Commentary on Political Economy

Sunday, 27 September 2020

THE ‘SPONTANEOUS ORDER’: Capitalism Between ‘Entrepreneurial Spirit’ and ‘Institutional Organization’.


THE ‘SPONTANEOUS ORDER’: Capitalism Between ‘Entrepreneurial Spirit’ and ‘Institutional Organization’.


The price we pay for equilibrium analysis is that it relativizes prices, turning them into direct exchange ratios between goods for exchange – and thereby hides the true value of value. To be sure, all “theories of value” that turn into a “law of value” whereby value is seen as a “quantity” inevitably turn value either into a metaphysical substance, or else they turn individual values of goods into “transformed” relative prices. This was precisely the danger against which Joan Robinson was warning us. The problem with her understanding of value is that she thought it was a quantity, much in the way Marx himself seems to treat it especially in the second volume of Capital where he describes the process of “the simple circulation” of capital, which is a direct precursor of Schumpeter’s Kreislauf (circular flow). Thus, if we treat prices as relative prices, without a political notion of value to stand for their real historical social substance, we are left with the empty formalism that Robinson denounces. But what is value, then? How did Marx get to its theoretical significance from the raw facts of history? Here is Schumpeter:


The "raw facts are, as such, a meaningless jumble "29

and "it is absurd to think that we can derive [even] the contour [467]

lines of our phenomena from our statistical material only." 30 No

"statistical method, however refined" 31 will help us toward this goal.

"We must put our trust in bold and unsafe mental experiments [cf. Ernst Machs thought experiments or Gedanken-experimenten] or else give up all hope." (Machlup, pp.467-8).


Raw facts, without a theory ordering them together in a meaningful relation, are a meaningless jumble. But the order we seek to bestow on facts must take account of the reality behind these facts. It is simply not sufficient to find a formal numerical relation between quantifiable data because this correlation is a mere formal schema, not a theory: it describes but does not explain. It cannot guide our actions because the formal equivalence of data their mathematical equation is utterly meaningless in two senses:- first, because one side of the equation nullifies the other side (cf. Hegels critique of Kants formal logic, A=A); and second because there is no causal temporal link between the two sides of the equation. Yet, this is precisely the formal logical positivism (Ernst Machs, and Walrass) that Schumpeter refuses to jettison. In his own words,


40 "The most important thing is, first, to find the existence of functional relations

and, second, to know as many properties of these functions as possible. One can, then,

establish algebraic expressions even if their numerical magnitudes cannot be found."

"Uber die mathematische Methode/' p. 37. Quite apart from any numerical magnitudes,

the mathematical method, according to Schumpeter, is "just the appropriate

instrument" of exposition because the use of "systems of simultaneous equations for

the representation of economic interrelationships affords a comprehension [Überblick]

of them that cannot otherwise be attained with the same clarity." "Epochen,"

p. 110.


This is precisely the problem Schumpeter perceives with the Walrasian equilibrium schema: on one hand, it co-ordinates neatly various hypothetical data in a functional relation that yields the relative prices of goods or endowments exchanged by atomic self-interested individuals amongst themselves so as to maximize their utility functions. But on the other hand, this functional relation tells us absolutely nothing about what it is that this functional relation, these relative prices, relates or prices! Herein lies the problem. The Statik of Walrasian equilibrium analysis eliminates entirely the substance, the whatness or quiddity of the economy it pretends to describe the value or wealth or endowments of its atomic individuals. And it entirely eliminates any metabolism (literally, material transformation), any pro-duction (bringing forth of a new reality) aside from a semaphoric exchange (Walrass infamous tatonnement, groping for equilibrium prices) that takes place, not just instantaneously - because that would suggest that there is a meaningful material place for chronological time in this exchange -, but semaphorically, logically that is, with no logical room for material time whatsoever! The concept, let alone the perception, of time is entirely contradictory to logic: time is material or it is not at all.


