Keynes and the Classics: A Study in Language, Epistemology and Mistaken Identities (Routledge Studies in the History of Economics, 7)

KEYNES AND THE ‘CLASSICS’

Is there a language which is adequate to describe our own econorny? In this volume, Michel Verdon undertakes a path-breaking analysis of the three major paradigms in economics: Marxian economics, neoclassical economics and Keynesian economics. Each of these, he argues, is built on an inherent representation of the ‘economic cosmos’ and, in the case of both Marxian and neoclassical economics, these preclude the development of a language which can accurately describe and analyse an economy. The same might not be said, however, of Keynesian economics. Born in Montréal, Michel Verdon studied anthropology at the Université de Montréal and at Cambridge University, where he obtained his Ph.D. in 1975. He taught at Cambridge from 1979 to 1984 and is now teaching in the Department of Anthropology at the Université de Montréal. His research interest in the epistemological problems plaguing the study of society resulted in the publication in Paris of his own theoretical manifesto, Contre la culture (Edition des Archives Contemporaines).

ROUTLEDGE STUDIES IN THE HISTORY OF ECONOMICS

1 Economics as Literature Willie Henderson 2 Socialism and Marginalism in Economics: 1870–1930 Edited by Ian Steedman 3 Hayek’s Political Economy: The Socio-economics of Order Steve Fleetwood 4 On the Origins of Classical Economics: Distribution and Value from William Petty to Adam Smith Tony Aspromourgos 5 The Economics of Joan Robinson Edited by Maria Cristina Marcuzzo, Luigi L.Pasinetti and Alessandro Roncaglia 6 The Evolutionist Economics of Léon Walras Albert Jolink 7 Keynes and the ‘Classics’: A study in language, epistemology and mistaken identities Michel Verdon

KEYNES AND THE ‘CLASSICS’ A study in language, epistemology and mistaken identities

Michel Verdon

London and New York

First published 1996 by Routledge 11 New Fetter Lane, London EC4P 4EE This edition published in the Taylor & Francis e-Library, 2003. Simultaneously published in the USA and Canada by Routledge 29 West 35th Street, New York, NY 10001 TP Routledge is an International Thomson Publishing company I 䊊

© 1996 Michel Verdon All rights reserved. No part of this book may be reprinted or reproduced or utilized in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage and retrieval system, without permission in writing from the publishers. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging in Publication Data Verdon, Michel. Keynes and the ‘Classics’: a study in language, epistemology and mistaken identities/Michel Verdon. p. cm.—(Routledge studies in the history of economics) Includes bibliographical references and index. 1. Keynesian economics. 2. Marxian economics. 3. Neoclassical school of economics. I. Title. II. Series. HB99.7.V43 1996 330.15’6–dc20 95–25779 CIP ISBN 0-203-00545-7 Master e-book ISBN

ISBN 0-203-21016-6 (Adobe eReader Format) ISBN 0-415-14072-2 (hbk) ISSN 1349–7906

For Heather

CONTENTS

Acknowledgements Introduction

ix 1

1 A BACKGROUND TO THE NEOCLASSICAL COSMOLOGY The ‘opposition’ from the point of view of the marginalist ‘revolutionaries’ The marginalist revolution

8 9 13

2 PROBING THE NEOCLASSICAL COSMOLOGY In search of the neoclassical minimal unit Equilibrium, exchange and perfection The cosmological implications of perfection

19 19 33 38

3 STRANGE COSMOLOGICAL BEDFELLOWS Marshall and OCT: inverted symmetries What’s in a name? The two Marshalls Misunderstanding ‘forces’: an economics of ‘resistances’

58 58 60 64 68

4 FROM COSMOLOGY TO LANGUAGE The conceptual costs of neoclassical economics’ cosmologies Irrealism or delusion?

75 76 91

5 KEYNES’S ECONOMICS: WHAT KIND OF REVOLUTION? Isolating the minimal unit Keynes’s economics: a Galilean revolution

96 100 118

6 KEYNES AND SPECULATION: ARISTOTLE REVISITED Keynes and the rate of interest Keynes and user costs

125 125 144

7 MORE SUBSTANCE AND TRANSACTIONS Keynes and effective demand Keynes and investment

148 148 156

vii

CONTENTS

8 FROM A GALILEAN COSMOLOGY TO A GALILEAN ECONOMICS From cosmology to language Economic actions and their symmetrically inverse counterparts From language to theory

161 161 165 167

CONCLUSION

173

Appendix 1 Mirowski on science and economics

177

Appendix 2 Marx’s economics: successes and failures

189

Notes Bibliography Index

203 220 226

viii

ACKNOWLEDGEMENTS

I wish to thank Gilles Dostaler for the light he threw on the more arcane parts of economic theory and for making available to me the draft copy of the book he wrote in collaboration with Michel Beault. His explanations and his book were invaluable in seeing clearly through the thicket of economic literature since Keynes. I also wish to thank Alan Jarvis of Routledge for his confidence in my manuscript, and for the celerity and efficiency with which he has dealt with it. My thanks also go to The Macmillan Press and to Cambridge University Press for permission to quote from volumes VII and XIV of The Collected Writings of John Maynard Keynes.

ix

INTRODUCTION

In his splendid Metaphysical Foundations of Modern Science, Burtt held that ‘[i]n the last analysis it is the ultimate picture which an age forms of the nature of its world that is its most fundamental possession. It is the final controlling factor in all thinking whatever’ (1932:3), an assumption which prompted him to search for the cosmology, or the world-view, underpinning modern science (that is, modern science up to 1905), and to contrast this modern vision to the medieval one. The resulting picture is most eloquent. The Middle Ages placed man at the centre of a finite universe and believed the whole world ‘to be teleologically subordinate to him and his eternal destiny’ (Burtt 1932:4), to such an extent that ‘the categories in terms of which it was interpreted were not those of time, space, mass, energy, and the like; but substance, essence, matter, form, quality, quantity…. Things that appeared different were different substances, such as ice, water, steam.’ (p. 5) More specifically, their very understanding of space and time differed radically from ours, and reached back to Aristotle, for whom space was ‘not something underlying all objects so far as they are extended, something occupied by them; it [was] the boundary between any object and those which enclose it. The object itself was a qualitative substance rather than a geometrical thing.’ (p. 84) As to time, Aristotle saw it as ‘the continuous transformation of potentiality into actuality’ (p. 85); the two categories of space and time, moreover, were completely lacking in importance. From Kepler, but more especially from Galileo onward, this cosmology, or world-view, was completely transformed: man became an insignificant part of nature, separate from it and passively acted upon by the blind and mechanical laws of an infinite universe. First the scientists, then our whole scientific culture came ‘to think about the universe in terms of atoms of matter in space and time instead of the scholastic categories’ (Burtt 1932:17), and abandoned teleological explanations ‘in favour of the notion that true explanations, of man and his mind as well as of other things, must be in 1

INTRODUCTION

terms of their simplest parts’ (p. 16). The Aristotelian, qualitative notions of time and space, were replaced by quantitative ones: Physical space was assumed to be identical with the realm of geometry, and physical motion was acquiring the character of a pure mathematical concept. Hence in the metaphysics of Galileo space (or distance) and time become fundamental categories. The real world is the world of bodies in mathematically reducible motions, and this means that the real world is a world of bodies moving in space and time. (p. 83, italics original) This story, retold countless times, has to my knowledge nowhere been followed up better than in Koyré’s work (Koyré 1961, 1965, 1966a, 1966b, 1967). One of the greatest, if not the greatest, student of the scientific transformations from Galileo to Newton, Koyré did not hesitate to assert that this volte-face was above all a philosophical one (1961:252–69), by which I believe he meant something akin to Burtt’s ‘metaphysical foundations’. For Koyré, as for Burtt, these transformations amounted to no less than a revolution from the qualitative world of everyday experience and commonsense to the Archimedean world of reified geometry (Koyré 1961:261). It is against this canvas that Koyré places Galileo’s more theoretical achievements in dynamics, namely the fact that he intuited matter’s inertial motion by imagining the motion of matter in a vacuum (a thought-experiment unthinkable in an Aristotelian Cosmos filled with matter) and derived the first law of dynamics. From a cosmological point of view, this notion of ‘inertial motion’ rested on no less than a complete inversion. Indeed, Aristotle described a cosmos differentiated according to the intrinsic attributes of its elements (earth, water, air, fire and ether), one in which every element sought to be in its ‘natural place’, that is, in that location in space to which it belonged according to its natural attributes. Once in its natural place matter had no desire to move: rest, or absence of motion, was its natural state. Matter thus resisted movement, and objects moved only if a force overcame this resistance. With Galileo implicitly, and with Descartes explicitly, both motion and rest were conceived of as states of matter, states to which matter was indifferent; in fact, even rest could be represented as a velocity (equal to zero), and Aristotle’s question, ‘What force can overcome matter’s resistance to movement and create motion?’ was reformulated as ‘What force can overcome matter’s resistance to change its velocity and account for acceleration or deceleration?’ When telling this saga Burtt and Koyré write of ‘transformations’, and Koyré more especially refers emphatically to the ‘revolution’ or the ‘mutation’ achieved by the New Science of the seventeenth century, thereby systematically opposing the ‘evolutionists’ in the interpretation of the history of science. Needless to say the camps are divided, and I quite openly side 2

INTRODUCTION

with the ‘revolutionists’—those who perceive discontinuities in the history of science. I also wish to draw attention to the type of approach that Burtt and Koyré adopted. Burtt claims to be looking for the ‘metaphysical foundations’ of science, whereas Koyré speaks of its ‘philosophical substructure’. As far as I am concerned such terms can lead to misapprehensions to readers unfamiliar with the history of science, and I wish to avoid them altogether. It is quite clear that both authors regarded their work as epistemological, and that their epistemological endeavours consisted in demonstrating that scientific revolutions do not result from a contest of theories: before new, revolutionary theories can be formulated, some deeper transformations have to take place. In some parts of their writings they describe these transformations as metaphysical or philosophical, but in the quotation opening this Introduction Burtt writes of an underlying ‘picture of the world’—sometimes referred to as a cosmology, sometimes as a world-view. As to Koyré, he appears to be doing something very cognate. To avoid confusion let us therefore forget metaphysics and philosophy and suppose that, underneath any theory, there breathes a cosmology (or world-view). Now, if the New Science of the seventeenth century accomplished a mutation of a cosmological nature, two conclusions necessarily follow: first, that theories nest in a cosmology from which they cannot be separated. Fully to understand and assess a theory from an epistemological point of view, one must start with a cosmological investigation. Second, if the Galilean science presupposed a cosmological revolution, that means that no science of dynamics (i.e., no set of coherent, quantifiable and falsifiable theories about movement) was possible within an Aristotelian world-view. In brief, some cosmologies preclude certain forms of theoretical discourses whereas others make them possible. Without a picture of the physical world enabling scientists to define space and time as we understand it, neither Galileo nor Newton could ever have formulated their celebrated theories, and a modern science of dynamics would have forever remained a purely chimerical project. Theories must be phrased in a language embedded in a cosmology and, from an epistemological point of view, they must first and above all be reinserted within this cosmology. On the two sides of a scientific revolution debates seem above all to be cosmological, not theoretical, although they are mostly phrased in theoretical terms. Before spelling out my project, however, one more point must be stressed. Burtt and Koyré produced their masterly works without any explicit and coherent theory linking theories to cosmologies or metaphysical foundations. Similarly, I do not uphold any theory of the interaction between a given cosmos and language. I believe that theories and the concepts they are written in betray a vision of the world, and that some of those world-views thwart the emergence of a language designed for the rigorous description and analysis 3

INTRODUCTION

of some phenomena; beyond that, I do not wish to get embroiled in debates on the causal connection between the two. Consequently, I posit axiomatically the existence of a cosmology behind any discourse aiming at explaining phenomena, and I further assume that this cosmos channels the manner in which the mind operates in drawing boundaries around the objects it observes. It is within this particular tradition of the epistemology of science that I wish to elaborate this study of economics. Let us repeat our opening quotation by Burtt, with small addenda: ‘in the last analysis it is the ultimate picture which an age forms of the nature of its [economic] world that is [economists’] most fundamental possession. It is the final controlling factor in all [their] thinking whatever’. Like Burtt, I will try to unearth economics’ ‘metaphysical foundations’, or to be more precise, to explore its cosmological underpinnings, and I will do so with a particular question in mind. In so far as I could ascertain from standard histories of economics, there are within economics three major research programmes, each one claiming to diverge completely from the others: Marxism, neoclassical economics and Keynesian economics. As to institutionalism, it is more of a residual category than a research programme with a hard core and auxiliary assumptions and, for many economists, it belongs more to sociology than pure economics. This is no value judgement, but simply a justification of my focus on constituted research programmes. I shall nevertheless reach out to institutionalism in the Conclusion. This state of affairs cannot fail to raise some unsavoury questions. Are we to believe that all three research programmes are adequate tools to describe and analyse our economy, or that all are partially valid and complementing one another? From the point of view of the history of science, either proposition is sorely problematic. Indeed, the history of science shows unequivocally that in most disciplines scientists originally held that different laws governed various subsets of the phenomena they studied, and that they explicitly held that a separate science must correspond to each subset. Until the Newtonian synthesis, for instance, students of nature thought that different laws governed the movement of bodies on earth and of those in space; there were thus two sciences of dynamics. Similarly with chemistry; until the synthesis of urea in 1828 chemists believed that different laws dictated the composition of inert and of organic matter, and that to those two types of matter corresponded two separate chemistries. And the same obtains with geology, not to mention the contemporary division of the world between quantum mechanics, the laws of which apply at the atomic level, and Einstein’s theory of relativity, the laws of which rule the macroscopic universe. But contemporary physicists are hardly happy with this dichotomy and eagerly seek a unified theory. In brief, if we have faith in the possibility of a scientific study of phenomena we should assume that the same research programme will ultimately account 4

INTRODUCTION

for all of them, instead of supposing that various research programmes are valid for different subsets (micro-economics would satisfactorily explain one type of economic phenomena, and macro-economics another; or the economics of our own society would account for economic phenomena in a capitalist, monetary economy, but would be helpless when confronted with different economies, for example). If only at a linguistic level, one and the same set of concepts should suffice to describe and analyse all phenomena declared ‘economic’ in our own society. If so, there is one alternative, and one only: either all contemporary economic research programmes fundamentally err, or one of the three should supplant the other two. This is the question I shall directly address, not as an economist but as an epistemologist. That is to say, I shall not broach economics directly through its theories but indirectly, through the cosmology within which these theories are embedded. As a result, my questions will differ markedly from those traditionally asked. Instead of emulating philosophers of science by asking, ‘Are these theories scientific and in what way?’, I shall rather ponder, ‘Do the cosmologies underlying economics’ research programmes enable us to describe our economic world adequately?’ or, more precisely, ‘Do they represent the economic cosmos in a way which makes it possible to develop the type of understanding they purport to achieve?’ I therefore dissociate radically what I consider an epistemological enquiry from those disquisitions inspired by the philosophy of science. The latter are concerned with what constitutes a theory, and the relationship of theories to reality; to that category of writings belong a host of books, reaching back to the nineteenth century (Blaug 1980; Boland 1982; Cairnes 1965; Coddington 1972; Friedman 1953; Green 1977; Hausman 1984; Hutchison 1965 [1938];1 Keynes, J.N. 1955 [1891]; Lowe 1977; Machlup 1978; Robbins 1935; Robinson 1964; Rosenberg 1976; Samuelson 1948; Schoeffler 1955; Stewart 1979; von Mises 1978). Epistemological enquiries of the type attempted here, however, are extremely rare. I can only think of Ménard’s masterly epistemological study of Cournot (1978). More indirectly, Fraser’s Economic Thought and Language (1937) is concerned with definitions and what lies behind them (in the same vein, I should also mention some of Machlup’s articles, edited in Machlup 1963). This divergence cannot be overemphasized. My project does not belong either to the philosophy or to the history of economics; it aims at describing economic cosmologies and their relevance to the manner in which economics is practised now. This may appear questionable, because of the manner in which I have proceeded. Indeed, to unearth the cosmological assumptions of Newtonian science Burtt did not turn to the works of Lagrange and Laplace but to those of Galileo, Descartes, Newton. The reasons are simple. The works that initiate scientific revolutions make their cosmological premises quite explicit; but soon, as Koyré observed, these premises are taken for 5

INTRODUCTION

granted, so much so that most practitioners lose awareness of the presuppositions of their own science and only the theories remain, often couched in the purest formalism. Therefore, even for economics as it is practised now, the cosmological clues are to be found in the initial statements. For Marxian and Keynesian economics the choices of initial statements were self-evident, namely Marx’s Capital and Keynes’s General Theory. For neoclassical economics the decision was more difficult because of the apparent schisms separating the three dominant traditions, namely the Anglo-Saxon (following Jevons and Marshall), the Austrian (probably descended more from Wieser and von Mises than from Menger) and the one issued from Walras. I resolved this dilemma at the cost of an asymmetry in the presentation. Quite aware that contemporary developments from neoclassical economics derive more from the Austrian and especially the Walrasian traditions, but also quite alive to the fact that Marshall’s Principles of Economics promised the richest cosmological harvest, I described the neoclassical cosmology mostly from secondary sources but referred to Marshall’s Principles for specific examples while attempting, nonetheless, to connect Marshall’s Principles to the other neoclassical traditions. I see no reason to be apologetic for this choice. Marshall seems to have reigned relatively unchallenged in the Anglo-Saxon world from the first edition of the Principles (1890) to that of Keynes’s General Theory (1936) and even beyond (in 1952, Guillebaud declared that the Principles is still a standard textbook (Guillebaud 1952:186)). In the English-speaking world, its fame surpassed that of J.S.Mill’s Principles of Political Economy and, according to Schumpeter, equalled that of Adam Smith’s Wealth of Nations (Schumpeter 1954:830). Stigler deems it one of the two greatest books in the whole history of economic thought (Stigler 1962:223) and Deane declares that the ‘neo-classical framework of analysis defined in Marshall’s Principles of Economics established the main foundations of orthodox economic thought for roughly half a century after its publication’ (1978:143). Shove puts it on a par with Smith’s Wealth of Nations and Ricardo’s Principles of Political Economy and Taxation (Shove 1942:147). With Marx, and especially Keynes, however, I proceeded in the opposite fashion, building my argument directly from the Capital and the General Theory. Finally, I deliberately refrained from attempting to relate those treatises to the author’s other publications or to other economic books and economic institutions of the time: hence the completely ahistorical nature of this work. Needless to say, it was impossible to toy with cosmological issues without delving into the question of analogies; in fact, as Ménard openly expressed and admirably demonstrated, analogies reveal better than anything else the underlying representation economists have of society—what I have preferred to call their cosmology (Ménard 1978). Therefore, analogies lie at the very 6

INTRODUCTION

heart of this exploration and Mirowski’s theses certainly could not be ignored (Mirowski 1991). Mirowski claims that neoclassical economics drew its main analogies from nineteenth-century proto-energetics. Unlike him, and despite the fact that I shall accept some of his theses although confining them to some later developments of neoclassical economics, I side with those who have espied economics’ analogies in the science of Galileo and Newton in so far as the first generation of neoclassical is concerned (Ménard 1978; Fisher 1986; Pribram 1986). I further recognize that various, and often conflicting, analogies happily cohabit within the same works and that these different analogies are often intertwined and as often misunderstood. I shall justify my stance as the analysis progresses and touch upon some of Mirowski’s arguments when apposite. However, I believe Mirowski’s interpretation of the history of science to be quite idiosyncratic, if not somewhat skewed, and I hold that it yields in places distorted views of the history of economics, especially when dealing with mercantilism and political economy. I address these more specific questions in Appendix 1, best consulted after having read Chapter 1. Whether one sees the inspiration of economics in the science of Galileo and Newton, or in the field formalism of proto-energetics, however, both views beg the question, ‘if neoclassical economics sought to emulate GalileanNewtonian (or Maxwellian) science in the study of economic phenomena and has succeeded, shouldn’t it then necessarily be the only valid research programme in economics, the others being but quackery, unless one assumes that Keynesian economics is to neoclassical economics what Einstein’s physics is to Newton’s?’ Some have dared draw such parallels, but most neoclassical and Keynesian economists shudder at the thought. The question, however, demands an answer. Through a careful scrutiny of neoclassical economics’ cosmology I shall conclude that it never understood the basic premises of Galileo’s and Newton’s revolution and has remained a completely Aristotelian science; the same applies to Marxism. Only Keynes’s economics achieved a Galilean revolution, albeit one so tangled up in Aristotelian elements that it has never been so understood. Once properly appreciated, however, it can be shown to be the only research programme that can adequately describe our own economy, one that can easily be wedded to institutionalism while logically leading to the new probabilistic economics developed in the field of complexity theory, for instance. This is the book’s central thesis. Many of the ideas put forth in this essay are not new and lie, in one form or another, scattered through the literature. However, I hope in this volume to innovate, first in the manner of rearranging old ideas around a new question, and second, in spelling out here and there what has often remained elliptic.

7

1 A BACKGROUND TO THE NEOCLASSICAL COSMOLOGY

For clarity of presentation, my central thesis demanded that the whole argumentation be organized around a contrast between neoclassical and Keynes’s economics. In turn, the epistemological study of neoclassical economics made better sense when set against the larger canvas of the socalled marginalist revolution. In this first chapter I thus sketch briefly the main transformations brought about by marginalist thinking, and this is best achieved when contrasted to the main modes of argumentation of classical political economy (or ‘classical economics’). Therefore, I do not tender this short sketch of classical political economy and the advent of marginalist thinking as a foray into the history of economic thought, but only as a small vignette, of necessity somewhat caricatural, aiming at capturing some of the main elements on which to peg the marginalist revolution. If there is one crucial lesson to be learnt from Schumpeter’s History of Economic Analysis, it is the futility of striving neatly to delineate any ‘classical economics’. The major strands that composed the misnamed classical economics coexisted with other views which must have struck contemporaries as more influential, and later interpreters as more orthodox. But how are we to measure orthodoxy when, to Schumpeter himself, Ricardo delayed the development of economics? In presenting this summary sketch my aim is scrupulously didactic; in this, I have adopted much of Maurice Dobb’s analysis of what he labels the ‘Jevonian revolution’ (Dobb 1973), despite the fact that his book confines itself to one brand of marginalism only. In the wake of so many authors, and for the sake of convenience and simplicity, I will call the emergence of this new economics the Marginalist Revolution and will deliberately avoid getting embroiled in the unending debate surrounding the question of whether or not it does constitute a revolution (Black et al. 1973). To the three discoverers of marginalism (Jevons, Wieser1 and Walras) correspond three dissimilar versions of marginalism which Karl Pribram has christened the utilitarian (Jevons’s), the psychological (Austrians) and the 8

A BACKGROUND TO THE NEOCLASSICAL COSMOLOGY

mathematical (derived from Walras and Pareto, or the so-called Lausanne school) (Pribram 1986). They diverge in many respects but can be shown to share many characteristics in their opposition to previous writers, and the utilitarian tradition can be used as our point of reference without distorting the facts. It also enables us better to articulate this short narrative with Dobb’s penetrating views. Better to appreciate neoclassical economics it has thus seemed apposite to place it within the more global marginalist revolution of the utilitarian kind, and to contrast the latter, not to a so-called classical or orthodox economics which would have preceded Jevons, but to the economics that Jevons was standing against. This enemy, whose views he sought to supplant, was Ricardian economics or, more specifically, one dimension of Smith’s economics selected and elaborated by Ricardo, synthesized by John Stuart Mill and used again by Marx; this Maurice Dobb has convincingly established and needs no further evidence. Indeed, despite the fact that Jevons had in all likelihood never read Marx, his visceral hatred of Mill is quite famous (Keynes 1951 [19331:291). Schumpeter may view Mill as a precursor of Marshall rather than a follower of Ricardo but from our point of view such a transverse approach to history, to use Fisher’s expression (Fisher 1986) confuses more than it enlightens (‘The transverse approach to an economic work of the past is to reinterpret it with the aid of modern analysis so as to determine which aspects of it are correct by that standard and which are incorrect’ (Fisher 1986:57)). What matters is how Mill appeared to Jevons, who certainly did not see in him his direct inspiration. Mill struck him as someone who both endorsed Ricardian economics, confessing quite openly that he was only extending and generalizing it, and as someone who declared the capitalist distribution of incomes completely artificial. And the same Ricardian filiation, as well as the same questioning of the capitalist distribution of incomes, resurface in Marx (and, incidentally, in the German historical school in general; see Streissler 1973). These are the views Jevons sought to eradicate, and in the wake of Maurice Dobb, I shall designate them as ‘Ricardian economics’ for the sake of convenience. Let us therefore identify some of the key elements that the Ricardians shared, and that the marginalists literally inverted.

THE ‘OPPOSITION’ FROM THE POINT OF VIEW OF THE MARGINALIST ‘REVOLUTIONARIES’ In the Wealth of Nations Adam Smith wished to account for the accumulation of capital, an accumulation he perceived in terms analogous to that of acceleration in dynamics. If the New Science of Galileo studied the motion of matter and discovered its law of acceleration, the economics of Adam Smith pondered the motion of production (what initiates the economic movement of goods), and its acceleration (that is, the growth of wealth). The analogy is 9

A BACKGROUND TO THE NEOCLASSICAL COSMOLOGY

not only clear in the identification and delineation of the problems, but equally in the methodology (Blaug 1980:57).2 The accumulation of wealth, like acceleration, raised two intertwined sets of questions, namely (a) that of its source (the force generating it), and (b) that of its measure. Galileo had discovered the first law of dynamics through a combination of experimental thinking and of measurement. And so, if the movement of matter begged the question of its measure, so did the accumulation of wealth. Superficially, money-prices might present themselves as the ideal gauge because they are quantifiable and embody the outward manifestation of wealth; to Smith, this was but mercantilist fallacy. Furthermore, he saw in money a commodity whose value also varies. Since the measure of wealth requires an absolute, unvarying yardstick, money failed to qualify. But what could? Before unlocking this enigma, he first had to isolate the factors that caused the accumulation of wealth. To espy distinctly the causes which ‘set industry in motion’ and even accelerated it, a Galilean economist first had to discern its velocity unhindered by any phenomenal interference—in a vacuum, so to speak. In this quest for the natural laws of the movement and of the acceleration of wealth in experimental circumstances Adam Smith identified several levels at which laws operated: at the level of individual nature, at the biological level, at the historical level and at the global (or aggregate) level of national wealth. Unlike the motion of matter, that of economic goods involved many different layers of natural phenomena. In the end, Smith concluded that two main factors concurred in causing the accumulation of wealth: first the division of labour in society, and second, the various uses to which capital is put. The division of labour, although embedded in a law of individual nature (the natural proclivity to exchange), also obeyed historical laws leading to the appropriation of land and the accumulation of capital, which in turn engendered a given social stratification. Before this stratification evolved, according to Smith, commodities were exchanged as the ratio of the labour invested in them, so that the quantities of labour necessary to produce a commodity were the real measure of its value. In a non-stratified society labour was both the source and the measure of value. But with division of labour and the economic ranking of individuals, landlords and owners of capital also demanded their respective part of the produce of labour. Therefore, if in a stratified society one removes the disturbing interference of the market (the ‘vagaries of supply and demand’), one would then behold the ‘natural’ price of commodities, namely the price that arises when all three ranks of people (labourers, landlords and capitalists) have claimed their ‘natural’ shares. (That such a view from stratification to prices owed much to Quesnay’s famous Tableau Economique needs no comment.) Without delving into what constitutes a natural share, it comes out visibly from Adam Smith’s treatise that prices could be looked upon as a microcosmic 10

A BACKGROUND TO THE NEOCLASSICAL COSMOLOGY

reflection of the macrocosmic society; indeed, one should directly perceive social stratification in prices if one contemplated value outside any of the hindrances to motion caused by nature (namely the vagaries of supply and demand) and by human beings (namely human laws inhibiting the free movement of economic agents). As a result of this law of historical development the true source of value no longer resides in the quantity of labour necessary to produce a commodity. Smith thus more or less swept the problem of the origin of value under the carpet and limited himself to considerations relative to its measure. In a stratified society, all that could be known is that the claims of the various classes determined prices and that value could thus be measured in terms of labour entitlements, that is, by the quantity of labour a commodity in hand can command. But the question of value and of its source surreptitiously crept back in the distinction between productive and unproductive activities, when Smith analysed the ‘accumulation of stocks’, for he then deemed activities to be ‘productive’ when they fix labour in a ‘vendible commodity’. The dissimilarities between the two categories of activities thus hinged on the fact that through production labour is generated; if it is not embodied in a tangible object so as to ensure its transmission, it is then expended and lost. In other words, the accumulation (acceleration) of stocks could only stem from more productive activities because Smith still regarded labour as the fount of value. Because of this constant dithering between explicit and implicit statements each contradicting the other, Smith’s theory of value has remained a moot point and the centre of many dissenting interpretations (as one witnesses with Mirowski’s somewhat peculiar treatment of the great Scottish philosopher and economist—see Appendix 1). Having apprehended a commodity’s inertial motion, so to speak, in the experimental conditions of a society not disturbed by oscillations of supply and demand, Smith still had to account for the natural variations in the rates of wages, of profits and of rent in space and over time. Over time, they appeared regulated by the general movement of wealth: if globally wealth accumulated, then wages and rent would rise, and profits diminish; the reverse would obtain in the opposite circumstances. Thus, the global velocity of national wealth dictated the relative movement of the parts. Of Smith’s method of argumentation, which was to be shared by the socalled Ricardians, let us underscore the following: 1 first of all the ‘natural’ source of value lies outside the market. Hence the slight inaccuracy of Dobb’s characterization of pre-marginalist economists; they did not argue from distribution to exchange, but from distribution to prices and, through prices, they looked for the source of value outside of the relationship of supply and demand (this, admittedly, is true of the English economists from Smith onward, but wrong when considering Quesnay). Smith uncovered it in labour but simultaneously denied it when 11

A BACKGROUND TO THE NEOCLASSICAL COSMOLOGY

considering stratified societies, giving the impression of locating it in the claims of the various classes when in fact those claims help measure value but do not account for its origin; Ricardo and Marx traced it to labour. Mill also pretended to detect it in labour although some historians allege that he beheld it in utility (Schumpeter 1954). From our point of view, suffice it to say that Jevons believed what Mill wrote and understood him to espouse the labour theory of value. 2 Furthermore, in one way or another, these economists all gave production a predominant role. 3 Finally, in a most un-Newtonian fashion, they all argued from the general movement of wealth, and for some of them, from social stratification to value and prices (Smith and Marx quite explicitly, and despite Dobb’s argument to the contrary, not Ricardo), and to the evolution of the rates of wages, profits and rent. In other words, they inferred the movement of the parts from that of the whole. This economics bore the seeds of unforeseen developments. Smith certainly had highlighted the historical character of the distribution of wealth, but expressed it in terms of laws, both historical laws and laws of the general movement of wealth. As to Ricardo’s economics, it can easily be translated as that of Smith to which has been affixed an explicit labour theory of value and the theory of rent. As a result of Ricardo’s elaborations on Smith landlords were portrayed as an unproductive class living off those who truly provided labour, and denounced as the principal cause of the fall of profits following an accumulation in capital. Who provided labour? The labourers (supplying live labour) and the capitalists supplying the labour embodied in their capital, or stored-up labour. Ricardo’s economics sought to defend and justify industrial capitalism but, in so far as it pointed to the existence of a parasitic class, it sowed the seeds of radicalism. Indeed, Dobb has established that much of the economics that flourished from the 1830s to Jevons, the economics of Senior, of Lauderdale, of Longfield and of Scrope, was a conservative antiRicardian reaction which sought the source of value in utility (value in use). But, without the theory of marginal utility, it could not account for relative prices. Mill, and especially Marx, squeezed more radical elements out of Ricardian economics. To Mill, the particular distribution of wealth in a given society did not flow from any natural necessity, but from human arbitrariness. As to Marx, he submitted that from a labour theory of value one ought equally to infer that labourers were robbed of a great part of their just returns, which accrued as profits to the capitalists because the latter owned all the capital, and labourers none. If some historically minded economists like de Sismondi or List, or bizarre characters like Proudhon, hardly stirred British economists, John Stuart Mill’s apostate statement on the socially arbitrary nature of distribution and Marx’s 12

A BACKGROUND TO THE NEOCLASSICAL COSMOLOGY

demonstration of capitalist exploitation hit where it hurts the most, since both argued from within the conceptual framework and the premises of what was considered an economics inspired by Smith, and therefore an economics sufficiently paradigmatic to contemporary writers. If their critique was right, and they enjoyed both the weight of evidence and of solid arguments on their side, the distribution of wealth in capitalism, not to say the type of property ownership itself, called for sweeping reforms; with Marx, it called for uncompromising political revolution. There was much at stake—no less than the interests of capitalists themselves. The defence of capitalism, of its type of property ownership, and above all, of its contemporary distribution of wealth, emerged more than ever before as economics’ supreme challenge. Around the 1860s, to justify it meant relinquishing—or, at least, severely qualifying— the labour theory of value. The outcome was, and one may add, could only be, marginalism.

