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<title>C.1 What is wrong with economics?
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<h1>C.1 What is wrong with economics?</h1>

In a nutshell, a lot. While economists like to portray their discipline
as "scientific" and "value free", the reality is very different. It is,
in fact, very far from a science and hardly "value free." Instead it is,
to a large degree, deeply ideological and its conclusions almost always
(by a strange co-incidence) what the wealthy, landlords, bosses and 
managers of capital want to hear. The words of Kropotkin still ring 
true today:
<p><blockquote><i>
"Political Economy has always confined itself to stating facts occurring
in society, and justifying them in the interest of the dominant class 
. . . Having found [something] profitable to capitalists, it has set it 
up as a <b>principle.</b>"</i> [<b>The Conquest of Bread</b>, p. 181]
</blockquote><p>
This is at its best, of course. At its worse economics does not even 
bother with the facts and simply makes the most appropriate assumptions
necessary to justify the particular beliefs of the economists and,
usually, the interests of the ruling class. This is the key problem
with economics: it is <b>not</b> a science. It is <b>not</b> independent of the 
class nature of society, either in the theoretical models it builds 
or in the questions it raises and tries to answer. This is due, in 
part, to the pressures of the market, in part due to the assumptions
and methodology of the dominant forms of economics. It is a mishmash 
of ideology and genuine science, with the former (unfortunately) being 
the bulk of it. 
<p>
The argument that economics, in the main, is not a science it not 
one restricted to anarchists or other critics of capitalism. Some 
economists are well aware of the limitations of their profession. 
For example, Steve Keen lists many of the flaws of mainstream 
(neoclassical) economics in his excellent book <b>Debunking 
Economics</b>, noting that (for example) it is based on a <i>"dynamically 
irrelevant and factually incorrect instantaneous static snap-shot"</i> 
of the real capitalist economy. [<b>Debunking Economics</b>, p. 197] The 
late Joan Robinson argued forcefully that the neoclassical economist 
<i>"sets up a 'model' on arbitrarily constructed assumptions, and then 
applies 'results' from it to current affairs, without even trying 
to pretend that the assumptions conform to reality."</i> [<b>Collected 
Economic Papers</b>, vol. 4, p. 25] More recently, economist Mark 
Blaug has summarised many of the problems he sees with the current 
state of economics:
<p><blockquote><i>
"Economics has increasing become an intellectual games played for
its own sake and not for its practical consequences. Economists have 
gradually converted the subject into a sort of social mathematics
in which analytical rigor as understood in math departments is 
everything and empirical relevance (as understood in physics 
departments) is nothing . . . general equilibrium theory . . . 
using economic terms like 'prices', 'quantities', 'factors of 
production,' and so on, but that nevertheless is clearly and even 
scandalously unrepresentative of any recognisable economic system. . .
<p>
"Perfect competition never did exist and never could exist because, 
even when firms are small, they do not just take the price but strive
to make the price. All the current textbooks say as much, but then
immediately go on to say that the 'cloud-cuckoo' fantasyland of
perfect competition is the benchmark against which we may say 
something significant about real-world competition . . . But how
can an idealised state of perfection be a benchmark when we are 
never told how to measure the gap between it and real-world
competition? It is implied that all real-world competition is 
'approximately' like perfect competition, but the degree of the 
approximation is never specified, even vaguely . . .
<p>
"Think of the following typical assumptions: perfectly infallible,
utterly omniscient, infinitely long-lived identical consumers; zero
transaction costs; complete markets for all time-stated claims for
all conceivable events, no trading of any kind at disequilibrium prices;
infinitely rapid velocities of prices and quantities; no radical, 
incalculable uncertainty in real time but only probabilistically
calculable risk in logical time; only linearly homogeneous production
functions; no technical progress requiring embodied capital investment,
and so on, and so on -- all these are not just unrealistic but also
unrobust assumptions. And yet they figure critically in leading 
economic theories."</i> [<i>"Disturbing Currents in Modern Economics",</i> 
<b>Challenge!</b>, Vol. 41, No. 3, May-June, 1998]
</blockquote><p>
So neoclassical ideology is based upon special, virtually ad hoc, 
assumptions. Many of the assumptions are impossible, such as the
popular assertion that individuals can accurately predict the future
(as required by "rational expectations" and general equilibrium theory),
that there are a infinite number of small firms in every market or 
that time is an unimportant concept which can be abstracted from.
Even when we ignore those assumptions which are obviously nonsense,
the remaining ones are hardly much better. Here we have a collection
of apparently valid positions which, in fact, rarely have any basis 
in reality. As we discuss in <a href="secC1.html#secc12">section C.1.2</a>, an essential one, without
which neoclassical economics simply disintegrates, has very little 
basis in the real world (in fact, it was invented simply to ensure 
the theory worked as desired). Similarly, markets often adjust in 
terms of quantities rather than price, a fact overlooked in general
equilibrium theory. Some of the assumptions are mutually exclusive. 
For example, the neo-classical theory of the supply curve is based on 
the assumption that some factor of production cannot be changed in 
the short run. This is essential to get the concept of diminishing
marginal productivity which, in turn, generates a rising marginal 
cost and so a rising supply curve. This means that firms <b>within</b> 
an industry cannot change their capital equipment. However, the 
theory of perfect competition requires that in the short period 
there are no barriers to entry, i.e. that anyone <b>outside</b> the 
industry can create capital equipment and move into the market. 
These two positions are logically inconsistent.
<p>
In other words, although the symbols used in mainstream may have 
economic sounding names, the theory has no point of contact with 
empirical reality (or, at times, basic logic):
<p><blockquote><i>
"Nothing in these abstract economic models actually <b>works</b> in the
real world. It doesn't matter how many footnotes they put in, or
how many ways they tinker around the edges. The whole enterprise
is totally rotten at the core: it has no relation to reality."</i> 
[Noam Chomsky, <b>Understanding Power</b>, pp. 254-5]
</blockquote><p>
As we will indicate, while its theoretical underpinnings are claimed
to be universal, they are specific to capitalism and, ironically,
they fail to even provide an accurate model of that system as it
ignores most of the real features of an actual capitalist economy.
So if an economist does not say that mainstream economics has no 
bearing to reality, you can be sure that what he or she tells you 
will be more likely ideology than anything else. "Economic reality" 
is not about facts; it's about faith in capitalism. Even worse, it 
is about blind faith in what the economic ideologues say about 
capitalism. The key to understanding economists is that they believe 
that if it is in an economic textbook, then it must be true -- 
particularly if it confirms any initial prejudices. The opposite
is usually the case. 
<p>
The obvious fact that the real world is not like that described by
economic text books can have some funny results, particularly
when events in the real world contradict the textbooks. For most
economists, or those who consider themselves as such, the textbook
is usually preferred. As such, much of capitalist apologetics is 
faith-driven. Reality has to be adjusted accordingly.
<p>
A classic example was the changing positions of pundits and "experts" 
on the East Asian economic miracle. As these economies grew spectacularly 
during the 1970s and 1980s, the experts universally applauded them as 
examples of the power of free markets. In 1995, for example, the 
right-wing Heritage Foundation's index of economic freedom had four 
Asian countries in its top seven countries. The <b>Economist</b>  explained 
at the start of 1990s that Taiwan and South Korea had among the least 
price-distorting regimes in the world. Both the Word Bank and IMF
agreed, downplaying the presence of industrial policy in the region. 
This was unsurprising. After all, their ideology said that free markets 
would produce high growth and stability and so, logically, the presence
of both in East Asia must be driven by the free market. This meant that,
for the true believers, these nations were paradigms of the free market,
reality not withstanding. The markets agreed, putting billions into 
Asian equity markets while foreign banks loaned similar vast amounts.
<p>
In 1997, however, all this changed when all the Asian countries previously
qualified as "free" saw their economies collapse. Overnight the same 
experts who had praised these economies as paradigms of the free market 
found the cause of the problem -- extensive state intervention. The free 
market paradise had become transformed into a state regulated hell! Why? 
Because of ideology -- the free market is stable and produces high growth 
and, consequently, it was impossible for any economy facing crisis to be 
a free market one! Hence the need to disown what was previously praised,
without (of course) mentioning the very obvious contradiction.
<p>
In reality, these economies had always been far from the free market. The 
role of the state in these "free market" miracles was extensive and well 
documented. So while East Asia <i>"had not only grown faster and done 
better at reducing poverty than any other region of the world . . . it 
had also been more stable,"</i> these countries <i>"had been successful not 
only in spite of the fact that they had not followed most of the 
dictates of the Washington Consensus [i.e. neo-liberalism], but <b>because</b> 
they had not."</i> The government had played <i>"important roles . . . far from 
the minimalist [ones] beloved"</i> of neo-liberalism. During the 1990s, 
things had changed as the IMF had urged a <i>"excessively rapid financial 
and capital market liberalisation"</i> for these countries as sound economic 
policies. This <i>"was probably the single most important cause of the [1997] 
crisis"</i> which saw these economies suffer meltdown, <i>"the greatest economic 
crisis since the Great Depression"</i> (a meltdown worsened by IMF aid and its 
underlying dogmas). Even worse for the believers in market fundamentalism, 
those nations (like Malaysia) that refused IMF suggestions and used state 
intervention has a <i>"shorter and shallower"</i> downturn than those who did not.
[Joseph Stiglitz, <b>Globalisation and its Discontents</b>, p. 89, p. 90, p. 91
and p. 93] Even worse, the obvious conclusion from these events is more
than just the ideological perspective of economists, it is that "the market" 
is not all-knowing as investors (like the experts) failed to see the statist 
policies so bemoaned by the ideologues of capitalism <b>after</b> 1997.
<p>
This is not to say that the models produced by neoclassical economists are 
not wonders of mathematics or logic. Few people would deny that a lot of 
very intelligent people have spent a lot of time producing some quite 
impressive mathematical models in economics. It is a shame that they are
utterly irrelevant to reality. Ironically, for a theory claims to be so 
concerned about allocating scarce resources efficiently, economics has 
used a lot of time and energy refining the analyses of economies which 
have not, do not, and will not ever exist. In other words, scare resources 
have been inefficiently allocated to produce waste. 
<p>
Why? Perhaps because there is a demand for such nonsense? Some economists 
are extremely keen to apply their methodology in all sorts of areas outside 
the economy. No matter how inappropriate, they seek to colonise every aspect 
of life. One area, however, seems immune to such analysis. This is the market 
for economic theory. If, as economists stress, every human activity can be 
analysed by economics then why not the demand and supply of economics itself? 
Perhaps because if that was done some uncomfortable truths would be discovered?
<p>
Basic supply and demand theory would indicate that those economic theories 
which have utility to others would be provided by economists. In a system 
with inequalities of wealth, effective demand is skewed in favour of the 
wealthy. Given these basic assumptions, we would predict that only these 
forms of economists which favour the requirements of the wealthy would 
gain dominance as these meet the (effective) demand. By a strange 
co-incidence, this is <b>precisely</b> what has happened. This did and does 
not stop economists complaining that dissidents and radicals were and
are biased. As Edward Herman points out:
<p><blockquote><i>
"Back in 1849, the British economist Nassau Senior chided those
defending trade unions and minimum wage regulations for expounding
an 'economics of the poor.' The idea that he and his establishment
confreres were putting forth an 'economics of the rich' never
occurred to him; he thought of himself as a scientist and
spokesperson of true principles. This self-deception pervaded
mainstream economics up to the time of the Keynesian Revolution 
of the 1930s. Keynesian economics, though quickly tamed into an
instrument of service to the capitalist state, was disturbing in
its stress on the inherent instability of capitalism, the tendency
toward chronic unemployment, and the need for substantial
government intervention to maintain viability. With the resurgent
capitalism of the past 50 years, Keynesian ideas, and their
implicit call for intervention, have been under incessant attack,
and, in the intellectual counterrevolution led by the Chicago
School, the traditional laissez-faire ('let-the-fur-fly')
economics of the rich has been re-established as the core of
mainstream economics."</i> [<b>The Economics of the Rich</b> ]
</blockquote><p>
Herman goes on to ask <i>"[w]hy do the economists serve the rich?"</i> and
argues that <i>"[f]or one thing, the leading economists are among the 
rich, and others seek advancement to similar heights. Chicago School 
economist Gary Becker was on to something when he argued that economic 
motives explain a lot of actions frequently attributed to other forces. 
He of course never applied this idea to economics as a profession . . ."</i> 
There are a great many well paying think tanks, research posts, 
consultancies and so on that create an <i>"'effective demand' that 
should elicit an appropriate supply resource."</i>
<p>
Elsewhere, Herman notes the <i>"class links of these professionals to the 
business community were strong and the ideological element was realised 
in the neoclassical competitive model . . . Spin-off negative effects on 
the lower classes were part of the 'price of progress.' It was the elite 
orientation of these questions [asked by economics], premises, and the 
central paradigm [of economic theory] that caused matters like unemployment, 
mass poverty, and work hazards to escape the net of mainstream economist
interest until well into the twentieth century."</i> Moreover, <i>"the economics 
profession in the years 1880-1930 was by and large strongly conservative, 
reflecting in its core paradigm its class links and sympathy with the 
dominant business community, fundamentally anti-union and suspicious of 
government, and tending to view competition as the true and durable state 
of nature."</i> [Edward S. Herman, <i>"The Selling of Market Economics,"</i> 
pp. 173-199, <b>New Ways of Knowing</b>, Marcus G. Raskin and Herbert J. 
Bernstein (eds.),p. 179-80 and p. 180]
<p>
Rather than scientific analysis, economics has always been driven by 
the demands of the wealthy (<i>"How did [economics] get instituted? As a 
weapon of class warfare."</i> [Chomsky, <b>Op. Cit.</b>, p. 252]). This works
on numerous levels. The most obvious is that most economists take 
the current class system and wealth/income distribution as granted
and generate general <i>"laws"</i> of economics from a specific historical
society. As we discuss in the <a href="secC1.html#secc11">next section</a>, this inevitably skews 
the "science" into ideology and apologetics. The analysis is also
(almost inevitably) based on individualistic assumptions, ignoring or 
downplaying the key issues of groups, organisations, class and the
economic and social power they generate. Then there are the assumptions 
used and questions raised. As Herman argues, this has hardly been a 
neutral process: 
<p><blockquote><i>
"the theorists explicating these systems, such as Carl Menger, Leon 
Walras, and Alfred Marshall, were knowingly assuming away formulations 
that raised disturbing questions (income distribution, class and market 
power, instability, and unemployment) and creating theoretical models 
compatible with their own policy biases of status quo or modest 
reformism . . . Given the choice of 'problem,' ideology and other 
sources of bias may still enter economic analysis if the answer is 
predetermined by the structure of the theory or premises, or if the 
facts are selected or bent to prove the desired answer."</i> [<b>Op. Cit.</b>,
p. 176]
</blockquote><p>
Needless to say, economics is a "science" with deep ramifications within
society. As a result, it comes under pressure from outside influences 
and vested interests far more than, say, anthropology or physics. This
has meant that the wealthy have always taken a keen interest that the
"science" teaches the appropriate lessons. This has resulted in a demand
for a "science" which reflects the interests of the few, not the many.
Is it <b>really</b> just a co-incidence that the lessons of economics are just
what the bosses and the wealthy would like to hear? As non-neoclassical 
economist John Kenneth Galbraith noted in 1972:
<p><blockquote><i>
"Economic instruction in the United States is about a hundred years
old. In its first half century economists were subject to censorship
by outsiders. Businessmen and their political and ideological acolytes 
kept watch on departments of economics and reacted promptly to heresy,
the latter being anything that seemed to threaten the sanctity of 
property, profits, a proper tariff policy and a balanced budget, or
that suggested sympathy for unions, public ownership, public regulation 
or, in any organised way, for the poor."</i> [<b>The Essential Galbraith</b>,
p. 135]
</blockquote><p>
It is <b>really</b> surprising that having the wealthy fund (and so control) 
the development of a "science" has produced a body of theory which so 
benefits their interests? Or that they would be keen to educate the
masses in the lessons of said "science", lessons which happen to 
conclude that the best thing workers should do is obey the dictates
of the bosses, sorry, the market? It is really just a co-incidence 
that the repeated use of economics is to spread the message that
strikes, unions, resistance and so forth are counter-productive and
that the best thing worker can do is simply wait patiently for wealth
to trickle down? 
<p>
This co-incidence has been a feature of the "science" from the start.
The French Second Empire in the 1850s and 60s saw <i>"numerous private 
individuals and organisation, municipalities, and the central government 
encouraged and founded institutions to instruct workers in economic
principles."</i> The aim was to <i>"impress upon [workers] the salutary
lessons of economics."</i> Significantly, the <i>"weightiest motive"</i> for
so doing <i>"was fear that the influence of socialist ideas upon the
working class threatened the social order."</i> The revolution of 1848
<i>"convinced many of the upper classes that the must prove to workers
that attacks upon the economic order were both unjustified and
futile."</i> Another reason was the recognition of the right to strike
in 1864 and so workers <i>"had to be warned against abuse of the new
weapon."</i> The instruction <i>"was always with the aim of refuting 
socialist doctrines and exposing popular misconceptions. As one
economist stated, it was not the purpose of a certain course to
initiate workers into the complexities of economic science, but
to define principles useful for 'our conduct in the social order.'"</i>
The interest in such classes was related to the level of <i>"worker
discontent and agitation."</i> The impact was less than desired:
<i>"The future Communard Lefrancais referred mockingly to the economists
. . . and the 'banality' and 'platitudes' of the doctrine they 
taught. A newspaper account of the reception given to the economist
Joseph Garnier states that Garnier was greeted with shouts of:
'He is an economist' . . . It took courage, said the article, to
admit that one was an economist before a public meeting."</i> [David 
I. Kulstein, <i>"Economics Instruction for Workers during the
Second Empire,"</i> pp. 225-234, <b>French Historical Studies</b>, vol. 1, 
no. 2, p. 225, p. 226, p. 227 and p. 233]
<p>
This process is still at work, with corporations and the wealthy funding
university departments and posts as well as their own <i>"think tanks"</i> and
paid PR economists. The control of funds for research and teaching plays
it part in keeping economics the <i>"economics of the rich."</i> Analysing the
situation in the 1970s, Herman notes that the <i>"enlarged private demand 
for the services of economists by the business community . . . met a 
warm supply response."</i> He stressed that <i>"if the demand in the market is 
for specific policy conclusions and particular viewpoints that will 
serve such conclusions, the market will accommodate this demand."</i> Hence 
<i>"blatantly ideological models . . . are being spewed forth on a large
scale, approved and often funded by large vested interests"</i> which
helps <i>"shift the balance between ideology and science even more firmly
toward the former."</i> [<b>Op. Cit.</b>, p. 184, p. 185 and p. 179] The idea 
that "experts" funded and approved by the wealthy would be objective 
scientists is hardly worth considering. Unfortunately, many people 
fail to exercise sufficient scepticism about economists and the 
economics they support. As with most experts, there are two obvious 
questions with which any analysis of economics should begin: <i>"Who is 
funding it?"</i> and <i>"Who benefits from it?"</i> 
<p>
However, there are other factors as well, namely the hierarchical 
organisation of the university system. The heads of economics departments 
have the power to ensure the continuation of their ideological position 
due to the position as hirer and promoter of staff. As economics <i>"has 
mixed its ideology into the subject so well that the ideologically 
unconventional usually appear to appointment committees to be 
scientifically incompetent."</i> [Benjamin Ward, <b>What's Wrong with 
Economics?</b>, p. 250] Galbraith termed this <i>"a new despotism,"</i> which 
consisted of <i>"defining scientific excellence in economics not as 
what is true but as whatever is closest to belief and method to 
the scholarly tendency of the people who already have tenure in 
the subject. This is a pervasive test, not the less oppress for 
being, in the frequent case, both self-righteous and unconscious. 