Non-sensical, therefore, was Joan Robinsons sophistical distinction once more demonstrating the characteristic arrogant asininity of Cambridge dons between logical and historical time. Time is a physical process. In the case of human economic agents, it is a physiological process a metabolism. There is no meta-bolism between the individuals of equilibrium analysis - both amongst themselves and least of all with their environment. Simply and devastatingly put, there is no change in this exchange!


That explains why Schumpeter had to swap terminology from the mere exchange of endowments as stocks the Statik to an exchange that involves flows that can include produced and producing goods (tools and machinery) the circular flow (Kreislauf). But even this subtle conceptual shift could not suffice, because even in the circular flow (this Nietzschean eternal return of the same) there is no real time for the simple reason that everything stays the same. The productive meta-bolism with the environment which itself changes the relation between producers and the environment as well as among producers themselves this essential meta-bolism, this Ent-wicklung (trans-crescence, de-velopment) - is missing also in the Kreis-lauf (circular flow)! Which is why Schumpeter had to return to the fundamental distinction between Statics and Dynamics’”:


He [Schumpeter] had originally adopted the terms "Statics" and [470]"Dynamics"

as suitable for his purposes. His 1908 and 1911 books

made ample use of the terms; indeed, he stated that his "exposition

rests on the fundamental distinction between 'Statics' and 'Dynamics'."

42 By 1926, in the second edition of his Theory of Economic

Development, he found that the terms had been used by others with

"innumerable meanings" and, in order to avoid confusion, he used

"theory of the circular flow" for what in 1911 he had called Statics,

and "theory of development" for what he had called Dynamics.43 By

1939, when he published his book on Business Cycles, he used the

terms Statics and Dynamics, "in deference to Professor Frisch," to

distinguish theorems which include "values of variables which belong

to different points of time" from others where all variables refer

to the same point of time.44

(Machlup, 469-70)



Schumpeter’s difficulty, of course, was that “the price mechanism or system” is the only one consistent with “methodological individualism” which posits “metaphysical” notions such as “utility” and “market”, “competition” and “prices”, in such a fashion that they can be ordered into a game whose “rules” seem then to be “scientific” but in fact are only logical and self-referential – they constitute a “closed system” that is internally consistent but does not explain the reality that lies outside of its axiomatic (self-referential) assumptions! This is the fate of “human nature” theories and formal schemata that turn historical realities into eternal immutable (‘metaphysical’) “truths” that turn out in fact to be axiomatic identities or tautologies devoid of all practical content – which is what reveals them as apories and antinomies.





As we have shown, equilibrium analysis describes a “state of affairs” frozen in time (timeless or synchronic or ‘simultaneous’ like its equations) that cannot even “conceive” of a ‘Dynamik’. Without a theory of value, without a theory that can explain why and how the capitalist economy transforms itself, bourgeois economic theory is stuck in half-way houses that are torn between Statik and Dynamik. Such is the fate not just of Schumpeter’s Kreislauf and Entwicklung, bridged by the “entrepreneurial spirit” and its Innovation), but also of Robinson’s “tranquility” based on the physiological analogy of the body politic drawn by Marsilius in his Defensor Pacis. (Cf. O. Gierke’s masterly exposition in The Political Thought of the Middle Age.) The chief difficulty with the formalism of bourgeois economic theory is represented, as Schumpeter put it, by the empirical “indeterminateness of prices” in the capitalist economy caused by its “incessant transformation” – although this curse afflicted also Marx’s own “transformation problem” in volume three of Capital. Schumpeter’s own conceptual barrier was illustrated by his characterization of the Innovations-prozess as a Veranderungs-mechanismus (transformation mechanism) – for how can a mechanism effect a transformation?