THE MARGINALIST REVOLUTION Fisher (1986) has pointed out that all three discoverers of marginalism endeavoured explicitly to achieve in economics the equivalent of a Newtonian revolution, and Ménard had long ago established the same about Cournot who, to some, anticipated marginalist thinking (we will deal with Mirowski’s claim that they drew their analogy from field formalism after a thorough scrutiny of the neoclassical cosmology). Thus, the experimental procedure which had inspired Smith and his followers continued unabated. However, if the Ricardians had respected the scientific tradition in its experimental orientation, they had failed in many other respects. If initially the scientific revolution symbolized the experimental study of matter in motion lending itself to measurement and quantification, it also meant much more. For one thing, it promoted analytical resolution. In the 1830s Auguste Comte introduced an important distinction in the study of science. Some sciences, epitomized by Newtonian physics, posited the whole to be but the sum of its parts, so that from an understanding of the behaviour of the component elements (atomic particles) one could infer the behaviour of the whole (solar system). Comte labelled this scientific procedure ‘analytical’ because it decomposes the whole into its smallest components and stipulates that one can reassemble the whole from the study of its individual parts. Other sciences, and especially the nascent vitalist biology, proceeded the other way around: they postulated that the whole (living organism) contains more than the sum of its parts, and professed that the whole cannot be decomposed. In such disciplines one must proceed from the whole to the parts, a procedure he described as ‘synthetic’. Against the Hobbesian and the utilitarian (hence analytical) stances in the study of social phenomena he advocated a synthetic approach.3 13

A BACKGROUND TO THE NEOCLASSICAL COSMOLOGY

After Comte, and in so far as economics did initially model itself on Newtonian physics (and especially so in the English-speaking world, since vitalist biology was very much a German and French creation), science as economists understood it came to be equated with analytical procedures. Thus originated the famous idea of ‘methodological individualism’.4 However, the Newtonian revolution had yet more lessons to teach. In the epistemological history of sciences one contrasts the substantialism of preclassical, or Aristotelian, sciences to the more relational nature of classical, or Newtonian science. In Newton’s classical equation, F=ma, expressing what some have designated as a functional relationship, the terms are defined relationally, in terms of one another. There is no substance endowing objects with ‘force’; a force is what acts to change the velocity of an object of a given mass. In pre-classical science, on the contrary, entities are marked off from one another in terms of the intrinsic attributes they possess and which give them their identity. Consequently, pre-classical scientists represented the world in terms of substances, and their modes of explanation were not functional; more often than not, they were teleological. This, Rogin had already discerned in Marshall’s work: This functional conceptualization contributes to the highly flexible character of Marshall’s theory, makes it both less dogmatic and more generally applicable. It renders it, however, particularly susceptible of misinterpretation from the point of view of a dogmatism which does not reckon with the difference between a relational and a substantive concept, which conceives the meaning of economic concepts to reside exclusively in their material reference rather than in the role they play in the definition of a theoretical system composed of reciprocally determining magnitudes. (Rogin 1936:64, italics added)5 When it comes to analytical resolution and relational definitions, labour theory failed miserably. First of all, labour theorists argued from the movement of the whole to that of the parts; although not quite as synthetic as Comte understood it, Ricardian economics could certainly not rank among the analytical sciences. Furthermore, the labour theory of value unquestionably harboured a substantialist element (as should by now be more than established by Mirowski’s book (1991)). Indeed, Ricardian economists explained prices, or value, not in terms of a relationship between an individual selling and another buying, but in terms of a producer and his product, and of the transmission of a ‘substance’, namely labour, imparted from one to the other. This ‘labour-substance’, an intrinsic attribute of goods, governed their value. Furthermore, this substantialist theory of value was directly associated to the search for an absolute yardstick; indeed, value had to be anchored in some unchanging, unvarying attribute, or substance, in something that persisted 14

A BACKGROUND TO THE NEOCLASSICAL COSMOLOGY

unchanged through time and space. Unfortunately, the labour theorists never caught a glimpse of their coveted yardstick. This dual axis helps trace a general canvas on which to place marginalism. On the one hand Jevons and Marshall attempted to undermine the radical implications of the Ricardians, and thus indirectly to legitimate capitalism on an allegedly scientific basis; on the other hand, these scientific aspirations stemmed from a deeper understanding of science and of scientific procedure, and, as many have argued, from a knowledge of calculus which none of the so-called classics shared.6 In this new perspective, what were the main targets? Quite obviously, a substantialist labour theory of value from which socially radical theses directly flowed, and its concomitant manner of reasoning from the movement of the whole—from accumulation and social stratification, to that of the parts. They could only be toppled by a relativistic, if not manifestly relational theory of value, and a recognizably analytical, methodologically individualist procedure. How could this be achieved? How could one define value in a relational way? By following a lead opposite to that of Ricardian economics, which had sought the value of commodities in some stable substance, in some inherent quality to be found outside the market. If value was not a property intrinsic to the object, what was it to be? It was to reside in the use-value to the one purchasing this commodity; in other words, it had to arise from its utility, the expected satisfaction it brings to the consumer or, more accurately, from its ‘desiredness’: ‘Utility, though a quality of things, is no inherent quality. It might be more accurately described, perhaps, as a circumstance of things arising out of their relation to man’s requirements’ (Jevons 1931 [1871]:44–5, 52, italics added). In this new outlook, as Jevons adds: ‘[l]abour is found often to determine value, but only in an indirect manner, by varying the degree of utility of the commodity through an increase in supply’ ([1871]:2). If demand expressed the wish to satisfy one’s needs and desires, supply signified labour, which for Jevons and Marshall, tells of ‘toil and trouble’. In brief, labour spelled the opposite of utility, or commodity: it meant disutility, or ‘discommodity’, leading British economics on the road to being a calculus of pleasure and plain, a ‘felicific calculus’ to use Bentham’s felicitous expression. This calculus was openly implanted in Jevons’s and Edgeworth’s economics, and more implicitly in Marshall’s; it amounted to a relational definition of value, although the terminology of the time did not permit one to word it in those terms. To Marshall, it meant that the economist, like the Newtonian physicist, does not measure a force directly, but only through its effects (Marshall 1938 [1920]:15, 16).7 In brief, the marginalists held that, in itself, an object cannot give us any clue as to its value; to appreciate value we must place this object back in a situation of exchange and connect it, not to its producer, but to the person who buys it, against the conditions of its supply. From this new vantage point 15

A BACKGROUND TO THE NEOCLASSICAL COSMOLOGY

the value of an object does not emanate from the labour it embodies, but from the utility the purchaser beholds in it; it cannot be discovered outside the market, as the Ricardians believed, but fully within it. The theory of value as utility thus accomplished a momentous displacement. If value is to be governed mostly in terms of the purchaser’s, that is, the consumer’s desires, the focus of economic enquiry must be turned onto consumption, or at least exchange. Instead of production acting at one and the same time as the primum movens of the economy and as the ultimate yardstick to measure value, exchange and consumption came to be seen as governing economic phenomena. As Schumpeter evinced with unparalleled erudition, most of economic thought from Aristotle to the end of the eighteenth century had associated the exchangeable value of commodities to their utility, but on the basis of utility itself, economists could not resolve the notorious paradox of water—a good of the utmost utility but void of any exchangeable value— and of diamonds, deprived of any value-in-use but endowed with the greatest value in exchange. To overcome this obstacle and to propose a viable alternative to the labour theory and to Ricardian economics, it was of no use to evaluate the total utility of an object. Ricardo had nonetheless built much of his economics around the notion of land’s diminishing returns at the margin of cultivation: his ‘rent’ did not express total fertility, but differential fertility between the last increment to cultivation and the infra-marginal one. Extended from the realm of production to that of consumption, the same idea provided the desired solution, namely the notion of ‘diminishing utility’, or what came to be known with Marshall as the ‘law of satiable wants’. This so-called law stated that utility decreases the more of a product is available to the consumer. Accordingly, one does not gauge the total utility of a commodity to the consumer in order to assess its value, but the utility of an additional increment of that commodity to this consumer. We would thus be ready to pay different prices for commodities according to our need and desires of them, which in turn depends on the supplies available (and our ability to purchase them). Assuming that a thing loses its ‘desiredness’ the more one’s craving for it is satisfied (what Marshall calls the axiom of the ‘satiability of wants’), the price one is willing to pay will vary correspondingly. Dehydrated in the middle of the desert, one would disburse vast sums for a first glass of water, but would be less inclined to pay a similar amount for the tenth litre; living next to a lake, one would not even disburse a penny for a glass of water. Therefore, supply enters in the very utility of a commodity; given a state of supply, the price of the commodity at the margin of doubt represent its marginal utility. If utility theory underpinned the relational definition of value, providing an alternative to the labour theory, the notion of marginal utility resolved the conundrum of price variations, explaining their scarcity value. 16

A BACKGROUND TO THE NEOCLASSICAL COSMOLOGY

The variability of prices thus flowed directly from the very transactions of a free market. Removed from the producer and put back on the market place where it belongs, the felicific calculus of value and its measure at the margin brought about another critical volte-face. Adam Smith and the Ricardians, including Marx, had debated in a synthetic fashion, deriving micro-economic phenomena from macro-economic ones, invoking the distribution of income and the velocity of national wealth to account for the rates of wages, of profits and of rent, and even for the levels of natural prices. In this global architecture, the parts were not individuals, but specific economic magnitudes: profits, interest, rent, wages, prices. The individual, at best, represented yet another layer or dimension of Nature about which, experimentally, it was possible to uncover laws of some consequence to understand the motion of labour and capital. But the individual neither stood as the building-block of the argumentation, nor did he embody the part whose behaviour an analysis of the whole should reveal. All this changed radically with the marginalists. Considerations about utility and disutility necessarily pertained to individuals, to individual economic agents. Methodologically, therefore, the marginalists entirely inverted the vector of economic argumentation. From a methodological point of view, a Newtonian science of economics could only be analytical, and the parts, this time, could only be individuals seeking to satisfy their consumption and to maximize it by distributing their expenditures so as to procure equal amounts of utility on every type of expense. The marginalists thus endorsed the analytical bend of Newtonian science and proceeded to build their demonstrations from the individual economic agent to the whole. To that extent, they adopted an individualist posture in their methodological outlook. In addition, if the whole included first the prices of consumption goods, it also encompassed the rates of interest, of profits and of wages. By the same token, marginalism suddenly enabled economists to infer the relative prices of factors of production from considerations about the maximizing rationality of individuals in market exchanges. For the more extreme among them, this even accounted for the national distribution of income (Clark 1938 [1889]); from incontrovertible laws of human nature’ they would deduce in a ‘scientific manner’ the necessary character of the distribution of income in capitalist society. In one way or another, even for the more moderate like Marshall, the capitalist distribution of income that the radical Ricardians had attacked could be scientifically sanctioned by an economics which could introduce differential calculus into its demonstration because it focused on the rates of change of utility at the margin (for small increments); thus economists finally rivalled the true scientific achievements of the Galilean-Newtonian revolution. In fact, I believe that with Jevons but more especially with Marshall, economics strives to be the study of labour in motion. In this 17

A BACKGROUND TO THE NEOCLASSICAL COSMOLOGY

perspective, the field formalism that Mirowski identifies with the birth of neoclassical economics belongs to a later phase. I see it as a post-1900 development, and mostly related to the desire to rid economics of the very notion of utility, and of its utilitarian connotations. We shall come to it later. The transformation was thorough and complete: from an economics whichs reasoned from the whole to the parts to one that moved in the opposite fashion; from the primacy of production to that of consumption and exchange; from prices apprehended outside of the market to prices understood exclusively in terms of market exchanges; from a labour theory to a utility theory of value; from a substantialist to a relational view of value; finally, from reasoning in global terms to a calculus at the margin, and from there to a differential calculus which empowered economists to derive the shares of capital and of labour from considerations of isolated market exchanges and thereby demonstrate in a rigorous, mathematical and scientific manner the superiority of capitalist institutions. The mutation was so radical, the Ricardian cosmology so completely inverted that it has been tempting for many historians of science to speak of a scientific revolution within economics.

18

2 PROBING THE NEOCLASSICAL COSMOLOGY

IN SEARCH OF THE NEOCLASSICAL MINIMAL UNIT This new economics was predicated on a novel conception of prices (in terms of real costs with Marshall, and of opportunity costs thereafter—albeit that from an epistemological point of view both belong to the same family). In their view, prices resulted from the transaction between a producer and a consumer, from an exchange initially represented in terms of intersecting supply and demand schedules constructed on the basis of the law of diminishing utility to both exchange partners. These individual schedules could then be aggregated to provide national supply and demand. Let us briefly examine how Marshall understood them.

Marshallian prices To Marshall, prices emanate from an exchange bringing together a supplier and his customer, or a producer and a consumer; as the famous quotation about the measurability of motives plainly avers (1938:15, 16), prices measure what one is ready to ‘give up in order to secure a desired satisfaction’. Guillebaud insists that money to Marshall does not measure the amount of effort and sacrifice, but a resistance (1937:78–9). In other words, the resistance overcome by parting with money would gauge the intensity of a force, the force attracting an individual to a desired commodity. But that force, let us not be deluded, is the very desiredness which individuals confer upon the commodity; in brief, it is nothing else than its perceived utility, so that prices may be said to give an indication of utility, if utility be conceived as a force overcoming a resistance. This is the aspect of utility that Mirowski’s thesis either denies or neglects but which unquestionably dwells there. Although it might be possible to squeeze out of the Principles isolated statements to the effect that utility is potential energy, I could adduce countless instances where it is defined as a force of 19

PROBING THE NEOCLASSICAL COSMOLOGY

attraction; this, Edgeworth lucidly remarked in his review of the second edition of Marshall’s Principles (1891). He writes, ‘[t]he attraction of distant objects playing so large a part in the mechanics of industry, it concerns us to study the law of that attraction. The formula, precise as that of gravitation, is the inverse…’ (p. 25). In fact, I would disagree with Guillebaud; in Marshall, money measures not a resistance, but a force, and that force is that of utility, as Edgeworth clearly saw. When one reviews the evidence Mirowski marshalled in favour of his thesis, there is no proof whatsoever that utility and marginal utility were compared to fields of forces among the first protagonists of marginalism and neoclassical economics (even if we substitute Wieser to Menger). Mirowski succeeds in proving only that they sought to emulate Newtonian physics and that they sometimes appealed to ‘energy’ as the underlying concept which might bring all the sciences together. It is with Irving Fisher (his dissertation of 1892, published in 1926) that the analogy comes out vividly, and there is a case to be made that this analogy surfaced at the precise moment when the second generation of neoclassical economists sought to sever the notion of utility from its utilitarian background. We will come back to this thesis much later. Despite his superficial disclaimer to that effect, Marshall does retain an essentially Jevonian felicific definition of economic phenomena. In a calculus of pain and pleasure the utility expected must prevail over the disutility incurred, if one is to agree to the exchange. Since there are two exchange partners there are thus two perspectives on prices: the price demanded by the producer, or supply price, and that sought by the consumer, or demand price. In the very logic of a felicific calculus the two partners should compute the ratio of pleasure to pain, or of utility to disutility, in a symmetrical but similar fashion. The supply price, or ‘the price required to call forth the exertion necessary for producing any given amount of a commodity’ (1938:142) is a measure of an anticipated utility strong enough to conquer man’s natural resistance to labour or, to put it in marginalist terms, to surmount labour’s disutility, the latter being conceived in the real, psychological terms of human efforts (Lackman 1977:571; Shove 1942:141). But if the consumer’s demand price is ‘the price required to attract purchases for any given amount of a commodity’ (p. 142), what disutility does the utility anticipated from consuming a commodity overcome? As the opening paragraph of this section suggests, it would be the cost of parting with money.1 But, as with many ideas in the Principles this one is not followed up. True, Marshall writes now and then of money’s marginal disutility and of the consumer’s resistance to parting with it, but he equally denies it by keeping constant the marginal utility of money (pp. 334–5), thereby clandestinely abandoning the cost implied in purchasing and ending up confessing that, ‘while demand is based on the desire to obtain commodities, supply depends mainly on the overcoming of 20

PROBING THE NEOCLASSICAL COSMOLOGY

the unwillingness to undergo discommodities’ (p. 140). Throughout the Principles, as a result, despite disseminated statements to the contrary (pp. 96, 132, 332, 470), Marshall writes as if demand does not have to override any discommodity whereas supply does. Hence the overwhelming impression one gains from reading the Principles—that Marshall comes to leave out any disutility incurred by the consumer and tacitly privileges the supply side, that Marshall’s prices are above all supply prices, a gauge assessing the utility necessary to overpower the producer’s resistance to labour and necessary, to use Smith’s analogy, to ‘set industry into motion’. I submit that Marshall furtively eluded a symmetrical felicific definition of prices because he had no alternative. Let us logically extend this symmetry. Demand prices would have then gauged the force subduing one’s resistance to part with money, because when buying a commodity, the customer is giving money away. The commodity purchased costs him something, and at the end of the road, this expenditure will be calculated in the same units as supply. Indeed, the cost of money to the one spending is that of the labour he or she has invested in order to obtain it. By paying out money to acquire a commodity the customer must surmount the resistance of the labour he or she has invested in procuring this money. If a demand price expresses anything (always in the framework of real costs), it can only be the strength of the force of anticipated consumption, over the disutility of past labour, or of the future labour necessary to replace the money spent. This Marshall could not openly admit, on two principal grounds (and grounds quite separate from the technical ones demanding that he declare constant the marginal utility of money, which shall be considered in Chapter 3). First, it would entail considering money as a commodity secured through yet another exchange, namely labour for money. In classical and neoclassical economics, however, money can never truly enjoy the full status of a commodity. Throughout the Principles Marshall mentions money in relation to prices only, as a measure of the utility of commodities. Everywhere else he religiously avoids using the word; he sometimes alludes to it as ‘general purchasing power’ or ‘command over material wealth’ (p. 22) or, more often, he subsumes it under the general and imprecise umbrella concept of ‘capital’. Money is then transmuted into ‘free’, ‘floating capital’ (p. 73), ‘fluid capital’ (p. 411) or ‘new investments’, and no more mention is made of it as money. Why should this be? Because of money’s pivotal role in a felicific calculus; intimately wedded to prices, it is actually the objective, quantifiable expression of a subjective, unquantifiable reality, namely utility. As such, money must operate as some kind of transparent commodity, a non-commodity in fact. Also, in so far as money serves to price commodities and to articulate supply to demand, it works as a medium of exchange. From both points of view, a commodity it must not be; were it to be one, it would be blessed with its intrinsic utility, and people would have to suffer disutility in order to acquire it. 21

PROBING THE NEOCLASSICAL COSMOLOGY

In brief, money cannot be both a commodity and a measure of utility because it could not concurrently be something produced and exchanged (a commodity) and a simple medium of exchange and gauge of utility. Disguised as capital, money does have a cost, which is neither that of producing it (coining), nor that of paying for its use. Interests, which mercantilists and now Keynesian economists understand to be the price paid for money’s use, is to Marshall the reward for a disutility, that of putting off consumption (saving). Money’s only cost is that of not using it! So, if some statements suggest that Marshall held money to have utility, the whole gist of his economics disclaims it. Second, had Marshall pressed to its logical limit the idea of the utility of a commodity overcoming the resistance to parting with money in the context of an economics of real costs, it would have shown labour to be the ultimate measure of utility for all exchange partners. Had he been coherent with his own premises he would have had to graft a utility theory of value onto a labour theory of value. But what of exchange?

Exchange in the Principles In their barest outline, Marshall’s exchange equations can be summarized as follows. Because of labour’s discommodity (and increasing marginal disutility) the producer will only labour when the satisfaction expected from the sale of his commodities is greater than the pain of the last unit of labour (of labour at the margin); this will be his supply price. On the other hand, the consumer will not accept to pay more than the utility of his last unit of consumption (at the margin of doubt), given a state of supply. This will represent his demand price. ‘When the demand price is equal to the supply price, the amount produced has no tendency either to be increased or to be diminished; it is in equilibrium’ (p. 345). For various prices, one will then draw supply and demand schedules from which supply and demand curves will be drafted.2 These curves intersect at the point of equilibrium between supply and demand, since at that point, producers will not be willing to produce more without a rise in price and consumers will refuse to buy more unless prices drop. At this intersection, therefore, the marginal utility of commodities to the consumer at a given price equals the marginal disutility of production to the labourer, at the same price. At that point supply is adjusted to demand and should stay in equilibrium (experimentally, that is). Marshall called ‘statical method’ this type of analysis of prices. There is no doubt that Marshall’s theory of exchange (pricing commodities) relied on partial equilibrium analysis and that his understanding of distribution (price of factor services) intimated an argumentation in terms of a general equilibrium (to some, his economics is 22

PROBING THE NEOCLASSICAL COSMOLOGY

best described in terms of general equilibrium (see Deane 1978:112, 117; Schumpeter 1954:836). Furthermore, it is also acknowledged that his notion of supply schedule embodies only one of many attempts to integrate production in neoclassical economics’ research programme (see Mirowski 1991:285). Whatever Marshall’s idiosyncrasies in these, and in many other respects, it remains the case that standard micro-economics still represents prices in terms of the intersection of supply and demand schedules, however defined, and that Marshall espoused the tenets of methodological individualism, in that both he and those who invoked his authority, did embrace it (Checkland 1957:339; Schumpeter 1954:942 note 50, 997; Shove 1942:149). But did they really comply with it?

Of some unavoidable constraints of methodological individualism The overwhelming part of neoclassical economics deals with real magnitudes. By real, in this context, I do not mean the conventional ‘non-monetary analysis’ of exchange, but economic phenomena amenable to computation because they are quantifiable; such are most of the conventional economic categories of ‘employment’, ‘output’, ‘consumption’, ‘wages’, ‘profits’ and the like (to avoid confusion, I shall henceforth write real in italics to refer to those quantifiable magnitudes). Among these real magnitudes we must demarcate those that express an amount, or a quantity—the quantity of goods produced, of goods purchased, the number of people employed, the number of enterprises or employers, the amount of money invested, the amount of money saved, and so on—from those that do not—prices (including wages), rates of interest, or rates of profits. In one way or another most of the economic magnitudes that do not express quantities can ultimately be translated as prices or ratios, and globally, ratios can be contrasted to amounts if we temporarily ignore some exclusively macro-economic magnitudes. The following considerations apply mostly to amounts because they differ from ratios in that they make up directly additive economic magnitudes. No experimental theorizing can take off without a prior understanding of what these magnitudes stand for, and the most sophisticated methodologies and their attendant theories founder if erected upon misunderstandings. It is consequently imperative to spell out the foundations of any study of real economic magnitudes before appraising any methodology evolved to study them. The first inescapable fact to be borne in mind is that all real economic magnitudes are nothing if not the result of activities, that is, the outcome of concrete actions (or happenings) which have taken place following actual decisions. At this stage, and for the clarity of the following argumentation, it might be apposite crudely to distinguish activities which either result in tangible results, or are normally interactive and therefore observable—that is, that 23

PROBING THE NEOCLASSICAL COSMOLOGY

are translated in visible forms of behaviour (such as dancing, for instance, or ostentatiously praying in a church)—from activities which are neither expressed in visible behaviours nor in tangible, material results. For want of a better terminology we could call the first type external or objective, and internal or subjective the last. I am extremely aware of the inadequacy of this terminology and I suggest them provisionally, hoping that a more adequate one may be evolved to designate activities. These activities can also be contrasted according to their ‘social visibility’, so that I shall indiscriminately refer to them as ‘external’, ‘objective’ or ‘socially visible’, although every one of these designations also raise some definitional problems. Thus, the amount of goods produced necessarily flows from the external activity of producing, and the amount of goods purchased results from the concrete, external activities of purchasing; on the other hand, the supplier’s price of a commodity follows from the activity of pricing only if this pricing is ‘socially visible’, rather than being a simple mental computation preceding exchange. All activities, furthermore, spring from individual decisions; all activities are therefore necessarily individual and economic agents when performing them may sometimes, often, or all the time be motivated by the most individualist maximizing motives; this is not disputed. Although individual in essence, activities do not for that reason form a homogeneous category because they cannot be divorced from their context, even experimentally. Some activities can be carried out by the individual in complete isolation whereas others are necessarily executed within relationships, or within groups (without for that matter losing their individual character). In keeping with sociological usage let us call ‘dyadic’ those activities occurring within the context of social relations, and for want of a more specific term, ‘isolated’ those that can be carried out in isolation (as to those executed within groups we shall simply designate them as ‘group activities’. It should be emphasized once again that by contrasting isolated and dyadic activities, I am not opposing individual to social activities; all activities result from individual actions and the adjectives ‘isolated’ and ‘dyadic’ denote the social context of these actions). Pricing, for instance, can be a completely isolated activity (even when socially visible) but exchanging is inevitably a dyadic one. Here I dissociate individuals from social relationships, and the latter from groups. In my opinion, whatever social scientists might otherwise think, groups are not composed of relationships, but of individuals.3 Social relationships may delineate networks but cannot add up to groups (such as a nation), and from the perspective of methodological individualism, this raises insurmountable problems. Indeed, networks are not intrinsically bounded. Let us suppose a relationship between A and B; if to it we add a relationship between B and C we draw an open, unbounded ‘chain’ (A«B«C). To close it, we would have to include another relationship between A and C; the result would not be a group, but simply a bounded network. Finally, to suppose that we can elicit aggregate information from bounded networks we would 24

PROBING THE NEOCLASSICAL COSMOLOGY

have to assume all individuals to be simultaneously exchanging with all the others. Hence the absurdity of supposing that we can obtain aggregate results by adding up transactions. Let us take stock. Some activities are performed by isolated individuals, others are executed by individuals in the context of groups, whereas other activities, such as making love or exchanging, cannot be carried out by individuals in isolation. In this latter case, the minimal group is composed of a social relationship; here, the social relation is the group itself. Hence a rider to our definition: some groups are composed of individuals, others of a (one) social relationship. But never are groups compounds of social relationships. For our immediate purpose and for the clarity of the exposition let us simply declare a social relationship this last type of grouping, so that overall, isolation, social (dyadic) relationships and groups constitute three separate contexts within which individual activities take place. To ignore this, even experimentally, neither simplifies nor abstracts from reality; it brutally mutilates it. These distinctions are fundamental for a proper assessment of the requirements and limitations of methodological individualism. If it means anything, methodological individualism does not solely imply that economic activities are ultimately the deeds of individuals and are motivated by individualist designs. As its very name suggests, it embodies an individualist procedure, not a holistic one (for clarification see Chapter 1, note 5) To all practical intents and purposes we can hang on to the following (working) definition of methodological individualism: it is a methodological procedure predicated on the idea that the whole does not contain anything that is not to be found in the parts, and that laws operate at the atomic level only. As a corollary, in dealing with macroscopic phenomena, the methodological individualist will begin with microscopic elements. Beware! Methodological individualism does not edict that one must first observe individual elements and then sum them up to deduce the features of the whole. It may be that only macroscopic phenomena can be observed, but in order to account for their behaviour it will be necessary to posit the existence of an individual element and to assume on the part of this element certain features and a given behaviour such that, added up, those elemental units would actually yield what is observed at the macroscopic level. This is a method typical of physical science, the very inspiration of economics’ methodological individualism. Also, methodological individualism applies to empirical sciences only; it is absurd to assume it for geometry, mathematics or logic. In axiomatic languages one may decompose problems better to solve them but the very notion of methodological individualism calls to mind natural microscopic units, not mathematical ones. 25

PROBING THE NEOCLASSICAL COSMOLOGY

According to this procedure, the elements we sum up must be homogeneous from the minimal unit upward, right up to the most inclusive one. Similarly, when comparing various entities, homogeneous entities must be correlated; in this latter case the entities must be homogeneous ‘sideways’, or laterally. If flouted, these corollaries deprive the whole procedure of any validity. Since we have also inferred that social relations cannot be added up to yield in the aggregate something corresponding to anything resembling a group (such as a nation), it also follows that the only units that can be truly summed up in the study of real economic magnitudes are isolated individual activities. In other words, the social relationships involving dyadic activities such as exchange do not yield anything other than networks if added up; hence the importance of dissociating dyadic from isolated activities. To draw macroeconomic inferences about additive real magnitudes one can only sum up isolated activities, not the relationships composing dyadic ones.4 From this follows a strict methodological requirement: in order to analyse the global results of dyadic activities such as exchange the analyst must first divide them analytically into two separate isolated activities. When thus dissociated, however, something has been lost. If it is methodologically acceptable, and even indispensable, to treat a dyadic activity as the sum of two isolated ones in the study of real magnitudes, the opposite process is methodologically unacceptable: two isolated activities can never add up to a dyadic one. They are qualitatively different, a difference which invalidates the analysis if not respected. Let us look at an exchange transaction in this perspective. Let us take a transaction in which a customer purchases a car from a dealer; as a dyadic activity it cannot be aggregated and cannot serve as the minimal element of any computation. It must first be severed into two isolated activities, namely the selling and the buying of a car, on the warranted assumption that every purchase of a car by one individual is simultaneously a sale of a car by another. If individual actions truly stand as the minimal unit they are the elemental units that should be summed up to derive aggregate figures. Having singled out the commodity, one would presumably count all the cars sold by one salesman in the course of the time period chosen, let us say a year, to obtain his annual individual sales. One would then aggregate all the annual individual sales to derive the annual national sales of cars, and may perhaps even call it the national output. One would then proceed in a similar fashion for the individual purchasers of cars, first to draw out the individual, and then the collective annual expenditures on cars; since consumption must be expressed through this effective demand one may then decide to write of the annual ‘aggregate consumption’ of cars. At the end of all these calculations one could only deduce the momentous conclusion that the aggregate sale of cars equals the aggregate purchases of cars, an inexorable tautology from which nothing else could be extracted because nothing else could be added. This would 26

PROBING THE NEOCLASSICAL COSMOLOGY

represent a proper individualist methodology, in fact the only legitimate one in real economics, but it would sadly yield a terminal tautology. In brief, if exchange is dissected into the isolated activities of buying and selling and if the isolated individual purchases and isolated individual sales are then computed one should not discover, in the aggregate, features which are not directly derived from the characteristics of the parts. And since it is precisely the relationship that has been eliminated from the parts, one certainly cannot uncover the equivalent of a dyadic relation at the collective level. To state the case more strongly, let us approach it differently. In so far as they cannot take place in isolation (that is, not without the context of a social relationship), dyadic activities can also be dubbed ‘social’. When the economist elects to decompose a dyad into two isolated actions he no longer perceives it in its social enactment. In brief, two isolated activities never add up to a social one. Having disjointed the dyad into two isolated actions he can even ignore the individual, focus on the result of his or her actions (sales and purchases) and write in the aggregate of national sales and purchases, and possibly of production (output) and consumption. If he leaves it at that and endeavours to put forth theories on national output or consumption by attempting to unravel how they mutually interrelate (or are mutually interconnected), there is no special problem, as long as these functional relationships between the added-up magnitudes do not implicitly project in the aggregate the very social element that had been deleted in order to perform a summation. To conclude, any economic methodology of any degree of mathematical sophistication which professes to be individualist but does not comply with these requirements is irrevocably flawed, and let there be no misunderstanding, methodological individualism is the only procedure to derive additive real magnitudes at the collective level. At the programmatic level, I therefore deem neoclassical economics to have been right; the main question arises concerning its accomplishments. To evaluate these methodological (and theoretical) achievements we will start with the very core of value theory—the celebrated intersection of supply and demand schedules defining an equilibrium price— and ask whether the entities aggregated are homogeneous from the minimal unit upward and whether they are comparable (if they are ‘laterally homogeneous’).

