All formal modelling must be in the nature of a
“closed system” because the equations derived through the manipulation of real
entities necessarily make these entities inter-dependent, that is, definable in
self-referential terms that end up being tautological.
Let us specify the main features of “closed
systems”. First, they reduce historical experience, human activity, to
its objectification, to its products. Hence, social relations are represented
as relations between things. Second, they prescribe a mathematical
relation between distinct elements of these objectifications. Third, the
objectified elements or variables are self-referential in the sense that they
are inter-dependent. As a result, all closed systems are tautological vicious
circles. The attempt of neoclassical theory to remedy this inescapable trap by
seeking to adapt its axiomatic assumptions to “real variables” clearly cannot
evade the fallacy because ultimately the equations must be valid in the sense
that there must be as many independent equations as there are independent
variables – which is the precise moment when the system of simultaneous
equations becomes “closed” and all its variables become inter-dependent in that
the value (in this case we are referring to market prices) of each individual
variable is relative to the values (market prices) of all other variables.
Lawson’s definition of a “closed
system” as one that can be reduced to the proposition “whenever x, then y” is
manifestly wrong because this kind of proposition is essential to the testing
of scientific hypotheses in both natural and social science; his test refers
simply to experimental predictability, which applies to all scientific
“laws”. Quite contrary to Lawson’s contention, then, a “closed system” becomes
an analytical deductive model of the type “whenever x, then y, where x is a
function of y” or f(x)=f(y): it is the classic circulus vitiosus or tautology, - nothing more nothing less: y is a
function of x and x is a function of y. That is why a closed system is defined
to be static, as against a dynamic system where the component
variables change in ways that are not self-referential, that is, implicit
in the existing variables.
In this regard,
Robert Clower has unleashed a vitriolic attack on “fraudulent”
neo-walrasian equilibrium analysis, and proposed to replace it instead with an
empiricist approach that presents economics as an inductive science –
one based on observations of existing regularities in economic behaviour,
including the intentions of agents. (Cf. R. Clower, Economics as Inductive
Science.) The problem with this approach is quite obviously that it assumes
that the existing economic system is the only proper possible object for
“scientific” research!
To escape
this trap, an economic theory worthy of the name must identify the interest
that constitutes the motive or wealth sought in economic activity:
it must address the real human purpose of economic activity – a purpose
that therefore must lie outside of the quantities to which economic
analysis wishes to reduce human activity and address (to invoke Adam Smith) the
nature of wealth (its substance) and its causes (its
pro-duction). Clearly, economic pursuits are ineluctably political
because they are motivated by human inter-ests (from the Latin, inter
homines esse, to live among men); they are quantitative only to the extent
that quantities are substituted for social relations. Both the nature of
economic activity and its causes refer to an inquiry (Smith again) that goes
beyond the quantities involved in economic exchange. Whether humans co-operate
or compete in the pursuit of economic interests, this pursuit remains
political because it represents a “working together” (operari, work; opus,
product)) or a “coveting together” (com-petere, to beg for the same
object). Even where human interests are in con-flict (Latin, clashing
together) there must still be a point at which they meet, an interest over
which there is conflict.
A formal model
or closed model in economic theory that does not account for value – the
interest for which humans co-operate or compete - is merely an analytical
tool which may very well have a purpose in the pursuit of an extrinsic
interest, but does not explain that interest because the interest may
only be implied by the tool or be concealed by it as part of a
series of other tools. Thus, the distinction mirrors the one we have made
between economic theory and economic analysis: the former
explains the behaviour of social agents y establishing a practical motivational
direct link to their interests; the latter simply provides tools to connect
variables without addressing the interests behind the variables and the
connections. (We shall exemplify this distinction further in connection with
John Hicks’s Value and Capital.)
Given the
intrinsic inapplicability of its fundamental assumptions and calculations to
the historical treatment of social antagonism, neoclassical economic analysis
has been entirely unable to develop a “dynamic economics” to identify the
drivers of economic change despite the best efforts on the part of economic
theoreticians in both the Neoclassical and the Austrian camps. All equilibrium theoreticians 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”, either to the mere “semaphoric” world of “information” and
“co-ordination” or else to an imaginary institutional evolution of economic
activity – with the overriding objective to account for what they assume to be
the sole purpose of that activity: either the simple or the expanded
(accumulated) reproduction of human society in an equilibrated co-ordination
leading to the efficient maximization or optimization of social wealth taken as
the aggregate of individual wealth.
Hence, in the words of Brian Loasby,
[t]he co-ordination of economic activities, of course, is what economics
is overwhelmingly about, (B. Loasby, 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 that
“co-ordination”, what makes it “economic
co-ordination” and not any other kind of “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.
The quite astounding con-fusion of the “co-ordination”
of economic activity with the “goal” or purpose of that activity is brilliantly
exemplified by Arrow and Hahn in what is perhaps the most rigorous exposition
of bourgeois neoclassical equilibrium analysis:
It is natural and
proper to ask whether this enquiry into an economy, apparently so abstracted
from the world, is worthwhile. We may answer in the usual way by drawing
attention to the enormously complex nature of the material that economists
study and the accordingly urgent need for simplification and so abstraction.