A recent, “evolutionary” way to overcome this “unbridgeable hiatus” between value and prices is provided by “the New Institutional Economics”. It was Friedrich Hayek, Wittgenstein’s cousin, who penetrated the intractability of “the tautological method” implicit in equilibrium analysis by conceding the solipsistic nature of its rationale. To be sure, Hayek’s intellectual background was almost identical with Schumpeter’s:


Not only was my first technical training largely scientific in the narrow sense of the word but also what little training I had in philosophy or scientific method was entirely in the school of Ernst Mach and later of the logical

positivists. Intro. To Schumpeter’s Meth. Indi.)


But, unlike his fellow Austrian, Hayek was able to penetrate the central difficulty with Walrasian equilibrium:


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”!


To be sure, Hayek – who did not possess the sharpest philosophical mind – still believed that equilibrium analysis, though solipsistic, that is to say, entirely akin to the thought-process of a single mind, left room for time:


Since equilibrium is a relationship between actions, and since the actions of one person must necessarily take place successively in time, it is obvious that the passage of time is essential to give the concept of equilibrium any meaning.  This deserves mention, since many economists appear to have been unable to find a place for time in equilibrium analysis and consequently have suggested that equilibrium must be conceived as timeless” (Hayek 1937).


Hayek is simply mistaking a logical equivalence, which does not admit of any kind of “time” – what we have called a semaphore – with real time. As Boettke puts it: with regard to Hayek:


As Hayek’s technical work in economics evolved, he became increasingly aware of both the power of, and the limitations of equilibrium theorizing.  At first it was the absence of time within the equilibrium construct that caused problems for Hayek’s theorizing on intertemporal  co-ordination of plans within a capital structure.[1]  In studying the derivation in value of the various inputs with relation to the value of the output produced, Hayek became aware of the dangers equilibrium theorizing poses by distorting the essential economic problem that the equilibrium propositions were supposed to enlighten. Hayek was acutely aware, on the other hand, of how the heterodox traditions, of the German historical school and the American institutional school, led to an atheoretical orientation of fact collection.  Somewhere between arid formalism and descriptive fact collection was the appropriate domain of theoretical social science.” (‘The “Context” of Context’, pp8-9) 


Boettke clearly fails to see that there is no “somewhere between” because both approaches suffer from incurable ‘reifications’ that also make them irreconcilable: the ‘theory’ and the ‘fact collection’ move in categorically different dimensions because the ‘theory’ reifies the ‘facts’ and the ‘fact collection’ can be ‘theorised’ only to the degree that its ‘facts’ are reified or “reduced/traduced” to formal categories. (See our discussion of Long’s “fallacy of misplaced concreteness” whereby he confuses the content of “language games” [such as the regular behaviour of market exchange] with the abstract logico-mathematical rules of the game. In seeking to reconcile “the Pure Logic of Choice” with its real referential content, Mises and Long forget the “inexorability” of the rules [!]) which obliterates the “choice” that is the essence of the “action axiom”! Mises “reads” ex post the validity of his a priori theory into behaviour consistent with it.)


Hayek instead seeks to validate the theory empirically ex ante by attributing “regularities” to the behaviour of human market ‘agents’ [homines agentes] that have an “observable tendency to equilibrium” [or co-ordination]. But in his case also, the reaching of “equilibrium” introduces the “equi-valent exchange” that eliminates the rationale for exchange! Once

“equilibrium co-ordination” is achieved, the economy simply stagnates and lapses into Misesian “non-action”.


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!