What is Marshall’s ‘minimal unit’? Marshall and neoclassical economists outspokenly declare the individual (either consumer-household or entrepreneur-firm) to be their minimal unit. But is it? When he totals up the isolated individual activities of buying and selling, Marshall gets a ‘relation’ of supply to demand in the aggregate. What exactly is the nature of this aggregate relationship? How are supply 27

PROBING THE NEOCLASSICAL COSMOLOGY

and demand functionally related at the global level? Quite conspicuously, through prices. But prices can only articulate global supply to global demand if the latter are implicitly projections of the social relationship between producer and consumer within a given market transaction. Indeed, prices can only connect total supply and demand because they are thought to regulate the individual market exchange between supplier and customer; in this transaction, the supplier prices his wares and the consumer prices their marginal utility to him, and the price they agree upon is such that the ratios between the marginal utilities of the commodities exchanged is equal to the ratios between their prices. This is the price that makes the exchange possible. This is not specific to Marshall, but common to neoclassical economics. When Marshall writes of the aggregate relation of supply and demand (for capital, for labour, or for whatever commodity), he thus sunders exchange into its two isolated components of buying and selling, adds them up, and conjures up at the collective level the very element which his methodology necessarily obliterates, namely the social dimension. From an epistemological point of view the conclusion is unavoidable: something suddenly appears at the global level which was not precontained in the element declared minimal, that elemental individual decision which allegedly materialized into an action. What does this inform us of? There are two possible interpretations. If we come across a social relationship at the collective level we may surmise that the minimal unit might itself have been a relationship. This is a most plausible assumption. Indeed, in the Principles Marshall often gives the impression that his minimal unit is actually the relationship between salesman and client, between seller and buyer—an allegedly ‘bargaining’ market relationship in which both concur over the price of a commodity.5 At first sight this relationship looks like the stereotypical relationship of a market economy operating on monetary exchange; it is quite manifestly an economic transaction. If this were so, it would be the isolated exchange-event between buyer and seller that would implicitly stand as Marshall’s minimal unit, not the individual decision and action; in brief, not an individual activity, but a transaction, or social relationship. On the other hand, we may suppose that the exchange-event is indeed disconnected into its isolated components which are then computed. This, for instance, is what Shove and Bharadwaj presuppose (Shove 1942:141; Bharadwaj 1978:612–13). Then, something not precontained in the parts unexpectedly surfaces in the aggregate picture and illegitimately crowns an individualist procedure with holistic conclusions. In the latter case the ‘aggregate relation of supply and demand’ visibly depicts a transaction, and very unambiguously the collective projection of a market transaction. Either way, the individualist methodology has been flouted, and either way, this economics is not individualist but manifestly ‘transactional’, since prices and 28

PROBING THE NEOCLASSICAL COSMOLOGY

markets always articulate social relationships from the minimal to the maximal level. Or, to put it differently, Marshall understands both the single exchangeevent and the aggregate relation of supply and demand in exactly the same terms, namely, as transactions. Unfortunately social relations, or dyadic activities (such as transactions), completely evade all such aggregation. Overall, either Marshall’s units are homogeneous upward, in which case he must have singled out transactions (dyadic activities) as his minimal units, or the transaction is something injected back at the aggregate level, and the elements are not homogeneous upwards. Either way, Marshall’s methodology is essentially transactional, as is that of neoclassical economics, and it contradicts the strict desiderata of methodological individualism.6 Whether at the individual or at the global level we inexorably meet a relation of supply and demand which can always be brought back to their intersection, and this intersection bespeaks of a transaction not included in the minimal units if those minimal units are maximizing individuals. If the units are exchange-events, then the methodology is still more fundamentally transactional. Either way it is inherently flawed. Furthermore, supply and demand curves can never intersect.

Are supply and demand comparable, and do they intersect? Let us follow in detail the construction of demand and supply curves as suggested, not in the Appendix but in Chapter III of Book III of the Principles (we will provisionally ignore the fact that Marshall derives his demand schedules from utility functions, since this does not alter our conclusion in the least). These are derived from the construction of demand and supply schedules. Marshall presents first the steps by which one constructs a demand schedule: To obtain complete knowledge of demand for anything, we should have to ascertain how much of it [the consumer] would be willing to purchase at each of the prices at which it is likely to be offered; and the circumstances of his demand for, say, tea, can be best expressed by a list of the prices which he is willing to pay; that is, by his several demand prices for different amounts of it. (This list may be called his demand schedule.) Thus for instance we may find that he would buy 6 7 8 9

lbs. lbs. lbs. lbs.

at at at at

50d. 40d. 33d. 28d.

per per per per

lb. lb. lb. lb.

10 lbs. at 24d. per lb. 11 lbs. at 21d. per lb. 12 lbs. at 19d. per lb. 13 lbs. at 17d. per lb.

If corresponding prices were filled in for all intermediate amounts we should have an exact statement of his demand…. We can represent [a 29

PROBING THE NEOCLASSICAL COSMOLOGY

person’s demand for a thing] exactly only by lists of the prices at which he is willing to buy different amounts. (Marshall 1938:96–7) This is the demand of a single individual but, ‘in large markets…the peculiarities in the wants of individuals will compensate one another in a comparatively regular gradation of total demand’ (p. 98) so that we can consider that ‘the total demand in the place for, say, tea, is the sum of the demands of all the individuals there’ (p. 99). Here are restated the main postulates of methodological individualism, namely that the whole is nothing but the sum of the parts or, in this more specific case, that an aggregate demand schedule is but the sum of individual ones. Now, ‘let us suppose a list of supply prices (or a supply schedule) made on a similar plan to that of our list of demand prices: the supply price of each amount of the commodity in a year, or any other unit of time, being written against that amount’ (pp. 343–4). We will also ignore the fact that Marshall’s supply schedules involve a time dimension which, alone, suffices to explode all symmetry; we will therefore assume a supply schedule constructed on the model of his demand schedule, where the schedule represents intentions to supply various quantities at one and the same time. This would then provide a supply schedule. For the quantities to be homogeneous we should assume symmetry and posit that an aggregate supply schedule is but the sum of individual ones. From the supply and demand schedules Marshall then constructs the supply and demand curves necessary for the analysis of the relation of supply and demand. If aggregate demand schedules are but sums of individual ones, let us first examine the latter. To illustrate his demand schedule Marshall starts with the amounts of a given commodity that an individual consumer would purchase at given prices, explicitly defining demand, not as quantities purchased but as willingness to purchase a certain quantity at a given price; he further adds that the individual’s ‘demand becomes efficient, only when the price he is willing to offer reaches that at which others are willing to sell’ (p. 95). As most commentators and critics have pointed out, demand so defined is a purely subjective phenomenon, allegedly objectified at equilibrium price where the exchange takes place and the schedules intersect. The methodological and theoretical critiques of demand curves, Marshallian or not, are so numerous that they have invaded articles, chapters, and even complete volumes (see in particular Fradin’s extremely sophisticated and formalized critique of all forms of demand or supply schedules in neoclassical economics, ancient and modern (Fradin 1976)). On Marshallian demand curves more specifically, Blaug summarizes most intelligently what there is to say (Blaug 1985:350–1)). From our much narrower point of view, what is striking is that these demand schedules have been variously described as hypothetical, imaginary, virtual 30

PROBING THE NEOCLASSICAL COSMOLOGY

or potential (on this topic see Attali and Guillaume 1990:126–9; Guitton 1979:83–5; Hollis and Nell 1975:227; Schumpeter 1954:1067, among others). From this we can either speculate (a) that as hypothetical or imaginary constructs they typify a normal experimental procedure or, (b) that as descriptions of virtual or potential consumption one can look upon them in terms of a process of actualizing a potential. According to the last interpretation, demand schedules would merely represent subjective, ex ante preferences objectified in ex post activities. As virtual, ex ante activities simply waiting for time to unfold to leap into the real world of ex post magnitudes, supply and demand schedules would intersect and this intersection would map the only point on the curves that corresponds to a real event. The intersection would represent the point where the virtual becomes actual (Guitton 1979:83). Let us first broach this second question and ask ourselves ‘Can we really move from ex ante considerations to ex post conclusions?’ To answer it, we must further scrutinize the unspoken message these schedules convey. According to Marshall, supply schedules are constructed like demand ones, and logically, we must further suppose that aggregate supply schedules should represent the sum of individual ones if we want the whole calculus to be possible. Throughout his text Marshall identifies supply and demand with production and consumption and does assume a symmetry between the two, with prices emerging at their point of intersection (production and consumption would be mediated by exchange). In fact, the very ‘lateral homogeneity’ we wrote about presupposes this symmetry in the intersection between supply and demand schedules, and in its most sophisticated versions, between consumption and production functions. According to Bharadwaj, Marshall would have grasped the full symmetry of supply and demand (1978:614), and this has survived as the cornerstone of neoclassical economics (Arndt 1984: Ch. 1; Mirowski 1991:310 ff.). Mirowski’s critique of this part of neoclassical economics stands as a model of theoretical demolition and I entreat the reader to consult the original. There is no point in repeating him, and I will here broach the question from a vantage point more akin to Arndt’s (1984). In fact, this supposed symmetry is predicated on the assumption that production= supply, and demand=consumption; these are the very assumptions about which Arndt harbours suspicions, and this analysis merely extends his findings one step further. To be more accurate, supply and demand to Marshall manifest the subjective, virtual dimension of those objective phenomena, namely production and consumption. But these terms call for extreme caution and a meticulous scrutiny of their possible connotations: production and consumption seem united by a process going from nature, passing through human beings and returning to nature, so to speak. In other words, whether production designates a simple ‘rearrangement of matter’ or the ‘creation of utilities’, it spontaneously 31

PROBING THE NEOCLASSICAL COSMOLOGY

conjures up the beginning of a process in which raw material is treated in order to be transformed into something else. At the other end of the same process, consumption intuitively evokes the fact that those utilities are then used up, or utilized, that matter’s arrangement, or utilities, are ‘undone’ so to speak (as ‘negative production’, Marshall wrote). Thus, unexpressed but nonetheless present in the ‘relationship of supply to demand’ lies an equivalent, symmetrical relationship between production and consumption. On this topic, there are two stances, and two stances only. Either (1) supply and demand stand to production and consumption as the subjective, virtual, ex ante to the objective, actualized, ex post dimensions of activities, or (2) they do not, and an intermediary step separates demand from consumption on the one hand, and supply from production on the other. From our point of view both views yield the same result in that both posit symmetry, whatever the number of intermediary steps, and for this reason, we shall confine ourselves to the first assumption. I shall then submit that ‘willingness to sell’ (supply; always assuming ‘given quantities at given prices’ but omitting it for the convenience of the exposition) and ‘willingness to buy’ (demand) cannot be read as intentions to supply and to consume (or ex ante production and consumption) because the two terms are asymmetrical. Indeed, the ‘willingness to sell or supply’ has habitually been preceded by actual production and no exchange can materialize without production having already been completed. This is not so with consumption, if by consumption we mean the utilization of resources. For the ‘willingness to purchase a given quantity at a given price’, once actuated, only settles an exchange and does not signify consumption.7 From the consumer’s point of view the exchange itself expresses only an intention to consume; from the supplier’s point of view, on the contrary, it manifests an actual, effective production. In short, ‘efficient’ demand (to use Marshall’s own language) is but intentional consumption whereas effective supply is necessarily preceded by actualized production; if efficient demand tells of potential consumption only, effective supply spells actualized production. It is thus most paradoxical to label the part of economics dealing with these matters ‘consumer theory’ since demand, as ‘the willingness to buy’, can only mean ‘willingness to trade’. Thus, if we take the neoclassical definitions at their face value, what do the ‘willingness to sell a given quantity at a given price’ and the ‘willingness to purchase a given quantity at a given price’ actually stand for? Very simply, for a ‘willingness to exchange’. Therefore, this part of economics should better be described as ‘trader theory’. The asymmetry between supply and demand can also be read in the reverse. In a monetary economy an intention to consume (given the ability to do so) automatically translates itself into a willingness to buy (demand), and ultimately, in an ‘efficient’ demand; in short, consumption may never be satisfied without a prior exchange. The economic agent must first buy (that 32

PROBING THE NEOCLASSICAL COSMOLOGY

is, exchange) before consuming. On the other hand, supposing on the part of the entrepreneur both the willingness and the ability to produce, his intention to produce can be completely actualized outside of any exchange (‘effective supply’ is actually a pre-exchange activity). Production must always come before exchange, and can be executed without any transaction. As activities, production and consumption thus remain irrevocably asymmetrical, and their schedules cannot intersect. If one argued from ex post observations to ex ante imputations the methodology would have to be quite different (this, if I understand it, would correspond to the assumptions of revealed preference theory. The criticisms of revealed preference theory are many and quite devastating; let us simply mention en passant those of Joan Robinson (1964:50) and of Hollis and Nell (1975:120, 126–7, 134)). If one believes in reading individual demand schedules from aggregate (market) data (or from realized demand), then consumer schedules can only be drawn from acts of exchange, or market transactions. But it is not so with suppliers; ex post, one could not plot their supply schedules from records of exchange transactions (from price statistics), but only from accounts of expenses of production. In brief, if market prices did reveal demand prices they could not disclose supply prices, and for a very simple reason; since selling prices are nothing else than market prices they are affected by the conjuncture (the general conditions of supply and demand) of the day and do not reflect supply prices; this is pivotal to Marshall’s economics. They are market prices, that is, a compound of supply prices and of the state of demand at the time. In brief, one could not build supply schedules ex post from market prices, but only from published data on production costs. Whichever way we look at it, this one obstinate fact stares us in the face: if supply can be connected to production or retail, demand must be coupled to exchange. In the study of the relationship of supply to demand we can neither argue from ex ante to ex post, nor in the opposite direction.

EQUILIBRIUM, EXCHANGE AND PERFECTION This representation of exchange, the kingpin of Marshall’s Principles, was not fortuitous. In fact, it is theoretically indispensable to derive equilibrium prices, and equilibrium prices, as a determinate solution to the question of maximization, are a necessary corollary of neoclassical economics’ vast and complex experimental scenario, the notorious perfect market defined by the perfect competition of its economic agents. Before delving directly in this world of perfection, let us briefly comment on the question of equilibrium. Here, admittedly, we go slightly beyond the Principles to the necessary presuppositions underpinning the concept of a perfect market, and of perfect 33

PROBING THE NEOCLASSICAL COSMOLOGY

competition. The following lines describe more the common denominator underneath neoclassical economics’ many variants than specifically Marshallian views. But, as repeated so often, the Marshall of Book V and the Marshall of the equations hidden in the Appendices had to share those assumptions, even if they could appear denied in the narrative: As was standard with Marshall, the narrative told one story, the mathematics another. The narrative claimed that the artifice of temporal frames would heal the rift between classical and neoclassical theories…. But the mathematics in the footnotes and appendixes said no such thing, given that equilibrium was expressed as a solution of simultaneous equations and that most feedback effects were frozen in the ceteris paribus conditions. With no mathematical contrivance for making temporal distinctions, production effectively remained instantaneous… (Mirowski 1991:299) As so many besides Mirowski have observed, simultaneous equations necessarily apply to the perfect market, with all the features we have alluded to (Chick 1983:85). Finally, when he deviates the most from his experimental construct (at the cost of inconsistency), it could easily be shown that Marshall normally seeks to rescue his Panglossian views about capitalism.

Equilibrium and equivalence The term of ‘equilibrium’ encompasses so many varied meanings that some preliminary remarks are called for (we will limit ourselves to the notion of equilibrium in neoclassical economics and leave aside Keynes’s idiosyncratic use, where ‘equilibrium’ denotes a situation where what is planned is also realized). Initially, we can discern two main ways in which it is used: (1) as the level at which prices settle at the outcome of an exchange (the point at which supply equals demand);8 in brief, as the necessary outcome of any exchange in neoclassical theory or, (2) as the various perspectives one can take on this exchange. To understand those perspectives, some basic features of a capitalist economy must be remembered. In capitalist economies some individuals, especially people who do not own much capital, sell their personal services to others who buy them, thereby delineating a fundamental cleavage between firms that employ salaried personnel and the salaried personnel that takes its income back home to satisfy its domestic consumption by purchasing commodities from these firms. As is well known in the Walrasian view of neoclassical macro-economic analysis, this exchange can be described as a flow of goods and services against income between firms and households. This inherent division of a capitalist 34

PROBING THE NEOCLASSICAL COSMOLOGY

economy (or of any economy where some individuals sell their personal services to others with enough wealth to afford the services of others) and the flows and counter-flows of commodities and money it stimulates, trace a vast macro-circular movement of exchange. At the level of the individual transaction exchange is bilateral, but at the national level it is macro-circular as well, although this macro-circularity is only discernible when individuals are differentiated according to wealth (or according to the ownership of the means of production, to use an old hackneyed formulation). If one experimentally sets aside the macro-circularity of exchange and focuses on the isolated exchange-event between two individuals (or between a supplier and his customer, and the sum of such events up to the level of the single industry), one then applies partial equilibrium analysis. If on the contrary one concentrates on the interconnected markets, one then studies the economy from the point of view of general equilibrium. Within neoclassical economics it is sometimes said that a general equilibrium is but the sum of partial equilibria (Machlup 1963:139; Guitton 1979:118–19); we will not broach this question. Suffice it to say that neoclassical economics always perceives markets in which ‘prices tend to settle at equilibrium’, whether one looks at them from the point of view of the isolated, bilateral exchange-event up to the industry level (partial equilibrium) or from that of macro-circular exchange (general equilibrium). But what does it mean for an exchange or a market to ‘settle at equilibrium? When economists struggled to topple mercantilist ideas in order to champion industrial capitalism they posited the source of all value to reside in the labour invested in commodities. If labour measured (and ultimately created) the value of goods, then only labour equivalents could be exchanged and no wealth could be got from trade; only production (the addition of labour units) could increase the value of commodities and beget wealth. This acutely stirred the question of profits: how could some individuals earn profits if strict equivalents of labour, or of embodied labour, circulate throughout the economy? The labour theorists circumvented the problem by subsuming profits under interests and assimilating the latter to the returns to physical capital. This might have resolved some difficulties but it left classical economics with a submerged problem of class antagonism; why, indeed, should only the owners of physical capital earn such interest-profits? If labour spawned value, added value should accrue to the labourer. With their marginalist representation of exchange, neoclassical economists solved the paradox in a most original way by reconciling the opposite ideas of equivalence and gains. In their mental computations prior to exchange, the partners-to-be calculate the marginal utility of additional increments of the commodities bartered, and will wish the process to continue until the marginal utilities of the commodities traded are inversely proportional to the ratio of their prices. At this point, and this point only, equivalent quanta of 35

PROBING THE NEOCLASSICAL COSMOLOGY

marginal utility change hands; and, by implication, individuals will only buy and sell when equivalent quanta of marginal utilities are transacted. From an objective point of view, no one gains and no one loses. From the subjective point of view, however, the transaction cannot take effect unless each exchange partner values more the additional unit of the good acquired than the last unit of the good sacrificed. Thus, from a subjective point of view, both benefit from the deal: there is a gain in subjective value (trade gains) despite the fact that, from an objective (i.e., external) point of view, strict equivalents were traded. Hence individuals would exchange as long as they saw a personal advantage in it, although this circulation does not add to the intrinsic value of the goods. Thus was the paradox of Ricardian economics solved without having to invoke class antagonisms, exploitation or surplus-value. But the equivalence is not confined to the quanta of marginal utility. In the set of deliberations preceding exchange the substitution between goods goes on in the economic agent’s mind until the marginal utility of the last increment acquired equals the marginal disutility (or loss of utility) of the last increment sacrificed. Since equivalent quanta of marginal utility are simultaneously given and taken (in that the marginal utilities of the goods, divided by their prices, must all be equal for the exchange to materialize) the two partners also profit in the same proportion; both benefit subjectively, and both gain in the same proportion. The equivalence thus extends both to the quanta exchanged and to the benefits accrued.

The experimental world of equilibrium: a world of perfection If equivalent quanta of marginal satisfaction circulate between trading partners, it is nonetheless in very specific circumstances only. In fact, it occurs exclusively in the experimental circumstances of the ‘perfect market’. What is this perfect market? It is one of neoclassical economics’ greatest achievements, that of imagining the thought-experimental space where economic agents and goods would move completely free of hindrances. The perfect market stands as the privileged arena in which to observe the movement of economic actors; in this respect, I believe the metaphor not to be the field (Mirowski’s thesis), but Galileo’s thought-experiment of the vacuum. In fact, Mirowski is mostly concerned with the theory of value, and with value’s various embodiments in economics, be it as substance (classical political economy) or as a field (neoclassical economics). As a result, the motion he singles out is that of value, through commodities. But, although motion in neoclassical economics ultimately boils down to that of commodities, economic agents also move and their movement is most conspicuous in that experimental construct, the perfect market, because a market achieves perfection only when both commodities and economic agents move with complete freedom. 36

PROBING THE NEOCLASSICAL COSMOLOGY

How, then, are we to characterize this perfect market? According to Cournot: Economists understand by the term Market, not any particular market place in which things are bought and sold, but the whole of any region in which buyers and sellers are in such free intercourse with one another that the prices of the same goods tend to equality easily and quickly. (Cournot, quoted in Marshall 1938:324, italics original) This is a view shared by Jevons (1931 [1871]:87) and thus summarized by Marshall: Thus the more nearly perfect a market is, the stronger is the tendency for the same price to be paid for the same things at the same time in all parts of the market…’ (p. 325). Markets are thus supra-local, to a certain extent, in that their spatial boundaries exceed those of the market place. In fact, the larger the market spatially, the more nearly perfect it is. The Galilean analogy is obvious. Without resistance—that is, with easy transportation, free and almost instantaneous communication—goods can circulate in some kind of physical vacuum and all move at the same speed. If prices measure velocity, a market is characterized first and above all by the velocity of its prices; the more nearly equal they are, the more perfect the market. Price differentials in a market would thus be accounted for by phenomenal (or physical) resistance to movement. Unlike Mirowski, therefore, who argues that neoclassical economics needed to invent the law of one price ‘to consolidate the various utility fields into a single metric of value’ (1991:238), I submit more prosaically that it was modelled on the Galilean idea of the vacuum, where differences in speed speak of phenomenal disturbances. Through this experimental creation Marshall (and neoclassical economics) fashioned an economic space which paralleled that of the New Science, and particularly Newton’s Euclidian space, an homogeneous and isotropic space, the abstract space of geometry. But it could only do so at the cost of further assumptions. Indeed, perfect competition demands a large number of free, perfectly homogeneous competing agents (socially undifferentiated), and of equally perfectly homogeneous but equally perfectly divisible products. Furthermore, these agents must not influence one another; consumers’ demand schedules have to be fully independent from producers’ supply schedules, and every consumer and producer must operate with full autonomy (Attali and Guillaume 1990:11, 33, 45; Guitton 1979:62–4, 115; Ménard 1978:130, 159–60, 301; Samuelson 1990:134–5, Shackle 1972:140, 260–1). Nonetheless, perfect independence, perfect homogeneity, perfectly frictionless (and in fact, instantaneous and costless) movement of goods do not yet ensure perfect competition, for some individuals might simply be more clever and better informed than others and therefore enjoy undue advantages which could stifle competition. So every agent has to be endowed with perfect rationality 37

PROBING THE NEOCLASSICAL COSMOLOGY

(perfect equality of perfect intellectual aptitudes). However, as many have commented, perfect rationality presupposes perfect information, or omniscience about every other agent’s intentions and about all the economic parameters of the world they live in (Hollis and Nell 1975:211; Hutchison 1953:322–3), and therefore pre-reconciled choices (Shackle 1972:54), or perfect expectation (Hutchison 1965:94). Furthermore, for no one to benefit from advantages over others and adulterate this perfect competition, information, like transportation, must be instantaneous and costless (Guitton 1979:67). Let us quickly take stock. In an experimental space devoid of all resistance, where transportation of goods is frictionless, that is, where it is costless and in fact instantaneous, where individual agents enjoy perfect homogeneity, perfect independence, perfect rationality, perfect information and perfect expectation, and where commodities themselves are perfectly homogeneous and perfectly divisible, one would then observe perfect competition, the condition that defines a perfect market, that is, a market where prices settle at equilibrium and are therefore perfectly uniform. And this, it should be stressed once again, necessarily undergirds any static equilibrium analysis (hence, Marshall’s own economics).

THE COSMOLOGICAL IMPLICATIONS OF PERFECTION In so far as it evolved this particular experimental scenario, I submit that neoclassical economics was striving to emulate Newtonian physics; this is clearly Ménard’s and Fisher’s thesis, among others (Fisher 1986; Ménard 1978), and there is enough evidence in Mirowski’s own book to substantiate the very same thesis in so far as Jevons, Marshall, Edgeworth and Walras are concerned. As an experimental science it should equally aspire to be empirical and therefore match its experimental constructs with something outside itself—namely the very object of study it pretends to describe and analyse. And it so happens that reality does prescribe upon empirical sciences some inescapable constraints. As we have seen, methodological individualism properly understood dictated some unavoidable desiderata; similarly, the very object to which economics is applied, namely monetary exchange in a capitalist economy, also brings the experimental works of pure economics face to face with some ineluctable facts. Perfection, time and money Of some inescapable constraints of economics’ object of study First of all, if economics purports to study observable phenomena it must of necessity include economic behaviour within its purview, and by extension, it must reckon with activities. Traditionally, the celebrated 38

PROBING THE NEOCLASSICAL COSMOLOGY

economic ‘functions’ of distribution, production, consumption and exchange have designated such activities. Let us temporarily leave aside all of them but exchange, which figures prominently in the very definition of economics’ object of study, namely ‘monetary exchange within a capitalist economy’. As an activity, what is exchange? It is a transaction whereby the holder of a given commodity obtains a commodity he does not have and wishes to acquire, by giving for it a commodity he possesses and which is desired by the holder of the commodity he himself covets. We have already found it to be a dyadic activity; of equal importance is the fact that it is, by definition, a bilateral activity, an instance of simultaneous reciprocal effective supply and demand. Exchange, moreover, is distinct from pricing. Let us temporarily accept the neoclassical definition of pricing as ‘establishing a ratio between commodities exchanged’. Of this activity, let us note the following attributes: first, unless made socially visible prior to the exchange, pricing is not an external activity falling within the purview of an economics of real magnitudes; second, even when socially visible, pricing is often an isolated activity; third, in and of itself, without its necessary complement of exchange, pricing loses any raison d’être. If the supplier does not simultaneously plan to sell his or her commodity and buy that of his or her exchange partner, what would be the point of pricing it? Overall, exchange can take place with but ad hoc pricing, whereas pricing is meaningless without the expectation of exchange. It is not only a derivative activity but, if considered in itself, merely a virtual one. No one would price for the intrinsic pleasure of pricing; pricing is only actualized with the prospect of exchanging. If the activity of exchange is inexorably bilateral, monetary exchange can therefore mean only one thing, namely the simultaneous sale and purchase of both a commodity and money.9 When a car-dealer sells a car he purchases money, and when a customer buys it, he actually sells the dealer his money. But what happens to money in the Principles? We have previously suggested reasons why money could not really be a commodity with a utility comparable to that of other commodities within a Marshallian economics of real costs (in the long term). Yet the Principles, and especially the glosses that have surrounded it, teem with references to money’s marginal utility, and especially to Marshall’s postulate of its constant marginal utility. Does this mean that Marshall holds two different views, asserting money to be a commodity with a marginal utility on the one hand, and denying it at the same time in other contexts? To elucidate this point, we will have to ponder more thoroughly Marshall’s notion of money’s marginal utility.

39

PROBING THE NEOCLASSICAL COSMOLOGY

Marshall and the constant marginal utility of money If Marshall really incorporated money in his analysis he ought to have described and analysed monetary exchange and predicated his analyses on the fact that money is exchanged. To assess whether this is the case, let us start with Jevons’s equation of the bilateral exchange of non-monetary commodities, that is, of barter. His equation, it will be recalled, still stands as the basis of contemporary consumer theory (Blaug 1985:310) and surreptitiously wriggled their way into Marshall’s economics. On this topic, let us quote Blaug himself: Let a and b represent the quantities of two goods held initially by two individuals; let x and y be the actual quantities exchanged, and the final degrees of utility of the respective parties. Then:

For the first individual, for example, the marginal utility of (a—x) goods left over after exchange—or the marginal utility of x goods given up— to the marginal utility of y goods acquired in exchange is inversely proportional to the ratios at which the goods have been exchanged…. Marginal utility is inversely related to the quantity of goods possessed and therefore to the goods given up in exchange. To convert Jevons’ expression to the modern consumer’s allocation formula, we look at either individual and observe that in equilibrium allocation of expenditures implies that:

or

(Blaug 1985:310) In a case of true (bilateral) monetary exchange, money would be one of those commodities; in the initial equation, we could thus replace the quantity x by money, or m. As a result, we should find:

or, in contemporary terms, according to Blaug’s transformation:

40

PROBING THE NEOCLASSICAL COSMOLOGY

or

Both equations intimate that money exchanged should be priced. From Jevons, let us move on directly to Marshall, who unequivocally introduced money and its marginal utility in his representation of exchange, and thereby provides the following equation (according to Blaug 1985:338): ‘…Marshall gives the equilibrium conditions for the consumption of commodity x as MUx=pxMUn. Taken across all goods, this gives the familiar equimarginal rule:

MUn being what Marshall calls ‘the marginal utility of money’ (p. 338) (where Marshall’s MUn is nothing but my MUm). From Marshall’s equation it would appear that Pn has vanished and that money is not priced; or, more accurately, Pn seems to have been made equal to 1. If money had either been exchanged or supplied, it would have had to be priced; can a commodity neither exchanged nor supplied be priced? Yes, in the framework of opportunity costs. And this was implicitly the manner in which commodities were valued in Jevons’ equation.10 Jevons’ exchange partners start the exchange with a stock of goods already in hand (an endowment), and even before the exchange, the partners-to-be assess the value of their goods by comparing the marginal utility of the goods to be obtained against the loss of utility of those given away. In Jevons’ experimental barter conditions, pricing can occur without goods being either exchanged or supplied. Here, admittedly, pricing is neither an objective nor an externally visible activity, but a completely internal one. Can we extend this reasoning to money? In Jevons’s barter model an individual can evaluate the marginal utility of the fifth loaf of bread to be sacrificed by comparing it to the anticipated pleasure of the four apples he could obtain in exchange, and so on and so forth. By introducing money, however, one does not simply substitute one commodity for another, leaving barter conditions unchanged; money does in fact make a difference. Let us assume that I have £100.00 in hand and that someone else has a commodity I wish to acquire, such as shoes. Let us say that I am asked £40.00 for a pair of shoes and that I could get two pairs for £65.00. Within the barter model was concealed an assumption which no longer holds in monetary exchange. The barterers could compare the marginal utilities of more apples and less loaves of bread to themselves because these commodities could be directly consumed and afford expected satisfactions that could be computed ordinally, if not cardinally. But how will I measure 41

PROBING THE NEOCLASSICAL COSMOLOGY

the loss of utility of giving away £25.00 more pounds for a second pair of shoes? How will I evaluate the marginal utility of the pounds I part with? In neoclassical economics money can only satisfy a need or a desire through the fact of being exchanged, and the neoclassical consumer can appreciate the loss of utility of spending more pounds only by imagining the other commodities he could have purchased with it and that he had to renounce in order to procure the second pair of shoes. In other words, money’s utility can only be assessed once exchanged into other commodities, once spent. In the final analysis, through money the neoclassical consumer still appraises the relative marginal utilities of nonmonetary commodities. We are back to Jevons’ equation of barter exchange. As a result, since the marginal utility of money can only be valued once money has been exchanged, and since the equations reveal that money could not have been either exchanged or supplied, it cannot therefore be priced. And even if traded, it is not money itself that would be priced, but the commodities it stands for. Something which is neither exchanged nor supplied nor priced cannot be a commodity, and by definition, cannot be possessed of any marginal utility. Furthermore, Marshall’s equations on the marginal utility of money depart from Jevons’s equation of barter exchange in a second, important, way. In barter the two exchanging partners possess stocks of commodities, only a fraction of which they seek to trade. One barterer does not intend to give away all his loaves of bread in order to procure all of his partner’s apples. With money, the situation is transformed. Indeed, Blaug makes it clear that Marshall writes as if the exchange partner beginning the transaction with money in hand (in other words, the customer out to purchase a non-monetary commodity) has actually set this money apart for consumption, and that Marshall calculates MUn on the basis of this money to be spent, and thus to be exchanged. In presenting Marshall’s economics, Blaug thus replaces MUn by MUe, or ‘the marginal utility of money expenditures in general’ (Blaug 1985:339). As a result, the consumer does not evaluate the anticipated satisfaction of keeping money in his possession against the expected discommodity of giving it away, but estimates the anticipated satisfaction of spending it on this commodity rather than that. According to Blaug, Marshall does not write about the marginal utility of money, but about that of money spent, or more precisely, that of expenditures. But expenditures are nothing else than purchases, and expected expenditures are planned exchanges. Therefore, ‘the marginal utility of money spent’ is but a euphemism denoting the more prosaic ‘marginal utility of purchases’, or the ‘marginal utility of exchanges’; since exchanges aim at satisfying consumption, it amounts to saying that money boils down to being a ‘substitution operator’.11 Money in Marshall’s equations thus stands modestly as the convenient expression of something it does not embody itself. The consumer does not contemplate the marginal utility of the pounds that he or she has given up in 42

PROBING THE NEOCLASSICAL COSMOLOGY

order to purchase a pair of shoes because neoclassical money exists in order to be spent. Money is not desired in itself—it has no intrinsic utility—but only as a means of procuring other things. The neoclassical customer does not evaluate money’s marginal utility with respect to itself but with respect to the marginal utilities of the commodities it enables him or her to purchase. In reality the marginal utility of money does not empower neoclassical exchanging partners to assess the marginal utilities of other commodities; on the contrary, it is the marginal utilities of commodities purchased that enables them to derive the marginal utility of money. One would actually define the uniform utility of a dollar by equalizing the marginal utilities of one’s expenditures, that is, of the commodities purchased. Behind all this, what are we really talking about? If money is no commodity but only a convenient substitution operator, and if the so-called constant marginal utility of money amounts to no more than postulating that Pm=1, this substitution operator oddly calls to mind Walras’ notorious numéraire, or an abstract unit of account, as A.Samuelson chooses to qualify it (Samuelson 1990:249).12 This raises two questions: (1) why introduce such an entity, and (2) is it adequate to call this entity ‘abstract? Why Marshall had to import the constant marginal utility of money in his equations is well known. Hicks dealt at length with it when studying the question of the determinateness of wages (Hicks 1930) and Blaug summarized it admirably in the following terms: Marshall’s appendix on barter trade shows that equilibrium is indeterminate unless the marginal utility of one of the goods exchanged is constant. If this is not the case, the final rates of exchange will depend on the terms on which the earlier exchanges were made: in the process of trial and error, the respective offer curves will shift about with every act of exchange and a final equilibrium may never emerge. In the case of market exchange, this problem disappears in partial equilibrium analysis because the marginal utility of money for ‘insignificant’ goods may be considered as approximately constant and hence unaffected by initial purchases at disequilibrium prices. This assumption is inadequate for general equilibrium analysis. (Blaug 1985:578) In brief, Pm=1, or the constant marginal utility of money, or even the numéraire, are all necessary constructs to find a determinate solution to the problem of maximization, that is, to define an equilibrium price. What shall we call such a construct? Their critics have labelled them ‘fictions’ (see Crosser 1969, or Ménard 1978 for instance) and are unanimous in pointing out how divorced they are from reality. I believe such a terminology dangerously misleading. On the one hand, mathematics (or even mathematical physics) teem with fictions; they are conveniently thrown in the equations because they later 43

PROBING THE NEOCLASSICAL COSMOLOGY

cancel out and permit a solution otherwise impossible. But it is not so with the numéraire; it stubbornly squats in those equations. On the other hand, against the accusation of irrealism mathematical economists evoke the simplifications, the abstractions or the idealizations commonly used in the sciences as necessary constructs for model-building before injecting the ‘disturbing factors’ that complexify the models. Indicting neoclassical economics of lack of realism can intimate that it can be improved with a greater dose of realism, and this is precisely what the numéraire is supposed to stand for: it was introduced in order to move from barter to monetary exchange. In reality, by claiming to substitute money for one of the commodities traded in a barter model by resorting to the numéraire, economists incorporate an entity which is neither exchanged, nor supplied nor priced. It is therefore impossible either to move from the numéraire back to reality or to assume that the numéraire injects more realism. To that extent it is neither a simplification nor an abstraction, an idealization or even a fiction. It is bluntly and squarely an illusion of money.

