The Test of Science in Economics

Michael Hudson writes in J is for Junk Economics (2017: 333) that:

When criticized, the authors of... [the mainstream] textbooks [of modern neoclassical economics], from Paul Samuelson to Bill Vickrey, say that it doesn't matter whether economic theory is realistic or not [the Milton Friedman line]. The judgement of whether economics is scientific is simply whether it is internally consistent.

Thus, for modern orthodox neoclassical economists, the criterion of science in economics is not the underlying realism of its economic theories but their internal logical consistency.

Now, with this sort of logic, anything could be deemed scientific, such as an economic theory about the price phenomena of a market economy like capitalism based on the hypothesis there are fairies in the garden 'crying' out like a grand auctioneer the market prices of all commodities. A simple logically deductive example can easily establish this point.

Fairies in the garden 'cry' out like a grand auctioneer the market prices of all commodities (major premise).

The market prices of all commodities are signals for all markets to clear at a general equilibrium price (minor premise).

Therefore: 

The 'cries' of fairies in the garden leads to all markets clearing at a general equilibrium price (conclusion).

This is, logically speaking, an internally consistent economic theory about how all markets clear at a general equilibrium price because of fairies 'crying' out in the garden like a grand auctioneer, as the conclusion deductively follows from its major and minor premises (in symbolic terms: if A is B, and B is C, then A is C). But, a moment's reflection is enough to tell us that we should reject this economic theory as it's based on an unrealistic hypothesis: there are no fairies in the garden actually 'crying' out like a grand auctioneer the market prices of all commodities: this is a piece of fiction! Yet, despite this glaring lack of realism, we are still expected to accept this theory as being scientific, all on the grounds of it being internally consistent - the criterion of science for modern orthodox neoclassical economists, according to the likes of Samuelson and Vickrey.

Now, this is where the influence of Milton Friedman's views about methodology (his F53 paper) come in. His methodological views are meant to justify the construction of patently unrealistic theories in modern orthodox neoclassical economics and fend off any criticisms about their unrealistic nature.

It basically does this by invoking the 'as if' mantra. That is, while it may be accepted that the economic theory in question is unrealistic because it's based on an unrealistic hypothesis or a set of unrealistic assumptions, that doesn't matter since it's enough to just treat the underlying hypothesis or assumptions of the theory in question as if they're realistic (or true) - not that they really are. Thus, in the particular above theoretical case of how all markets clear at a general equilibrium price, we should look at its underlying hypothesis or assumptions as if they're true in the sense that there really are fairies in the garden who 'cry' out like a grand auctioneer the market prices of all commodities, even though we know there are no such things in reality.

But why should we do this? Well, for Friedman, the short answer is that it enables one to 'scientifically' draw the right sorts of conclusions that one is after in their economic theories about the economic phenomena of a market economy like capitalism. (NB. I'm only giving the guts of his methodological views here.)

And furthermore, for Friedman, the only real scientific test of any economic theory is whether its predictions are confirmed by the world of experience. If a theory's predictions are discomfirmed by the world of experience then the theory is to be either rejected or revised until its predictions are finally confirmed by the world of experience. Equally, if the predictions of a theory are immediately confirmed, then the theory is immediately accepted. Either way, for Friedman, the realism of the underlying hypothesis or the assumptions of the theory in question is irrelevant as to whether it's accepted as a valid 'scientific' theory in economics.

However, as pointed out in an earlier blog post - "Scientific Truth Matters" - it's not correct to say that the realism issue is irrelevant as to whether we accept a theory as being scientifically valid. As I argued there, the more realistic a theory is in terms of its underlying assumptions, the more accurate its predictions are likely to be, as exemplified by Einstein's general theory of relativity - which had come to ultimately replace Newton's theory of universal gravity as being a more accurate scientific representation of our solar system and universe because of its more accurate or truthful assumptions about the causes and nature of gravity.

It's notable, by the way, that the central criterion for determining whether a theory in economics is 'scientific' is different for both Friedman and Samuelson-Vickrey. For Friedman, as we've just seen, the criterion is whether a theory's predictions are confirmed by the world of experience; while, for Samuelson-Vickrey, as we saw earlier, the criterion is whether a theory is internally consistent. Despite these differences, what they all accept however is Friedman's original assertion that the issue of realism is irrelevant to the acceptance or non-acceptance of the 'scientific' status of a theory in economics; hence, the influence of Friedman's methodological views on the economics profession, especially its modern orthodox neoclassical economics school (the dominant school of modern mainstream economics). However, as I've just pointed out, such a methodological view is quite questionable. Hence, it's not a sound or firm basis for resting their respective criterion of 'science' on, in economics.

At any rate, here's one pivotal example (as provided by Hudson) of how modern orthodox neoclassical economists try to demonstrate the 'scientific' status of their type of economics on the underlying basis of Milton Friedman's methodological views in modern mainstream economics.

It needs noting that on the subject of Milton Friedman's methodological influence in modern mainstream economics, one of the key issues to tackle is his 'as if' approach in economics, as this is really at the centre of not just his own methodological views but also at the practice of economics itself within the theoretical framework of modern orthodox neoclassical economics. In doing so, as I shall show in other blog posts on this topic, we will need to confront Friedman's 'as if' approach with the Galilean method of abstraction and idealisation in science. This is the scientific practice or 'mental act' in science which seeks to, on the one hand, leave things out while giving a literally true description of something (the method of abstraction), while, on the other, treating things as having features they clearly do not have (the method of idealisation). Such a method of science is rooted in reality, not independently of it, as in the case of Friedman's 'as if' approach (see my blogpost, "A Follow-Up: a Conceptual Distinction"). Therefore, such a confrontation will reveal that Friedman fails to understand some essential features of how actual science works in a methodological sense, as it goes about its central task of revealing the hidden essence of the phenomena of the world and consequently producing as practical as possible an accurate representation of the phenomena of the world.

Also, as we shall eventually come to see, Milton Friedman's methodology is best construed as being a form of instrumentalism - one of the major outshoots of modern positivism in the philosophy of science, and which also stands in opposition to the views and aims of scientific realism (meaning, it rejects any theory which claims to have discovered the hidden essence of phenomena on the philosophical grounds that they are unknowable).

Addendum

Milton Friedman's recommendation that economists should ignore the realism issue is a way of sidestepping it rather than addressing it.

Revisiting the Mr. Peel Story

There's an underlying assumption within modern neoliberal ideology, which in turn feeds our general thoughts about the economics of capitalism, that without 'bosses' (whether they be the owners of capital itself or their managers) workers wouldn't have a job. This is true if (1) wage-workers are propertyless and consequently have nothing to sell but their labour-power in the labour market to the 'bosses' in exchange for a 'living' wage, as the Mr. Peel story illustrates. However, this truism only applies to what happens in capitalism. What the Mr. Peel story also highlights is that (2) in capitalism, capitalists can't be capitalists and make profits if there aren't any wage-workers to employ and exploit; and (3) wage-workers don't actually need capitalists if they possess their own means of production, as would be the case in a non/post-capitalist society like some form of socialism. But what can be said, as the Mr. Peel story further points out, is that (4) if capitalism is to be what it is and function in the ways that it tends to, then its underlying social structure must be one in which both capitalists and wage-workers 'need' each other if they are to constantly reproduce themselves under capitalism despite how this might result in a widening gap in their relative wealth. So, whenever it's said that workers need bosses more than the other way round, then that's not necessarily true - as these four points make clear.

It can additionally be said here that such a line about who needs the other more under capitalism is nothing more than an ideological assertion rather than a substantive scientific claim about the nature of capitalism. Indeed, it's just a piece of unabashed class propaganda on the part of and for the dominant socio-economic class of capitalist society, the capitalist class itself.

NB. To fully appreciate the philosophical point being made here about the structural relationship between the class of capitalists and the class of wage-workers, then there's no better starting point than (apart from Marx's Capital) Ian Hunt's book, Analytical and Dialectical Marxism, and Michael Lebowitz's book, Beyond Capital. What they both show is how 'capital' and 'wage-labour' need each other in order for capitalism to be both what it is and operate in the ways it does. 

Addendum to Previous Blog Post

Taking our cue from Anwar Shaikh's work in economics, rather than constantly invoking the perfection versus imperfection view of a real market economy like capitalism (as is done by both the orthodox and heterodox streams of modern mainstream economics), it might be better to simply talk in terms of the real versus the non-real or a realistic theory of the capitalist market economy versus an unrealistic or ideal theory of it - as this would remove any references to the perfectionist/imperfectionist divide in the theories of contemporary economics.

