Wealth and Political Economy
Smith’s “nature and causes”
refers precisely to this “diachronic” dimension analysis or theory dealing with
“the origins” of the present reality – not just in an “evenementiel” sequence
(a list of events or facts), but in “practical” terms that “explain” this
present reality in a way that makes us conscious agents of its present
transformation and creation or “making” (cf. Thompson’s “The Making of the
English Working Class”, in this double meaning of conscious
politico-institutional ‘erecting’ in the face of antagonistic social
relations). This aspect we will examine in connection with Hegel and Marx. To
ask about “the nature of wealth” invites us to question its “meaning”, to find
out “of what” it consists, what is its “substance”. And to ask about “the
causes” of wealth invites us to enquire about its “origins”, about its
“source”, about its “efficient cause”.
Already, by asking these
related questions, Smith is intimating that “wealth” is not a “fixed amount”;
that it is not a fixed quantity already in existence and immutable so that all
that can take place between its “owners” is a simple “exchange”. Nor is Smith
confining his enquiry to the mere “horizontal” growth of “wealth” through the
simple expansion of the national population or the annexation of foreign
territories and their wealth.
Smith is enquiring therefore
about “the creation” or “pro-duction” (leading forth, creation, making) of
wealth. And his answer to these questions is of two contrasting orders: on one
hand, he suggests that “wealth” is created through the amount of “labour” that
goes in the pro-duction of goods and services; on the other hand, he suggests
that this wealth is created instead through the “exchange” of goods and
services between self-interested individuals who can then “specialize” in their
employment and therefore be more “pro-ductive” so that “wealth” expands.
But in both cases, Smith
never abandons the belief that the “exchange” between individuals is an “equal
exchange” because the competitive (leveling) forces of the free market
mechanism will ensure that any “inequality” of exchange will be “leveled out”
through the price mechanism. So not only does the market price mechanism ensure
“equal exchange”, but also it leads to the expansion of wealth through the
efficient allocation of individual resources for production.
Market And Social Osmosis
Two
doubts arise at this stage: First, what exactly do we mean by “in-dividual”?
Here the whole “empiricist” conception of reality (social and metaphysical)
from Hobbes to Schopenhauer comes to the fore and is brought into question.
Note that the “individual as a “physical unit of political decision-making” may
have some relevance/force, but not as an economic unit where it seems entirely
arbitrary.
Second,
if individuals are truly “self-interested”, how can they “exchange” anything?
How are their activities, their individual labours “co-ordinated”? Let us
assume that these individuals are seeking to maximize their “utility” through
exchange. Obviously, they will seek to derive from the “exchange” as much
personal utility as they can by minimizing the amount of “endowments/utility”
that they exchange with other self-interested individuals. But given that each
good and service that these individuals exchange with one another contains “at
equilibrium” a given “level” of “utility” (not “quantity” because utilities are
incommensurable except in terms of objectified relative prices), it can then be
argued that the individuals are not necessarily seeking to maximize “utility”
but rather any number of “quantities” (including those in inverse proportion,
as with “labour”, which has a “disutility”). Thus, we can see that “utility” is
a purely “metaphysical” entity or substance that simply does not explain why
“exchange” takes place: we may as well replace it with “labour” or any other
“good or service”.
So
now we can see that if we assume that the market economy involves “equal or
equivalent exchange”, then everything within it is “equivalent” and the
selection of a particular “substance” that lies “behind” the exchange, from
“utility” to “labour”, is just a “metaphysical” entity that tells us absolutely
nothing about the market economy and does not “explain” in causal terms the
“nature” of “wealth” or indeed its “causes”. (Myrdal, below, seems to make the
same point about the “tautology of circular definitions”. But he is wrong in
branding this circularity “meaningless”, as we will show with Wittgenstein.)
Furthermore,
here we are assuming that all these “exchanges” are happening “simultaneously”
or “synchronically” and that all individuals know fully the
“utilities/endowments” of everyone else. Even the Walrasian process of
“tatonnement” (“groping”), or auctioneering, assumes that exchange ratios are
fixed “simultaneously”, because there is simply no way of moving from one
“intertemporal” fixing of prices to the next without having before us all the
information needed to attain equilibrium! In other words, though utility
maximization may be proposed as the “purpose” behind the process of market
activity, it is not a purpose that can effectively serve as a price-discovery
entity driving the process of exchange toward equilibrium – because market exchange
is “blind” outside of equilibrium and, as established above, “empty”
(“purposeless” or a “non-action state” as Mises dubbed it) once we assume that
we have attained it. (Hayek makes similar points about the “timelessness” of
equilibrium and its “omniscience” [“happening in a single mind”].)
But
if instead we see these “exchanges” taking place over time, there can be no
guarantee that the exchanges would lead the market price mechanism “to
converge” toward “equilibrium”. For it is just as likely, if not indeed more
likely, that the “self-interested” behaviour of individuals would lead the
mechanism “to diverge” from equilibrium over time. Imagine, for instance, the
existence of “opportunistic” behaviour whereby some individuals concealed the
extent of their “endowments” so as to be able to exchange the lesser amount for
a greater quantum of “utility” from other individuals, and so forth.
