The ABCs Of Political Economy

297 Pages·2006·2.45 MB·English

by  Robin Hahnel

Contents
List of Illustrations x
Preface xi
Acknowledgements xv
1 Economics and Liberating Theory 1
People and Society 1
The Human Center 2
The Laws of Evolution Reconsidered 2
Natural, Species, and Derived Needs and Potentials 4
Human Consciousness 5
Human Sociability 6
Human Character Structures 7
The Relation of Consciousness to Activity 8
The Possibility of Detrimental Character Structures 9
The Institutional Boundary 10
Why Must There Be Social Institutions? 11
Complementary Holism 13
Four Spheres of Social Life 13
Relations Between Center, Boundary and Spheres 15
Social Stability and Social Change 16
Agents of History 17
2 What Should We Demand from Our Economy? 20
Economic Justice 20
Increasing Inequality of Wealth and Income 20
Different Conceptions of Economic Justice 24
Conservative Maxim 1 24
Liberal Maxim 2 28
Radical Maxim 3 30
Efficiency 31
The Pareto Principle 32
The Efficiency Criterion 33
Seven Deadly Sins of Inefficiency 37
Endogenous Preferences 38
Self-Management 40
Solidarity 41
vi The ABCs of Political Economy
Variety 42
Environmental Sustainability 43
Conclusion 44
3 A Simple Corn Model 45
A Simple Corn Economy 45
Situation 1: Inegalitarian Distribution of Scarce Seed Corn 49
Autarky 50
Labor Market 50
Credit Market 54
Situation 2: Egalitarian Distribution of Scarce Seed Corn 57
Autarky 57
Labor Market 58
Credit Market 59
Conclusions from the Simple Corn Model 60
Generalizing Conclusions 63
Economic Justice in the Simple Corn Model 67
4 Markets: Guided by an Invisible Hand or Foot? 71
How Do Markets Work? 71
What is a Market? 71
The “Law” of Supply 72
The “Law” of Demand 72
The “Law” of Uniform Price 75
The Micro “Law” of Supply and Demand 75
Elasticity of Supply and Demand 79
The Dream of a Beneficent Invisible Hand 80
The Nightmare of a Malevolent Invisible Foot 84
Externalities: The Auto Industry 85
Public Goods: Pollution Reduction 88
The Prevalence of External Effects 91
Snowballing Inefficiency 96
Market Disequilibria 97
Conclusion: Market Failure is Significant 99
Markets Undermine the Ties that Bind Us 99
5 Micro Economic Models 103
The Public Good Game 103
The Price of Power Game 106
The Price of Patriarchy 109
Conflict Theory of the Firm 111
Contents vii
Income Distribution, Prices and Technical Change 112
The Sraffa Model 114
Technical Change in the Sraffa Model 118
Technical Change and the Rate of Profit 123
A Note of Caution 125
6 Macro Economics: Aggregate Demand as Leading Lady128
The Macro “Law” of Supply and Demand 128
Aggregate Demand 132
Consumption Demand 133
Investment Demand 133
Government Spending 135
The Pie Principle 136
The Simple Keynesian Closed Economy Macro Model 137
Fiscal Policy 140
The Fallacy of Say’s Law 141
Income Expenditure Multipliers 143
Other Causes of Unemployment and Inflation 147
Myths About Inflation 150
Myths About Deficits and the National Debt 152
The Balanced Budget Ploy 154
Wage-Led Growth 157
7 Money, Banks, and Finance 160
Money: A Problematic Convenience 160
Banks: Bigamy Not a Proper Marriage 162
Monetary Policy: Another Way to Skin the Cat 168
The Relationship Between the Financial and “Real”
Economies 171
8 International Economics: Mutual Benefit
or Imperialism? 175
Why Trade Can Increase Global Efficiency 176
Comparative, Not Absolute Advantage Drives Trade 177
Why Trade Can Decrease Global Efficiency 180
Inaccurate Prices Misidentify Comparative
Advantages 181
Unstable International Markets Create Macro
Inefficiencies 182
Adjustment Costs Are Not Always Insignificant 183
Dynamic Inefficiency 183
viii The ABCs of Political Economy
Why Trade Usually Aggravates Global Inequality 184
Unfair Distribution of the Benefits of Trade Between
Countries 185
Unfair Distribution of the Costs and Benefits of
Trade Within Countries 187
Why International Investment Can Increase Global
Efficiency 190
Why International Investment Can Decrease Global