It is notable that prior to the emergence of marginalist economics (Jevons, Menger and Walras), which is the theoretical basis of modern orthodox neoclassical economics, there is no talk about perfect and imperfect competition in the works of the classical political economists like Smith, Ricardo and, especially, Marx. Rather, as Shaikh says, there's just real competition for them. So, it would have been an anathema to them to think otherwise.

On a personal note, until I had read anything about or by non-classical political economists, I would not had even considered that anyone interested in understanding capitalism would think in terms of the perfection/imperfection divide. In other words, it just wasn't a part of my conceptual toolkit. Of course, as one will gather, it's not something I want to buy into either, even though (I must admit) the possibility of doing so, while under the influence of the Joseph Stiglitzes of the world, was real for a period of time. However, the theoretical work of Anwar Shaikh has been pivotal in ensuring that I don't go down such a false theoretical path.

However, this has not prevented different schools of economists from including the concepts of perfection and imperfection into their theoretical vocabulary, despite where they stand on the subject of understanding capitalism as an economic system. Think of the Joan Robinsons and Joseph Stiglitzes of the economics profession. Their economic works are predicated on such a conceptual divide in order to develop their respective versions of a 'realistic' analysis of a capitalist market economy.

It also should not be overlooked that even within Marxism itself there is a tendency for some Marxist thinkers to go down the conceptual divide path of a perfectionist versus imperfectionist account of a real market economy like capitalism. They do it whenever they wish to point out that the real world of a capitalist market economy is nothing like the ideal theoretical world of a perfectly competitive market economy since it's full of 'market imperfections' - like, for example, when the Paul Barans and the Paul Sweezies of the world talk about 'monopolies'.

Ideal Theory Versus Reality in the Real-World of a Capitalist Market Economy

The following passage is taken from Kate Raworth's book, Doughnut Economics (2017: 122-3), from the chapter on 'mechanical equilibrium' and 'dynamic complexity':

... equilibrium economics... get[s] the results it seeks by imposing severely restrictive assumptions about how market systems behave – assumptions including perfect competition, diminishing returns, full information, and rational actors – so that no errant effects get in the way of the price mechanism’s ability to act as the balancing feedback loop that restores market equilibrium. Think of it in terms of starlings: what restrictions would you have to impose on a large flock of these birds if you wanted to make sure that they all stayed still? You could place each bird in its own narrow little coop and shut them all away in a dark, quiet room: that should encourage them to stay put. But don’t expect the flock to behave like that once you remove these unnatural confines and release them into the air. They will twist and turn, putting on an extraordinary aerial display of a complex system in action. So it is with economic actors trapped in the narrow confines of an equilibrium model: when all the restrictive assumptions are in place, they will indeed behave as required. But remove those assumptions – enter the real world – and all havoc could break loose. It often does, of course...

This passage of Raworth's sums up brilliantly how the ideal Platonist theory of modern orthodox neoclassical economics - the Walrasian general equilibrium theory of a perfectly competitive market economy - completely diverges from the reality of an actual market economy like capitalism. Rather than producing a theoretical picture of a real capitalist market economy as being dynamic and complex in nature, it instead reduces it to a static state. Drawing an analogy with a flock of starlings (birds) illustrates this point quite well - ie, the divergence between economic theory and economic reality.

But the root cause of this divergence between economic theory and economic reality, on the part of modern orthodox neoclassical economics, is to be found in its use of some very restrictive assumptions like 'perfect information' and 'rational actors' (the sorts of 'unrealistic assumptions' which Milton Friedman defends in his methodology essay). These sorts of assumptions are, as is well noted both within the philosophy and methodology of economics and economics itself, the wrong ones to use if the genuine scientific aim is to produce as practical as possible a fairly accurate representation of a real capitalist market economy. They should, therefore, be abandoned if that's the aim.

However, as argued within the Marxist tradition, these sorts of assumptions are designed (whether insincerely or not, or unconsciously or not) to derive the theoretical conclusions that modern orthodox neoclassical economists seek in their effort to either establish their picture of reality and/or to justify the kind of world a real capitalist market economy is with all its class inequalities in income and wealth and economic problems like unemployment and poverty.

At any rate, what this passage of Raworth's highlights then is how out of touch with reality the core theory of modern orthodox neoclassical economics is because of its underlying assumptions. This is reason enough to reject such an economic theory of a real-world market economy like capitalism.

Addendum

Raworth's above framing of the equilibrium models of neoclassical economics aptly captures their static nature. Their equilibrium models are like frozen pieces of a make-believe picture of a market economy devoid of any capitalistic elements, even though it's the capitalist economic system they're overly-abstracting from - ie, their model of a market economy is what they arrive at by leaving out the other essential features (apart from the market) which make up an actual capitalist economic system, viz, concentrated private property in the hands of the capitalist class (the class which monopolises the means of wealth creation) and the class of propertyless wage-workers (the class which owns nothing but their labour-power). 

Michael Hudson's Insight

In his book, Junk Economics (2017: 292), Michael Hudson says that those 'conservatives' who narrowly define economics in terms of 'the market' and who also claim that there is no alternative to neoliberal capitalism (Margaret Thatcher's TINA) tend to 'take the existing social institutions [of capitalism] for granted' and hence 'not as objects of reform' - unlike 'the market' if it's not working as expected.

This is a fairly insightful comment of Hudson's. It tells us that while the official rationale for excluding the study of the social institutions of capitalism from 'economics proper' is because it's (apparently) irrelevant, that's not the real or only reason. It's because these 'conservatives' (a.k.a. neoliberal modern orthodox neoclassical economists) don't want the underlying social institutions of capitalism to be subjected to any theoretical analysis and consequently be the 'objects of reform'. In short, they don't want it to be a topic of economic and/or political discussion.

So, to avoid this, they simply push aside any critical examination of the underlying social institutions of capitalism by saying they 'take them for granted' - end of story! As a consequence, we're meant to take them at their word. But what exactly is 'it' that we're taking them at their word 'about'? Is it, for example, Marx's account of the underlying social structure of capitalism that they take for granted, which consists of a social power relation of production between the capitalist class and the class of wage-workers? Or is it a social relation between free and equal individuals in the market place? No one ever knows, as they never actually say what it is, specifically.

Perhaps, then, the best way to construe the mantra of 'we take the social institutions of capitalism for granted' is as a cover for avoiding any critical discussion about the topic itself.

If this is right, then we're in a better position to understand why they don't want 'economics proper' to be about anything else other than 'the market'. And, of course, it has the added advantage of suppressing any talk about the class structure of capitalism per se and what to possibly do about it, in general.

I should add here, that such 'conservatives' are engaging in (despite any protestations on their part) an ideological game to avoid any critical scrutiny of their type of 'economics proper'. And since this is the case, they are,  furthermore, not doing science; it's just bad faith.

Addendum

At length, Hudson (2017: 292) writes: 'Insisting that There Is No Alternative (TINA...), conservatives take the existing social institutions for granted, not as objects of reform.' And, in order to 'shift attention away from how markets favor... vested interests... , they exclude political power relationships as being... external to their economic models...'. 

Addendum to Previous Blog Post

As they say, you can't fit a square peg or, better still, an irregular square peg, into a round hole. So why, in economics, would you try and fit a real-world thing like a real-world capitalist market economy into your ideal round hole of a perfectly competitive market economy, if it doesn't fit? Better, instead, to construct a theoretical hole which actually fits the shape of the real-world peg itself. At least, then, your economic theory would match up with the real world of capitalism.

Seems a perfectly sensible and rational thing to do, as the history of science shows - and, as John Locke argues in his Essay.

Incidentally, the question about whether science is and/or should be a rational pursuit is worth exploring. A useful resource for thinking about these sorts of questions is John Locke's philosophy, as he has much to say on the subject, especially with respect to the work of 'wary chymists' - such as the Robert Boyles of his time.

The Natural World of Species: a Critical Response to the Perfectionist Approach of Neoclassical Economics

The following comments from Geoff Davies's book, Sack the Economists: and Disband Their Departments (2013: 218), which are made in the context of discussing the Platonic theories of neoclassical economics, are worth bearing in mind when thinking critically about the perfectionist approach of modern orthodox neoclassical economics as well as the imperfectionist approach of some modern heterodox economics:

Plato thought in terms of the ideal, the perfect... there is no such thing as perfection in nature, indeed the concept makes no sense. Every living organism... is scrambling to maintain a place amidst the continually shuffling and changing order of creatures and conditions... Plato thought there was a conceptual ideal horse, and that all real horses are imperfect approximations... the horse was excellent at what it was, good enough to survive and persist on the Asian steppes...

