Commentary on Political Economy

Friday, 25 September 2020

THE VALUE OF VALUE AND THE PRICE OF PRICES - The Methodological Divide of Economic Analysis (Schumpeter and Robinson)


THE VALUE OF VALUE AND THE PRICE OF PRICES - The Methodological Divide of Economic Analysis


I would like to say that the concrete results for my purpose are of only secondary importance. In any case, as I said, I do not strive for systematic completeness. Cure a relatively small number of basic sentences is to be demonstrated. At the centre is the problem of equilibrium, the importance of which is small from the point of view of practical applications of theory, but which is fundamental to science. In Germany, it has not received sufficient attention and it is important to stress that it is the basis of our exact system.  The exchange, price and money theory and their main application, the exact distribution theory, are based on it and most of the following explanations are dedicated to them. These things form that part of the national economy that is ripe for exact treatment and to which one has been given so far.

My presentation is based on the fundamental divorce/scission [Scheidung] between the "static" and "dynamics" of the economy, a point whose importance cannot be overemphasized. For the time being, the methods of pure economics are sufficient only for the former, and only in the former yield their most important results. The "dynamics" in every respect is something completely different from the "statics", methodically as well as in content. This divorce/scission [Scheidung] is not something new. (J. Schumpeter, Introduction to The Essence and Content of Theoretical Economics, 1908).


A cynic, quipped Oscar Wilde, is someone who knows the price of everything and the value of nothing. An equilibrium schema describes how a set of prices clears markets when the supply of goods meets the demand for them. But the very equivalence of supply and demand in price proves to be the very undoing of equilibrium theory as a theory. Because it does not explain why a given price secures the equivalence of supply and demand. To do so, the price should tell us “what” it is the price of! A system of relative prices will not do, because aggregate relative prices will always (by definition!) be equivalent to whatever aggregate we say that demand and supply consist of – marginal utility (Menger, Jevons, Walras), labour (Classical Political Economy), or socially necessary labour time (Marx). An aggregate will always be equivalent to, and therefore in equilibrium with, another aggregate! This is a tautology.


And such an equilibrium theory will never be able to explain how the system it describes, but does not explain, can ever move out of equilibrium, except through external shocks or exogenous factors – in other words, by evading any theoretical explanation intrinsic to the equilibrium system itself! Schumpeter is therefore entirely wrong to opine that for the time being, the methods of pure economics are sufficient only for [equilibrium analysis]” because these methods will never be able to deal with “dynamic” theory, with a theory that explains why as well as how an economy changes due to endogenous or internal forces. – Which is why Schumpeter is right in his very next proposition: - namely, that “the ‘dynamics’ in every respect is something completely different from the ‘statics’, methodically as well as in content”. So this is the Scheidung – the scission, the fracture, the chasm, the yawning gap at the heart of bourgeois economic science that Schumpeter identifies as early as 1908 and that still troubles him thirty years later:


Walras ... would have said (and, as a matter of fact, he did say it to me the only time that I had the opportunity to converse with him) that of course economic life is essentially passive and merely adapts itself to the natural and social influences which may be acting on it, so that the theory of a stationary process constitutes really the whole of theoretical economics and that as economic theorists we cannot say much about the factors that account for historical change, but must simply register them. ... I felt very strongly that this was wrong....
I was trying.... to answer the question of how the economic system generates the force which incessantly transforms it.... 
a source of energy within the economic system which would of itself disrupt any equilibrium that might be attained....  If this is so, then there must be a purely economic theory of economic change which does not merely rely on external factors propelling the economic system from one equilibrium to another. It is such a theory that I have tried to build ...
(Schumpeter 1937/1989, p. 166)” (Preface to Japanese edition of “Theorie”, quoted in N. Rosenberg, ‘Endogeneity’, p.7.)

It is clear that if indeed Schumpeter’s Dynamik theorizes “an economic system [which] generates a force [internally] which incessantly transforms it”, then this economic system is and can never be in equilibrium, nor can it “be propelled from one equilibrium to another”, because the notion of equilibrium is categorically inapplicable to such an economic system unless it relies on external factors, which Schumpeter expressly excludes. As we have amply shown, this Scheidung, this categorical chasm between Statik and Dynamik is unbridgeable because it is categorical! – Because equilibrium analysis is conceptually incompatible with the theorization of economic change that is generated internally to the system, by endogenous factors. But because Schumpeter stubbornly wishes to preserve the presumed “scientificity” of equilibrium analysis (which, again, is not a “theory” because it does not explain prices), the only way he can attempt to bridge this gaping theoretical abyss is by means of a subjective, voluntaristic criterion, by means of an Ent-scheidung – literally, an “out-scission” – a decision – “the entrepreneurial Act”! Thus, Schumpeter marries – bridges the “divorce” (Scheidung) with an “out-of-divorce” leap (Ent-scheidung, de-cision) – the instrumentalism that he applies to equilibrium analysis with the purely voluntaristic Dezisionismus of his Entwicklungs-theorie (theory of economic development) where the Innovations-prozess (innovation process) with which he wishes to explain this development/transformation of the economy is guided by the Unternehmer-geist (the entrepreneurial spirit) that induces “the entrepreneurial Act”.