Eventually, “competition” among self-interested individuals would not lead to
“convergent price discovery” and therefore to “equilibrium” but rather to the
opposite of “competition”, that is, to “monopoly”.
So
therefore this “exchange” theory of the market economy does not even tell us
how “competition” in its “pure” form at “equilibrium” can ever lead to
“equilibrium” and “co-ordination” at all, rather than its opposite, either
monopoly or indeed “chaos”. This is why, once Adam Smith took the “equilibrium”
approach to the market economy not as one where “wealth” is pro-duced but where
it is merely “exchanged” he had to assume or posit the existence of
“com-petition” as a convergent force, and therefore had to invoke a “deus ex
machina”, an “invisible hand” or a “deus absconditus”, a “hidden god” or
“hidden rationality” (ratio abscondita) that “guided” the market economy to
“self-regulation” and “co-ordination” – an unconscious, involuntary,
“spontaneous” Plan that turned the “self-interest” of “individuals” into
“enlightened self-interest”.
Crises, cycles, Planlosigkeit and “the
Law of Value”.
We
have seen that if we assume that the market economy involves the exchange of
given “quantities”, whether they be a quantum of “ subjective utility” or a
given amount of “labour” measured in “socially necessary labour time” – the
latter being the “socialist” position whereby “wealth” is pro-duced by the
amount of labour-time socially necessary to produce a good or service – then
the problem for a just market economy is to ensure a just “distribution” of the
“wealth” either through market exchange via competition or by more direct
political means. Socialists were quick to observe that the distribution of the
“value” or wealth produced by workers with their labour was clearly not equal
to their contribution to the creation of the wealth and that this was distorted
by the “ownership” of the means of production by capitalists which led to the
unjust or unfair “expropriation” of workers of the product of their labour.
Indeed, the obvious fluctuations in business, investment and employment
conditions in the market economy were attributed by socialists to the very
“Planlosigkeit” (unplanned and chaotic nature) of market capitalist production
due to the private ownership of the means of production. They proposed
therefore a “Plan” to ensure the equitable distribution of social wealth and the
full employment of social resources.
For
their part, proponents of the market economy saw these fluctuations in part as
necessary yet temporary disequilibria due to the efficiency and productivity
gains of competitive activities among entrepreneurs that would ultimately
benefit consumers, or else as distortions arising from “exogenous factors” not
controllable through the market pricing mechanism, or else at worst as
occasioned by “political interference” with the free operation of the market,
especially on the part of governments.
In
both cases, we can see that, whether we see the sphere of exchange as one of
“equivalent exchange” tending toward equilibrium or as one of “unequal
exchange”, the question is whether or not “the market pricing mechanism” can
work efficiently without political planning (as in the case of “utility”) or
whether it needs to be guided and reformed politically to ensure the equitable
redistribution of “value” based on “socially necessary labour time”. But, once
again, in both cases the “quantity” of value produced by or ‘endowed’ to
participants in the economy is taken as “given” and “quantifiable” so that the
pivotal economic problem is that of “distribution” of wealth or the
“co-ordinated exchange” of wealth and not that of how wealth is produced!
In
the market capitalist and the socialist view, the Law of Value says that the
amount of “wealth” (labour value or utility) is fixed and quantifiable either
absolutely (in terms of labour time) for the socialists or relatively (in terms
of utilities as displayed by supply and demand of goods) for the market
capitalists. In both cases it is possible to have an “equivalent exchange”
either through political distribution of value in a centrally planned economy
(socialism) or else through the “unplanned” competitive market mechanism where
the relative prices of goods and services are set by supply and demand which in
turn “co-ordinate” economic activity without the need for a “planning
authority”.
The Law of Value and the Sphere of
Equivalent Exchange – Equilibrium and Circular Flow. – Plan turns society into
a factory – Market allows “Choice” or “Spontaneity” – Indeterminacy of “labour
time” and of “equilibrium”: a posteriori definition arbitrary and tautologous
because “labour time” and “utility” are “metaphysical” notions. Again, sphere
of production hidden from analysis.
From
our exposition, it is easy to see why the socialist labour theory of value
would call for the “planned” redistribution of social wealth and why its market
opponents would object that such “political” interference with the market
pricing mechanism would remove the “free choice” of individuals based on their
self-interest and would also be tantamount to “transforming society into a
factory” because the only “value” allowed by socialist theories is that coming
out of workers. For the “socialists” instead the “freedom” claimed by the
market proponents is really the freedom of the owners of the means of
production “to steal labour time” from workers and their “choice” of
investments only leads to harmful fluctuations in the level of economic
activity.
Surplus Value (theft of labour time) or
Efficient Allocation of Resources (exchange and division of labour). Economics
as “Science of Value” (labour time “hidden behind” market prices [metaphysics])
or as ‘Pure Logic or Science of Choice’ (means-ends co-ordination through
competition; market-price empiricism “hiding” utility).
