abcs of political economy modern primer 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 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 vi The ABCs of Political Economy 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 Lady 128 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 Contents vii 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 viii The ABCs of Political Economy 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 Contents ix 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 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. 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 institutions to 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. To develop a theory that expresses this view of humans – as a self- conscious, self-creative, social species – and this view of society – as a web of interconnected spheres of social life – we first concentrate on concepts helpful for thinking about people, or the human center; next on concepts that help us understand social institutions, or the institutional boundary within which individuals function; and finally on the relationship between the human center and institutional boundary, and the possible relations between four spheres of social life. 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 2 The ABCs of Political Economy 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 that under 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. Economics and Liberating Theory 3 This does not mean that our 10,000-year history of war, oppression, and exploitation has had no impact on people’s attitudes and behavior today. These aspects of our history have had important 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 influence on genetic selection. So it is perfectly possible that under institutional conditions that are very different from those we have today, and the different expectations that go with them, that human behavior – the combined product of our genetic inheritance and our institutional environment – could be quite different than it is presently. This simple fact is something apologists for capitalism ignore when they argue that people are doomed to the economics of competition and greed by “human nature.” Instead it is just as plausible that an economics of equitable cooperation is compatible with our genetic make-up, and perfectly possible under different institutional conditions – popular opinion to the contrary, not withstanding. 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 our species 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 4 The ABCs of Political Economy 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, and we therefore need to be in positions to do so. While some call this the “need for freedom,” it bears pointing out that the human “need for freedom” goes beyond that of many animal species. There are animals that cannot be domesticated or will not reproduce in captivity, thereby exhibiting an innate “need for freedom.” But the human need to employ our powers of consciousness requires freedom beyond the “physical freedom” some animal species require as well. People require freedom to choose and direct their own activities in accord with their understanding and evaluation of the effects of that activity. In chapter 2 I will define the concept “self- management” to express this peculiarly human species need in a way that subsumes the better known concept “individual freedom” as a special case. Economics and Liberating Theory 5 [...]... worthy of some consideration A monist paradigm presumes some form of dominance, or hierarchy of influence among the spheres of social life, while a pluralist social theory studies the dynamics of each sphere separately and then attempts to sum the results A complementary holist 14 The ABCs of Political Economy approach assumes any form of dominance (or lack of dominance) among the four spheres of social... of Population Economics 5, 1992, and Laurence Kotlikoff and Lawrence Summers, “The Role of Intergenerational Transfers in Aggregate Capital Accumulation,” Journal of Political Economy 89, 1981 What Should We Demand from Our Economy? 29 input, depends as much on the number of units of that input available, and on the quantity and quality of other, complimentary inputs, as on any intrinsic quality of. .. and 70% of all wealth in the US is inherited Daphne Greenwood and Edward Wolff estimated that 50 to 70% of the wealth of households under age 50 was inherited Laurence Kotlikoff and 28 The ABCs of Political Economy Lawrence Summers estimated that as much as 80% of personal wealth came either from direct inheritance or the income on inherited wealth.11 A study published by United for a Fair Economy. .. shoulder fewer of the burdens of social cooperation in any sphere have an interest in acting to preserve the status quo Groups who suffer more of the burdens and enjoy fewer of the benefits under existing arrangements in any sphere can become agents for social change In this way groups that are either privileged or disadvan- 18 The ABCs of Political Economy taged by the rules of engagement in any of the four... Inequality of Wealth in America (The Twentieth Century Fund, 1995): 1–2 2 Chuck Collins and Felice Yeskel with United for a Fair Economy, Economic Apartheid in America (The New Press, 2000): 54–7 3 The New Field Guide to the US Economy, by Nancy Folbre and the Center for Popular Economics (The New Press, 1995) 22 The ABCs of Political Economy was generated by increasing the value of initial wealth – much of. .. Maxim 1: Payment according to the value of one’s personal contribution and the contribution of the productive property one owns The rationale behind the conservative maxim is that people should get out of an economy what they and their productive possessions contribute to the economy If we think of the goods and services, or benefits of an economy, as a giant pot of stew, the idea is that individuals... patterns, social institutions 12 The ABCs of Political Economy Figure 1.1 Human Center and Institutional Boundary are a very practical and limited kind of mental phenomenon As a matter of fact they are a kind of mental phenomenon that other social animals share – baboons, elephants, wolves, and a number of bird species have received much study But just because our definition of roles and institutions locates... the richest 1% of families held 45% of all nonresidential real estate, 62% of all business assets, 49% of all publicly held stock, and 78% of all bonds.3 Moreover, “most wealth growth arose from the appreciation (or capital gains) of pre-existing wealth and not savings out of income Over the 1962 to 1989 period, roughly three-quarters of new wealth 1 Edward N Wolff, Top Heavy: A Study of the Increasing... consciousness of himself and of his relations with others and with nature are that of a social being, since the manner in which he conceives of anything is a function of his society In sum, there never was a Hobbesian “state of nature” where individuals roamed the wilds in a “natural” state of war with one another Human beings have always lived in social units such as tribes and clans The roots of our sociality... Moreover, whereas previous periods of high profits accompanied high rates of investment and economic growth, the average rate of economic growth over these eight years was just 1.9% Whatever was good for corporate profits was clearly not so good for the rest of us 4 Lawrence Mishel and Jared Bernstein, The State of Working America 1994–1995 (ME Sharpe, 1994): 246 5 The State of Working America 1998–1999: . who spends his lifetime in a 6 The ABCs of Political Economy laboratory may delude himself that he is a modern version of Robinson Crusoe, but the material of his activity and the apparatus and. within the limits of our potentials, ours to design. 2 12 The ABCs of Political Economy 2. Thorstein Veblen, father of institutionalist economics, and Talcott Parsons, a giant of modern sociology,. Models 103 The Public Good Game 103 The Price of Power Game 106 The Price of Patriarchy 109 Conflict Theory of the Firm 111 vi The ABCs of Political Economy Income Distribution, Prices and Technical