Efficiency 191
Why International Investment Usually Aggravates
Global Inequality 193
The Balance of Payments Accounts 198
Open Economy Macro Economics and IMF
Conditionality Agreements 201
9 Macro Economic Models 208
Bank Runs 208
International Financial Crises 211
International Investment in a Simple Corn Model 212
Banks in a Simple Corn Model 216
Imperfect Lending Without Banks 216
Lending With Banks When All Goes Well 217
Lending With Banks When All Does Not Go Well 218
International Finance in an International Corn Model 219
Fiscal and Monetary Policy in a Closed Economy Macro
Model 220
IMF Conditionality Agreements in an Open Economy
Macro Model 225
Wage-Led Growth in a Long Run, Political Economy
Macro Model 231
The General Framework 231
A Keynesian Theory of Investment 235
A Marxian Theory of Wage Determination 235
Solving the Model 236
An Increase in Capitalists’ Propensity to Save 238
An Increase in Capitalists’ Propensity to Invest 240
An Increase in Workers’ Bargaining Power 240
10 What Is To Be Undone? The Economics of
Competition and Greed 242
Free Enterprise Equals Economic Freedom – Not 242
Contents ix
Free Enterprise is Efficient – Not 248
Biased Price Signals 249
Conflict Theory of the Firm 249
Free Enterprise Reduces Economic Discrimination – Not 251
Free Enterprise is Fair – Not 253
Markets Equal Economic Freedom – Not 254
Markets Are Fair – Not 257
Markets Are Efficient – Not 258
What Went Wrong? 261
11 What Is To Be Done? The Economics of Equitable
Cooperation 265
Not All Capitalisms Are Created Equal 265
Taming Finance 266
Full Employment Macro Policies 267
Industrial Policy 268
Wage-Led Growth 270
Progressive Not Regressive Taxes 270
Tax Bads Not Goods 272
A Mixed Economy 272
Living Wages 274
A Safe Safety Net 276
Worker and Consumer Empowerment 277
Beyond Capitalism 278
Replace Private Ownership with Workers’
Self-Management 279
Replace Markets with Democratic Planning 280
Participatory Economics 282
Reasonable Doubts 284
Conclusion 291
Index 293
1 Economics and Liberating
Theory
Unlike mainstream economists, political economists have always
tried to situate the study of economics within the broader project of
understanding how society functions. However, during the second
half of the twentieth century dissatisfaction with the traditional
political economy theory of social change known as historical
materialism increased to the point where many modern political
economists and social activists no longer espouse it, and most who
still call themselves historical materialists have modified their theory
considerably to accommodate insights about the importance of
gender relations, race relations, and the “human factor” in under-
standing social stability and social change. The liberating theory
presented briefly in this chapter attempts to transcend historical
materialism without throwing out the baby with the bath water. It
incorporates insights from feminism, national liberation and anti-
racist movements, and anarchism, as well as from mainstream
psychology, sociology, and evolutionary biology where useful.
Liberating theory attempts to understand the relationships between
economic, political, kinship and cultural activities, and the forces
behind social stability and social change, in a way that neither over
nor underestimates the importance of economic dynamics, and
neither over nor underestimates the importance of human agency
compared to social forces.1
PEOPLE AND SOCIETY
People usually define and fulfill their needs and desires in coopera-
tion with others – which makes us a social species. Because each of us
assesses our options and chooses from among them based on our
1. For a fuller treatment see Liberating Theory (South End Press, 1986) by
Michael Albert, Leslie Cagan, Noam Chomsky, Robin Hahnel, Mel King,
Lydia Sargent, and Holly Sklar.
1
2 The ABCs of Political Economy
evaluation of their consequences we are also a self-conscious species.