This, however, leaves open the question of why the particular simplifications
here used should be the appropriate ones. Our answer is somewhat different. There
is by now a long and fairly imposing line of economists from Adam Smith to the
present who have sought to show that a decentralized economy motivated by
self-interest
PREFACE vii
and guided
by price signals
would be compatible with a coherent disposition of economic
resources that could be regarded, in a well-defined sense, as superior
to a large class of possible alternative dispositions. Moreover, the price
signals would operate in a way to establish this degree of coherence. It is important to understand how
surprising this claim must be to anyone not exposed to this tradition. The
immediate "common sense" answer to the question "What will an
economy motivated by individual greed and controlled by a very large number of
different agents look like?" is probably: There will be chaos. That quite
a different answer has long been claimed true and has indeed permeated the
economic thinking of a large number of people who are in no way economists is
itself sufficient grounds for investigating it seriously. The
proposition having been put forward and very seriously entertained, it is
important to know not only whether it is true, but also whether it could
be true. A good deal of what follows is concerned with this last
question, which seems to us to have considerable claims on the attention of
economists. If confirmation of the proposition we have been discussing has been
found in a particular formalization of the economy, it then becomes interesting
to see how robust this result is. Will it survive a change in assumption from a
perfectly competitive to an imperfectly competitive economy? Will it be
overturned by external economics, by apparent irrationalities such as
"judging quality by price" or by lack of sufficient "future
markets" and the special role that might be taken by the medium of
exchange? Some answers to these questions have been suggested in what follows.
Other questions, of course, remain.
Note how here Arrow and Hahn admit the impossibility
of co-ordinated economic activity on the part of atomically
(decentralized) and egoistic (self-interested) market agents – because it can
only lead to chaos, to the Hobbesian “war of all against all”. And
yet they proceed blithely to propose as legitimate two levels of
theoretical exploration for equilibrium analysis: one is that the price system
is “compatible” in terms of the co-ordination (coherence) of these agents; and
the other is that this system is “superior” to others – in other words, this
economic system is not just formally possible (because of its co-ordination
or “coherence”), but also substantively better (because of its price
efficiency, and consequent “superiority” to other possible economic systems).
The con-fusion consists in the fact that because equilibrium analysis can
only determine relative prices, not prices based on material political
values – because it does not describe the “substance” or human interest
underlying prices - it is then impossible to say that the closed economic
system indicated by it could ever be comparable to any other “possible
systems” let alone “a large class of them”!
Furthermore, the co-ordinated “coherence” of the
system is not derived from its substantive interest but by the axiomatic
definition of its mathematical premises, and specifically by the postulated
inclusion of a providential Walrasian “auctioneer”. It now becomes quite
evident that from a political standpoint, a set of simultaneous equations such
as that of Walrasian equilibrium can be co-ordinated if and only if we
postulate the existence of a totalitarian
omniscient and omnipotent auctioneer who (a) has complete knowledge of
all the utility schedules of every atomic agent in the market, and (b)
has absolute power to compel these absolutely egoistic agents to accept
perfect competition (complete decentralization) and to accept the relative
prices determined by the utility schedules of all other egoistic agents!
Needless to say, these equations are “simultaneous” not in any chrono-logical
sense, in physical time, but in a logical sense, which most
certainly excludes the notion of physical time categorically! Because
formal models are “closed”, they are also time-less; they do not allow
conceptually for time as the sphere of human action. In this sense, when
transposed onto the societal plane, formal models appear to be eternal and
immobile. A closed model describes politically a condition of inertia,
of stasis or stalemate in which there is either complete paralysis or
else at best a “circular flow” (Schumpeter), a simple reproduction (Marx in
Volume Two of Capital). – Which is the reason why they require a
beginner who originates outside the model as a disturbance or an exogenous
subjective factor – a revolutionary innovator, a destructive creator who
“decides on the exception”. (Antiquity, by contrast, although it had no notion
of “revolution”, allowed at least corruptio [corruption] or metabole
[transformation], as against autarkia [self-sufficiency] and stasis
[civil war, stalemate].)
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).
Similarly,
Debreu has admitted that “there is no intellectual life in equilibrium” (quoted
in Loasby ‘E&E’). 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!
Interestingly, Loasby (in “Closed
Models and Open Systems”) sees “closedness” not as tautology or even as
determinateness of relative prices but rather as “rest”, absence of
“development” or “growth”. The central question becomes then how “to open” this
“closed system” so that “co-ordination” allows for “evolution” and “growth”.
This is where Adam Smith and Schumpeter differ from the other theoreticians – although,
significantly, Loasby allows, contra Lawson and Langlois, that Smith was also an equilibrium thinker.
Because orthodox
economic analysis cannot provide and specify an inter-est or value
behind economic co-ordination or competition, or refuses to do so, then it must
introduce an extrinsic agency that can ensure this co-ordination
implicit in the notion of an equilibrium Schema. This will be a deus ex
machina or a deus absconditus (Smith’s Invisible Hand) or a deus
mortalis (Hobbes’s Sovereign) or a neutral arbiter (Walras’s auctioneer).
But this expedient cannot infuse life in the formal machinery of the
analysis – because there is no motive, no interest in it that can
lead to historical qualitative change or trans-formation or meta-morphosis
in the subject-matter of economic theory, which this analysis clearly
and axiomatically leaves out! Hence, the dire need to supply other outside or
external or exogenous factors to explain the change observed in
real economies – the development, the transformation and growth, the trans-crescence
of the real economy its cyclicality, its crises - for which there
is no space in the “closed model” but are evidently present in an “open
system”.
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!
But closedness is a totality
and because economic co-ordination cannot arise from the will of market
agents who are by axiom absolutely selfish, then it must be enforced
coercively from an external Sovereign. This renders the co-ordination
not one by agreement but one by total subjection. (This is
the poignant sense given to Nazi Gleich-schaltung by K D Bracher in his
masterly, The German Dictatorship.) Equilibrium analysis is totalitarian
(Hayek) in its logical need for an external guarantor of the cohesion
of the system – its “closure” – precisely because there is no corpus, no
material common weal or pursuit, however eristic, for which its
constituent individuals com-pete (Latin, “search and seek together”). Hayek, to
his unending credit, was the first bourgeois theoretician 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 “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” 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).
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