26min chapter

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Marx, Capitalism, and Neoclassical Economics | Steve Keen | Escaped Sapiens #65

The Escaped Sapiens Podcast

CHAPTER

Exploring the Ideological Battles in Economics

The chapter delves into the ideological battle within economics, showcasing the historical struggles over societal beliefs and the portrayal of capitalism as a system for maximizing utility. Criticizing the dominant neoclassical ideology, the speaker aims to provide a new foundation for the discipline by challenging traditional economic models. The discussion highlights the contrast between capitalism and socialism within the neoclassical framework, addressing issues of central planning, income distribution, and the practical reality of capitalist competition.

00:00
Speaker 2
I would imagine just to push back a little bit to play devil's advocate, I would imagine that it would be really lucrative to have a good scientific understanding of economics, right? We can do it for the weather, we can do it for all sorts of chaotic and complicated systems. I imagine this should be the system that we understand best because it's so lucrative. Why is that not the case?
Speaker 1
Largely because it's tied up with economics is tied up with what we believe about society. And there have been immense struggles over, you know, throughout history about what is the nature of the society we're in. I imagine that Spartacus wasn't too fond of Rome, for example. Whereas the Romans were very fond of Rome. And therefore, when you have a social system, because we're embedded in that social system and our views about that social system driven by our position and what it does to us and so on, ideology dominates. And economists had an ideological struggle over where does wealth come from, who creates the wealth that we as a society enjoy and equally the poverty that that society creates. And that battle's been going on for 250 years, pretty much since Adam Smith wrote The Wealth of Nations. And that ideology in many ways, economists of all persuasions are rather unconscious of their ideology. They say their ideology is truth rather than a political orientation. But I see the current state of it being dominated by ideology, whether you're left wing or right wing. And the effectively the right wing ideology is what's dominated the current version of economics. So what's called neoclassical economics sees capitalism as a system which maximizes people to utility given constraints. That's its orientation. Now that's treating it like something which was designed to achieve a purpose. And it's not. It's something which evolved out of human culture, the capacity, our capacity to reason, our capacity to exploit resources, capacity to exploit each other and all those elements. And that is simply unrecognized by the dominant strand of economics. It treats capitalism as though it's society has always been capitalist. You'll feel people on people, neoclassicals applying the idea that people are trying to maximize the utility and they were trying to trade and so on back in chromagnant days. So let's literally predict it back that far. So I'm trying to find a foundation that will give us something which you can't object to as a logical foundation for the discipline. And I think I've achieved that for some degree. But the mainstream, anything which challenges the vision of capitalism as a system that maximizes utility subject to constraints of minimizing costs. They just don't want to know about may reject it. So I really regard the current nature of economics as similar to astronomy before
Speaker 2
Copernicus. It's also the case in the public discourse, right? Because you listen to the way that people talk about different economic systems and some people will say capitalism or socialism or Marxism. They're not just wrong or faulty, but they're evil. Let's say they, you know, people will say capitalism causes all environmental destruction or socialism led to so and so many deaths. People have even very distorted views of what these systems are. Why do you think it is that people become so ideologically invested in something that's so abstract?
Speaker 1
I think because of something that humans have always done because I mean, my vision is like the first human conversation would have been to about evolutionary predecessors lying back on the ground or in a tree and looking up at the stars and saying, what do you think they are? And then you have a belief system about that which we then share those beliefs. So I see humans as being distinguished from most other animals, not all, but most other animal by the capacity to share beliefs and to be motivated by those beliefs to do things which without the beliefs you would never take on. So for example, if you imagine us back as animal, a predator animal on the African plains 300,000 years ago, the fact that we could come together and collect these right to take on a mammoth or an elephant and bring it down for food is something which no individual would do on their own. Only if you have to share beliefs and say, look, we can do it. We can build this trap. We can get the elephant in there and we can kill it. We can cut it up. We can cook it, et cetera, et cetera. That's an incredible level of cooperation which involves a set of shared beliefs. And that's practical when it comes to wanting to fill that animal and feed with the hunter-gatherer approach. But it equally applies to how we think the universe operates. So we've always been driven by having a set of beliefs. We find that we criticize older manifestations of ourselves by having what they call primitive religions. Well, look at modern religion. It broke 200,000 years ago. It happened to be God was crucified, got buried, went to heaven. I mean, come on. If you want to criticize any, all of our beliefs fundamentally have a religious component to them. And in that sense, science, the great advance of science was breaking free from that and saying, wow, your religion tells you that the heavens are perfect. And I've just invented this little thing called a telescope. My name is Galileo, by the way. And take a look at the telescope and you'll find that there are craters on the moon, which means the moon is not a perfect sphere. And obviously, something else has clotted into it, which doesn't fit your theory that the heavens are perfect. And what's the reaction of a toll-makers astronomer? I don't want to know. I don't want to look through that telescope. So the science developed the capacity to challenge those beliefs. And that is what I think is given us the incredible capacity to advance that we've done since the 1500s and our technology and so on. But the background is that even scientists have beliefs. So scientists believe in their paradigm. They don't try to contradict the paradigm. They try to confirm it. But because they're using observation, observations will sometimes contradict the paradigm and ultimately cause it to change and evolve. That unfortunately does not happen in economics. And that's why I see it fundamentally not being a science, but still reflecting the