What is important for us to
notice, however, is that neither the socialist nor the market theory of the
economy can determine satisfactorily its basis. First of all, it is simply
impossible to define a “socially necessary labour time” for a society to
reproduce overall or indeed for each sector of the economy, let alone for each
individual good or service. Besides, this theory simply cannot account for
capitalist profits and accumulation or “surplus value” because, if labour time”
is already “socially necessary” to produce existing goods and services, then
where does the “surplus value” that enables the “theft of labour time” by
capitalists come from? (Schump in ‘CS&D’ makes this point.) And if we allow
that “necessary labour time” contains a “surplus” component, then how “socially
necessary” is this labour time? The objection that “necessary labour time” is
not a quantity as such but must take into account “social standards” as well
simply relegates the analytical problem from that of “labour time” to that of
“political and social relations”. So it is to these that we will turn at a
later stage to complete our analysis.
For the market proponents,
however, the suggestion that “utility” lies at the heart of exchange can be
refuted quite simply with the objection that “utility” is a very “metaphysical”
notion indeed. And if it is impossible to define “labour time” then it is even
harder to define the “marginal utility” that determines market prices because,
in order to do so, we must first identify an “equilibrium” so that all marginal
utilities can be given a “price” denominated in terms of a “numeraire”, that
is, in terms of any of the goods or services traded in the market. In that
sense, we could have relative market prices denominated in oranges or apples or
cars and trucks – and where does that leave “utility”?
We can conclude on the
metaphysical character of both approaches to economic activity by saying that
whereas the Law of (Labour) Value indicates “labour time” as the metaphysical
entity “hidden behind” market prices – something that needs to be “uncovered”
by “transforming” prices into values; the market theory instead can far more
easily indicate market prices as the actual exchange ratio at the margin of the
“utilities” of the goods and services exchanged to their market sellers and
buyers so that “utility” can be conveniently “hidden” behind actual market
prices (at equilibrium) far more easily than “labour time values” because the
latter, unlike the former, do not need to be “transformed” into market prices.
Wealth as ‘Growth potential’ or
‘tumescence/ex-crescence’ through efficient exchange and specialisation
(immanence) or as ‘Trans-crescence/Krisis’ (transcendence).Entwicklung.
The notion of “equilibrium” is entirely concerned with
and wholly originates from “equal exchange”. Equally, both the Law of Value and Marginal Utility allow the theoretical
possibility of “equal exchange” in a market capitalist economy by positing a
“Value” (labour time or utility) that can be maximized by the economy through
its “regulation” either by the market mechanism (unplanned) or by political
intervention (planned). Therefore both
theories presume the existence of “individual labours” (Trennung) and of
“private property”.
But by concentrating
respectively on the “distribution” of wealth (socialism) and on the “exchange”
of goods and services (market economists) it is clear that both the Law of
Value and Marginal Utility Theory have the powerful effect of concentrating our
attention exclusively on the Sphere of Exchange and hiding from our view and
analysis the Sphere of Production. Now, in the Sphere of Exchange every
category is “equi-valent” so that every category is linked to every other and
can “sprout” or “swell” from it homogeneously like an “ex-crescence”. This is
why for Hayek and now for the GE theoreticians (Hahn) “co-ordination” becomes
the central problem of economics and “the division of labour”, now that it has
become a mere “sign” in the uni-versal equi-valence of equilibrium analysis, is
inter-changeable with “information/knowledge” even when the system has no
“intellectual exchange or activity” whatsoever” (Debreu). - Because equilibrium
has no “action”, no “purpose” as pure “crystallized immanence” where the sheer
“id-entity” of its categories nullifies any “telos” or “conatus” or “aim” or
“goal”, where “choice” becomes meaningless because there is no further “choice”
to be taken, where all “values” are “semaphored”. In this empyrean frozen for
eternity, in this paralysis, everything is “fungible” and therefore becomes
pure “form” without content – sheer apory.
In other words, what is left
out is the notion of “wealth” itself, its “development”, its tumescence or else
trans-crescence – the quidditas of the system, its human “purpose” in terms of
“nature and causes”, in terms of “origin”, of “whys and wherefores” – the
quaestio occulta, the causa finalis, the “reason for it”. “Tumescence”is
immanent/endogenous and “trans-crescence” is transcendent/exogenous. But the
latter refers to “wealth” as an amorphous protean category that undergoes a metamorphosis and that cannot be
“quantified” by a homogeneous “substance” that “lies behind and is transformed”
into market prices or is “hidden/represented” by them.
Let us assume that we finally
reach equilibrium either by planned or unplanned means. We still have not
accounted for “growth” or the “expansion of wealth”. Indeed, because we cannot
be sure about what exactly “wealth” consists of in this market mechanism (we
have seen that it could be any number of “substances” or “entities” or
“ectoplasms”), we cannot really talk of “growth” or “expansion” of “wealth” –
so we need to talk rather of “development” or “trans-crescence”, that is, the
movement of the market economy from “equilibrium” to “something else” whose
nature and causes we do not know yet.