Here we have the neo-Darwinian picture of the world of nature and the origins of species. It's a realistic picture. It depicts the natural world as it is and tries to scientifically understand it, not by recourse to some Platonic idealist conception of perfection, but by how things really are. If, for example, there's a blind spot in the back of the retina of the human eye, as Richard Dawkins cites in his book, The Blind Watchmaker, and even though (say) from the perspective of a Platonist this is held to be an 'imperfection', it doesn't actually matter from a neo-Darwinian perspective (ie, the scientific perspective which holds that the evolution of species is driven by the two causal mechanisms of natural selection and genetic mutations) as long as it doesn't hinder the ongoing survival of the human species. What matters from the neo-Darwinian perspective is not whether a species is perfect and/or imperfect, but whether it has survival value. A species can look like a thing of ideal beauty or not, for example, but if it lacks the ability to survive within its environment then that is all that matters. Therefore, the task of such a biological science (like any science worth its salt) is to get its theoretical picture of things to match up with the real world itself at both the descriptive and explanatory levels. This is what modern orthodox neoclassical economics (plus some schools of heterodox economics) fails to do by coming from a perfectionist/imperfectionist methodological perspective. That is, it fails to start with the real-world of a market economy like capitalism in order to accurately represent it in terms of a theory of it. In short, it fails to start with the real in preference for the ideal.

On this note, both modern orthodox neoclassical economics and some schools of heterodox economics could learn a lot from studying the philosophy of John Locke who, in his account of the names of natural substances in his Essay on Human Understanding (ie, the naming and classification of the genus and species of both inorganic and organic things via their real and nominal essences), shows that one of the aims of science (or what he called 'natural philosophy') should be to get our conceptual picture of things in the world to rigorously match up with the way nature is actually 'carved at the joints'. Thus, they could learn a lot about how science endeavours to be a realist research project rather than an idealist one.

Addendum to the Underlying Theory of Modern Orthodox Neoclassical Economics Series of Blog Posts

A few pointers about the series of blog posts on the underlying theory of modern orthodox neoclassical economics. Firstly, its aim has been to show how the marginalists developed a pure exchange theory of a market economy devoid of social classes in opposition to Marx's political economy approach. As a result, one comes to see how the political economy of the classical economists, like Smith, Ricardo and, especially, Marx, transforms into pure economics: hence, a shift in focus from how commodities are produced under a specific set of social relations of production to how they are traded in the market place. Secondly, it's a history of ideas piece of work, which is what philosophy does, sometimes. This means, then, that it's more concerned with sketching out the theoretical development of the underlying theory of modern orthodox neoclassical economics, rather than engaging in a direct critique of it (at this stage, anyway). And thirdly, it should be apparent that this underlying theory of modern orthodox neoclassical economics is fairly removed from the reality of an actual market economy like capitalism, notwithstanding the methodological reflections of Walras. That is, a real-world market economy like capitalism simply doesn't work as envisaged in this theory.

The Underlying Theory of Modern Orthodox Neoclassical Economics: Observation about Walras - Part 6

It is notable that Walras himself did not take his theory to be an accurate representation of a real-world market economy like capitalism – although he did think, as pointed out by Vivian Walsh and Harvey Gram, that ‘if “land-services” were not privately owned, and if monopoly were eliminated’ in ‘real life’, then the ‘dynamic and uncertain’ nature of ‘real life’ would come as practically as possible to approximating the ‘timeless, perfect-knowledge, governed, competitive equilibrium of his’ theoretical ‘model’ of a market economy (1980:. 154). Thus, in this light, as pointed out by Anwar Shaikh, Walras viewed his own model of a general equilibrium market economy as providing ‘a means’ by which to understand what ‘“forces’” hinders a market economy like capitalism from reaching a general equilibrium state in which its ‘given resources’ can be most efficiently allocated in order to meet consumers’ demand (2016: 342-3).

The Underlying Theory of Modern Orthodox Neoclassical Economics: Walras - Part 5

Now, as already indicated, Walras develops his theory of general equilibrium on the basis of these two parts of the ‘marginalist’ or ‘neoclassical’ picture of the market economy of capitalism in Jevons’s ‘mathematical’ theory of exchange and Menger’s ‘non-mathematical’ theory of production. However, as pointed out by Vivian Walsh and Harvey Gram, Walras does this for two reasons. The first is because they only sketched out the basic features of the two ‘[i]ndividual components’ (Walsh and Gram, 1980: 142) of the ‘marginalist’ or ‘neoclassical’ picture of the market economy of capitalism. The second is because they failed to present their theories within a more ‘complete system of general equilibrium’ (Walsh and Gram, 1980: 142), viz., one which shows the interrelationships between the consumers’ market and the resources’ market and how they might operate together in a more complete, general economic system. Despite these criticisms of Walras’s, he nevertheless, as I shall now show, develops his theory of general equilibrium on the basis of a pure exchange model (á la Jevons) without any use of social class categories (á la Jevons and, especially, Menger) in order to construct a theory about the allocation of ‘given resources’ which meet ‘consumers’ demand’.

I begin with some preliminary comments on Walras’s theory of general equilibrium as presented in his Elements of Pure Economics, or Theory of Social Wealth.

Central to Walras’s theory of general equilibrium is, as pointed out by Vivian Walsh and Harvey Gram, his concept of ‘scarcity (rareté)’ (1980: 143). Scarcity, according to Walras, refers to the ‘intrinsic value’ of something (like ‘land and its services’ for instance [Walsh & Gram, 1980: 143]): meaning, it has such a ‘value’ as the result of it possessing a particular ‘utility’ which is also of a ‘limited supply’ (Walsh & Gram, 1980: 143). In other words, if something of use which is desired by others is scarce because of its limited stock (meaning, in other words, that the scarcer something is, the more valuable, or desirable, or wanted it is), then it is deemed to have a ‘scarcity value’. So, if item X is scare because of its limited supply or stock, and it is something that most people want in order to produce item Y, then it will elicit or fetch a greater demand and therefore ‘scarcity value’ for it.

Now, as pointed out by Vivian Walsh and Harvey Gram (via the quotes of Arrow and Hahn in their text), Walras conceives the ‘“economic system”’ that he is investigating as being comprised of ‘“households and firms”’ (1980: 149). As such, he sees ‘“each household”’ as ‘“owning a set of resources”’, viz., ‘“commodities”’ which are ‘“useful in both production and consumption”’, especially, ‘“different kinds of labour”’ (Walsh & Gram, 1980: 149). Accordingly, for Walras, it is his position that for ‘“any given set of prices”’, any ‘“household”’ will derive a specific ‘“income from the sale of its resources”’, and, as a consequence of having this particular ‘“income”’, it will thus be able to ‘“choose among alternative bundles of consumer goods whose cost”’ in terms of their ‘“given prices”’ will not ‘“exceed the household’s income”’ (Walsh & Gram, 1980: 149). Thus, for Walras, this particular economic system, as outlined here by the quotes from Arrow and Hahn, describes a ‘general equilibrium system’ or economic state affairs in which the ‘given resources’ of the economic system is allocated in order to meet the demands of consumers, which are the households of the economic system (Walsh & Gram, 1980: 149).

As Vivian Walsh and Harvey Gram point out, Walras, like Jevons, begins with a model of pure exchange – meaning, there is no treatment of production. Walras does this in two stages: first, in terms of a simple model in which there are only two commodities or goods being exchanged amongst many traders; and secondly, in terms of an extended model in which there are many commodities or goods being exchanged amongst many traders. Once Walras has finished presenting his model of pure exchange in both these ways (viz., in terms of a simple and extended model of pure exchange), in which it is posited that all ‘trading parties’ are, as in the case of Jevons, endowed with ‘given stocks’ of exchangeable ‘goods’ (Walsh & Gram, 1980: 149), he then presents his ‘expanded model’ of production. (How these ‘trading parties’ come to have these ‘given stocks’ of ‘goods’ is not mentioned or discussed by Walras; they are just a ‘given’ in the model, something which we do not need to worry about.) In doing so, Walras’s aim is to show how it is that the commodities or ‘these goods are themselves produced by the exchange of the services of the given resources in return for claims to income’ (Walsh & Gram, 1980: 149). Thus, the model of production as developed by Walras is presented by him as a model of indirect exchange between the given resources or the factors of production and the commodities or goods in the consumers’ market. (This is, it is worth noting, the Mengerian aspect of Walras’s general equilibrium theory or model of a market economy, like capitalism. Furthermore, in presenting his model of production as an indirect form of exchange, Walras, like Menger, but unlike Marx, is not interested in presenting a model of production which is grounded on how products for the market are produced by wage-labour under capitalist relations or conditions of productions. Instead, as will become apparent, Walras’s focus is, like Menger’s, on the ‘inputs’ and ‘outputs’ of production.)