Speaker 2
nature of humanity. I plan to get on to your economics in a little bit down the conversation. But before that, so that we don't lose people, can you give me a broad overview of the different schools of economics or the different schools of economic thought that are at play currently? OK.
Speaker 1
Well, the dominant one is called neoclassical economics. It will also be described as mainstream economics. And that is dominated by what's called microeconomics, which is the analysis allegedly of how individual schools behave as consumers and how firms behave as producers. And the concept is that the firms are trying to maximize their profits and consumers are trying to maximize their utility, subjective utility. So it has a subjective theory of value at its foundation. And the proposition is that you and I as consumers are subject to what's called diminishing marginal utility. So utility is subjective. The utility you get out of a chair is how comfortable it makes you feel, not objective definition that a chair is something you can sit in without considering how good it makes you feel. So you buy things to subjective utility maximization. And as you buy more units of individual commodity, you get less utility if you get extra unit that you buy. So your utility diminishes, but is always positive as you consume more. That's the orientation they have the consumer behavior. And we decide how much to consume by rational calculation. So even though it's our subjective utility we're maximizing, it's possible to apply mathematical rules to say whether we are or are not behaving rationally. So one obvious example of rational behavior is more as compared to less. So if you consume, if you actually do something like something less when you consume more of it, you must be irrational. And that's ruled out. So out of all that they can derive a way in which given a budget, the budget constraint is what your income is. You can then state how many units of one commodity you can buy if you spent all your income on that commodity. And then how many of another you could buy if you spent all of your income on that commodity, you got a straight one between the two of course. And then they work out what's called the demand curve by changing the relative price of one good to another and then driving how many units you would consume given that income and given the relative prices and other that they drive the demand curve. So then they aggregate all individual demand to say there's market demand that that's one side of the thinking. And on the other side they say firms are profit maximizes. They are subject to diminishing marginal productivity. So as you produce output you must have fixed units fixed inputs, largely capital machinery, variable inputs, largely labor but also raw materials but they tend to forget about the raw materials and just talk about labor. And then to produce more output, each extra work you add will add more units of output but at a diminishing rate because of this diminishing marginal productivity. So out of that they derive a size supply curve. The demand curve slopes down in price at the higher the price the less people will consume and the lower the price the more they'll consume. The supply curve slopes up if you want to have producers supply more because they are subject to diminishing marginal productivity they need a higher price to cover the lower units that are produced per input of workers as you increase output. Supply and demand meet, spending you've got across everything happens with the lines intersects. That's the micro vision and then they try to build the macro vision out of an extrapolation of the micro. So they say the aggregate level demand, the total demand in the economy not just demand in the individual market from all consumers or demand from an individual consumer for all markets at the aggregate level they apply the same analysis. And you'll see them talking about things like rational expectations and natural rate of unemployment and natural rate of interest etc. Those are all concepts that come out of the mainstream. And again they treat capitalism at the aggregate level as an optimisation system. You want to get the maximum possible level of utility for all of society at the minimum possible cost and capitalism achieves that outcome. That's neoclassical. You want one of
Speaker 2
the others now? Well, can I stop you for a sec? You said marginal cost, right? There's marginal value. This idea of marginal value, marginal cost, this came out of the neoclassical approach economics, right? So for people who don't know what that is, that's, if I understand what you're saying, it's the cost of producing just one more item. So as you produce a factory, producing 10 items will be cheaper or more expensive per unit than say 11 or 1000. And so the marginal cost is the cost of that one extra. As you produce more, you can plot these production curves, how much, what the cost is a production. So you have these dynamic curves, I suppose, of supply and demand. And the whole idea, if I understand what you're saying, is that you have some sort of static point where the supply and demand cross. And it's a study of that. Is this a correct rendition of...
Speaker 1
It's a correct rendition, but can I use a technical term to describe that model now? It's bullshit.
Speaker 2
It's bullshit. I knew this was the word that was
Speaker 1