Time and money In fact, most historians of economics recognize that neoclassical economics denies money any role (Chick 1983; Fisher 1986:180; Guitton 1979:79; Hutchison 1953:339–40; Hutchison 1965:107; Mirowski 1991; Samuelson 1990:99, 249; Schumpeter 1954:589, 1088), a conclusion that can be reached from considerations about time, as Shackle so beautifully showed. Indeed, one of the most momentous features of neoclassical economics’ experimental world is the manner in which it precludes time. This may sound a rather extraordinary indictment of Marshall, whose economics has often been characterized by its concern with time, and may seem to apply particularly to the economics issued from the Austrian and the Walrasian traditions. It is more purely so in those non-Marshallian creeds, it is true. Nonetheless, most of the elements that make up those two brands of neoclassical economics also weave the main canvas of the eighth edition of the Principles. Marshall did struggle with time, as Shackle remarked: ‘[t]he real character of Marshall’s Principles seems to me to go almost unnoticed by his commentators. Marshall sought to accommodate the intractable implications of time in an analysis appealing essentially to logic’ (Shackle 1972: Preface, pages unnumbered, italics original; see also pp. 287– 306, as well as Deane 1978:112–13, 118). And, as Shackle equally explained, an ‘analysis appealing essentially to logic’ can unfold only within the experimental framework of equilibrium, perfect competition and perfect rationality, and necessarily rules out time (see also Shackle 1972:90–91, 125, 137, 156, 229–31, 254, 265; Guitton 1979:60, 62–4). Marshall’s time has been aptly called ‘operational’; it is not the real time of economic processes, but a time one could also dub ‘classificatory’ because 44

PROBING THE NEOCLASSICAL COSMOLOGY

it barely serves to demarcate periods endowed with different attributes rather than picture the economic process as evolving through time, an experimental time which should enable the economist to observe unhindered the movement of prices and witness where it tends to settle in the long run. It is the time necessary to apprehend the laws that govern economic phenomena if one includes real costs in the determination of prices. But even in his endeavour to accommodate the ‘intractable implications of time’ Marshall argued within a timeless system, as his equations of exchange necessarily presuppose. To that extent, although the attempt to incorporate time in economic analysis differentiates Marshall from the two other main inspirations of neoclassical economics (except for the study of capital in Jevons and the Austrians) it is, like money, an illusion of time grafted onto a timeless system. Perfect competition thus unfolds in a timeless cosmos. Therefore, if money is time, as some Keynesian economists hold, its very existence contradicts all the experimental premises of neoclassical economics. The timeless world of equilibrium theory shuts out a commodity typified by its very liquidity, a commodity which serves to defer commitment, to bide time; in a word, it proscribes money. If equilibrium and its experimental preconditions exclude both time and money from the purview of economic analysis, they also bar strategy (Schumpeter 1954:972–3) and eject all considerations about speculation, whether or not some economists may have erroneously believed that Walras’ economics best applied to the stock market.13 As Shackle expounded, the prices reached at the stock market are by definition the very opposite of neoclassical equilibrium prices because the essence of speculation is precisely to gamble on time (Shackle 1972:266). It is a corollary, both of the equilibrium of the isolated exchange-event and of that of macro-circular exchange (sometimes described as general equilibrium) that, if their experimental conditions of the perfect market are strictly observed, they also leave no room for profit (Blaug 1985:461–2). This is the famous zero-profit entrepreneur of Walras’s general equilibrium which Schumpeter views as being necessarily present in Marshall’s pure theoretical statements (Schumpeter 1954:1050; Pribram 1986:358). Indeed, if objectively nothing is gained from trading because strict equivalent quanta are exchanged at equilibrium, there are no profits to be made (Boland 1982:55, Hollis and Nell 1975:216; Pribram 1986:334) and no room left for entrepreneurial functions (Arndt 1984:94, 181). Even trade is unnecessary (Arndt 1984:42–3, 60). Altogether, neoclassical economists removed more than money from exchange. In the real world, exchange rarely brings together socially undifferentiated partners. But, in addition to complete independence and homogeneity, perfect competition dictated that economic agents be socially undifferentiated. In the process, neoclassical economists levelled all social and cultural differences and methodically cast aside all references to social 45

PROBING THE NEOCLASSICAL COSMOLOGY

classes or to any other element of social identity (Dobb 1973:179; Hollis and Nell 1975:16; Ménard 1978; Samuelson 1990:133, 135). In a word, the thorough homogeneity of social agents eroded any social relief, and actually removed ‘social space’ from Marshall’s Euclidian view of the economic cosmos. This social levelling annihilates the very possibility of bargaining. Marshall’s exchange partners do not bargain, because they cannot bargain, for bargaining normally presupposes differential economic rapports de force giving one of the agents an advantage over the other and ruling out the idea of equilibrium price (or of a determinate solution to a problem of maximization).14 Finally, by eradicating social classes, as well as bargaining power, equilibrium theory also liquidates exploitation (Hollis and Nell 1975:14, 215). Before exploring other aspects of this economic cosmos, let us quickly take stock of some of the dimensions we have hitherto uncovered. Because of the social levelling implicit in perfect competition we have seen bargaining and exploitation expelled from the compass of neoclassical economics, and the absence of money, itself a necessary corollary of the timelessness of this experimental construct, also spelled the impossibility of profits and of any quest for profit-making, ridding economics of the entrepreneur and even of the capitalist, merging profits and interests and deflating them both to the status of returns to physical capital. It remains a world of barter—a ‘real-exchange’ model as some have tagged it. Like classical political economy, it leaves no room for money, and when trying to introduce it, creates its illusion only.

The peculiarities of partial equilibrium exchange There is a further twist in that tale of a money-less market. As long as economists discussed within a barter model, their equations did respect the bilaterality of exchange. And yet, it is generally acknowledged that by adding money to complexify the barter model neoclassical economists treated it as a simple veil and left unaltered the underlying barter analogy. Money would have acted as an unobtrusive unit of account allowing economists to go on debating as if monetary exchange was but a special case of barter, money being some kind of transparent medium which would have modestly served as a useful construct to disjoint barter and dissociate the two separate ‘moments’ that compose it (Guitton 1979:67; Samuelson 1990:99, 249, 272; Schumpeter 1954:589, 1088). This thesis, however, is not borne out by the facts, and it can be hazarded that by conjuring up an illusion of money within a barter model, especially in their partial equilibrium analysis, neoclassical economists have ipso facto imported an illusion of barter or, more specifically, an illusion of reciprocal exchange. This is nowhere more manifest than in Marshall’s Principles. 46

PROBING THE NEOCLASSICAL COSMOLOGY

In Jevons’s equation of barter exchange the two barterers are already in possession of a stock and stand vis-à-vis one another as two consumers reciprocally demanding one another’s commodity and pricing their goods in terms resembling opportunity costs. When we get to Marshall’s equations of exchange (after money and its constant marginal utility have been summoned back for greater complexification and realism) we witness a significant innovation. The two exchanging partners no longer stand as reciprocal consumers, but as a consumer facing a supplier, and considerations of disutility, which to Jevons were restricted to the short-term supply of labour, now form part and parcel of the equations. The symmetry of Jevons’s barter gives way to asymmetry, and all because of the presence of illusory money. Marshall’s consumer owns money—the cost of acquiring itis relegated to irrelevant considerations—and he prices the marginal utility, not of money, but of commodities, according to a calculus of substitution; no real costs are involved. The supplier, on the contrary, computes according to a calculus of real costs. It has cost him something (the exertions and the waiting) to produce what he is about to trade, so that the utility of the commodity sold is gauged in terms of the disutility of labour. In the name of realism we are suddenly served an essentially dichotomic picture of exchange: on one side stands a supplierproducer who reckons everything in terms of efforts and sacrifices (or the real costs of production), and on the other a consumer who calculates everything in terms of the anticipated satisfaction (or utility) of the commodity to be consumed. This yields a tilted view of exchange as a unilateral flow of commodities, in which money plays no part whatsoever. The fundamental event of this economics is not even a true exchange, but a unilateral representation of a bilateral economic transaction. The consequences are worth mentioning. In Marshall’s economics suppliers price their commodities but the consumers do not price any commodity, not even their money; they evaluate the anticipated satisfaction that the commodity will provide them. Consumers reckon in terms of quasi-alternative costs and producers in terms of real costs, in an economics allegedly rooted in the latter. Hence the bias towards production; between buyer and seller only one commodity is truly priced, namely the supplier’s (since neither consumer nor producer can price money). There is no exchange, but a unilateral flow of commodities from producers to consumers in which money functions as an insubstantial medium of exchange which, on the part of the consumer, flatly measures the commodities’ ‘desiredness’. ‘Market exchanges’ are thus misnamed; one should frankly write of ‘unilateral commodity flows’. It is exchange robbed of one of its intrinsic dimensions, tilted towards production, with money playing an illusory part. Why this asymmetry? First, because if money was truly bought and sold, and if this transaction was duly inscribed in the equations, it would make it impossible to draw neatly intersecting supply and demand curves; both 47

PROBING THE NEOCLASSICAL COSMOLOGY

partners would concurrently be suppliers and consumers, simultaneously assessing the selling and buying prices of both a commodity and money. Second, the symmetry would stir up the difficulties mentioned above: if the consumer also acted as a supplier of money, then the cost of obtaining it would have to be taken into consideration, and in an economics of real costs, the disutility of labour would in reality measure the utility of commodities. Finally, there would be no ground to hold constant the marginal utility of money and no determinate solution to the problem of maximization. The whole neoclassical research programme would collapse. An alternative might be to repudiate all disutility understood in terms of real costs and to treat both the supplier and his customer as consumers, pricing everything in terms of opportunity costs. This is the Austrian (psychological) formulation, and it will be examined in Chapter 3. This new asymmetry thus evades the barter model, and, it must be stressed, does not flow from the constraints of partial equilibrium analysis. But, in the last analysis, is this the only indictment? Is it simply that we have been presented with a lopsided version of exchaSnge, instead of barter or true monetary exchange? Could we rectify things by bringing bilaterality back into exchange? No, for the same cosmos denies the very reality of exchange. To prove this, let us once again call to the stand Jevons’ equation of barter exchange. The exchange partners in a barter model do not wish to trade the totality of the goods in their possession and every agent assesses the proportional advantage of adding a unit of the other’s good against the disadvantage of losing one unit of his own commodity, before exchanging. In brief, each trader would compare his goods to those belonging to someone else prior to the transaction, and in this representation, Jevons implicitly focuses upon the relation of individuals to commodities held by themselves and by others. Yet, in his presentation of demand Marshall slightly displaces the focal point. By defining demand as the willingness (and ability) to purchase given quantities of a commodity at a given price, he already played down the fact that these commodities must be owned by others for an exchange (or purchase) to be possible. Admittedly, the term ‘purchase’ still hints at a differential relationship of individuals to commodities but it has been shrunk to the shadow of a relationship. The ‘other’ and his ownership of commodities that one does not possess have been flattened to a mere suggestion; and they entirely evaporate when Marshall points out that the individual’s overwhelming economic desire is to maximize his satisfaction through the equimarginal distribution of his income. In this final formulation exchange has been narrowly restricted to being a relationship between individuals and commodities. By then, the very notion of exchange has been dissolved; commodities do not even flow unilaterally from suppliers to consumers since the individual is the smallest market, that is, the minimal space where supply 48

PROBING THE NEOCLASSICAL COSMOLOGY

and demand relate (‘[t]he simplest case of balance or equilibrium between desire and effort is found when a person satisfied one of his wants by his own direct effort’ (Marshall 1938:331)). Thus, what ought to be minimally a relation between two individuals (a market exchange ought at least to involve two individuals) reemerges as something internal to the individual. If this remains slightly subdued in Marshall, it bursts out in the open and dominates the neoclassical developments to follow. Already in Marshall’s economics, but more so afterwards, supply and demand do not bring a supplier and a consumer face to face but shrivel to dimensions internal to the consumer himself. In the process exchange has been emptied of any substance and collapsed to being the individual’s equimarginal distribution of his income, the rational allocation of his scarce resources to alternative uses. From this new vantage point demand no longer intimates on the part of an individual the desire to acquire what someone else possesses, it designates a relationship between individuals and objects, exclusive of all other individuals. This downgrading of exchange to something internal to the individual is neither peculiar nor restricted to Marshall since it may even be said to be the hallmark of later developments in neoclassical economics, especially of the Austrian brand, which typically built up its experimental scenario about barter and eventually monetary exchange from considerations about Robinson Crusoe. To Marshall, in a timid fashion, but unabashedly with the Austrians (including non-Austrians such as Wicksteed and Robbins, for instance) and later the Walrasians, exchange boils down to choice—the choice of scarce resources in the face of alternative uses in order to maximize gains or satisfaction. This explains why the necessarily dyadic activity of exchange (always necessarily ‘realized’ as the French say, or ex post by definition) is demoted to the isolated, imaginary, ex ante process of making up one’s mind or, more specifically, of ordering one’s preferences in order to allocate resources optimally. But allocating resources optimally will never amount to exchanging; no exchange breathes in the Principles or in later neoclassical economics, but only an illusion of exchange. At this point, in my opinion, Mirowski’s theses apply with their full force, although by playing down the experimental construct of the perfect market he also minimizes the importance of the multiplicity of analogies within neoclassical economics, and the fact that it blithely and often unconsciously oscillates between various visions of utility, and of exchange. Indeed, I would hold that the field analogy which Mirowski sees in all neoclassical economics was actually imported to purge economics of its utilitarian roots; it could be observed in a mutation of analogies, from conceiving of utility as a Newtonian force overcoming a resistance (the conservation of inertial motion), to regarding it as potential energy, although the field analogy never supplanted the earlier ones. Mirowski writes that in neoclassical economics utility is a field of possibilities that can characterize an empty commodity space and 49

PROBING THE NEOCLASSICAL COSMOLOGY

that ‘[i]f utility looks like potential energy, then prices are determined by the introduction of a given set of commodities into the potential field’ (1991:282). If so, the potential field cannot be anything else than the mind, and no exchange is necessary to generate prices in such a potential field. This, in my opinion, did not typify the original neoclassical analogy where exchange still presupposed, even if in a muted fashion, the presence of two individuals; when exchange withered to choice and to preference-ordering, the analogy might then have evolved from the (actualized) force of gravitation to that of potential energy. If exchange has been so distorted, what of the other economic activities, those of production, of consumption, of distribution, consumption and the like?

The peculiarities of neoclassical production What is production, in all this? Let us tease out an answer from Marshall’s own definitions. In Book II, on ‘Some fundamental notions’, Marshall elucidates much of his terminology, and in Chapter III of the same Book, dedicated to definitions of production, consumption, and labour, he writes that ‘man cannot create material things [so that] when he is said to produce material things, he really only produces utilities; or in other words, his efforts and sacrifices result in changing the form or arrangement of matter to adapt it better for the satisfaction of wants’ (p. 63). If production is nothing else than a change ‘in the form or arrangement of matter’, a mere ‘rearrangement’ of matter, Marshall can assimilate the circulation of goods (trading and retailing) to a special case of production (pp. 63, 340 footnote 1), and further flatten consumption into a case of negative production: Consumption may be regarded as negative production. Just as a man can produce only utilities, so he can consume nothing more…but as his production of material products is really nothing more than a rearrangement of matter which gives it new utilities; so his consumption of them is nothing more than a disarrangement of matter, which diminishes or destroys its utilities. (Marshall 1938:64) After deflating both consumption and circulation to production, after proclaiming the predominance of production over consumption and retrieving a cost of production variant of Ricardo’s theory of value into his economics, it might seem that Marshall devised not so much an economics of market exchange as an economics of production. Indeed, as he proceeds to Book III and to his study of consumption he betrays the same partiality to production. After general considerations about ‘wants in relation to activities’, about ‘gradations of consumer’s demand’ 50

PROBING THE NEOCLASSICAL COSMOLOGY

and ‘the elasticity of wants’ from Chapters I to IV of this Book III on consumption, he elaborates in Chapter V his crucial marginalist ideas on the ‘choice between different uses of the same thing’, in which he adduces the example of domestic consumption to make a general point about demand. Invoking a hypothetical primitive housewife having to decide how best to employ the limited amount of yarn in her possession, knowing the array of domestic wants to satisfy in order to maximize family well-being, he concludes to the fundamental thesis of equimarginal distribution: ‘If a person has a thing which he can put to several uses, he will distribute it among these uses in such a way that it has the same marginal utility in all’ (p. 117). In a footnote, however, he owns up to the fact that his ‘illustration belongs indeed properly to domestic production rather than to domestic consumption’ (p. 118 footnote 1, italics added). When we read on in the same footnote, however, we notice that production acquires a more specialized meaning; indeed Marshall adds that ‘in a moneyeconomy good management is shown by adjusting the margins of suspense on each line of expenditure that the marginal utility of a shilling’s worth of goods on each line shall be the same’ (p. 118, italics added); in brief, production would consist in seeking equimarginal distribution in order to maximize profits, and this equimarginal distribution would characterize good management. What does this all add up to? First, in his key chapter on consumption Marshall can do no better than instance an example from production to bolster up his central intuition of equimarginal distribution. On the very same page he further identifies equimarginality with management. Throughout Book IV, when not referring to land, production denotes business, and business is assimilated to management and organization. Since organization is but a euphemism for the bringing of capital and labour together, that is, the allocation and reallocation of resources, natural and human, it follows that the firm is all about management, and management, all about equimarginality, which Marshall presents as the ‘principle of substitution’ (p. 355). When combined, his various definitions lead us to understand that production is nothing else than the rational allocation and reallocation of resources (the ‘rearrangement of matter’) so as to equalize their marginal utility in order to maximize profits; and this, in turn, is assimilated to management. Rather than an economics of production, Marshall has in fact concocted an economics of management. If Marshall’s entrepreneur is but a manager, the firm is but a management unit. But is management restricted to the firm? To our great astonishment, in the eighth edition of the Principles, we find Marshall utilizing the firm as a paradigm to describe and analyse the various organizational levels of the economy. This is what one could call a ‘vertical analogy’, and it pervades the Principles; in plainer language, it means that Marshall perceives the household (domestic group of production) as a mini-firm and the individual as a microfirm. Above the firm he understands the national economy as a larger firm (a 51

PROBING THE NEOCLASSICAL COSMOLOGY

maxi-firm, so to speak) and the international economy as a mega-firm. From the individual to the world at large he reads and interprets every economic unit (we can call ‘economic unit’ every organizational level) on the model of the firm. From the individual through the household and the firm right up to the national economy, everything is to be analysed in terms of good management since the market, or the national economy, is but an extension of the individual consumer’s equimarginal distribution, or good management of his own individual resources. By the same token, this very analogical extension discloses a most baffling amalgamation. As we have already seen, the individual, minimal firm or unit of management, is also the smallest market, that is, the minimal space where supply and demand relate, and this extraordinary conceptual assimilation between firm and market, as the economic space within which supply is adjusted to demand, extends from the individual right up to the national economy. The household, economic unit where the principle of substitution operates, acts both as a mini-firm and as a mini-market: it also delineates an economic space within which supply and demand must be articulated. Above the firm, the national economy (the market properly speaking) is but an extension of the individual consumer-manager, and thus a maxi-firm. The international economy, quite understandably a multinational market, stands out as a mega-firm. A long string of unspoken, but nonetheless visible, equations suffuse the Principles: the ‘relation of supply and demand’—what the uninitiated reader would have spontaneously understood to mean a ‘market exchange’—is equated with the rational allocation and reallocation of resources through the operation of the principle of substitution; as it is, the very principle of substitution designates both the extra-firm market competition and the intrafirm allocation of scarce resources, as it does encompass the optimal disposal of the consumer’s income. Furthermore, the ‘allocation and reallocation of scarce resources’—in reality a straightforward case of management—actually encompasses production. When the various pieces are collated, they lay open a most extraordinary vision of the economy. An economist truly committed to methodological individualism would have at least discriminated between the various economic activities (i.e., functions) and the reader would expect individualist economists to discuss separately the so-called classical activities of economics, such as exchanging, pricing, producing and redistributing income, among others. And yet, when we carefully follow Marshall’s definitions throughout his treatise, it stands out that exchange, as a relation of supply and demand, is subsumed under the optimal allocation of scarce resources—as are equally distribution, competition and production, that all are conceived as the internal dimension of the firm, and that both individuals and markets are further perceived on the analogy with the firm. And so, all economic functions (or activities) are collapsed to a single one, namely management. 52

PROBING THE NEOCLASSICAL COSMOLOGY

In other words, all economic activities would be compressed into one, namely that which echoes Lionel Robbins’s celebrated definition of economics as that ‘science which studies human behaviour as a relationship between ends and scarce means which have alternative uses’ (Robbins 1935:16–17). Economics would be the science of that one activity, the allocation of scarce resources capable of alternative uses, to maximize given ends. Fraser has already observed that such a definition does not single out an activity, but an aspect of all activities. Such definitions—such as ‘economics is about choice’ or ‘politics is about power’—thus rule out the very possibility of defining any social organization since groups cannot exist in the absence of activities. And, without social organization, economic rationality is but a vacuous incantation. This, however, is only part of the problem. The fervent champions of neoclassical economics might retort that ‘deciding to allocate scarce resources optimally’ in itself constitutes an activity. They would be sadly mistaken, however, because neoclassical economics flatly obliterates the very possibility of activities, and even of behaviour, and this for different sets of reasons. First, because of the incompatibility between perfect competition and perfect expectation: when combined they simply freeze all action.15 Second, and most importantly, activities and behaviour can only unfold within time and space; yet, the perfect (or static equilibrium) market excludes time and internalizes space.16 There would remain only one apparent activity, without any concrete result in and of itself—that of studying all the alternatives in order to arrive at the optimal combination of resources (Hollis and Nell 1975:114; Hutchison 1965:104; Shackle 1972:264). Then a choice would be necessary, but that choice is never made because it would actually be an activity with a result. Therefore, those economists who speak of neoclassical economics as an economics of exchange, of behaviour, of action-variables, of decisions and choices, candidly perpetuate a myth. In this economics people do not even properly allocate resources, since allocation is an action; in this economics individuals never act, and only conditional actions are discussed: how the individual would optimally allocate resources if…(cf. Hollis and Nell 1975 on the conditional—and neither testable nor refutable—aspect of this economics). Let us therefore be more precise; if, following Marshall’s usage, we call this economizing management, this is then an economics of conditional management. Therefore, even the concept of ‘choice’ carries too strong a connotation to describe this economic cosmos. Separated from the decisions and activities which should actualize them, choices have no existence. Choosing materializes into action when it is followed by action; in a timeless world preventing the very possibility of action we are not dealing with choices but, at best, with intentions, or preference-ranking. The individuals of neoclassical economics rank their preferences but never choose because choosing should lead to 53

PROBING THE NEOCLASSICAL COSMOLOGY

exchanging, and therefore to a given result; in fact, they rank hypothetical relations between emotional intensities, which are then dubbed preferences. Choice is no virtual activity, it does not live in an ex ante world separated from the real world only by the span of an instant. Even if it was, that instant never comes to pass in neoclassical economics. The ex ante dimension is not populated with choices and virtual activities; it describes a ‘timeless process’ (a contradiction in terms), not of choosing since choosing is actually doing something, but of instantaneously studying alternatives in order to make up one’s mind—or to establish one’s preferences—in case one was faced with the necessity of choosing. It is an economics of intentions never realized, of intentions which have to remain intentions for, otherwise, they would be actions, activities, and because activities inexorably hark back to that dimension so skilfully removed, namely time. And the time of social action is no simple unfolding, paradoxically permitting us to do away with it; it is a creative time which relegates choices to yet another illusory dimension, that of a so-called ‘action ex ante’. However, neoclassical economics does not even leave space for such diluted version of ‘choice twice removed’ and for different, although related, reasons. In his profound and brilliant enquiry into the implications of time, Shackle notes that neoclassical economics’ timelessness also rules out choice (Shackle 1972:364–5). Besides, the very perfection of the market precludes choice. Under conditions of perfect competition producers are price-takers, prices are given (Samuelson 1990:206); under conditions of equilibrium, there is only one possible price, the equilibrium price, predetermined by the economic agents’ perfect rationality, perfect information and perfect expectation (see Arndt 1984; Guitton 1979; Ménard 1978). This is aptly expressed by Blaug: Once an independent decision maker with a well behaved profit function in a perfect competitive market is given perfect information about the situation he faces, there is nothing left for him to do, according to neoclassical theory, but to produce a unique level of output, or else to go out of business. There is no internal decisionmaking machinery, no information search, no rules for dealing with ignorance and uncertainty in the theory: the problem of choice among alternative lines of action is so far reduced to its simplest elements that the assumption of profit maximization automatically singles out the best course of action. (Blaug 1980:180, italics added) On the one hand, we have observed Marshall assimilating the national economy to a giant firm; on the other, we witness a market where individuals are passive price-takers. Together, these features link up with other incongruities espied in Walras’s notion of tâtonnements. In so far as 54

PROBING THE NEOCLASSICAL COSMOLOGY

the perfect (instantaneous) market presupposes pre-reconciled choices where individuals wield no power over prices and entrepreneurs act as price-takers, there had to be some pre-exchange mechanism whereby the instantaneous information and preference-ranking would be executed. Edgeworth had mentioned ‘recontracting’ and Walras suggested the auctioneer and tâtonnements; the two are riddled with the same contradictory elements. The problems surrounding them, epitomized in the debates surrounding the tâtonnements, are well known and have been excellently summarized by Ménard: Two controversial issues [about the tâtonnements, in the literature of the 1970s]: the first, on the very nature of the tâtonnement, e.g. whether it is a static description or a dynamic process…, the second, on how to give a specific content to this mechanism. One possible answer is the auctioneer. Whatever his name is, auctioneer, price setter, or monopolist (as in some distribution models …), the idea is that prices must be adjusted in one way or another, so as to coordinate plans that are not compatible on an a priori basis. Now, admitting the principle of a centralized procedure of adjustment introduces several major inconsistencies in the Walrasian model. First is that astonishing paradox of a decentralized economy that turns out to be a planned system, where the auctioneer is both external to the system…and its most powerful component, an idea that retrospectively illuminates Lange’s [1948] analysis on market socialism. (Ménard 1990:109) Perfect competition is thus predicated upon its very opposite, namely the operations of a monopolist, a price-maker. It cannot function without central planning. The conclusion, however, is hardly astonishing, as it tallies remarkably well with Marshall’s hidden analogies bringing every organizational level back to the firm. In fact, it should have been clear at the outset that if the market is identified with the internal dimension of firms, and if the operations of firms are reduced to management narrowly defined (that is, to ‘the rational allocation of scarce resources between alternative uses, given specified ends’), one unintentionally wrote about planning. No wonder that Lange could apply it to planned (socialist) economies (Lange 1948 [1938]), and that neoclassical apologists monotonously allude to this demonstration to denounce accusations that their research programme might be ideologically biased. Neoclassical individuals are passive because their lives are ruled by supra-individual economic laws, the laws of the market (found in the experimental conditions of the perfect market; see Hutchison 1965:88); thus, with Marshall as with the others, pricing is not the outcome of an individual decision but something imposed by the market. The perfect 55

PROBING THE NEOCLASSICAL COSMOLOGY

market is self-stabilizing, it adjusts itself for reasons that lie beyond individual will, because of a supra-individual necessity to which rational individuals have to bend, or be broken. The market decides, the rational individual complies. The aggregate result is automatic. Hence the ambiguous position of the individual in classical theory: both axiomatic as a micro-analytical necessity but subtly removed from exchange and aggregate considerations through the automatic regulation of ‘market exchanges’ (supply and demand). The individual of neoclassical economics should not be spoken of as an economic agent but as an economic patient, someone acted upon by the natural laws of the market as he or she is by the laws of the physical universe. The market alone is real and governed by laws. In the mechanicist model of the perfect market, with choice struck out, the individual himself vanishes. More precisely, with him as with all other dimensions studied, neoclassical economics actually creates the illusion of an individual, deduced in practice from preconceived postulates about the nature of exchange in a perfect market. He is skilfully grafted on ex post facto, and endowed with the necessary attributes which would engender the perfect market: maximization-seeking, perfect rationality of a felicific kind, perfect foresight and expectation. Neoclassical economists believe that the aggregate supply and demand in any market results from intersecting schedules defining equilibrium at prices which markets must clear, and then suppose on the part of the economic agent a behaviour which would account for what they see at the collective level. Superficially, this could be deemed a methodology common in empirical sciences. Superficially only, for as Ménard once more admirably showed, the neoclassical mode of argumentation amounts to positing in economic agents a natural tendency to what is supposedly observed at the macrostructural level. To that extent, all economic agents are moved by a teleological principle (Ménard 1978:300–1), a mode of conceptualization radically foreign to rational mechanics. In brief, the perfect market is predicated on teleological assumptions, in that all agents aim at achieving the same thing, namely the maximization of gains according to a marginal calculus; hence the isomorphism between the micro- and macro-structural levels (Ménard 1978:300) and the social undifferentiation of economic actors from the point of view of economic rationality. In this perfect market individuals are ultimately demoted to the status of carriers of goods, of simple economic vectors; in the final analysis, goods move by themselves, so to speak, with human agents acting solely as their vehicles.17 In a perfect market where individuals are only needed as carriers of goods, economic goods themselves must already know their destination. More specifically, the laws of their movement constrain economic agents; the movement belongs to commodities, who carry individuals along.18 56

PROBING THE NEOCLASSICAL COSMOLOGY

This tallies well with other dimensions observed through this cosmological probe. As noticed, Marshall (and neoclassical economists) defines demand in terms of a willingness to buy a given quantity of a commodity at a given price, subtly omitting the fact that in exchange the individual wishes to acquire what someone else possesses; demand is then translated into a relationship between individuals and objects (as it was already, in the very definition of utility), exclusive of all other individuals. Competition no longer sets individuals against one another; it is henceforth objects that compete among themselves. As a matter of fact, neoclassical writings are replete with formulations which leave no doubt about this implicit cosmology; when analysing the problem of distribution (the shares accruing to the various factors of production), Marshall depicts capital (hence objects) and an objectified labour vying with one another to gain the businessman’s custom, as the consumer settles between competing uses of commodities.19 Commodities have replaced human beings and ‘competition’ has subtly been transmuted into ‘competing uses’; and behind the notion of ‘competing uses’ lurks that of ‘allocation of resources so as to ensure equimarginal distribution’. We are no longer observing an economic world of consumer, or entrepreneurial, behaviour, but an economics of ‘commodity behaviour’. Commodities move, they compete, that is, they allocate themselves optimally, and this displacement defines exchange, production, consumption and distribution. What once upon a time were activities, and therefore the deeds of individuals, have been metamorphosed into the deeds of commodities. The individual has vanished for good.

