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Dissidents and alternatives

Pekka SutelaAalto University

11. 03.2015b

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From peak to peak...• Economics, at each point of time, is never just an advance from peak

to peak– Though history books all too easily concentrate on that

• Most economists are involved in more mundane matters– And it is difficult to say whether they are ”standing on the shoulders of past

giants” (Marx), ”being prisoners of views long time abandoned” (Keynes), just confused, or working on matters where theories do not really matter

– So it makes sense to look at the economic views of Hitler, Stalin and Pol Pot. (Hitler at least had none.)

• There are also always alternative views– Which may make sense or then not

• And the economists’ views get misunderstood– Tobin Tax, Mundell’s Theory of Optimum Currency Area

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What might economics be criticised for? Typically...

• Being overly theoretical and abstract– ”look at the institutions”– Thorstein Veblen (1857-1929), John Kenneth Galbraith (1908-2006)

• Using the wrong assumptions– Does anybody really really maximise?

• Serving special interests– List: free trade– Marx: class struggle– International economics

• But fortunately the border between (external) criticisms and internal reform movements remains unclear – Example: the various New Institutional Economics’s

• One can think of several...

– So capacity of renewal is not lost! Nice example: Psychologist Kahneman receiving the Nobel Memorial Price (for work done with Tversky)

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Karl Marx (1818-83)

• Philosopher, journalist, revolutionary, ”free-lance researcher”

• Marx – Engels Gesamtausgabe 55 volumes– And it does not include everything

• Hesitant analyses on Russia• Eastern European nations without state-forming capability• Oriental despotism in China and elsewhere

• Friedrich Engels (1820-95)– Friend and supporter (economically and otherwise)– Editor of many of Marx’s publications– Possibly an undervalued scholar

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The aims

• Grand dynamics– Human history as a procession of ”modes of production”,

with feodalism, capitalism and communism as the latest ones

• Solving the remaining political economy issues– A return to ”the best” in classical political economy– Scorn on ”vulgar economics”

• Making a revolution• Anything else– The aim to know ”everything”, bad organization of life and

health problems prevented finishing most work

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Labour theory of value• True, supply and demand determine price in markets

– But just noting that implies ”vulgar economics” unable to distinguish between appearance and substance

– Since J.St. Mill economics no longer truly scientific• At bottom a labouring society

– Only labour creates new value; accumulated value from capital is transferred to commodities

• What then is the relation between value and price?– New value created by labour, but profits accrue to capital as well– The transformation problem at the heart of early criticisms of Marx (esp. Böhm-

Bawerk)– In the 1970s the transformation problem made a brief visit to mainstream

economics (Samuelson, Morishima)– Heterogenous labour?– Additional problems in agriculture and foreign trade as well

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Exploitation

• All societies so far based on exploiting surplus value– Value of produce minus value of labour– Is the source of profits (and land rent – here theoretical problems)– In serf society and feodalism exploitation is evident, but in

capitalism hidden beyond voluntary and thus equal market exchange (this is why the transformation problem became so crucial)

– As a later attempt to define different kinds of exploitation see Roemer (1989)

– Clearly, there will be surplus in communism but no exploitation as use of surplus will be decided ”jointly”. This became a key criticism of ”really existing socialism”

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Growth theory

• Das Kapital vol. II– Unfinished, difficult to read

• Two premises– Productive and unproductive labour

• But what actually is the difference?

– Two-sector model: producing investment goods and consumption goods

• End result– Numerical examples– Soviet economic debates of the 1920s– Formal two-sector models since 1960s– Morishima (1973)

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Old wine in new barrels• Declining rate of profit

– All new value is created by labour. As production becomes more capital-intensive, rate of profit must decline.

– Marx’s version of the traditional political economy argument, not a prophesy of revolution

– Contradiction between ”forces of production” and ”mode of production”. Marx was a prophet of industrial capitalism and of its demise. (Compare Schumpeter later).

• Impoverishment – Wages are the sum of subsistence minimum plus something dependent on power

relation between capital and labour– As competition and technical change lead to concentration of capital, labour loses

in relative power– Unclear, how seriously Marx and Engels took the ensuing impoverishment thesis in

a fast growing economy. But income differences (also across nations) did grow in the 19th century

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Society of the future

• Aggressive distinction between ”utopian” and ”scientific” socialism– Earlier, utopian socialism (Saint-Simon, Fourier, Owen etc) tried to

convince people by describing the future as a better society or through small model societies

– Marxian scientific socialism ”laid bare the laws of movement of social development”

• Communism as continuation of trends under capitalism– Technical progress, practical science, large-scale production,

hierarchies, globalisation... • Communism as non-capitalism

– Joint vs private ownership of capital, planning vs markets, scientific foresight vs competition...

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Debate on economic systems: The decentralized solution

• In Walras the conditions of general equilibrium are independent of property rights and other institutions

• Pareto, Barone: in competitive markets the conditions are prices. How would prices come about under communism?

• Von Mises (1921), Hayek (1935). Information relevant for prices is dispersed and often private. A central planner will be overwhelmed by the task of putting info together. It will be groping in the dark, which makes rational decision making impossible. Socialism when attempted is bound to collapse.

• Lange (1936 etc): but Walras never showed how tatonnement happens in perfect competition. Under market socialism the central planner can play the role of auctioneer. Thus market socialism is theoretically superior to market economy. Irritatingly (to most) nice argument.

• Lange did not try to implement this is post-war Poland

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Debate on economic systems: The centralized solution

• Leonid Kantorovich– The plywood trust case (1938): origins of linear

optimization (later independently by Koopmans)– 1941 (published in 1956): nation-wide optimal plan

• Maximize production volume with given structure decided by planners (ie political leadership) under (linear) constraints of resource availabilities and technologies

• Solving the problem gives shadow prices (contributions of resources to target function). Let plants maximize profits under these shadow prices

• The resulting equilibrium is equivalent with perfect competition Walras equilibrium, without existence of markets

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Optimal planning as Soviet reform economics

• Guide to reforming the Soviet economy, not primarily a theoretical argument– Rational prices and incentives

• Novocherkassk 1962!• Profit maximization hardly a sufficient target in practice• Plant incentives and plan bargaining

– Primacy of political decision making retained– Benefits over market economy argued

• For instance, avoiding investment-induced fluctuations. But politicians want to maintain powers

– But the problems of dispersed and private information not solved• Dual-track planning

– Petrakov (1970), China (1978), Putin (1997)