going to come. Because when you go and take a look at actual firms, they're not subject to diminishing marginal productivity. And this has been found by, I think the latest count is 80 or so surveys that have been done. Every last survey has found that firms do not have diminishing marginal productivity. And the reason which any engineer listening to this will know is that engineers are designed by factories to reach their maximum productivity at or very near all capacity. So we've designed them very carefully to be... You're making a giant machine that makes machines that makes goods and services. That's what a factory largely is. And with engineering setting it up, the maximum efficiency is almost at capacity. And most firms work well below capacity because if you're working at factory capacity, you don't have enough factories or factories too small. So when you do the empirical work, that is exactly like finding craters on the surface of the moon or moon circling Jupiter and Saturn. When you do that, the paradigm should go out the window. But of course, as we know, certainly a century or so after Copernicus, astronomers will clun to the old paradigm. But ultimately, the gave away. This research about the nature of firms has been done for almost a century now. The first surveys went on in about 1936, I think, in America. And it contradicts the theory. But the theory is still taught exactly as it is. So this is why I say it's not a science. If you'd actually had the behavior of a science to find that you've got an empirical discovery that firms have constant or falling marginal costs, that empirical discovery would have caused a scientific revolution ultimately. And the science would have been transformed. Well, that hasn't happened with economics. They're still teaching the same bullshit in the textbooks. Despite the fact that we have 80 surveys that have been done that have found that marginal cost does not rise, we did another 80 surveys that have 160 that found the same result. But they don't want to know about it. They don't look at the data and they therefore continuing teaching a fantasy that their students have been calling it science.
Speaker 2
Would you recommend going and doing an economics degree?
Speaker 1
So
Speaker 2
would you recommend going and doing an economics degree currently given the
Speaker 1
current degree? No, no. I'd say that if you want to learn, if you're interested in the economy, then go into a degree in the system dynamics and then apply what you learn in system dynamics to analyzing the economy and ground yourself in the empirical data. Only use a textbook if you can't keep the door open because it's still windy
Speaker 2
outside. So neo-classical economics, that evolved following Marx. So what did he not
Speaker 1
know? No, not after Marx. In contradiction to Marx. If you look back at the history of neo-classical economics, there were proton neo-classicals way, way back in time. So Jeremy Bentham, for example, who is mainly known as a legal scholar, he was one of the founders of the philosophy that gave rise to neo-classical economics. Augustine Corneau, who was a French mathematician, who did some interesting mathematical theories about people's attendance at competing spars. And that's what led to what's called Corneau oligopoly theory and game theory as well today. And then Jean Baptiste say he was one of the main sort of intellectual counterpoints to Ricardo. He was clearly, I think, the most obvious proton neo-classical. And that was all about utility maximization, a non-monetary model of the system and so on. And they were the underdogs. They were the people laughed at in the days when Smith and Ricardo set the nature of economics. So if you read Ricardo, you'll find a phrase at one point where Ricardo says, and this is pretty much a direct quote, it is the ultimately the cost of production, which determines prices at which God's goods are sold and not, as has often been said, supply and demand. So Ricardo was just trashing supply and demand theory. What do we have two centuries later? Supply and demand theory. So they became dominant because the classical school, which came out of Adam Smith and David Ricardo in particular, led ultimate of the Marx. And then Marx took the classical theory and said that what capitalism generates wealth by exploiting workers. So you then had the whole argument about capitalism should lead to socialism. That was Marx's proposition. He was wrong about that. I'm happy to elaborate why, but nonetheless, that was the background there. So as the time when Marx became a very politically significant figure, that was around the time he published capital, which is 1867. In that period, 1867 to about 1880, I don't really know the details. I haven't studied the site of it myself properly. I'm sure there are economic historians or historians of economic thought who have. But across that period, the classical school basically went into complete decline in academic circles. And then the neoclassical school took over. So you had three major characters responsible there. William Jevons in England, Leon Volrus in France and Menger and I met Menger's first name in Austria. And those three gave us what became neoclassical economics and also the Austrian offshoot, which comes out of Menger's work, which was rather different to Marshall to Jevons and Volrus. But Jevons and Volrus were all seeing capitalism as a system that shaped equilibrium where wealth was created by the joint efforts of labor and capital. And they both contributed their own productivity to it. So the marginal productivity of the two came to be seen as to how incomes would determine capitalists get the marginal product of capital workers get the marginal product of labor. And it's all seen as a very fair system and basically a meritocracy. Now, so that foundation flipped from Mark saying it's based on exploitation. And there are nuances there, but nonetheless, that's a general coverage. Across the saying, well, it's all about meritocracy. People get what they deserve in capitalism and any non-market intervention damages that meritocratic outcome. So we should get rid of trade unions, we should get rid of governments. The anti-government anti-union side of neoclassical economics comes out of that foundation as saying that with a free market, with no intervention and no collaboration between individual agents, you'll get the best possible social outcome. And that's what's taught. And I think you can see to some extent the ideological component of