57

3 STRANGE COSMOLOGICAL BEDFELLOWS

One may justly take exception to the fact that this epistemological exploration has hitherto confined itself to the experimental skeleton of Marshall’s Principles; in this portrayal, the realistic Marshall was not given a fair hearing. Against the other two traditions, or more specifically against that tradition of economics that rejected real or ‘historical’ costs in favour of ‘alternative’ or ‘opportunity’ costs, however, Marshall’s realism will resurface, if only to measure a distance and better to appreciate the specificity of the various approaches (we shall henceforth refer to ‘opportunity costs’, or ‘alternative cost theory’ as OCT).

MARSHALL AND OCT: INVERTED SYMMETRIES Jevons held two contrary points of view on exchange, whether one contemplated commodities or labour (labour is obviously a commodity but, for convenience, we shall here contrast the two, instead of contrasting ‘nonservice commodities’ to labour in general). In the equation of exchange describing the trading of two non-monetary commodities the exchanging partners do not aim to depart with the whole stock of their goods, and for this reason, compare the marginal utility of the commodity acquired against that of the one given away; the gain was measured by the sacrifice. In his equations on labour, however, Jevons introduced the disutility of labour, an element already present in Mill’s Principles (Schumpeter 1954:660). The disutility of labour embodied a real cost, in terms of the real pain incurred by physical exertions. These two strands Marshall more or less wedded in his theory of exchange: the consumer assessed the utility of the commodity to be acquired against that of the money he had to part with (a quasi-OCT consideration)1 whereas the supplier calculated his costs in terms of the exertions and the waiting that went into producing his wares in the long term (or real costs). This representation of exchange suffered from an important asymmetry. To implant symmetry in this calculus of real costs, Marshall should 58

STRANGE COSMOLOGICAL BEDFELLOWS

have included the real cost of acquiring money (or whatever commodity was to be exchanged) and should have ultimately computed everything in terms of disutility. As a matter of fact, there existed a theoretical alternative to this dilemma. One could on the contrary jettison disutility and real costs altogether and conceive of all transactions exclusively in terms of utility. Instead of introducing the disutility of labour in the consumer’s valuations, one could on the contrary expunge it from the supplier’s. Then, the supplier meeting his customer would price his commodities in exactly the same, symmetrical, fashion: as with Jevons’s and Marshall’s consumer, the cost of the supplier’s goods would incorporate all the opportunities foregone (the sacrifices) in their production. This was most admirably developed to its extreme logical conclusions by Wicksteed in his Commonsense of Political Economy (1949) [1910] in which, following a clue from Böhm-Bawerk, he elaborated the notion of supply as reverse demand, where ‘what is usually called the supply curve is in reality the demand curve of those who possess the commodity’ (Wicksteed 1949:785, quoted in Blaug 1985:488), a logical extension of the doctrine of alternative costs. In OCT, Supply…is conditioned not by the ‘real cost’ of calling a commodity into existence but by the cost of excluding other uses, including that of the supplier himself…. The costs of producing a commodity reflect nothing but the competing offers of other producers for the services of the factors used to produce it; they represent the payments needed to attract the factors used to produce it; they represent the payments needed to attract the factors from their next most remunerative employment. (Blaug 1985:490) Far from us is the idea of getting tangled up in the theoretical debates surrounding OCT. Our only concern is cosmological: does the cosmology underpinning OCT differ in any respect from that extracted from the experimental substructure of Marshall’s Principles? What does OCT really tell us? First of all, the notion of supply as ‘reverse demand’ can be more or less translated as ‘negative consumption’ and, as such, surfaces as the symmetrical inverse of Marshall’s notion of consumption as negative production: it fuses the supplier with the consumer, presenting the supplier as a consumer with an own-demand, reducing everything to considerations of demand and of utility. It is an inverted mirror-image of Marshall’s lopsided exchange, presenting a unilateral flow of commodities tilted towards consumption. If Marshall’s demand prices were somewhat illusory, and if in the final analysis Marshallian prices appeared primarily as supply prices, we could claim the opposite of Wicksteed: his supply prices live a somewhat phantom life, all prices being ultimately converted into demand prices. Is there any money in this economics? No more than in Marshall’s; with 59

STRANGE COSMOLOGICAL BEDFELLOWS

Marshall, was money not also ‘the marginal significance of something else’? In an economics like Wicksteed’s, where the utility of any commodity is ‘the marginal significance of something else’, money lives perforce the same notional existence. OCT cannot integrate money, for the same reasons that prevented Marshall from doing so (also a result of timelessness of a perfect market, as we shall soon see). Without monetary exchange and with a unilateral understanding of exchange tilted towards consumption, does OCT retain at least an idea of a unilateral flow of commodities external to the individual, or does it also collapse exchange to an operation completely internal to the individual? To answer this question we need to ponder the very meaning of ‘opportunity costs’.

WHAT’S IN A NAME? How, exactly, do real costs differ from alternative, or opportunity, costs? It has been suggested that the ones (real costs) are to the others (opportunity costs) what a substantialist definition of costs is to a relational one; this is a specious argument. The difference, in fact, is cosmological. Behind real costs lurks the idea that something is spent, expended, that energy is lost during production and that this loss has to be compensated. Commenting on the meaning of the term ‘consumption’ in the ordinary language, Fraser writes: ‘The essence of “consuming” a thing in the usual sense rests…in so using it as to destroy its physical identity’ (Fraser 1937:188). Real costs intimate that during production something akin to this loss of identity occurs, that something is used up, loses its physical identity to be transformed and thereby gains a new physical identity; also, what has been used up should be compensated for. In this representation of costs, that of the realistic Marshall, production preserves its status of activity, that is, that of a process, and he who thinks transformation or process necessarily thinks time. A production that incurs real costs must actually unfold through time, and it is no coincidence that the champions of OCT saw in real costs nothing but ‘historical costs’. Marshall’s real costs evoke the ‘intractable dimension’ of time, they remind us of the Marshall praised by some for his concern with time and history, whatever the degree of success of this reconciliation. But what of alternative, or opportunity costs? Davenport once described them as ‘displacement costs’ (Davenport 1905). In OCT, production costs would not indemnify the producer for a real loss, for efforts and sacrifices (or energy converted) but for displacement, for movement in space. In contrast with ‘historical costs’ it would be tempting to label them ‘spatial costs’. This, however, would be misleading because displacement, as movement in space, must necessarily possess a temporal dimension; but do opportunity costs integrate the dimension of time? 60

STRANGE COSMOLOGICAL BEDFELLOWS

Within the framework of any exchange, monetary or not, and of a production that uses up services and materials, the cost of a commodity is that of the commodities forgone (including labour), used up or converted into something else. This is implicitly the way Marshall understands costs of production, although he reduces the commodities foregone to their common substratum, namely efforts and waiting. In OCT the timeless computations of Marshall’s consumer extend to the producer, with one signal qualification. To speak of commodities foregone ultimately begs the question of time, and of real costs; inevitably, one would be led to ask how the commodities foregone were acquired in the first place, a question which, pursued logically, should connect commodities back to income, and ultimately back to labour. But neither the consumer nor the producer in OCT ever renounce commodities: they sacrifice opportunities. This choice of terms is most revealing. Commodities are real, they are material and have a temporal existence; opportunities, on the contrary, are immaterial and timeless. They are what could have been but has been excluded by reality; the OCT producer does not have to be compensated for commodities that have lost their physical identity, or for energy (labour) expended and converted. He has to be rewarded for the loss of an opportunity, for what he could have done had he not done what he is doing. It is the loss of an intentional activity located next down on the map of the individual’s ranked intentions. It would have been tempting to write of ‘substitution costs’ rather than displacement costs but even the term substitution could bring to mind the idea of commodities foregone; thus, the decision to select the notion of ‘alternative’ or ‘opportunity costs’ says it all. Such expressions persisted because they conveyed exactly the right message, the central idea that economics is about the movement of illusory commodities in a timeless space. Superficially, opportunity costs can be viewed as displacement costs, the cost of moving a productive agent from his next most remunerative use. But let us assume perfect equilibrium, let us suppose all agents to be allocated to their most advantageous use. At equilibrium, as Guitton observed, they have no reason to move (Guitton 1979:51). Guitton’s expression, however, confounds as much as it enlightens because the association between equilibrium and OCT can be conceived of in two completely different ways. On the one hand there is a movement intimately connected to costs; with OCT, this movement can be described as displacement costs. When economic movement is thus understood, it is true that economic agents at equilibrium do not wish to be displaced, that they resist movement in space, that they do not want to move. But in the history of economic thought ‘movement’ applies equally to activities, not only to the spatial displacement of individuals, and this is the economic movement that Adam Smith had in mind when he repeatedly wrote of what ‘set industry into motion’. Even when resisting displacement, economic agents may be moving in the sense of ‘functioning’, or executing 61

STRANGE COSMOLOGICAL BEDFELLOWS

economic activities (employing, investing, producing, consuming, saving and the like). This, in fact, embodied the original (classical) meaning of economic movement; the spatial connotation only surfaced with some neoclassicals. In its classical acceptation, economic agents moved if they invested, if they employed, if they produced. At equilibrium, they may resist displacement without for that matter ‘being at rest’. Quite the contrary, they then move with a uniform velocity (they produce, employ, invest, or save at a constant rate) and resist any change from that velocity (any acceleration in output, in employment, and so on). To be more precise we should separate ‘functional’, or ‘economic’ motion from ‘spatial’ motion, and state that at equilibrium economic agents move functionally at a constant rate (and resist acceleration) but seek spatial rest (understood as ‘absence of movement’), that is, resist displacement. This is why I earlier rejected Chick’s assimilation of equilibrium with rest and why I believe that Mirowski’s theses are incomplete. Depending upon what we single out as the locus of movement, we come across severely discrepant analogies. Let us assume the equilibrium situation to last indefinitely. Shall we then conclude that, without further displacement, production costs vanish in the OCT model? Not in the least, and this more than anything else betrays the true meaning of opportunity costs. Even in the perfect experimental conditions of ever-lasting equilibrium opportunity costs would constantly be incurred because all the agents could be somewhere else, despite the fact that they are not moving through space (they are not being displaced). It is this alternative, parallel world of what there is not but could have been which measures the cost of what is. We thus move from the real to the potential or, more precisely, to the ‘hypothetical-conditional’: the cost of something, even at equilibrium, is the cost of something else ‘that could have been if…’. This is why displacement is a misnomer; the displacement is hypothetical and occurs within the individual. It is a mental displacement, the mental computation of what the economic agent could have gained had he done something else. This displacement occurs inside his head; economic agents themselves do not change uses but assess mentally what an alternative use would have earned them; this measures the cost of their employment. Hence, concealed in ‘displacement’ is an internal space, the mental space of comparisons between alternative uses. Nothing changes place in real space: competing uses, or opportunities, are compared in mental space. The economic cosmos of OCT is thoroughly spatialized but simultaneously deprived of any temporal dimension. Since it purports to describe movement, however, and since movement necessarily spreads out through space and time, it must then be detached from real space and made internal to the individual. It is not so much of spatialization that we should speak, but of hypothetical mental operations translated in spatial terms. This is no hypothetical space, but once more an illusion of space. What OCT has accomplished is to replace commodities 62

STRANGE COSMOLOGICAL BEDFELLOWS

(or the energy they embody) by opportunities, and this by regarding the mind to be space, and considering (perfectly rational) thought to be movement through space. This, to repeat a conjecture hazarded earlier, is where Mirowski’s analysis applies with all its might; as he himself wrote, the doctrine of opportunity costs ‘is the closest thing to a purely mental theory of production and exchange…’ (1991:285). Since I believe that his understanding of utility as a field presupposes the mind to be an ‘empty commodity space and locus of the field of potential energy’, it does seem that those efforts to sever utility from its felicific calculus, very conscious with the Austrians and later the Walrasians, were those that generated a cosmology which is best described in terms of the field formalism. This is what opportunity costs really and truly mean, and this, better than anything else, sums up its cosmological achievement: that of shrinking all economic activities to the mere displacement of commodities, that of dematerializing commodities into opportunities, of spatializing the economic cosmos while blotting out the dimension of time and of achieving this by transmuting a ‘movement of commodities through space’ into ‘the instantaneous comparison of opportunities in the mind’. In this cosmos even more than in Marshall’s, exchange is exclusively sited within the individual, as a pricing of opportunities foregone, as a purely mental operation presented as pre-action, understood as a virtual activity waiting in the limbo of that infinitesimally small absence of time preceding the instant that marks the sudden irruption of time, and the realization of that virtuality. All pricing, all costs, can then be scrupulously defined in terms of the alternatives sacrificed by one and the same individual. In this fashion, Robinson Crusoe is liable to opportunity costs, even when he elects to rest and do absolutely nothing. And Robinson Crusoe repeatedly emerges as the experimental stepping-board of the early Austrian neoclassicals. This aspect of the neoclassical cosmos we could describe as the ‘field cosmos’. By extension, all reasoning in terms of marginal rates of substitution belong to the same cosmological family: exchange is but an evaluation of alternatives, a mental computation. This answers our earlier question. OCT forbids time even more so than did Marshall’s economics, if such a thing were possible (if one could write of ‘degrees of timelessness’…) and, as a result, conjures exchange away, collapsed as it is to a mental operation buried within the individual (socially invisible). This completes the inverted symmetry. In the Principles we unearthed a vertical analogy assimilating supply and demand to firms (and therefore to producers) and portraying firms at every organizational level, from the individual to the international market, depicting the individual both as a micro-firm and a micro-market, and deflating both firm and market (i.e., relation of supply and demand) to an instance of allocation of scarce resources between alternative uses. Symmetrically but in an opposite fashion, economists in the 63

STRANGE COSMOLOGICAL BEDFELLOWS

Austrian (OCT) tradition assimilate the market (relation of supply and demand) and the consumer from the individual upward, reading all organizational levels in terms of ‘consuming units’ (or household equivalents), also declaring the individual the smallest market. Thus the relation of supply and demand, which originally stood for exchange, is as internal to the individual in OCT as it was in the Principles, if not more so; furthermore, it stands for nothing else than the rational allocation of scarce resources between alternative uses, as it did in Marshall’s magnum opus. Paradoxically enough, the two economics converge at the same focal point despite the fact that they invert the terms of the relationship between production and consumption: both bar exchange as a socially visible activity, both reduce production, consumption, exchange and distribution to a question of allocation or, to use the terminology which was ultimately to replace that of early marginalists, of substitution. And, with the timelessness and the absence of money, we retrieve exactly what we discerned behind the realism of the Principles: the absence of any activity and ultimately, the absence of choice and of truly individuated individuals; only passive automata. For the timeless world of OCT sheds neoclassical economics of Marshall’s realistic and pragmatic garb, purifies it so to speak, and lays bare its experimental substructure. The economic world of OCT brings out in the open the most perfect of those perfect constructs which we saw hiding behind the commonsense of Marshallian economics.

THE TWO MARSHALLS Although our earlier enquiry divulged in Marshall a cosmology strikingly akin to that of OCT, Marshall’s real costs actually exhibit more realism than we originally allowed for. In one major respect, the realistic or pragmatic Marshall can be summed up as the Marshall who attempted to subdue the ‘intractable dimension of time’ in a cosmology which proscribed it. There is no denying it, time does inhabit the Principles, but a time which needs to be placed back in its proper perspective. A concession to realism it may be, but for reasons that are essentially unrealistic, namely scientific and experimental reasons. Because of time, two radically different experimental scenarios coexist in Marshall’s Principles: one, shared by all other neoclassicists, is that of the perfect market; the other, peculiar to Marshall and the Marshallians, is that of the experimental ‘long run’ which, if pursued to its logical limit, would then merge into the stationary state (and the perfect market). Because the second often enjoys pride of place one frequently gains the impression that Marshall’s markets are not quite the perfect markets of purely static equilibrium theory, and that somehow they would lie closer to reality than OCT’s or Walrasian perfect markets. One scenario seems to contradict the other, and creates overall ambiguous impressions. 64

STRANGE COSMOLOGICAL BEDFELLOWS

But why should Marshall have introduced time in one of his experimental scenarios? Here, the various traditions which read in Marshall either Ricardo’s or Mill’s economics translated into differential calculus (Bharadwaj 1978; Schumpeter 1954; Shove 1942) all err in their partiality. In matters of exchange Marshall did develop the economics of Mill (many aspects of which originated with Malthus, according to Schumpeter) but in matters of distribution, he stood strongly and directly against Mill; it is this powerful anti-Mill posture which throws light on some of the apparent inconsistencies. John Stuart Mill, let us recall, had concluded to the arbitrary, and purely historical, nature of distribution, a conclusion which Marshall forcefully disowned by distinguishing various time-periods in order to show that the conditions of supply governed prices in the long term (and therefore manifested the action of laws beyond human capriciousness), even if demand (and therefore utility) explained prices in market and short periods. This counter-argument found its inspiration, not in Mill’s, but in some elements of Ricardo’s economics. One element, however, remains enigmatic. Why search a solution in Ricardian economics, in real costs of production and, therefore, why invoke time? From a theoretical point of view this was not necessarily the best option for, as some have remarked, it is the very cause of imprecisions (Deane 1978; Shackle 1972) and indirectly the reason why the Principles stymied British economics for more than a generation, if one is to believe Pribram (1986:305). Indeed, the Austrian point of view might have provided a purer and possibly more consistent version of marginal productivity theory, and therefore answered Mill’s argument better than Marshall’s experimental long run and its normal prices. Why did Marshall waver in his acceptance of marginal productivity theory and, implicitly, of a thorough version of OCT? No doubt scores of reasons can be adduced, but only two will be mentioned. I would personally tender an ungenerous interpretation and argue that Marshall conjured time to fight Mill on his own battlefield. Mill summoned history to support his thesis because history seems to escape natural laws. Against such an argument Marshall could hardly score by repudiating history altogether. There was therefore only one strategy left, namely that of establishing that history, when properly understood, did manifest the operations of natural laws. This could be accomplished by converting history into the one-dimensional element of his operational time and arguing that, given a proper (experimental) time framework, commodities were priced according to their normal costs of production, and services according to their marginal efficiency. In this ‘ungenerous’ interpretation Marshall does not accommodate time because of an acute sense of realism but for the very opposite reason: to denounce and refute Mill’s realistic understanding of history and distribution. Against this harsh interpretation one can offer the more standard, generous, thesis that Marshall was intensely torn between the logical implications of 65

STRANGE COSMOLOGICAL BEDFELLOWS

the new economics and the fact that it flew in the face of so many phenomena of the real world. If there is a realistic Marshall, and no doubt there is one, it seems to me above all the Marshall who chose time, rather than alternative costs, in order to refute Mill’s conclusions. And time does explain all those aspects of Marshall’s economics that seem to preserve elements from the classics. Indeed, time is what contrasts supply to demand, production to consumption, the experimental to the observed. With the time-conscious Marshall the laws governing prices are not to be found in demand; demand is the volatile variable. It is only in the long run, when the supply of factors of production has had time to adjust itself to changes in demand, that prices reflect their real costs of production. And it is only in real costs that laws can be discerned because only real costs relate to something outside the individual, to something natural and not completely absorbed into subjectivity. For if everything is subjective (as is demand), how can it escape man’s whimsical and capricious nature? Theoretically, Marshall uncomfortably wriggled his way from one horn of the dilemma to the other. He did need a subjective theory of value (or tries to by-pass the question of value to focus on prices, as Schumpeter claims (Schumpeter 1954:309), but unfortunately does not succeed), but he was also eminently aware of the theoretical dangers of subjectivity. If value is rooted in subjectivity how can it be law-like, if from subjectivity also flows man’s unpredictable behaviour? Demand, as a subjective phenomenon, would be exposed to the fecklessness of economic agents: although an understanding of prices must start with subjective appreciation, its laws cannot be apprehended wholly within the individual. They have to be found outside him, in those objective conditions with which we must all comply. Within, we are stirred by capriciously shifting oscillations; without, we are moved by natural necessity. This natural necessity cannot emanate from demand; it must stem from supply, but changes in supply take time. And, as Joan Robinson has remarked, this is one of the main discrepancies which segregates Marshall from neoclassical economists of the Austrian and the Walrasian creeds. For both OCT and the Walrasian general equilibrium the supply of factors and of their services is posited as given; factors are never supplied (only their services are). With Marshall, on the contrary, the factors themselves are supplied and adjust to changes in demand. This is what endows his economics with a realistic veneer. There is apparently change, and a true process of production that unfurls through time; production is no mere displacement, as in OCT. In brief, Marshall struggled to wed time to space and to depict production as a movement through time, not space; Marshall’s production had not yet dispensed with all the appearances of an activity, and for this very reason, he had to emphasize the predominance of activities over wants.2 Hence the complete inversion between the two economics; in the experimental scenario including time Marshall’s laws do not belong to the 66

STRANGE COSMOLOGICAL BEDFELLOWS

realm of demand. They cannot be espied in the short term but in the long period only, in the conditions of supply. The Austrians on the contrary see in the conditions of demand the experimental situation out of which laws are to be detected, whereas Marshall reads in demand the disturbing factor accounting for the discrepancy between the experimental and the observed and he perceives in the conditions of supply the experimental situation out of which laws can be descried. It is one of the greatest ironies of the history of economic thought that Marshall ended up with a notion of costs which other economists discarded and derogatorily dismissed as ‘historical’, this very Marshall who conjured time to contradict Mill’s theses on the historical character of distribution. Does this invalidate our prior conclusions about Marshall and the perfect market? No, because Marshall’s time was not chronological time but operational time, as it has been termed, or experimental time, as I prefer to call it; it was but an illusion of time, and this experimental scenario of the long-run normal prices was grafted onto another experimental scenario which perfectly paralleled that of the Austrian and Walrasian economics. This, in my opinion, is the true Marshallian synthesis, that of endeavouring to weld the dimension of time to the purely timeless and spatialized (and therefore completely ‘internalized’) economic cosmos implicit in the other brands of marginalism. And, as a result, this encapsulates Marshall’s greatest failure. In the final analysis, Marshall’s time remained completely extraneous to a cosmological substructure essentially akin to that of OCT; hence the Austrians’ impatience with the CambridSge pontiff. Neoclassical economics in the twentieth century could be depicted as Marshallian economics without the element of time. It has indeed been said that Marshall’s economics was indeed toppled by OCT and Walras’s general equilibrium theory. In the light of ulterior developments, the Principles did hold things back for economists wholeheartedly embracing a timeless cosmos of ‘internal space and matter’, espousing a ‘field cosmos’ (if we accept Mirowski’s theses regarding these developments of neoclassical economics). Post-Marshallian neoclassical economics thus evolved as a purified version of Marshall’s economics—Marshallian economics cleansed of an element of time fundamentally alien to its statical inspiration, purged of the contradictions and the paradoxes of disutility and translated into the unified language of utility (and ultimately of substitution). Everything could then be brought back to demand, and to subjective evaluation. No need to take account of the real world, no need to refer to anything outside the individual, to seek in nature constraints which would manifest the operations of economic laws. The economic laws would reside wholly within the individual. Thus the variants of neoclassical economics which issued from Wieser and Walras have a consistency, a unity and a coherence lacking in Marshall, for they completely ousted the experimental construct of the long-run to adhere to that of the 67

STRANGE COSMOLOGICAL BEDFELLOWS

perfect market. Marshall vacillated between the experimental perfect market and the experimental time of changes in supply, and this might explain why his markets do not always appear perfect; but the two experimental scenarios could not coexist, and of the two, the latter was the one which was implanted from outside, and which had to be excised. Does that mean that only Marshallian economics is transactional? Not in the least. In the field cosmos, preference-ranking is exchange, but prices still require that something outside the mind irrupts within; this something is the budget constraint which, as Tsiang has already demonstrated, euphemistically stands for the conditions of fair exchange constraint’ (Tsiang 1966). Moreover, we have seen ‘consumer theory’ to be misnamed because, in the final analysis, demand stands for the ‘willingness to exchange’ (see above, p. 32). Despite the desperate attempts of non-Marshallian neoclassical economics completely to internalize economic phenomena, the outside universe obdurately kept on intruding and, willy-nilly, so did in the aggregate the relation of supply and demand. Somewhere along the line the individual consumer had to run into someone outside himself, the supplier, for a theory of relative prices to make sense. And so neoclassical economics, of whatever persuasion, has remained intractably transactional, and in this respect, reveals yet another, radically different, analogy.

MISUNDERSTANDING ‘FORCES’: AN ECONOMICS OF ‘RESISTANCES’ At the cost of redundancy let us return to Koyré’s main thesis, the one that inspired this epistemological disquisition, namely that an Aristotelian cosmology thwarted the emergence of a science of movement. We have briefly sketched this Aristotelian cosmology in the Introduction, but let us recall some of the main assumptions of Aristotle’s dynamics. To Aristotle, matter was intrinsically immobile; it resisted movement (or conserved rest) so that the very existence, or appearance, of motion had to be accounted for, had to be explained. For matter to change places, a force had to overcome its natural proclivity to rest; read from a transverse point of view, his assumptions could be formalized in the following terms: F/R=v (with F=force, R=resistance, and v=velocity) In such a dynamics, the condition F>R must be met for motion to be. If F
STRANGE COSMOLOGICAL BEDFELLOWS

F>R, one only obtains uniform velocity. This dynamics was inscribed within a cosmos in which matter occupied a place in space according to its intrinsic qualities. This was its ‘natural place’, where it strove to be and rest, and from whence it did not wish to move. Galileo overthrew this cosmos and its conception of movement by declaring matter indifferent to the state of rest or movement, and according to some historians of science, by positing matter to be intrinsically mobile and assuming rest to represent a case of infinitesimally slow motion. Once an object acquires a given velocity (henceforth expressed as a rate of change of space over time, where rest is simply the velocity resulting from a rate of change equal to zero), it will keep it indefinitely (constant velocity). In this new representation of the universe uniform motion (of which rest, once more, is but a special case) simply is, and does not beg to be accounted for. What calls for explanation is not the creation of movement, but changes in velocity (acceleration and deceleration). If Aristotelian matter conserved rest and resisted movement, Galilean matter conserved uniform velocity and resisted changes in velocity. Thus were laid the foundations of a true science of dynamics, and thus were thoroughly contradicted the assumptions of the Aristotelian study of movement. In the cosmological incursion of the last three chapters we unearthed one aspect of Marshall’s Principles which reaches out to the expurgated Austrian and Walrasian versions, which in their ultimate formulations, partake of what Mirowski has perceived as a field analogy. And yet, other facets of the Principles also reveal a Newtonian analogy, one in which utility is not potential energy but a force of attraction, in a cosmos where individuals do move functionally, in that they allegedly do things. In the final analysis, however, I submit that both views of utility are mistaken, and that deep underneath neoclassical economics there lies dormant an analogy which reaches back much beyond Newton and Galileo.

Marshall and Aristotle Like matter in Aristotle’s cosmos, Marshall’s economic patient, and more generally, the individual of neoclassical economics, also seeks rest. The very notion of an economic ‘agent’ tells of economic action. Yet, Marshall postulates the exact opposite, namely the individual’s natural aversion to all economic activity. At the outset, Marshall beholds in man an innate opposition even to consume (because of the cost of parting with money; or, to be more precise, we should rather speak of an innate repugnance to exchanging), which has to be overcome by the anticipated utility of the commodity for exchange (and consumption) to take place; he also perceives in mankind an inborn hostility to labour which has to be overpowered by the expected utility of wages for labouring to be set in motion. He notices in the employer a reluctance 69

STRANGE COSMOLOGICAL BEDFELLOWS

to employment (and therefore to production) which has to be overwhelmed by the profits contemplated for industrial production to be set in motion. And so it is as well with saving; without the force of interest to induce them to save, individuals would give in to their natural propensity to consume their whole income as soon as it is earned (note the paradox: the individual is loath to exchange—and, by extension to consume—but is possessed of a natural inclination to spend the whole of his or her income in the current period in which it is earned!). Resistance to exchange, and therefore to consume (from the consumer’s point of view), resistance to work (from the labourer’s point of view), resistance to employ, to invest and to produce (from the entrepreneur’s point of view), and resistance to save (from the domestic income-earner’s point of view) all presuppose, as in the Aristotelian physical cosmology, a natural antipathy to economic activity. We could retranslate this in different terms. Neoclassical economics’ individual is born with a tendency to immediate consumption (to live in the present, to carpe diem and make no provision for the future) and to idleness (not to work and not to produce, to do nothing and indulge in dolce far niente). It may strike the reader that such a predisposition describes the conditions which the Bible portrays for the Garden of Eden. We may thus boldly conclude that Marshall’s Aristotelian view of Homo Oeconomicus is equally a Biblical one; mankind’s fall came with the necessity to labour, the pain related to it, and the necessity for a reward in order to overcome this natural resistance. This natural inclination to the absence of labour, of production, of investment or saving, and its concomitant resistances betray undeniably Aristotelian elements. As with Aristotelian dynamics, the very existence, or ‘setting in motion’ of labour, of production, of saving and investment calls for an explanation, and for these activities to materialize, for economic agents to ‘move functionally’, a force must conquer their disinclination. This force was originally utility, and despite the unrelenting efforts to expurgate the concept from economics because of its unsavoury utilitarian connotations, any economics which postulates a reticence to economic action itself rather than a resistance to changes of economic motion will have to conjure a force which, despite the terminological disguises, will always amount to something positive anticipated—be it utility, satisfaction, or gain—and which will always have to surmount a negative element (disutility, disincentive, dissatisfaction, cost or whatnot).3 All in all, it adds up to a very Aristotelian formulation, namely F/R=v. As with the field formalism, neoclassical economists did not even understand their Newtonian analogy. There is something conserved in both Aristotelian and Newtonian dynamics, and whatever is conserved defines a resistance; hence the theoretical necessity, in both dynamics, to call forth the action of a force. But it is velocity that is conserved with Newton, and its opposite with Aristotle, so that an Aristotelian force can never act like gravitation (since gravitation causes changes in uniform velocity, and therefore 70

STRANGE COSMOLOGICAL BEDFELLOWS

acceleration, not movement). It is this failure to understand the cosmological representation behind the equations that spawned this most astounding hybrid: an Aristotelian cosmology hidden under the sheen of a Newtonian (and later field) rhetoric. We thus meet Aristotle rather than Newton or Maxwell, but Aristotle with a major nuance because we are describing interacting agents and because this interaction further inspired the admixture of analogies between dynamics and statics. Let us examine some of the strange effects of interactions and statical considerations implanted into an Aristotelian understanding of movement. To Aristotle, a force greater than the resistance of the mass to which it was applied generated both movement and uniform velocity (the two being synonymous, in a way), and all movement stopped when the resistance equalled the force or exceeded it. With Marshall, the terms are somewhat inverted. As with Aristotle, a force must be acting and must prevail over the natural disposition to rest for economic activities to be set in motion. The utility must be greater than the disutility (or the opportunities foregone) for economic agents to move functionally. But once this force triumphs over the agents’ inertia it does not yield a uniform velocity, but an acceleration. Once there is a prospective (subjective) gain to be made from a transaction (including production, which leads to exchange), economic agents will then move with increasing speed, until the force equals the resistance again (marginal revenue=marginal cost). Then, unlike Aristotelian and even Galilean dynamics, where v=0 if F=R, we find on the contrary that economic agents will move at uniform speed; once the resistance has caught up with the force (F1=R1), then v=k. This is not conspicuous when examining exchange in a timeless cosmos. In a timeless exchange economic movement obeys strange laws. Since no time elapses between the instant the force starts operating and the moment the exchange takes place we should rather say that there will be an instantaneous acceleration in the quantities to be exchanged, before the exchange itself eventuates, as soon as a force overcomes a resistance (that of parting with something), and that the exchange will happen when F1= R1. Then only will the individuals trade, and the movement will be over. Viewed from the collective vantage point of general equilibrium however, a different picture emerges. Indeed, the employer will stop employing when marginal cost equals marginal revenue, but at that level, the economy will have reached full employment and will be producing at full capacity. Labourers will work as much as they are willing to labour, entrepreneurs will invest to keep production constant, people will go on saving at a constant rate to support this level of investment, and employers will hire only to replace those leaving the labour force. In other words, as soon as the forces start acting and overpower the various resistances, economic agents instantaneously accelerate to their maximum velocity, and 71