Just how misconceived equilibrium analysis truly has become is illustrated by Ronald Coase’s devastating lampooning of “the pure logic of choice” in his review of “the New Institutional Economics”:


“This disregard for what happens concretely in the real world is strengthened by the way economists think of their subject. In my youth, a very popular definition of economics was that provided by Lionel Robbins ( 1935 p. 15 ) in his book An Essay on the Nature and Significance of Economic Science: "Economics is the science which studies human behaviour as a relationship between ends and scarce means that have alternative uses." It is the study of human behavior as a relationship. These days economists are more likely to refer to their subject as "the science of human choice" or they talk about "an economic approach." This is not a recent development. John Maynard Keynes said that the "Theory of Economics ... is a method rather than a doctrine, an apparatus of the mind, a technique of thinking, which helps the possessor to draw correct conclusions" (introduction in H. D. Henderson, 1922 p. v). Joan Robinson (1933 p. 1 ) says in the introduction to her book The Economics of Imperfect Competition that it "is presented to the analytical economist as a box of tools." What this comes down to is that economists think of themselves as having a box of tools but no subject matter. It reminds me of two lines from a modern poet (I forget the poem and the poet but the lines are indeed memorable): I see the bridle and the bit all right. But where's the bloody horse? I have expressed the same thought by saying that we study the circulation of the blood without a body.”


The reference to “the circulation of the blood without a body” is a clear endorsement of Schumpeter’s Kreislauf/Entwicklung distinction in the Theory and of the dog’s anatomy/evolution analogy in Business Cycles. Let us review briefly this instructive Schumpeterian analogy:


The commonsense of this tool of analysis may be formulated as follows: first, if we deal with, say, the organism of a dog, the interpretation of what we observe divides readily into two branches. We may be interested in the processes of life going on in the dog, such as the circulation of the blood, its relation to the digestive mechanism, and so on. But however completely we master all their details, and however satisfactorily we succeed in linking them up with each other, this will not help us to describe or understand how such things as dogs

Joseph Schumpeter, Business Cycles. (1939) 29

have come to exist at all. Obviously, we have here a different process before us, involving different facts and concepts such as selection or mutation or, generally, evolution. In the case of biological organisms nobody takes offense at the distinction. There is nothing artificial or unreal about it and it comes naturally to us; the facts indeed impose it on us.

It is incessant change in the data of the situations, rather than the inadequacy of the data of any given situation, which creates what looks like indeterminateness of pricing. We conclude, on the one hand, that we must take account of this pattern when dealing with the process of change which it is our task to analyze in this book and which must be expected to create precisely such situations, and, on the other hand, that it does not paralyze the tendency toward equilibrium [Gleichgewichtstendenz](BC, p.43)


Equilibrium theory completely neglects the most essential aspect of economics – the “pro-duction” of goods and services and therefore the “metabolism” of the economic system with the physical environment of which human beings are part (this is indeed the very first concern of Schumpeter’s intellectual mentor, Eugen Bohm-Bawerk, at the beginning of The Positive Theory of Capital). The certainty that equilibrium theory affords lies in the axiomatic determination of prices. Yet, once we allow the market participants of equilibrium, which as we have shown are merely mechanical inert bodies, to become political “economic agents”, then the prices of the economic system become wholly “indeterminate”, precisely because the system undergoes “incessant transformation” or mutation. For Schumpeter, the problem with both Classical and Neoclassical economic theories is that their formalization of the relations between the component parts or functions of the economy (supply, demand, investment, consumption, interest, monetary mass), is entirely “static” or “closed” or “self-referential”, and is therefore entirely incapable of accounting for the equally observable fact of the “dynamic” movement of the capitalist economy, for its mutation “from one equilibrium to another”, - equilibria that are quite different not only in quantitative but also in qualitative terms! Capitalist development is not just horizontal quantitative growth or development (Wachstum); it is above all vertical qualitative mutation or evolution (Entwicklung). Schumpeter’s initial objection to the translation of Entwicklung with “development” rather than “evolution” is all here: “development” refers to incremental change; “evolution” points starkly to the possibility of extinction.


