erect bourgeois political practice on effectual scientific grounds. Hobbes begins with the positivist scientific hypothesis of the “universal conflict” between human beings taken as atomic individuals, and from there he develops “rationally” – that is, with the “rationality” of the “laws” of mechanics - the jusnaturalist political convention (common-wealth) that will make social life possible based on the “natural rights” of these conflicting individuals. (This astute twining of positivist authoritarianism and jusnaturalist contractualism is masterfully unjumbled by N. Bobbio in Da Hobbes a Marx.)

 

In order to erect his political theory, Hobbes starts from the Euclidean axiom that each human being represents a “point” or “body” entirely unconnected to other human “points” or “bodies” and entirely self-interested or, mechanically put, having its own momentum or “appetite” or “conatus” – which Hobbes calls “Power”. From this axiom he deduces that the original, most “natural” state of human beings, the “state of nature” or status naturae, is a state of civil war (bellum civium) or “the war of all against all” (bellum omnium contra omnes). This “clash of wills” or appetites, this “war of all against all”, can lead logically only to a deterministic mechanical equilibrium in which there is no “room for manoeuvre for the individual freedom of the will” because each individual will is bound by the wills and boundless appetites of other wills,  or else to the assured self-destruction of human beings. This is Hobbes’s scientific hypothesis taken directly out of Galileo-Newtonian mechanics.

 

The way out of equilibrium or stasis is provided by the ultima ratio, the absolutely indispensable need for self-preservation, which leads these atomic self-interested individuals to reach freely a political con-vention, an agreement or “social contract” that can avert mutually assured destruction. Here the positive empirical evidence of a society that the bourgeoisie has reduced coercively to little more than a moral jungle from which all notion of “natural law” has been expunged meets with and satisfies the jusnaturalist (natural-law) requirement that individuals must agree freely and rationally to a political regime that will protect them from civil war. Hobbes acknowledges that what coerces individuals to accept this bourgeois political regime based on “the laws of the marketplace” is the metus mortis, the fear of death at the hands of any other individual. And given that each individual is axiomatically defined as being “equal” in the ability to harm another in the state of nature, then it follows axiomatically that each individual decides freely (by political convention, otherwise known as “social contract”) and rationally (by scientific hypothesis, following the definition of in-dividuals in conflict) to erect a “common wealth” or State or status civilis that will protect them from certain death.

 

The central feature of capitalism is that the bourgeoisie has tried as far as is humanly possible without tearing asunder the very fabric of human society to reduce this society to the state of absolute possessive individualism. That is why all accounts of bourgeois economic theory must start with the axiomatic postulate of this possessive individualism. Hobbes did not neglect to include in the “possessive” part the ability of individuals to buy or sell their own “power”, meaning both their physical possessions and their labour-power, in exchange for physical possessions. In the Leviathan, he describes “the value or worth or price of a man” as “so much as would be given for the use of his power”. Clearly, Hobbes had already an embryonic notion of what Marx would theorize later as “labour-power”, the commodified form of living labour in capitalist industry.

 

As Loasby has very perceptively pointed out (in Equilibrium and Evolution), the “complete decentralization” of economic decisions that is implicit in Hobbesian political theory and then in Walrasian equilibrium economic theory makes the co-ordination of economic decisions “a matter of life and death”. This is indeed another factor that makes the Hobbesian-Walrasian schema or blueprint absolutely axiomatic for the analysis of capitalism. But this interdependence of human economic action is still subordinated to the axiomatic primacy of individual self-interest; consequently, it cannot form part of equilibrium theory except as a Hobbesian ultima ratio or dira necessitas ob metum mortis, dire necessity upon fear of death, as we explained above.

 

The locus classicus of “possessive individualism” is CB Macpherson’s towering study by that name. Alchian-Demsetz, to give yet another example of the rampant stupidity of Nobel prize laureates in economics, quite incorrectly select a negative definition of capitalism – the absence of government in the economic process - and completely leave out the “individual”:

 

The mark of a capitalistic society is that resources are owned and allocated by such non-governmental organizations as firms, households, and markets. [First sentence of “Production, Information Costs and Economic Organization”.]

 

This is quite clearly nonsense because, in practice and in reality, governments have historically played a crucial role in “the ownership and allocation of [social] resources”; and in bourgeois economic theory, it is individuals, not “firms and households”, that must axiomatically take precedence over “firms and households and markets”! It is possible, of course, that by “markets” Alchian-Demsetz mean the economic exchange of atomistic individuals. Demsetz in any case will later take a fresh look at competition as “perfect decentralization”, which requires the postulate of possessive individualism (cf. above all his “Freedom and Coercion” and “Fallacies in the Economic Doctrine of Externalities”).