It helps ensure, needless to say, the perpetuation of the neoclassical 
orthodoxy."</i> [<b>Op. Cit.</b>, p. 135] This plays a key role in keeping 
economics an ideology rather than a science:
<p><blockquote><i>
"The power inherent in this system of quality control within the
economics profession is obviously very great. The discipline's
censors occupy leading posts in economics departments at the 
major institutions . . . Any economist with serious hopes of 
obtaining a tenured position in one of these departments will soon
be made aware of the criteria by which he is to be judged . . .
the entire academic program . . . consists of indoctrination in 
the ideas and techniques of the science."</i> [Ward, <b>Op. Cit.</b>, pp. 29-30]
</blockquote><p>
All this has meant that the "science" of economics has hardly changed
in its basics in over one hundred years. Even notions which have been 
debunked (and have been acknowledged as such) continue to be taught:
<p><blockquote><i>
"The so-called mainline teaching of economic theory has a curious 
self-sealing capacity. Every breach that is made in it by criticism 
is somehow filled up by admitting the point but refusing to draw any 
consequence from it, so that the old doctrines can be repeated as 
before. Thus the Keynesian revolution was absorbed into the doctrine 
that, 'in the long run,' there is a natural tendency for a market 
economy to achieve full employment of available labour and full 
utilisation of equipment; that the rate of accumulation is determined 
by household saving; and that the rate of interest is identical with 
the rate of profit on capital. Similarly, Piero Sraffa's demolition 
of the neoclassical production function in labour and 'capital' was 
admitted to be unanswerable, but it has not been allowed to affect 
the propagation of the 'marginal productivity' theory of wages and 
profits.
<p>
"The most sophisticated practitioners of orthodoxy maintain that the
whole structure is an exercise in pure logic which has no application
to real life at all. All the same they give their pupils the impression
that they are being provided with an instrument which is valuable,
indeed necessary, for the analysis of actual problems."</i> [Joan Robinson, 
<b>Op. Cit.</b>, vol. 5, p. 222]
</blockquote><p>
The social role of economics explains this process, for <i>"orthodox 
traditional economics . . . was a plan for explaining to the 
privileged class that their position was morally right and was 
necessary for the welfare of society. Even the poor were better off 
under the existing system that they would be under any other . . .
the doctrine [argued] that increased wealth of the propertied class 
brings about an automatic increase of income to the poor, so that, 
if the rich were made poorer, the poor would necessarily become poorer
too."</i> [Robinson, <b>Op. Cit.</b>, vol. 4, p. 242]
<p>
In such a situation, debunked theories would continue to be taught
simply because what they say has a utility to certain sections of
society:
<p><blockquote><i>
"Few issues provide better examples of the negative impact of economic
theory on society than the distribution of income. Economists are forever
opposing 'market interventions' which might raise the wages of the poor,
while defending astronomical salary levels for top executives on the basis
that if the market is willing to pay them so much, they must be worth it.
In fact, the inequality which is so much a characteristic of modern 
society reflects power rather than justice. This is one of the many
instances where unsound economic theory makes economists the champions
of policies which, is anything, undermine the economic foundations of
modern society."</i> [Keen, <b>Op. Cit.</b>, p. 126]
</blockquote><p>
This argument is based on the notion that wages equal the marginal 
productivity of labour. This is supposed to mean that as the 
output of workers increase, their wages rise. However, as we note
in <a href="secC1.html#secc15">section C.1.5</a>, this law of economics has been violated for the 
last thirty-odd years in the US. Has this resulted in a change in 
the theory? Of course not. Not that the theory is actually correct. 
As we discuss in <a href="secC2.html#secc25">section C.2.5</a>, marginal productivity theory has 
been exposed as nonsense (and acknowledged as flawed by leading 
neo-classical economists) since the early 1960s. However, its 
utility in defending inequality is such that its continued use 
does not really come as a surprise. 
<p>
This is not to suggest that mainstream economics is monolithic.
Far from it. It is riddled with argument and competing policy
recommendations. Some theories rise to prominence, simply to 
disappear again (<i>"See, the 'science' happens to be a very flexible 
one: you can change it to do whatever you feel like, it's that kind 
of 'science.'"</i> [Chomsky, <b>Op. Cit.</b>, p. 253]). Given our analysis that
economics is a commodity and subject to demand, this comes as no
surprise. Given that the capitalist class is always in competition 
within itself and different sections have different needs at different 
times, we would expect a diversity of economics beliefs within the 
"science" which rise and fall depending on the needs and relative 
strengths of different sections of capital. While, overall, the 
"science" will support basic things (such as profits, interest and
rent are <b>not</b> the result of exploitation) but the actual policy 
recommendations will vary. This is not to say that certain individuals 
or schools will not have their own particular dogmas or that individuals 
rise above such influences and act as real scientists, of course, just 
that (in general) supply is not independent of demand or class 
influence.
<p>
Nor should we dismiss the role of popular dissent in shaping the
"science." The class struggle has resulted in a few changes to
economics, if only in terms of the apologetics used to justify
non-labour income. Popular struggles and organisation play their 
role as the success of, say, union organising to reduce the working 
day obviously refutes the claims made against such movements by
economists. Similarly, the need for economics to justify reforms 
can become a pressing issue when the alternative (revolution) 
is a possibility. As Chomsky notes, during the 19th century (as
today) popular struggle played as much of a role as the needs 
of the ruling class in the development of the "science":
<p><blockquote><i>
"[Economics] changed for a number of reasons. For one thing, these 
guys had won, so they didn't need it so much as an ideological weapon
anymore. For another, they recognised that they themselves needed
a powerful interventionist state to defend industry form the
hardships of competition in the open market -- as they had always
<b>had</b> in fact. And beyond that, eliminating people's 'right to
live' was starting to have some negative side-effects. First of
all, it was causing riots all over the place . . . Then something
even worse happened -- the population started to organise: you 
got the beginning of an organised labour movement . . . then a
socialist movement developed. And at that point, the elites . . .
recognised that the game had to be called off, else they <b>really</b>
would be in trouble . . . it wasn't until recent years that 
laissez-faire ideology was revived again -- and again, it was a 
weapon of class warfare . . . And it doesn't have any more validity 
than it had in the early nineteenth century -- in fact it has even 
<b>less.</b> At least in the early nineteenth century . . . [the] 
assumptions had <b>some</b> relation to reality. Today those assumptions 
have <b>not</b> relation to reality."</i> [<b>Op. Cit.</b>, pp. 253-4]
</blockquote><p>
Whether the <i>"economics of the rich"</i> or the <i>"economics of the poor"</i>
win out in academia is driven far more by the state of the class
war than by abstract debating about unreal models. Thus the rise
of monetarism came about due to its utility to the dominant sections
of the ruling class rather than it winning any intellectual battles 
(it was decisively refuted by leading Keynesians like Nicholas Kaldor 
who saw their predicted fears become true when it was applied -- 
see <a href="secC8.html">section C.8</a>). Hopefully by analysing the myths of capitalist
economics we will aid those fighting for a better world by giving 
them the means of counteracting those who claim the mantle of 
"science"</i> to foster the <i>"economics of the rich"</i> onto society.
<p>
To conclude, neo-classical economics shows the viability of an unreal 
system and this is translated into assertions about the world that we 
live in. Rather than analyse reality, economics evades it and asserts 
that the economy works <i>"as if"</i> it matched the unreal assumptions of 
neoclassical economics. No other science would take such an approach 
seriously. In biology, for example, the notion that the world can be 
analysed <i>"as if"</i> God created it is called Creationism and rightly 
dismissed. In economics, such people are generally awarded 
professorships or even the (so-called) Nobel prize in economics 
(Keen critiques the <i>"as if"</i> methodology of economics in chapter 7 
of his <b>Debunking Economics</b> ). Moreover, and even worse, policy 
decisions will be enacted based on a model which has no bearing in 
reality -- with disastrous results (for example, the rise and fall 
of Monetarism). 
<p>
Its net effect to justify the current class system and diverts 
serious attention from critical questions facing working class 
people (for example, inequality and market power, what goes on in 
production, how authority relations impact on society and in the 
workplace). Rather than looking to how things are produced, the 
conflicts generated in the production process and the generation
as well as division of products/surplus, economics takes what was 
produced as given, as well as the capitalist workplace, the division 
of labour and authority relations and so on. The individualistic 
neoclassical analysis by definition ignores such key issues as 
economic power, the possibility of a structural imbalance in 
the way economic growth is distributed, organisation structure, 
and so on. 
<p>
Given its social role, it comes as no surprise that economics is not 
a genuine science. For most economists, the <i>"scientific method (the 
inductive method of natural sciences) [is] utterly unknown to them."</i> 
[Kropotkin, <b>Anarchism</b>, p. 179] The argument that most economics is 
not a science is not limited to just anarchists or other critics of 
capitalism. Many dissident economics recognise this fact as well, 
arguing that the profession needs to get its act together if it is to
be taken seriously. Whether it could retain its position as defender
of capitalism if this happens is a moot point as many of the theorems
developed were done so explicitly as part of this role (particularly 
to defend non-labour income -- see <a href="secC2.html">section C.2</a>). That economics can 
become much broader and more relevant is always a possibility, but 
to do so would mean to take into account an unpleasant reality marked 
by class, hierarchy and inequality rather than logic deductions 
derived from Robinson Crusoe. While the latter can produce 
mathematical models to reach the conclusions that the market is 
already doing a good job (or, at best, there are some imperfections 
which can be counterbalanced by the state), the former cannot.
<p>
Anarchists, unsurprisingly, take a different approach to economics. As
Kropotkin put it, <i>"we think that to become a science, Political Economy 
has to be built up in a different way. It must be treated as a natural 
science, and use the methods used in all exact, empirical sciences."</i> 
[<b>Evolution and Environment</b>, p. 93] This means that we must start 
with the world as it is, not as economics would like it to be. It
must be placed in historical context and key facts of capitalism,
like wage labour, not taken for granted. It must not abstract from 
such key facts of life as economic and social power. In a word, 
economics must reject those features which turn it into a sophisticated
defence of the status quo. Given its social role within capitalism
(and the history and evolution of economic thought), it is doubtful it 
will ever become a real science simply because it if did it would 
hardly be used to defend that system. 

<h2><a name="secc11">C.1.1 Is economics really value free?</a></h2>

Modern economists try and portray economics as a "value-free science." 
Of course, it rarely dawns on them that they are usually just taking 
existing social structures for granted and building economic dogmas 
around them, so justifying them. At best, as Kropotkin pointed out: 
<p><blockquote><i>
"[A]ll the so-called laws and theories of political economy are in reality 
no more than statements of the following nature: 'Granting that there are 
always in a country a considerable number of people who cannot subsist a 
month, or even a fortnight, without earning a salary and accepting for 
that purpose the conditions of work  imposed upon them by the State, or 
offered to them by those whom the State recognises as owners of land, 
factories, railways, etc., then the results will be so and so.'
<p>
"So far academic political economy has been only an enumeration of
what happens under these conditions -- without distinctly stating the 
conditions themselves. And then, having described <b>the facts</b> which 
arise in our society under these conditions, they represent to us 
these <b>facts</b> as rigid, <b>inevitable economic laws.</b>"</i> [<b>Anarchism</b>, 
p. 179]
</blockquote><p>
In other words, economists usually take the political and economic 
aspects of capitalist society (such as property rights, inequality 
and so on) as given and construct their theories around it. At best. 
At worse, economics is simply speculation based on the necessary 
assumptions required to prove the desired end. By some strange 
coincidence these ends usually bolster the power and profits of 
the few and show that the free market is the best of all possible 
worlds. Alfred Marshall, one of the founders of neoclassical economics, 
once noted the usefulness of economics to the elite:
<p><blockquote><i>
"From Metaphysics I went to Ethics, and found that the justification
of the existing conditions of society was not easy. A friend, who
had read a great deal of what are called the Moral Sciences, 
constantly said: 'Ah! if you understood Political Economy you 
would not say that'"</i> [quoted by Joan Robinson, <b>Collected Economic 
Papers</b>, vol. 4, p. 129]
</blockquote><p>
Joan Robinson added that <i>"[n]owadays, of course, no one would put it 
so crudely. Nowadays, the hidden persuaders are concealed behind 
scientific objectivity, carefully avoiding value judgements; they are 
persuading all the better so."</i> [<b>Op. Cit.</b>, p. 129] The way which economic 
theory systematically says what bosses and the wealthy want to hear is 
just one of those strange co-incidences of life, one which seems to 
befall economics with alarming regularity.
<p>
How does economics achieve this strange co-incidence, how does the
"value free" "science" end up being wedded to producing apologetics
for the current system? A key reason is the lack of concern about 
history, about how the current distribution of income and wealth 
was created. Instead, the current distribution of wealth and income
is taken for granted.
<p>
This flows, in part, from the static nature of neoclassical economics.
If your economic analysis starts and ends with a snapshot of time,
with a given set of commodities, then how those commodities get into
a specific set of hands can be considered irrelevant -- particularly
when you modify your theory to exclude the possibility of proving
income redistribution will increase overall utility (see 
<a href="secC1.html#secc13">section C.1.3</a>). It also flows from the social role of economics as defender 
of capitalism. By taking the current distribution of income and 
wealth as given, then many awkward questions can be automatically
excluded from the "science." 
<p>
This can be seen from the rise of neoclassical economics in the 
1870s and 1880s. The break between classical political economy 
and economics was marked by a change in the kind of questions 
being asked. In the former, the central focus was on distribution, 
growth, production and the relations between social classes. The 
exact determination of individual prices was of little concern, 
particularly in the short run. For the new economics, the focus 
became developing a rigorous theory of price determination. This 
meant abstracting from production and looking at the amount of 
goods available at any given moment of time. Thus economics 
avoided questions about class relations by asking questions 
about individual utility, so narrowing the field of analysis 
by asking politically harmless questions based on unrealistic 
models (for all its talk of rigour, the new economics did not 
provide an answer to how real prices were determined any more 
than classical economics had simply because its abstract models 
had no relation to reality).
<p>
It did, however, provide a naturalistic justification for capitalist 
social relations by arguing that profit, interest and rent are the 
result of individual decisions rather than the product of a 
specific social system. In other words, economics took the classes 
of capitalism, internalised them within itself, gave them universal 
application and, by taking for granted the existing distribution of 
wealth, justified the class structure and differences in market power 
this produces. It does not ask (or investigate) <b>why</b> some people own 
all the land and capital while the vast majority have to sell their 
labour on the market to survive. As such, it internalises the class 
structure of capitalism. Taking this class structure as a given, 
economics simply asks the question how much does each "factor" 
(labour, land, capital) contribute to the production of goods. 
<p>
Alfred Marshall justified this perspective as follows:
<p><blockquote><i>
"In the long run the earnings of each agent (of production) are, as 
a rule, sufficient only to recompense the sum total of the efforts 
and sacrifices required to produce them . . . with a partial exception
in the case of land . . . especially much land in old countries,
if we could trace its record back to their earliest origins. But
the attempt would raise controversial questions in history and ethics
as well as in economics; and the aims of our present inquiry are
prospective rather than retrospective."</i> [<b>Principles of Economics</b>,
p. 832]
</blockquote><p>
Which is wonderfully handy for those who benefited from the theft 
of the common heritage of humanity. Particularly as Marshall himself 
notes the dire consequences for those without access to the means of 
life on the market:
<p><blockquote><i>
"When a workman is in fear of hunger, his need of money is very great;
and, if at starting he gets the worst of the bargaining, it remains
great . . . That is all the more probably because, while the advantage 
in bargaining is likely to be pretty well distributed between the 
two sides of a market for commodities, it is more often on the side
of the buyers than on that of the sellers in a market for labour."</i>
[<b>Op. Cit.</b>, pp. 335-6]
</blockquote><p>
Given that market exchanges will benefit the stronger of the parties 
involved, this means that inequalities become stronger and more 
secure over time. Taking the current distribution of property as a 
given (and, moreover, something that must not be changed) then
the market does not correct this sort of injustice. In fact, it 
perpetuates it and, moreover, it has no way of compensating the 
victims as there is no mechanism for ensuring reparations. So the 
impact of previous acts of aggression has an impact on how
a specific society developed and the current state of the world. To
dismiss <i>"retrospective"</i> analysis as it raises <i>"controversial questions"</i>
and <i>"ethics"</i> is not value-free or objective science, it is pure 
ideology and skews any <i>"prospective"</i> enquiry into apologetics.
<p>
This can be seen when Marshall noted that labour <i>"is often sold under 
special disadvantages, arising from the closely connected group of facts 
that labour power is 'perishable,' that the sellers of it are commonly 
poor and have no reserve fund, and that they cannot easily withhold it 
from the market."</i> Moreover, the <i>"disadvantage, wherever it exists, is 
likely to be cumulative in its effects."</i> Yet, for some reason, he still 
maintains that <i>"wages of every class of labour tend to be equal to the 
net product due to the additional labourer of this class."</i> [<b>Op. Cit.</b>, 
p. 567, p. 569 and p. 518] Why should it, given the noted fact that 
workers are at a disadvantage in the market place? 
<p>
As such, how could it possibly be considered "scientific" or "value-free"
to ignore history? It is hardly <i>"retrospective"</i> to analyse the roots of
the current disadvantage working class people have in the current and
<i>"prospective"</i> labour market, particularly given that Marshall himself 
notes their results. This is a striking example of what Kropotkin 
deplored in economics, namely that in the rare situations when social 
conditions were <i>"mentioned, they were forgotten immediately, to be spoken 
of no more."</i> Thus reality is mentioned, but any impact this may have on 
the distribution of income is forgotten for otherwise you would have to
conclude, with the anarchists, that the <i>"appropriation of the produce of 
human labour by the owners of capital [and land] exists only because 
millions of men [and women] have literally nothing to live upon, unless 
they sell their labour force and their intelligence at a price that 
will make the net profit of the capitalist and 'surplus value' possible."</i> 
[<b>Evolution and Environment</b>, p. 92 and p. 106]
<p>
This is important, for respecting property rights is easy to talk 
about but it only faintly holds some water if the existing property 
ownership distribution is legitimate. If it is illegitimate, if the 
current property titles were the result of theft, corruption, 
colonial conquest, state intervention, and other forms of coercion 
then things are obviously different. That is why economics rarely, 
if ever, discusses this. This does not, of course, stop economists
arguing against current interventions in the market (particularly
those associated with the welfare state). In effect, they are arguing
that it is okay to reap the benefits of past initiations of force but 
it is wrong to try and rectify them. It is as if someone walks into 
a room of people, robs them at gun point and then asks that they should 
respect each others property rights from now on and only engage in 
voluntary exchanges with what they had left. Any attempt to establish 
a moral case for the "free market" in such circumstances would be 
unlikely to succeed. This is free market capitalist economics in a 
nutshell: never mind past injustices, let us all do the best we can 
given the current allocations of resources. 
<p>
Many economists go one better. Not content in ignoring history, 
they create little fictional stories in order to justify their 
theories or the current distribution of wealth and income. Usually, 
they start from isolated individual or a community of approximately
equal individuals (a community usually without any communal 
institutions). For example, the "waiting" theories of profit and 
interest (see 
<a href="secC2.html#secc27">section C.2.7</a>) requires such a fiction to be remotely 
convincing. It needs to assume a community marked by basic equality 
of wealth and income yet divided into two groups of people, one of 
which was industrious and farsighted who abstained from directly 
consuming the products created by their <b>own</b> labour while the 
other was lazy and consumed their income without thought of the 
future. Over time, the descendents of the diligent came to own 
the means of life while the descendants of the lazy and the prodigal 
have, to quote Marx, <i>"nothing to sell but themselves."</i> In that way, 
modern day profits and interest can be justified by appealing to 
such <i>"insipid childishness."</i> [<b>Capital</b>, vol. 1, p. 873] The
real history of the rise of capitalism is, as we discuss in
<a href="secF8.html">section F.8</a>, grim.
<p>
Of course, it may be argued that this is just a model and an 
abstraction and, consequently, valid to illustrate a point. 
Anarchists disagree. Yes, there is often the need for abstraction 
in studying an economy or any other complex system, but this is 
not an abstraction, it is propaganda and a historical invention 
used not to illustrate an abstract point but rather a specific 
system of power and class. That these little parables and stories 
have all the necessary assumptions and abstractions required to 
reach the desired conclusions is just one of those co-incidences 
which seem to regularly befall economics. 
