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A comparison with a Marxist bias
on December 15, 2014
The book is a comparative and mostly clear presentation of three economic theories, or four counting late neoclassical. Despite the authors' posturing of a neutral comparison of the contending theories -- a noble aim -- there is a clear bias towards Marxism. A bit of searching, like Wikipedia and an article 'Anti-Slavery and Anti-Capitalism' available online, confirms they are Marxist. They are knowledgeable about the other theories, but their selection of what to include in the book seems "overdetermined."
Much space is devoted to Marxist economics, which consists mostly of criticism of capitalism. It is weak on criticisms by neoclassical economists of the essentials of Marxist economics -- the labor theory of value, surplus value and the exploitation theory. It relegates Böhm-Bawerk's criticisms of the labor theory of value to an appendix, and omits Menger's. It neglects most of the neoclassical (mainly Austrian) theory of capital and the attendant risk. It is weak on the role of the knowledge (and ignorance) of individual economic actors, both private actors and public officials. It includes Herbert Simon's "bounded rationality" but not F. A. Hayek (he is mentioned once) on knowledge (and ignorance). It omits the principle of comparative advantage. It doesn't include a neoclassical (nor Marxist) theory of money and credit. It omits Milton Friedman's diagnosis of the Great Depression, which focuses on the government-made Federal Reserve System. Including them would have made a better book. Agreeing with them is not the point; a neutral comparison is.
They present some traditional Marxist economics and some of their own with the "entry point" of class analysis/structure and "overdetermination". Marx's "entry points" were, in my view and clearer, the essentials in the previous paragraph. (Entry points are given for neoclassical and Keynes economics, too.) Marx's diagnosis of capital was motivated by hostility. As the authors say, Marx ridiculed the idea of "dispassionate analysis." What a neoclassical or Keynesian economist calls "finance capital" or "financial and equity capital", Marx called "fictitious capital."
Their own Marxist theory seems to have an excess of concepts. There are "fundamental class process", "subsumed class process", and "nonclass process." Similarly, there are fundamental, subsumed, and nonclass incomes. Their examples of "nonclass" income are very heterogeneous -- gifts, stealing, but also "a woman who sells her labor power to an industrial capitalist and obtains a wage income in exchange" (p. 216). Oddly, a woman who loans money to a capitalist receives interest as "subsumed income", but if she loans (or deposits) money to a bank who in turn lends it to the capitalist, the interest she receives is "nonclass income." Oddly, "noncapitalist forms of the fundamental class process also exist in the United States. Millions of individual, self-employed persons perform and appropriate their own surplus labor" (p. 164). They omitted non-profits such as mutual insurance companies, credit unions, trade associations, charities, and many hospitals. (If the Marxists are correct, worker wages in nonprofit hospitals should be higher than in for-profit hospitals since the latter are exploited. Are they higher?) There are "productive labor" and "unproductive labor." Oddly, a capitalist can employ both, and a gardener I hire to work in my yard is "unproductive." So is a manager at a capitalist firm, no matter how much he/she is valued at the firm. I believe I understand what they were trying to do, but see no "use value" in it beyond understanding them. Anyway, elsewhere they give Marx's division between direct laborer and capitalist, the exploited and the exploiter, which is clearer and more economical. Compared to Marx's concepts, I estimate the "surplus value" of their cadre of concepts is about zero.
The authors assert that the USSR was state-capitalism, not state-socialism. Very disingenuous. The USSR had near total public ownership of the means of production and near total centralized decision making by government. The assertion is a glaring contradiction, given that two essential features of capitalism are _private_ ownership of the means of production and _de-centralized_ decision making by individuals in the _private_ sector. The authors try to claim it wasn't socialism because some people in government acted corruptly, not in accordance with "true" socialism. They should label it truthfully -- the USSR economy was crony _socialism_. The USSR was the unforeseen consequence of trying to implement the socialist ideal.