I shall now expand on all of this.

Walras starts with a simple model of pure exchange in which there are only two commodities or goods being exchanged amongst many traders. In doing so, Walras assumes, as pointed out by Vivian Walsh and Harvey Gram, that ‘the total stock of goods in the hands of the participants in exchange are given’ (1980: 150). In other words, how they come to have these commodities or goods in the first place or how there comes to be a total stock of these goods in the first place is not a question which needs exploration. Such things are meant to be taken for granted, i.e., as ‘givens’. So, on the basis of this assumption, Walras considers what happens within a model of pure exchange in which there are only two commodities being exchanged amongst the various traders or participants within the exchange market for goods or commodities. In so doing, Walras introduces the following terms into his simple or basic model of pure exchange. On the one hand, he introduces ‘“the term effective offer”’ which applies or refers ‘“to any offer made… of a definite amount of a commodity at a definite price”’; while, on the other, he introduces ‘“the term effective demand””, which in turn applies to or refers to ‘“any such demand for a definite amount of a commodity at a definite price”’ (Walsh & Gram, 1980: 150). These two terms, the ‘effective offer’ and the ‘effective demand’, are Walras’s terms for what is ordinarily called supply and demand in modern economics. It is subsequently on the basis of these two opposite terms that Walras formulates:

“the law of effective offer [supply] and effective demand [demand] or the law of the establishment [or emergence] of equilibrium prices in the case of the exchange of two commodities [the law of equilibrium prices]” (Walsh & Gram, 1980, p. 150).

In short, what is commonly called in modern economics the basic economic law of supply and demand or the basic law of equilibrium.

This law is, accordingly, stated by Walras as follows. First, Walras states that:

“… given two commodities, for the market to be in equilibrium with respect to these commodities, or for the price of either commodity to be stationary in terms of the other, it is necessary and sufficient that the effective demand be equal to the effective offer of each commodity.” (Walsh & Gram, 1980: 150)

Then, Walras states that:

“Where this equality does not obtain, in order to reach equilibrium prices, the commodity having an effective demand (demand] greater than its effective offer [supply] must rise in price, and the commodity having an effective offer [supply] greater than its effective demand [demand] must fall in price.” (Walsh & Gram, 1980: 150)

But how does all this happen? That is, how do the ‘individual economic agents’ arrive at such an ‘equilibrium price’ or equilibrium state of affairs? Well, according to Walras, it happens, as Vivian Walsh and Harvey Gram point out, by:

“… each holder attain[ing] maximum satisfaction of wants… when the ratio of the intensities of that last wants satisfied [by each of these goods], or the ratio of their raretés [scarcity values], is equal to the price.” (Walsh & Gram, 1980: 150)

Consequently, for Walras:

“Until this equality has been reached, a party to the exchange will find it to his advantage to sell the commodity the rareté [scarcity value] of which is smaller than its price multiplied by the rareté [scarcity value] of the other commodity and to buy the other commodity the rareté [scarcity value] of which is greater than its price multiplied by the first commodity.” (Walsh & Gram, 1980: 150)

Thus, this all happens on the basis of ‘maximum satisfaction’ on the part of both traders. Neither will sell or buy a commodity unless it maximises the level of satisfaction they will derive from either selling or buying it at a certain ‘equilibrium price’. Of course, what they are prepare to trade is dependent on the scarcity value (rareté) of the commodity or good in question.

In this, Walras is basically following Jevons, albeit in a more refine and explicit way in that he talks in terms of the laws of supply and demand and the law of equilibrium price. The suggestion here is that in such a market, even for two commodities, there will be nothing traded until a certain equilibrium price is reached, which means in turn a situation in which the market ‘clears’.

Significantly, as Vivian Walsh and Harvey Gram point out, this all happens on the assumption of ‘perfect competition among traders’ (1980: 150), meaning, none of them can affect or influence the price of the commodity supplied (offered) and demanded in the market. That is, none of them (these traders), as pointed out by Vivian Walsh and Harvey Gram, can do this either by their own individual actions or by forming ‘coalitions’ (1980: 150).

So, for Walras, what is shown by his initial basic model of a pure exchange market economy in which there are only two commodities or goods being exchanged amongst many traders is that this is how a market ‘clears’ in terms of an equilibrium price via the laws of supply and demand – which is in turn predicated on individual agents (traders) seeking to maximise their satisfaction (their marginal utility as Jevons would put it).

Now, it is on the basis of this initial, basic model of a pure market exchange of two goods or commodities amongst many traders that Walras presents his extended model of a pure market exchange economy. In this extended model, Walras considers the case in which there are ‘many goods’ to be exchanged amongst many traders. In doing so, Walras once again bases his model on the principle of maximum satisfaction (scarcity [rareté]). As a consequence, he states that under ‘the condition of “maximum satisfaction”’ (Walsh & Gram, 1980: 150), it will be found that this condition will:

“… always consist in the attainment of equality between the ratio of the raretés [scarcity values] of any two commodities and the price of one in terms of the other, for otherwise it would be advantageous to make further exchanges of these commodities for each other”. (Walsh & Gram, 1980: 150)

Hence, as Vivian Walsh and Harvey Gram perceptively point out, ‘the demand, and the offer, of any commodity is a function, not simply of the price of that commodity, but of the prices of all commodities’ (1980: 150). In other words, the prices of all commodities or goods determines how much one commodity or good is exchanged at a certain equilibrium price in terms of the laws of supply and demand.

So, for Walras, not only will there be an equilibrium price reached amongst many traders over the exchange of two commodities, but also amongst many traders over many commodities being exchanged within the market. Thus, for Walras, whether it is two commodities or goods or many commodities or goods, an equilibrium price will be attained in the sense that the supply or offer of a commodity or good and the demand for it balance each other. Whenever this happens, an equilibrium price will be attained and the market for that commodity or good or for many commodities or goods will ‘clear’ – clear at that equilibrium price which reflects the ‘maximum satisfaction’ of the traders involved in the exchange process, i.e., the exchange of commodities or goods in the market amongst many traders who are endowed with them (i.e., a bundle of commodities or goods).

Now, it is on the basis of these two models of a pure market exchange economy (the simple and extended models of pure exchange in which there is a ‘pure exchange of given stocks of many commodities among many traders under competition’ [Walsh & Gram, 1980: 151]) that Walras consequently develops his expanded model of a market exchange economy which takes into account the production side of the economy.

First, as Vivian Walsh and Harvey Gram point out, Walras draws a distinction between what he calls ‘capital goods’ and ‘income goods’ (1980: 151-2). Accordingly, for Walras, a ‘capital good’ is anything which is deemed to be a ‘durable’ (Walsh & Gram, 1980: 151); meaning, it is something which can be re-used over an extended period of time within the production of commodities or goods, such as a piece of land or a machine. An ‘income good’, however, is anything which is a ‘non-durable’ (Walsh & Gram, 1980: 152); meaning, anything which is used up immediately in the production of commodities or goods, like raw materials such as seeds used to sow a field or fuel used to drive machines.

Now, for Walras, it is the ‘capital goods’ (the ‘durables’ of production), and not the ‘income goods’ (the ‘non-durables’ of production), which are subsequently held to be the things which provide the ‘services’ (Walsh & Gram, 1980: 152) utilised in the production of commodities or goods, which in turn are to be sold in the consumers’ market (the market in which ‘goods and services’ are exchanged or traded for a certain ‘equilibrium price’ as determined by the laws of supply and demand and in accordance with the economic principle of ‘scarcity [rareté]’). So, for Walras, ‘capital goods’ are conceived as the ‘inputs’ of production which in turn produce the ‘outputs’ of production, viz., certain ‘quantities’ of commodities or goods (Walsh & Gram, 1980: 152) – which in turn can become, as Walras tells us, the ‘income goods’ used alongside of the ‘capital goods’ of production (Walsh & Gram, 1980: 152).