<p>
The strange thing about these fictional stories is that they are 
given much more credence than real history within economics. Almost 
always, fictional "history" will always top actual history in 
economics. If the actual history of capitalism is mentioned, then the
defenders of capitalism will simply say that we should not penalise
current holders of capital for actions in the dim and distant past
(that current and future generations of workers are penalised goes
unmentioned). However, the fictional "history" of capitalism suffers
from no such dismissal, for invented actions in the dim and distant
past justify the current owners holdings of wealth and the income
that generates. In other words, heads I win, tails you loose. 
<p>
Needless to say, this (selective) myopia is not restricted to just 
history. It is applied to current situations as well. Thus we find 
economists defending current economic systems as "free market" regimes 
in spite of obvious forms of state intervention. As Chomsky notes:
<p><blockquote><i>
"when people talk about . . . free-market 'trade forces' inevitably
kicking all these people out of work and driving the whole world 
towards a kind of a Third World-type polarisation of wealth . . .
that's true if you take a narrow enough perspective on it. But if 
you look into the factors that <b>made</b> things the way they are, 
it doesn't even come <b>close</b> to being true, it's not remotely
in touch with reality. But when you're studying economics in the
ideological institutions, that's all irrelevant and you're not
supposed to ask questions like these."</i> [<b>Understanding Power</b>, 
p. 260]
</blockquote><p>
To ignore all that and simply take the current distribution of wealth
and income as given and then argue that the "free market" produces
the best allocation of resources is staggering. Particularly as the
claim of <i>"efficient allocation"</i> does not address the obvious question:
"efficient" for whose benefit? For the idealisation of freedom in and 
through the market ignores the fact that this freedom is very limited 
in scope to great numbers of people as well as the consequences to the 
individuals concerned by the distribution of purchasing power amongst 
them that the market throws up (rooted, of course in the original 
endowments). Which, of course, explains why, even <b>if</b> these parables 
of economics were true, anarchists would still oppose capitalism. We 
extend Thomas Jefferson's comment that the <i>"earth belongs always to the 
living generation"</i> to economic institutions as well as political -- the 
past should not dominate the present and the future (Jefferson: <i>"Can 
one generation bind another and all others in succession forever? I 
think not. The Creator has made the earth for the living, not for the 
dead. Rights and powers can only belong to persons, not to things, not 
to mere matter unendowed with will"</i>). For, as Malatesta argued, people
should <i>"not have the right . . . to subject people to their rule and
even less of bequeathing to the countless successions of their
descendants the right to dominate and exploit future generations."</i>
[<b>At the Cafe</b>, p. 48]
<p>
Then there is the strange co-incidence that "value free" economics 
generally ends up blaming all the problems of capitalism on workers. 
Unemployment? Recession? Low growth? Wages are too high! Proudhon summed 
up capitalist economic theory well when he stated that <i>"Political economy 
-- that is, proprietary despotism -- can never be in the wrong: it must 
be the proletariat."</i> [<b>System of Economical Contradictions</b>, p. 187] And 
little has changed since 1846 (or 1776!) when it comes to economics 
"explaining"</i> capitalism's problems (such as the business cycle or 
unemployment). 
<p>
As such, it is hard to consider economics as "value free" when economists 
regularly attack unions while being silent or supportive of big business. 
According to neo-classical economic theory, both are meant to be equally 
bad for the economy but you would be hard pressed to find many economists 
who would urge the breaking up of corporations into a multitude of small 
firms as their theory demands, the number who will thunder against 
"monopolistic" labour is substantially higher (ironically, as we note in 
<a href="secC1.html#secc14">section C.1.4</a>, their own theory shows that they must urge the break up of
corporations or support unions for, otherwise, unorganised labour <b>is</b> 
exploited). Apparently arguing that high wages are always bad but high 
profits are always good is value free.
<p>
So while big business is generally ignored (in favour of arguments 
that the economy works <i>"as if"</i> it did not exist), unions are rarely
given such favours. Unlike, say, transnational corporations, unions
are considered monopolistic. Thus we see the strange situation of 
economists (or economics influenced ideologies like right-wing 
"libertarians") enthusiastically defending companies that raise 
their prices in the wake of, say, a natural disaster and making 
windfall profits while, at the same time, attacking workers who 
decide to raise their wages by striking for being selfish. It 
is, of course, unlikely that they would let similar charges against 
bosses pass without comment. But what can you expect from an ideology 
which presents unemployment as a good thing (namely, increased leisure 
-- see <a href="secC1.html#secc15">section C.1.5</a>) and being rich as, essentially, a <b>disutility</b> 
(the pain of abstaining from present consumption falls heaviest on 
those with wealth -- see <a href="secC2.html#secc27">section C.2.7</a>).
<p>
Ultimately, only economists would argue, with a straight face, that 
the billionaire owner of a transnational corporation is exploited 
when the workers in his sweatshops successfully form a union 
(usually in the face of the economic and political power wielded
by their boss). Yet that is what many economists argue: the 
transnational corporation is not a monopoly but the union is
and monopolies exploit others! Of course, they rarely state it
as bluntly as that. Instead they suggest that unions get higher 
wages for their members be forcing other workers to take less 
pay (i.e. by exploiting them). So when bosses break unions they 
are doing this <b>not</b> to defend their profits and power but really 
to raise the standard of other, less fortunate, workers? Hardly.
In reality, of course, the reason why unions are so disliked by
economics is that bosses, in general, hate them. Under capitalism,
labour is a cost and higher wages means less profits (all things 
being equal). Hence the need to demonise unions, for one of the 
less understood facts is that while unions increase wages for 
members, they also increase wages for non-union workers. This 
should not be surprising as non-union companies have to raise 
wages stop their workers unionising and to compete for the best 
workers who will be drawn to the better pay and conditions of
union shops (as we discuss in <a href="secC9.html">section C.9</a>, the neoclassical 
model of the labour market is seriously flawed). 
<p>
Which brings us to another key problem with the claim that economics 
is "value free," namely the fact that it takes the current class 
system of capitalism and its distribution of wealth as not only a 
fact but as an ideal. This is because economics is based on the 
need to be able to differentiate between each factor of production 
in order to determine if it is being used optimally. In other words, 
the given class structure of capitalism is required to show that an 
economy uses the available resources efficiently or not. It
claims to be "value free" simply because it embeds the economic 
relationships of capitalist society into its assumptions about 
nature.
<p>
Yet it is impossible to define profit, rent and interest independently 
of the class structure of any given society. Therefore, this <i>"type of 
distribution is the peculiarity of capitalism. Under feudalism the 
surplus was extracted as land rent. In an artisan economy each commodity 
is produced by a men with his own tools; the distinction between wages 
and profits has no meaning there."</i> This means that <i>"the very essence of 
the theory is bound up with a particular institution -- wage labour. 
The central doctrine is that 'wages tend to equal marginal product of 
labour.' Obviously this has no meaning for a peasant household where 
all share the work and the income of their holding according to the 
rules of family life; nor does it apply in a [co-operative] where, 
the workers' council has to decide what part of net proceeds to allot 
to investment, what part to a welfare found and what part to distribute 
as wage."</i> [Joan Robinson, <b>Collected Economic Papers</b>, p. 26 and p. 130]
<p>
This means that the "universal" principles of economics end up by making
any economy which does <b>not</b> share the core social relations of capitalism
inherently "inefficient." If, for example, workers own all three "factors
of production" (labour, land and capital) then the "value-free" laws of
economics concludes that this will be inefficient. As there is only 
"income", it is impossible to say which part of it is attributable to 
labour, land or machinery and, consequently, if these factors are being
efficiently used. This means that the "science" of economics is bound
up with the current system and its specific class structure and, 
therefore, as a <i>"ruling class paradigm, the competitive model"</i> has 
the <i>"substantial"</i> merit that <i>"it can be used to rule off the agenda 
any proposals for substantial reform or intervention detrimental to 
large economic interests . . . as the model allows (on its assumptions) 
a formal demonstration that these would reduce efficiency."</i> [Edward S. 
Herman, <i>"The Selling of Market Economics,"</i> pp. 173-199, <b>New 
Ways of Knowing</b>, Marcus G. Raskin and Herbert J. Bernstein
(eds.), p. 178]
<p>
Then there are the methodological assumptions based on individualism.
By concentrating on individual choices, economics abstracts from 
the social system within which such choices are made and what 
influences them. Thus, for example, the analysis of the causes of 
poverty is turned towards the failings of individuals rather than 
the system as a whole (to be poor becomes a personal stigma). That 
the reality on the ground bears little resemblance to the myth 
matters little -- when people with two jobs still fail to earn 
enough to feed their families, it seems ridiculous to call them 
lazy or selfish. It suggests a failure in the system, not in the 
poor themselves. An individualistic analysis is guaranteed to 
exclude, by definition, the impact of class, inequality, social 
hierarchies and economic/social power and any analysis of any
inherent biases in a given economic system, its distribution of
wealth and, consequently, its distribution of income between 
classes.
<p>
This abstracting of individuals from their social surroundings results 
in the generating economic "laws" which are applicable for all 
individuals, in all societies, for all times. This results in all 
concrete instances, no matter how historically different, being 
treated as expressions of the same universal concept. In this way the 
uniqueness of contemporary society, namely its basis in wage labour, 
is ignored (<i>"The period through which we are passing . . . is 
distinguished by a special characteristic -- WAGES."</i> [Proudhon, 
<b>Op. Cit.</b>, p. 199]). Such a perspective 
cannot help being ideological rather than scientific. By trying to 
create a theory applicable for all time (and so, apparently, value 
free) they just hide the fact their theory assumes and justifies 
the inequalities of capitalism (for example, the assumption of given 
needs and distribution of wealth and income secretly introduces the 
social relations of the current society back into the model, something 
which the model had supposedly abstracted from). By stressing 
individualism, scarcity and competition, in reality economic analysis 
reflects nothing more than the dominant ideological conceptions found 
in capitalist society. Every few economic systems or societies in 
the history of humanity have actually reflected these aspects of 
capitalism (indeed, a lot of state violence has been used to create 
these conditions by breaking up traditional forms of society, property 
rights and customs in favour of those desired by the current ruling 
elite). 
<p>
The very general nature of the various theories of profit, interest 
and rent should send alarm bells ringing. Their authors 
construct these theories based on the deductive method and stress 
how they are applicable in <b>every</b> social and economic system. In 
other words, the theories are just that, theories derived independently 
of the facts of the society they are in. It seems somewhat strange, to 
say the least, to develop a theory of, say, interest independently
of the class system within which it is charged but this is precisely 
what these "scientists" do. It is understandable why. By ignoring 
the current system and its classes and hierarchies, the economic 
aspects of this system can be justified in terms of appeals to 
universal human existence. This will raise less objections than 
saying, for example, that interest exists because the rich will 
only part with their money if they get more in return and the 
poor will pay for this because they have little choice due to
their socio-economic situation. Far better to talk about "time
preference" rather than the reality of class society (see 
<a href="secC2.html#secc26">section C.2.6</a>).
<p>
Neoclassical economics, in effect, took the "political" out of 
"political economy" by taking capitalist society for granted along 
with its class system, its hierarchies and its inequalities. This
is reflected in the terminology used. These days even the term 
capitalism has gone out of fashion, replaced with the approved 
terms <i>"market system,"</i> the <i>"free market"</i> or <i>"free enterprise."</i> Yet,
as Chomsky noted, terms such as <i>"free enterprise"</i> are used <i>"to 
designate a system of autocratic governance of the economy in 
which neither the community nor the workforce has any role (a
system we would call 'fascist' if translated to the political 
sphere)."</i> [<b>Language and Politics</b>, p. 175] As such, it seems 
hardly "value-free" to proclaim a system free when, in reality,
most people are distinctly not free for most of their waking 
hours and whose choices outside production are influenced by 
the inequality of wealth and power which that system of production
create.
<p>
This shift in terminology reflects a political necessity. It 
effectively removes the role of wealth (capital) from the economy. 
Instead of the owners and manager of capital being in control or, 
at the very least, having significant impact on social events, we 
have the impersonal activity of <i>"the markets"</i> or <i>"market forces."</i> 
That such a change in terminology is the interest of those whose 
money accords them power and influence goes without saying. By 
focusing on the market, economics helps hide the real sources of 
power in an economy and attention is drawn away from such a key 
questions of how money (wealth) produces power and how it skews 
the "free market" in its favour. All in all, as dissident economist 
John Kenneth Galbraith once put it, <i>"[w]hat economists believe and 
teach is rarely hostile to the institutions that reflect the 
dominant economic power. Not to notice this takes effort, although 
many succeed."</i> [<b>The Essential Galbraith</b>, p. 180]
<p>
This becomes obvious when we look at how the advice economics gives 
to working class people. In theory, economics is based on individualism 
and competition yet when it comes to what workers should do, the 
"laws" of economics suddenly switch. The economist will now deny 
that competition is a good idea and instead urge that the workers 
co-operate (i.e. obey) their boss rather than compete (i.e. struggle 
over the division of output and authority in the workplace). They 
will argue that there is <i>"harmony of interests"</i> between worker 
and boss, that it is in the <b>self</b>-interest of workers <b>not</b> to be
selfish but rather to do whatever the boss asks to further <b>the
bosses</b> interests (i.e. profits). 
<p>
That this perspective implicitly recognises the <b>dependent</b> position 
of workers, goes without saying. So while the sale of labour is 
portrayed as a market exchange between equals, it is in fact an 
authority relation between servant and master. The conclusions 
of economics is simply implicitly acknowledging that authoritarian 
relationship by identifying with the authority figure in the 
relationship and urging obedience to them. It simply suggests 
workers make the best of it by refusing to be independent individuals
who need freedom to flourish (at least during working hours, outside
they can express their individuality by shopping). 
<p>
This should come as no surprise, for, as Chomsky notes, economics 
is rooted in the notion that <i>"you only harm the poor by making 
them believe that they have rights other than what they can win 
on the market, like a basic right to live, because that kind 
of right interferes with the market, and with efficiency, and 
with growth and so on -- so ultimately people will just be worse off 
if you try to recognise them."</i> [<b>Op. Cit.</b>, p. 251] Economics teaches 
that you must accept change without regard to whether it is appropriate 
it not. It teaches that you must not struggle, you must not fight. You 
must simply accept whatever change happens. Worse, it teaches that 
resisting and fighting back are utterly counter-productive. In other
words, it teaches a servile mentality to those subject to authority.
For business, economics is ideal for getting their employees to change 
their attitudes rather than collectively change how their bosses treat 
them, structure their jobs or how they are paid -- or, of course, 
change the system.
<p>
Of course, the economist who says that they are conducting "value free"
analysis are indifferent to the kinds of relationships within society is 
being less than honest. Capitalist economic theory is rooted in very
specific assumptions and concepts such as "economic man" and "perfect 
competition." It claims to be "value-free" yet its preferred terminology 
is riddled with value connotations. For example, the behaviour of "economic 
man" (i.e., people who are self-interested utility maximisation machines) 
is described as <i>"rational."</i> By implication, then, the behaviour of real 
people is <i>"irrational"</i> whenever they depart from this severely truncated 
account of human nature and society. Our lives consist of much more than 
buying and selling. We have goals and concerns which cannot be bought or 
sold in markets. In other words, humanity and liberty transcend the limits
of property and, as a result, economics. This, unsurprisingly, affects 
those who study the "science" as well:
<p><blockquote><i>
"Studying economics also seems to make you a nastier person. Psychological
studies have shown that economics graduate students are more likely to
'free ride' -- shirk contributions to an experimental 'public goods'
account in the pursuit of higher private returns -- than the general
public. Economists also are less generous that other academics in
charitable giving. Undergraduate economics majors are more likely to
defect in the classic prisoner's dilemma game that are other majors.
And on other tests, students grow less honest -- expressing less of
a tendency, for example, to return found money -- after studying 
economics, but not studying a control subject like astronomy.
<p>
"This is no surprise, really. Mainstream economics is built entirely
on a notion of self-interested individuals, rational self-maximisers
who can order their wants and spend accordingly. There's little room
for sentiment, uncertainty, selflessness, and social institutions.
Whether this is an accurate picture of the average human is open to
question, but there's no question that capitalism as a system and
economics as a discipline both reward people who conform to the
model."</i> [Doug Henwood, <b>Wall Street</b>, p, 143]
</blockquote><p>
So is economics "value free"? Far from it. Given its social role, it
would be surprising that it were. That it tends to produce policy 
recommendations that benefit the capitalist class is not an accident. 
It is rooted in the fibre of the "science" as it reflects the 
assumptions of capitalist society and its class structure. Not only
does it take the power and class structures of capitalism for granted, 
it also makes them the ideal for any and every economy. Given this,
it should come as no surprise that economists will tend to support 
policies which will make the real world conform more closely to 
the standard (usually neoclassical) economic model. Thus the 
models of economics become more than a set of abstract assumptions, 
used simply as a tool in theoretical analysis of the casual
relations of facts. Rather they become political goals, an ideal
towards which reality should be forced to travel. 
<p>
This means that economics has a dual character. On the one hand, 
it attempts to prove that certain things (for example, that free 
market capitalism produces an optimum allocation of resources or 
that, given free competition, price formation will ensure that each 
person's income corresponds to their productive contribution). On 
the other, economists stress that economic "science" has nothing to
do with the question of the justice of existing institutions,
class structures or the current economic system. And some people
seem surprised that this results in policy recommendations which 
consistently and systematically favour the ruling class.

<h2><a name="secc12">C.1.2 Is economics a science?</a></h2>

In a word, no. If by "scientific" it is meant in the usual sense of 
being based on empirical observation and on developing an analysis 
that was consistent with and made sense of the data, then most forms
of economics are not a science. 
<p>
Rather than base itself on a study of reality and the generalisation 
of theory based on the data gathered, economics has almost always been
based on generating theories rooted on whatever assumptions were required
to make the theory work. Empirical confirmation, if it happens at all, 
is usually done decades later and if the facts contradict the economics, 
so much the worse for the facts. 
<p>
A classic example of this is the neo-classical theory of production. 
As noted previously, neoclassical economics is focused on individual
evaluations of existing products and, unsurprisingly, economics is
indelibly marked by <i>"the dominance of a theoretical vision that treats 
the inner workings of the production process as a 'black box.'"</i> This
means that the <i>"neoclassical theory of the 'capitalist' economy makes 
no qualitative distinction between the corporate enterprise that
employs tens of thousands of people and the small family undertaking
that does no employ any wage labour at all. As far as theory is
concerned, it is technology and market forces, not structures of
social power, that govern the activities of corporate capitalists
and petty proprietors alike."</i> [David Lazonick, <b>Competitive Advantage 
on the Shop Floor</b>, p. 34 and pp. 33-4] Production in this schema
just happens -- inputs go in, outputs go out -- and what happens 
inside is considered irrelevant, a technical issue independent of the
social relationships those who do the actual production form between
themselves -- and the conflicts that ensure. 
<p>
The theory does have a few key assumptions associated with it, however.
First, there are diminishing returns. This plays a central role. In
mainstream diminishing returns are required to produce a downward
sloping demand curve for a given factor. Second, there is a rising
supply curve based on rising marginal costs produced by diminishing
returns. The average variable cost curve for a firm is assumed to be 
U-shaped, the result of first increasing and then diminishing returns. 
These are logically necessary for the neo-classical theory to work.
<p>
Non-economists would, of course, think that these assumptions are
generalisations based on empirical evidence. However, they are not.
Take the U-shaped average cost curve. This was simply invented by
A. C. Pigou, <i>"a loyal disciple of [leading neo-classical Alfred]
Marshall and quite innocent of any knowledge of industry. He therefore 
constructed a U-shaped average cost curve for a firm, showing economies 
of scale up to a certain size and rising costs beyond it."</i> [Joan 
Robinson, <b>Collected Economic Papers</b>, vol. 5, p. 11] The invention
was driven by need of the theory, not the facts. With increasing 
returns to scale, then large firms would have cost advantages against
small ones and would drive them out of business in competition. This
would destroy the concept of perfect competition. However, the 
invention of the average cost curve allowed the theory to work as 
"proved"</i> that a competitive market could <b>not</b> become dominated by 
a few large firms, as feared. 
