The
Problem of Closed Models.
The temptation of every
theoretician is to freeze and crystallise reality, to render it 'objective' and
thus to reify it, to turn it into an
immutable 'thing in itself' impervious to human action. This is what we must
avoid. But‚ again‚ we must avoid it not for the sake of an abstract principle
to preserve the 'openness' of theory against 'closed' schemata - because
otherwise there would be no difference between closed and open systems. The
difference between a 'closed' and an 'open' theory cannot be formal, because then we would reify the
'openness' of the 'open' theory, reducing it thus to a 'crystallised'
abstraction. Instead, we must specify in what sense a theory is ‘open’ as
opposed to 'closed', principally so we may understand (a) how closed systems are
possible, and (b) why they are constructed.
Although one still sees it
repeated incessantly (often from the pens of those
who should know better)
that Adam Smith dealt with a world of atomistic
traders, equilibrium, and
perfect competition, students of Smith understand
that quite the opposite is
the case. One has only to read the first few pages of
The Wealth of Nations to recognize that Smith was
concerned with economic
growth — and that the
engine of growth is innovation brought about by the
division
of labor. (Langlois, Analytical Survey of the Austrian School, p.9)
It is incorrect to argue
against Arrow and Hahn that Adam Smith’s “invisible hand” was not, or differed
from, “equilibrium analysis” in that it had an ‘ontic’ dimension (it was
‘open-ended’ and ‘inter-relational’ and so on) and did not envisage “atomistic”
entities unconnected to “social reality”. That may be true of the
“wealth-of-nations” or “development” side of Smith’s theory, as Langlois
maintains above, but certainly not of the “co-ordination” side (see Loasby’s
discussion of Smith in Equilibrium and Evolution). Once one accepts, as
one must, that, in Lawson’s own words, (a) “social
reproduction of complex, internally related, dynamic, social structures occurs”; (b) that it “occurs in an open world of individuals seeking
their own ends”; and (c) that the aim of the theorization of such a system
is to optimize the welfare of its individual agents, - then one accepts
“the problematic of co-ordination” and the social reality or “social order”
viewed as a “sphere of exchange”. And at
that precise instant, “the social reproduction” of such “social structures”
becomes subject to the “formalistic modeling” of neoclassical theory, that
is, to a “closed” theory or Schema – because all its variables are interdependent.
In other words, whatever else Smith may have had in mind, his very definition
of the problematic of economic theory – the determination of clearing exchange
prices in a self-regulating market system, one where agents act
self-interestedly and independently – means necessarily that his was a
“closed” theory. And this is precisely what Arrow and Hahn argue (in their “Historical
Introduction” to General Competitive Analysis), however much Lawson and
Langlois may disagree! Smith’s “Invisible Hand” would make no sense
whatsoever if this were not the case! (Truly, Langlois “ought to know
better”!) Because Smith (unlike Marx, to name one) makes the determination of
value of goods dependent on the amount of “labour”, and their corresponding
prices - including the price of “labour” - dependent on market-clearing
prices, it follows that all of Smith’s system variables are interdependent, his
market prices are relative prices, and therefore his is an equilibrium model
and necessarily tautological.
Although Langlois denies that Smith was an “optimizer” in this
sense, he states quite correctly the difficulty involved with closed systems, as
is shown here:
That economic agents — and
economists, for that matter — live in an
open-ended world is hard to
dispute. Yet economic theory, especially in its
neoclassical
manifestations, finds this an extremely troubling idea. It is
difficult to analyze the
optimum allocation of resources if there are always
new resources, techniques,
markets, or even tastes yet to be discovered.
Now, one may legitimately
choose to construct closed theories (models) in
which all knowledge is
ultimately given. For instance, one might argue that
all theories (models)
necessarily convey only part of the truth, and that there
are circumstances in which
the assumption of fixed-and-given knowledge is
not inappropriate.
Similarly, one might argue that economic theory
progresses by successive
approximation, and thus that “perfect knowledge” is
only a starting point from
which to move to more “realistic” assumptions
about the knowledge agents
possess. What sets the Austrians apart is that,
for the most part, they rejected
both of these arguments and chose to pursue
theories in which the
open-ended character of the world makes itself
unmistakably felt. (Langlois, Analytical Survey of Austrian School.)