Of course, the term “evolution” has its own problems in the sense that, first, as Murray Rothbard acutely observed, capitalism and capitalists are not “dogs” (however much we Marxists would like to think of it as such); in other words they are not an animal species with genes so that the analogy is very imperfect; and second, “evolution”, as Schumpeter himself pointed out, has a tone of “complacency” about it. Indeed, it is even possible to challenge further the status of equilibrium economics as “science” given that, to reprise Schumpeter’s metaphor of the “circular flow” or Kreislauf, equilibrium analysis is just that – mere ana-lysis! It is, as it were, a descriptive or “ana-tomical” schema that can only “photograph” or sketch an economic system and “classify” its individual organs. It relies exclusively on “pure exchange” and on the maximization of welfare or utility from the redistribution of “given endowments”.


Above all else, because equilibrium is quite simply a formal descriptive schema, it exists only logically, but it does not ec-sist metabolically, physiologically, in the sense that it does not face the certainty of death, in the case of its “individuals”, or the certainty of “extinction”, in the case of the capitalist economic system. The equilibrium schema does not allow of real entropic time. Once the certainty of ontogenetic death and phylogenetic extinction are taken into account, then we understand that the “individuals” that make up the economic system must deal with their physical environment, with their physis: – this is the “metabolism” that is entirely and conceptually absent from the equilibrium schema and that is instead essential to the notion of market process, that is, to the unfolding or extrinsication of an economic system in the physical world, in the environment – the world that envelops us (French, environs, surrounds).


What equilibrium analysis cannot do is understand and explain how the economic system metabolises, how it interacts with its social, political, and physical environment, how it grows, mutates, and dies – or, phylogenetically, how it evolves and becomes extinct. Seen from the point of view of “market process” – which, as we explained earlier, is the quasi-logical or dialectical conceptual extrinsication or unfolding of the concept of equilibrium, its Hegelian dialectical Auf-hebung or else its Heideggerian phenomenological ec-sistence – seen from this perspective, equilibrium is a purely descriptive or classificatory exercise: it merely describes the logical and functional relation of each component of an economic system to other components, and then determines the price matrix that will maximize the individual utility schedules of its self-interested individuals.


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 the subject-matter of economic science," (ibid., p.9).


The theoretical standpoint of “the New Institutional Economics” is closer to Hayek’s than to Schumpeter’s because it does not challenge the validity of equilibrium analysis at all, it simply shifts the analysis of price co-ordination from the “simultaneous/synchronic equations” of Walrasian equilibrium analysis to the “spontaneous order” of Hayek’s long-run equilibrium. By contrast, Schumpeter’s ‘Theory’ certainly did challenge equilibrium analysis, despite his avowals of faith in its “heuristic” value, not just for Hayek’s reasons and for its a-historical ‘Statik’ approach, and not only for its “metaphysical” belief in “utility” (and its presumed “maximization”) as the “substance” of exchange and market prices. This is the irreconcilable conflict that only a “histoire raisonnee” in the manner of Marx and as described by Schumpeter (initially opposed to it as “unscientific”, in the ‘Theorie’ and in ‘HEA’, but finally more condescending in ‘BC’ and ‘CD&S’) can seek to overcome.


It is Hayek’s ambiguity and the subsequent mis-conceptions that it engendered that is carried over into the New Institutional Economics and gives rise to Williamson’s “fallacy of composition”, whereby he pretends “to distil” economic theoretical relations from historical “institutional” analysis through a “compositive” or “descriptive”, block-by-block method. We know that this was the bane of the German Historical School – because no amount of “descriptive” studies, no matter how ‘detailed’, will ever amount to a theory of economic activity. In this regard, of course, the critique of the GHS by the Austrian School (from Menger in Irrturmer des Historismus to Bohm-Bawerk and Mises and even Weber in Roscher und Knies) was entirely right. A proper economic theory must not fall into the “mathematical formalism” of general equilibrium or the “logical formalism” of ‘praxeology’, but must avoid also the ‘descriptive’, ‘pictorial’, ‘data-collecting’ empiricism of historiography or, indeed, of management and business studies. No amount of historical, factual or ‘institutional’ evidence will ever yield a ‘theory’ – which is an abstract rule that connects the evidence in a causal relation. This irreconcilability of ‘theory’ and ‘history’ is a recurrent problem, an Ariadne’s thread, in our entire critique of equilibrium analysis that will lead us out of the labyrinth of bourgeois reification. Because “the sphere of exchange” is a “sphere of equi-valence”, “a final state of rest” or of “non-action” (Mises) or a “Kreislauf” and a “Statik” (Schumpeter), not only does it defeat every attempt to introduce “time” in it [cf. Boettke et al.’s futile attempt to postulate an ‘ex ante’ and ‘ex post’ equilibrium], but a fortiori it is also impervious to any effort to locate “causality” in the notion of “equilibrium” and “co-ordination”.