<p>
The model, in other words, was adjusted to ensure that it produced 
the desired result rather than reflect reality. The theory was 
required to prove that markets remained competitive and the 
existence of diminishing marginal returns to scale of production 
<b>did</b> tend by itself to limit the size of individual firms. That 
markets did become dominated by a few large firms was neither here 
nor there. It did not happen in theory and, consequently, that 
was the important thing and so <i>"when the great concentrations of 
power in the multinational corporations are bringing the age of 
national employment policy to an end, the text books are still 
illustrated by U-shaped curves showing the limitation on the 
size of firms in a perfectly competitive market."</i> [Joan Robinson,
<b>Contributions to Modern Economics</b>, p. 5]
<p>
To be good, a theory must have two attributes: They accurately describe 
the phenomena in question and they make accurate predictions. Neither
holds for Pigou's invention: reality keeps getting in the way. Not only
did the rise of a few large firms dominating markets indirectly show that
the theory was nonsense, when empirical testing was finally done decades
after the theory was proposed it showed that in most cases the opposite 
is the case: that there were constant or even falling costs in production.
Just as the theories of marginality and diminishing marginal returns 
taking over economics, the real world was showing how wrong it was with
the rise of corporations across the world. 
<p>
So the reason why the market become dominated by a few firms should be 
obvious enough: actual corporate price is utterly different from the 
economic theory. This was discovered when researchers did what the 
original theorists did not think was relevant: they actually asked 
firms what they did and the researchers consistently found that, for 
the vast majority of manufacturing firms their average costs of 
production declined as output rose, their marginal costs were 
always well below their average costs, and substantially smaller 
than 'marginal revenue', and the concept of a 'demand curve' (and 
therefore its derivative 'marginal revenue') was simply irrelevant. 
<p>
Unsurprisingly, real firms set their prices prior to sales, based on a 
mark-up on costs at a target rate of output. In other words, they did 
not passively react to the market. These prices are an essential feature 
of capitalism as prices are set to maintain the long-term viability of 
the firm. This, and the underlying reality that per-unit costs fell as 
output levels rose, resulted in far more stable prices than were 
predicted by traditional economic theory. One researcher concluded 
that administered prices <i>"differ so sharply from the behaviour to be 
expected from"</i> the theory <i>"as to challenge the basic conclusions"</i> of 
it. He warned that until such time as <i>"economic theory can explain
and take into account the implications"</i> of this empirical data, <i>"it
provides a poor basis for public policy."</i> Needless to say, this did
not disturb neo-classical economists or stop them providing public
policy recommendations. [Gardiner C. Means, <i>"The Administered-Price 
Thesis Reconfirmed",</i> <b>The American Economic Review</b>, pp. 292-306, 
Vol. 62, No. 3, p. 304]
<p>
One study in 1952 showed firms a range of hypothetical cost curves, 
and asked firms which ones most closely approximated their own costs. 
Over 90% of firms chose a graph with a declining average cost rather 
than one showing the conventional economic theory of rising marginal 
costs. These firms faced declining average cost, and their marginal 
revenues were much greater than marginal cost at all levels of output. 
Unsurprisingly, the study's authors concluded if this sample was typical 
then it was <i>"obvious that short-run marginal price theory should be
revised in the light of reality."</i> We are still waiting. [Eiteman and 
Guthrie, <i>"The Shape of the Average Cost Curve",</i> <b>The American Economic
Review</b>, pp. 832-8, Vol. 42, No. 5, p. 838]
<p>
A more recent study of the empirical data came to the same conclusions,
arguing that it is <i>"overwhelming bad news . . . for economic theory."</i>
While economists treat rising marginal cost as the rule, 89% of firms
in the study reported marginal costs which were either constant or
declined with output. As for price elasticity, it is not a vital
operational concept for corporations. In other words, the <i>"firms
that sell 40 percent of GDP believe their demand is totally 
insensitive to price"</i> while <i>"only about one-sixth of GDP is sold
under conditions of elastic demand."</i> [A.S. Blinder, E. Cabetti,
D. Lebow and J. Rudd, <b>Asking About Prices</b>, p. 102 and p. 101] 
<p>
Thus empirical research has concluded that actual price setting has nothing 
to do with clearing the market by equating market supply to market demand 
(i.e. what economic theory sees as the role of prices). Rather, prices 
are set to enable the firm to continue as a going concern and equating 
supply and demand in any arbitrary period of time is irrelevant to a firm 
which hopes to exist for the indefinite future. As Lee put it, basing 
himself on extensive use of empirical research, <i>"market prices are not 
market-clearing or profit-maximising prices, but rather are enterprise-, 
and hence transaction-reproducing prices."</i> Rather than a non-existent
equilibrium or profit maximisation at a given moment determining prices,
the market price is <i>"set and the market managed for the purpose of 
ensuring continual transactions for those enterprises in the market,
that is for the benefit of the business leaders and their enterprises."</i>
A significant proportion of goods have prices based on mark-up, normal
cost and target rate of return pricing procedures and are relatively
stable over time. Thus <i>"the existence of stable, administered market
prices implies that the markets in which they exist are not organised
like auction markets or like the early retail markets and oriental 
bazaars"</i> as imagined in mainstream economic ideology. [Frederic S. 
Lee, <b>Post Keynesian Price Theory</b>, p. 228 and p. 212]
<p>
Unsurprisingly, most of these researchers were highly critical the 
conventional economic theory of markets and price setting. One viewed 
the economists' concepts of perfect competition and monopoly as virtual 
nonsense and <i>"the product of the itching imaginations of uninformed and 
inexperienced armchair theorisers."</i> [Tucker, quoted by Lee, <b>Op. Cit.</b>, 
p. 73f] Which <b>was</b> exactly how it was produced.
<p>
No other science would think it appropriate to develop theory utterly
independently of phenomenon under analysis. No other science would wait
decades before testing a theory against reality. No other science would
then simply ignore the facts which utterly contradicted the theory and
continue to teach that theory as if it were a valid generalisation of
the facts. But, then, economics is not a science.
<p>
This strange perspective makes sense once it is realised how key the
notion of diminishing costs is to economics. In fact, if the assumption
of increasing marginal costs is abandoned then so is perfect competition
and <i>"the basis of which economic laws can be constructed . . . is shorn 
away,"</i> causing the <i>"wreckage of the greater part of general equilibrium 
theory."</i> This will have <i>"a very destructive consequence for economic 
theory,"</i> in the words of one leading neo-classical economist. [John 
Hicks, <b>Value and Capital</b>, pp. 83-4] As Steve Keen notes, this is 
extremely significant:
<p><blockquote><i>
"Strange as it may seem . . . this is a very big deal. If marginal
returns are constant rather than falling, then the neo-classical 
explanation of everything collapses. Not only can economic theory 
no longer explain how much a firm produces, it can explain nothing
else.
<p>
"Take, for example, the economic theory of employment and wage
determination . . . The theory asserts that the real wage is 
equivalent to the marginal product of labour . . . An employer
will employ an additional worker if the amount the worker adds
to output -- the worker's marginal product -- exceeds the real
wage . . . [This] explains the economic predilection for blaming
everything on wages being too high -- neo-classical economics
can be summed up, as [John Kenneth] Galbraith once remarked, 
in the twin propositions that the poor don't work hard enough
because they're paid too much, and the rich don't work hard
enough because they're not paid enough . . .
<p>
"If in fact the output to employment relationship is relatively
constant, then the neo-classical explanation for employment and
output determination collapses. With a flat production function,
the marginal product of labour will be constant, and it will
<b>never</b> intersect the real wage. The output of the form then
can't be explained by the cost of employing labour. . . [This
means that] neo-classical economics simply cannot explain 
anything: neither the level of employment, nor output, nor,
ultimately, what determines the real wage . . .the entire
edifice of economics collapses."</i> [<b>Debunking Economics</b>,
pp. 76-7]
</blockquote><p>
It should be noted that the empirical research simply confirmed
an earlier critique of neo-classical economics presented by
Piero Sraffa in 1926. He argued that while the neo-classical
model of production works in theory only if we accept its 
assumptions. If those assumptions do not apply in practice,
then it is irrelevant. He therefore <i>"focussed upon the economic
assumptions that there were 'factors of production' which were
fixed in the short run, and that supply and demand were 
independent of each other. He argued that these two assumptions 
could be fulfilled simultaneously. In circumstances where it
was valid to say some factor of production was fixed in the short 
term, supply and demand could not independent, so that every 
point on the supply curve would be associated with a different
demand curve. On the other hand, in circumstances where supply
and demand could justifiably be treated as independent, then it
would be impossible for any factor of production to be fixed.
Hence the marginal costs of production would be constant."</i>
He stressed firms would have to be irrational to act otherwise,
foregoing the chance to make profits simply to allow economists
to build their models of how they should act. [Keen, <b>Op. Cit.</b>, 
pp. 66-72] 
<p>
Another key problem in economics is that of time. This has been known, 
and admitted, by economists for some time. Marshall, for example, stated
that <i>"the element of <b>time</b>"</i> was <i>"the source of many of the greatest
difficulties of economics."</i> [<b>Principles of Economics</b>, p. 109] The
founder of general equilibrium theory, Walras, recognised that the
passage of time wrecked his whole model and stated that we <i>"shall 
resolve the . . . difficulty purely and simply by ignoring the time 
element at this point."</i> This was due, in part, because production
<i>"requires a certain lapse of time."</i> [<b>Elements of Pure Economics</b>, 
p. 242] This was generalised by Gerard Debreu (in his Nobel Prize
for economics winning <b>Theory of Value</b> ) who postulated that everyone
makes their sales and purchases for all time in one instant. 
<p>
Thus the cutting edge of neo-classical economics, general equilibrium 
ignores both time <b>and</b> production. It is based on making time 
stop, looking at finished goods, getting individuals to bid for 
them and, once all goods are at equilibrium, allowing the transactions 
to take place. For Walras, this was for a certain moment of time and
was repeated, for his followers it happened once for all eternity. 
This is obviously not the way markets work in the real world and, 
consequently, the dominant branch of economics is hardly scientific.
Sadly, the notion of individuals having full knowledge of both now
and the future crops up with alarming regularly in the "science"
of economics.
<p>
Even if we ignore such minor issues as empirical evidence and time,
economics has problems even with its favoured tool, mathematics. As
Steve Keen has indicated, economists have <i>"obscured reality using 
mathematics because they have practised mathematics badly, and
because they have not realised the limits of mathematics."</i> indeed,
there are <i>"numerous theorems in economics that reply upon 
mathematically fallacious propositions."</i> [<b>Op. Cit.</b>, p. 258 and 
p. 259] For a theory born from the desire to apply calculus to 
economics, this is deeply ironic. As an example, Keen points to 
the theory of perfect competition which assumes that while the 
demand curve for the market as a whole is downward sloping, an 
individual firm in perfect competition is so small that it cannot 
affect the market price and, consequently, faces a horizontal 
demand curve. Which is utterly impossible. In other words, 
economics breaks the laws of mathematics. 
<p>
These are just two examples, there are many, many more. However, these
two are pretty fundamental to the whole edifice of modern economic
theory. Much, if not most, of mainstream economics is based upon 
theories which have little or no relation to reality. Kropotkin's 
dismissal of <i>"the metaphysical definitions of the academical 
economists"</i> is as applicable today. [<b>Evolution and Environment</b>,
p. 92] Little wonder dissident economist Nicholas Kaldor argued that:
<p><blockquote><i>
"The Walrasian [i.e. general] equilibrium theory is a highly developed
intellectual system, much refined and elaborated by mathematical 
economists since World War II -- an intellectual experiment . . . But 
it does not constitute a scientific hypothesis, like Einstein's theory 
of relativity or Newton's law of gravitation, in that its basic assumptions 
are axiomatic and not empirical, and no specific methods have been put
forward by which the validity or relevance of its results could be tested. 
The assumptions make assertions about reality in their implications, but 
these are not founded on direct observation, and, in the opinion of 
practitioners of the theory at any rate, they cannot be contradicted by 
observation or experiment."</i> [<b>The Essential Kaldor</b>, p. 416]
</blockquote>

<h2><a name="secc13">C.1.3 Can you have an economics based on individualism?</a></h2>

In a word, no. No economic system is simply the sum of its parts. The 
idea that capitalism is based on the subjective evaluations of individuals 
for goods flies in the face of both logic and the way capitalism works. 
In other words, modern economists is based on a fallacy. While it would 
be expected for critics of capitalism to conclude this, the ironic thing 
is that economists themselves have proven this to be the case. 
<p>
Neoclassical theory argues that marginal utility determines demand and
price, i.e. the price of a good is dependent on the intensity of demand
for the marginal unit consumed. This was in contrast to classic economics,
which argued that price (exchange value) was regulated by the cost of
production, ultimately the amount of labour used to create it. While
realistic, this had the political drawback of implying that profit,
rent and interest were the product of unpaid labour and so capitalism 
was exploitative. This conclusion was quickly seized upon by numerous 
critics of capitalism, including Proudhon and Marx. The rise of marginal 
utility theory meant that such critiques could be ignored. 
<p>
However, this change was not unproblematic. The most obvious problem with 
it is that it leads to circular reasoning. Prices are supposed to measure 
the "marginal utility" of the commodity, yet consumers need to know the 
price <b>first</b> in order to evaluate how best to maximise their satisfaction. 
Hence it <i>"obviously rest[s] on circular reasoning. Although it tries to 
explain prices, prices [are] necessary to explain marginal utility."</i> 
[Paul Mattick, <b>Economics, Politics and the Age of Inflation</b>, p.58] 
In the end, as Jevons (one of the founders of the new economics) 
acknowledged, the price of a commodity is the only test we have of the 
utility of the commodity to the producer. Given that marginality utility 
was meant to explain those prices, the failure of the theory could not 
be more striking.
<p>
However, this is the least of its problems. At first, the neoclassical 
economists used cardinal utility as their analysis tool. Cardinal utility 
meant that it was measurable  between individuals, i.e. that the utility 
of a given good was the same for all. While this allowed prices to be 
determined, it caused obvious political problems as it obviously justified 
the taxation of the wealthy. As cardinal utility implied that the "utility" 
of an extra dollar to a poor person was clearly greater than the loss of 
one dollar to a rich man, it was appropriated by reformists precisely to 
justify social reforms and taxation. 
<p>
Capitalist economists had, yet again, created a theory that could be used 
to attack capitalism and the income and wealth hierarchy it produces. As
with classical economics, socialists and other social reformists used the
new theories to do precisely that, appropriating it to justify the 
redistribution of income and wealth downward (i.e. back into the hands of 
the class who had created it in the first place). Combine this with
the high levels of class conflict at the time and it should come as 
no surprise that the "science" of economics was suitably revised.
<p>
There was, of course, a suitable "scientific" rationale for this revision.
It was noted that as individual evaluations are inherently subjective,
it is obvious that cardinal utility was impossible in practice. Of 
course, cardinality was not totally rejected. Neoclassical economics 
retained the idea that capitalists maximise profits, which is a cardinal 
quantity. However for demand utility became "ordinal," that is utility 
was considered an individual thing and so could not be measured. This 
resulted in the conclusion that there was no way of making interpersonal 
comparisons between individuals and, consequently, no basis for saying
a pound in the hands of a poor person had more utility than if it had 
remained in the pocket of a billionaire. The economic case for taxation
was now, apparently, closed. While you may think that income redistribution
was a good idea, it was now proven by "science" that this little more
than a belief as all interpersonal comparisons were now impossible. 
That this was music to the ears of the wealthy was, of course, just 
one of those strange co-incidences which always seems to plague 
economic "science."
<p>
The next stage of the process was to abandon then ordinal utility in 
favour of "indifference curves" (the continued discussion of "utility" 
in economics textbooks is primarily heuristic). In this theory 
consumers are supposed to maximise their utility by working out which 
bundle of goods gives them the highest level of satisfaction based
on the twin constraints of income and given prices (let us forget, for
the moment, that marginal utility was meant to determines prices in the
first place). To do this, it is assumed that incomes and tastes are
independent and that consumers have pre-existing preferences for all
possible bundles.
<p>
This produces a graph that shows different quantities of two different goods, 
with the "indifference curves" showing the combinations of goods which give
the consumer the same level of satisfaction (hence the name, as the consumer
is "indifferent" to any combination along the curve). There is also a straight 
line representing relative prices and the consumer's income and this budget 
line shows the uppermost curve the consumer can afford to reach. That these
indifference curves could not be observed was not an issue although leading 
neo-classical economist Paul Samuelson provided an apparent means see these
curves by his concept of <i>"revealed preference"</i> (a basic tautology). There 
is a reason why "indifference curves" cannot be observed. They are literally 
impossible for human beings to calculate once you move beyond a trivially 
small set of alternatives and it is impossible for actual people to act as 
economists argue they do. Ignoring this slight problem, the "indifference 
curve" approach to demand can be faulted for another, even more basic, 
reason. It does not prove what it seeks to show:
<p><blockquote><i>
"Though mainstream economics began by assuming that this hedonistic,
individualist approach to analysing consumer demand was intellectually
sound, <b>it ended up proving that it was not.</b> The critics were right:
society is more than the sum of its individual members."</i> [Steve Keen,
<b>Debunking Economics</b>, p. 23]
</blockquote><p>
As noted above, to fight the conclusion that redistributing wealth would 
result in a different level of social well-being, economists had to show 
that <i>"altering the distribution of income did not alter social welfare.
They worked out that two conditions were necessary for this to be
true: (a) that all people have the same tastes; (b) that each person's
tastes remain the same as her income changes, so that every additional
dollar of income was spent exactly the same way as all previous dollars."</i>
The former assumption <i>"in fact amounts to assuming that there is only
one person in society"</i> or that <i>"society consists of a multitude of
identical drones"</i> or clones. The latter assumption <i>"amounts to assuming
that there is only one commodity -- since otherwise spending patterns 
would necessary change as income rose."</i> [Keen, <b>Op. Cit.</b>, p. 24] This
is the real meaning of the assumption that all goods and consumers 
can be considered <i>"representative."</i> Sadly, such individuals and goods
do not exist. Thus:
<p><blockquote><i>
"Economics can prove that 'the demand curve slows downward in price'
for a single individual and a single commodity. But in a society 
consisting of many different individuals with many different 
commodities, the 'market demand curve' is more probably jagged, and
slopes every which way. One essential building block of the economic
analysis of markets, the demand curve, therefore does not have the
characteristics needed for economic theory to be internally 
consistent . . . most mainstream academic economists are aware of 
this problem, but they pretend that the failure can be managed with a 
couple of assumptions. Yet the assumptions themselves are so absurd 
that only someone with a grossly distorted sense of logic could accept 
them. That grossly distorted sense of logic is acquired in the course of
a standard education in economics."</i> [<b>Op. Cit.</b>, pp. 25-7]
</blockquote><p>
Rather than produce a <i>"social indifference map which had the same
properties as the individual indifference maps"</i> by adding up all the 
individual maps, economics <i>"proved that this consistent summation from 
individual to society could <b>not</b> be achieved."</i> Any sane person would 
have rejected the theory at this stage, but not economists. Keen states 
the obvious: <i>"That economists, in general, failed to draw this inference 
speaks volumes for the unscientific nature of economic theory."</i> They 
simply invented <i>"some fudge to disguise the gapping hole they have 
uncovered in the theory."</i> [<b>Op. Cit.</b>, p. 40 and p. 48] Ironically, it
took over one hundred years and advanced mathematical logic to reach 
the same conclusion that the classical economists took for granted, 
namely that individual utility could not be measured and compared. 
However, instead of seeking exchange value (price) in the process of
production, neoclassical economists simply that made a few absurd 
assumptions and continued on its way as if nothing was wrong. 
