A review of Ben Fine, Microeconomics: A Critical Companion Pluto Press (2016), £17.50 and Ben Fine and Ourania Dimakou Macroeconomics: A Critical Companion Pluto Press (2016), £17.50
Writing in the mid-19th century, British historian Thomas Carlyle described economics as the “dismal science”. Arguing against John Stuart Mill, among others, he claimed that the continuance of slavery would be morally superior to market forces because emancipated slaves would be worse off if they had to rely entirely on selling their labour power to survive. It is hard to discern why Carlyle considered slavery more favourable than “letting men alone”, especially given that his predecessor Adam Smith had suggested that individual self-interest acting through the “hidden hand” of the market was both superior as a mechanism for wealth creation and brought about the best possible (and most morally desirable) “commonweal” outcome for the nation as a whole.
Although, as a political economist, Smith’s analysis was concerned with society, the “rational” individual became the foundational assumption of the developing discipline of economics. This orthodox view of the economy as an aggregate of individual actions is very different to the Marxist approach which starts with commodity production and goes on to derive social classes.
In their critical companions to microeconomics and macroeconomics, Ben Fine (co-author of the book Marx’s Capital) and Ourania Dimakou (Fine’s colleague at London’s School of Oriental and African Studies) refer to mainstream economics as “dismal unaware[ness] of methodology, history, alternatives to mainstream or critical approaches”. Their mammoth task is a critique of mainstream economics from its (mainly abandoned) roots in the classical political economy writings of the 18th century, through the so-called marginalist revolution of the 19th, which attempted to establish economics as a science, through the Keynesian developments in the inter-war years, the Monetarist “counter-revolution” of the 1980s and up to the “Michael Fish moment” of 2007-8, where almost no orthodox economist predicted the crash. The books also embrace the challenge of the increasing dominance of the subject by mathematics, but not in such a way as to dissuade the non-mathematician.
One of the main concerns of classical political economy was the distribution of the social product between three classes: workers (in the form of wages), capitalists (profit) and landlords (rent). Not surprisingly, this debate originated with an argument about the declining share of the surplus taken by the landlords in the face of the rising capitalist and working classes.
Both Smith and Ricardo accepted that value was created by workers—ie the price of goods produced and sold under competitive conditions tends to be proportionate to the labour costs incurred in producing them. The key shift in the marginalist (or neoclassical) revolution was to locate value, not in the labour time taken to produce the goods, but in two related aspects: scarcity and utility. Adam Smith had argued that water should be expected to have a higher exchange value than diamonds, because water had utility (“use value”) whereas diamonds did not, so he discarded the concept of scarcity as a way of measuring value. The neoclassicals, however, introduced consumer perception into the concepts of both utility and scarcity in explicit opposition to the labour theory of value. For them “utility” is not so much related to usefulness as to whether or not the good is “desired”. Therefore customer perceptions can cause scarcity and drive prices. Value is therefore a subjective matter reflected in shifting patterns of demand (and supply) and changing prices until the market settles at its equilibrium point. Utility, originally associated with general well-being, was thus reduced to the “simple satisfaction derived hedonistically from consumption of goods”—a binary logic of choice between one bundle of goods and another.
The “utility function” approach is now increasingly used in other areas of social science, a case of what Fine calls “economics imperialism”. The orthodox preference for methodological individualism—the axiomatic assumption that “scientific” analysis of social phenomena must begin at the (micro) level of the “rational” individual “optimising her/his utility” is matched by social science’s increasing use of mathematical modelling and statistics. Steven Levitt’s 2005 bestseller Freakonomics and a rash of other titles cast the “undercover” economist as unlikely hero, revealing the “truths” apparently left untouched by other disciplines, including sociology, which is seen as failing to grasp the importance of market-based incentives in explaining behaviour.
The “Micro/Macro dichotomy”, identified by Fine and Dimakou as running through the whole body of orthodox theory, came under sustained attack following the First World War and the Great Recession of the 1930s. Microeconomics was dismissed by John Maynard Keynes as inadequate for an analysis of the whole economy. Treating the macro economy as though it were simply a mathematical aggregate of individuals’ rational actions ignores both history and structure (especially the state). Fundamental to the orthodoxy is a belief that the economy is in long-term equilibrium, a view still maintained by the current New Consensus Economics (NCE). Without a random “shock”, such as a spike in energy prices, the economy would remain in equilibrium forever, moving through a series of (episodic) short-run variations towards long-run equilibrium.
