Reduction, Rationality and Game Theory in Marxian Economics

Bruce Philp

• Publisher: Taylor & Francis
• Year: 2004
• eBook ISBN: 9781134444748
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

This book examines the main areas of interest in Marxian economics, paying particular attention to class conflict, analytical Marxism and game theory. Very few books can claim to cover the areas that this book does with such clarity, academic rigour and originality. Its study of game theory and Marxism makes it a particularly unique book that will

1 Introduction

Contemporary issues in Marxian economics

Without wishing to begin in an unduly negative way, it is important to recognise that there are a number of difficulties which confront the future development of Marxian economics. Theoretical problems associated with value, the falling rate of profit and surplus-value require investigation, and these are discussed in detail in this book. The nature, mechanisms and structures advocated as an alternative to capitalist/market systems require parallel elaboration, in particular in the light of the failures of the political and economic systems which prevailed in Eastern Europe throughout much of the twentieth century. The failure of ‘Communism’ in Eastern Europe and the former Soviet Union, the continued dominance of dictatorial politics in China, the apparent failure of the central allocation of resources, and the incentive problems which arise as a consequence of these factors all warrant explanation from Marxists wishing to develop a sound materialist alternative to capitalism. However, in recognising the failure of Communism in Eastern Europe one should not be distracted from developing a modern, alternative understanding of the functioning and dynamics of capitalist economies, to that which is proposed by neoclassical economists. And while Marx provided many valuable theoretical, historical and methodological insights, capitalist economies have evolved and developed since his death. Moreover, Marx’s theory of capitalism was incomplete when he died. There have been noteworthy developments in Marxian economics in the intervening period. But the task of developing Marx’s work has not been completed, and theoretical work is required to render convincing the case for replacing capitalism with a democratic socialist alternative.

There are compelling reasons for seeking an alternative to capitalism. The existence of positive profits, necessary to enable capitalism to persist, requires the exploitation of workers. Workers are alienated and work for longer than is necessary to produce what they themselves consume. It is desirable that some in society work surplus labour time to provide for those unable to satisfactorily provide for their own needs. However, under capitalism the social surplus, the product of surplus labour time, is in principle appropriated on the basis of property. Thus, the existence of capitalism presupposes exploitation. Other problems facing the world’s population in the late twentieth century include a global environmental threat which governments seem unable to control, and famines and war which leave large proportions of the population of this planet under continual threat. Dictatorial politics are not confined to Communist states, and western democracies tolerate and trade arms with dictatorships.
Such ‘democracies’ also have distinctly anti-democratic forces working within them. Agents’ preferences (for commodities and policies) are systematically manipulated through advertising and mass media, and this serves to stifle serious, fundamental debate about the functioning and ethics of capitalism itself. Elsewhere, the fall of the Soviet Union has given rise to civil wars, rising crime and extortion. Moreover, we can observe concentration of ownership of large, formerly state-owned assets, in the hands of a few very wealthy individuals – primitive accumulation for the modern era. In recognising these problems, this does not represent a desire to return to the Communism of the Soviet Union before the fall. Rather resolution of these ills require political and economic structures other than those adopted in western capitalist economies. This book will focus on a small subset of these problems – namely exploitation and the process of competition in capitalist economies. These involve strategic interaction between agents and so one approach which is explored is the use of game theory.

It is therefore possible to identify two key issues which Marxist economists should endeavour to address: ‘What are the forces which determine pricing, development and distribution in capitalist economies?’ Secondly: ‘What alternative form(s) of political and economic arrangements might overcome these difficulties and provide universal and equal opportunities for self-realisation and welfare?’ Whilst there is a clear connection between these issues, it is principally the first question which is examined in this book.

