Alternative Principles of Economics

Stanley Bober

• Publisher: Routledge
• Year: 2016
• ISBN:
  9781134897216
• Edition: 1
• Topic: Betriebswirtschaft
• Subtopic: Business allgemein

This is the first book to provide a complete introduction to Post-Keynesian and other alternative theories of economics. Concise yet comprehensive, and written to be accessible to a wide audience, it offers a unique opportunity to enhance traditional neo-classical economics training with authoritative coverage of the full range of the non-orthodox paradigm.

1
An Alternative Introduction to Economics

We begin with what is, by now, the universal way to introduce the study of economics and convey what it is supposedly all about. The wide range of issues and problems that people associate with being “economic” is understood to have its grounding in this widely accepted core approach of discipline to which we will then offer an alternative.

The conventional approach is to see society in a continuous state of confrontation between a virtually unlimited desire for material things and services and the “fact” of an inherent limited capability to satisfy this desire. While it is also a fact that from time to time society realizes a condition of unused resources and productive capacity, the attitude, at least in introductory Principles, is that the insufficiency of demand is an anomaly, and that basic understanding comes through the vision of society in a state of limitation of supply. This limitation is seen as resulting from a scarcity of resources or “factors of production” that are the inputs to all production processes to produce the output satisfying those diverse material wants. One can simply say that economic activity is the actions of society, is what people do to cope with this scarcity problem.

What is this activity composed of? What kinds of decisions result from societal action to deal with the limitations placed upon it? As is normally portrayed, there is the necessary decision as to what types of goods are to be produced and in what quantities they are to be produced. An immediate associated question is whether society allows this decision to be arrived at privately, that is by organizations or individuals who own (have legal entitlement to) or control the productive capability of what has been referred to as the means of production of society. Or is this decision somehow vested in society as a whole through the community ownership of the means of production? To what degree is society reflective of a middle way in which this decision is entered into by the government as an agent of the community, as well as by private owners? Students are told that what is being studied is the operation of a capitalist market system in which practically all of the means of production is privately owned, and that it is the decision outcome of this private sector that generates employment and income in the society and that allocates resources to the production of the different kinds of output, thereby determining the composition of the aggregate level of production.

The term “market” as part of the description of the economic system is conceived of as an operating mechanism on a day-to-day basis that guides the economic decisions of society. We ask whether a market-clearing concept, which is espoused to be the essential determining process, is indeed a description of the way the economy really works. Or are we dealing primarily with an emotional term that, while it may have descriptive significance for a particular economic-political arrangement, bears very little on actual economic outcomes.

Now let us mention two other economic decisions. One deals with the choice of technique involved in the production process, and the other is the mechanism at work that results in a societal decision regarding the distribution of income, which itself is greatly related to the “how” decision entered into by the individual producing units of the system. As we are told, the three questions of the economic system—the what, how, and for whom (the distribution question)—are coordinated and answered through market operations that yield outcomes dealing with quantities and types of goods produced, while simultaneously determining selling prices and costs (input prices) of production.

Yet all of the above questions arise out of the accepted condition of scarcity characteristic of the material and human inputs of production. This gives rise to a definition of economics as a discipline concerned with administering scarce resources so as to bring about the maximum fulfillment of society’s unlimited wants, or as one textbook by McConnell and Brue puts it: “Economics is concerned with doing the best with what we have.”¹ The fundamental aspect of economics is the problem of an optimum allocation of scarce resources; that is, to study the mechanics of the market procedure that reflects rational choice leading to this optimum outcome.

So we have individual (atomistically behaving) economic units—individual consumers or producing entities—entering into an ever constant exchange process, through which individuals maximize their utility subject to the constraint of a given distribution of income among them, and firms maximize their profits (or minimize losses) subject to the constraints of existing selling prices and production costs. The economic problem is to understand how the society determines those prices that bring about this optimum outcome, which simultaneously reveals the combination of goods produced and consumed. Of course the endowment of resources by individuals is simply a reflection of the exchange process entered into by producing units in their quest to purchase that combination of inputs that minimizes production costs. We are given to understand that the workings of an economy are the working of markets that set factor prices, thereby determining the level of income and, greatly, its distribution, and that set the prices of produced goods and services. As is made clear, it is through interplay of these markets that society solves the what, how, and for whom issues. They are solved in a manner that leads to a maximization of the utilities of the economic constituents so that no single element can become better off without some other being made worse off. There has been, in other words, an optimum allocation of existing scarce resources. But how do these prices (equilibrium prices) come into existence? To say that they are determined by the free market or by competition is to propose a largely mythical concept, because the institutional basis for such an explanation is, generally, nonexistent.