The main argument between Keynes and the neoclassicals revolved around the level of unemployment at which the economy achieved equilibrium. The latter, assuming “perfect market” theory, believed there would be full employment because all those who wanted jobs would work at the going rate of wages. But Keynes pointed out that there could still be unemployment, because some workers would see no point in working for very low wages. Higher unemployment would lead to reduced aggregate demand and slower growth, thus forcing businesses to reduce employment still further. Escaping from this downward spiral towards economic depression in the 1930s required government “pump-priming” investment to boost aggregate demand and reduce unemployment.
But, according to neoclassical orthodoxy, such fiscal intervention was (and is) a prime cause of inflation. So when inflation combined with stagnation in the early 1970s Keynesianism became discredited. A neoclassical revival began with monetarism and its focus on the money supply and the use of “supply-side” measures. Though monetarism was quietly abandoned in the mid-1980s, a collection of policies related to it began to be adopted globally, in what became neoliberalism. Neoliberals treat government intervention as automatically doomed to failure; so there was a shift towards just using monetary policies (particularly adjusting interest rates) rather than fiscal (government spending and taxation) policies and putting monetary policy into the hands of technical “experts” rather than elected governments that might be subjected to political pressure.
As the 1930s depression gave rise to Keynesianism and the “stagflation” crises of the 1970s led to a return to orthodoxy, so too did the 2007 crash lead to a limited critique of the orthodoxy from within, especially given that financial markets were deemed to be as close to the “perfect market” of orthodoxy as it was possible to get. There is still nothing like a consensus as to why the crash occurred. A key problem identified by Fine and Dimakou is orthodoxy’s treatment of money as “exogenous” (outside the real economy) and its view that in terms of its effects on the economy, money is neutral in the long run. But the collapse (and near collapse) of some major banking and financial institutions globally, and the response from central banks, cannot easily be explained by the micro theoretical orthodox apparatus of economics, even by grafting on macro perspectives such as Keynesianism.
So, despite the financial crash, there was no “paradigm shift” to match those that resulted from previous crises. Fine and Dimakou, unsurprisingly, are underwhelmed by the response from both the orthodoxy and the “new” Keynesians. The former models the economy as though moving through a series of short-term equilibria as it (relatively smoothly) adjusts to (exogenous) technological change towards long-term equilibrium, so that “any observed variation from equilibrium is an optimal and full employment response to evolving technological conditions”—a strong technological determinism.
The “New” Keynesianism approach accepts a degree of state intervention with an adequate treatment of money (it recognises “[the] speculative inability of the financial system [to] generate adequate investment and aggregate demand”) couched in orthodox terms of demand for and supply of money, interest and foreign exchange. It is somewhat better at grasping the dynamics of real economies than NCE with its more abstract models. However, what all varieties of New Keynesian share is a reliance on the “microfoundations” of neoclassical economics with which Keynes was originally claimed to have broken.
Though the so-called post-Keynesians (some of whom advise Labour shadow chancellor John McDonnell) are sympathetic to Marx, they work within a hybrid theoretical mix which shares many of the assumptions of orthodoxy. The perceived problems of low productivity, inequality, low growth, lack of investment and so on are framed within an orthodox model that renders labour (“human capital”) almost invisible and sees technology, rather than capitalist accumulation, as the driving force of capitalism. Not surprisingly, policy solutions focus on tweaks to government policy—investment, education, regulation (particularly of “finance”)—which take little account of the systemic contradictions of capitalism and how its trajectory towards barbarism might be averted.
Fine’s and Dimakou’s books are dense texts that repay close reading. Space here doesn’t permit inclusion of anything like all the topics discussed, including some of the bizarre ways in which orthodox economics in effect rationalises the capitalist economy, both at the level of states and globally, in the form of development economics. The theoretical impasse in which mainstream economics finds itself and its apparent inability to adapt to changing historical conditions, even in the limited manner achieved by Keynesianism in the 1930s, is, in the main, a reflection of the contradictions of the capitalist system itself.
Padraic Finn is a longstanding activist with an equally long interest in political economy.