If “wealth” remains
homogeneous, then we can see how Smith could mistakenly derive it from
“exchange” and then pass seamlessly to “specialization” and “efficiency” as
“generating” greater wealth (tumescence) from endogenous (immanent) factors
(exchange of existing values or utilities). But this is antinomical because
“efficiency” means “better use of” some pre-existing “quantity” that cannot
“generate” greater wealth except as “potential”. But potential production (like
energy) must be contained already in the existing division of labour or
information. The system cannot outgrow its “potential”. But there is something
very wrong with a theory that starts with a notion of “equilibrium” that
maximizes utility and then pretends that “exchange” can lead indefinitely to
growth through constant “co-ordination” and “specialization”! It is obvious
that an economy where exchange can induce growth through efficient allocation
of resources is one in disequilibrium, and one that will stagnate once it
reaches equilibrium. Therefore, “exchange” cannot generate growth unless we do
away with the notion of equilibrium.
But then, if we do, we have
to introduce some notion of “unequal exchange”, because “equivalent exchange”
by definition will be neutral and cannot induce growth outside of the
“potential” that can be realized from some initial position through greater
allocative efficiency with existing techniques and inputs or “resources”, until
we reach equilibrium. For the economy to grow or trans-cresce beyond
equilibrium, we must introduce some “exogenous” factor such as “competition” or
“innovation” that can stir the system away from stagnant equilibrium. The next
question is: how can these “exogenous factors” be explained in terms of “how”
they upset equilibrium and of “why” actors are motivated to engage in “growth
activities”. In other words, what is it about “growth” that induces economic
agents to act? What is the “aim” (substantive and strategic) of competition? If
it is “wealth”, what does “wealth” mean? And how is such motivation consistent
with the “equivalent exchange” of the market pricing mechanism?
Evidently, our conclusion is
that “utility maximization” from “self-interested individuals” cannot be
indicated as a “motivation” for economic activity outside of the state of
equilibrium because it is incompatible with “convergence” to equilibrium and
indeed it cannot be defined at all because its “definition” presupposes the
attainment of equilibrium so “relative prices” can be calculated to define the
“maximization of utility”. But once we do reach equilibrium, then utility can
no longer “act” as a motivation to drive the system out of equilibrium and into
growth – because no further “action” or “motivation” is possible. And this is
why “utility” cannot be indicated as a “purpose” or “goal” of economic
activity. Because “utility” is an utterly “subjective” notion, its “reality” is
totally inscrutable in social terms by definition. That is the meaning of
Hayek’s “subjectivism”.
This also means that the
Hayek-Robbins “science of logic” as a technique of “means-ends” rationality must be discarded –
because the “ends” become redundant at equilibrium, and so does the further use
of any means. The logical flaw with Robbins’s formulation is that it fails to
define both “resources” and “efficiency” independently of the relative prices
attained at equilibrium, which is needed ex ante to assess the appropriateness
of the means, the “choice” of the “science of choice”, to achieve the proposed
ends/goals! (Hayek made the same point contra the market socialists in the “Socialist
Calculation” debate. We will see with our discussion of Demsetz-Alchian that
“resources” cannot be defined independently of “property rights”, which
destroys the “scientific neutrality” of economics because its aim at all times
was to define “resources” and “efficiency” neutrally/scientifically in terms of
means-ends.) Robbins was obviously thinking in terms of “output growth” – but
this begs the question of how “output” is to be measured! It is a petitio
principii.
Thus,
ex ante, the market mechanism is “unfounded” as a means for achieving
equilibrium and requires the postulation of an “invisible hand” or of a
“spontaneous order” (a ratio abscondita) which transforms the exercise into a
petitio principii. If however we wish to define equilibrium ex post, then we
have a tautology - this is equilibrium because this is equilibrium – given that
“utility” or “utilities” are inscrutable notions that are “hidden” by relative
prices determined by market forces (supply and demand).
A.
Exchange and Equivalence
THE MOST IMPORTANT PROBLEM with Hayek’s theoretical revision
of economic theory is therefore that, fixed as it is within the uni-verse of
“exchange” of neoclassical theory, the “prices” of his “intertemporal
equilibrium”, just like those of general equilibrium, become mere “signals” or
ciphers to enable the equilibrium co-ordination
of economic activities in the market economy. This is what enables Hayek to
suggest the replacement of “the division of labour” (which points clearly
towards the uni-verse of “production”) with “the division of information” which, as symbolic exchange, is clearly anchored
to “the uni-verse of exchange”.
Indeed, Hahn and Loasby have
suggested that “prices and quantities” in equilibrium analysis ought to be
abandoned in favour of “information and action” (see Loasby, ‘Eq&Evol’).