<p>
This is important because <i>"economists are trying to prove that a
market economy necessarily maximises social welfare. If they can't
prove that the market demand curve falls smoothly as price rises,
they can't prove that the market maximises social welfare."</i> In
addition, <i>"the concept of a social indifference curve is crucial
to many of the key notions of economics: the argument that free 
trade is necessarily superior to regulated trade, for example,
is first constructed using a social indifference curve. Therefore,
if the concept of a social indifference curve itself is invalid,
then so too are many of the most treasured notions of economics."</i>
[Keen, <b>Op. Cit.</b>, p. 50] This means much of economic theory is 
invalidated and with it the policy recommendations based on it. 
<p>
This elimination of individual differences in favour of a society
of clones by marginalism is not restricted to demand. Take the 
concept of the <i>"representative firm"</i> used to explain supply. Rather
than a theoretical device to deal with variety, it ignores diversity.
It is a heuristic concept which deals with a varied collection of
firms by identifying a single set of distinct characteristics which
are deemed to represent the essential qualities of the industry 
as a whole. It is <b>not</b> a single firm or even a typical or average
firm. It is an imaginary firm which exhibits the "representative"
features of the entire industry, i.e. it treats an industry as if 
it were just one firm. Moreover, it should be stressed that 
this concept is driven by the needs to prove the model, not by any 
concern over reality. The <i>"real weakness"</i> of the <i>"representative 
firm"</i> in neo-classical economics is that it is <i>"no more than
a firm which answers the requirements expected from it by the
supply curve"</i> and because it is <i>"nothing more than a small-scale
replica of the industry's supply curve that it is unsuitable for
the purpose it has been called into being."</i> [Kaldor, <b>The
Essential Kaldor</b>, p. 50] 
<p>
Then there is neoclassical analysis of the finance market. According 
to the Efficient Market Hypothesis, information is disseminated 
equally among all market participants, they all hold similar
interpretations of that information and all can get access to all
the credit they need at any time at the same rate. In other words, 
everyone is considered to be identical in terms of what they know, 
what they can get and what they do with that knowledge and cash. 
This results in a theory which argues that stock markets accurately 
price stocks on the basis of their unknown future earnings, i.e. 
that these identical expectations by identical investors are correct. 
In other words, investors are able to correctly predict the future 
and act in the same way to the same information. Yet if everyone 
held identical opinions then there would be no trading of shares 
as trading obviously implies <b>different</b> opinions on how a stock 
will perform. Similarly, in reality investors are credit rationed, 
the rate of borrowing tends to rise as the amount borrowed increases 
and the borrowing rate normally exceeds the leading rate. The 
developer of the theory was honest enough to state that the <i>"consequence 
of accommodating such aspects of reality are likely to be disastrous 
in terms of the usefulness of the resulting theory . . . The theory 
is in a shambles."</i> [W.F Sharpe, quoted by Keen, <b>Op. Cit.</b>, p. 233] 
<p>
Thus the world was turned into a single person simply to provide a 
theory which showed that stock markets were "efficient" (i.e. accurately 
reflect unknown future earnings). In spite of these slight problems, 
the theory was accepted in the mainstream as an accurate reflection 
of finance markets. Why? Well, the implications of this theory are 
deeply political as it suggests that finance markets will never 
experience bubbles and deep slumps. That this contradicts the 
well-known history of the stock market was considered unimportant. 
Unsurprisingly, <i>"as time went on, more and more data turned up which
was not consistent with"</i> the theory. This is because the model's 
world <i>"is clearly not our world."</i> The theory <i>"cannot apply in a
world in which investors differ in their expectations, in which the
future is uncertain, and in which borrowing is rationed."</i> It 
<i>"should never have been given any credibility -- yet instead it
became an article of faith for academics in finance, and a
common belief in the commercial world of finance."</i> [Keen, <b>Op. Cit.</b>,
p. 246 and p. 234] 
<p>
This theory is at the root of the argument that finance markets should 
be deregulated and as many funds as possible invested in them. While 
the theory may benefit the minority of share holders who own 
the bulk of shares and help them pressurise government policy, it 
is hard to see how it benefits the rest of society. Alternative, 
more realistic theories, argue that finance markets show endogenous 
instability, result in bad investment as well as reducing the overall 
level of investment as investors will not fund investments which are 
not predicted to have a sufficiently high rate of return. All of 
which has a large and negative impact on the real economy. Instead, 
the economic profession embraced a highly unreal economic theory 
which has encouraged the world to indulge in stock market 
speculation as it argues that they do not have bubbles, booms 
or bursts (that the 1990s stock market bubble finally burst like 
many previous ones is unlikely to stop this). Perhaps this has to do 
the implications for economic theory for this farcical analysis of 
the stock market? As two mainstream economists put it:
<p><blockquote><i>
"To reject the Efficient Market Hypothesis for the whole stock
market . . . implies broadly that production decisions based on
stock prices will lead to inefficient capital allocations. More
generally, if the application of rational expectations theory to
the virtually 'idea' conditions provided by the stock market fails,
then what confidence can economists have in its application to
other areas of economics . . . ?"</i> [Marsh and Merton, quoted by
Doug Henwood, <b>Wall Street</b>, p. 161]
</blockquote><p>
Ultimately, neoclassical economics, by means of the concept of 
"representative" agent, has proved that subjective evaluations 
could not be aggregated and, as a result, a market supply and 
demand curves cannot be produced. In other words, neoclassical 
economics has shown that if society were comprised of one individual, 
buying one good produced by one factory then it could accurately reflect
what happened in it. <i>"It is stating the obvious,"</i> states Keen, <i>"to 
call the representative agent an 'ad hoc' assumption, made simply 
so that economists can pretend to have a sound basis for their 
analysis, when in reality they have no grounding whatsoever."</i> 
[<b>Op. Cit.</b>, p. 188]
<p>
There is a certain irony about the change from cardinal to ordinal
utility and finally the rise of the impossible nonsense which are
"indifference curves." While these changes were driven by the need
to deny the advocates of redistributive taxation policies the mantel
of economic science to justify their schemes, the fact is by rejecting 
cardinal utility, it becomes impossible to say whether state action 
like taxes decreases utility at all. With ordinal utility and its
related concepts, you cannot actually show that government intervention 
actually harms "social utility." All you can say is that they are 
indeterminate. While the rich may lose income and the poor gain, it 
is impossible to say anything about social utility without making an 
interpersonal (cardinal) utility comparison. Thus, ironically, ordinal 
utility based economics provides a much weaker defence of free market 
capitalism by removing the economist of the ability to call any act of 
government "inefficient" and they would have to be evaluated in, horror
of horrors, non-economic terms. As Keen notes, it is <i>"ironic that this
ancient defence of inequality ultimately backfires on economics, by
making its impossible to construct a market demand curve which is 
independent on the distribution of income . . . economics cannot defend 
any one distribution of income over any other. A redistribution of 
income that favours the poor over the rich cannot be formally 
opposed by economic theory."</i> [<b>Op. Cit.</b>, p. 51]
<p>
Neoclassical economics has also confirmed that the classical perspective 
of analysing society in terms of classes is also more valid than the 
individualistic approach it values. As one leading neo-classical economist
has noted, if economics is <i>"to progress further we may well be forced
to theorise in terms of groups who have collectively coherent behaviour."</i>
Moreover, the classical economists would not be surprised by the 
admission that <i>"the addition of production <b>can</b> help"</i> economic analysis
nor the conclusion that the <i>"idea that we should start at the level of
the isolated individual is one which we may well have to abandon . . .
If we aggregate over several individuals, such a model is unjustified."</i>
[Alan Kirman, <i>"The Intrinsic Limits of Modern Economy Theory",</i> pp. 126-139,
</b> The Economic Journal</b>, Vol. 99, No. 395, p. 138, p. 136 and p. 138]
<p>
So why all the bother? Why spend over 100 years driving economics into
a dead-end? Simply because of political reasons. The advantage of 
the neoclassical approach was that it abstracted away from production 
(where power relations are clear) and concentrated on exchange (where 
power works indirectly). As libertarian Marxist Paul Mattick notes,
the <i>"problems of bourgeois economics seemed to disappear as soon as one 
ignored production and attended only to the market . . . Viewed apart from 
production, the price problem can be dealt with purely in terms of the 
market."</i> [<b>Economic Crisis and Crisis Theory</b>, p. 9] By ignoring 
production, the obvious inequalities of power produced by the dominant 
social relations within capitalism could be ignored in favour of 
looking at abstract individuals as buyers and sellers. That this meant 
ignoring such key concepts as time by forcing economics into a static, 
freeze frame, model of the economy was a price worth paying as it 
allowed capitalism to be justified as the best of all possible worlds:
<p><blockquote><i>
"On the one hand, it was thought essential to represent the winning of 
profit, interest, and rent as participation in the creation of wealth. 
On the other, it was thought desirable to found the authority of economics 
on the procedures of natural science. This second desire prompted a search 
for general economic laws independent of time and circumstances. If such 
laws could be proven, the existing society would thereby be legitimated 
and every idea of changing it refuted. Subjective value theory promised 
to accomplish both tasks at once. Disregarding the exchange relationship 
peculiar to capitalism -- that between the sellers and buyers of labour 
power -- it could explain the division of the social product, under 
whatever forms, as resulting from the needs of the exchangers themselves."</i>
[Mattick, <b>Op. Cit.</b>, p. 11]
</blockquote><p>
The attempt to ignore production implied in capitalist economics comes 
from a desire to hide the exploitative and class nature of capitalism. 
By concentrating upon the "subjective" evaluations of individuals, 
those individuals are abstracted away from real economic activity (i.e. 
production) so the source of profits and power in the economy can be 
ignored (<a href="secC2.html">section C.2</a> indicates why exploitation of labour in production 
is the source of profit, interest and rent and <b>not</b> exchanges in the 
market). 
<p>
Hence the flight from classical economics to the static, timeless
world of individuals exchanging pre-existing goods on the market. The 
evolution of capitalist economics has always been towards removing any
theory which could be used to attack capitalism. Thus classical economics 
was rejected in favour of utility theory once socialists and anarchists 
used it to show that capitalism was exploitative. Then this utility theory
was modified over time in order to purge it of undesirable political
consequences. In so doing, they ended up not only proving that an economics
based on individualism was impossible but also that it cannot be used to
oppose redistribution policies after all. 

<h2><a name="secc14">C.1.4 What is wrong with equilibrium analysis?</a></h2>

The dominant form of economic analysis since the 1880s has been equilibrium 
analysis. While equilibrium had been used by classical economics to explain 
what regulated market prices, it did not consider it as reflecting any real 
economy. This was because classical economics analysed capitalism as a 
mode of production rather than as a mode of exchange, as a mode of 
circulation, as neo-classical economics does. It looked at the process of 
creating products while neo-classical economics looked at the price 
ratios between already existing goods (this explains why neo-classical 
economists have such a hard time understanding  classical or Marxist 
economics, the schools are talking about different things and why they
tend to call any market system "capitalism" regardless of whether wage
labour predominates of not). The classical school is based on an analysis 
of markets based on production of commodities through time. The 
neo-classical school is based on an analysis of markets based on the 
exchange of the goods which exist at any moment of time.
<p>
This indicates what is wrong with equilibrium analysis, it is essentially
a static tool used to analyse a dynamic system. It assumes stability 
where none exists. Capitalism is always unstable, always out of equilibrium, 
since <i>"growing out of capitalist competition, to heighten exploitation, 
. . . the relations of production . . . [are] in a state of perpetual 
transformation, which manifests itself in changing relative prices of 
goods on the market. Therefore the market is continuously in 
disequilibrium, although with different degrees of severity, thus giving 
rise, by its occasional approach to an equilibrium state, to the illusion 
of a tendency toward equilibrium."</i> [Mattick, <b>Op. Cit.</b>, p. 51] Given 
this obvious fact of the real economy, it comes as no surprise that 
dissident economists consider equilibrium analysis as <i>"a major 
obstacle to the development of economics as a <b>science</b> -- meaning 
by the term 'science' a body of theorems based on assumptions that are
<b>empirically</b> derived (from observations) and which embody hypotheses that 
are capable of verification both in regard to the assumptions and the 
predictions."</i> [Kaldor, <b>The Essential Kaldor</b>, p. 373]
<p>
Thus the whole concept is an unreal rather than valid abstraction of
reality. Sadly, the notions of "perfect competition" and (Walrasian) "general 
equilibrium" are part and parcel of neoclassical economics. It attempts 
to show, in the words of Paul Ormerod, <i>"that under certain assumptions the 
free market system would lead to an allocation of a given set of resources 
which was in a very particular and restricted sense optimal from the point
of view of every individual and company in the economy."</i> [<b>The Death
of Economics</b>, p. 45] This was what Walrasian general equilibrium proved.
However, the assumptions required prove to be somewhat unrealistic (to 
understate the point). As Ormerod points out:
<p><blockquote><i>
"[i]t cannot be emphasised too strongly that . . . the competitive model 
is far removed from being a reasonable representation of Western
economies in practice. . . [It is] a travesty of reality. The world
does not consist, for example, of an enormous number of small firms,
none of which has any degree of control over the market . . . The
theory introduced by the marginal revolution was based upon a series
of postulates about human behaviour and the workings of the economy.
It was very much an experiment in pure thought, with little empirical
rationalisation of the assumptions."</i> [<b>Op. Cit.</b>, p. 48]
</blockquote><p>
Indeed, <i>"the weight of evidence"</i> is <i>"against the validity of the model 
of competitive general equilibrium as a plausible representation of
reality."</i> [<b>Op. Cit.</b>, p. 62] For example, to this day, economists 
still start with the assumption of a multitude of firms, even worse, a 
"continuum" of them exist in <b>every</b> market. How many markets are there 
in which there is an infinite number of traders? This means that from
the start the issues and problems associated with oligopoly and imperfect 
competition have been abstracted from. This means the theory does not 
allow one to answer interesting questions which turn on the asymmetry of 
information and bargaining power among economic agents, whether due 
to size, or organisation, or social stigmas, or whatever else. In the 
real world, oligopoly is common place and asymmetry of information and 
bargaining power the norm. To abstract from these means to present an 
economic vision at odds with the reality people face and, therefore, 
can only propose solutions which harm those with weaker bargaining 
positions and without information. 
<p>
General equilibrium is an entirely static concept, a market marked
by perfect knowledge and so inhabited by people who are under no
inducement or need to act. It is also timeless, a world without a 
future and so with no uncertainty (any attempt to include time, and 
so uncertainty, ensures that the model ceases to be of value). At
best, economists include "time" by means of comparing one static
state to another, i.e. <i>"the features of one non-existent equilibrium 
were compared with those of a later non-existent equilibrium."</i> [Mattick,
<b>Op. Cit.</b>, p. 22] How the economy actually changed from one stable
state to another is left to the imagination. Indeed, the idea of 
any long-run equilibrium is rendered irrelevant by the movement 
towards it as the  equilibrium also moves. Unsurprisingly, therefore, 
to construct an equilibrium path through time requires all prices for 
all periods to be determined at the start and that everyone foresees 
future prices correctly for eternity -- including for goods not 
invented yet. Thus the model cannot easily or usefully account for 
the reality that economic agents do not actually know such things as 
future prices, future availability of goods, changes in production 
techniques or in markets to occur in the future, etc. Instead, to 
achieve its results -- proofs about equilibrium conditions -- the 
model assumes that actors have perfect knowledge at least of the 
probabilities of all possible outcomes for the economy. The opposite 
is obviously the case in reality:
<p><blockquote><i>
"Yet the main lessons of these increasingly abstract and unreal
theoretical constructions are also increasingly taken on trust
. . . It is generally taken for granted by the great majority
of academic economists that the economy always approaches, or
is near to, a state of 'equilibrium' . . . all propositions
which the <b>pure</b> mathematical economist has shown to be valid
only on assumptions that are manifestly unreal -- that is to
say, directly contrary to experience and not just 'abstract.' 
In fact, equilibrium theory has reached the stage where the 
pure theorist has successfully (though perhaps inadvertently)
demonstrated that the main implications of this theory cannot
possibly hold in reality, but has not yet managed to pass his
message down the line to the textbook writer and to the classroom."</i>
[Kaldor, <b>Op. Cit.</b>, pp. 376-7]
</blockquote><p>
In this timeless, perfect world, "free market" capitalism will prove
itself an efficient method of allocating resources and all markets will 
clear. In part at least, General Equilibrium Theory is an abstract answer 
to an abstract and important question: Can an economy relying only on 
price signals for market information be orderly? The answer of general 
equilibrium is clear and definitive -- one can describe such an economy 
with these properties. However, no actual economy has been described and,
given the assumptions involved, none could ever exist. A theoretical 
question has been answered involving some amount of intellectual 
achievement, but it is a answer which has no bearing to reality. And 
this is often termed the "high theory" of equilibrium. Obviously most 
economists must treat the real world as a special case.
<p>
Little wonder, then, that Kaldor argued that his <i>"basic objection
to the theory of general equilibrium is not that it is abstract -- 
all theory is abstract and must necessarily be so since there can
be no analysis without abstraction -- but that it starts from the
wrong kind of abstraction, and therefore gives a misleading
'paradigm' . . . of the world as it is; it gives a misleading
impression of the nature and the manner of operation of economic
forces."</i> Moreover, belief that equilibrium theory is the only 
starting point for economic analysis has survived <i>"despite the 
increasing (<b>not</b> diminishing) arbitrariness of its based 
assumptions -- which was forced upon its practitioners by the ever 
more precise cognition of the needs of logical consistency. In 
terms of gradually converting an 'intellectual experiment' . . . 
into a scientific theory -- in other words, a set of theorems 
directly related to observable phenomena -- the development of 
theoretical economics was one of continual <b>de</b>gress, not <b>pro</b>gress 
. . . The process . . . of <b>relaxing</b> the unreal basis assumptions 
. . . has not yet started. Indeed, [they get] . . . thicker and more 
impenetrable with every successive reformation of the theory."</i> 
[<b>Op. Cit.</b>, p. 399 and pp. 375-6]
<p>
Thus General Equilibrium theory analyses an economic state which 
there is no reason to suppose will ever, or has ever, come about.
It is, therefore, an abstraction which has no discernible applicability 
or relevance to the world as it is. To argue that it can give insights
into the real world is ridiculous. While it is true that there are 
certain imaginary intellectual problems for which the general 
equilibrium model is well designed to provide precise answers (if 
anything really could), in practice this means the same as saying 
that if one insists on analysing a problem which has no real world 
equivalent or solution, it may be appropriate to use a model which 
has no real-world application. Models derived to provide answers to 
imaginary problems will be unsuitable for resolving practical, 
real-world economic problems or even providing a useful insight 
into how capitalism works and develops. 
<p>
This can have devastating real world impact, as can be seen from the
results of neoclassical advice to Eastern Europe and other countries
in their transition from state capitalism (Stalinism) to private
capitalism. As Joseph Stiglitz documents it was a disaster for all 
but the elite due to the <i>"market fundamentalism preached"</i> by economists
It resulted in <i>"a marked deterioration"</i> in most peoples <i>"basic standard
of living, reflected in a host of social indicators"</i> and well as 
large drops in GDP. [<b>Globalisation and its discontents</b>, p. 138 
and p. 152] Thus real people can be harmed by unreal theory. That 
the advice of neoclassical economists has made millions of
people look back at Stalinism as "the good old days" should be 
enough to show its intellectual and moral bankruptcy.
<p>
What can you expect? Mainstream economic theory begins with 
axioms and assumptions and uses a deductive methodology to
arrive at conclusions, its usefulness in discovering how the world 
works is limited. The deductive method is <b>pre-scientific</b> in nature. 
The axioms and assumptions can be considered fictitious (as they 
have negligible empirical relevance) and the conclusions of 
deductive models can only really have relevance to the structure 
of those models as the models themselves bear no relation to economic 
reality:
<p><blockquote><i>
"Some theorists, even among those who reject general equilibrium as
useless, praise its logical elegance and completeness . . . But if
any proposition drawn from it is applied to an economy inhabited
by human beings, it immediately becomes self-contradictory. Human 
life does not exist outside history and no one had correct foresight 
of his own future behaviour, let alone of the behaviour of all the
other individuals which will impinge upon his. I do not think that
it is right to praise the logical elegance of a system which 
becomes self-contradictory when it is applied to the question that 
it was designed to answer."</i> [Joan Robinson, <b>Contributions to Modern 
Economics</b>, pp. 127-8]
</blockquote><p>
Not that this deductive model is internally sound. For example, the 
assumptions required for perfect competition are mutually exclusive. 