There are further issues to be resolved in that much has been written in recent years concerning the method of Marxian social science. In particular, the suggestion offered by a number of analytical Marxists, that a microfoundations approach may constitute the most appropriate method by which to investigate/model capitalist economies, is challenged. This challenge to traditional Marxian ‘holistic’ approaches represents a fundamental departure since it suggests individual agents be our units for analysis. Traditionally, one distinguishing feature of Marxian analysis has been the emphasis on classes as important explanatory units. However analytical Marxists have modelled classes as emerging out of individual optimising decisions made by individual agents. Such an approach is inadequate. Nevertheless, rejection of microfoundations approaches does not entail that all methods and tools used within neoclassical economics need be rejected. One suggestion made here is that game theory may be used to either provide insight into aspects of Marxian economics, or to communicate some of the insights of Marxian economics to a broader audience. But to use game theory in a Marxian setting requires more that simply adopting the tools and methods of non-cooperative game theory, root and branch. One of the features of the application of non-cooperative game theory in neoclassical economics has been the adoption of methodological individualism which Marxists (other than analytical Marxists) are generally hostile to. Therefore, an important precursor to applying game theory to Marxian economics, if we reject the microfoundations approach often adopted by analytical Marxists, is to extract those aspects of strategic interaction pertinent to Marxian analyses of capitalism, from the underlying, and deeply problematic assumptions of neoclassical theory.¹

This work begins from the premise that Marxian analyses of capitalism can still provide powerful insights into the functioning, dynamics and ethics of capitalist economies. Moreover, these insights are likely to be more profound than those offered by competing schools of economic thought. In Capital, Marx sought to develop a theory of the dynamics of capitalist economies and to provide a historical account of the emergence and functioning of capitalism. Such approaches remain crucial in understanding how the world works, as economies and cultures are assimilated into the global capitalist system while injustice, exploitation and crisis pervade contemporary society. In such a climate, one might expect interest in Marx, and Marxian work, to be considerable. However, in the field of economics this is not the case as neoclassical economics and its variants have occupied an increasingly dominant position, and attempts to offer serious immanent critiques of capitalism are ignored in the mainstream literature. Marx was critical of the ideological role of bourgeois political economists; so neoclassical economists today play a similar role as the hired prize-fighters of the ruling class. What passes for academic research either seeks to demonstrate the efficiency of market systems, or how interventionist measures can bring about improvements. But there is no serious attempt to examine, fundamentally, the limits, injustices and contradictions of capitalism. Intellectual resources are not channelled to address these questions, of course, because it is not in the interest of policy makers and business to raise such problematic issues.

The case for developing further a truly critical analysis of capitalism is thus overwhelming, whatever the historical and contemporary problems faced. This book is concerned with the determinants and dynamics of exploitation, mediated through the competitive process. The approach is inspired by the work of Marx and the challenge posed by analytical Marxism. The latter work has sought to defend important elements of Marx’s theory using the tools and methods of mainstream social science. This book, in the process of examining Marx’s work, rejects certain elements, most significantly a labour theory of exchange-value. However, a labour theory of exploitation is regarded to be of utmost importance for understanding the functioning and inequality of capitalism. The reductionist pretensions of a number of analytical Marxists are rejected although not, perhaps, for the same reasons as given by orthodox Marxists. In each of these fundamental theoretical and methodological respects, this book can neither be considered orthodox nor analytical in its approach to Marxism. However labelled, it is nevertheless hoped the reader is convinced that the issues raised here are important, and concurs with the view that capitalism need not and should not represent the pinnacle of economic development.

Neoclassicism, Marxism and methodology

The development of theory and pursuit of empirical research implicitly or explicitly involves adopting a methodological position. While some social scientists may see overt interest in methodology as peripheral, such considerations have benefits that are likely to contribute constructively to the development of human understanding. Explicit reflection on how social science is to be pursued has the advantage of aiding the researcher in developing a consistent approach.
This should not be taken as implying methodological conformity is desirable amongst social scientists; indeed there is considerable merit in maintaining a plurality of methodological approaches. However, it is likely to yield further development and more constructive debate if a given social scientist states what they regard to be fundamental to their scientific approach.