According to the NIE, the capitalist economy is never in “equilibrium” because it is intrinsically “developing” and “innovating” and therefore “growing” and “evolving” – hence, the “body” that Coase was looking for! Ecce homo! But this inter-pretation of Schumpeter grossly mis-construes his meaning because by ‘Entwicklung’ and ‘Innovation’ he meant something much more radical and fundamental than “growth” or “development” or “evolution”: he meant to encompass the profoundly “political” and “antagonistic” and “conflictual” essence of capitalism, - one that is in a different dimension from and ir-reducible to the sphere of exchange and neoclassical equilibrium.


Coase’s animadversions echo those of the German Historical School which, not by chance, has been invoked by Williamson as among the ‘precursors’ of “the New Institutional Economics”. Indeed, we may describe the NIE as a go-between, tempering the extremes of the “historical-institutional” approach to political economy of the German Historical School and the American Institutional School, on one side, and the formalistic-mathematical ambitions of the neoclassical tradition (equilibrium analysis and Austrian School) on the other.


[For Alchian &Demsetz in ‘Property Right Paradigm’, the way out is the Hayek-Schump one, ‘to processualise’ the central questions of economic theory.]

[Note also the “economic sociology” efforts of G. Hodgson and above all R. Swedberg.]


In conclusion, let us appeal to the insuperable reflections of Hannah Arendt, who is perhaps the only great social theoretician to have identified the crucial flaw with all economic theories – and that is the fact that they take “society” as an inert, objective fact, not as the construct of human activity:


It is the same conformism, the assumption that men behave and {p42} do not act with respect to each other, that lies at the root of the modern science of economics, whose birth coincided with the rise of society and which, together with its chief technical tool, statistics, became the social science par excellence. Economics—until the modern age a not too important part of ethics and politics and based on the assumption that men act with respect to their economic activities as they act in every other respect—could achieve a scientific character only when men had become social beings and unanimously followed certain patterns of behavior, so that those who did not keep the rules could be considered to be asocial or abnormal. (H. Arendt, Human Condition, pp. 41-2)


At footnote 35. "The conception of political economy as primarily a 'science' dates only

from Adam Smith" and was unknown not only to antiquity and the Middle Ages,

but also to canonist doctrine, the first "complete and economic doctrine" which

"differed from modern economics in being an 'art' rather than a 'science' "

(W. J. Ashley, of. tit., pp. 379 ff.). Classical economics assumed that man, in so

far as he is an active being, acts exclusively from self-interest and is driven by

only one desire, the desire for acquisition. Adam Smith's introduction of an

"invisible hand to promote an end which was no part of [anybody's] intention"

proves that even this minimum of action with its uniform motivation still contains

too much unpredictable initiative for the establishment of a science. Marx

developed classical economics further by substituting group or class interests for

individual and personal interests and by reducing these class interests to two major

classes, capitalists and workers, so that he was left with one conflict, where

classical economics had seen a multitude of contradictory conflicts. The reason

why the Marxian economic system is more consistent and coherent, and therefore

apparently so much more "scientific" than those of his predecessors, lies

primarily in the construction of "socialized man," who is even less an acting being

than the "economic man" of liberal economics. (ibid.)