Yet such descriptions serve as propagandizing tools for a particular organization of society. One popular view is that political democracy is linked to market capitalism and may even be an essential underlining of it. A society in which voters determine the government, where all voters have equal power, where the central administrative authority is prevented from excessive power by a checks-and-balances structure, and where the government must earn its mandate, could only exist in concert with an economic structure where there is great diffusion of economic power among the producing and consuming units and where all constituents interact with generally equal influence in their respective markets, leading to price and quantity outcomes that reflect that optimum allocation of resources.

The lack of coercive political power manifests itself in the workings of the competitive market structure with the free enterprise of large numbers of independent agents. In determining a government of democratic policy, voters bring into being an organization that maintains the legal and institutional structure of competitive markets. From this point of view (and it is only one view) the political and economic arrangements are reflective; where you find political democracy, you should also find free competitive markets. And where you do not find the one, you will not find the other. Though the emphasis placed on the microfoundations of competitive market-clearing exchanges is, I would say, a misguided attempt at a comfortable fit between the “economy” and the “political” of democratic capitalism. One is aware that the economic system operates overwhelmingly upon a foundation of highly imperfect competitive arrangements where prices do not continuously adjust to clear markets. Indeed, in the reality of matters economic, agents trade at what is labeled as false prices—prices that are nonequilibrium and not competitive-market determined. We will, in a subsequent chapter on pricing, examine this phenomenon in some detail.

Yet the way this reality is handled is to see it as a departure from some “normal” or “desirable” state (and as calling upon the central authority to restore “competition”), rather than to consider the organizations operating in this false environment as the normal structure representative of the current development of modern capitalist society—if indeed one could upon hindsight find a period of time where the perfectly competitive market generally held sway. One must bring to the forefront of study the price determination and production arrangements of noncompetitive (in the traditional sense) economic agents. One must also understand the role of prices in this pervasive environment.

If we may reiterate the point here: For a realistic understanding of the economic workings of our society, we must eschew the “vulgar economics” (to use a Marxian term) that views the economy through the lens of appearance rather than that of reality—the appearance being the continuous presence of exchanges between atomistic independent-acting agents within a structure of competitive markets characterized by the separability of supply-and-demand schedules. These exchanges then, allocate the given resources between competing ends and give rise to the price and quantity outcomes. Now this allocation is presumed subject to constraints imposed by “nature” and technical knowledge. The latter constraint is, as well, usually thought of as given but not immutable; from time to time the state of knowledge is acknowledged to have changed, but it is invariably seen to impact the system from outside. It is normally not thought of (as indeed it should) as the driving force of economic activity, and the internal operation of the economy is not analyzed in terms of a cause-and-effect relationship to technological change itself.

Luigi Pasinetti has been much involved in propagandizing for and developing an alternative approach to the current (marginalist competitive) model of economic analysis. He overviews the existing state as follows:

We may say that the marginal economic theorists have chosen to look at the real world through the lens of the scarcity model. All aspects of reality have been magnified or eliminated according to whether they did or did not fit into the pattern of a scarcity world. The conception that has thereby arisen is that of a world where the material goods which are the object of man’s desire, and technical knowledge have been shaped by some external agents. Let us simply call it ‘nature’ and given to man in scarce quantities, with a haphazard distribution and in immutable form. Of course some changes in the state of technical knowledge may now and then suddenly come in from the outside; but this is not the model’s concern…. All that concerns to be done, or to be talked about, is a possible series of exchanges of the existing goods. In other words, the only economic problem that the members of society are facing is a problem of rational behavior in order to increase when possible the enjoyment they obtain out of what is given and immutable. By combining and exchanging the existing goods on the basis of their given preferences and knowledge they may reach a better allocation than the one which happened to be given to them by nature at the beginning.²

Now we are proposing a Principles of Economics that discards this marginalist schematization. The economy is more, indeed it must be more, than a mere allocating mechanism. The reality of the world as we look back over long periods of time is the secular rise in real output experienced by industrial societies (i.e., advanced capitalist economies). Societies have experienced capability that is largely the result of the cumulative effects of technical changes, that is, of the growth and infusion of such knowledge into the production process, thereby freeing man from the constraints of nature.