In order for the market reach equilibrium, economic actors need to 
able to affect it. So, for example, if there is an excess supply some 
companies must lower their prices. However, such acts contradict the 
basic assumption of "perfect competition," namely that the number of 
buyers and sellers is so huge that no one individual actor (a firm 
or a consumer) can determine the market price by their actions. In 
other words, economists assume that the impact of each firm is zero 
but yet when these zeroes are summed up over the whole market the 
total is greater than zero. This is impossible. Moreover, the 
<i>"requirements of equilibrium are carefully examined in the
Walrasian argument but there is no way of demonstrating that a 
market which starts in an out-of-equilibrium position will tend
to get into equilibrium, except by putting further very severe
restrictions on the already highly abstract argument."</i> [Joan 
Robinson, <b>Collected Economic Papers</b>, vol. 5, p. 154] Nor does 
the stable unique equilibrium actually exist for, ironically, 
<i>"mathematicians have shown that, under fairly general conditions, 
general equilibrium is unstable."</i> [Keen, <b>Debunking Economics</b>, 
p. 173] 
<p>
Another major problem with equilibrium theory is the fact that it 
does not, in fact, describe a capitalist economy. It should go 
without saying that models which focus purely on exchange cannot, 
by definition, offer a realistic analysis, never mind description, 
of the capitalism or the generation of income in an industrialised 
economy. As Joan Robinson summarises:
<p><blockquote><i>
"The neo-classical theory . . . pretends to derive a system of prices
from the relative scarcity of commodities in relation to the demand
for them. I say <b>pretend</b> because this system cannot be applied to
capitalist production.
<p>
"The Walrasian conception of equilibrium arrived at by higgling and 
haggling in a  market illuminates the account of prisoners of war
swapping the contents of their Red Cross parcels.
<p>
"It makes sense also, with some modifications, in an economy of
artisans and small traders . . .
<p>
"Two essential characteristics of industrial capitalism are absent 
in these economic systems -- the distinction between income from work
and income from property and the nature of investments made in the
light of uncertain expectations about a long future."</i> [<b>Collected 
Economic Papers</b>, vol. 5, p. 34]
</blockquote><p>
Even such basic things as profits and money have a hard time 
fitting into general equilibrium theory. In a perfectly competitive 
equilibrium, super-normal profit is zero so profit fails to appear. 
Normal profit is assumed to be the contribution capital makes to 
output and is treated as a cost of production and notionally set 
as the zero mark. A capitalism without profit? Or growth, <i>"since 
there is no profit or any other sort of surplus in the neoclassical 
equilibrium, there can be no expanded reproduction of the system."</i> 
[Mattick, <b>Op. Cit.</b>, p. 22] It also treats capitalism as little 
more than a barter economy. The concept of general equilibrium 
is incompatible with the actual role of money in a capitalist 
economy. The assumption of <i>"perfect knowledge"</i> makes the 
keeping of cash reserves as a precaution against unexpected 
developments would not be necessary as the future is already 
known. In a world where there was absolute certainty about
the present and future there would be no need for a medium of 
exchange like money at all. In the real world, money has a real
effect on production an economic stability. It is, in other words,
not neutral (although, conveniently, in a fictional world with
neutral money <i>"crises <b>do not occur</b>"</i> and it <i>"assumed away the
very matter under investigation,"</i> namely depressions. [Keynes,
quoted by Doug Henwood, <b>Wall Street</b>, p. 199]).
<p>
Given that general equilibrium theory does not satisfactorily 
encompass such things as profit, money, growth, instability or 
even firms, how it can be considered as even an adequate 
representation of any real capitalist economy is hard to 
understand. Yet, sadly, this perspective has dominated economics 
for over 100 years. There is almost no discussion of how scarce 
means are organised to yield outputs, the whole emphasis is on 
exchanges of ready made goods. This is unsurprising, as this 
allows economics to abstract from such key concepts as power, 
class and hierarchy. It shows the <i>"the bankruptcy of academic 
economic teaching. The structure of thought which it expounds 
was long ago proven to be hollow. It consisted of a set of 
propositions which bore hardly any relation to the structure 
and evolution of the economy that they were supposed to 
depict."</i> [Joan Robinson, <b>Op. Cit.</b>, p. 90]
<p>
Ultimately, equilibrium analysis simply presents an unreal picture
of the real world. Economics treat a dynamic system as a static one, 
building models rooted in the concept of equilibrium when a 
non-equilibrium analysis makes obvious sense. As Steven Keen notes,
it is not only the real world that has suffered, so has economics: 
<p><blockquote><i>
"This obsession with equilibrium has imposed enormous costs on
economics . . . unreal assumptions are needed to maintain conditions
under which there will be a unique, 'optimal' equilibrium . . . If
you believe you can use unreality to model reality, then eventually
your grip on reality itself can become tenuous."</i> [<b>Op. Cit.</b>, p. 177]
</blockquote><p>
Ironically, given economists usual role in society as defenders of
big business and the elite in general, there is one conclusion of 
general equilibrium theory which does have some relevance to the 
real world. In 1956, two economists <i>"demonstrated that serious 
problems exist for the model of competitive equilibrium if any 
of its assumptions are breached."</i> They were <i>"not dealing with the
fundamental problem of whether a competitive equilibrium exists,"</i>
rather they wanted to know what happens if the assumptions of the
model were violated. Assuming that two violations existed, they 
worked out what would happen if only one of them were removed. The
answer was a shock for economists -- <i>"If just one of many, or even
just one of two [violations] is removed, it is not possible to 
prejudge the outcome. The economy as a whole can theoretically be
worse off it just one violation exists than it is when two such
violations exist."</i> In other words, any single move towards the
economists' ideal market may make the world worse off. [Ormerod,
<b>Op. Cit.</b>, pp. 82-4]
<p>
What Kelvin Lancaster and Richard Lipsey had shown in their paper
<i>"The General Theory of the Second Best"</i> [<b>Review of Economic Studies</b>, 
December 1956] has one obvious implication, namely that neoclassical
economics itself has shown that trade unions were essential to stop 
workers being exploited under capitalism. This is because the 
neoclassical model requires there to be a multitude of small firms
and no unions. In the real world, most markets are dominated by a
few big firms. Getting rid of unions in such a less than competitive
market would result in the wage being less than the price for which
the marginal worker's output can be sold, i.e. workers are exploited
by capital. In other words, economics has <b>itself</b> disproved 
the neoclassical case against trade unions. Not that you would know
that from neoclassical economists, of course. In spite of knowing 
that, in their own terms, breaking union power while retaining big 
business would result, in the exploitation of labour, neoclassical
economists lead the attack on "union power" in the 1970s and 1980s.
The subsequent explosion in inequality as wealth flooded upwards
provided empirical confirmation of this analysis. 
<p>
Strangely, though, most neoclassical economists are still as anti-union 
as ever -- in spite of both their own ideology and the empirical 
evidence. That the anti-union message is just what the bosses want 
to hear can just be marked up as yet another one of those strange 
co-incidences which the value-free science of economics is so prone 
to. Suffice to say, if the economics profession ever questions 
general equilibrium theory it will be due to conclusions like this
becoming better known in the general population.

<h2><a name="secc15">C.1.5 Does economics really reflect the reality of capitalism?</a></h2>

As we discussed in <a href="secC1.html#secc12">section C.1.2</a>, mainstream economics is rooted in 
capitalism and capitalist social relations. It takes the current 
division of society into classes as both given <b>as well as</b> producing
the highest form of efficiency. In other words, mainstream economics
is rooted in capitalist assumptions and, unsurprisingly, its conclusions
are, almost always, beneficial to capitalists, managers, landlords, 
lenders and the rich rather than workers, tenants, borrowers and the
poor.
<p>
However, on another level mainstream capitalist economics simply does
<b>not</b> reflect capitalism at all. While this may seem paradoxical, it 
is not. Neoclassical economics has always been marked by apologetics.
Consequently, it must abstract or ignore from the more unpleasant 
and awkward aspects of capitalism in order to present it in the best
possible light.
<p>
Take, for example, the labour market. Anarchists, like other socialists,
have always stressed that under capitalism workers have the choice 
between selling their liberty/labour to a boss or starving to death
(or extreme poverty, assuming some kind of welfare state). This is
because they do not have access to the means of life (land and 
workplaces) unless they sell their labour to those who own them. In 
such circumstances, it makes little sense to talk of liberty as the 
only real liberty working people have is, if they are lucky, agreeing 
to be exploited by one boss rather than another. How much an person 
works, like their wages, will be based on the relative balance of power 
between the working and capitalist classes in a given situation.
<p>
Unsurprisingly, neoclassical economics does not portray the choice 
facing working class people in such a realistic light. Rather, it
argues that the amount of hours an individual works is based on 
their preference for income and leisure time. Thus the standard 
model of the labour market is somewhat paradoxical in that there 
is no actual labour in it. There is only income, leisure and the 
preference of the individual for more of one or the other. It is 
leisure that is assumed to be a "normal good" and labour is just what 
is left over after the individual "consumes" all the leisure they 
want. This means that working resolves itself into the vacuous double 
negative of not-not-working and the notion that all unemployment is
voluntary.
<p>
That this is nonsense should be obvious. How much "leisure" can someone
indulge in without an income? How can an economic theory be considered
remotely valid when it presents unemployment (i.e. no income) as the 
ultimate utility in an economy where everything is (or should be) subject
to a price? Income, then, has an overwhelming impact upon the marginal
utility of leisure time. Equally, this perspective cannot explain why
the prospect of job loss is seen with such fear by most workers. If the
neoclassical (non-)analysis of the labour market were true, workers would
be happy to be made unemployed. In reality, fear of the sack is a major
disciplining tool within capitalism. That free market capitalist economists 
have succeeded in making unemployment appear as a desirable situation suggests
that its grip on the reality of capitalism is slim to say the least (here,
as in many other areas, Keynes is more realistic although most of his 
followers have capitulated faced with neoclassical criticism that standard Keynesian
theory had bad micro-economic foundations rather than admit that later
was nonsense and the former <i>"an emasculated version of Keynes"</i> inflicted
on the world by J.R. Hicks. [Keen, <b>Op. Cit.</b>, p. 211]). 
<p>
However, this picture of the "labour" market does hide the reality of 
working class dependency and, consequently, the power of the capitalist 
class. To admit that workers do not exercise any free choice over whether 
they work or not and, once in work, have to accept the work hours set by 
their employers makes capitalism seem less wonderful than its supporters 
claim. Ultimately, this fiction of the labour market being driven by the
workers' desire for "leisure" and that all unemployment is "voluntary"
is rooted in the need to obscure the fact that unemployment is an
essential feature of capitalism and, consequently, is endemic to it. 
This is because it is the fundamental disciplinary mechanism of the 
system (<i>"it is a whip in [the bosses'] hands, constantly held over
over you, so you will slave hard for him and 'behave' yourself,"</i> to
quote Alexander Berkman).  As we argued in <a href="secB4.html#secb43">section B.4.3</a>, capitalism <b>must</b> have 
unemployment in order to ensure that workers will obey their 
bosses and not demand better pay and conditions (or, even worse, 
question why they have bosses in the first place). It is, in other
words, <i>"inherent in the wage system"</i> and <i>"the fundamental condition
of successful capitalist production."</i> While it is <i>"dangerous and
degrading"</i> to the worker, it is <i>"very advantageous to the boss"</i> and
so capitalism <i>"can't exist without it."</i> [Berkman, <b>What is Anarchism?</b>,
p. 26] The experience of state managed full employment between (approximately)
1950 and 1970 confirms this analysis, as does the subsequent period (see 
<a href="secC7.html#secc71">section C.7.1</a>).
<p>
For the choice of leisure and labour to be a reality, then workers need
an independent source of income. The model, in other words, assumes that
workers need to be enticed by the given wage and this is only the case
when workers have the option of working for themselves, i.e. that they
own their own means of production. If this were the case, then it would
not be capitalism. In other words, the vision of the labour market in
capitalist economics assumes a non-capitalist economy of artisans and
peasant farmers -- precisely the kind of economy capitalism destroyed
(with the help of the state). An additional irony of this neoclassical 
analysis is that those who subscribe to it most are also those who attack 
the notion of a generous welfare state (or oppose the idea of welfare 
state in all forms). Their compliant is that with a welfare state, the 
labour market becomes "inefficient" as people can claim benefits and so 
need not seek work. Yet, logically, they should support a generous welfare
state as it gives working people a genuine choice between labour and
leisure. That bosses find it hard to hire people should be seen as
a good thing as work is obviously being evaluated as a "disutility"
rather than as a necessity. As an added irony, as we discuss in 
<a href="secC9.html">section C.9</a>, the capitalist analysis of the labour market is <b>not</b>
based on any firm empirical evidence nor does it have any real logical 
basis (it is just an assumption). In fact, the evidence we do have 
points against it and in favour of the socialist analysis of unemployment
and the labour market.
<p>
One of the reasons why neoclassical economics is so blas about 
unemployment is because it argues that it should never happen. 
That capitalism has always been marked by unemployment and that this
rises and falls as part of the business cycle is a inconvenient 
fact which neoclassical economics avoided seriously analysing until 
the 1930s. This flows from Say's law, the argument that supply creates 
its own demand. This theory, and its more formally put Walras' Law, is 
the basis on which the idea that capitalism could never face a general
economic crisis is rooted in. That capitalism has <b>always</b> been marked
by boom and bust has never put Say's Law into question except during 
the 1930s and even then it was quickly put back into the centre of 
economic ideology.
<p>
For Say, <i>"every producer asks for money in exchange for his products
only for the purpose of employing that money again immediately in 
the purchase of another product."</i> However, this is not the case in
a capitalist economy as capitalists seek to accumulate wealth and
this involves creating a difference between the value of commodities
someone desired to sell and buy on the market. While Say asserts 
that people simply want to consume commodities, capitalism is marked
by the desire (the need) to accumulate. The ultimate aim is <b>not</b>
consumption, as Say asserted (and today's economists repeat), but 
rather to make as much profit as possible. To ignore this is to
ignore the essence of capitalism and while it may allow the economist
to reason away the contradictions of that system, the reality of
the business cycle cannot be ignored. 
<p>
Say's law, in other words, assumes a world without <b>capital</b>:
<p><blockquote><i>
"what is a given stock of capital? In this context, clearly, it is
the actual equipment and stocks of commodities that happen to be
in existence today, the result of recent or remote past history, 
together with the know-how, skill of labour, etc., that makes up
the state of technology. Equipment . . . is designed for a particular
range of uses, to be operated by a particular labour force. There
is not a great deal of play in it. The description of the stock of
equipment in existence at any moment as 'scare means with alternative
uses' is rather exaggerated. The uses in fact are fairly specific, 
though they may be changed over time. But they <b>can</b> be utilised,
at any moment, by offering less or more employment to labour. This
is a characteristic of the wage economy. In an artisan economy, where
each producer owns his own equipment, each produces what he can and
sells it for what it will fetch. Say's law, that goods are the demand
for goods, was ceasing to be true at the time he formulated it."</i>
[Joan Robinson, <b>Collected Economic Papers</b>, vol. 4, p. 133]
</blockquote><p>
As Keen notes, Say's law <i>"evisage[s] an exchange-only economy: an
economy in which goods exist at the outset, but where no production
takes place. The market simply enables the exchange of pre-existing
goods."</i> However, once we had capital to the economy, things change
as capitalists wish <i>"to supply more than they demand, and to 
accumulate the difference as profit which adds to their wealth."</i> 
This results in an excess demand and, consequently, the possibility
of a crisis. Thus mainstream capitalist economics <i>"is best suited to 
the economic irrelevance of an exchange-only economy, or a production
economy in which growth does not occur. If production and growth
do occur, then they take place outside the market, when ironically
the market is the main intellectual focus of neoclassical economics.
Conventional economics is this a theory which suits a state economy
. .  .when what is needed are theories to analyse dynamic economies."</i>
[<b>Debunking Economics</b>, p. 194, p. 195 and p. 197]
<p>
Ultimately, capital assets are not produced for their own stake but 
in expectation of profits. This obvious fact is ignored by Say's
law, but was recognised by Marx (and subsequently acknowledged by
Keynes as being correct). As Keen notes, unlike Say and his 
followers, <i>"Marx's perspective thus integrates production, exchange 
and credit as holistic aspects of a capitalist economy, and therefore 
as essential elements of any theory of capitalism. Conventional
economics, in contrast, can only analyse an exchange economy in
which money is simply a means to make barter easier."</i> [<b>Op. Cit.</b>, 
pp. 195-6] 
<p>
Rejecting Say's Law as being applicable to capitalism means recognising 
that the capitalist economy is not stable, that it can experience booms 
and slumps. That this reflects the reality of that economy should go 
without saying. It also involves recognising that it can take time for 
unemployed workers to find new employment, that unemployment can by 
involuntary and that bosses can gain advantages from the fear of 
unemployment by workers.
<p>
That last fact, the fear of unemployment is used by bosses to get 
workers to accept reductions in wages, hours and benefits, is key
factor facing workers in any real economy. Yet, according to 
the economic textbooks, workers should have been falling over
themselves to maximise the utility of leisure and minimise the
disutility of work. Similarly, workers should not fear being made
unemployed by globalisation as the export of any jobs would simply
have generated more economic activity and so the displaced workers 
would immediately be re-employed (albeit at a lower wage, perhaps). 
Again, according to the economic textbooks, these lower wages would 
generate even more economic activity and thus lead, in the long run, 
to higher wages. If only workers had only listened to the economists
then they would realise that that not only did they actually gain (in 
the long run) by their wages, hours and benefits being cut, many of
them also gained (in the short term) increased utility by not having
to go to work. That is, assuming the economists know what they are 
talking about. 
<p>
Then there is the question of income. For most capitalist economics, 
a given wage is supposed to be equal to the <i>"marginal contribution"</i> 
that an individual makes to a given company. Are we <b>really</b> expected 
to believe this? Common sense (and empirical evidence) suggests 
otherwise. Consider Mr. Rand Araskog, the CEO of ITT in 1990, who in 
that year was paid a salary of $7 million. Is it conceivable that an 
ITT accountant calculated that, all else being the same, the company's 
$20.4 billion in revenues that year would have been $7 million less 
without Mr. Araskog -- hence determining his marginal contribution 
to be $7 million? This seems highly unlikely. 
<p>
Which feeds into the question of exploding CEO pay. While this has affected
most countries, the US has seen the largest increases (followed by the UK).
In 1979 the CEO of a UK company earned slightly less than 10 times as much 
as the average worker on the shop floor. By 2002 a boss of a FTSE 100 
company could expect to make 54 times as much as the typical worker. 
This means that while the wages for those on the shopfloor went up a 
little, once inflation is taken into account, the bosses wages arose 
from 200,000 per year to around 1.4m a year. In America, the 
increase was even worse. In 1980, the ratio of CEO to worker pay 
50 to 1. Twenty years later it was 525 to 1, before falling back to 
281 to 1 in 2002 following the collapse of the share price bubble. 
[Larry Elliott, <i>"Nice work if you can get it: chief executives quietly 
enrich themselves for mediocrity,"</i> <b>The Guardian</b>, 23 January, 2006]
<p>
The notion of marginal productivity is used to justify many things on the 
market. For example, the widening gap between high-paid and low-paid 
Americans (it is argued) simply reflects a labour market efficiently 
rewarding more productive people. Thus the compensation for corporate 
chief executives climbs so sharply because it reflects their marginal 
productivity. The strange thing about this kind of argument is that,
as we indicate in <a href="secC2.html#secc25">section C.2.5</a>, the problem of defining and measuring
capital wrecked the entire neoclassical theory of marginal factor
productivity and with it the associated marginal productivity theory
of income back in the 1960s -- and was admitted as the leading 
neo-classical economists of the time. That marginal productivity theory 
is still invoked to justify capitalist inequalities shows not only how 
economics ignores the reality of capitalism but also the intellectual
bankruptcy of the "science" and whose interests it, ultimately, serves.