The difficulty here is that once we define an empirically
determinable “catallaxy” that determines prices ex ante, which gives the market
economy a “tendency to equilibrium”, then the “economic” problem becomes a
strictly “technical” one from which all “competitive choice” or “self-interest”
is removed: – in short, economics becomes a branch of engineering (see our
discussion of “the Pure Logic of Choice”) or an ex post facto “rationalization”
of a “mechanical evolutionary process” independent of human will (Hayek’s
“spontaneous order”, see our discussion in ‘Hayek’s Scientism’). Hayek does not
state clearly whether it is “the price mechanism” that ensures economic
‘co-ordination’, or whether it is the “spontaneous order” and the “institutions”
that compose it that determine the
price mechanism. The ambiguity is illustrated by Hayek himself: -
“The economic problem of
society is not merely a problem of how
to allocate ‘given’ resources… It is rather a problem of how to secure the best use of resources
known to any members of society, for ends whose relative importance only
the individuals know… it is a problem of
the utilization of knowledge not given to anyone in its totality,”
Hayek is clearly hypothesizing that the co-ordination problem
is one of explaining not the optimal ‘potential’ allocation of resources, but
rather the best available allocation from the perspective of freely-competing
‘individuals’ – which is what transforms ‘co-ordination’ from a ‘technical
(engineering) allocation’ problem to a “spontaneous/institutional or political”
one.
[Incompatibility of “co-ordination” and “competition” is the
greatest problem. Hayek speaks of “different plans” or “(individual) ends of
relative importance” and of “utilization of knowledge”. But he presumes all
along that these “plans”, “ends” and “knowledge” all have a common goal or
convergent aim, which is not at all what “competition by self-interested
individuals” actually means! The outcome is that no “co-ordination” is possible
without the further specification of a “convergence mechanism”. This takes us
back to the ‘metaphysical’ notion of ‘utility’/endowments, that of “scarcity”
and “resources”, and above all brings into question that of “self-interested
individual”! Hence, the need for Hayek to embark on the whole “evolutionary”
enterprise of discovering a “spontaneous order” accompanied by the
“institutional” regulation of competition”.]
The problem with this approach is that we can never know,
even a posteriori – except tautologically – whether the market pricing
mechanism truly ensures this “best use” of resources in the sense of “best
utilization of knowledge”.
So, either we prescribe a “spontaneous order” that ensures
“co-ordination” as an outcome; or we postulate (a posteriori) that the existing
system is the “best use” in any case. Obviously, because Hayek sees
‘co-ordination’ as a problem, his
approach must favour the former pathway.
But another even greater
difficulty emerges right away. If indeed the entire purpose of “the
division of knowledge/information” is solely to ensure the “efficient co-ordination”
of different individual plans, even assuming that these “plans by
self-interested individuals” can be “convergent” and therefore are capable of
“co-ordination”, it is no longer possible to divine what is the basis of the “market competition” that determines the
“economic” character of the whole “market exchange mechanism based on the price
system”. Again it seems evident that unless individuals can “profit” from this
process, the logic of “equivalent exchange” will result in equilibrium and
stagnation. Alternatively, if individuals do profit from the exchange, then the
logic of “competition” will end up in “monopoly”, with devastating consequences
for Hayek’s entire analysis of “best use of resources known”, and tendentially
“monopoly” will result once again in “stagnation” and “non-action”.
Economic theory involves the interaction between prices and quantities for exchange. Ultimately,
the purpose of “market exchange” is not “information” or “knowledge” – but
something far more controversial such as profits!
It will never be clear whether it is
“prices” that determine “the utilization of knowledge” (the ‘institutions’ of
NIE) or “utilization of knowledge based
on quantities” that determines “prices” to ensure the “co-ordination” of
economic decisions in the sphere of exchange. The question remains: do prices
determine “the utilization of knowledge” (the shape of ‘institutions’) so that
some individuals may ‘profit’ or is it the other way around so that the
end-result will be a stagnant equilibrium with no profits and no price changes?
It is no answer to break up the
economic decision-making process into ex
ante plans and ex post
“verification” (as do Boettke et al. in ‘Context’) because no amount of slicing up of individual exchange decisions (or
learning process or Walrasian ‘tatonnement’) will ever give us the answer to
the fundamental arrow of causality:
Boettke et alii:
Economic coordination
requires the dovetailing of the diverse plans of individuals dispersed
throughout the economic system. The production plans of some, must mesh
with consumption demands of others, and do so in a manner that tends to exploit
the gains from trade, and realize technological efficiency. Minds must meet and
this is accomplished through the market process of relative price adjustments
and profit and loss accounting. Ex ante expectations guide the
decisions of individuals and are informed by the existing array of prices that
decision-makers confront. Ex post improvements of plans are communicated via profit and loss, and
serve to indicate the appropriateness of those plans in terms of the competing
demands for the resources and the concurrent plans of everyone else in the
economy,” (‘Context’).
Walrasian ‘tatonnement’ was meant precisely, like Boettke’s
ex ante/ex post analysis, to remedy the aporetic ‘timelessness’ of the
equilibrium simultaneous equations (see Hayek quote above). But neither
stratagem can remove the insuperable difficulty that the ‘theoretic’ framework
is an ‘identity’ and therefore lacks ‘causality’ and ‘time’ (is ‘synchronic’
and not ‘diachronic’, and therefore is ‘aporetic’).