Finally, in seeking to meet the needs we identify today, we choose to
act in ways that sometimes change our human characteristics, and
thereby change our needs and preferences tomorrow. In this sense
people are self-creative.
Throughout history people have created social institutionsto help
meet their most urgent needs and desires. To satisfy our economic
needs we have tried a variety of arrangements – feudalism,
capitalism, and centrally planned “socialism” to name a few – that
assign duties and rewards among economic participants in different
ways. But we have also created different kinds of kinship relations
through which people seek to satisfy sexual needs and accomplish
child rearing goals, as well as different religious, community, and
political organizations and institutions for meeting cultural needs
and achieving political goals. Of course the particular social arrange-
ments in different spheres of social life, and the relations among them,
vary from society to society. But what is common to all human
societies is the elaboration of social relationships for the joint iden-
tification and pursuit of individual need fulfillment.
Todevelopatheorythatexpressesthisviewofhumans–asaself-
conscious,self-creative,socialspecies–andthisviewofsociety–as
awebofinterconnectedspheresofsociallife–wefirstconcentrate
onconceptshelpfulforthinkingaboutpeople,orthehumancenter;
nextonconceptsthathelpusunderstandsocialinstitutions,orthe
institutionalboundarywithinwhichindividualsfunction;andfinally
on the relationship between the human center and institutional
boundary,andthepossiblerelationsbetweenfourspheresofsociallife.
THE HUMAN CENTER
Except for creationists most consider the laws of evolution straight-
forward and non-controversial. Unfortunately popular inter-
pretations that emphasize the advantages of aggression and strength,
but neglect equally important factors for passing on one’s genes like
good parenting skills and successful cooperation, sprinkle more
ideology over the scientific basis of Darwin’s theory of evolutionary
biology than most realize.
The laws of evolution reconsidered
Human nature as it now exists was formed in accord with the laws
of evolution under conditions pertaining well before recorded
Economics and Liberating Theory 3
human history. Fossils discovered in Ethiopia and Kenya now date
human ancestors back at least 5 or 6 million years. Distinctly human
species arose in Africa at least 2 million years ago, while present
evidence indicates that modern humans are only about 100,000
years old. Therefore the conditions relevant to which genetic
mutations were advantageous and which were not are the conditions
prevailing in central Africa between 6 million and 100,000 years ago.
It is often noted that the last 10,000 years of human history – so
called “historic time,” the time period we know much about – has
been fraught with war, conquest, genocide, and slavery. And it is
often speculated thatunder those conditions people with a genetic dis-
position to aggression and vengeance, for example, might have been
well suited to survival. But historic time is only a tenth of the time
modern humans have roamed the earth, and is only an evolution-
ary instant compared to the 6 million years during which the human
species evolved from our common ancestry with apes and chim-
panzees. This means it is impossible for the historical conditions we
know something about to have selected genetic characteristics sig-
nificantly different from those humans already had 100,000 years
ago. Therefore, it is not possible that the human history we know
something about – our history of war, oppression, and exploitation
– has made our genetic “nature” hopelessly aggressive, vindictive, or
power hungry. Throughout the 10,000 years of recorded history we
have been, and remain, genetically what we were at the outset. To
believe otherwise is to believe that a baby plucked from the arms of
its mother, moments after birth, 10,000 years ago, and time-traveled
to the present would be genetically different from babies born today.
And this is simply not the case.
But what is the relevance of this to perceptions about “human
nature?” The point is that whether conditions during the past 10,000
years favored survival of the more aggressive and vindictive, or
survival of those who cooperated more successfully, is irrelevant to
what “human nature” is really like. Because the conditions during
known history played no role in forging our genetic nature. The
relevant conditions for speculations concerning genetic traits
promoting survival were the conditions that prevailed in Africa 6
million to 100,000 years ago. And whether or not the conditions
human ancestors lived in during that lengthy period favored genetic
traits conducive to aggression any more than traits conducive to
successful cooperation, is very much an open question.