Speaker 2
that. Right. And so how does socialism then compare? So if you were going to look at the parameter space of capitalism versus a socialist economic system, how do they differ in their organization?
Speaker 1
Well, totally different to whether they're actually described in the economic textbooks, nonetheless. But again, socialism is seen by the neoclassicals as being not having a price system, not using a money system, which is ironic because they've been neoclassical's model capitalism without money. But nonetheless, they criticize it for not having a money system, not having a price system, central control, and the major argument from the Austrians, this is quite valid, in my opinion, was that a central planner can't possibly work out what the actual distribution of taste and output should be to maximize people's utility. That's ironic, by the way, because most neoclassical models now include the idea that there is a central planner, but that's another little curly. But they will criticize it on that basis. Equally, socialists will say, well, you know, this is dominated by an incredibly uncapital that sounds an incredibly unfair distribution of income. The capitalists get income they don't deserve. So if we have a socialist system, democracy of some description, which of course never happened in socialist countries, can ensure that we get an outcome that actually does maximize people's utility welfare. And I think that's all, but both arguments are basically pissing on the wind. The person whose work I most appreciate on capitalism versus socialism is actually a Hungarian economist called Janos Kornai. He died about four years ago. But Janos, looking at Hungarian economy and seeing how technological development was not happening in the Soviet economies, tried to work out an explanation based on observation and logic as to why socialism failed as a production system, whereas capitalism succeeded. And he developed the argument that capitalism is demand constrained, whereas socialism is supply constrained. So he'd imagine an ideal socialist economy, no Stalin. You are actually trying to reach everybody's welfare. So you all the good stuff about the intentional good stuff about socialism actually occurs, no Google Ags, et cetera, et cetera. And you said, and of course you're talking in a country, a economy which you're developing. So Marx's division of socialism was that it would happen in the most advanced countries. Capitalists would have already got all the production worked out. The reality was that it happened in Russia and China and Eastern Europe and so on, which are devastated by the first and second world's wars and so on. So you had to get these industries developed. You had a drastic need to expand production in every area of the economy, more housing, more food, more clothing, more cars, et cetera, et cetera. That meant that every single sector of the economy was supply constrained. You didn't have enough of these things to begin with. You wanted to produce more of everything in every sector. So consequently, every sector got less inputs than it actually needed to reach its necessary production levels required by the five-year plan. And what that meant was, you're out put, you didn't have enough factories to make everything, you didn't have enough inputs, so you supply constrained. Now in that situation, the best way to come close to achieving what the plan requires you to produce is to make last year's model all the time, not to innovate, but all your resources into maximum possible output, minimum innovation. When I saw a personal instance of that, which has sets this in history, I had my girlfriend back when I was in my early 20s. Her brother wanted to buy a 750 CSC motorbike, but he didn't have the money to buy a Kawasaki or a Honda at that time. And he then found he could buy a COSAC motorbike. So back in those days, buying a 650 CSC Japanese or American, or Japanese, they were the dominant models at the time. The Japanese motorbike would cost you $3,000. He literally bought a COSAC, the $650, which is $1 per CSC, quite quite funny. I helped him, the thing arrived at hit their house, and I helped him unpack it, was in a wooden crate. We took the wooden crate apart, and then there were all these oil-soaked rags over the whole thing. We took the oil-soaked rags off, and there, tied down to the bottom of the pallet in all that score, it was in 1942 BMW. It was a bicycle seat for the sitting on. It's sort of thing you'd see in an old Steve McQueen, maybe, if you know who Steve McQueen is, which we just worked out. You probably don't. So there was no change. They literally stole the design from the Germans, and then this is 1972, not 1942, 30 years later, they're still making the same thing. So Cornet's case to me made eminent sense when I first became exposed to his logic. They then described capitalism as being demand constrained. The idea being there is you've got this dispersed production, there's no centralization whatsoever. A whole bunch of firms who are competing sell things like motorbikes to a, to a, to a, to an, to an intentional bias because you're all trying to compete, you've got excess capacity. This also locks into the whole thing about no such thing as diminishing marginal productivity, because you want to take out of sales from your rivals. The way you compete is not on price, which is the neoclassical nonsense about how you compete, you compete on features. You come up with some new features, somebody else hasn't got. And therefore technological development is happening all the time. You're paying workers as little as possible. So you're short of demand, et cetera, et cetera. But the way to get the additional demand from your rivals is the innovate. So to me, to me, corn eyes picture of what capitalism was and the socialism was much more realistic, much better descriptions of how they once succeeded and the other failed. But ironically, the neoclassical theory, or an ARG in, I agree with them, almost apply the Soviet idea of what factories are like to the real world, you know, working past capacity, supply constraint, et cetera, et cetera. So neoclassical economists have an answer about it.

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