His conclusion, a strict denial of any "methodological or material

connection" between economics and psychology,23 has long remained

a contested issue. But Schumpeter himself was by no means obstinate

or narrow in the matter. In his own analytical work he soon found

it fruitful to discuss types of human motivation and conduct. This

was particularly true when he came to elaborate his model of economic

development, for which he needed the conduct model of the

"dynamic entrepreneur," of the man filling the "leadership function"

in the economic system.24 (F. Machlup, p.465)


It is obvious that such Dezisionismus, the Ent-scheidung (Latin, de-cision, break) that leads to the Ent-wicklung, to the trans-crescence of the capitalist economy, will simply not do as a theory of capitalist accumulation. Yet, the paramount importance of a theory that can explain capitalist development from factors internal rather than external to the capitalist economy could not be lost on a sharp and sophisticated intellect such as Schumpeter surely possessed; nor was the fact that the only theoretician who had made the attempt previously was Karl Marx himself, the bete noire of bourgeois political economy:

It was not clear to me at the outset what to the reader will perhaps be obvious at once, namely, that this idea and this aim are exactly the same as the idea and the aim which underlie the economic teaching of Karl Marx. In fact, what distinguishes him from the economists of his own time and those who preceded him, was precisely a vision of economic evolution as a distinct process generated by the economic system itself.” (Schumpeter 1937/1989, p. 166) (Preface to Japanese edition of “Theorie”, quoted in N. Rosenberg, ‘Endogeneity’, p.7.)

The sheer inability of bourgeois economic science to outline a proper theory – an explanation – of capitalist economic development – or, as we prefer, trans-crescence, the more literal translation of Schumpeter’s German term Ent-wicklung -, of the accumulation of capital, is a constant lament recurring through all bourgeois academic attempts to bridge the gap between static and dynamic analysis. Joan Robinson’s account of this disarming and alarming inability due to the appalling formalism of bourgeois thought is both a condemnation and a symptom of this theoretical shipwreck:

Economic analysis, serving for two centuries to win an understanding of the Nature and Causes of the Wealth of Nations, has been fobbed off with another bride — a Theory of Value. There were no doubt deep-seated political reasons for the substitution but there was also a purely technical, intellectual reason. It is excessively difficult to conduct analysis of over-all movements of an economy through time, involving changes in population, capital accumulation and technical change, at the same time as an analysis of the detailed relations between output and price of particular commodities. Both sets of problems require to be solved, but each has to be tackled separately, ruling the other out by simplifying assumptions. Faced with the choice of which to sacrifice first, economists for the last hundred years have sacrificed dynamic theory in order to discuss relative prices. This has been unfortunate, first because an assumption of static over-all conditions is such a drastic departure from reality as to make it impossible to submit anything evolved within it to the test of verification and, secondly, because it ruled out the discussion of most of the problems that are actually interesting and condemned economics to the arid formalism satirised by J. H. Clapham in ' Of Empty Economic Boxes '. (J. Robinson, Preface to The Accumulation of Capital)


Robinson is quite right to stress how “relative prices”, which are invariably tied to equilibrium analysis, do not – and, we add, cannot – form the theoretical basis of the Dynamik. And she is wise to emphasise the word “analysis” rather than “theory” by reference to her own approach to economics. But she is wrong to suggest, however obliquely here, that “the Theory of Value” is necessarily tied to relative prices and therefore to equilibrium analysis. True, to the extent that theories of value, from Smith to Marx, seek to draw an aggregate equivalence between value and prices – to that extent they end up being equilibrium schemata that cannot draw a theoretical relationship between values and prices, except tautologically because aggregates can always be equated (!). And least of all can such theories of value account for the Dynamik – for the simple reason, once again, that an economy that is “incessantly transforming” itself cannot ever have values, and therefore also corresponding prices, that relate to fixed measurable “quantities”.