It is thus in terms of this model of the inputs (the ‘services of the capital goods’) and the outputs (the ‘quantities of income goods’) of production (Walsh & Gram, 1980: 152) that Walras extends the law of equilibrium. First, Walras, as Vivian Walsh and Harvey Gram point out, distinguishes between two types of market: the ‘services market’ and the ‘products market’ (1980: 153). The services market is the place where, as Walras tells us:

“land-owners, workers and capitalists appear as sellers, and entrepreneurs as buyers of the various productive services, i.e., land-services, labour and capital-services”. (Walsh & Gram, 1980: 152)

While, as Walras also tells us, the products market is the place where:

“the entrepreneurs appear as sellers, and the land-owners, labourers and capitalists as buyers of products. These products are exchanged, like services, with the aid of a numéraire and in accordance with the mechanism of free competition”. (Walsh & Gram, 1980: 152)

It is Walras’s assertion that there will be an equilibrium between these two aspects of production as long as the ‘selling prices’ of the outputs of production (the various quantities of income goods, i.e., commodities or goods) ‘equal’ the ‘costs’ of the inputs of production (the various quantities of capital goods, i.e., the ‘productive services’ of, specifically, ‘land-service, labour and capital-service’) that have been used by the ‘entrepreneurs’ in order to produce products for the consumers’ market.

So, for Walras, like the pure exchange models of the simple and extended varieties, his model of production as just articulated here is also an equilibrium model. It too is an economic state of affairs in which there is a market balance between the amount of capital goods used to produce commodities for the consumers’ market and the amount of commodities produced on the basis of these capital goods. And all this is, according to Walras, reflected in the prices of commodities and the costs of the capital goods. Consequently, for Walras, in such markets of ‘indirect exchange’ between the sellers of productive services and the buyers of commodities (i.e., between the ‘households’ themselves) there will also be an equilibrium state of affairs.

Yet, none of these different market models of Walras’s can on their own, as he points out, establish a ‘general equilibrium’ state of affairs. For this to happen, according to Walras, then they must all be in equilibrium at once.

As pointed out by Vivian Walsh and Harvey Gram, Walras describes and/or summarises a market system as being in a state of ‘general equilibrium’ whenever the following market properties hold. On the assumption that ‘“equilibrium in production… implies equilibrium in exchange”’, a ‘“general equilibrium”’ state can be ‘“defined”’ as one in which (Walsh & Gram, 1980: 153), firstly:

“it is a state in which the effective demand and offer of productive services are equal and there is a stationary current price in the market for these services.” (Walsh & Gram, 1980: 153)

Hence, there is an equilibrium state in the resources or the factors of production market (productive services). Secondly:

“it is a state in which the effective demand and supply of products are also equal and there is a stationary current price in the products market.” (Walsh & Gram, 1980: 153)

Thus, there is an equilibrium state in the products market (consumer’s goods and service). And thirdly:

“it is a state in which the selling prices of products equal the costs of the productive service that enter into them.” (Walsh & Gram, 1980: 153)

In short, there is an equilibrium state between the costs of production and the selling prices of products, i.e., between the ‘inputs’ and the ‘outputs’ of production.

Accordingly, for Walras:

“The first two conditions relate to equilibrium in exchange; the third to equilibrium in production.” (Walsh & Gram, 1980: 153)

Thus, for Walras, all markets in terms of consumers’ goods and services, productive services and the ‘inputs’ and ‘outputs’ of production are simultaneously in balance with each other. As a consequence, all markets simultaneously ‘clear’ at a general equilibrium price in terms of the laws of supply and demand and in accordance with the economic principle of ‘scarcity (rareté)’.

It is subsequently within this general equilibrium framework or model of a market economy (like capitalism) that Walras purports to show how the ‘given resources’ of society are allocated in order to meet the demands of consumers. They are allocated in the specific quantities that they are and for the specific costs that they fetch as a result of the specific prices that commodities attain in the consumers’ market. Accordingly, for Walras, this proves to be the most efficient and most optimal way in which a market society like capitalism can produce what consumers want at a ‘general equilibrium price’ in which all markets simultaneously ‘clear’. This means, therefore, that the supply and demand of commodities (the ‘goods and services’ of the consumers’ market) are never below or above the ‘general equilibrium price’ (whatever that is). Equally, it means that the supply and demand of the productive services of a market society (the services of land, labour and capital) are never below or above the ‘general equilibrium price’ either (whatever that is).

Now, as Vivian Walsh and Harvey Gram point out, this purportedly efficient allocation of the ‘given resources’ of society, which takes place as a result of meeting consumers’ demand, is predicated on the existence of the following core feature of such a ‘system of general equilibrium’ (1980: 142): ‘the households’ (1980: 155; my italics). As Vivian Walsh and Harvey Gram say: it is through the pursuit of ‘maximizing’ their individual ‘satisfaction’ in terms of wanting certain commodities in the consumers’ market that they consequently ‘determine what shall be the composition of output’ and in so doing ‘influence the relative prices’ (1980: 155) of not just what is produced as output, but also the costs of the inputs and, in turn, the respective ‘incomes’ that are paid to the households themselves when offering up their particular services in the services market (i.e., the resources or factors of production market). As a consequence, ‘social classes play no analytical role’ in Walras’s general equilibrium model, since ‘the main actors are individual resource-owning households who derive incomes from the sale of resource services and spend these incomes on commodities’ (Walsh & Gram, 1980: 155). Thus, within such a general equilibrium system of a market economy (like capitalism), the ‘[p]roducers [i.e., the firms of the system] thus act simply as agents for resource-owning households, transforming given factor services into consumption goods’ (Walsh & Gram, 1980:. 155).

In sum, then, this is how Walras brings together a ‘complete system of general equilibrium’ (Walsh & Gram, 1980: 142) in which the problem has been to establish the means by which the ‘given resources’ of a market-based society (like capitalism) can be most efficiently allocated in order to meet the demands of consumers. In doing so, Walras does it by abandoning any analytical use of social classes. As a result, he has constructed what can be called, as Vivian Walsh and Harvey Gram do, a ‘pure economic theory in terms of a general equilibrium model’ (1980: 138).

The Underlying Theory of Modern Orthodox Neoclassical Economics: Mid-Conclusion - Part 4

In sum, then, what we have here in these two theories of Jevons’s and Menger’s is this. First, as pointed out by Vivian Walsh and Harvey Gram, in Jevons’s ‘mathematical’ theory of exchange we have the ‘maximizing individual’ being placed ‘at the center of the picture’ which in turn allows him to construct ‘a mathematical account of the allocation of given stocks of commodities among trading individuals’ (1980: 137-8), which constitutes the first part of the ‘marginalist’ or ‘neoclassical’ picture of a market economy like capitalism. And second, as also pointed out by Vivian Walsh and Harvey Gram, in Menger’s ‘non-mathematical’ theory of production we have the other, complimentary part of the ‘marginalist’ or ‘neoclassical’ picture of a market economy like capitalism, viz., a ‘[non-mathematical] theory of production by means of given resources’ (1980: 138). And furthermore, these two theories of Jevons’s and Menger’s are developed without any reference to social class categories or distinctions.

The Underlying Theory of Modern Orthodox Neoclassical Economics: Menger - Part 3

I now turn to Menger’s ‘non-mathematical’ theory of production, which provides the other founding half of the ‘marginalist’ or ‘neoclassical’ picture of a market economy like capitalism. This theory of Menger’s is, as Vivian Walsh and Harvey Gram point out, developed after he has presented his own theory of exchange which, like Jevons’s, is based on the ‘maximising individual’ (1980: 134).

Menger constructs his theory of production as follows. First, as Vivian Walsh and Harvey Gram point out, Menger draws a distinction between what he calls the ‘factors of production’, which are defined as ‘goods of higher order’, and what he calls ‘commodities’, which are defined as ‘goods of lower order’ (1980: 136). Accordingly, for Menger, these various factors of production (‘goods of higher order’) are exchanged or traded in the resources’ market between their owners and those who will use them in order to produce the various commodities (‘goods of lower order’) for the consumers’ market. Then, as Vivian Walsh and Harvey Gram further point out, Menger goes on to argue that the ‘value’ of the various factors of production (‘goods of higher order’) is derived from the ‘value’ of the various commodities (‘goods of lower order’) which have been produced as a result of using these various factors of production (‘goods of higher order’) (1980: 136). Thus, for Menger, these various factors of production (‘goods of higher order’) are exchanged or traded in the resources’ market between their owners (household consumers) and purchasers (producing firms) on the basis of their determined market ‘value’, which is in turn predicated on the determined market ‘value’ of the commodities (‘goods of lower order’) which they have produced for the consumers’ market.