4 The ABCs of Political Economy
This does not mean that our 10,000-year history of war,
oppression,andexploitationhashadnoimpactonpeople’sattitudes
andbehaviortoday.Theseaspectsofourhistoryhavehadimportant
effects on our consciousness, culture, and social institutions that
cannot be ignored or “willed away.” But the point is that known
history has left ideological and institutional residues, not genetic
residues. Only conditions in Africa 6 million years ago had any
influenceongeneticselection.Soitisperfectlypossiblethatunder
institutionalconditionsthatareverydifferentfromthosewehave
today,andthedifferentexpectationsthatgowiththem,thathuman
behavior–thecombinedproductofourgeneticinheritanceandour
institutional environment – could be quite different than it is
presently. This simple fact is something apologists for capitalism
ignorewhentheyarguethatpeoplearedoomedtotheeconomicsof
competitionandgreedby“humannature.”Insteaditisjustasplausible
that an economics of equitable cooperation is compatible with our
geneticmake-up,andperfectlypossibleunderdifferentinstitutional
conditions–popularopiniontothecontrary,notwithstanding.
Natural, species, and derived needs and potentials
All people, simply by virtue of being human, have certain needs,
capacities, and powers. Some of these, like the needs for food and
sex, or the capacities to eat and copulate, we share with other living
creatures. These are our natural needs and potentials. Others, however,
such as the needs for knowledge, creative activity, and love, and the
powers to conceptualize, plan ahead, evaluate alternatives, and
experience complex emotions, are more distinctly human. These are
ourspecies needs and potentials. Finally, most of our needs and powers,
like the desire for a particular singer’s recordings, or the need to share
feelings with a particular loved one, or the ability to play a guitar or
repair a roof, we develop over the course of our lives. These are our
derived needs and potentials.
In short, every person has natural attributes similar to those of
other animals, and species characteristics shared only with other
humans – both of which can be thought of as genetically “wired-
in.” Based on these genetic potentials people develop more specific
derived needs and capacities as a result of their particular life
experiences. While our natural and species needs and powers are the
results of past human evolution and are not subject to modification
by individual or social activity, our derived needs and powers are
subject to modification by individual activity and are very
Economics and Liberating Theory 5
dependent on our social environment – as explained below. Since a
few species needs and powers are especially critical to understanding
how humans and human societies work, I discuss them before
explaining how derived needs and powers develop.
Human consciousness
Human beings have intellectual tools that permit them to
understand and situate themselves in their surroundings. This is not
to say that everyone accurately understands the world and her
position in it. No doubt, most of us deceive ourselves greatly much
of the time! But an incessant striving to develop some interpretation
of our relationship with our surroundings is a characteristic of
normally functioning human beings. We commonly call the need
and ability to do this consciousness, a trait that makes human systems
much more complicated than non-human systems. It is conscious-
ness that allows humans to be self-creative – to select our activities
in light of their preconceived effects on our surroundings and
ourselves. One effect our activities have is to fulfill our present needs
and desires, more or less fully. But another effect of our activities is
to reinforce or transform our derived characteristics, and thereby the
needs and capacities that depend on them. Our ability to analyze,
evaluate, and take the human development effects of our choices
into account is why humans are the “subjects” as well as the
“objects” of our histories.
The human capacity to act purposefully implies the need to
exercise that capacity. Not only can we analyze and evaluate the
effects of our actions, we need to exercise choice over alternatives,
andwethereforeneedtobeinpositionstodoso.Whilesomecall
this the “need for freedom,” it bears pointing out that the human
“needforfreedom”goesbeyondthatofmanyanimalspecies.There
are animals that cannot be domesticated or will not reproduce in
captivity,therebyexhibitinganinnate“needforfreedom.”Butthe
human need to employ our powers of consciousness requires
freedombeyondthe“physicalfreedom”someanimalspeciesrequire
as well. People require freedom to choose and direct their own
activitiesinaccordwiththeirunderstandingandevaluationofthe
effects of that activity. In chapter 2 I will define the concept “self-
management” to express this peculiarly human species need in a
waythatsubsumesthebetterknownconcept“individualfreedom”
asaspecialcase.