The laws of statistics are valid only where large numbers or

long periods are involved, and acts or events can statistically

appear only as deviations or fluctuations. The justification of statistics

is that deeds and events are rare occurrences in everyday

life and in history. Yet the meaningfulness of everyday relationships

is disclosed not in everyday life but in rare deeds, just as the

significance of a historical period shows itself only in the few

events that illuminate it. The application of the law of large numbers

and long periods to politics or history signifies nothing less

than the wilful obliteration of their very subject matter, and it is

a hopeless enterprise to search for meaning in politics or signifi-[43]-

cance in history when everything that is not everyday behavior

or automatic trends has been ruled out as immaterial.

However, since the laws of statistics are perfectly valid where

we deal with large numbers, it is obvious that every increase in

population means an increased validity and a marked decrease of

"deviation." Politically, this means that the larger the population

in any given body politic, the more likely it will be the social

rather than the political that constitutes the public realm. The

Greeks, whose city-state was the most individualistic and least

conformable body politic known to us, were quite aware of the

fact that the polls, with its emphasis on action and speech, could

survive only if the number of citizens remained restricted. Large

numbers of people, crowded together, develop an almost irresistible

inclination toward despotism, be this the despotism of a

person or of majority rule; and although statistics, that is, the

mathematical treatment of reality, was unknown prior to the

modern age, the social phenomena which make such treatment

possible—great numbers, accounting for conformism, behaviorism,

and automatism in human affairs—were precisely those traits

which, in Greek self-understanding, distinguished the Persian

civilization from their own.

The unfortunate truth about behaviorism and the validity of its

"laws" is that the more people there are, the more likely they are

to behave and the less likely to tolerate non-behavior. Statistically,

this will be shown in the leveling out of fluctuation. In reality,

deeds will have less and less chance to stem the tide of behavior,

and events will more and more lose their significance, that is,

their capacity to illuminate historical time. Statistical uniformity

is by no means a harmless scientific ideal; it is the no longer

secret political ideal of a society which, entirely submerged in the

routine of everyday living, is at peace with the scientific outlook

inherent in its very existence. (pp.42-3)


[I]t was not Karl Marx but the liberal economists themselves who had to introduce the “communistic fiction”, that is, that there is [p44] one interest of society as a whole which with "an invisible hand" guides the behavior of men and produces the harmony of their conflicting interests.36 The difference between Marx and his forerunners was only that he took the reality of conflict, as it presented itself in the society of his time, as seriously as the hypothetical fiction of harmony; he was right in concluding that the "socialization of man" would produce automatically a harmony of all interests, and was only more courageous than his liberal teachers when he proposed to establish in reality the "communistic fiction" underlying all economic theories. …(p.43)


At footnote 36: That liberal utilitarianism, and not socialism, is "forced into an untenable 'communistic fiction' about the unity of society" and that "the communist fiction [is] implicit in most writings on economics" constitutes one of the chief theses of Myrdal's brilliant work {op. ct., pp. 54 and 150). He shows conclusively that economics can be a science only if one assumes that one interest pervades society as a whole. Behind the "harmony of interests" stands always the "communistic fiction" of one interest, which may then be called welfare or commonwealth. Liberal economists consequently were always guided by a "communistic" ideal, namely, by "interest of society as a whole" (pp. 194—95). The crux of the argument is that this "amounts to the assertion that society must be conceived as a single subject. This, however, is precisely what cannot be conceived. If we tried, we would be attempting to abstract from the essential fact that social activity is the result of the intentions of several individuals" (p.154).


Of course, Arendt and Myrdal neglect the fact that we are talking not about “society” in the abstract but about “capitalist” society; and that the “communistic fiction” means “accumulation” (profitability) and then only in a purely “hortatory” sense, because “theoretically” neoclassical economics does not conceive of “self-interested individuals” (the building blocks of its theory) as being “communistic” in the least!


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