Above all, this framework always needs to introduce
surreptitiously the whole rationale of the “exchange” – profit and loss – which
is what makes it “competitive” and destroys all the sanctimonious elaborations
on “co-ordination” and “spontaneous order”. As long as economic analysis remain
‘imprisoned’ in the sphere of exchange, these ‘apories’ will be irresoluble and
the “theory” will remain “flat” in the sense that it will lack “the arrow of causality” or “the purpose”
between production and prices for exchange. Let us examine these separately.
EXCHANGE
The profound incomprehension
of the fundamental problem of economic theory and the well-nigh total confusion and misconception of the fact
that it cannot be “reduced/traduced” to a simple problem of “exchange” is again
made evident by Boettke et alii:
“Hayek’s focus on the epistemic properties of the market
process led him to recognize the role of the division of knowledge in promoting
social order just as Smith (1776) emphasized the division of labor to promote
economic prosperity. Adam Smith taught us
that the great increase in the productive capacity of a people resulted from
expansions in the division of labor.
Hayek, similarly, taught us that a division of labor also entailed a
division of knowledge in society. Both
emphasized the complexity that the division of labor and division of knowledge
implied and the enormity of the coordinative task that must be accomplished by
the market system to realize the great benefits of specialization and trade,”
(‘Context’, p3, my emphasis).
The problems are compounded by the fact that, as Boettke et alii
confirm above, both Smith and Hayek sought to theorise the role of competitive
market ‘co-ordination’ (“the market system”) “to realize the great benefits of specialization and trade”. In
other words, they are aware of the fact that “best use of resources” is not
just an “epistemic” problem, but also one of “specialization and trade” – or
rather… one of productivity and growth!
The “allocation of resources” can get us to “distribution”
and then to “productive distribution using
existing technological and human resources” – which returns us to the
“technical (engineering)” definition of ‘co-ordination’. But it will not take
us to “innovation”, because otherwise market co-ordination would have to
encompass not just existing technologies but also other “combinations” of
technologies and innovation (Schumpeter). [Metcalfe
(‘Evol.Econs.&Cr.Destr.’) agrees with the futility of pursuing this line of
enquiry.]
But then we need also a theory of how market system
‘co-ordination’ not only ‘allocates’ resources but also causes these resources to grow. And yet, the mechanism that causes resources “to
grow” (the economy “to develop”) must be conceptually and institutionally
distinct and separate from the market process of ‘co-ordination’ through
exchange of resources!
In other words, it is not possible to incorporate the notion
of “development and growth” in the concept of ‘co-ordination’ because the
former involves more than sheer ‘co-ordination’, whether of ‘given resources’
or of ‘knowledge about use of existing resources’. It involves the expansion of resources however
defined.
So, what can Boettke et alii mean by “the enormity of the coordinative task that must be accomplished by the
market system to realize the great benefits of specialization and trade”?
Because no “enormity of the coordinative
task” will ever be enormous
enough to cause “the market system to
realize the great benefits of specialization and trade”, once we concede
(as we must) that “the great benefits of specialization and trade” are
necessarily distinct and separate in theory and in practice from “the
co-ordinative task of the market system”!
The economic concept of “productivity and growth”, or
“development” involve social mechanisms or interactions that are quite
different from the concepts of ‘co-ordination’ and ‘exchange’ and ‘allocation’.
For growth and development to occur, we need to specify a “motor or engine of
growth or development”.
Recall that it was Adam Smith’s original confusion of
exchange as the cause of specialization (rather than the other way around) that
led him astray from his quest “to enquire into the nature and causes of wealth”
(that is, ‘growth’) and that condemned him ultimately to seek ‘value’ in the
sphere of exchange and to turn therefore into “the father of general
equilibrium” (Arrow and Hahn) and to invoke “the invisible hand” (timeless equilibrium determined by simultaneous equations).
Even if we follow the orthodox interpretation of Schumpeter’s
‘theory’and locate ‘innovation’ endogenously with Rosenberg within
‘corporations/firms’, there is still absolutely no conceptual link between “the
market” as a “co-ordinating” mechanism of “knowledge/information utilization”
(Hayek) and the actual process of “innovation”.
And even superficially, quite apart from the ‘conceptual’
difficulties of Boettke’s hypothesis, there is ample evidence to show that,
purely at a ‘geographical/logistical’ level, “innovation” very often takes
place in a ‘non-market’, non-competitive setting – “the fourth quadrant”, as
Steven Johnson has called it.
Metcalfe (‘Evol.Econs.&Cr.Destr.’) accepts the
difficulties but clings to the role of “market competition” in innovation. His
theses are so bizarre as to defy belief! – Worthy of quotation to show how
“scarce resources” are not applicable to “evolutionary and institutional
economics”!