STRANGE COSMOLOGICAL BEDFELLOWS

remain constantly at that speed. At maximum capacity the resistances have intensified up to the level of the forces, so to speak, and instead of bringing the economy to a halt they ensure its movement at a constant rate at its maximum speed. This is the economy’s equilibrium state and, as in Galilean-Newtonian dynamics, agents oppose changes from this uniform (and also maximum) velocity. We have partly left Aristotle behind because of the peculiarities both of the object of study, and of the analogy imported. In Aristotelian dynamics an intrinsically immobile matter exhibited aversion to movement. In a transactional economics, the perspective diverges. Instead of an opposition to economic activity we are dealing with two sets of opposing resistances, and therefore with an intersection of forces at equilibrium. Let me elucidate. No economic agent is ever perceived alone, despite all the prestidigitation to achieve this; he is always acting in a relationship. Let us take the labourer, for instance. He resists labouring and must be induced to do so, but the force that will overwhelm his opposition is that of an employer who also struggles against employing unless enticed to do so! It is Aristotle transported into the Archimedean world of statics tainted by Newtonian gravitation and mutual attraction. The employer will therefore be prompted to hire only if the marginal revenue from an additional unit of labour is greater than its cost, whereas the labourer will only be incited to work if the utility represented by the wages rewarding him for the last unit of labour exceeds the pain of the last hour of labouring. The two forces act simultaneously, and in symmetrically opposite directions. Hence the hybrid result: a force must overcome both a resistance and an opposite force. When F1=R1 because R has spiralled to level with F (after the initial F>R which sets the whole machine in motion), the labourer will refuse to labour more. He will therefore cease to add to the amount of labour he is ready to exchange and will be opposed by an employer equally unwilling to hire more. At that point the businessman employs as much as he aspires to, and refrains from hiring more or hiring less (unless the force increases or the resistance decreases again), and the labourer works as much as he desires, and opposes labouring more or labouring less (unless the force intensifies or the resistance diminishes again). We have not left Aristotle; we have merely complexified him by inserting the original equation within a transaction that tells of the action of opposite forces, in addition to forces overcoming resistances, thereby superficially giving the impression of formulating the problem in terms of the virtual velocities of the static theory of the lever. The equilibrium, therefore, is a dual equilibrium, where F1=R1=F 2=R2; at that intersection we do not find rest but a uniform maximum velocity, or a fixed ideal velocity: all markets then clear, there is neither overproduction nor underconsumption. Such an Aristotelian understanding of economic motion, however, is in no way peculiar to Marshall; indeed, it pervades the whole of neoclassical thinking.4 72

STRANGE COSMOLOGICAL BEDFELLOWS

In fact, neoclassical economists did not import Aristotelian elements into economics. Although awed by the achievements of physics and striving to emulate them, Adam Smith was no physicist and did not understand the presuppositions of a scientific dynamics. Hence he regrettably represented the problem of economics in terms of forces explaining both movement (setting industry in motion) and acceleration (the accumulation of wealth), thereby instilling into economic thinking those very ‘resistances’ to economic movement which came to dominate both classical and neoclassical economics. We come across the same unfortunate misunderstanding in J.S.Mill: What is now commonly understood by the term ‘Political Economy’… makes entire abstraction of every other human passion or motive; except those which may be regarded as perpetually antagonizing principles to the desire of wealth, namely, aversion to labour, and desire of the present enjoyment of costly indulgences [or resistance to saving. (Mill 1967 [1848]:321, quoted in Blaug 1980:60) It was thus the classics who bequeathed this Biblical view of mankind, who supposed ‘antagonizing principles to the desire of wealth’ which had to be overpowered for economic agents to budge. On this Aristotelian foundation neoclassical economics added marginal calculus and the statical analogy of equilibrium.5 Throughout this analysis we have neglected Walras, and the so-called Lausanne school. There were two main reasons to this. The first Ménard expressed quite unequivocally: ‘if there is such a thing as a Lausanne [Walras and Pareto] school, its expansion is mostly a contemporary phenomenon’ (1990:103) and, more specifically, a development which followed the Second World War (1990:99). If we take Hicks’ Value and Capital (1939) as our point of reference, the Walrasian approach to the economy spread throughout the profession mostly after the General Theory itself had been published. The second, and most important reason, is that Walras encapsulates better than anyone else the cosmology we have discerned in Marshall’s Principles. Admittedly, there are a number of important divergences between the two brands, and a number of properly Walrasian innovations. There is, for instance, what one could call Walras’s use of the rental scenario, that is, the distinction Walras introduced between factors of production and their services. Above all, Walras imported into economic reasoning what may be termed the macro-circularity of monetary exchange, one of the cornerstones of Keynes’s macro-economic thinking. But despite this and numerous other divergences, such as his refusal to derive demand curves from utility functions, Walras’ economics harbours every element of the neoclassical cosmology. Despite heroic efforts to interpret the insertion of encaisses désirées into his economics as a successful way of integrating money (Morishima 1977, 1980; Walker 1987) the facts persist, 73

STRANGE COSMOLOGICAL BEDFELLOWS

unmoved, obstinate: his economics, rooted in exchange like that of Marshall, ruled out for money any role other than that of numéraire, that is, that of a useful tool for generalizing from two to three commodities (Barrère 1990:6; Wolff 1981:57, 59). And more than anyone else, Walras used and abused those simultaneous equations which exclude time and uncertainty; more than anyone else he made use of the perfectly (frictionless) competitive market (Jaffé 1972:117) where the entrepreneur makes zero profits (and where, in fact, the entrepreneur and the firm itself are robbed of any economic identity— Mirowski 1991:326), where production is only virtual (Mirowski 1991:334) and, therefore, the macro-circularity of monetary exchange is tacitly denied (Mirowski’s demonstration makes it quite clear that the field formalism proscribes the very macro-circularity of monetary exchange (1991:347)). In exchange he also understood relative prices of commodities in terms of the intersection of supply and demand (Robinson 1971:4), and the acquisition of a commodity in terms of sacrifices (Wolff 1981:54), thus implying that the utility expected must be greater than the loss incurred. Finally, his obsession with a theory of value led him to decree that a scientific economics would exclusively concern itself with the relationship of individuals to things (Wolff 1981:33ff.). Overall, Walras’ understanding of exchange conveyed the same transactionalism and the same Aristotelian premises as Marshall, and he was never able to incorporate money at the theoretical, let alone the conceptual, level. In brief, his economics exhibits all the cosmological, methodological and theoretical vices that we have already descried in the Marshallian and Austrian versions, and this perhaps to a higher degree. It is therefore mistaken to claim that neoclassical economics drew its main analogies from proto-energetics. There are indubitable elements of a field cosmos in neoclassical economics, but superimposed on a GalileanNewtonian layer, the latter concealing an Aristotelian substructure which neoclassical economists certainly did not wish to import but introduced all the same (not to mention a host of other analogies, some explicitly from Descartes, others from axiomatic languages (mathematics, geometry and logic)). How are they reconciled? With great inconsistency, and through the central notion of neoclassical economics—namely prices. For neoclassical prices express the emotional connection between individuals and objects (the anticipated satisfaction they read in them) besides articulating these relationships between individuals. Neoclassical prices live a dual existence, measuring resistances and therefore portraying isolated individuals evaluating the pleasure of leisure or immediate consumption, and at the same time expressing the force necessary to overcome this resistance, a force located within social relationships. Prices simultaneously exclude others, and include them. This is how such unlikely partners can happily cohabit. 74

4 FROM COSMOLOGY TO LANGUAGE

Neoclassical economics accomplished three things at the same time: it posited the ‘other’, because without him nothing would overpower Homo Economicus’ asociability and aversion to trade. Simultaneously, however, it also obliterated the ‘others’ and restricted economics to the study of relationships between individuals and objects, so that the Aristotelian cosmos invited the field formalism. At the same time, it even removed Ego, reified everything and depicted the economic universe in terms of the movement of commodities. These various ‘moments’ have all infected its conceptual procedures, as we shall see. To my knowledge only one book, namely Fraser’s dated but nonetheless masterly Economic Thought and Language (1937), has explicitly and exclusively concerned itself with the conceptual problems raised by economics’ various definitions. Interestingly enough from the point of view of a sociology (and perhaps also a psychology) of knowledge, it has more or less escaped attention and has remained rarely and sparingly quoted. And yet, few epistemological enquiries rival with it in the field of economics. It is inconceivable to dwell at length upon Fraser’s book without stretching a chapter into a short treatise, but many of the arguments of this chapter have been directly or indirectly inspired by his views. In the briefest terms (which, by definition, hardly do justice to such a subtle and complex book), Fraser’s thesis can be summarized as follows. Classical economics would have defined its terms ‘substantially’, with reference either to an attribute of the individual or to a phase in technical processes; these would lead either to confusion, or to separating phenomena which should have been brought together. To this substantialist way of thinking neoclassical economics would have substituted functional definitions and expressly separated economics from what was in the final analysis a discourse on techniques (namely, from classical political economy). In this new economics production is no technical process but the ‘creation of utilities’ (and consumption consists in their ‘absorption’); in this new economics, furthermore, economic phenomena 75

FROM COSMOLOGY TO LANGUAGE

would be circumscribed with reference to their role, or function, within this strictly economic process. What Fraser never confesses but intimates all along is that this functional language ultimately rests on a set of relational definitions. He does not mention any analogy to evince his thesis but, as usual, Newtonian science could be summoned to provide it. Equations such as F=ma would express functional relationships and testify to relational thinking, because in them, velocity and acceleration are rates of change, do not denote the attributes of objects, but a relationship between two variables. I attach great importance to Fraser’s book because of those that I have come across it is the most sensitive to language, because he dared bring out many of the conceptual contradictions underlying economics and because his solution, completely inspired by neoclassical economics, brilliantly epitomizes some of the difficulties that this very research programme generates. Although the following argument merely develops the corollaries nestled in the cosmological premises already unveiled it will now and then be woven around Fraser’s theses. The reason is simple: against Fraser’s sophisticated argument in favour of neoclassical economics’ functional and implicitly relational manner of conceptualizing, I shall submit that all neoclassical concepts are incurably substantialist and that they forbid the conceptual discontinuity necessary for the formulation of scientific theories—and this because of neoclassical economies’ hybrid Aristotelian-cum-field cosmos.

THE CONCEPTUAL COSTS OF NEOCLASSICAL ECONOMICS’ COSMOLOGIES At the most superficial level, a cosmology that experimentally voids its universe of all the problems it purports to describe and analyse is a poor contender in the language contest. But our thesis goes much further; it is not by importing and implanting more realistic considerations, or by ‘relaxing some of the heroic assumptions’ that it could provide a language suited to its purpose. On the contrary, it can be argued that under no conditions can such a cosmology, retailored or not for a better fit with reality, can ever render possible the definition of concepts capable of describing this reality. And despite the chorus of disclaimers, the flaw lies above all in the fact that this language is inseparably welded to a theory of value. My thesis is simple: as long as economics is mesmerized by the question of value, it will never escape substantialist thinking.

A substantialist economics At first glance, all the evidence points in the opposite direction. Mirowski, who better than anyone else fathomed the insidious extension of substantialist 76

FROM COSMOLOGY TO LANGUAGE

thinking in neoclassical economics and neoclassical production theory, seems to absolve neoclassical price theory from substantialist thinking; according to him utility would exclusively be in the mind. Fraser, of lesser stature but capable of great perspicaciousness in matters epistemological, could write: Now, value is not an inherent quality of things, but a relation between them, even although (as we know) it is for certain purposes convenient to treat it—under the name of ‘purchasing power’—as though it were a quality. The value of any commodity is simply the ratio, or ratios, at which it exchanges with other commodities. (1937:159) The two views do not add up, but the divergences do not matter, for even with Fraser comparisons are above all mental operations, and internal to the individual. Whether in the guise of a field, or of ‘functional relationships’ (i.e., relational in its outlook), most commentators agree on one point: the neoclassical theory of value left behind the substantialist legacy of its classical forebears. But has it? On the one hand these ratios of which Fraser writes are but the prices of commodities; on the other, neoclassical economics supposes that goods must be valued before exchange and that, behind prices, must necessarily hide a value. Despite all the claims to the contrary it cannot logically be otherwise, for without the possibility of evaluating goods before exchange the pricing agent could never establish any ratio between commodities. Thus even the alleged relative value of a commodity, within a subjective theory of value, necessarily links the individual to what he seeks to derive from commodities, either considered in themselves or as competing with other commodities. As I have repeatedly harped on, one part of the neoclassical cosmos relates individuals first and above all to objects (openly and explicitly stated in Walras’s Eléments). In brief, Mirowski’s proposition is incomplete: utility is both within individuals and within commodities. And this procedure, I submit, is no more relational than the labour theory of value. In fact, this stance can even be generalized. There is indeed something in the search for the value behind prices—from which, let us stress it again, neoclassical economics does not escape—which perforce isolates the relationship between individuals and things. In over a millennium of reflections on the topic the greatest minds have only come up with two answers, both of which without issue. Either value derives objectively and substantially from what the individual has invested of himself in things (labour), or it stems from a quality in the object which he connects to his wants and needs (value in use, or utility). Either way we necessarily bring prices and value back, not to the exchange, but to the individual as producer (labour being then source of value) or consumer (satisfaction of needs or desires being source of value). In the final analysis, value (on which prices are based) flows either from 77

FROM COSMOLOGY TO LANGUAGE

what the economic agent imparted to the object (labour), or from what he wishes to appropriate from it (satisfaction, utility). If the first type has been christened substantialist in Chapter 1, the other can hardly be called relational. True, what the individual hopes to get from the object is defined with respect to him or her, but so is what he or she puts into it; in both cases, he or she endows the object with value. The main difference lies in that he or she transmits a substance to it in the one case, whereas he or she wishes to extract a substance from it in the other, however subjectively comprehended that ‘substance’ is. Whether I confer something to, or procure something from, objects surrounding me, there is always a substance transmitted (from agents to things, or from things to agents). We should not contrast a substantial to a relational understanding of value, but oppose an ‘objectively defined’ to a ‘subjectively defined’ substantialism. What distinguishes neoclassical theory is not its relational perception of value but its axiom of a subjective evaluation of the substance called value. This subjectively defined value is an attribute that might not objectively reside in the object desired, but that individuals nonetheless perceive in them (so, objects must at least give the impression that they possess it). In so far as individuals behold it there, it is as good as being there. As long as economics will cling on to a theory of relative prices, which of necessity evoke considerations of value (i.e., a theory of value), it will endlessly circle in the most scholastic disputations. Value will always hark back to the relationship linking the individual to objects and fatally anchor the language of economics in irremediably substantialist foundations. But what’s wrong with substantialist foundations? Mirowski never makes his position clear on this topic; Fraser has a position which he cannot elaborate to its full conclusion. Before elucidating this point, let us once more insist on the divergences between Mirowski’s orientation and the avenue followed here. Mirowski looks at economics from the point of view of conservation principles; from that stand-point, what strikes him is the fact that neoclassical economics borrowed its analogy from the physics of energy and its field formalism, but that it was inconsistent with it by neglecting to specify the conservation principles which the analogy demands. Moreover, it was doubly incoherent in trying to reconcile its price theory of value (based on a field analogy) with its theory of production, which inevitably implies the conservation of substance. Unlike Mirowski, I am here concerned with the language of economics (and not with its theories), and whether economics has drawn the boundaries around its concepts in a substantialist or a relational manner. From a conceptual point of view, what does substantialism consist in? We will spell out our thesis through a detour via Fraser. Fraser hoped to prove that neoclassical economics had been successful in severing the notion of production from the purely technical process to which it was assimilated in 78

FROM COSMOLOGY TO LANGUAGE

classical political economy, that it had achieved this momentous transformation by equating production with the creation of utilities, and that production thus understood yielded in turn functional definitions of labour, of capital, and so on. He further put forth a crucial idea, namely that we succumb to our native substantialist penchant by identifying production with technical considerations and thereby get bogged down in insuperable contradictions. From a technical point of view, production is a phase in the transformation of materials ultimately consumed, or used up. But—and here his demonstration is flawless—he shows that it is impossible to know ‘technically’ where either production or consumption starts or stops, that the two merge into one another, and that no technical process can usefully serve to distinguish them. Turning then his attention to production (or investment) and consumption goods, he establishes that the various attempts at dissociating them along the axes of durability, or of multiple- versus single-use, or of exchange- versus personal-uses, have also met with similar problems. Here again Fraser displays his skills at the highest degree, but he unfortunately fails to correlate the two manners of conceptualizing and to extract more general reflections on the epistemology of substantialism. In the final analysis, what does his demonstration prove (but fail to conclude)? That there have been two ways of defining commodities (e.g. investment or consumption goods), namely (a) by reference to a phase of a technical process, and (b) by reference to their intrinsic attributes (such as durability), and that ultimately goods do not belong to this or that phase of the technical process by their intrinsic qualities. Whichever characteristics one selects, the commodities so identified will straddle the two domains of production and consumption, thereby proscribing any conceptual discontinuity. From a conceptual point of view, substantialism thus consists in defining economic entities through their intrinsic attributes, and in some cases, in connecting those features to the technical process. And although Fraser does not exactly mean this by substantialism, his whole discussion reveals what is wrong with it: that intrinsic attributes (of a commodity, or a technological process) very rarely lend themselves to the conceptual discontinuity required to erect a language rigorous enough to describe and analyse reality unambiguously.

A utilitarian economics Substantialism, however, occupies only one (although a vital) part of the picture. We closed the earlier chapter on a paradox: that the neoclassical cosmologies both excluded and included the individual. And so it is. If, fundamentally, the neoclassical theory of value is based on the relationship of individuals to objects, it also incorporates others through prices. In and of itself, utility would only account for the individual’s attraction to objects; for 79

FROM COSMOLOGY TO LANGUAGE

exchange, prices are mandatory, and neoclassical prices convey the false impression that valuing is a social phenomenon. The problem, once more, resides in the protean nature of utility. At one level it is something that binds individuals to objects. What is consistently omitted, however, although it cannot be completely conjured away, is that it must attract individuals to objects possessed by others; otherwise prices and exchange vanish in thin air (as they actually do). But the ‘other’, as we shall see, lives a strange existence. At the outset the neoclassical individual is disinclined to trade because it costs him something to sacrifice in trade some of the goods in his possession; in fact, is not the simple ordering of his preferences a sufficient substitute to exchange? He yearns for self-sufficiency, like Plato’s perfect Good, and must be enticed to exchange by the greater utility he senses in the goods the other possesses. And so it is with labour, production and the like; not only is our Homo Oeconomicus fundamentally loath to exchange and therefore a-social, but he is incurably idle, and once again, others have to arouse him out of his inertia. There are therefore two associated features of this cosmology: on the one hand it is of necessity transactional. Without the presence of others, no economic activity would ever arise. On the other hand it is Aristotelian, and therefore inescapably utilitarian. All economic motion costs the individual something, and the prospect of gain must be stronger than the costs for agents to be stirred, be it in Marshallian, Austrian or Walrasian economics. The neoclassical individual seeks to conserve rest, and all movement inflicts a cost, a pain, a sacrifice, a disutility, or a disincentive and the force must perforce be some kind of expected satisfaction (projection of desires), of gain, of advantage, of utility or incentive. This Aristotelian vision thus leads necessarily to forces always being in one way or another those of an anticipated satisfaction, of something positive to be derived and acting against something negative; as a result, it cannot cast off its utilitarian origins and inspiration, whatever the semantic and methodological acrobatics to renege them; being utilitarian, it is inexorably felicific.1 As a result of this felicific and utilitarian reasoning, all valuation precedes prices, and as Mirowski has already observed, money is completely deflated to utility. Money can only live an imaginary existence within a felicific comprehension of prices, and economists who move conceptually within this cosmological space are condemned to argue in real terms, to describe and analyse a monetary economy in terms of barter. Without money, and within a felicific set of definitions, prices always settle at equilibrium and markets always clear. It cannot be otherwise. And without money it is beyond one’s power satisfactorily to represent prices (and more so pricing), as well as all categories of income (since incomes are but the prices of factor services). Because rent, quasi-rent, profits and interest are all returns to physical factors of production, and since labour is assimilated to a factor of production, incomes have to be distinguished in substantialist terms, in terms of some 80

FROM COSMOLOGY TO LANGUAGE

intrinsic property of the factor. I would thus argue that it is partly neoclassical economics’ utilitarian roots that condemns it to substantialism (the other cause being its tendency to reify, as we shall demonstrate in the following section). Let us briefly illustrate from Marshall definitions of interest, rent and quasi-rent. At one point, when discussing distribution, Marshall defines interests as the share that accrues to capital, in its competition with labour, as determined by their relative efficiency; in that capacity, they are returns to capital, the supply price that capital-owners exact to ‘sink’ their free capital, that is, to invest. They could more precisely be defined as returns to investments. But when discussing exchange rather than distribution (let us therefore dissociate his ‘exchange equations’ from his ‘distribution equations’, ‘equations’ being here used to mean a set of statements relating phenomena causally), Marshall sees things differently. Here, not only do the scene and protagonists change, but so does the phenomenon itself. In the exchange equations Marshall still writes of capital as the commodity demanded, but here capital no longer denotes the agent of production competing healthily with labour; it no longer designates ‘sunk’ (or committed) capital, but the ‘free’, ‘floating’ one, that is, money. But money to Marshall cannot be endowed with a reality of its own, it cannot be a commodity. Hence, instead of money, it is ‘free capital’ which is demanded by borrowers (industrialists) and provided by lenders (individual savers). It is therefore some intrinsic attribute of capital, whether ‘free’ or ‘committed’ which would serve as a discriminating criteria. But let us note that ‘sunk’ or ‘committed’ capital is nothing but investment, and we have seen that from the point of view of distribution, interests were returns to capital. Hence, whether we look at interests from the point of view of exchange, or from that of distribution, we find two different phenomena: interests are returns, either to free capital from the perspective of exchange, or to committed capital from the perspective of distribution! Things get more complicated, however, when we try to relate those two definitions to those of rent and of quasi-rent. According to Marshall, what is rent? Very much what it would have been to Ricardo, according to Stigler.2 Although Ricardo defined rent as ‘that portion of the produce of the earth which is paid to the landlord for the use of the original and indestructible powers of the soil’ (Ricardo 1987 [1817]: 33), this had little to do with his famous theory of rent, as no rent would ever have been paid had land been abundant and of uniform fertility. But with scarcity, and above all, with differential fertility, rent came to measure the difference between costs of production at the margin (on the least fertile land, on which no rent was paid because the price obtained for the commodities produced just rewarded labour and profits) and costs of production on inframarginal lands. This came to be known as rent calculated on the ‘extensive’ margin. But rent was not limited to differential productivity between two 81

FROM COSMOLOGY TO LANGUAGE

plots of land, since the law of diminishing returns to successive applications of capital and labour also generated differential productivity between those successive doses within a given plot of land; in this latter case, economists wrote of rent at the ‘intensive’ margin. Admittedly, prices would behave differently if they were set at the extensive rather than the intensive margin, but neither Ricardo nor Marshall nor, to my knowledge, anyone ever worked out a satisfactory theory of the articulation between the two margins. Whatever the case may be, producers would apply successive doses of capital and labour until the returns to a given dose barely covered their expenses of production (wages and profits); this would define their margin of production. Let us call ‘natural production’ the output of natural agents of production (this is no Marshallian concept, but one devised to help the presentation). In natural production, rent is universal above a certain level of investment of capital and labour, in conditions of diminishing return, to which all natural production tends, sooner or later. As returns start abating between successive doses of capital and labour the agricultural producer must sell his products at the price they cost him at the margin of production. Hence the excess between the gross income determined by costs of production at the margin and infra-marginal costs is rent, or the producer’s surplus. Since rent emanates from land’s differential fertility, a fertility given by nature, Marshall consequently perceives it as an ‘income derived from the free gifts of nature’ (1938:74). Finally, because rent is no reward, no utility to excite an effort but a sheer bonus, it evades all felicific calculus. Since land is fixed and consequently cannot be supplied (read ‘produced’), it follows that rent cannot enter agricultural supply prices (it is pricedetermined, not price-determining). As a bonus from nature, it is an income above costs of production, and only costs of production pass into supply prices. From the notion of rent Marshall develops that of quasi-rent. When first mentioned, quasi-rent is contrasted to rent. If rent denoted ‘the income derived from the free gifts of nature’ (p. 74), quasi-rent is defined as ‘the income derived from machines and other appliances for production made by man’ (ibid.).3 Further on, Marshall elucidates: Thus the rate of interest is a ratio: and the two things which it connects are both sums of money. So long as capital is ‘free’, and the sum of money…over which it gives command is known, the net money income, expected to be derived from it, can be represented as bearing a given ratio…to that sum. But when the free capital has been invested in a particular thing, its money value cannot as a rule be ascertained except by capitalizing the net income which it will yield: and therefore the causes which govern it are likely to be akin in a greater or less degree to those which govern rents. 82

FROM COSMOLOGY TO LANGUAGE

We are thus brought to the central doctrine of this part of economics, viz.:—That which is rightly regarded as interest on ‘free’ or ‘floating’ capital, or on new investments of capital, is more properly treated as a sort of rent—a Quasi-rent—on old investments of capital. (1938:412) Interestingly, rent and quasi-rent would embody a form of interest on investments of indeterminate value, or old investments which could only be evaluated by capitalizing the money derived from them, whereas interest would be a ratio calculated on free capital (read ‘money’), or new investments of known value. Conceptually, the result is most interesting. Indeed, what appeared earlier as a contrast between free and ‘sunk’ capital now reemerges as one between new and old investments: interests would be returns to new investments, and quasi-rent to old ones. But we have already seen interests to denote returns to physical capital in the distribution equations; there would thus be no way of distinguishing interests from quasi-rent. Also, at a more general level, at what point in time does an investment change from new to old? As with any such attribute of objects, it is absolutely impossible to grade such an axis; it precludes conceptual discontinuity. Thus interests merge with quasi-rent but, according to Marshall, so does rent. Indeed, rent and quasirent would all fade into one another, rent being a term connoting both a specific and a generic reality: there is likeness [between land and machinery], in that, since some of them cannot be produced quickly, they are practically fixed stock for short periods: and for those periods the incomes derived from them stand in the same relation to the value of the products raised by them, as do true rents. (1938:432, italics in original) On the one hand ‘natural factors of production’ (land, and also ‘natural ability’ to Marshall) would stand contrasted to man-made ones and would justify separating rent from quasi-rent. On the other hand they would both share the attribute of being impossible to supply in the short term; to that extent, the quasi-rent would be a form of rent.4 But the confusion does not stop there: the quasi-rent would also partake both of interest and of the rent, depending on the time perspective chosen, as in the case of exchange. When looking at the ‘income derived from machines and other appliances for production made by man’, in the short term Marshall understands it as a surplus over prime costs because the investment has been made a long time ago and is likely not to be taken into account when evaluating the year’s income. To that extent, it would approximate a rent. Marshall holds that the levels of both rent and quasi-rent are determined by demand, not by prime costs of production. If demand suddenly soars prices will follow suit without 83

FROM COSMOLOGY TO LANGUAGE

additional costs of production. This additional income, considered in the short term, would appear as a surplus above costs of production, that is, above prime costs. Therefore incomes that depend mostly on sudden upward fluctuations of demand partake of the nature of a rent; they are rent, strictly speaking, where the supply of agents of production is fixed (in the case of land), and quasi-rent where they take a long time to be produced because they are man-made appliances of production and can therefore be taken as fixed in the short term. When taking a longer-term view of the phenomenon however, Marshall computes quasi-rent among the supplementary costs which, if not covered by supply prices, would lead to bankruptcy after some time. From this point of view, they partake of interest and profits and are to be reckoned within the long-term supply prices (or normal supply prices). Marshall thus depicts a continuous chain running from interest to quasi-rent and to rent, rent being both a specific term when applied to land, and a generic one when describing a type of income. The problems surrounding the definition of the rent are infinitely more complex (as are those of wages, profits, interest and quasi-rent), but we shall mention a last one. On the one hand rent designates the returns to free gifts of nature; as such, no notion of surplus is implied. On the other, it is equally termed a producer’s surplus, a surplus perceived either in terms of costs, as ‘that excess which its [a farm’s] produce yields over its expenses of cultivation, including normal profits’ (p. 656), or in terms of margins, as ‘the excess of the gross income from the improved land over what is required to remunerate [the farmer] for the fresh doses of capital and labour he annually applies’ (p. 631; see Aggarwala 1948; Ogilvie 1930); furthermore, rent is ‘a surplus over total costs of the produce’ (p. 425). Ironically, there is a hidden twist in this tale of surplus; indeed, when looked at as a gift of nature or in terms of differential productivity (whether in terms of costs or of margin), rent stems from nature itself. Nevertheless, a surplus over total costs of produce can sometimes emanate from a sudden rise in demand, and such demand-induced surpluses also rank among rent and quasi-rent. But what are those sudden vagaries of demand? They are the outcome of human capriciousness; the jumpiness of the short period, or the maladjustments of supply to demand, as Ogilvie describes it (1930), manifest unpredictable collective movements which are artificial, or triggered off by human beings. They spring from abrupt changes of fashion, or from what one could call cultural causes. One cannot place rent both in nature (differential advantages rooted in land’s natural fertility, or income derived from the free gifts of nature) and in culture; in fact, Marshall’s dichotomy between the experimental long-term revealing natural laws which cannot be discerned because of the disturbing causes of short periods is but an extension of the contrast between nature and culture. Here, culture (demand) perturbs but, once its upsetting effect set aside, nature will show its true colours. A surplus 84

FROM COSMOLOGY TO LANGUAGE

resulting from suddenly soaring demand should rather be defined as ‘income derived from the free gifts of culture’! There is no need to belabour the point. By arguing in real terms (since money cannot play its real role) and defining most economic categories with respect to some of its attributes, all the boundaries are blurred, and in the particular case we have considered (and which could be repeated with any other set of definitions from any neoclassical author, dead or alive), all types of income partake of one another because intrinsic attributes rarely lend themselves to marked conceptual discontinuity. The price of a real economics firmly planted in felicific definitions is to flout the most elementary rules of any discourse. Finally, having conjured up the other as the necessary locus of that force of gravitation by intimating of transactions rooted in utilitarian considerations, the very same Aristotelian cosmology immediately conjures him away or, to be more precise, transmutes him.