 

Although our treatment of Hobbes’s political theory is perhaps more systematic than Hannah Arendt’s, we simply could not resist drawing on her devastating prose and quote in full what is truly one of the most moving and inspiring passages in her entire work which stands as a lasting indictment not only of the capitalist bourgeoisie but also of its venal intellectual apologists, among whom we count first and foremost professional economists:

 

It is significant that modern believers in power are in complete accord
with the philosophy of the only great thinker who ever attempted to derive
public good from private interest and who, for the sake of private good,
conceived and outlined a Commonwealth whose basis and ultimate end is
accumulation of power. Hobbes, indeed, is the only great philosopher to
whom the bourgeoisie can rightly and exclusively lay claim, even if his principles
were not recognized by the bourgeois class for a long time. Hobbes's
Leviathan ^^•' exposed the only political theory according to which the state
is based not on some kind of constituting law—whether divine law, the law
of nature, or the law of social contract—which determines the rights and
wrongs of the individual's interest with respect to public affairs, but on the
individual interests themselves, so that "the private interest is the same with
the publique." ^'^
There is hardly a single bourgeois moral standard which has not been anticipated
by the unequaled magnificence of Hobbes's logic. He gives an
almost complete picture, not of Man but of the bourgeois man, an analysis
which in three hundred years has neither been outdated nor excelled. "Reason
... is nothing but Reckoning"; "a free Subject, a free Will . . .
[are] words . . . without meaning; that is to say, Absurd." A being without
reason, without the capacity for truth, and without free will—that is,
without the capacity for responsibility—man is essentially a function of
society and judged therefore according to his "value or worth ... his
price; that is to say so much as would be given for the use of his power."
This price is constantly evaluated and re-evaluated by society, the "esteem of
others," depending upon the law of supply and demand.
Power, according to Hobbes, is the accumulated control that permits the
individual to fix prices and regulate supply and demand in such a way that
they contribute to his own advantage. The individual will consider his advantage
in complete isolation, from the point of view of an absolute minority,
so to speak; he will then realize that he can pursue and achieve his
interest only with the help of some kind of majority. Therefore, if man is
actually driven by nothing but his individual interests, desire for power must
be the fundamental passion of man. It regulates the relations between individual
and society, and all other ambitions as well, for riches, knowledge,

and honor follow from it.

140 IMPERIALISM

Hobbes points out that in the struggle for power, as in their native capacities

for power, all men are equal; for the equality of men is based on the

fact that each has by nature enough power to kill another. Weakness can be

compensated for by guile. Their equality as potential murderers places all

men in the same insecurity, from which arises the need for a state. The

raison d'etre of the state is the need for some security of the individual, who

feels himself menaced by all his fellow-men.

[146….Hobbes was the true, though never fully recognized, philosopher of the
bourgeoisie because he realized that acquisition of wealth conceived as a
never-ending process can be guaranteed only by the seizure of political power,
for the accumulating process must sooner or later force open all existing
territorial limits. He foresaw that a society which had entered the path of
never-ending acquisition had to engineer a dynamic political organization
capable of a corresponding never-ending process of power generation….
For a Commonwealth based on the accumulated and monopolized power
of all its individual members necessarily leaves each person powerless, deprived
of his natural and human capacities. It leaves him degraded into a
cog in the power-accumulating machine, free to console himself with sublime
thoughts about the ultimate destiny of this machine, which itself is
constructed in such a way that it can devour the globe simply by following

its own inherent law.

 

Make no mistake: the Hobbesian-Weberian mechanical science we mean here is not an “objective science”, - for as Nietzsche demonstrated, there is and there can be no such “thing”! The science we intend here is a political practice based on the inflexible application of axiomatic rules to human society by a historically specific social class – the capitalist bourgeoisie. The bourgeoisie would be blind deaf and mute without this inflexible science, which is why it has erected the most fabled monuments to it. This science consists for the bourgeoisie in placing political decisions in a precise relationship to the existing relations of power in society that it has imposed to its own advantage so as to be able to reproduce them according to its own axiomatic postulates or schema. And then, of course, in presenting these political decisions as “that peculiar jumble of conditioning and freedom, which economic life shows us”, which is how Schumpeter defines “economic science”.

 

The question now is: what is this “precise relationship….of conditioning and freedom”, and how can it escape its evident apories and become effectual? It simply will not do, it entirely misses the point, to conclude that Schumpeter has failed in his attempt “to integrate theory and history” and to reconcile freedom and necessity (this is Moura’s claim in his homonymous essay based on Lawson’s epistemology): - because the crucial point, the key to the enigma, is to understand this “precise relationship [of subjective] to objective conditions”: that is the task and also the limit of science.