Rothbard
tackles the problem more helpfully. He invokes Mises to say that it is “mutual
benefit” derived from “the diversity and inequality of talents and interest
among men” that causes “exchange” and “the division of labor”, rather than the
other way around, as the “anti-rationalist” Adam Smith would have it. Taken to
an extreme, Mises would then have to argue that butchers and carpenters have
innate talents that lead them to specialize in those trades! No further comment
is required on the foolishness of this notion. But Rothbard asks a valid
question: “If for Smith, the diversity
and inequality of talent is not the root cause of the division of labor but the
effect, what in the world is the
root cause?” Smith ought to answer that it is the obvious productivity
advantages of “specialization”. – Which is acceptable and preferable to what
Mises and Rothbard propose for an explanation. Instead, he opts for “the natural tendency to barter, truck and
exchange one thing for another” (quoted below). But none of this deals with “the nature and causes” of exchange value!
“It should be noted that Smith was antirationalist
as well, if for rather different reasons. Smith was
concerned to purge economic theory of all
subjective utility considerations, so he had to
discard mutual benefit as the reason for exchange. Indeed, in
contrast to Mises’s insight that the division of labor
(the base of exchange) stems from the diversity and
inequality of talents and interests among men, Smith
maintained that all people and children are originally
almost totally the same, and that the existing
division of labor and of occupation willy-nilly pushes them
into specialization and differences of interest. As
Smith puts it: “the very different genius which appears to
distinguish men of different professions . . . is not.
. . so much the cause, as the effect of the division of
labor.”
If for Smith, the diversity and inequality of talent
is not the root cause of the division of labor but the effect,
what in the world is the root cause?....[Smith] falls back on some sort of
built-in “instinct”: or, as he put it. “a certain propensity in human nature”
which has no regard for utility, but is instead, “a propensity to truck,
barter, and exchange one thing for another,” Ibid., pp. 25, 28. Or, as Smith
rather absurdly put it: “without disposition to truck, barter, and exchange,
every man must have procured to himself every necessary and convenience of life
which he wanted,” ibid., p. 29.” (Rothbard, ‘PresentStateofAE’, p26 fn46)
Rothbard then continues to discover the motivation behind
the exchange, which changes the entire “nature” of the “exchange”, which
neither Smith nor Mises nor anyone else seems to be able to comprehend, still
less to admit!
‘Perhaps the best case for stress on unintended
consequences comes from analyzing the
motive of exchange on the free market and was best
expressed in the famous quote from
The Wealth of Nations: “It is not from the benevolence
of the butcher, the brewer, or the
baker, that we expect our dinner, but from their
regard to their own interest. We address
ourselves, not to their humanity but to their
self-love, and never talk to them of our own
necessities but of their
advantages.(26)
To translate this passage into our current concerns:
the butcher and the baker’s actions
result in the intended consequences of yielding them a
profit, but, more importantly for
society, they result in the unintended consequences of
benefiting consumers, indeed
society as a whole, in the most efficient possible
manner.
This is surely an important and valid point, so far as
it goes. But, we might wonder: why
the rush to celebrate unintended consequences?
Wouldn’t it have been better if these proconsumer
or pro-general standard of living consequences had
been understood and
intended by the actors as well? To put it another way:
the butcher, baker, and so on desire
and intend the consequences of their production
yielding them a satisfying profit. But
suppose that they are informed, by economists and
others, that their actions also have the
effect of helping the rest of society and the general
standard of living? Wouldn’t they
then come to intend this general welfare as well, even
conceding that their own selfinterest
would still be their primary goal? Wouldn’t they be
likely, at the very least, to
feel better and happier about their own activities,
knowing now that they benefit the body
of consumers as well as
themselves? How could such knowledge hurt?’ (p27).
As is evident, Rothbard is totally blind and deaf to the
fact that if we allow “altruistic” motives to enter the field of economic
theory, the entire basis of “individual decision-making or choice” falls apart
together with “the market mechanism” because now the individual will weigh up
private and public gains. So, market agents’ “purposive rationality” implied by
“praxeology” dissipates into an infinity of conflicting selfish and altruistic
considerations! But the whole point to “the Pure Logic of Choice” is that
“individual plans” are invariably the best – no, the “only” rational choices possible! Because
Rothbard-Pangloss believes that individual preferences always lead to the
greater good, then there is no ‘difference’ or, to put it with Hayek, no
adverse “unintended consequences” following from pursuing the former.
This exquisite brand of stupidity was obviously too much for
Hayek, and he wisely eschewed it:
‘Thus, Mises’s view of why men participate in the
basic form of market interaction exchange, which also implies participating in
the social division of labor. Harking back to the insight of the Scholastics,
beginning at least with the great fourteenth-century French philosopher and
scientist John Buridan, Mises saw that a
man participates in an exchange because he sees that he will benefit more from
the good or service received, than the good or service he has to give up. Here
is the root of the basic subjective-utility, or Austrian, insight: men engage
in exchange because and only because they subjectively prefer what they will receive
in exchange to what they give up. Hence, also, Mises’s conclusion on how to
preserve and maintain the great oecumene, the mighty network, or system, of
voluntary, mutually beneficial exchanges that constitute the free-market
economy: The mass of the public must learn, must be educated to understand,
the vast importance of maintaining and preserving that free market from
aggression and coercive interference.