There are two ways to escape closed systems. The
first is to turn the notion of equilibrium into a “process” ex ante facto
(inter-temporal equilibrium). The other is to point to the existence of co-ordination
in the economy – the fact that “it works” to a given extent - to show, ex
post facto, that it exists empirically and from there advance an inductive
theory of the operational equilibrium of the economy. Both these approaches
dispense with treating the inter-est of economic activity because they
focus exclusively on its modus operandi – and specifically on that
peculiar point called “equilibrium” where all prices are necessarily relative,
and therefore dispense with the need to indicate what absolute prices
are about! Hence, the emphasis on “spontaneous [unplanned, organic] order”
(Hayek) or co-ordination. In the absence of such assumed “spontaneity” or
synallagmatic catallaxy, the equilibrium of such absolutely selfish and atomic agents
necessitates a totalitarian entity, an external “demon” (Clower) or a
providential entity (Adam Smith’s Invisible Hand), or a “hidden God” (deus
absconditus), or a Sovereign (Hobbes’s Leviathan, a deus mortalis), or
even a neutral arbiter (Walras’s auctioneer) to ensure the “closed functioning”
of the system, which otherwise would be unstable axiomatically (because obviously
its selfish and atomistic agents are
antithetical to its cohesion).
Here we wish to throw more light on the conceptual
characteristics of “closed systems” and then see how they apply to, or assume
the form of, socio-political categories. What Langlois fails to perceive is
that the problem of orthodox economic theory is not that “closed
systems” or “formal models” cannot take account of a necessarily changing
reality – because, as we shall show presently, they cannot do so by
definition! The problem is instead that bourgeois orthodox economic theory
erects closed systems or models precisely because it does not wish to identify,
let alone confront, what it is that market agents are seeking in a
competitive market (Latin, com-petere, covet or fight together over a common
bone of contention). Neoclassical theory studiously avoids the most essential
element of capitalism:- the real political antagonism at the heart of
capitalist social relations of production that makes these social relations
categorically impervious to their description or encapsulation by a
logico-mathematical Schema.
To exemplify, when Bohm-Bawerk exulted for his proof
that Marx’s transformation of values into prices – which he called appropriately “the ‘close’
[Ab-schluss] of Marx’s system” – was categorically impossible (thereby
earning for himself the sobriquet of “the bourgeois Marx”), he inadvertently
and ironically was celebrating the demise of his own attempt at squaring the
circle with yet another stab at “the Law of Value” – his theory of
“roundaboutness”. The fundamental characteristic of all theories of value –
including Marx’s - is that they seek to find a univocal relation between prices
and values – a Law of Value. But this is attempting the impossible –
because value is a political category whereas prices are the empirical
institutional monetary manifestation of the transformation of value from the
production of goods (valorization) to their sale (realization of value). Per
contra, the existence of a Law of Value would signify the end of economic
activity as a conflictual and antagonistic reality – thereby turning economic
theory into pure engineering! If we could measure all the inputs to economic
production according to a Law of Value in the same way we measure the material
quantities needed to produce material goods, then economics would be
indistinguishable from engineering.
(Indeed, let it be said parenthetically, the origins
of Neoclassical Political Economy is to be found in Anglo-Saxon academic
circles firmly implanted in engineering faculties. From Gossen to Gottl to Menger,
Wieser, Jevons and Walras, the engineering stamp of these neophyte “political
economists”, for whom economics was only an appendage to their
technico-mathematical bent, is utterly unmistakable.)
Langlois’s conclusion that the problem
with closed systems is “that economic agents — and
economists, for that matter — live in an open-ended world” both mystifies the
issue and misses the mark. It misses the mark because the fact that “the
world is open-ended” has nothing to do with anything – because it can be
applied to any aspect of “the world”, of human experience – and therefore to
any scientific hypothesis. And it mystifies the issue because it dissolves the
political antagonism of capitalist economic reality into the ethereal vault of
“the open-ended world”! In other words, it attributes the transformation of
economic relations philosophisch to the becoming of “the world”.
The first question
that the critics of equilibrium analysis fail to ask and confront is (a) why
bourgeois economists feel the need to try to achieve the impossible – to
encapsulate economic relations into a Schema whose very formalism obliterates,
nullifies the substance and purpose of economic activity – to leave out the
political element. (Gunnar Myrdal was wrong to title his study “the political
element in economic theory” – because the real political element of bourgeois
economic theory is: – to conceal and obliterate that very political element! –
With the consequence that there is no political element in economic theory
outside of the theory itself. Economic theory eschews politics – and
that is precisely why it is political!) And the second question – by far
the most important of all – is, (b): given that a closed system or model is
intrinsically tautological and therefore meaningless in and of itself – how is
it then possible for the bourgeois economists to make any use of it, to
give it a purpose?