It is worth noting that what Menger is doing here is looking at, to put it in modern economics terms, the ‘inputs’ and ‘outputs’ of production, where the ‘inputs’ of production are its ‘factors of production’ while its ‘outputs’ are commodities. This approach to and/or view of production is very different to Marx’s. In Marx’s analysis of production, the focus is on how capitalists combine wage-workers with the means of production in order to turn raw materials into products which can then be sold on the market in the hope of making a profit for capitalists. In doing so, Marx’s aim is to reveal that the source of capitalists’ profits is the ‘unpaid surplus labour’ of wage-workers. Such an approach is for Marx grounded in an analysis of the underlying social structure of capitalism.

Now, as Vivian Walsh and Harvey Gram point out, this particular theory of Menger’s about the production side of a market economy (like capitalism) forms the basis for not only a ‘theory’ about the ‘“distribution” among the “factors” of the total income resulting from production’, but also a ‘theory’ about ‘the allocation of the given factors’ used in production itself (1980: 136). However, as Vivian Walsh and Harvey Gram further point out, Menger’s theory of production does this in terms of discarding altogether any reference to social classes and therefore social class distinctions. Menger’s theory of production does this by substituting the ‘classical analysis of distribution in terms of the rent of land, the profits of stock, and the subsistence wage’ (Walsh and Gram, 1980: 136), which in turn correspond to the socio-economic class categories of landlord, capitalist and wage labourer, with ‘a single concept of higher order’ (Walsh and Gram, 1980: 136), viz., factors of production or the ‘given resources’ of the market. The upshot of this is that we have in Menger’s theory of production a ‘pure economic theory’ (Walsh and Gram, 1980: 138) which seeks to describe in non-class terms how the various factors of production or ‘given resources’ of the market not only derive their own ‘values’ on the basis of the market-determined ‘values’ of commodities but also are ultimately allocated by the market-determined ‘values’ of commodities themselves.

The Underlying Theory of Modern Orthodox Neoclassical Economics: Jevons - Part 2

I begin with Jevons’s ‘mathematical’ theory of exchange, as this is, as Vivian Walsh and Harvey Gram point out, the basis of the ‘marginalist’ or ‘neoclassical’ picture of a market economy like capitalism (1980: 168-72). This theory of Jevons’s develops a model of a ‘pure exchange’ economy in which ‘production is not treated’ (Walsh and Gram, 1980: 128), as the focus is simply on establishing how goods are exchanged in the market place. (As Vivian Walsh and Harvey Gram point out, this was for Jevons the more fundamental and far easier question to address first before tackling the more complex and difficult question about the economic processes of ‘production’ [1980 129].)

The starting point of Jevons’s theory of exchange is the ‘maximizing activity of the individual’ (Walsh and Gram, 1980: 128) within the consumers’ market for exchangeable household goods (‘commodities’). Accordingly, Jevons constructs on the basis of this type of individual or economic agent a ‘pure exchange’ model in which there are at least two individuals who are ‘endowed with given stocks of commodities’ (Walsh and Gram, 1980: 129) and who seek to offer for trade any part of them through the exchange process of the market and in doing so seek to maximise a certain ‘objective’ in terms of what sorts of commodities they prefer over others: in short, they seek to maximise, as pointed out by Vivian Walsh and Harvey Gram, their ‘utility’ (1980: 130) or, as Anwar Shaikh says, making ‘optimal choices’ (2016: 344). Now, what Jevons wants to show here is that on ‘the assumption’ that such utility-maximising individuals (to put it in modern neoclassical economics terms) are able ‘to make marginal changes’ (Walsh and Gram, 1980: 130) in terms of the commodities they possess, they will consequently exchange them with each other until they have achieved their specific objective in maximising what sorts of commodities they prefer over others (hence maximising their utility). Consequently, for Jevons, this is how within a pure exchange model of a market economy, various stocks of commodities are allocated in order to maximise the objectives of these types of utility-maximising individuals.

As pointed out by Vivian Walsh and Harvey Gram, this model of a pure exchange economy as formulated by Jevons is devoid of any clear reference to social classes and therefore social class distinctions. The economic agents here are simply utility-maximising individuals or agents. Whether they are landlords, wage labourers or capitalists is not apparent and nor does it seem to matter for the purpose of constructing such a ‘theory of pure exchange’ (Walsh and Gram, 1980: 128). What does matter, at least from Jevons’s position, is describing the allocative ‘mechanism’ (Walsh and Gram, 1980, p. 130) by which such economic agents achieve their objectives in terms of maximising their utility – viz., the marginal adjustments to their stock of commodities. The absence of social classes and hence social class distinctions is, as we shall shortly see in the case of Menger’s ‘non-mathematical’ theory of production, even more pronounce.

The Underlying Theory of Modern Orthodox Neoclassical Economics: Introduction - Part 1

NB. I here insert some draft material from my research on a critical comparison between Marx and modern orthodox neoclassical economics. This first piece of six acts as an introduction to the underlying theory of modern orthodox neoclassical economics: Walras's general equilibrium theory. As we shall see, in contrast to Marx who makes the social class structure of capitalism his theoretical focus, modern orthodox neoclassical economics in terms of its 'marginalist' origins aims to rid itself of any notion of social classes altogether so it can arrive at a 'pure theory' of the economy.

The theoretical basis of modern orthodox neoclassical economics is the general equilibrium theory of Léon Walras – as presented by him in the Elements of Pure Economics, or Theory of Social Wealth. This theory of Walras’s is essentially based on a ‘pure exchange’ model which does away with any ‘social class’ distinctions in order to construct a theory about the allocation of ‘given resources’ which meet ‘consumers’ demand’. Thus this theory, as I shall show, abstracts completely from the underlying social structure of a capitalist market economy in order to construct a ‘pure economic theory’ of it.

This theory of Walras’s is, as pointed out by Vivian Walsh and Harvey Gram in Classical and Neoclassical Theories of General Equilibrium: Historical Origins and Mathematical Structure (1980), concerned with the following central problem of ‘marginalist’ economics: how does the economic system of capitalism allocate within the general market ‘a set of given resources’ (Walsh and Gram, 1980: 123) in terms of land, labour and capital goods so as to meet ‘consumers’ demand’ for various goods and services? This particular problem about ‘resource allocation’ is thus concerned with, as pointed out by Vivian Walsh and Harvey Gram, ‘the phenomena of the market’ (1980: 10). As such, it differs from another type of allocation problem, which, as pointed out by Vivian Walsh and Harvey Gram, is found in the work of the ‘classical economists’ (1980: 9), viz., the physiocrats, Adam Smith, David Ricardo and Karl Marx. Here, the particular problem is about how the ‘social surplus’ of capitalist production is allocated between ‘capital accumulation’ and ‘luxury consumption’ (Walsh and Gram, 1980: 10), i.e., between using it for the purpose of accumulating more capital so there can be further economic growth and using it for the purpose of personal consumption on the part of capitalists. Consequently, this particular type of allocation problem focuses on what can be called the phenomena of capitalist production. So, as can be seen here, the general equilibrium theory of Walras is very much concerned with an allocation problem which is market-focused rather than production-based.

As pointed out by Vivian Walsh and Harvey Gram, this theory of Walras’s is developed by him on the basis of the two halves which make up the ‘marginalist’ or ‘neoclassical’ picture of the market economy of capitalism: William Stanley Jevons’s ‘mathematical’ theory of exchange (as presented by him in The Theory of Political Economy) and Carl Menger’s ‘non-mathematical’ theory of production (as presented by him in the Principles of Economics). Since this is so, it is worthwhile sketching out the basics of their respective theories.

Marx's Theoretical Foundations in 'Capital'

NB. I here insert some draft material from my research on a critical comparison between Marx and modern orthodox neoclassical economics.

 

Marx bases his account of capitalism on the underlying social structure of capitalism. The make-up of this social structure is a particular social power relation of production between capitalists and wage labourers. But why does Marx do this?

