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 Mach’s “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. Hegel’s critique of Kant’s 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 Mach’s, and Walras’s) 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” (Walras’s 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 Robinson’s 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 welfare...is 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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