When
heterodox critics of closed systems complain about their formalism,
their failure to describe reality and therefore also to predict it, they pose
an ideal value (a veritable Kantian Sollen [Ought, Categorical Imperative])
that underlies “social reality”, as if this mythical “social reality” were a
neutral, objective state of affairs and not an antagonistic one that requires a
hortatory or even partisan theory or analysis – what Schumpeter
calls “a heuristic tool”. The crucial difficulty with this criticism of
closed systems is that “social reality” as an objective neutral entity simply
does not exist! The problem is not in the theory or the analysis
or the “system”, then: the problem lies with the reality because the
reality is a problem! The fact is that social reality changes constantly
because it is antagonistic and conflictual. And this is the greatest problem
with closed systems: they leave out logically the political antagonism
central to the “social reality” that they wish to capture or describe
but in fact can only prescribe! By contrast, the problem with “open
systems” is that they reify the sources of change by seeking “to freeze” them,
or else do not specify them sufficiently so that the system is rendered useless
(Robinson’s “one to one map”).
Neoclassical theoreticians never pretended to
imitate or encompass “social reality”. Under their stated aim “to formulate”
reality lay the ideological and strategic goal which consisted, in Lawson’s
express words,
“[in] inventing ‘a reality’ of a form that their
modeling methods can address (i.e., a world of isolated atomistic individuals
possessed, for example, of perfect foresight, or rational expectations,
omniscience, pure greed, and so forth)”.
If
Lawson had bothered to look more into this ‘social reality’, he would have
found the problems that equilibrium analysis reflects and mirrors! But Lawson
does not even bother to examine the assumptions of the analysis except to oppose
to it his ‘post-modern’ late-romantic progressive ideals – pathetic and
powerless – but still in the same world of meaning that belongs to Neoclassical
theory, namely, the sphere of exchange and its axiomatic assumptions. Lawson
and Langlois assume that there is a “reality” that theory can disclose or
represent. But this “reality” is itself subject to distortion by conflict
and antagonism! Theory and analysis then must reflect this conflicting
“reality”; they must be one-sided.
The kind of ‘ontic’ assumptions that Lawson would
substitute for those of equilibrium analysis are not much better or realistic
than those of equilibrium analysis itself - and would end up as ‘reifications’
capable of “formalization/formulation” in an equally “dynamic equilibrium” model.
Heterodox economists should ask not whether equilibrium analysis is “true” or
even “realistic”, but whether it is effectual – and above all why and
how it can be effectual! What they should challenge are not the
claims to “realism” but what kind of “practical assumptions” lie behind the
“theoretical assumptions” of neoclassical analysis. As Hahn put it in his own
defence:
The great virtue of mathematical reasoning in
economics is that by its
precise account of assumptions it becomes crystal
clear that applications
to the “real” world could at best be provisional.
When a mathematical
economist assumes that there is a three good economy
lasting two periods,
or that agents are infinitely lived (perhaps because
they value the
utility of their descendants which they know!),
everyone can see that we
are not dealing with any actual economy. The assumptions are there to
enable
certain results to emerge and not because they are to be taken
descriptively. (Hahn, 1994, p. 246)” (434)
Hence, the question
remains of how a formal logico-mathematical tool - that possesses no meaning
because it is a pure identity – can be applied practically to a society
so as to guide political decision-making or policies. The obvious
immediate way out is to insist on the objectivity and mechanical properties of
the equilibrium Schema – to insist not on its substantive merits, the creation
and distribution of “wealth”, but on the equally formal fact of
co-ordination. But the co-ordination of productive activities cannot in
and of itself justify its actual existence without referring to what is
being co-ordinated, that is, the purpose of economic activity. Co-ordination
is simply a relation between several activities. But the existence of co-ordination
can be justified, can have any sense or meaning at all, only if it is founded
on an aim or goal or purpose or interest that is conducive
to that co-ordination! Co-ordination of anything for its own sake is quite
simply meaningless! In the absence of an interest for which
market agents can agree to co-ordinate their activities, there is no point to
the co-ordination at all!
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.
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