‘But now, in his Foreword [to Socialism] written after Mises’s death, Hayek writes:
“I had always felt a little uneasy about that
statement of basic philosophy, but only now can I articulate why I was
uncomfortable with it.” Hayek then adds patronizingly: “The extreme rationalism
of this passage, which as a child of his time he could not escape from, and
which he perhaps never fully abandoned, now seems to me factually mistaken.
It certainly
was not rational insight into its general benefits that led to the spreading of
the market economy.”42 (Rothbard,
pp23-4).
Yet even for Hayek this still leaves open the whole problem
of how individual needs or wants or preferences or choices, especially if
axiomatically “self-interested”, can
lead to economic let alone social “co-ordination” (remember “externalities” and
“income distribution” [Napoleoni on Robbins]).
This is not just a matter of “natura non facit saltum”. It
is not just a matter of the conceptual impossibility of deriving “innovation”
from “combination” (see Loasby re Schumpeter in ‘Eq&Evltn’). It is rather
that no amount of ‘co-ordination’ can give us ‘development’. If indeed
‘development’ is a product of ‘innovation’, then the ‘mechanism’ of innovation
is different from that of ‘co-ordination’:- the “institutions” are different,
or heterogeneous. But it is essential to remember that this is not a problem of
‘institutions’! It is a problem that requires us to move from the ‘sphere of exchange’ to the ‘sphere of production’!
In this context, Robbins
(quoted by Coase) was intuitively quite right to insist that “institutions”
such as the firm were not within the scope of economics – something Coase
himself seems to accept. (See our discussion below, ‘The NIE’, where we insist
on the ‘theoretical dependence’ of
the NIE on the neoclassical paradigm.) As Klein reminds us (‘The NIE’, par.9):
“Speaking of Lionel Robbins’s
influential Nature and Significance
of Economic Science
(1932), Coase (1992, p. 714) remarked that ‘in Robbins’s view, an economist does
not interest himself in the internal arrangements within organizations but only
in what happens on the market’. Even Coase himself believed, as late as 1988,
that ‘[w]hy firms exist, what determines the number of firms, what determines
what firms do ... are not questions of interest to most economists’ (Coase,
1988, p. 5).
Exchange does not lead to the division of (social) labour
(it’s the other way around!) and the division of (social) labour or of
knowledge does not lead to “innovation” or “development/growth”. We must
explore the nexus between these last two:- but remember, “innovation” is about
novelties that lead to greater market share. But market share is a share of
‘consumption’! What we need is “greater production”, not in “physical” terms
but in terms of “share of purchasing power” (the real meaning of “market
share”). “Purchasing power” means, in terms of revenue and profits, “the power
to purchase” more existing goods for sale on the market. So we see that
“greater production” must involve a “growing exchange” in terms of “greater
purchasing power”. This means “greater command over existing resources”, which
entails “greater resources” and “greater command”!
Hence, “growth” means “growth of purchasing power” – but
this has nothing to do with “innovation” or “productivity” which are concepts
relating to “novelty” and “rate of output”. Only the “command” side remains to
be explained. What can “purchasing power” or “greater command over resources”
mean?
Let us state this as emphatically as we can: no amount of “exchange” or “co-ordination”
will ever cause “specialization” and no amount of “specialization” will ever
tell us what determines “prices” – the total amount of “value” – in an economy!
What the “price mechanism” can do is ‘optimise’ or ‘maximise’ the pro-duction
of existing resources through their efficient allocation or co-ordination: but
no amount of ‘allocation’ or ‘co-ordination’ will be able to expand the productive potential of a ‘given’
economy. Indeed, because we can only speak of “given resources” (Hayek above)
we will never know what the “efficient allocation of existing resources” or
“price co-ordination” or “the problem of utilization of knowledge” really means!
– Except a posteriori, after the event (!). But in that case our conclusions
will be empty “rationalizations” of the status quo: we will assume what we are seeking to prove!
In reality, it is the division of social labour that
permits ‘exchange’, so that when ‘social labour’ is separated into ‘in-dividual labours’ through ‘private property’
over the means of production, then the ‘exchange’ must become one of ‘equivalents’
(exchange values) that need to be measured.
And the ‘measure’ can only be ‘value’,
not a ‘numeraire’ or a relative price, because the ‘exchange’ is not one of
‘use values’ (utility) but one of ‘potential pro-duction’ where the use values
for exchange are not ‘given’ as “endowments” at the outset but must be
pro-duced in terms of the amount of ‘exchange value’ they can command potentially.
To command more ‘value’, the exchangers need to
control the quantities (potential pro-duction) of use values that are pro-duced
for exchange (potential exchange). This can be achieved by “owning the factors
of pro-duction”, that is the means of production and the now “individual labours” of workers who do not “possess”
independent means of production.
The ‘exchange’ now is not one of “use values” but one
of “exchange values” and is aimed at commanding
more exchange values, which means “owning” more means of production and
“individual labours”, or the “labour-power” of “commanded living labours”. It is this last “exchange” that is the vital
one!