Clearly, whether through “innovation” or “accumulation”, the theorization of a dynamic economy must treat both prices and values as political notions whose formal analysis can only “describe how” but never “explain why” the economy functions the way it does. Therein lies the fatal mistake or misapprehension under which both Schumpeter and Robinson are obviously laboring! Quite evidently, they think that theories of value, including the Marxian, involve or seek the quantitative determination of market prices – and to the extent that they go beyond prices, to “values”, they are purely “metaphysical” and “irrelevant” to economic analysis. But because market prices in equilibrium analysis are necessarily “relative prices”, it is blatantly obvious that any “values” assigned to them must be “metaphysical” or “essentialist” (one could almost say “animistic”!) in nature. - Because values are supposed to be the sub-stance lying behind or beneath prices, because prices are only the visible empirical manifestation of under-lying (sub-stantial) values, it is utterly evident that no theory will ever be able to prove or disprove empirically the quantitative relation between values and prices!


Schumpeter's emphasis on the character of economics as a quantitative

science, as an equilibrium system whose elements are "quantities

of goods," led him to regard it as unnecessary and, hence, as

methodologically mistaken for economics to deal with "economic conduct"

and with the "motives of human conduct." 21 He conceded that

a relationship between the value functions which the economist must

assume and certain psychological or physiological facts may well

exist, but this relationship "is only of philosophical interest. For the

economic remits it is irrelevant and it can never be the task of the

economist to go into these matters."(F. Machlup, Methodology of Economics, p.465)


Of course, Schumpeters methodological position here is wholly untenable and, worse still, in stark contradiction with his own central theory of economic development based on the crucial concepts of innovation and creative destruction. These are politico-psychological and historico-philosophical notions that form one leg of Schumpeters dyad wishing to combine Statik and Dynamik. Once again, before we leave this aspect of bourgeois economic methodology, the Statik, let us revisit Schumpeters own stance regarding with regard to the quantifiable facts that supposedly form the foundation of the Economic Equilibrium Schema. For it turns out that even the formal Schema of Walrasian equilibrium analysis is erected on facts that are questionable on their own arbitrary assumptions:



The model or schema (as it was invariably called in Schumpeter's

earlier work) rests entirely on assumptions and "is, thus, a creation

of our discretion, just as any other exact science. . . . To be sure,

neither our 'assumptions' nor our 'laws' lie in the real world of phenomena.

. . . But this does not preclude them from fitting the facts.

How can this be? Simply because in constructing our schema we

proceeded, no doubt arbitrarily, but reasonably in that we designed

the schema with the facts in mind!'33

This is the "decisive point" in Schumpeter's epistemological position:

"On the one hand, our theory is in essence arbitrary, and on this

are based its system, its rigor, and its exactness; on the other hand,

it fits the phenomena and is conditioned by them, and this alone gives

it content and significance." 34

That our hypotheses, "although just as arbitrary as our definitions"

are conditioned by "facts," distinguishes them, in Schumpeter's view,

from "aprioristic [philosophical] speculations." 35 He concedes that "some of our

refinements upon common sense are logically anterior to the facts

we wish to study and must be introduced first, because our factual

discussions would be impossible without them." M But this must not

be confused with the aprioristic position in economic theory. Schum-[468]

peter insists that the "basic assumptions" of pure theory rest on "observation

of facts," only that most of them "are so simple and are so

strikingly confirmed by everyday experience as well as historical

experience that it would be a shame to waste paper printing any

special compilations of facts to confirm them." 37

(F. Machlup, Methodology of Economics, pp.467-8.)


Two points must be made immediately. The first is that Schumpeter, like all bourgeois economists, completely leaves out the political reality that the “facts” on which the “schema” is based are precisely (a) created and coerced by the capitalist bourgeoisie, and (b) selected on the basis of assumptions that the bourgeoisie itself mandates and imposes on the rest of society! Schumpeter himself laid out the fundamental assumptions of bourgeois economic equilibrium analysis:


The whole of pure economics rests with Walras on the two

conditions that every economic unit wants to maximize utility and

that demand for every good equals supply. All his theorems follow

from· these two assumptions.