In any economic system, as pointed out by Schweickart (2^nd ed., 2011), human beings will interact with the nonhuman aspects of nature in order to produce the various things they desire or want (2011: 24). Specifically, this involves human labour utilising the nonhuman aspects of the means of production in order to make products for their own immediate consumption (Schweickart 2011: 24). However, for this to happen, then there must be in place a specific type of economic structure, which means a set of customs and laws which govern the actual relationships of these three basic elements of any economic system – its (1) human labour, (2) means of production and (3) products aspects (Schweickart 2011: 24). So, for Schweickart, the governing aspect of any economic system is its particular underlying economic structure. The way any economic system operates in terms of how its human labour component utilises its nonhuman means of production aspect in order to make the various products desired by the human beings of a given society is, therefore, dependent upon its particular economic structure.

So, in a capitalist society, the way in which the relationships of its three basic elements of human labour, means of production and products will be governed, is reflected in the following three defining institutional features or structures which, as Schweickart points out, it possesses (2011: 24-6). Firstly:

The bulk of the means of production are privately owned, either directly or by corporations that are themselves owned by private individuals. (Schweickart 2011:24)

In other words, it possesses the institutional feature or structure of concentrated private property. Secondly:

Most products are exchanged in a “market.” That is to say, goods and services are bought and sold at prices determined by competition and not by some governmental pricing authority. Individual enterprises compete with one another in providing goods and services to customers, each enterprise trying to make a profit. (Schweickart 2011: 24)

In short, it contains the institutional feature or structure of markets. Finally:

Most of the people who work for pay in this society work for other people who own the means of production. Most working people are “wage labourers.” (Schweickart 2011: 24)

A key institutional feature or structure of capitalism is thus wage labour.

As can be seen here from Schweickart’s characterisation of the three basic institutional features or structures of a capitalist society in terms of (1) concentrated private property, (2) markets and (3) wage labour, its economic structure is basically one in which the human labour of such a society, which is provided by wage labourers (the wage labour component), is utilised by those who own the bulk of the means of production of such a society, the owners of individual enterprises (the concentrated private property component), to make products which can then be exchanged in the market for a price and so make a profit, if possible (the market component). Accordingly, this economic structure is the basis of the economic system of a capitalist society and as such it has its own specific laws and customs which govern the relationships amongst its three basic elements in human labour, means of production and products.

While the economic structure of a capitalist economic system is so constituted, in terms of concentrated private property, markets and wage labour, these three institutional aspects of the economic structure do not hold equal weight for Marx. Of them, it is the institutions of concentrated private property and wage labour that have priority for Marx. This is because it is Marx’s view that although the market, as one of the institutions of a capitalist society, is an essential component of its economic structure, a capitalist society cannot be what it is without the other two institutions which comprise its economic structure in concentrated private property and wage labour. For example, in a society of simple commodity producers, such as one which consists of small farmers and artisans, the simple commodity producers of such a society will trade their various products with one another in a market-place for money or its equivalent. In such a society there will be no concentrated private property or wage labour because all such simple commodity producers, like simple farmers and artisans, will be working for themselves and selling their own products directly to other simple commodity producers in the market in exchange for a certain amount of money or its equivalent. Thus, in such a society, it will have the institution of the market and the institution of private producers who work for themselves, but it will lack the other two institutions of concentrated private property and wage labour. However, for a capitalist society, if it is to be a capitalist society in terms of Schweickart’s characterisation, it must possess in addition to the institution of the market the two other institutions of concentrated private property and wage labour. Since this is so, it would appear that these two institutions in concentrated private property and wage labour are the distinguishing features of such a market-type society: they are what essentially distinguish a capitalist market society from other non-capitalist market societies, such as a socialist market society wherein there will be a genuine lack of concentrated private property or a merchant market society wherein there will be little wage labour. So, for Marx, if we want to understand the essential distinguishing nature of a capitalist society or the capitalist economic system then we must focus on these two defining institutional features or structures of its underlying economic structure.

In doing so, however, it is Marx’s contention that the theoretical focus of a scientific analysis of capitalism should be on the actual social relationship between these two key institutional features or structures of its underlying economic structure. This is why, as pointed out by Palermo (2007: 551), Marx singles out these two institutional features of the economic structure from its market institution. For Marx, the theoretical focus should be on how the owners of the means of production (concentrated private property) and those who work for them in exchange for a living wage (wage labour) are actually socially related or connected. In Marx’s view, the theoretical focus of capitalism should be on what he takes to be an actual social relation of production, which, as pointed out by Hunt (1993: 105), is a relation over who owns and controls the means of production. Thus, for Marx, this social relation of production between concentrated private property and wage labour constitutes for him the social structure aspect of the underlying economic structure of capitalism, to distinguish it from the market structure aspect of the underlying economic structure of capitalism.

This particular social relation of production is a social power relation of production. This is essentially because wage labourers, who do not own the means of production, are consequently forced to sell in the market to those who do own the means of production (capitalists), their only productive asset, labour-power or the capacity to labour, as a commodity in exchange for a living wage. As a result, they come under the direct control or authority of the capitalist within the production process.  As such, they find themselves in a social relationship with the capitalist in which they are subordinate to the latter.

It is, accordingly, on the basis of this social power relation of production between capitalists and wage labourers that capitalists are able to generate profits: they are able to do this because within the production process they are able to extract surplus labour out of wage labourers without any compensation (hence capitalist exploitation of wage labour). Furthermore, it is on the basis of this social power relation of production that the actual class relation between capitalists and wage labourers is reproduced on an ever-expanding scale. The mechanism for this is the industrial reserve army of capitalism, a permanent pool of unemployed wage labourers who, through their existence, put downward pressure on those wage labourers who have employment to work harder for a minimal amount of wages. As a result, the social power of capitalists increases at the expense of wage labourers, who in turn become progressively more powerless. In short, it is how capitalists perpetuate their dominance over wage labourers and continue to exploit them. Most importantly, however, this is how the capitalist economic system (or the capitalist mode of production) continually reproduces itself on an ever-expanding scale: its very existence as a particular economic system or mode of production is dependent on it. In short, it is the very essence (causal mechanism) which drives the entire capitalist economic system.

So, the underlying social structure aspect of the capitalist economic structure is its fundamental feature. And so, for Marx, if we want to produce a scientific account of capitalism then we must theoretically base it on its underlying social structure: the social power relation of production between capitalists and wage labourers. For this is, according to Marx, the causal foundations of capitalism (its essence).

Addendum to the Mr. Peel Story

It's notable that in Marx's story about Mr. Peel, the 'state' in the form of the local colonial authorities of the colony of Western Australia play an active role in the implementation of the capitalist mode of production, and do so for the economic benefit of the capitalist class. Consequently, as is noted within the general literature about the class role of the 'state', in capitalism the state is the right arm of the capitalist class in terms of actively advancing its economic interests as a class in its own right, which simultaneously means acting against the economic interests of the working class. This is, incidentally, a central theme of William Mitchell's and Thomas Fazi's book, Reclaiming the State, which is specifically a critique of the contemporary neoliberal version of the capitalist state.

The Story of Mr. Peel: Marx

One of the chief themes of Volume 1 of Marx's Capital is how the capitalist mode of production (ie, the capitalist economic system) constantly reproduces itself in an expanded way on the basis of its principal social relation of production, which is between, on the one hand, the capitalist class who own and control the means of production, and, on the other, the class of wage-workers who own nothing but their labour-power. For this to happen, which is driven by the profit-motive of the capitalist economic system, then members of the working class must constantly sell their labour-power to capitalists in the labour market in exchange for wages (if they want to economically reproduce themselves and not starve), so capitalists can then use their labour-power to produce commodities for the market in the hope of making a profit. This is, importantly for Marx, based on the capitalist exploitation of wage-workers: the forced extraction of surplus labour in the form of surplus-value without any financial compensation.

Now, one of the crucial outcomes of all this is that an 'industrial reserve army' of unemployed workers is generated largely as a result of fierce competition amongst capitalists at the point of production, wherein competing capitalists seek to increase the labour productivity of their workers by developing new forms of technology which need fewer workers to operate them. As a result, excess workers are sacked as they are surplus to requirements (they're no longer needed to operate new forms of technology). The net result of all this is that the industrial reserve army of unemployed workers puts downward pressure on those workers who've kept their jobs to work even harder than before for whatever wages capitalists are prepared to pay them, by being a disciplinary stick for capitalists to threaten these employed workers with - ie, they are threaten with the possibility of also being sacked and joining the ranks of the industrial reserve army of unemployed workers if they don't toe the line with their capitalist employers. Coupled with this particular function of the industrial reserve army of unemployed workers is the additional one of being a permanent pool of available unemployed wage-workers for capitalists to draw upon whenever the competitive need to do so demands it, such as when new markets open up for their commodities. (It should be noted that it's quite possible for there to be full employment under capitalism; it's just not the norm.)