<p>
In spite of this awkward little fact, what of the claims made based on
it? Is this pay <b>really</b> the result of any increased productivity on 
the part of CEOs? The evidence points the other way. This can be seen 
from the performance of the economies and companies in question. In 
Britain trend growth was a bit more than 2% in 1980 and is still a bit 
more than 2% a quarter of a century later. A study of corporate 
performance in Britain and the United States looked at the companies 
that make up the FTSE 100 index in Britain and the S&P 500 in the US 
and found that executive income is rarely justified by improved 
performance. [Julie Froud, Sukhdev Johal, Adam Leaver and Karel 
Williams, <b>Financialisation and Strategy: Narrative and Number</b> ] 
Rising stock prices in the 1990s, for example, were the product of 
one of the financial market's irrational bubbles over which the CEO's
had no control or role in creating. 
<p>
During the same period as soaring CEO pay, workers' real wages remained 
flat. Are we to believe that since the 1980s, the marginal contribution of 
CEOs has increased massively whereas workers' marginal contributions remained 
stagnant? According to economists, in a free market wages should increase
until they reach their marginal productivity. In the US, however, during
the 1960s <i>"pay and productivity grew in tandem, but they separated in the
1970s. In the 1990s boom, pay growth lagged behind productivity by almost
30%."</i> Looking purely at direct pay, <i>"overall productivity rose four times
as fast as the average real hourly wage -- and twenty times as fast in
manufacturing."</i> Pay did catch up a bit in the late 1990s, but after 2000
<i>"pay returned to its lagging position."</i> [Doug Henwood, <b>After the New 
Economy</b>, pp. 45-6] In other words, over two decades of free market 
reforms has produced a situation which has refuted the idea that a
workers wage equals their marginal productivity.
<p>
The standard response by economists would be to state that the US economy
is not a free market. Yet the 1970s, after all, saw the start of reforms 
based on the recommendations of free market capitalist economists. The 
1980s and 1990s saw even more. Regulation was reduced, if not effectively
eliminated, the welfare state rolled back and unions marginalised. So 
it staggers belief to state that the US was <b>more</b> free market in the 
1950s and 1960s than in the 1980s and 1990s but, logically, this is what
economists suggest. Moreover, this explanation sits ill at ease with the 
multitude of economists who justified growing inequality and skyrocketing 
CEO pay and company profits during this period in terms of free market 
economics. What is it to be? If the US is not a free market, then the
incomes of companies and the wealth are <b>not</b> the result of their marginal
contribution but rather are gained at the expense of the working class.
If the US is a free market, then the rich are justified (in terms of 
economic theory) in their income but workers' wages do not equal their
marginal productivity. Unsurprisingly, most economists do not raise the
question, never mind answer it.
<p>
So what is the reason for this extreme wage difference? Simply put, 
it's due to the totalitarian nature of capitalist firms (see 
<a href="secB4.html">section B.4</a>). Those at the bottom of the company have no say in what happens 
within it; so as long as the share-owners are happy, wage differentials 
will rise and rise (particularly when top management own large amounts 
of shares!). It is capitalist property relations that allow this 
monopolisation of wealth by the few who own (or boss) but do not produce. 
The workers do not get the full value of what they produce, nor do they 
have a say in how the surplus value produced by their labour gets used 
(e.g. investment decisions). Others have monopolised both the wealth 
produced by workers and the decision-making power within the company
(see <a href="secC2.html">section C.2</a> for more discussion). This is a private form of 
taxation without representation, just as the company is a private 
form of statism. Unlike the typical economist, most people would not 
consider it too strange a coincidence that the people with power in 
a company, when working out who contributes most to a product, decide 
it's themselves!
<p>
Whether workers will tolerate stagnating wages depends, of course, on
the general economic climate. High unemployment and job insecurity help
make workers obedient and grateful for any job and this has been the
case for most of the 1980s and 1990s in both America and the UK. So a 
key reason for the exploding pay is to be found in the successful
class struggle the ruling class has been waging since the 1970s. There 
has <i>"been a real shift in focus, so that the beneficiaries of corporate 
success (such as it is) are no longer the workers and the general public 
as a whole but shareholders. And given that there is evidence that only 
households in the top half of the income distribution in the UK and the 
US hold shares, this represents a significant redistribution of money 
and power."</i> [Larry Elliott, <b>Op. Cit.</b>] That economics ignores the social
context of rising CEO pay says a lot about the limitations of modern
economics and how it can be used to justify the current system.
<p>
Then there is the trivial little thing of production. Economics used 
to be called "political economy" and was production orientated. This 
was replaced by an economics based on marginalism and subjective 
evaluations of a given supply of goods is fixed. For classical
economics, to focus on an instant of time was meaningless as time 
does not stop. To exclude production meant to exclude time, which 
as we noted in <a href="secC1.html#secc12">section C.1.2</a> this is precisely and knowingly what 
marginalist economics did do. This means modern economics simply 
ignores production as well as time and given that profit making is 
a key concern for any firm in the real world, such a position shows 
how irrelevant neoclassical economics really is. 
<p>
Indeed, the neo-classical theory falls flat on its face. Basing itself, 
in effect, on a snapshot of time its principles for the rational 
firm are, likewise, based on time standing still. It argues that 
profit is maximised where marginal cost equals marginal revenue
yet this is only applicable when you hold time constant. However, a
real firm will not maximise profit with respect to quantity but also
in respect to time. The neoclassical rule about how to maximise profit
<i>"is therefore correct if the quantity produced never changes"</i> and 
<i>"by ignoring time in its analysis of the firm, economic theory ignores 
some of the most important issues facing a firm."</i> Neo-classical economics 
exposes its essentially static nature again. It <i>"ignores time, and is 
therefore only relevant in a world in which time does no matter."</i> 
[Keen, <b>Op. Cit.</b>, pp. 80-1] 
<p>
Then there is the issue of consumption. While capitalist apologists 
go on about <i>"consumer sovereignty"</i> and the market as a <i>"consumers
democracy,"</i> the reality is somewhat different. Firstly, and most
obviously, big business spends a lot of money trying to shape and
influence demand by means of advertising. Not for them the neoclassical
assumption of "given" needs, determined outside the system. So the
reality of capitalism is one where the "sovereign" is manipulated by
others. Secondly, there is the distribution of resources within society. 
<p>
Market demand is usually discussed in terms of tastes, not in the 
distribution of purchasing power required to satisfy those tastes. 
Income distribution is taken as given, which is very handy for those 
with the most wealth. Needless to say, those who have a lot of money 
will be able to maximise their satisfactions far easier than those 
who have little. Also, of course, they can out-bid those with less 
money. If capitalism is a "consumers" democracy then it is a strange 
one, based on <i>"one dollar, one vote."</i> It should be obvious whose 
values are going to be reflected most strongly in the market. If we 
start with the orthodox economics (convenient) assumption of a <i>"given 
distribution of income"</i> then any attempt to determine the best allocation 
of resources is flawed to start with as money replaces utility from the 
start. To claim after that the market based distribution is the best 
one is question begging in the extreme.
<p>
In other words, under capitalism, it is not individual need or "utility" as 
such that is maximised, rather it is <i><b>effective</b></i> utility (usually called 
"effective demand") -- namely utility that is backed up with money. This 
is the reality behind all the appeals to the marvels of the market. As 
right-wing guru von Hayek put, the <i>"[s]pontaneous order produced by the 
market does not ensure that what general opinion regards as more important 
needs are always met before the less important ones."</i> [<i>"Competition as a 
discovery process",</i> <b>The Essence of Hayek</b>, p. 258] Which is just a polite 
way of referring to the process by which millionaires build a new mansion 
while thousands are homeless or live in slums or feed luxury food to their 
pets while humans go hungry. It is, in effect, to dismiss the needs of, 
for example, the 37 million Americans who lived below the poverty line 
in 2005 (12.7% of the population, the highest percentage in the developed 
world and is based on the American state's absolute definition of poverty, 
looking at relative levels, the figures are worse). Similarly, the 46 
million Americans without health insurance may, of course, think that 
their need to live should be considered as <i>"more important"</i> than, say, 
allowing Paris Hilton to buy a new designer outfit. Or, at the most 
extreme, when agribusiness grow cash crops for foreign markets while 
the landless starve to death. As E.P. Thompson argues, Hayek's answer:
<p><blockquote><i>
"promote[s] the notion that high prices were a (painful) remedy for dearth, 
in drawing supplies to the afflicted region of scarcity. But what draws 
supply are not high prices but sufficient money in their purses to pay 
high prices. A characteristic phenomenon in times of dearth is that it 
generates unemployment and empty pursues; in purchasing necessities at 
inflated prices people cease to be able to buy inessentials [causing 
unemployment] . . . Hence the number of those able to pay the inflated 
prices declines in the afflicted regions, and food may be exported to 
neighbouring, less afflicted, regions where employment is holding up 
and consumers still have money with which to pay. In this sequence, 
high prices can actually withdraw supply from the most afflicted area."</i> 
[<b>Customs in Common</b>, pp. 283-4]
</blockquote><p>
Therefore <i>"the law of supply and demand"</i> may not be the "most efficient"
means of distribution in a society based on inequality. This is clearly
reflected in the "rationing" by purse which this system is based on. While
in the economics books, price is the means by which scare resources are
"rationed" in reality this creates many errors. As Thompson notes, 
<i>"[h]owever persuasive the metaphor, there is an elision of the real 
Relationships assigned by price, which suggests . . . ideological 
sleight-of-mind. Rationing by price does not allocate resources equally 
among those in need; it reserves the supply to those who can pay the 
price and excludes  those who can't . . . The raising of prices during 
dearth could 'ration' them [the poor] out of the market altogether."</i> 
[<b>Op. Cit.</b>, p. 285] Which is precisely what does happen. As economist 
(and famine expert) Amartya Sen notes:
<p><blockquote><i>
"Take a theory of entitlements based on a set of rights of 'ownership, 
transfer and rectification.' In this system a set of holdings of 
different people are judged to be just (or unjust) by looking at past
history, and not by checking the consequences of that set of holdings.
But what if the consequences are recognisably terrible? . . .[R]efer[ing]
to some empirical findings in a work on famines . . . evidence [is
presented] to indicate that in many large famines in the recent past,
in which millions of people have died, there was no over-all decline
in food availability at all, and the famines occurred precisely because
of shifts in entitlement resulting from exercises of rights that are
perfectly legitimate. . . . [Can] famines . . . occur with a system of
rights of the kind morally defended in various ethical theories, including
Nozick's. I believe the answer is straightforwardly yes, since for many
people the only resource that they legitimately possess, viz. their
labour-power, may well turn out to be unsaleable in the market, giving
the person no command over food . . . [i]f results such as starvations
and famines were to occur, would the distribution of holdings still
be morally acceptable despite their disastrous consequences? There is
something deeply implausible in the affirmative answer."</i> [<b>Resources,
Values and Development</b>, pp. 311-2]
</blockquote><p>
Recurring famines were a constant problem during the lassiez-faire 
period of the British Empire. While the Irish Potato famine is
probably the best known, the fact is that millions died due to 
starvation mostly due to a firm believe in the power of the
market. In British India, according to the most reliable estimates, 
the deaths from the 1876-1878 famine were in the range of 6-8 million
and between 1896 and 1900, were between 17 to 20 million. According 
to a British statistician who analysed Indian food security measures 
in the two millennia prior to 1800, there was one major famine a 
century in India. Under British rule there was one every four years.
Over all, the late 1870s and the late 1890s saw somewhere between 30 
to 60 million people die in famines in India, China and Brazil (not 
including the many more who died elsewhere). While bad weather 
started the problem by placing the price of food above the reach 
of the poorest, the market and political decisions based on profound 
belief in it made the famine worse. Simply put, had the authorities 
distributed what food existed, most of the victims would have survived 
yet they did not as this would have, they argued, broke the laws of 
the market and produced a culture of dependency. [Mike Davis, <b>Late 
Victorian Holocausts</b> ] This pattern, incidentally, has been repeated 
in third world countries to this day with famine countries exporting 
food as the there is no "demand" for it at home.
<p>
All of which puts Hayek's glib comments about <i>"spontaneous order"</i> into
a more realistic context. As Kropotkin put it:
<p><blockquote><i>
"The very essence of the present economic system is that the worker
can never enjoy the well-being he [or she] has produced . . . Inevitably,
industry is directed . . . not towards what is needed to satisfy the 
needs of all, but towards that which, at a given moment, brings in the
greatest profit for a few. Of necessity, the abundance of some will be
based on the poverty of others, and the straitened circumstances of the
greater number will have to be maintained at all costs, that there may
be hands to sell themselves for a part only of what which they are 
capable of producing; without which private accumulation of capital is
impossible."</i> [<b>Anarchism</b>, p. 128]
</blockquote><p>
In other words, the market cannot be isolated and abstracted from the network
of political, social and legal relations within which it is situated. This
means that all that "supply and demand" tells us is that those with money
can demand more, and be supplied with more, than those without. Whether this
is the "most efficient" result for society cannot be determined (unless, of
course, you assume that rich people are more valuable than working class
ones <b>because</b> they are rich). This has an obvious effect on production, 
with "effective demand" twisting economic activity and so, under capitalism, 
meeting needs is secondary as the <i>"only aim is to increase the profits of 
the capitalist."</i> [Kropotkin, <b>Op. Cit.</b>, p. 55]). George Barrett brings home 
of evil effects of such a system:
<p><blockquote><i>
"To-day the scramble is to compete for the greatest profits. If there is 
more profit to be made in satisfying my lady's passing whim than there is 
in feeding hungry children, then competition brings us in feverish haste 
to supply the former, whilst cold charity or the poor law can supply the 
latter, or leave it unsupplied, just as it feels disposed. That is how it 
works out."</i> [<b>Objections to Anarchism</b>, p. 347] 
</blockquote><p> 
Therefore, as far as consumption is concerned, anarchists are well aware 
of the need to create and distribute necessary goods to those who require 
them. This, however, cannot be achieved under capitalism and for all its
talk of "utility," "demand", "consumer sovereignty" and so forth the real
facts are those with most money determine what is an "efficient" allocation 
of resources. This is directly, in terms of their control over the means
of life as well as indirectly, by means of skewing market demand. For if 
financial profit is the sole consideration for resource allocation, then 
the wealthy can outbid the poor and ensure the highest returns. The less 
wealthy can do without. 
<p>
All in all, the world assumed by neo-classical economics is not the one 
we actually live in, and so applying that theory is both misleading and 
(usually) disastrous (at least to the "have-nots"). While this may seen 
surprisingly, it is not once we take into account its role as apologist 
and defender of capitalism. Once that is recognised, any apparent 
contradiction falls away.

<h2><a name="secc16">C.1.6 Is it possible to a non-equilibrium based capitalist economics?</a></h2>

Yes, it is but it would be unlikely to be free-market based as the
reality of capitalism would get the better of its apologetics. This
can be seen from the two current schools of economics which, rightly, 
reject the notion of equilibrium -- the post-Keynesian school and
the so-called Austrian school.
<p>
The former has few illusions in the nature of capitalism. At its best, 
this school combines the valid insights of classical economics, Marx 
and Keynes to produce a robust radical (even socialist) critique of both 
capitalism and capitalist economics. At its worse, it argues for state 
intervention to save capitalism from itself and, politically, aligns 
itself with social democratic (<i>"liberal",</i> in the USA) movements and 
parties. If economics does become a science, then this school of economics 
will play a key role in its development. Economists of this school include 
Joan Robinson, Nicholas Kaldor, John Kenneth Galbraith, Paul Davidson and 
Steven Keen. Due to its non-apologetic nature, we will not discuss it
here.
<p>
The Austrian school has a radically different perspective. This school,
so named because its founders were Austrian, is passionately pro-capitalist
and argues against <b>any</b> form of state intervention (bar, of course, the
definition and defence of capitalist property rights and the power that
these create). Economists of this school include Eugen von Bhm-Bawerk,
Lugwig von Mises, Murray Rothbard, Israel Kirzner and Frederick von Hayek 
(the latter is often attacked by other Austrian economists as not being 
sufficiently robust in his opposition to state intervention). It is very 
much a minority school.
<p>
As it shares many of the same founding fathers as neoclassical economics
and is rooted in marginalism, the Austrian school is close to neoclassical 
economics in many ways. The key difference is that it rejects the notion 
that the economy is in equilibrium and embraces a more dynamic model of 
capitalism. It is rooted in the notion of entrepreneurial activity, the 
idea that entrepreneurs act on information and disequilibrium to make  
super profits and bring the system closer to equilibrium. Thus, to use 
their expression, their focus is on the market process rather than a 
non-existent end state. As such, it defends capitalism in terms of
how it reacts of <b>dis</b>-equilibrium and presents a theory of the market 
process that brings the economy closer to equilibrium. And fails.
<p>
The claim that markets tend continually towards equilibrium, as the 
consequence of entrepreneurial actions, is hard to justify in terms of
its own assumptions. While the adjustments of a firm may bring the specific 
market it operates in more towards equilibrium, their ramifications may 
take other markets away from it and so any action will have stabilising 
and destabilising aspects to it. It strains belief to assume that 
entrepreneurial activity will only push an economy more towards 
equilibrium as any change in the supply and demand for any specific good 
leads to changes in the markets for other goods (including money). That 
these adjustments will all (mostly) tend towards equilibrium is little 
more than wishful thinking. 
<p>
While being more realistic than mainstream neo-classical theory, this method 
abandons the possibility of demonstrating that the market outcome is in any 
sense a realisation of the individual preferences of whose interaction it 
is an expression. It has no way of establishing the supposedly stabilising 
character of entrepreneurial activity or its alleged socially beneficial 
character as the dynamic process could lead to a divergence rather than a 
convergence of behaviour. A dynamic system need not be self-correcting, 
particularly in the labour market, nor show any sign of self-equilibrium 
(i.e. it will be subject to the business cycle). 
<p>
Given that the Austrian theory is, in part, based on Say's Law the critique
we presented in the <a href="secC1.html#secc14">last section</a> also applies here. However, there is
another reason to think the Austrian self-adjusting perspective on 
capitalism is flawed and this is rooted in their own analysis. Ironically 
enough, economists of this school often maintain that while equilibrium 
does not exist their analysis is rooted on two key markets being 
in such a state: the labour market and the market for credit. The 
reason for these strange exceptions to their general assumption is, 
fundamentally, political. The former is required to deflect claims that 
"pure"</i> capitalism would result in the exploitation of the working class, 
the latter is required to show that such a system would be stable.
<p>
Looking at the labour market, the Austrians argue that free market capitalism
would experience full employment. That this condition is one of equilibrium 
does not seem to cause them much concern. Thus we find von Hayek, for example, 
arguing that the <i>"cause of unemployment . . . is a deviation of prices and 
wages from their equilibrium position which would establish itself with a 
free market and stable money. But we can never know at what system of relative 
prices and wages such an equilibrium would establish itself."</i> Therefore, <i>"the 
deviation of existing prices from that equilibrium position . . . is the cause 
of the impossibility of selling part of the labour supply."</i> [<b>New Studies</b>, 
p. 201] Therefore, we see the usual embrace of equilibrium theory to defend 
capitalism against the evils it creates even by those who claim to know better. 
<p>
Of course, the need to argue that there would be full employment under 
"pure"</i> capitalism is required to maintain the fiction that everyone will
be better off under it. It is hard to say that working class people will
benefit if they are subject to high levels of unemployment and the 
resulting fear and insecurity that produces. As would be expected, the
Austrian school shares the same perspective on unemployment as the
neoclassical school, arguing that it is <i>"voluntary"</i> and the result of
the price of labour being too high (who knew that depressions were so
beneficial to workers, what with some having more leisure to enjoy
and the others having higher than normal wages?). The reality of 
capitalism is very different than this abstract model.