 

From the outset, Schumpeter’s aim is not so much to find out empirically the “mechanism” that impels the capitalist economy to change and mutate spasmodically; rather, his aim is to discover the conceptual requirements for the practical implementation of the axiomatic postulates of Neoclassical equilibrium analysis on which the very idea of a bourgeois civil society and of its economic system are founded. The “mechanism” is capable of being embodied by an “institutional framework” in which decisions are made within the limits and boundaries set by the axiomatic schema of the bourgeois system of social power so as “to put it in motion” or “energize” (the literal meaning of dynamis in Greek) it. In other words, the subjective, historical “force” or “source of energy” of the bourgeois social system must be placed in a “precise relationship” to the “objective conditions” or boundaries or strictures that are necessary for the expanded reproduction of human society in a bourgeois form. Schumpeter’s aim then is to find out the reason why capitalist society cannot stand still. This reason cannot be the result of experience because human experience could lead to uncertain outcomes. Instead, this reason has to be deduced from the very conceptual framework of a capitalist economy acquiring its own dynamic, from its axiomatic postulates “coming into being” or ec-sisting. Schumpeter’s science must be, as he styles it, a histoire raisonnee – a marriage of equilibrium and history.

 

The axiomatic postulates - the “reasoning” schema of this “history”, the logical basis for its “scientific hypothesis” - are formalized in Neoclassical political economy, of which Walrasian equilibrium theory is the most “perfect” expression. Now, a dynamic equilibrium is impossible if by equilibrium we intend a predictable state, because then any position of equilibrium is inescapable. It is possible to understand how an economy can reach equilibrium, but it is unimaginable that it can ever move out of equilibrium without the intervention of “external or exogenous factors”. As Schumpeter put it: “An equilibrium can only exist at all… [as] a static one. A dynamic equilibrium is a contradiction in terms.

 

The ec-sistence of equilibrium is not at all a pure mathematical concept. The requirements for the “pure” mathematical “existence” of economic equilibrium are entirely different from those of its real, practical ec-sistence. And this is so not just from the standpoint of practical experience itself, but indeed also and above all from the very conceptual requirements or implications of the practical ec-sistence of a concept. On one side, we have the formal conceptual elements of a concept; but on the other we have also the conceptual implications of its coming-into-being, of the ec-sistence of the concept, of its extrinsication or embodiment from ideal concept to conceptual reality! The two sets of conceptual requirements are simply not the same. Yet, it is absolutely evident that the practical requirements for the ec-sistence of a concept are just as much a part of its conceptual being as are the purely formal logical requirements of the internal consistency of the concept! But whereas the formal axiomatic definition of a concept can only be self-referential and “closed”, and therefore “totalitarian” or “tautologous” (cf. Hayek, Demsetz, Loasby, Langlois), the conceptual requirements for the ec-sistence of the concept turn it into an “open” concept because its practical implementation is subject to the minimal intuitive requirements of empirical experience and observation. At that point, the concept may be said to form a “scientific hypothesis” and it may be said to be “scientific”.

 

What turns Schumpeter’s “science” into “bourgeois science” is not this methodology but rather the necessary practical implications of the “axioms” adopted by bourgeois Neoclassical economic science, that is to say, the “precise relationship” between the axioms of the theory and their practical implementation or ec-sistence. If then we wish to find out what are the internal or endogenous factors that move the economy out of equilibrium we must separate the logical concept of equilibrium from the dynamic concept, which includes the practical implications of its real implementation. In this light, the concept of equilibrium serves only a schematic heuristic purpose but it can never be said to reflect the reality of a capitalist economy. Science is the meeting point of schematic formalism and empirical experience: the one cannot exclude the other, science must combine both. (To paraphrase Kant’s famous dictum, “intuition without concepts is blind, and concepts without intuition are empty”. Kant’s dictum is often misconstrued as: “thoughts without content are empty, intuition without concepts is blind”. But by “thoughts” Kant obviously means “concepts”, and by “content” he means “intuition”.) This is why a conceptual analysis of equilibrium shows that it cannot exist except as a closed stationary system, but also that it cannot ec-sist except as an open dynamic system.

 

Let us see how Schumpeter squares this circle. If we are successful in our attempt, we would have made perhaps the greatest leap in critical social theory since Nietzsche aphoristically and anti-systematically pointed the way to a solution of these apories, antinomies, enigmas and conundrums of bourgeois thought.