Now, as long as this particular social relation of production of capitalism is in place (ie, between the capitalist and working classes), and all these basic things happen, then the capitalist mode of production will constantly reproduce itself in an expanded way (except when there are disruptions to the system, eg, financial and public health crises). And furthermore, the gap in relative wealth between the capitalist class and the class of wage-workers will constantly grow larger over time.

So, this is a basic summary of one of the main themes of Volume 1 of Marx's Capital. Bearing this theme in mind, let's turn to the final chapter of this volume of Marx's Capital, wherein we discover the general 'truth' and consequently some of the essential conditions about capitalism in the 'motherland' of England through one of its colonies in mid 19th century Australia.

This final chapter of Volume 1 of Capital (chapter 33) is about the 'modern theory of colonisation'. Also, there's been some debate about whether this last chapter of Volume 1 of Capital should even be the last or concluding chapter. It's often been claimed that the true concluding chapter should have been the previous one (chapter 32) as it deals with what Marx calls 'the historical tendency of capitalist accumulation' - ie, the chapter in which Marx makes a prediction about the fate of capitalism as an economic system. I shall say something about this issue at the end of this blog post.

At the end of Volume 1 of Capital, Marx tells the 'sad' story of a Mr. Peel who brought with him on his voyage over to the Swan River District region of the colony of Western Australia in the mid 19th century everything he needed in terms of the means of production, such as money, raw materials, equipment, etc. Being a 'good Englishman' and a 'would-be capitalist', he expected (Marx noted) to find at his free disposal (as he would've back in the 'motherland' of England) an available workforce to draw upon in order to get paid wage-workers to work with the means of production so as to produce commodities for the market in a hope to make a profit for himself. However, to his surprise and displeasure, he finds there is no available workforce to freely draw on as all the English colonial workers who had come out with the Mr. Peels of the world decided to work for themselves on the land with their own tools and labouring skills, as it was (notwithstanding the rights and interests of the local indigenous peoples of the land) all free and abundant. Thus, these English colonial workers came to possess and own land for themselves; they were, in short, property owners. Consequently, these English colonial workers were able to reproduce themselves without having to sell their labour-power to capitalists in the labour market in exchange for wages. This in turn meant there was no-one around to provide any 'free labour' to any would-be capitalist like a Mr. Peel.

To fix up this economic problem for the Mr. Peels of the world, the colonial authorities had to enact some colonial laws which would preclude these and any other English colonial workers from ever possessing and owning any land for themselves: hence, making them propertyless. They did this by dividing the land up into acreages and putting an exorbitant price on them, which meant only the wealthiest of the English colonials could buy acres of land for themselves. As a result, these English colonial workers were forced to make themselves freely available in the labour markets of the Swan River District region of Western Australia, since they could not afford to buy any land for themselves. Just like back in the 'motherland' of England these workers, if they wanted to be able to earn a living and not starve, had no choice but to (hopefully, that is) sell their labour-power to any would-be capitalist in the labour market in exchange for wages. This in turn allowed the Mr. Peels of the world to freely draw on these now freely available English colonial workers, which meant they could hire them to work the means of production with the aim of producing enough commodities for the market in the hope of making a profit for themselves.

So, at this point (through this colonial enactment), we have the successful recreation of the principal capitalist/wage-workers social relation of production of the capitalist mode of production, or, capitalism, for short - which, for Marx, is to be found in the 'old motherland' of England. This is, subsequently, the first truth to be discovered about capitalism in the new colonies of England. Capitalism is founded on the capitalist/wage-workers social relation of production; without it, capitalism can't even get off the ground (which, as Marx suggests, would be a shame for any would-be capitalist like a Mr. Peel). In short, it's the very social foundations of the capitalist economic system itself.

However, returning to Marx's account of the Mr. Peel story, not all competing workers could be employed at once by all the competing capitalists (the Mr. Peels of the world), and so some were left unemployed. As a consequence of this newly created pool of unemployed workers, downward pressure could be subsequently applied to those newly created wage-workers to accept less favourable pay and working conditions if they wanted to keep their new job and not end up as a part of the newly created industrial reserve army of unemployed workers. Thus, the emergence of this newly created industrial reserve army of unemployed workers acted as a disciplinary stick to keep the employed sections of the newly created working class in check. Also, it had the added advantage of being a permanent pool of unemployed workers to draw upon whenever the need to do so arose for the competing capitalists, given what was going on in the markets at the time, whether in the colonies themselves or elsewhere (such as back in the 'motherland' of England).

So, on the basis of the recreation of the capitalist/wage-workers social relation of production of capitalism we also have the recreation of a permanent industrial reserve army of unemployed workers with these particular dual functions: on the one hand, being a disciplinary stick to keep employed wage-workers in check, while, on the other, being a permanent pool of available labour for capitalists to draw upon whenever they needed to. This is the second truth to be discovered in the colonies of England. Capitalism cannot function in the way it generally tends to do without the existence of an industrial reserve army of unemployed workers at the disposal of the capitalist class.

What the story of Mr. Peel in the colonies of England ultimately reveals, then, about the capitalist mode of production is that unless the principal capitalist/wage-workers social relation of production is in place - which means above all that there exists a class of propertyless people who own nothing but their labour-power (wage-workers), and so must sell it to some capitalist buyer in the market who wants it (this is an essential condition too, and so is another truth discovered in the English colonies) - then capitalism can't even get off the ground, regardless of how much money, raw materials and equipment would-be capitalists like a Mr. Peel have in their possession in terms of the means of production. However, even when that's in place (one essential condition), it's not enough, particularly from the position of capitalists, if they want to make lots of profits. Therefore, what's required is that a means exist which can dictate the pay and working conditions of wage-workers, or, of the working class overall. Hence, the necessary existence of an industrial reserve army of unemployed workers (the other essential condition). For this is the mechanism by which the capitalist class can constantly increase their own relative wealth at the expense of the working class.

Now, as Marx says, here we have the basic social institutional framework of the capitalist mode of production being reproduced in one of the colonies of the England, with all its essential conditions in place.  As a result, the would-be capitalists (like the Mr. Peels of the world) can now go about their business of trying to be successful capitalists by making lots of money, rather than seeing all their financial and physical capital in the means of production going to waste. And moreover, the capitalist mode of production can continue in its own relentless mode of reproducing itself in an expanded way (despite any periodic disruptions to it).

So what the story of Mr. Peel (and his like) jointly reveals about the nature of capitalism are the following two things. On the one hand, it reveals how capitalism works on the basis of there being property-owning capitalists and propertyless wage-workers and the existence of an industrial reserve army of unemployed workers, which are three of the chief institutional features of capitalism. While, on the other, it reveals that if capitalism is to exist and constantly reproduce itself in an expanded way then all these chief institutional features of capitalism must be put in place, if they don't already exist (hence the theory of colonisation - it's a capitalist enterprise).

These, then, are the general truths which the story of a Mr. Peel in the Swan River District region of the the new English colony of Western Australia reveals about the nature of capitalism back in the 'old motherland' of England. It's, on the one hand, a kind of thought experiment on Marx's part to highlight the essential social institutional arrangements of the capitalist mode of production. It allows us to see the essence of capitalism. On the other, it's an actual empirical illustration of what happens to capitalism if its essential features are missing - it can't function. (It's a bit like a car without its motor - it won't go.)

Now, on the question about whether this final chapter is a valid concluding chapter to Volume 1 of Capital, I have this to say. Firstly, the previous chapter 32 of Capital Volume 1 in which Marx makes a theoretical prediction about the fate of capitalism, is sometimes seen as Marx's triumphant call for the end of capitalism as an economic system, and therefore that's the revolutionary note it should end on. However, while this is a valid theoretical point in terms of where the overall argument of Volume 1 of Capital leads one, it overlooks the summary role that the final chapter 33 performs. The final chapter of Capital Volume 1 is there to remind us of the essence of capitalism in terms of its essential social institutional arrangements. It sums up the institutional guts of capitalism. For, it ought to be remembered, before you can radically change or transform any socio-economic system, you first need to understand what it fundamentally is in terms of what makes it up with respect to its particular social institutional features. In other words, if you intend to radically change or transform any socio-economic system, then it will be done so in terms of its fundamental social institutional features, since they are what define or constitute any socio-economic system - as illustrated by the Mr. Peel story in the final chapter of Capital Volume 1.