Methodology is not important solely for identifying the approach of an individual researcher. Schools of economic thought are each methodologically distinct and identification of these differences is important. It is also important to note that such classification may lead to over-simplification and there are all too frequently exceptions which make hard and fast distinctions, at the least, problematic. But it is useful to identify some common characteristics to render debate and comparison between different paradigms practical.

Neoclassical economics represents the dominant orthodoxy in economics. Whilst the term ‘neoclassical’ may not reflect the diversity of modern mainstream economics, the use of the term is sufficiently widespread to make its use convenient. Here the term ‘neoclassical economics’ is taken to refer to that body of work which assumes: (i) agents are instrumentally rational, maximising utility in a world of scarcity using marginal calculus; (ii) individual optimising agents are our units for analysis, and methodological individualism the appropriate philosophy of science; (iii) equilibrium is the dominant modelling tool and general equilibrium modelling is an extension intended to reflect the interaction of agents and markets in a macro economy. In empirical work neoclassical economists test predictions of behaviour based on these rationality postulates and compare these with the empirical evidence from gathered data. In the modern economic literature there is the frequent use of econometric methods. Indeed this is consistent with Friedman’s approach, where he suggests: ‘the only relevant test of the validity of a hypothesis is comparison of its predictions with experience’ (1953, p.8). Neoclassical economics can take different forms, from research which uses simple utility functions to look at particular markets, to the work of those who focus on the interaction of markets in computable general equilibrium models. Underpinning these are the optimisation techniques referred to above, and while there are some exceptions, this definition of neoclassical economics captures what are generally held to be the essential characteristics of that body of work.

Marxian economics is distinct in that it identifies capitalism, or a market system, as one of a number of modes of production (feudalism, capitalism, socialism, communism), whereas neoclassical economics focuses exclusively on capitalist economies (with the possibility, of course, of some government intervention). Even Marxist economists who have flirted with aspects of neoclassical methodology have nevertheless identified capitalism as one of a number of economic systems (e.g. Roemer 1982a, 1982b, 1986b). This makes it possible for Marxist economists to challenge, not only particular market outcomes, but the ethics of capitalism as a system as a whole. As Roemer suggests, Marxism maintains ‘a belief in the injustice of capitalism, and the transience of it, which flows from a historical world view, based on the evolution of forms of property’ (1986c). At the heart of Marx’s analysis of capitalism lies the concept of surplus-value, or capitalist exploitation.
In this book the Fundamental Marxian Theorem (FMT) – the claim that capitalist exploitation is necessary and sufficient for the production of positive profit – is taken to be the key to understanding the injustice of capitalist economies. However, Marxist economists also see the invisible hand floundering as capitalism is crisis prone. In common with the optimisation assumption of neoclassical economists, Marxists generally hold that capitalists seek to maximise profits, achieved through extracting as much surplus labour time as possible. But in seeking to maximise profits, by introducing new techniques, Marx maintained that this would result in a fall in the general rate of profit.
Such a structure is not necessarily at odds with some of the outcomes generated by neoclassical economists. Paradoxical examples such as the prisoners’ dilemma and public good provision are studied intensively by neoclassical economists and these are formally not dissimilar outcomes.

In addition to Marxists beginning with the economic structure, and regarding ethical concerns as fundamental to the analysis of capitalism, there are other elements which distinguish their methodology. One particular element concerns the boundaries between economic and broader social scientific explanations of phenomena. The ceteris paribus assumption is frequently invoked by neoclassical economists. This may be done as a modelling assumption to facilitate investigation of causal processes individually, because of the complexity of examining many factors all at once. This is not dissimilar to the traditional approaches adopted to the study of certain issues, such as the analysis of the falling rate of profit as a consequence of technical change, which tends to hold other factors, such as respective class power, constant in order to focus on a particular issue. However, neoclassical economists are also prone to use the ceteris paribus assumption to render non-economic causes/factors exogenous in the process of investigation. Thus instrumental rationality presupposes exogenously determined preferences, precluding any investigation of how desires might be cultivated or false needs induced. There have been suggestions recently that neoclassical economics should cultivate its relationship with other social sciences (e.g. Lazear 2000), but the presumption from within neoclassical economics is that the appropriate methodology is that which is employed within mainstream economics, and the relationship should be one of economics imperialism. Marxist economists, in contrast, may be taken by some to be a misnomer, since it implies the possibility of there being a distinct branch of Marxian investigation separate from a broader social scientific understanding of political, social and economic systems. While this book will focus on quite narrowly defined economic aspects, non-economic causes are not precluded, a priori, in the process of investigation.