(TGE 79)


The first objection, of course, is that the economy rests on “units” (individuals) who wish “to maximize” something – and that something is “utility”! But “utility” is nothing other than the very “metaphysics” that Schumpeter pretended to eschew from “economic analysis” in the first place! The second objection is: What must “demand” must equal which supply? Schumpeter has elided and avoided here the very essence of economic activity as political action – the fact that the demand and supply in capitalist society do not serve human needs at all! (We shall deal with these matters shortly.) Schumpeter himself, joining Weber’s discussion in “Objektivitat”, acknowledges that the “explanatory” – “theoretical”, we say – power of economic analysis is extremely limited aetiologically and epistemologically – that is, in terms of causation and in terms of constitutiong scientific knowledge:


If factsthe simple facts of our immediate everyday experience as

well as "statistical and historical facts""induce the theoretical work

and determine its pattern," can they also fill "the function that

theorists usually assign to themthe function of verification?" 38 No,

said Schumpeter, and he explained his answer with reference to

statistical facts: "But no statistical finding can ever either prove or

disprove a proposition which we have reason to believe by virtue of

simpler and more fundamental facts. It cannot prove such a proposition,

because one and the same behaviour of a time series can analytically

be accounted for in an indefinite number of ways. It cannot

disprove the proposition, because a very real relation may be so overlaid

by other influences acting on the statistical material under study

as to become entirely lost in the numerical picture, without thereby

losing its importance for our understanding of the case. It follows

that the claim usually made for statistical induction and verification

must be qualified. Material exposed to so many disturbances as ours

is, does not fulfill the logical requirements of the process of induction."

(Machlup, pp.468)


Furthermore, the conclusion now imposes itself that, first, bourgeois economic theory can offer very little help in the theorization of capitalism, and second, that no theory of capitalist accumulation can ever separate or “divorce” (Schumpeter’s famous “Scheidung”) the theory of capitalist accumulation from the political antagonism that lies at the core of the notion of “value”! In this precise context, here is Robinson attempting to do the impossible:


At the same time, I believe that modern academic economics has something to offer to the Marxists. First, a reconsideration of Marx's argument in the light of the more precise and refined methods of modern analysis clears up many obscurities in his theory, and helps to


reveal its strong and weak points. Second, in the analysis of effective demand — the theory of employment — modern economics provides a basis for the study of the law of motion of capitalism, which is suggested, but not fully developed, by Marx himself…

I have confined my argument to Marx's economic analysis in the narrow sense, and made no attempt to deal with the broad treatment of history and sociology which forms the most important part of Marx's doctrine. This specialised approach is perhaps an unnatural one, and it is true that no particular aspect of Marx's argument can be properly understood without a grasp of the whole. But at the same time a detailed study of particular aspects is also useful, and the aspect which I have chosen to discuss is one of the highest importance in the development of the whole. (Preface)


One must give praise to Robinson for at least intuiting the difficulty involved in theorising the accumulation of capital – without ensuring that it includes as an indissoluble element “the broad treatment of history and sociology which forms the most important part of Marx’s doctrine”! This is Robinson’s own attempt to confront the Schumpeterian “Scheidung” – the separation of economics and politics implicit in equilibrium analysis. In both cases – Schumpeter and Robinson – the difficulty lies in the utter inability of bourgeois economic theory to understand “value” in anything other than quantifiable entities! And not only quantifiable entities, but indeed the formal schematic mathematical relationship between presumably quantifiable entities that now bear no direct relationship to the mathematical equilibrium schema! Thus, bourgeois economic analysis, far from being “theoretical” is actually formalism to the nth degree! (We shall examine this point further in connection with J. Hicks’s Value and Capital.)


Now we can finally understand what seemed so mysterious to Schumpeter, and why it had to appear to be so mysterious to him and Robinson and all bourgeois economists:– the “chemical bond” in Marx’s economic theory lay precisely in the political antagonism contained in his theory of value, in the Marxian notion of value, without which the trans-crescence (development) of the capitalist economy and its corollary accumulation of capital will always break down into the formal mechanicism and antinomy of bourgeois thought: the unbridgeable separation (Scheidung) between formal Schema (Statik) and historical transformation (Schumpeter’s Ent-scheidung):


There is however one thing of fundamental importance for the methodology of economics which he [Marx] actually achieved. Economists always have either themselves done work in economic history or else used the historical work of others. But the facts of economic history were assigned to a separate compartment. They entered theory, if at all, merely in the role of illustrations, or possibly of verifications of results. They mixed with it only mechanically. Now Marx’s mixture is a chemical one; that is to say, he introduced them into the very argument that produces the results. He was the first economist of top rank to see and to teach systematically how economic theory may be turned into historical analysis and how the historical narrative may be turned into histoire raisonnee. (J. Schumpeter,  Capitalism, Socialism and Democracy, p.44)

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