Real or reifying economics? If the resistances dwell within individuals, the force lies without, and this is where the neoclassical cosmos harbours most paradoxes. First of all that moving force is located within other individuals so that neoclassical economic agents move through interaction only, within relationships. In this respect neoclassical economics is quite explicitly transactional, as we have not tired of repeating. But it is so in a peculiar way, because of yet another consequence of its cosmological foundations. For the animating force of the economy resides both within others and within objects, in that others have the power to make reluctant economic agents budge by flaunting the purely material benefits to be expected from the transaction; it is the goods that others promise, and the satisfaction or pleasure individuals anticipate from those goods, that propel them. In the final analysis the ‘other’ is but a carrier of goods that have the power to rouse economic agents into action; but to the ‘other’ excited into exchanging, or hiring, or investing, the ‘one’ is also but a carrier of good. Overall, as we have seen, individuals are not even needed, nay, they are not wanted because this ‘scientific’ economics struggles to portray economic phenomena as matter in motion. We have already been acquainted with the conceptual procedure whereby individuals are completely dislodged from the economic scene, but the strategy deserves greater attention. When studying wages, for instance, Marshall abstracts capital from the capitalist and labour from the labourer, to paint economic competition as if it pitted two objective economic phenomena against one another, namely capital and labour. More generally we have seen how neoclassical economics describes an economy where individuals actually follow the circulation of goods—where commodities, rather than individuals, 85

FROM COSMOLOGY TO LANGUAGE

compete. What has happened? Simply that neoclassical economists have taken to translating social relations as relationships between purely objective, quantifiable economic magnitudes (what I earlier called real magnitudes).5 Let us briefly examine this mode of conceptualization in Marshall’s Principles. Let us start with Marshall’s understanding of employment. Behind employment there lives in reality a social relationship between employers and employees who simultaneously exchange labour and money. In a first step Marshall transmutes this exchange into a unilateral flow of labour for money, divided into two separate isolated activities: the labourer sells labour, and the industrialist buys it. They both price one commodity only, namely labour. Second, he assumes equality between the two partners (although denying it places, while insisting that it does not change anything from the theoretical point of view) and finally assimilates the labourer to his labour to depict the unequal, social relationship between employers and employees as an equal relationship between the supply and demand for an ‘objective’ economic magnitude (a commodity), namely labour. This, however, would only describe the price of labour as the result of a given exchange. But what of wage rates (the share of the national dividend accruing to labour considered as a factor of production)? On this topic, it is worthwhile to follow Marshall more closely. In order to appreciate the details of Marshall’s procedure let us briefly recall what was at stake. The question of distribution lay at the heart of socialist and reformist critiques; inequalities of wealth had been their target. In pre-industrial England one could speak of unequal access to wealth. After the Industrial Revolution, and especially over the matter of wages, one could no longer speak of unequal, but of discontinuous access to wealth, in that industrial workers owned next to nothing and lived from one day to the next from the sale of their own labour whereas a minority possessed vastly more wealth than it could ever reasonably consume in a lifetime. This, to Proudhon, Mill and Marx among many others, epitomized capitalism’s most fundamental vice; to the votaries of the capitalist distribution of wealth it stood as the main theoretical challenge. That it was so comes out vividly in Marshall’s appraisal of Mill: if Mill had not naïvely believed distribution to escape the realm of economic laws he would not have hindered the progress of economics by thirty years (Marshall 1938:824). Thus Marshall unequivocally sought to submit distribution to the same ‘scientific’ treatment as exchange and production, and silently attempted to exonerate the existing distribution of wealth.6 How did he do it? First, by translating what in reality was a discontinuous access to wealth as a benign differential one, and second, by positing initial equality between the protagonists in the competition for wealth. This he achieved by disconnecting capital from the capitalists and labour from the labourers, in the classical and in fact purely Ricardian tradition, depicting a competition 86

FROM COSMOLOGY TO LANGUAGE

between capital and labour which smacked more of collaboration than competition, and seemed overall to work in favour of labour, and by explaining whatever inequalities were left—between capital and labour—as the result of a natural process, that of their differential marginal efficiency (all this, admittedly, within the framework of experimental conditions). This accounted only for interests on capital, not for profits. In a second step, he studied profits as detached from capital, as the just and fair earnings of an individual, the businessman. In this way the discontinuous access to wealth linked to capitalism was completely emasculated. Interests on capital emanated from a competition between capital and labour whereas profits sprang from the unique deeds of a unique individual, the businessman. We shall here investigate the relationship between labour and capital only, leaving aside Marshall’s complex treatment of profits. Within the firm it is the capital-owner who uses both capital and labour and decides on their respective proportion on the basis of the equimarginal principle. Marshall chose to call this process ‘substitution’ (p. 341). The same principle of substitution also allowed him to conflate the firm with the national economy. Within the firm it is clear for anyone to see that this so-called substitution prosaically denotes the rational allocation of resources in order to maximize profits, or what Marshall himself sometimes calls management. Yet Marshall can sidle effortlessly from exchange to distribution in his study of wages without acknowledging any displacement in the level of argumentation merely by calling substitution a special case of competition (and the latter a special of the survival of the fittest). How is this possible? Realistic as he is, Marshall does recognize that within the firm it is the businessman who allocates resources; this, however, is easily sidestepped. Through a somewhat Hegelian sleight-ofhand the businessman emerges as a modest agent through which the principle of substitution operates: ‘A chief function of business enterprise is to facilitate the free action of this great principle of substitution’ (p. 662, italics added). Within the firm it operates rationally through the businessman, and within the national market it works indirectly, in a more haphazard and slightly more wasteful manner, through competition between undertakers. Hence, what is management within the firm abruptly surfaces as competition within this supra-firm entity called the nation, both of them (management and competition) under the various guises of the principle of substitution. Labour and capital, which by no stretch of the imagination could be said to compete freely within the firm, unexpectedly do so within the nation as a whole because, under the guise of substitution, what is the businessman’s management within the firm merges with free competition outside. To call this a demonstration one would have to appeal to a new kind of logic. Within the nation as a whole, where does the demand lie for labour and capital? Obviously, in nineteenth-century laissez-faire capitalism, with 87

FROM COSMOLOGY TO LANGUAGE

industrialists. The discontinuous ownership of capital—industrialists possessed vast quantities of it, labourers next to none—governed the demand for both labour and capital—industrialists had a gigantic demand for it, and labourers none. Marshall eludes this rather inescapable fact, first by separating capital from the capitalists, then by subsuming both management and free-market competition under the umbrella concept of substitution, and then by reviving the wage-fund theory. The wage-fund theory was central to classical economics, according to which, wages were advances of capital. In standard presentations in books on the history of economic thought the wage-fund theory is introduced as a somewhat primitive theory of the labour market. Primitive because it knows nothing of schedules for the supply and demand of labour. Schumpeter may be taken as representative of this standard interpretation: Demand is represented in the wage-fund theory in a somewhat unusual manner, namely, by indicating a ‘sum in real terms’—wage goods, means of subsistence, variable capital—that capitalists have decided to spend on labour. This ‘demand’, also, is no schedule, at any given moment, but a given quantity. And again—as with workers on the supply side who have no reserve price below which they refuse to go—there is no price of labour beyond which ‘capitalists’ will refuse to go: having decided what to reserve for their own consumption, they cannot, given this decision, spend more than that sum (the wage fund); and, never allowing capital to be idle, they (normally) will not spend less. (Schumpeter 1954:666, italics original) This, to use Fisher’s terminology, is but a transverse reading of the facts. On the contrary, rather than a demand for labour on the part of capitalists-cumemployers (or employers who borrow their capital), one can read it in its original form—as a demand for capital on the part of labourers. Indeed, wage-fund theorists methodically present the labourer as a self-employed person, a mini-businessman in need of capital which he borrows from more fortunate capitalists. This, fundamentally, is what the classics understood it to be; they are, to use Quesnay’s expression, ‘avances de capital’. Just as landlords renting out land, farm equipment and even seeds to the farmer are ‘advancing capital to them’, so does the industrialist to wage-earners (according to Schumpeter, when the classics discuss the ‘business man’, they actually mean the farmer). Thus, the wage-fund theory portrays the agricultural labourer as a businessman in need of capital, and the capitalist as the one lending him the capital necessary to perform his work and survive the year. The very vocabulary testifies to this; throughout Ricardo’s Principles, labourers are ‘aided by capital’, and even Marshall writes of capital as that which assists labour in its work (1938:543, 829). Thus classical economists described 88

FROM COSMOLOGY TO LANGUAGE

salaried workers as people who borrowed money to carry out their trade, as mini-capitalists producing on loans. Despite the strong qualifications he proffers about the theory, Marshall expeditiously incorporates it for the same reasons that he blends in views which contradict his basic axioms: namely, in order to support the view of fair and just wages. In fact the wage-fund theory flies in the face of every other statement of Marshall on wages; it contradicts the notion of wages as reward, or as the supply price of labour, among others. Yet Marshall needs it because it is the only way to inject symmetry where there is none and to treat asymmetrical relationships rooted in discontinuous ownership of capital as if they were symmetrical relations between equal economic entities. Indeed, by depicting the labourer as someone who borrowed money, he could then be said to have a demand for capital. With the wage-fund theory every one, from the most destitute worker to the most opulent manufacturer, has a demand for capital. But what about a demand for labour? Are not capital-owners the only consumers of other people’s labour? Not if in a Ricardian-cum-Senior tradition we define capital as ‘labour plus a lot of waiting’, the lot of waiting’ referring to savings (pp. 523, 541, 543). If wages are borrowed capital and if capital is but labour to which waiting has been added, then the most poorly paid worker also has a demand for labour! With these conceptual transformations, the stage is finally set for Marshall’s scientific demonstration of the law-like behaviour of distribution. Since (1) wages are but loans of capital, and (2) capital is nothing but labour to which has been added a lot of waiting; since furthermore (3) substitution is nothing but a case of competition, it is then possible, first to blur the distinction between exchange and distribution by assuming that the same mechanism rules both the intra-firm and the extra-firm levels of organization, and by calling this mechanism competition, to demonstrate that capital and labour were equal, symmetrical agents of production competing freely on the national market, their demand—and therefore their reward—being fixed by the demand for their services, and the latter by their marginal efficiency on this national market. Once more the socially rooted differential access to capital between capitalists and labourers is transformed into the differential productivity of equal ‘objective’ economic categories. If prices, wages and profits are all handled through exactly the same thought-process, what about the rent? We owe it to Ricardo for having initiated this scientific transformation, and to Marshall, among others, for having completed it. It is with none other than the eminent stock-broker that this type of conceptualization first emerged. Once more, what is, empirically, the rent?—An uneven exchange (hence social) relationship stemming from a differential, if not an outright discontinuous, ownership of land. And, under Ricardo’s scientific genius, what does it become? A relationship, no longer between landlord and tenants, but between plots of land (hence, economic quantities) embedded in differential productivity. 89

FROM COSMOLOGY TO LANGUAGE

Is this ‘real’ analysis? Not in the least. Any such thought-process which demotes social agents to real economic magnitudes (capital, labour, productivity of land) and represents their social relationships in terms of relations between these real phenomena crudely reifies social relations. It is no ‘real’ analysis, but a reifying economics. This, however, lays bare only half of the procedure. Looked at from the level of transactions (or exchange) upward, Marshall (and here must be listed both classical and neoclassical economists) transmutes unequal social relationships into impersonal (objective, or natural) and equal relationships between economic quantities: the supply and demand for commodities; the supply and demand for labour; the supply and demand for business ability; the competition between capital and labour; the differential productivity of various plots of land. Nonetheless, what is abolished at the level of the individual transaction is actually reinserted at the global level. When considered from the point of view of aggregates, neoclassical economists exhibit yet another interesting manoeuvre. Indeed, it is quite manifest that neoclassical (transactional) economists envision the relationship between aggregate variables on the model of the relationship between exchanging partners in a market transaction. They apprehend aggregate variables as simple extensions of these isolated market exchanges; thus, if it reifies social relationships when arguing from the minimal to the aggregate units, neoclassical economics actually conceives of the functional relationship between neutral, objective, real magnitudes on the model of social relationships when examining things at the collective level. It ‘socializes’ the articulation of truly neutral and objective aggregate variables (such as output, consumption, rates of interest, level of employment and the like). Let us reconsider employment within this framework. At the microeconomic level it appears as a relationship between an employer and an employee in which a commodity, namely labour, is both sold and purchased at an agreed price; it is depicted in the aggregate as a relation between the supply and demand of an objective, neutral economic entity, labour, adjusted through its price, namely wages. But let us contemplate it from the other point of view. One may indeed say that neoclassical economists actually think of truly neutral, objective, real economic magnitudes such as the level of employment on the model of social relationships. As the quantity of labour sold, employment in the aggregate nonetheless evokes suppliers and purchasers of labour, together with the price of the commodity exchanged, namely labour. And so it is with rates of interest. As the price regulating the supply and demand of saving it implicitly conjures the relationship bringing together lenders and borrowers. We can again generalize. Prices are central to this economics because they adjust supply to demand, when behind ‘supply and demand’ hides a transaction between suppliers to buyers. Prices emerge as the kingpin of any market transaction and the problem of employment is thought of primarily in terms 90

FROM COSMOLOGY TO LANGUAGE

of the price of labour (wages), that of saving in terms of the price of saving (rate of interest) and that of consumption in terms of the price of commodities. Through prices neoclassical economics thus reifies social relationships between economic partners in market exchange but also represents socially the relationship between real economic magnitudes at the aggregate level. This is what we meant by dubbing it transactional’; it is simultaneously reifying and transactional, whether we look up or down. We have hitherto concentrated on the lack of conceptual boundaries separating production from consumption, investment from consumption goods, the various factors of production from one another, and the various types of incomes from another, and we could extend the demonstration to most of neoclassical economics’ concepts. This conceptual amalgamation, in one way or another, flows directly from the reifying element underpinning neoclassical economics’ Aristotelian and field cosmologies, and the substantialism and utilitarianism they entail.

IRREALISM OR DELUSION? From a cosmological point of view the achievements of neoclassical economics are quite impressive. In its experimental attempt to come to grips with the mechanisms of a capitalist economy rooted in monetary exchange, it has defined demand in such a way as to remove every reference to ownership and to others, thus radically obliterating the social elements that could enter the definition of capitalism, as well as the very possibility of bargaining or exploitation. Second, it has dislodged money from exchange, thereby eradicating the very character of the entrepreneur and the very possibility of speculation and profits, not to mention the omission of time that it entailed. Not satisfied with this experimental procedure, it has actually eliminated exchange itself, collapsing it to a process of preference-ordering within the individual’s mind. Satisfied with this new understanding of exchange it similarly demoted production, consumption and distribution to the same mental dimension that it branded as ‘allocation of scarce resources between alternative uses’, which it further assimilated to choice, in the process doing away with the very existence of any economic activity. But even choices imported too many imperfections in this experimental universe; so neoclassical economics unceremoniously circumvented them by jettisoning the individual himself, showing that the very processes that economics writes about derive from the movement of goods themselves, and that there are supra-individual laws of the market similar to the laws of physics reigning over this circulation of commodities. With the individual firmly out of the picture, it could then emulate that queen of experimental science, namely physics; henceforth everything economic could be shown unmistakably to be a 91

FROM COSMOLOGY TO LANGUAGE

question of matter in movement. In this, however, it has made it forever unfeasible to retrieve the world we know, and this for two related reasons. Ménard has already brought out the first element, albeit too timidly perhaps. Between physics and mathematical economics lies a vast divide. If physics postulates atoms in order to build its models, it does so in so far as experiments enable physicists to rectify them. By positing an economic cosmos peopled with atomized individuals, mathematical economics borrows an analogy ‘which leads to elaborating a fiction contrary to all possible observations, giving the model a purely negative status: it would serve to understand what is by giving an image of what is not, while making the second the aim of the first’ (Ménard 1978:304, my translation). In fact, I see it slightly differently. Because mathematical economists believed that the laws of ‘economic motion’ could only be discerned in a world devoid of hindrances, they thought up the perfect market, and the vice lies in this idea of perfection. Indeed there is something eminently paradoxical about this perfection, in that the world it portrays is a world best described in negative terms, rather than positive ones. It is a universe filled with ‘absences’: absence of money, absence of exchange, absence of social classes, absence of bargaining, of speculation, of profits, of entrepreneurs, of exchange, of production, of consumption, of activities, of choice, and to crown it all, of individuals. To be more accurate, it voids the universe it claims to describe of everything that fills it and replaces the elements it has surgically removed with their shadows. It creates an illusion of money, of exchange, of production, of profit, of choice and even of individuals. Against this cosmological canvas not the faintest lineament remains of antique contours: production, consumption, exchange, competition or distribution have all shrunk to non-dimensional deliberative economizing. Second, and because of the peculiarities of that cosmos and the multiple origins of its analogies, it has inexorably led to semantic confusion, precluding any possibility of establishing any kind of conceptual discontinuity in its language. Hence the impasse of all the philosophical debates surrounding neoclassical economics; as long as economists insist on describing this process as the experimentation, or the simplification of experimental sciences, or even the idealizations of geometry, or the fictions of mathematics, and as long as the only form of critique boils down to emphasizing its divorce from reality, its lack of realism, the belief lingers that it is theoretically possible to move from this experimental, or simplified, idealized, or simply axiomatic world populated with illusions, to this world, or that it is theoretically possible to use the findings derived from this perfect market to unravel the problems of this imperfect world, that a proper injection of realism, or a relaxing of assumptions which seem too ‘heroic’ or restrictive could take us back to the world we live in. Sadly, this is neoclassical economics’ greatest delusion. Imperfect markets and 92

FROM COSMOLOGY TO LANGUAGE

imperfect competition are meaningless concepts because perfection itself is a theological construct, not a scientific one. With their perfect market neoclassical economists strove to imitate Galileo’s experimental scenario of a vacuum but achieved something radically different. Galileo envisioned the vacuum by experimentally removing all hindrances to motion; he did not, however, define it as a world of perfection. Perfection does not belong to empirical sciences but to the world of theology. Throughout two millennia of the most scholarly exegeses none of the greatest minds has ever moved deductively from God, perfection incarnate, to his creatures. On the contrary, God was apprehended in the negative terms of his creatures, as is the perfect market. An unbridgeable divide separated the perfect—who possessed all qualities in the infinite—and the finite creatures which he engendered. Perfection necessarily spells infinity and it is no more possible to reason from the perfect to the imperfect than it is from the infinite to the finite. From an infinite series one may subtract subsets of any length, and always be left with an infinite series; infinity minus any finite series equals infinity. Similarly, nothing taken away from perfection can yield anything else than perfection, because the ‘perfect’ enjoys all attributes in the infinite. If neoclassical economics’ perfect market has a true analogy in the history of ideas, I would submit that it is not to be espied in the direction of experimental sciences, but in the direction of theology (to see the convergence, read Lovejoy’s great masterpiece, The Great Chain of Being). In the empirical sciences experimental constructs constitute but initial steps ideally followed by the reinsertion of disturbing causes and by complexification, in order to account for the observed. However, we are forever inhibited from moving from the perfect market to the observable world because this perfection rules out this world and fills it with illusions, and because the creation of illusions cannot lead to anything outside itself. Illusions are absolutely self-contained, closed-in, not to say schizophrenic; they are radically impervious to reality, because they seek precisely to replace it. Because of the illusory world it conjures up and the type of conceptualization it fosters, the neoclassical cosmology intrinsically proscribes the description of our own capitalist monetary economy (or of any economy), as the Aristotelian cosmos precluded the representation of time and space necessary for a scientific dynamics to emerge. It thus equally rules out analysing this economy (i.e., explaining it). Thus our initial question about neoclassical economics is answered: the cosmology underlying neoclassical economics makes it impossible to describe and analyse our own economy. Consequently, more theoretical discussions are futile since it is the very cosmology that has to be exploded. Discussing Aristotle’s theories of motion without questioning his cosmology (or ontology) amounted to sharing his cosmological assumptions and generating yet more Aristotelian theories. Similarly with 93

FROM COSMOLOGY TO LANGUAGE

any brand of neoclassical economics (the cosmological unity of which should by now be manifest); debating its theories without a prior epistemological assessment adds up to circular debates within its own cosmological space, and to a sheer waste of time. Finally, let us not be deluded; this is no diagnosis applying to the cofounders of neoclassical economics. This epistemological assessment applies to neoclassical economics as it is practised now; the cosmological elements, however, had to be gleaned where they appeared in their most transparent formulations. If neoclassical economics is forever vitiated methodologically, theoretically, conceptually and cosmologically, if it is transactional, Aristotelian, substantialist, incapable of integrating money and riddled with inconsistencies, why has it survived the repeated onslaughts of so many powerful critiques? This is the very question that Kuhn raised about the Aristotelian cosmology and science in his Copernican Revolution, and in both cases—that of Aristotelian science in the seventeenth century and of neoclassical economics now—it is undisputable that the problem does not boil down to a question of mere theoretical constructs. Critiques or attempts at creating new research programmes in economics are confronted by more than a sturdy opponent, as Kepler and Galileo were four hundred years ago. Like the New Scientists then, economists who now oppose neoclassical economics have to confront theories embedded in a cosmology which reaches out beyond economics. If Aristotle’s cosmology was inseparable from an image of Man poised at the centre of the world, neoclassical economics is wedded to an image of society, and on this point, one can only repeat a hackneyed litany. In the final analysis, neoclassical economics’ Aristotelian inspiration did not have to engender a reifying economics and a calculus at the margin with rising supply curves and downward-sloping demand curves intersecting at equilibrium prices. Ultimately, the reason why neoclassical economics persists is the ideological message it carries, despite the astonishing Jesuitic casuistry adduced to prove the contrary:7 it is, and remains, the most powerful tool to demonstrate ‘scientifically’ (i.e., ‘objectively’ and, hence, ‘with no winning horse to back’) that capitalism (or, more precisely, the liberal version of capitalism) is the most economical world possible: In these difficult circumstances, a methodology which took as its central exemplar a demonstration of the optimal allocation of scarce resources in a perfect market and substituted a ‘scientific’ concept of equilibrium for the out-dated assumption of the ‘natural law’ was well worth some narrowing in the scope of the discipline. For it permitted economists to justify an ideological bias towards the status quo of income distribution on ostensibly non-political grounds. (Deane 1978:111; also 101, 121) 94

FROM COSMOLOGY TO LANGUAGE

If it had not bolstered up liberalism, if it had not supported a Panglossian view of laissez-faire capitalism, that ‘most precise and elegant tool’ would not have survived the lethal blows directed at it. It would long have been supplanted. If this epistemological diagnosis is right it should point to the elements of a solution. Classical economists sought in the discontinuity of stratification the necessary elements to circumscribe economic phenomena: they would elicit their definition of labour from that of the labourer, that of profits from the capitalist, and that of rent from the landlord. In this their effort was marred by a host of inhibiting vices, paramount among which were their latent Aristotelianism and the substantialism attendant upon any economics erected on a theory of value, not to mention the rigid exclusiveness of their social categories. If we want to retrieve meaningful conceptual discontinuities which will enable us to write accurately about a capitalist economy we will have to seek some inspiration from classical political economy without falling victims to its conceptual limitations. To elaborate a tight conceptual framework we must locate discontinuities where they can be found. Since they cannot be discovered either in the macro-cyclical bio-process of transforming energy from one form into another and back into its original form (in short, in the production-consumption process; Fraser 1937), or in most of the intrinsic qualities of objects, there is only one place left to pry into and this will have to be social organization. This, Mirowski has clearly fathomed, without however developing the idea (1991:317). We will have to delineate our conceptual grid for the study of economic phenomena according to social boundaries. Although some features of objects will sometimes give us clues because they are truly discrete, it is mostly in the direction of social organization that we will have to look because social organization does exhibit discontinuities. Admittedly this can never be found in neoclassical economics, and to topple the latter economists will need a research programme free of the fatal flaws which blight it. Since similar faults can be discerned in Marx’s Capital (see Appendix 2), can Keynes’s economics then do the job?

95

5 KEYNES’S ECONOMICS: WHAT KIND OF REVOLUTION?

For self-evident reasons, Keynes’s General Theory imposed itself as the paradigmatic statement of the so-called Keynesian research programme. Accordingly, I have completely ignored the links between the Treatise on Money and the General Theory and the historical investigation regarding Keynes’s predecessors.1 A vast literature has explored the relationship between Keynes and the Swedish economists, and scrutinized more particularly the possibility that Myrdal, or even D.H.Robertson, anticipated him in the formulation of this research programme. Despite its paramount importance, such historical research falls entirely beyond the compass of this narrowly epistemological essay. Here, Keynes’s General Theory unambiguously encapsulates the major ideas of the research programme associated to his name, rightly or wrongly. Most writers on Keynes have contrasted his theories to those he labelled ‘classical’, while neglecting his more important cosmological message. This mislabelling has caused further confusion. On this, I accept Fitzgibbons’s judgement that by ‘classical’ economics Keynes meant ‘scientific’ economics, an economics that believed in a ‘hidden reality’ and sought to emulate Newtonian science in discovering the laws governing this hidden world. Since this usage is most idiosyncratic, I see Keynes as standing against neoclassical economics, and will strive to mention ‘neoclassical’ where Keynes writes ‘classical’. Admittedly, if the General Theory intractably opposes efforts to lay bare its underlying cosmology, much of the blame lies with Keynes himself and with the host of myths he propagated about his own contribution. Of these many myths, some are more pernicious than others. First, Keynes deemed his theory to pertain to all possible levels of output and employment in a monetary economy, and he restricted the validity of neoclassical economics to conditions of full employment only (16; XIV:84, 118, 340; repeated in Asimakopulos (1991:75); Barrère (1990:285); and Fletcher (1989:95) among others). His would have stood as a general theory, of which neoclassical economics would have constituted an 96

KEYNES’S ECONOMICS: WHAT KIND OF REVOLUTION?

adequate approximation when all the labour force was employed. This has fostered a most dangerous picture of Keynes as a ‘theoretician of the phenomenal world’, so to speak, as an economist who distinguished himself from neoclassical economics only by relaxing some of the restrictions of the latter’s experimental constructs, by injecting into their apriorism a sorely needed dose of realism. This view lives in the work of Leijonhufvud (1968),where Keynes dons the cloak of a Walrasian without the auctioneer—or in that of Fitzgibbons, for whom Keynes would have intuited that no hidden reality lies behind the surface economy (Fitzgibbons 1988:124); it also lives in the works of so many others, such as Brunner and Meltzer (1971); Clower (1969, 1971); Coddington (1983); Davidson (1991); Fender (1981); Kregel (1973), Joan Robinson (1971) and Tobin (1980), to name but a few. Although some of these portrayals may faithfully reflect the specificity of his mode of thought, they drag the debate onto very slippery grounds. Before dealing with such questions however, let us first dispel some misapprehensions about the relationship of ‘special’ to ‘general’ theories in the history of science. Research programmes do not all stride ahead in the same way; some are circular, others spiralling. Aristotelian, pre-Darwinian and pre-Lavoisier research programmes tended to get bogged down in discussions which stifled their advance, whereas Galilean—Newtonian physics, Darwinian evolutionary biology or Lavoisier’s chemistry irreversibly displaced their predecessors and launched their programme into a spiralling movement. How they do so, I believe, is largely a matter of cosmology; some cosmologies simply prevent science’s spiralling movement, others do not. Scientific revolutions thus come in various guises, and of the cosmological ones, two types can be set apart: those that thrust research programmes from a circular to a spiralling trajectory, and those that convulse already spiralling sciences. To the first type would belong Galileo’s overthrow of Aristotle’s physics, Lavoisier’s victory over alchemical thinking and the phlogiston theory, or Darwin’s dislodging of teleological evolutionary biology; to the latter, the theory of relativity or quantum mechanics. But never have sciences on the opposite sides of a ‘cosmological revolution’ been related as general to special theories. Let us call ‘classical’ those already spiralling sciences later ousted by a post-classical coup (as happened in classical physics with the theory of relativity and quantum mechanics), and ‘scholastic’ those circular research programmes toppled by classical revolutions. Classical revolutions thoroughly disclaim the foundations of scholastic research programmes and their underlying cosmology, mercilessly inverting most if not all of their premises. Post-classical sciences do not face the same challenge. They preserve many of the cosmological changes which stimulated the emergence of classical sciences while dismissing cosmological elements obstructing further progress. In neither instance can the new science claim 97

KEYNES’S ECONOMICS: WHAT KIND OF REVOLUTION?

the status of a general theory, of which the previous one would embody but a special case. On the other hand, other types of scientific advances (but are they revolutions?) consist precisely in formulating a grand synthesis, a unified theory encompassing special ones, but within the same cosmological space. This is admittedly the case with Newton (the actual cosmological shift being much more Galileo’s and Descartes’ achievement than Newton’s), or with Maxwell, to name but a few. In these innovative syntheses the originality lies in the new theory’s ability suddenly to weld hitherto disparate theories into one overarching General Theory, of which the previous ones can afterwards only pretend to be special cases. Such syntheses do not precipitate cosmological ruptures; they build on various strands of research which until then had been disconnected. They are ‘connecting’ revolutions, if one wishes to call them ‘revolutions’, ‘generalizing’ ones. By definition, generalizing revolutions break forth only within the spiralling state of science. This crude typology certainly does not do justice to the many sudden turnabouts in science, but it enables us to demarcate, for the restricted purposes of our argumentation (1) cosmological revolutions (a) from scholastic to classical research programmes and (b) from classical to post-classical science and, finally (2) synthesizing revolutions, within classical or post-classical research programmes. By presenting his economics as a General Theory Keynes was inviting the reader to believe, perhaps unwittingly, that both his and the neoclassical brand of economics inhabited the same cosmological space— neoclassical economics being demoted to a special case of his synthesizing endeavour—and that by extension, both were classical research programmes; that is, both had ascended to a spiralling stage. Others have understood it to imply that economics had undergone its Newtonian revolution with the marginalists, and its Einsteinian one with Keynes (Leijonhufvud (1968), mentioned by Hodgson (1985:16) and Hutchison (1977) and repeated by Hutton (1986:117)). By looking more closely at Keynes’s mode of conceptualizing and theorizing, we shall show him to have calamitously misled his readers by suggesting such an affinity between his economics and that of neoclassical economists. A second myth, equally pernicious although under fire for a good many years, is Keynes’s idea that his contribution belonged to macro-economics, a field of enquiry which he construed as distinct from neoclassical microeconomics. The camps are divided; some still adhere faithfully to the master’s own pronouncements and proclaim for his macro-economics the status of a quasi-autonomous discipline whereas others seek to establish the micro-foundations to his macro-economics. I side with the latter in holding that all macro-economics must be erected on acceptable microeconomic foundations and that a micro-economics closed to macroeconomic inferences leads economics up a garden path. But the muddles submerging the question 98

KEYNES’S ECONOMICS: WHAT KIND OF REVOLUTION?

of aggregation are so many and so formidable that I shall sidestep it initially, better to assess it later. Last but not least, of the many myths that Keynes and most of his commentators have also implicitly sanctioned, is the idea that both the quantity theory of money and the neoclassical theory of value moved within the same cosmological space, as two parts of what Keynes identified as classical theory. Keynes rightly pointed out that neoclassical economists never properly articulated the two parts, but he wrongly supposed that the two were cosmologically and methodologically homogeneous—with the quantity theory playing the role of some kind of macro-economics to neoclassical micro-economics. This is positively untenable. The quantity theory does not build up from individuals, as transactional economics pretends to, but single-mindedly focuses on the quantity of money and its circulation, seeking to derive conclusions about aggregate magnitudes by positing the absence of any decisional process and of any activity. Instead of reasoning from the exchanging partners and their imputed rationality it isolates the medium of exchange itself, ignores the fact that money is only what circulates between exchanging partners and experimentally removes those partners to discuss prices (the results of individual decisions). There is no doubt that the quantity of money does affect prices; it is one of those constraints which make up the environment within which economic agents operate. But apart from inferring that the stock of money influences the level of prices, the quantity theory can hardly draw more meaningful inferences about economic behaviour. Because the quantitativist reasoning denies the very premises of neoclassical micro-economics I believe that the General Theory can best be appreciated against neoclassical microeconomics (despite the fact that Keynes endorsed the quantity theory himself in the Treatise on Money and displayed strong vestiges of it in the General Theory (Klein 1966 [1947]:93). I have singled out Marshall’s Principles of Economics as the neoclassical paradigm and I shall appraise Keynes’s General Theory against it. I will reiterate with the General Theory the procedure I adopted with Marshall and attempt to draw out of Keynes’s theories and method the minimal units of his economics. Before going ahead however, I would like to issue three very strong caveats. First, this somewhat cursory introduction does not pretend to be a faithful representation of Keynes’s economics; in the light of the innumerable debates opposing neoclassical economists, monetarists, neo-Keynesians, post-Keynesians and Keynesians of the neoclassical synthesis on Keynes’s ‘true’ contribution to economic theory, and especially after such masterful exegeses such as those of Chick (1983), Fitzgibbons (1988), Leijonhufvud (1968) and Shackle (1967, 1972), to name but a few, it would be incredibly naïve to search for the ‘true’ Keynes. As many see it, the challenge facing the Keynesians is one of salvaging, if not reconstructing, elements from Keynes’s economics in order 99

KEYNES’S ECONOMICS: WHAT KIND OF REVOLUTION?

to perfect a research programme that can successfully topple neoclassical economics. The following ideas embody but a fragment of what can be read in the General Theory, but a fragment I believe to be worth reclaiming if it serves as a new shoot to refertilize a revolution that so many have pronounced aborted. Thus I present the following not as an exegesis but as a ‘reconstruction’ of Keynes. Second, only a most schematic (the experts will say caricatural) version of Keynes’s economics will be sketched, and one that wilfully ignores the sequence of his argumentation, that overlooks the overwhelming theoretical problem he was tackling (involuntary unemployment) and the overall architecture of the General Theory! The details of Keynes’s economics have been presented too many times and too well to deserve more than a passing mention in this type of investigation. From an epistemological point of view, the most important clues are often scattered and buried throughout a volume. Finally, Keynes’s theories will be portrayed in their roughest contours, leaving aside many details and qualifications, together with most of the difficulties that they bring about. On the one hand, such works as those of Chick or Fletcher, for instance, achieve this much better than I could ever hope to; on the other, some of these problematic issues will resurface in the following chapters, but only after enough elements have been gathered which I hope are novel in their arrangement, and can assist in the discussion. In brief, the grossest lineaments may help to accentuate the contrast with neoclassical economics, to espy a different landscape in which the finer details can later be placed back.