Structure of argument

In considering class conflict, three broad economic themes emerge.
In Marx’s analysis, competition between the capitalist and working class in the labour market is modelled in terms of surplus-value. This presupposes the capitalist class has a monopoly over the means of production. Secondly, competition among groups of workers is often analysed in terms of ‘divide and rule’ models, suggesting a need for an analysis of class consciousness and collective action. Finally, theories of competition between capitalists are more diverse. Considerations include the equalisation of the rate of profit, the tendency for the rate of profit to fall, and more general theories of crises. This is a considerable body of work and therefore, to make analysis tractable, this book will primarily examine unrestricted competitive capitalism where product markets are not characterised by monopoly.

The recent development of analytical Marxism and contemporaneous developments in orthodox Marxism raise important methodological issues that are discussed in Chapters 2 and 3. The issues surrounding alternative methodologies of explanation are of extreme importance in all areas of social science that apply any form of aggregate analysis. Chapter 2 assesses a number of alternative positions that have emerged in recent years in debates surrounding the development of analytical Marxism. The issue of reduction in the philosophy of science is considered, and it is claimed that reduction, which is often interpreted as an ontological claim is, in reality, a claim about the possibility of explanation. In Chapter 2, the ‘reductionism versus holism’ oversimplification is rejected and it is claimed that there are at least four methodologies of explanation: atomism, methodological individualism, anti-reductionism and radical holism. The latter two reject reductionism. The work of three analytical Marxists – Wright, Levine and Sober – is the reference point for this discussion. Their work is particularly pertinent since they do not advocate methodological individualism, which typifies the approach of other analytical Marxists, such as Roemer and Elster. Finally, the relevance of this debate to a theme of central importance in Marxism – class analysis – is considered, and the reductionist approach is questioned.

In Chapter 3, the philosophical foundations of game-theoretic Marxism are discussed. Initially the reductionist pretensions of analytical Marxism, which has practised game-theoretic Marxism, are considered and rejected. After advancing an anti-reductionist game-theoretic formulation of Marx’s theory of surplus-value, in terms of bilateral monopoly, problems of collective action are examined.

In Chapter 4, the most significant problems facing Marxian economic theory in the last hundred years, namely value, price and distribution are discussed. After framing the problem in Marx’s own terms from the third volume of Capital, Böhm-Bawerk’s subsequent critique is outlined. Thereafter a number of solutions to the transformation problem are considered. Proposed solutions – such as the approach of Morishima, Roemer’s ‘Walrasian’ general equilibrium model, and Dumenil, Levy, Foley and Lipietz’s ‘new solution’ – are introduced before discussing recent developments in the Marxian theory of exploitation and class in Chapter 5. After discussing Marx’s original formulation of surplus-value, Roemer’s game-theoretic general theory of exploitation and class is considered. The limits of Roemer’s microfoundations model of class formation are highlighted, before discussion of the...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Figures and Tables
• Acknowledgements
• 1. Introduction
• 2. Methodology of Reduction
• 3. Marxism and the Foundations of Collective Action
• 4. Value, Price and Exploitation
• 5. Marxian Theories of Exploitation and Class
• 6. Class Conflict and Working Hours
• 7. Reduction, Rationality and the Rate of Profit
• 8. Conclusion
• Notes
• References