Again from Pasinetti:

A cursory look around us is enough to perceive this most clearly. The constantly advancing technology in the more modern parts of the world has by now freed entire populations, for the first time in history, from the yoke of hunger and starvation. Technical change has made and is constantly making men less and less dependent on nature and more and more dependent upon themselves. The commodities that nowadays men produce and the surroundings in which they live are more and more shaped by them; the product of their own decisions. Even the raw materials and the traditional sources of energy, which at the beginning of the industrial revolution absolutely conditioned the rise of industries, are becoming less and less important, as men themselves learn how to make, in whatever place they like, a great part of the raw materials (or their synthetic substitutes), and are moreover developing entirely new sources of energy…. The world of the future is going to become more and more a man-made world.³

So the goods that are consumed and exchanged, and have positive prices, are not scarce goods reflecting nature’s constraints on the ability of society to produce them as a result of some niggardly endowment of resources. They are goods that can be produced in practically whatever quantity is desired, provided the society decides it is worthwhile to devote the amount of effort that is required by the given technology. And the quantity and type of resources required (the effort involved) is itself always changing as a result of the ongoing technical knowledge.

In an overall way, then, the different starting point for an introduction to economics is that of a world of abundance. But let us again be clear about this world. In terms of produced physical inputs to a productive process, these inputs can be generally manufactured without limit. So that all other resources besides land, normally considered as given by nature, are not so at all—they are not scarce. One may encounter a scarce condition, but it would only be temporarily so. Given the technological know-how in land reclamation, water treatment, and the so-called green revolution, our agricultural capability is being enlarged more and more. It is questionable whether we should even consider land in the sense of agricultural capability as being fixed.

But in an operative economic way, abundance means that the system will, as a matter of course, have at its disposal a degree of excess capacity of output in a structural sense and a not fully employed labor force. This is generally what characterizes the economic environment: The society always has the capability to increase output overall. It is not a central matter, or as it is put, “the research program” of the society, as to how to allocate a fully employed limited amount of resources. What is the real research program is how to bring about the increase in production at any point in time so as to utilize the available capability. The related longer-term issue is how to keep production growing in line with society’s capability (its abundance, if you will), which is itself greatly driven by ongoing changes in technical knowledge.

One need only recall those early discussions in introductory economics to realize how different our proposal is concerning the core issue of the discipline. Those lectures are wrapped around the production-possibilities curve as illustrative of the basic allocative function of the system. The student is told repeatedly that this structure is based on the idea of a given quantity of resources that is not unemployed or used inefficiently and that the level of technology is constant. And while one does allude to the possibility of the curve shift and some causal factors therein, this is rather quickly put aside in favor of the analyses of the stationary state of the society and the allocative mechanics of a market.

Yet upon observing the world as it is, looking out the classroom window, the student does not find an operating market as the term is understood resulting from those introductory lectures (some in very particular circumstances), nor does the student find an operating competitive production environment, and the student is well aware of how rapidly technological change has altered the availability and types of jobs. Certainly the cost curves of the firm that form the bases of much of the introductory micro setting are, as we will make clear, very unrealistically based, causing a misunderstanding between prices and demand changes.

What I believe the instructor has in mind when tracing out the cost–production curves is a vision of the family-run firm supposedly subject to the “inexorable” law of diminishing returns. And one accepts these curves as the reality; one does not inject any doubt. The question is not asked whether a production function extracted on this basis (even if we were to accept its existence in the agricultural sector) is applicable to the industrial component of modem society. What is done is to generalize those cost curves as they are promulgated to represent the competitive (the agricultural firm again being the mind-set) as well as those “aberrant” noncompetitive arrangements. We consider this approach as another example in the Principles of Economics that removes much reality from our understanding.

As we begin to recast some of the Principles, let us propose that theory and accompanying explanatory models be based on realistic hypotheses. One should take an epistemological position on a stand of realism and eschew the approach whereby one abstracts from reality supposedly for the purpose of simplification, only to systematically add helpful pieces of reality to the initial design. The incorporation of different assumptions will in all likelihood cast aside the original model altogether as a basis for a realistic understanding of what is happening. Our approach is that the analyses of the economy be constructed of elements that, in the words of Lavoie, an unorthodox economist, are “observable and objective rather than metaphysical and subjective.”⁴

In the following chapter we confront the Principles with the heterodox reasoning concerning the law of diminishing returns and the cost curves of the firm.

Notes

1. Campbell McConnell and Stanley Brue, Economics, ISO ed. (New York: McGraw-Hill, 1996).

2. Luigi Pasinetti, Structural Change and Economic Growth (London: Cambridge University Press, 1981), p. 20.

3. Ibid., p. 21.

4. Marc Lavoie, Foundations of Post Keynesian Economic Analysis (Aldershot, UK: Edward Elgar, 1992), p. 9.

2
Returns and the Costs of Production

Initial Thoughts

An analysis of the cost curves o...