<p>
Anarchists have long realised that the capitalist market is based upon 
inequalities and changes in power. Proudhon argued that <i>"[t]he manufacturer 
says to the labourer, 'You are as free to go elsewhere with your services 
as I am to receive them. I offer you so much.' The merchant says to the 
customer, 'Take it or leave it; you are master of your money, as I am of 
my goods. I want so much.' Who will yield? The weaker."</i> He, like all 
anarchists, saw that domination, oppression and exploitation flow from 
inequalities of market/economic power and that the <i>"power of invasion 
lies in superior strength."</i> [<b>What is Property?</b>, p. 216 and p. 215] 
This is particularly the case in the labour market, as we argued in
<a href="secB4.html#secb43">section B.4.3</a>. 
<p>
As such, it is unlikely that "pure" capitalism would experience full 
employment for under such conditions the employers loose the upper hand. 
To permanently experience a condition which, as we indicate in 
<a href="secC7.html">section C.7</a>, causes "actually existing" capitalism so many problems seems more
like wishful thinking than a serious analysis. If unemployment is 
included in the Austrian model (as it should) then the bargaining 
position of labour is obviously weakened and, as a consequence, capital 
will take advantage and gather profits at the expense of labour. 
Conversely, if labour is empowered by full employment then they can 
use their position to erode the profits and managerial powers of their 
bosses. Logically, therefore, we would expect less than full unemployment 
and job insecurity to be the normal state of the economy with short 
periods of full unemployment before a slump. Given this, we would expect 
"pure" capitalism to be unstable, just as the approximations to it in 
history have always been. Austrian economics gives no reason to believe 
that would change in the slightest. Indeed, given their obvious hatred 
of trade unions and the welfare state, the bargaining power of labour 
would be weakened further during most of the business cycle and, contra 
Hayek, unemployment would remain and its level would fluctuate 
significantly throughout the business cycle. 
<p>
Which brings us to the next atypical market in Austrian theory, namely
the credit market. According to the Austrian school, "pure" capitalism 
would not suffer from a business cycle (or, at worse, a very mild one). 
This is due to the lack of equilibrium in the credit market due to 
state intervention (or, more correctly, state non-intervention). Austrian 
economist W. Duncan Reekie provides a summary:
<p><blockquote><i>
"The business cycle is generated by monetary expansion and contraction . . . 
When new money is printed it appears as if the supply of savings has 
increased. Interest rates fall and businessmen are misled into borrowing 
additional founds to finance extra investment activity . . . This would 
be of no consequence if it had been the outcome of [genuine saving] 
. . . - but the change was government induced. The new money reaches 
factor owners in the form of wages, rent and interest . . . the factor 
owners will then spend the higher money incomes in their existing 
consumption:investment proportions . . . Capital goods industries will 
find their expansion has been in error and malinvestments have been 
incurred."</i> [<b>Markets, Entrepreneurs and Liberty</b>, pp. 68-9] 
</blockquote><p>
This analysis is based on their notion that the interest rate reflects the 
"time preference" of individuals between present and future goods (see 
<a href="secC2.html#secc26">section C.2.6</a> for more details). The argument is that banks or governments 
manipulate the money supply or interest rates, making the actual interest 
rate different from the "real" interest rate which equates savings and loans.
Of course, that analysis is dependent on the interest rate equating 
savings and loans which is, of course, an equilibrium position. If we
assume that the market for credit shows the same disequilibrium tendencies
as other markets, then the possibility for malinvestment is extremely 
likely as banks and other businesses extend credit based on inaccurate
assumptions about present conditions and uncertain future developments
in order to secure greater profits. Unsurprisingly, the Austrians (like
most economists) expect the working class to bear the price for any 
recession in terms of real wage cuts in spite of their theory indicating
that its roots lie in capitalists and bankers seeking more profits and,
consequently, the former demanding and the latter supplying more credit
than the "natural" interest rate would supply.
<p>
Ironically, therefore, the Austrian business cycle is rooted in the
concept of <b>dis</b>-equilibrium in the credit market, the condition it 
argues is the standard situation in all other markets. In effect, 
they think that the money supply and interest rates are determined 
exogenously (i.e. outside the economy) by the state. However, this 
is unlikely as the evidence points the other way, i.e. to the 
endogenous nature of the money supply itself. This account of 
money (proposed strongly by, among others, the post-Keynesian school) 
argues that the money supply is a function of the demand for credit, 
which itself is a function of the level of economic activity. In other 
words, the banking system creates as much money as people need and any 
attempt to control that creation will cause economic problems and, 
perhaps, crisis. Money, in other words, emerges from <b>within</b> the system 
and so the Austrian attempt to <i>"blame the state"</i> is simply wrong.
As we discuss in <a href="secC8.html">section C.8</a>, attempts by the state to control the money 
during the Monetarist disasters of the early 1980s failed and it is
unlikely that this would change in a <i>"pure"</i> capitalism marked by a
totally privatised banking system. 
<p>
It should also be noted that in the 1930s, the Austrian theory of the 
business cycle lost the theoretical battle with the Keynesian one (not
to be confused with the neoclassical-Keynesian synthesis of the 
post-war years). This was for three reasons. Firstly, it was irrelevant 
(its conclusion was do nothing). Secondly, it was arrogant (it essentially 
argued that the slump would not have happened if people had listened to 
them and the pain of depression was fully deserved for not doing so). 
Thirdly, and most importantly, the leading Austrian theorist on the
business cycle was completely refuted by Piero Sraffa and Nicholas 
Kaldor (Hayek's own follower who turned Keynesian) both of whom exposed
the internal contradictions of his analysis. 
<p>
The empirical record backs our critique of the Austrian claims on the
stability of capitalism and unemployment. Throughout the nineteenth 
century there were a continual economic booms and slumps. This was 
the case in the USA, often pointed to as an approximately lassiez-faire 
economy, where the last third of the 19th century (often considered as 
a heyday of private enterprise) was a period of profound instability 
and anxiety. Between 1867 and 1900 there were 8 complete business cycles. 
Over these 396 months, the economy expanded during 199 months and 
contracted during 197. Hardly a sign of great stability (since the 
end of world war II, only about a fifth of the time has spent in 
periods of recession or depression, by way of comparison). Overall, 
the economy went into a slump, panic or crisis in 1807, 1817, 1828, 
1834, 1837, 1854, 1857, 1873, 1882, and 1893 (in addition, 1903 and 
1907 were also crisis years). Full employment, needless to say, was 
not the normal situation (during the 1890s, for example, the 
unemployment rate exceeded 10% for 6 consecutive years, reaching a
peak of 18.4% in 1894, and was under 4% for just one, 1892). So much 
for temporary and mild slumps, prices adjusting fast and markets 
clearing quickly in pre-Keynesian economies!
<p>
Luckily, though, the Austrian school's methodology allows it to ignore
such irritating constrictions as facts, statistics, data, history or 
experimental confirmation. While neoclassical economics at least 
<b>pretends</b> to be scientific, the Austrian school displays its deductive 
(i.e. pre-scientific) methodology as a badge of pride along side its 
fanatical love of free market capitalism. For the Austrians, in the 
words of von Mises, economic theory <i>"is not derived from experience; 
it is prior to experience"</i> and <i>"no kind of experience can ever force 
us to discard or modify <b>a priori</b> theorems; they are logically prior 
to it and cannot be either proved by corroborative experience or 
disproved by experience to the contrary."</i> And if this does not do 
justice to a full exposition of the phantasmagoria of von Mises' 
<b>a priorism</b>, the reader may take some joy (or horror) from the 
following statement:
<p><blockquote><i>
"If a contradiction appears between a theory and experience, <b>we must 
always assume</b> that a condition pre-supposed by the theory was not 
present, or else there is some error in our observation. The disagreement 
between the theory and the facts of experience frequently forces us to think
through the problems of the theory again. <b>But so long as a rethinking of 
the theory uncovers no errors in our thinking, we are not entitled to doubt 
its truth</b>"</i> [emphasis added, quoted by Homa Katouzian, <b>Ideology and Method 
in Economics</b>, pp. 39-40]
</blockquote><p>
In other words, if reality is in conflict with your ideas, do not adjust 
your views because reality must be at fault! The scientific method would 
be to revise the theory in light of the facts. It is not scientific to
reject the facts in light of the theory! Without experience, any theory 
is just a flight of fantasy. For the higher a deductive edifice is built, 
the more likely it is that errors will creep in and these can only be 
corrected by checking the analysis against reality. Starting assumptions 
and trains of logic may contain inaccuracies so small as to be undetectable, 
yet will yield entirely false conclusions. Similarly, trains of logic may 
miss things which are only brought to light by actual experiences or be
correct, but incomplete or concentrate on or stress inappropriate factors.
To ignore actual experience is to loose that input when evaluating a theory. 
<p>
Ignoring the obvious problems of the empirical record, as any consistent
Austrian would, the question does arise why does the Austrian school make 
exceptions to its disequilibrium analysis for these two markets. Perhaps 
this is a case of political expediency, allowing the ideological supporters 
of free market capitalism to attack the notion of equilibrium when it 
clearly clashes with reality but being able to return to it when attacking, 
say, trade unions, welfare programmes and other schemes which aim to aid 
working class people against the ravages of the capitalist market? Given 
the self-appointed role of Austrian economics as the defender of "pure" 
(and, illogically, not so pure) capitalism that conclusion is not hard to 
deny.
<p>
Rejecting equilibrium is not as straightforward as the Austrians hope,
both in terms of logic and in justifying capitalism. Equilibrium plays a 
role in neo-classical economics for a reason. A disequilibrium trade means 
that people on the winning side of the bargain will gain real income at 
the expense of the losers. In other words, Austrian economics is rooted 
(in most markets, at least) in the idea that trading benefits one side 
more than the other which flies in the face of the repeated dogma that 
trade benefits both parties. Moreover, rejecting the idea of equilibrium 
means rejecting any attempt to claim that workers' wages equal their 
just contribution to production and so to society. If equilibrium does
not exist or is never actually reached then the various economic laws 
which "prove" that workers are not exploited under capitalism do not 
apply. This also applies to accepting that any real market is unlike 
the ideal market of perfect competition. In other words, by recognising 
and taking into account reality capitalist economics cannot show that 
capitalism is stable, non-exploitative or that it meets the needs of all.
<p>
Given that they reject the notion of equilibrium as well as the concept
of empirical testing of their theories and the economy, their defence 
of capitalism rests on two things: "freedom" and anything else would be
worse. Neither are particularly convincing.
<p>
Taking the first option, this superficially appears appealing, particularly
to anarchists. However this stress on "freedom" -- the freedom of individuals 
to make their own decisions -- flounders on the rocks of capitalist reality. 
Who can deny that individuals, when free to choose, will pick the option 
they consider best for themselves? However, what this praise for individual 
freedom ignores is that capitalism often reduces choice to picking the lesser 
of two (or more) evils due to the inequalities it creates (hence our reference 
to the <b>quality</b> of the decisions available to us). The worker who agrees to 
work in a sweatshop does "maximise" her "utility" by so doing -- after all, 
this option is better than starving to death --  but only an ideologue blinded 
by capitalist economics will think that she is free or that her decision 
is not made under (economic) compulsion. 
<p>
The Austrian school is so in love with markets they even see them where
they do not exist, namely inside capitalist firms. There, hierarchy reigns
and so for all their talk of "liberty" the Austrian school at best ignores,
at worse exalts, factory fascism 
(see <a href="secF2.html#secf21">section F.2.1</a>) For them, management 
is there to manage and workers are there to obey. Ironically, the Austrian 
(like the neo-liberal) ethic of "freedom" is based on an utterly credulous 
faith in authority in the workplace. Thus we have the defenders of "freedom" 
defending the hierarchical and autocratic capitalist managerial structure, 
i.e. "free" workers subject to a relationship distinctly <b>lacking</b> freedom. 
If your personal life were as closely monitored and regulated as your work 
life, you would rightly consider it oppression. 
<p>
In other words, this idealisation of freedom through the market completely 
ignores the fact that this freedom can be, to a large number of people, very 
limited in scope. Moreover, the freedom associated with capitalism, as far 
as the labour market goes, becomes little more than the freedom to pick your 
master. All in all, this defence of capitalism ignores the existence of economic 
inequality (and so power) which infringes the freedom and opportunities of 
others. Social inequalities can ensure that people end up <i>"wanting what 
they get"</i> rather than <i>"getting what they want"</i> simply because they have 
to adjust their expectations and behaviour to fit into the patterns 
determined by concentrations of economic power. This is particularly the 
case within the labour market, where sellers of labour power are usually 
at a disadvantage when compared to buyers due to the existence of unemployment 
as we have discussed.
<p>
As such, their claims to be defenders of "liberty" ring hollow in anarchist
ears. This can be seen from the 1920s. For all their talk of "freedom", when 
push came to shove, they end up defending authoritarian regimes in order to
save capitalism when the working classes rebel against the "natural" order. 
Thus we find von Mises, for example, arguing in the 1920s that it <i>"cannot be 
denied that Fascism and similar movements aiming at the establishment of 
dictatorships are full of the best intentions and that their intervention 
has, for the moment, saved European civilisation. The merit that Fascism 
has thereby won for itself will live eternally in history."</i> [<b>Liberalism</b>, 
p. 51] Faced with the Nazis in the 1930s, von Mises changed his tune 
somewhat as, being Jewish, he faced the same state repression he was happy 
to see inflicted upon rebellious workers the previous decade. Unsurprisingly, 
he started to stress that Nazi was short for "National Socialism" and so 
the horrors of fascism could be blamed on "socialism" rather than the 
capitalists who funded the fascist parties and made extensive profits 
under them once the labour, anarchist and socialist movements had been 
crushed. 
<p>
Similarly, when right-wing governments influenced by the Austrian school
were elected in various countries in the 1980s, those countries saw an
increase in state authoritarianism and centralisation. In the UK, for
example, Thatcher's government strengthened the state and used it to 
break the labour movement (in order to ensure management authority over
their workers). In other words, instead of regulating capital and the 
people, the state just regulates the people. The general public will 
have the freedom of doing what the market dictates and if they object 
to the market's "invisible hand", then the very visible fist of the 
state (or private defence companies) will ensure they do. We can be 
sure if a large anarchist movement developed the Austrian economists 
will, like von Mises in the 1920s, back whatever state violence was 
required to defend "civilisation" against it. All in the name of 
"freedom," of course. 
<p>
Then there is the idea that anything else that "pure" capitalism would be
worse. Given their ideological embrace of the free market, the Austrians 
attack those economists (like Keynes) who tried to save capitalism from 
itself. For the Austrian school, there is only capitalism or "socialism" 
(i.e. state intervention) and they cannot be combined. Any attempt to
do so would, as Hayek put it in his book <b>The Road to Serfdom</b>, inevitably
lead to totalitarianism. Hence the Austrians are at the forefront in 
attacking the welfare state as not only counterproductive but inherently
leading to fascism or, even worse, some form of state socialism. Needless 
to say, the state's role in creating capitalism in the first place is 
skilfully ignored in favour of endless praise for the "natural" system 
of capitalism. Nor do they realise that the victory of state intervention 
they so bemoan is, in part, necessary to keep capitalism going and, in part, 
a consequence of attempts to approximate their utopia (see 
<a href="secD1.html">section D.1</a>
for a discussion).
<p>
Not that Hayek's thesis has any empirical grounding. No state has ever
become fascist due to intervening in the economy (unless a right-wing 
coup happens, as in Chile, but that was not his argument). Rather, 
dictatorial states have implemented planning rather than democratic
states becoming dictatorial after intervening in the economy. Moreover,
looking at the Western welfare states, the key compliant by the capitalist 
class in the 1960s and 1970s was not a lack of general freedom but rather 
too much. Workers and other previously oppressed but obedient sections 
of society were standing up for themselves and fighting the traditional 
hierarchies within society. This hardly fits in with serfdom, although 
the industrial relations which emerged in Pinochet's Chile, Thatcher's 
Britain and Reagan's America does. The call was for the state to defend 
the <i>"management's right to manage"</i> against rebellious wage slaves by 
breaking their spirit and organisation while, at the same time, intervening 
to bolster capitalist authority in the workplace. That this required an 
increase in state power and centralisation would only come as a surprise
to those who confuse the rhetoric of capitalism with its reality.
<p>
Similarly, it goes without saying Hayek's thesis was extremely selectively 
applied. It is strange to see, for example, Conservative politicians 
clutching Hayek's <b>Road to Serfdom</b>  with one hand and using it to defend 
cutting the welfare state while, with the other, implementing policies which 
give billions to the Military Industrial Complex. Apparently "planning" 
is only dangerous to liberty when it is in the interests of the many.
Luckily, defence spending (for example) has no such problems. As Chomsky 
stresses, <i>"the 'free market' ideology is very <b>useful</b> -- it's a weapon
against the general population . . . because it's an argument against 
social spending, and it's a weapon against poor people abroad . . . But 
nobody [in the ruling class] really pays attention to this stuff when it 
comes to actual planning -- and no one ever has."</i> [<b>Understanding Power</b>,
p. 256] That is why anarchists stress the importance of reforms from <b>below</b> 
rather than from above -- as long as we have a state, any reforms should be 
directed first and foremost to the (much more generous) welfare state for 
the rich rather than the general population (the experience of the 1980s 
onwards shows what happens when reforms are left to the capitalist class).
<p>
This is not to say that Hayek's attack upon those who refer to 
totalitarian serfdom as a "new freedom" was not fully justified. Nor is 
his critique of central planning and state "socialism" without merit. 
Far from it. Anarchists would agree that any valid economic system must 
be based on freedom and decentralisation in order to be dynamic and meet 
needs, they simply apply such a critique to capitalism <b>as well as</b> state 
socialism. The ironic thing about Hayek's argument is that he did 
not see how his theory of tacit knowledge, used to such good effect 
against state socialist ideas of central planning, were just as 
applicable to critiquing the highly centralised and top-down capitalist 
company and economy. Nor, ironically enough, that it was just as 
applicable to the price mechanism he defended so vigorously (as we note 
in <a href="secI2.html#seci12">section I.1.2</a>, the price system hides as much, if not more, necessary 
information than it provides). As such, his defence of capitalism can
be turned against it and the centralised, autocratic structures it is
based on.
<p>
To conclude, while its open and extreme support for free market 
capitalism and its inequalities is, to say the least, refreshing, 
it is not remotely convincing or scientific. In fact, it amounts to 
little more than a vigorous defence of business power hidden behind 
a thin rhetoric of "free markets." As it preaches the infallibility of 
capitalism, this requires a nearly unyielding defence of corporations, 
economic and social power and workplace hierarchy. It must dismiss the 
obvious fact that allowing big business to flourish into oligopoly and 
monopoly (as it does, see <a href="secC4.html">section C.4</a>) reduces the possibility of 
competition solving the problem of unethical business practices and 
worker exploitation, as they claim. This is unsurprising, as the 
Austrian school (like economics in general) identifies "freedom" with 
the "freedom" of private enterprise, i.e. the lack of accountability 
of the economically privileged and powerful. This simply becomes a 
defence of the economically powerful to do what they want (within 
the laws specified by their peers in government).
<p>
Ironically, the Austrian defence of capitalism is dependent on the belief 
that it will remain close to equilibrium. However, as seems likely, 
capitalism is endogenously unstable, then any real "pure" capitalism 
will be distant from equilibrium and, as a result, marked by unemployment 
and, of course, booms and slumps. So it is possible to have a capitalist
economics based on non-equilibrium, but it is unlikely to convince anyone
that does not already believe that capitalism is the best system ever
unless they are unconcerned about unemployment (and so worker exploitation)
and instability. As Steve Keen notes, it is <i>"an alternative way to 
ideologically support a capitalist economy . . . If neoclassical economics 
becomes untenable for any reason, the Austrians are well placed to provide 
an alternative religion for believers in the primacy of the market over all 
other forms of social organisation."</i> [Keen, <b>Debunking Economics</b>, p. 304]
<p>
Those who seek freedom for all and want to base themselves on more than 
faith in an economic system marked by hierarchy, inequality and oppression 
would be better seeking a more realistic and less apologetic economic theory.

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