I was working on making a few finishing touches (so to speak) to an unfinished appendix of “An Anarchist FAQ” on classical economics (aka, the labour theory of value). During it, I had a look at Ricardo’s Principles and Chapter XX (“Value and Riches, Their Distinctive Properties”) in which Ricardo disputes Say on the question of utility and value.
I was working on making a few finishing touches (so to speak) to an unfinished appendix of “An Anarchist FAQ” on classical economics (aka, the labour theory of value). During it, I had a look at Ricardo’s Principles and Chapter XX (“Value and Riches, Their Distinctive Properties”) in which Ricardo disputes Say on the question of utility and value.
It reminded me of the current crisis, where billions (trillions?) have been wiped off the stock market as well as unpaid bad loans yet nothing has changed in real life. In terms of actual use value (“utility”), we are still as rich as ever. The houses and workplaces have not disappeared yet, apparently, “we” (as if there could be a “we” in a class system!) are less wealthy. Which proves a key point in classical economics (and its critics like Proudhon and Marx), namely there is a difference between use value and exchange value. To use Ricardo’s terminology, we do not have less riches because stock and housing prices have fallen. Our wellbeing is not dependent on this fictitious “capital”, but we will be suffering because of it. (I put quotes round capital as it is, first and foremost, a social relationship rather than actual things or symbols of things, like stock).
But as I’ve said before, capitalism is a somewhat insane way to run an economy!
Talking of classical economics, I would recommend Duncan K. Foley’s Adam’s Fallacy: A Guide to Economic Theology (Belknap Press, 2008) as an excellent introduction to the subject, as well as the rise (and limitations) of subsequent economics (including neo-classical economics). However, it is much more than that and most people will gain something from it, not least a grounding in classical economics and Marx. He also has a homepage which contains interesting articles.
And talking of economics, in any crisis the schools of thought which have been marginalised by the mainstream attempt to raise their profile (in the 1970s, this saw the rise of Monetarism – and, thankfully, its fall as reality destroyed it). Hopefully, this will see the rise of post-Keynesian economics as the neo-classical paradigm gets increasingly called into question. At its best, this school bases itself on the best of Keynes and Marx as well as seeking models which reflect reality rather than deny it. Obviously, many of its supporters draw reformist conclusions (i.e., social democratic reforms to keep capitalism going) although some are more radical. However, I do not feel that anarchists need to re-invent the wheel in terms of economics and should utilise those schools which present a realistic analysis of capitalism and its working.
However, given that its supporters have kind words for socialists like Marx I think it will be unlikely to get much acceptance in a profession which believes such nonsense as neo-classical economics. If it did, it would probably suffer (like Keynes in the 1930s) with such a gutting of its radical insights that it will become the opposite of what it started out as (as can be seen from Keynesianism, where “Keynesians” blame the Great Depression on “sticky wages” in spite of Keynes explicitly critiquing such a position).
On the other side, the “Austrian” school is trying to breakout of the marginalised position they have had since they (rightfully) lost the business cycle debates of the 1930s. However, its pro-capitalism perspective would make it popular (as can be seen by the funding of its think-tanks by rich individuals and their corporations). However, the schools rejection of mathematics may cause problems as liberal use of mathematics helps neo-classical economists think of themselves as scientists…
The “Austrian” school theory of the business cycle is rooted in equilibrium theory (the “natural rate of interest” and all that) and, ironically, they denounce equilibrium as a meaningless and unrealistic concept for all other markets (bar labour, but then that is so they can bash unions and welfare).
The ironic thing, of course, about the “Austrian” theory is that (logically) it concludes that banks need to be regulated — a no fractional reserves policy needs to be enforced, as banks will do it anyway due to desire to make money by meeting demand for loans. Also, of course, it also suggests that individuals are not the best judge of what to do with their own money. After all, no one forces the banks to not have 100% reserves nor for customers to not frequent banks that may provide a 100% reserves policy. After all, why has no enterprising entrepreneur not created a bank with a 100% reserve police and advertised that policy. If the “Austrians” are right, customers would flock to it but, strangely, no such thing has happened (even during America in the 19th century).
Equally, it also suggests that bankers, unlike other capitalists, cannot make informed business decisions on what is, and is not, a good risk and investment. Which is ironic, given its tendency to glorify the capitalist class. Murray Rothbard states that entrepreneurs “are trained to forecast the market correctly; they only make mass errors when governmental or bank intervention distorts the ‘signals’ of the market.” He even attacks Joseph Schumpeter’s crisis theory because, in effect, Schumpeter does not show how entrepreneurs cannot predict the future (“There is no explanation offered on the lack of accurate forecasting . . . why were not the difficulties expected and discounted?”). [America’s Great Depression, p. 48 and p. 70]
Rothbard does not ponder why bankers, who are surely entrepreneurs as well, make their errors nor why the foresight of business people in an uncertain and complex economy seems to fail them in the face of repeated actions of banks (which they could, surely, have “expected and discounted”?).
So the notion that if the actual interest rate somehow equalled the “natural” one is not only rooted in equilibrium but also the neo-classical notion of perfect knowledge of current and future events — all of which “Austrian” economists are meant to reject. So this level of silliness may make some neo-classical economics take certain parts of the “Austrian” perspective more seriously, but let us hope not!
And it would be remiss of me not to mention that even if we assume equilibrium in the credit market and perfect foresight by entrepreneurs, it is still flawed — as discussed by Robert Vienneau using Saffra and the Cambridge Capital Controversy
Ultimately, there is a reason that the “Austrians” lost the business cycle debates of the 1930s. Sraffa and Kaldor destroyed von Hayek’s theory (although that did not stop the Swedish Central Bank giving von Hayek its so-called Nobel Prize in 1976!). Not that many “Austrians” like to talk about either Sraffa or Kaldor, of course…
Still, time will tell — there is no apparent limit to the nonsense that economists can believe (for example, the Efficient Market Hypothesis) so while I hope that this crisis will help turn economics into more like a science (due to a rise on post-Keynesian influence), I’m not too optimistic about it.
Lastly, a few words on my last article (Bailouts or Co-operatives). This is just a suggestion for what libertarians should be arguing in the current situation, a stepping step in a process of getting more people aware of, and interested in, libertarian ideas. It should not be taken as advocating mutualism as an end goal (although that would be a step forward compared to capitalism, but the issue of market forces making co-operatives act against their desires is a real one). Rather, it is a suggestion on how we can progress towards communist-anarchism (and every revolution seems to go through a mutualist phase).
We need to remember where we are now and think about how we get to where we want to be. If we start by dismissing everything which does not meet our desired goals exactly, we will never get closer to them! That should, I hope, be obvious — as obvious that any real social movement will make what we consider to be mistakes — and that these “mistakes” are far more fruitful than even the best ideologically correct statements from the most ideologically correct libertarian federation. And, of course, the fact that we may consider something to be a “mistake” could, itself, be the real mistake. We need to learn from struggle, develop our ideas as a result, and not impose our theory onto it! If facts change, we need to change our theory.
Our task as libertarians is to encourage direct action and self-activity, not to sit by the sidelines moaning that people are not going things correctly — we can leave that to the Leninists!