Marx's innovative socialist idea of "associated workers," where capitalist corporate directors are replaced by democratic workers who meet to decide what will be produced and how, and how the surplus value should be distributed (p.323), is pure fantasy. It fails to recognize the role of knowledge (and ignorance), the division of labor, and the informative nature of market prices. Imagine that -- the janitor, fork-lift driver, cafeteria worker, and a data entry clerk given the authority to make decisions about complex production (e.g. engineering and computer architecture), research and development, mergers/disinvestment/reorganization, suppliers, customers, and financing. In the section about Herbert Simon, they write: "How does one expect individuals to make optimal decisions if it is impossible for them to process cognitively or gain access to all of this required information?" Consider that question regarding the "associated workers" as corporate directors.
These democratic workers -- or maybe their government representatives -- will also be "the main means for distributing resource and products throughout the society." More fantasy. How far does society extend - the world, the nation, province, or city? Who decides that? How do they know what society needs or wants, or might like to have even if they don't yet know it? How do they account for other enterprises that produce the same products, similar ones or substitutes? What helped anybody decide to get a cell phone? Replace a cell phone with a smart phone, along with its service level, or not do so? In capitalism market prices get used to help tackle such questions. Market prices function like "invisible hands" -- borrowing Adam Smith's famous metaphor-- even when the price tag is visible.
The authors claim that the marginal productivity of members of capitalist corporate boards of directors is zero (p. 361). That is like saying the value of wisdom about a particular business and its environment is zero because it can't be easily quantified. Suppose that Marx's fantasy were implemented as follows. The workers meet on Monday to make said decisions and do their normal job Tuesday-Friday. Then their marginal productivity on Mondays must be zero, too!
The authors follow the usual Marxist assumption that surplus value is always a positive number. What if surplus value were negative instead? Suppose an employer hires workers to produce a commodity, expecting to sell it for more than the cost of labor and materials. Instead, the money realized upon sale is even less than the cost of labor. To be consistent didn't the workers exploit the employer? Wouldn't justice be served by expropriating whatever possible from the workers to offset the deficit?
The authors are committed to "overdeterminism" rather than essentialism. They say such a commitment ends any need to look for essential causes or truth (p. 368). Be wary. Somebody not committed to seeking truth is committed to what -- propaganda?
In Appendix B the authors claim to revise Marx's "essentialist" theory of price by tweaking his theory to make it an "overdeterminist" one. The tweak is to change purchased inputs other than labor to be based on market price paid rather than Marx's assumed labor value of said inputs. It seems they consider this an advance in Marxian economics. Perhaps so. Another perspective is that their tweak is in effect a partial concession to neoclassical market price theory.
In my view the labor theory of value offers little explanatory power for market prices. Suppose I talk to an electrician about doing some work at my house. If there were twice as much of the same kind of work, I can reasonably conclude that the electrician will charge me about twice as much. If I were to get additional quotes from more electricians for the same work, then the labor theory of value starts to crumble. Different electricians will quote different prices. Such different price quotes will be affected by the quality of their work, the price of materials, the supply of and demand for electrical contractors in the local market, how eager the electrician is to get the job, scheduling, and so forth. On the other hand, the real market price to me, taking into account all these factors and perhaps more (overdetermination?), is whatever price the electrician, whom I finally select to do the work, and I agree to.
Assume two electricians -- one self-employed and the other not. The latter has an employer and is paid a wage. They are equally skilled, efficient, and work the same number of hours. The self-employed one earns $50,000 per year, partly because he has to spend more time finding jobs, buying supplies, etc. The one paid a wage earns $60,000 per year because he doesn't have to spend time doing the other things that the self-employed one does. His employer does them. Would the authors say the self-employed one ($50,000 per year) is not exploited but the other one ($60,000 per year) is. If yes, really? Or is the latter exploiting his employer?
Chapters 6 and 7 are quite interesting. They are in part about the intellectual duels between the theories over time, how the theories have changed over time, and how real world events have influenced their acceptance. But the authors are mistaken in chapter 7 about theories of truth. After stating the correspondence theory -- true ideas best fit the facts -- they call empiricism and rationalism 'theories of truth'. They are not; they are theories of _knowledge_. Empiricists typically agree with the correspondence theory, and rationalists typically agree with the _coherence_ theory of truth, which appeals to logic.