ISOLATING THE MINIMAL UNIT We have already dissected neoclassical economics and discovered its minimal unit not to be the individual. What of Keynes’s economics in the General Theory? (In this whole essay, we hold Keynes’s economics to be synonymous with the economics of the General Theory.) Before sounding it, we must return to an issue mentioned earlier. Several of the most loyal adulators of Keynes contrast his realism, his denial of a ‘hidden reality’, to the apriorism, if not the outright irrealism of neoclassical economics. However true some of these appraisals may ring—and here I have in mind Fitzgibbons’s magnificent work—they can easily be misused by ill-intentioned theoretical opponents to imply the absence of a specific Keynesian experimental construct. Indeed, one intent on discrediting Keynes’s originality could easily be lured into thinking that only neoclassical economics makes use of experimental constructs. Against the backdrop of neoclassical economics, Keynes would have only relaxed some restrictions (euphemistically described as ‘heroic assumptions’) to create an impression of greater realism, somewhat in the tradition of Marshall. To dodge the series of false problems that this caricature 100

KEYNES’S ECONOMICS: WHAT KIND OF REVOLUTION?

has promoted it is important to understand Keynes not as a theoretician of the phenomenal world, but as a pure theoretician, whose experimental constructs and revolutionary insights empowered him to account for observable phenomena while eschewing mechanical, Laplacean determinism. One part of this experimental construct Keynes himself made quite explicit throughout the General Theory; the other is much less so, and I will superimpose it on the first one, but only after a long detour. Let us present the most explicit experimental scenario first. The most recent exegeses might give the impression that Keynes’s experimental scenario consisted in elaborating an economics of a ‘monetary production economy’ (see especially Barrère (1990) and Fitzgibbons (1988)). He most certainly did entertain such a project but this image of Keynes’s vision, like that of the realist Keynes, can too easily serve as a double-edged weapon because it gives prominence to production at the expense of exchange. Indeed KeynSes himself wished not to embroil his economics in exchange because exchange is so pivotal to neoclassical economics, his very target. By so doing however, he deplorably occulted the fact that a capitalist economy must operate as a ‘monetary exchange’ economy before evolving into a monetary production economy. The consequences have been unfortunate: because of this bias towards production Keynes has introduced money at the theoretical, or functional, level, while omitting it at the most basic conceptual substructure. Until money has infiltrated economics’ very language as well as its theoretical constructions, it is to be feared that some debates will continue in their circular orbits. In reality, the fact that a modern capitalist economy is first and above all an economy of monetary exchange surfaces as the basic experimental construct of the General Theory. This Keynes openly established by arguing exclusively within the experimental context of an economy completely lacking integration, that is, of an economy in which consumers do not make the goods they consume but purchase them from entrepreneurs, in which entrepreneurs do not manufacture the products they use in processing but procure them from other entrepreneurs, and in which all exchanges are monetarized. This is no realistic picture but a straightforward experimental scenario, one that can be described as a ‘completely monetarized economy’, and one which overtly underpins the whole of the General Theory. Upon this construct he added other experimental conditions, namely that firms stood for producers and households for consumers, and that their relationship was unequal; that it was firms (or entrepreneurs) who steered the economy (hence its being a ‘monetary production economy’), and that these firms were many and small (supposing therefore a polypolistic market (Chick: 1983:25)). Finally, he assumed experimentally that individuals in this economy did not exchange with other nations (it is a closed economy). To this, he appended a number of simplifications (this list does not claim to be exhaustive, only illustrative): (a) 101

KEYNES’S ECONOMICS: WHAT KIND OF REVOLUTION?

that the economy was composed of firms and households uniquely (hence the economic role of government was not initially taken into account, and as Chick has observed, even banks were given a scant treatment (Chick 1983:233)); (b) that these firms and households could be represented by a single individual—respectively the entrepreneur and the ‘individual producer’; (c) that households did little borrowing (Chick 1983:105), (d) that firms did little or no saving (no corporate saving), and (e) that it suffices to dissociate money as cash from ‘debts’, the latter encompassing all financial assets other than money and excluding real capital. Within this experimental scenario, what are Keynes’s minimal units? Instead of following his itinerary from wages to involuntary unemployment we will select as our stepping-stone his famous (or notorious) equations articulating national output, national income, national expenditures, savings and investment (located at the end of a series of definitions in Chapter 6 of the General Theory). There, he explains: Provided it is agreed that income is equal to the value of current output, that current investment is equal to that part of current output which is not consumed, and that saving is equal to the excess of income over consumption—all of which is conformable both to common sense and to the traditional usage of the great majority of economists—the equality of saving and investment necessarily follows. In short— Income=value of output=consumption+investment. Saving=income–consumption. Therefore saving=investment, (Keynes 1973 [1936]:63) which it has often been customary to rewrite as: (1) Y=C+I; (2) Y=C+S; (3) I=S. Chick has drawn attention to some of the problems surrounding the notion of income (see also Shackle 1967:170), to the fact that the macro-economic and micro-economic views of income diverge: the macro-economic definition designates ‘the sum of newly produced goods available to be distributed amongst the community (whether through markets or by other means)’ (1983:41), a notion at variance with the individual’s view of income as ‘what he can spend while leaving his wealth intact’ (1983:47). These conflicting perspectives, however, are not confined to the contrast between micro- and macro-economics; as a matter of fact they inhabit the very equations quoted above. In searching for Keynes’s minimal units we shall depart from standard interpretations of his equations by reasoning from the second to the first. 102

KEYNES’S ECONOMICS: WHAT KIND OF REVOLUTION?

Moreover we will understand this second equation to speak of income disposal—of the disposal of the incomes of individuals (including the entrepreneur’s own income), and of whether it is spent on consumption goods or not. In this, we are justified by some of Keynes’s own statements. In the Preface to the French edition of the General Theory, composed in 1939, Keynes writes: ‘The decisions of entrepreneurs, which provide the incomes of individual producers, and the decisions of those individuals as to the disposition of such incomes determine the demand conditions’ (CW, VII:xxxiv). This can be taken to mean that there are two compartments to demand, namely that of entrepreneurs for investment goods and of ‘individual producers’ (income-earners) for consumption goods. In so far as the decisions of individual producers regarding the allocation of their income determines the demand for consumption goods we can therefore read the second equation as describing exactly that.2 Here we come across a first stumbling block. If ‘C’ in the second equation denotes purchases of consumption goods, then for the equations to make any sense, ‘C’ in the first equation must stand for consumption goods sold (in other words, the first equation must speak of production (supply) and sales). These two ‘Cs’ would allude to purchases (second equation) and sales (first equation) of consumption goods. If this is a legitimate interpretation, then the two meanings of income that Chick contrasted actually nest at the very core of those equations. The first equation informs us that Income=value of output, but if one reads from the second equation towards the first, it must state the opposite: income must be the value of output sold. Keynes himself wavers between the two definitions; in the page following the above quotation he announces: ‘Income is created by the value in excess of user costs which the producer obtains for the output be has sold’ (1973:64, italics added) and again: ‘We can then define the income of the entrepreneur as being the excess of the value of his finished product sold (italics added) during the period over his prime cost’ (p. 53). User costs are dealt with below (Chapter 6, section II). Suffice it to know that they will be excised from a definition of income, but that spared or not, we would be faced with two irreconcilable stances: those of defining income as the value of output, and of simultaneously equating it with the value of output sold. When one considers the equations from the point of view of investment, they lead to absurdities which make it imperative to equate income with the value of the output sold. Let us consider a manufacturer of consumption goods; if he intends to swell his inventory (assuming that he does not refrain from selling) he will increase his output and will purchase more investment goods. Let us provisionally accept that he has then invested. From a production point of view (that of the individual entrepreneur), this investment has enlarged his stock of working and liquid capital (and perhaps even of fixed capital, depending on the industry) 103

KEYNES’S ECONOMICS: WHAT KIND OF REVOLUTION?

without necessarily having brought money in. Since one produces liquid capital (finished manufactured goods) expressly to sell it in order to gain an income it is blatantly preposterous to assume his income to have risen with his output if the latter is not sold; this can only arise from a mingling of perspectives.3 From an accountant’s point of view this entrepreneur might have increased his wealth by stepping up production, assuming wealth to be the monetary value of capital (and assuming that the additions to his capital are greater than the costs incurred in producing and storing it); from the entrepreneur’s point of view this increment in wealth has not translated itself in a supplement of income. It thus makes more sense provisionally to regard income as the value of output sold and consider that finished but unsold goods represent potential income, whether this potential income was intended or results from failures to sell; but it cannot ever be counted as income. If income expresses the value of output sold, the first equation can be understood as stating that the sum of all sales of consumption and investment goods makes up national income. Let us take an individual entrepreneur, whose output ‘A’ registers the number of goods produced and sold. He will have purchased A1 goods from other entrepreneurs (raw materials as well as finished goods to be further processed, as well as equipment), and disbursed money for wages and payments of interests (the two combined making up ‘factor costs’, represented by ‘F’). From a macro-economic point of view, if one sums up the production of all entrepreneurs the A1 and F cancel out because they are income to others (A1 to entrepreneurs, and F to ‘individual producers’). If we shift perspective and look at the economic universe from the point of view of individual incomes (therefore, from the point of view of the second equation: let us note that entrepreneurs also receive individual incomes, once the cost of operating their enterprise has been deducted from their proceeds), we then note that one’s personal income must either be spent on consumer goods (C), or saved (‘S’); hence the second equation, Y=C+S. By definition, for the equations to hold, we ought equaslly to surmise that national income must also be the sum total of all personal incomes, so that ‘Y’ in the first equation could be interpreted as the aggregated figure of ‘Ys’ in the second equation. From these two equations Keynes drew his third, most disputed one, namely that I=S (saving equals investment). These equations and the theories Keynes laced around them have stirred endless controversies which neglect, sadly, the portentous message they convey about his manner of conceiving the economy. If out of Keynes’s many definitions of income we select the one we have chosen, if we read his equations in monetary terms as he himself indicates we should, and if we understand the second equation to describe the disposal of individual incomes, what do these equations divulge? Ironically, the very opposite of 104

KEYNES’S ECONOMICS: WHAT KIND OF REVOLUTION?

what he taught us about himself. What does it entail to suppose that the sum of all consumption and investment goods sold equals national income? Innocuous as it may seem, this identity actually discloses one of the most revolutionary intuitions of Keynes’s economics, although one that Keynes himself never made explicit and which in reality was frankly contradicted in several other passages of his General Theory. This equation economists translate as the definitional identity between national output and national income (Ackley 1961); I disclaim this identity, since I take income to be output sold. Then, the equation reveals what always eluded neoclassical economics, namely that in every monetary exchange the sale of a product is simultaneously a purchase of money; thus, income (Y) should logically be defined as the purchase of money. I submit that all of Keynes’s economics collapses if it does not speak of the bilaterality of monetary exchange, and there is much evidence to suggest that Keynes did assume it, even if unwittingly. Indeed Chick, one of the most perceptive authorities on Keynes and the most epistemologically minded, remarks that ‘[w]hen money circulates in the payments for goods and labour, Keynes calls it income (Chick 1983:192, italics original). The notion that in monetary exchange money is bought and sold in every transaction pervades the whole Keynesian literature, but it is everywhere evaded; this irreducible fact, however, should be built in the very definitions of economics. Clower (famous for his theses on Keynes but also for his aphorism that ‘[m]oney buys goods and goods buy money, but goods do not buy goods’ (Clower 1969:207–8)), and especially Leijonhufvud, got extremely close to the decisive leap. Leijonhufvud frankly declared money a ‘good traded in all markets’ (1968:90), insisting that in a monetary economy ‘all exchanges involve money on one side of the transaction’ (1968:90, italics original), an idea he repeated in 1973. In 1968, this crucial observation led to a theoretical conclusion, that of the transaction structure specific to a monetary economy. In 1973, it inspired him to derive more theoretical implications, this time about effective demand failures. But neither Clower nor Leijonhufvud ever drew the necessary conceptual inference. After repeating Clower’s famous aphorism Fender dismisses it as theoretically trivial, as a bland restatement of money’s role as a medium of exchange (Fender 1981:94),4 thereby repeating Keynes himself, the main culprit in this matter: Money, it is well known, serves two principal purposes. By acting as a money of account it facilitates exchanges without its being necessary that it should ever itself come into the picture as a substantive object. In this respect it is a convenience which is devoid of significance or real influence. (CW, XIV, 115) 105

KEYNES’S ECONOMICS: WHAT KIND OF REVOLUTION?

Unbeknownst to themselves, all are thus endorsing a neoclassical assumption. If it is theoretically trivial it is nonetheless conceptually fundamental to integrate Clower’s idea, and it is because Keynes and Keynesian economists have systematically avoided coming to grips with it that so many misunderstandings have plagued their interpretations. Keynes and the Keynesians would thus embrace the neoclassical view of money when considered as a medium of exchange and would innovate by adding another dimension to money’s role, that of a store of value. This unfortunate dichotomy, in my opinion, explains why money failed to seep down to the conceptual substructure of Keynesian economics. In my view, Keynes would have retrieved money’s functional role while failing to root his very conceptual framework upon its presence at the very heart of the economy, in exchange itself. Why avoid drawing the right definitional corollaries from Clower’s statement? Because it would smack of neoclassical economics, where money is allegedly but another commodity. This is mistaken; there is nothing neoclassical in acknowledging that money is both purchased and bought, and therefore a commodity, since the money they deal with is only the illusion of a commodity, as we have already demonstrated. In reality, money’s unique status gives an orientation to monetary exchange and renders it imperative to devise conceptual distinctions expressing it. But as long as economists write of flows moving in opposite directions and of the separate identities of sales and purchases on the one hand, and of income and expenditure on the other, they still inadvertently dissociate the real from the monetary economy and move conceptually within a two-sphere universe, albeit one in which the two spheres are connected or, still more, are dominated by money (Fletcher illustrates this admirably, when he writes that ‘[i]n a developed “social” economy (an economy with a number of interacting participants), in which exchange takes place mediated by money, the necessary equality of purchases and sales, of expenditure and income, will ensure the operation of the paradox of thrift’ (1989:51, italics added)). This restricts money’s place to a functional role when it should be squarely embedded at the very foundation of the experimental construct itself, namely exchange. I therefore advocate that money be placed directly into the set of definitions, in the language itself, and this can only be accomplished by acknowledging that a production monetary economy is first and above all an economy of almost completely monetarized exchange. Willy-nilly, monetary exchange will have to be reinstated at the heart of a Keynesian language even if exchange is to disappear from the theoretical superstructure, and economics will steer clear of the subversive dichotomy between real and monetary spheres only by devising a conceptual framework on the idea that in monetary exchange money is both bought and sold. If so, we must logically infer that income be defined as the purchase of money in the 106

KEYNES’S ECONOMICS: WHAT KIND OF REVOLUTION?

experimental conditions of a completely monetarized economy. As a consequence, income will have to be distinguished from what could be called ‘revenue’—the latter comprising all the purchases of money (income) plus the capital (and windfall) gains that an individual cumulates over a period of time.5 Upon this definition of income rests our whole reconstruction of Keynes’s economics (it should be noted that this definition does not rule out the notion of income as a flow; in reality, a flow only describes a set of reiterated exchanges over a specified period of time). Let us return to the message hidden in Keynes’s three equations. We have decoded the second one as the inverse of the first. If the first spoke of the acquisition of income by firms (and therefore, of national income), the second tells of its disposal by individual income-earners—the manner in which it is spent. In this second equation ‘Y’ designates the income individuals earn by selling their labour and services to entrepreneurs (hence, the income of individual producers, or domestic income-earners), not by selling goods. Admittedly, these equations take for granted a given social organization of production and property. Individual producers either spend this income on consumer goods or withdraw it from consumption and save. Always within the experimental scenario of a completely monetarized economy, and keeping in mind the true bilaterality of monetary exchange, this second equation also lays bare another identity never made explicit, to my knowledge, and one also expressly disclaimed by Keynes in many a passage. Indeed, if we call income the sale of goods, labour and services in order to purchase money, we will have to label differently the inverse movement whereby money is sold in order to acquire goods, labour or services; in a completely monetarized economy this transaction can only be dubbed consumption. This may seem at variance with the meaning the word carries both in the common language and in economics, but only superficially so. Even in common parlance, we implicitly term a consumer, not so much someone who uses up commodities as someone who buys them, as a ‘big spender’. Keynes himself, in a letter to D.H. Robertson, wrote that ‘the public will consume more of its income’ (CW, XIV:225, italics added), a meaningless sentence if consumption does not denote spending, and spending the exchange of money for commodities. In fact, this definition flows from the directed, or tilted, bilaterality of monetary exchange in the experimental construct of a completely monetarized economy.6 Where money enters exchange it gives it a vector which cannot be omitted from one’s conceptual framework. In an economics of monetary exchange, as I understand Keynes’s economics to be first and above all, consumption does not stand coupled to production but to income, and this at the most basic level of definitions. The theoretical implications are far-reaching. Before assessing them however, let us first appreciate the methodological procedure that the self-same equations suggest. 107

KEYNES’S ECONOMICS: WHAT KIND OF REVOLUTION?

It must be remembered that the standard history of economic thought often pictures Keynes’s economics as a macro-economics without microeconomic roots (Barber 1967; Samuelson, A. 1990). Once more, Keynes bears the responsibility for this myth of a quasi-autonomous macroeconomics, in that among so many other declarations to the same effect, he offered the world most of his cogitations as macro-economic statements. Yet, one might ask, how could one obtain the aggregate figures of our first two equations? Let us remember that we regard them as ex post magnitudes. Again, let us start with the second one: for the ‘Ys’ of the two equations to match, it must be possible to regard Y=C+S as an aggregate result. How could we perform the aggregation? Very simply, by interviewing every individual in the nation, collecting statements about their sources of incomes and expenditures, and then adding up all such individual accounts (there are patent problems of matching times which will be set aside). What can we make of this? In a monetary economy, let us recall, every exchange-event is simultaneously a sale of money and the purchase of a commodity, as well as its opposite. When goods are converted into money one sees global entrepreneurial income, located in the first equation (Y=C+I). In the second equation however, ‘Y’ denotes individual incomes, or the incomes of individuals considered as private income-earners and earned by selling labour and services to entrepreneurs for money. Instead of isolating the exchange-events and adding them up in order to generate global data we could assume it possible and legitimate in this second equation to take an individual during a given time-period (let us use a year, the standard fiscal time unit). During that year, this individual has been involved in exchangeevents, either as one purchasing money by selling labour and services to an entrepreneur (gaining an income), or as one buying goods, labour or services (selling money, i.e., consuming; we will temporarily overlook the fact that he could have borrowed money). The individual producer has thus been involved in separate purchases, either of money (gaining of income), or of commodities (spending the income earned; let us remember that we are always treating these magnitudes as ex post variables, at the end of a named time period). Having singled out the individual during a time period, one can then compute all the times he or she has chosen to buy a given consumption good, yielding this individual’s purchases of that commodity for the year under examination. One can then add all purchases of consumption goods on the part of this individual to derive what could be called the individual’s yearly consumption. One could finally total the yearly consumption of all individuals and reach an aggregate figure, namely ‘C’, or the national purchase of consumption goods which, by definition, is the same as the national sales of consumer goods, since we no longer equate income with output. One would proceed along similar lines to elicit individual and national (gross) ‘Y’ in the second equation, and derive ‘S’ by subtracting ‘C’ from ‘Y’. 108

KEYNES’S ECONOMICS: WHAT KIND OF REVOLUTION?

The procedure is the very one we earlier supposed should have been followed had the individual been the real minimal unit of neoclassical economics, but which then led to an abrupt tautology. Doesn’t it terminate as bluntly in this case? No, for the simple reason that the other part of the so-called definitional identity, namely that purchases of consumer goods constitute at one and the same time sales of consumer goods, does not cohabit within the same equation but dwells in a different one. If we contemplate the second equation in terms of individual incomes and of their allocation, then the ‘C’ of purchases and expenditures belongs to the second equation and its twin ‘C’ of sales belongs to the first one, a scission impossible with Marshall. What has happened? Three immensely important and revolutionary reversals, if we accept the interpretation of the equations hitherto suggested. First of all, it stands out quite patently that the hidden but nonetheless omnipresent minimal unit beneath these macro-economic variables is not only the individual, but the actual ‘punctual’ decision of the individual yielding a socially visible result (an action, for the sake of convenience; hence the magnitudes are ex post). This alone makes it possible to draw out our collective figures through a simple process of summation, from the action of an individual at one moment in time to the sum of his or her actions during a time period (yearly consumption of an individual) to national socially visible results of decisions that have materialized. The units are homogeneous from the smallest to the most inclusive, and the whole is nothing more than the sum of its truly individual parts. In brief, Keynes’s macro-economics genuinely posits the individual as its minimal unit and empowers one to educe collective data through a methodologically legitimate process of adding up individual actions in the case, it goes without saying, of additive economic magnitudes. Second, and because we can translate Keynes (a) as having intuited the bilaterality of monetary exchange and, (b) as having used punctual individual actions as his minimal units (although, I insist, he openly denies both!), we are in a better position to appreciate his macro-economic thinking. It is then quite striking that he does not relate his macroeconomic variables ‘functionally’ as projections of social relationships; within the second equation, income, consumption and saving are linked together in the very manner in which they are connected within the individual acting (and having decided before), and they are linked differently according to the individuals social identity (whether individual producer or entrepreneur-investor). This explains why we can sum up individual actions and avoid any tautology; it also explains that, from the point of view of economic rationality, we are henceforth dealing with a socially differentiated cosmos, unlike that of neoclassical economics.7 Let us draw the contours of this new economic cosmos more visibly. First of all, the first two equations tacitly dissociate the commodities sold by 109

KEYNES’S ECONOMICS: WHAT KIND OF REVOLUTION?

entrepreneurs from the labour and services sold by individual producers to entrepreneurs, assuming a given social organization of production, namely that all production takes place in the context of firms and of a completely monetarized economy. The sale of commodities by firms defines their income (and, by extension, national income), encompassing individual incomes, whereas the sale of labour and services to entrepreneurs provides private incomes out of which consumer goods are purchased. In this context the individual producer (or more precisely perhaps the ‘individual income-earner’ whose income (Y) lies in the second equation) participates in two types of exchanges: on the one hand he purchases money (earns an income) by selling his labour and services, and on the other, he buys consumer goods (sells the money gained; spends his income, in plainer language). By ignoring the transaction to privilege the individual, these actions appear as the result of separate decisions, although united within the same individual, since it is the same individual who buys money and consumer goods (earns an income and spends it; here, let us recall, the individual stands for the household). In a purely individualist perspective, as distinct from a transactional one, consumption is therefore not coupled to the production of consumer goods but to the disposal of incomes by individual producers (let us emphasize, moreover, that this flows directly from our very definition of monetary exchange). Thus, by distinguishing the income gained through the exchange of commodities by firms from that earned through the exchange of labour and services to entrepreneurs, and by choosing the individual as his minimal unit, Keynes could simultaneously articulate the consumption of individual producers to their income and detach it from the production of consumption goods. Hence those sempiternal and inseparable companions—in this instance the production and consumption of consumer goods, or their supply and demand—are disengaged, while individual consumption is reunited to the very factors affecting it within the individual deciding, namely individual income, for the individual can only sell the money (consume) he or she has previously purchased (received as income). (As to the demand for investment goods it belongs to the question of investment where, as we shall see, similar considerations obtain.) Against the backdrop of neoclassical economics, the implications are nothing short of revolutionary. The acquisition of consumption goods is no longer wedded to their production as demand is to the supply of a commodity, but attached to income, as purchases and sales of money. But how are we then to articulate decisions to produce and decisions to consume? Through Quesnay’s and Walras’s notion of the macro-economic circularity of exchange. Keynes’s two equations are conjoined through Y because individual incomes are derived from the firms’ collective sales, because entrepreneurs both purchase money through the sale of the commodities they produce, and provide income (sell money) to individual producers who then acquire consumer goods 110

KEYNES’S ECONOMICS: WHAT KIND OF REVOLUTION?

with this income and thus determine the quantity of investor goods needed. One can thus add up individual acts of consumption and production of consumption goods and yet avoid a tautology because their purchases and sales do not belong to the same equation. In so doing, Keynes succeeded in rethinking the whole question of output and consumption outside of any market representation. It has often been stressed that Keynes did not represent the economy in terms of markets (especially Barrère (1990:62–3) and Chick (1983:132)), but interpretations of Keynes in market terms continue unabated;8 in my opinion, the importance of this crucial innovation cannot be overemphasized. In fact, I will submit that the essence of Keynes’s economics is to understand the economy in non-transactional terms and that any transactional representation of economic reality cannot, by definition, claim any kinship with Keynes’s. This non-transactional economics deserves closer scrutiny. Keynes does not depict any direct relationship between producers and consumers; he completely does away with a transactional view in terms of intersecting schedules of supply and demand and yet succeeds in linking producers to consumers through ‘Y’ because of the macro-economic circularity of exchange. In this ‘vision’ prices have lost their pivotal role; ‘Y’ is no price but the purchase of money, which in generalized monetary exchange underpins every sale of goods, labour or services. Consumers and producers do not stand on the two sides of ‘Y’ as they do on the two sides of prices in neoclassical economics, because income does not adjust output to consumption as prices do in a transactional perspective. Because the macro-circularity of exchange stems directly from monetary exchange, income surges as the focal variable, which makes it possible to perceive new functional relationships between production and consumption, yielding radically novel theories of consumption, output, employment, saving and investment, among many others. We have already come across consumption, the theory of which Keynes subsumes under the notion of the ‘propensity to consume’, personally and culturally influenced but determined by income. We will meet this propensity to consume again, but for the moment we must beware of the idiosyncratic use Keynes makes of the term ‘propensity’. First, by propensity Keynes intimates ‘proclivity’. Second, he also employs the same term to mean functional relationship, or as he sometimes writes, ‘functional tendency’ (pp. 90, 168). In this context, the propensity to consume alludes to the functional relationship between consumption and income. Third, in so far as a functional relationship can be translated as an equation, the variables of which can assume a number of values, a propensity also describes a schedule, where the schedule is simply the graphical representation of the equation. This can be termed a ‘functional schedule’. This is what a schedule should stand for but this is not what it truly signifies in neoclassical economics, despite all the 111

KEYNES’S ECONOMICS: WHAT KIND OF REVOLUTION?

proclamations to the contrary. When one betokens a calculus of utility and disutility behind a so-called ‘functional relationship’ (or sees a marginal rate of substitution or, to put it more generally, the idea of a force overcoming a resistance), we shall christen it a ‘neoclassical schedule’. On the whole, Keynes steers clear of neoclassical schedules but he does lapse here and there into old modes of thought and his schedules then merge with neoclassical ones. With his notion of a propensity to consume Keynes by-passed prices completely. When considering consumption in the aggregate he deemed prices to be irrelevant because they only pertain to one’s choice of one commodity as opposed to another. Prices will help elucidate the composition of an individual’s consumption but will not account for the fraction of his income he has set aside for the purchase of consumer goods. This is explained by the propensity to consume, in conjunction with the level of income. Consumption thus reinterpreted, what of the traditional supply? It resurfaces as a theory of output, once more determined by income, albeit in a radically different fashion. Entrepreneurs derive income from the output (and sale) of consumer and investor goods; the same entrepreneurs, however, purchase labour and services from individual producers, so that the national income secured from the sale of their commodities is the very same which goes to feed private incomes (always within our experimental scenario). Entrepreneurs thus stand in a privileged position, as producers of commodities and providers of private incomes. The decision to produce (and its materialization in production), by definition, is an entrepreneur’s privilege. Before resolving to produce, entrepreneurs will have to compare (a) the income to be obtained from the sale of their products (this ‘income expected from output’ Keynes defines as the ‘aggregate supply function’), with (b) the income to be expected from the manner in which both entrepreneurs and individual producers will spend their income on the purchase of consumer and investor goods (what Keynes calls the ‘aggregate demand function’). Where the two functions intersect defines the ‘effective demand’, that is, the amount entrepreneurs will settle to produce. No transaction unites supply to demand any longer, no price intervenes to equilibrate them since Keynes places both output and effective demand on the same side, both to be understood from the entrepreneur’s point of view. And where the classics beheld two separate problems, namely those of producing (supply) and of employing, Keynes discerns but one, because entrepreneurs in the short term produce through hiring labour and services and thereby distribute the very incomes from which emanates the demand for their goods. Entrepreneurs have to assess that the employment they provide will yield decisions to consume that will actually materialize and will amount in the aggregate to the quantity of consumer and investor goods they wish to manufacture. They cannot plan to produce without concurrently projecting to employ, and cannot set the level of their employment without having fixed 112

KEYNES’S ECONOMICS: WHAT KIND OF REVOLUTION?

the scale of their output; hence the intimate connection between effective demand, output and employment. Entrepreneurs have to evaluate that a given aggregate level of employment will yield a specified level of individual income which should then add up, through actual consumption, to their aggregate production of consumer goods (and will therefore induce on the part of entrepreneurs the purchases of investor goods adding up to the production of such goods). Entrepreneurs will establish the scale of their production in the light of these evaluations, and by extension, will decide the scale of their employment in the short run (since Keynes assumes employment to be a good approximation of output). Of the transactionalists’ demand, nothing remains. As the result of a choice to consume, consumption, both individual and aggregate, must be brought back to income. But as the expectation of a given level of consumption, influenced by the level of income, directly determined by the level of employment, effective demand is not the sum of decisions to consume that are actualized but the sum of entrepreneurs’ expectations of decisions to consume on the part of private income-earners and is therefore to be associated to the scale of employment, since employment is the source of individual incomes. With effective demand, and once more through income, Keynes was then in a position to reunite consumption to output, but through the mediating term of employment. He thus averted the neoclassical market representation and stood traditional neoclassical wisdom on its head. For the neoclassical economists, the demand for labour (employment) and its supply were adjusted through its price, namely wages. As in any market, if left to oscillate, the price of labour would ensure that the market cleared and that full employment be reached. If there was less than full employment, it could be that wages were too high because of union demands; by lowering wages the demand for labour would automatically rise to full employment. In brief, employment would increase as wages fell if they had been set too high and were left to find their equilibrium level. Outside a transactional framework, however, this no longer made sense. As wages fall, so do individual incomes. Since decisions to consume (demand) are linked to individual incomes, aggregate demand could thus be depressed with lowered wages if no compensating factors counteracted it, thus leading to a reduced estimation of effective demand, a slackening of output, and therefore of employment. Finally, Keynes achieved the same tour de force with saving. If saving and investment were no longer to be depicted in terms of individual savers and individual investors facing one another across a relationship of supply and demand, they had to be considered as the actions of separate individuals no longer directly involved in a transaction. Let us examine saving first. With most neoclassical theorists the rate of interest automatically equilibrated the flow of saving to the flow of investment because the 113

KEYNES’S ECONOMICS: WHAT KIND OF REVOLUTION?

decisions to save and to invest were related as lenders are to borrowers.9 Once more Keynes succeeded in articulating saving to investment in an indirect fashion. To avoid contradictions, let us suppose that the aggregate amount of savings is but the sum of individuals’ enactment of their decision to consume, but not the totality of their current income. Since the decision to consume is directly influenced by the level of the individual’s income, the difference between his income and his consumption (from Y=C+S) will measure the amount of his savings at the end of the current period, and saving must thus be related to income above all else (there are serious problems in the time-horizons involved here, but as mentioned above, such problems will temporarily be omitted). What role is then left to the rate of interest? In neoclassical theory it brought forth a flow of saving, or of loanable funds, thus acting directly upon the aggregate amount of savings at the end of the time-period. Since Keynes declared saving to be a function of income, the rate of interest cannot attract a flow of saving; it does not play upon the decision to save but on the completely separate decision of the manner in which to keep one’s savings. In other words, having resolved how much not to consume according to the level of his or her income, the individual is faced with the decision of how to keep the money not spent on consumer goods; should he or she hold it as liquid cash, or should he or she use it to purchase illiquid assets. Supposing a natural propensity to keep savings in a liquid form, Keynes concludes that the rate of interest works upon people’s decisions to part, or not to part, with their liquidities. It no longer stands as the ‘price of saving’ (or that of ‘not spending’), but as the ‘price of not hoarding’, or the price of parting with liquidity, and it regulates the quantity of liquid money in circulation. In this light, the decision to invest is entirely detached from that of not consuming the totality of one’s current income, although it is not unrelated to the rate of interest. In neoclassical economics, the desire to invest acted directly upon the decisions to save; but what influenced the decision to invest? On this topic, Marshall held two views, one of which superficially resembles Keynes’s, one which Keynes himself singled out in the General Theory. In fact, when taken together, Marshall’s two stances conflict markedly with Keynes’s. For Marshall, the decision to invest is what brings forth a flow of saving and sets savings’ supply price; it must therefore be prompted by an expectation of profits greater than the rate of interest. Keynes isolated this view of investment from Marshall’s writings, without wedding it to a second, equally important, idea: to Marshall, investing is also choosing to purchase capital equipment rather than labour, and is accordingly dictated by the marginal productivity of both. Consequently, Marshall’s ‘marginal productivity of capital’ and Keynes’s ‘marginal efficiency of capital’ share nothing in common. In the final analysis, neoclassical economists comprehend the decision to invest as a problem of distribution (or of allocation of resources) and what could 114

KEYNES’S ECONOMICS: WHAT KIND OF REVOLUTION?

pass for the marginal efficiency of capital must be the capital’s efficiency on the marginal product (it cannot be anything else than capital’s marginal productivity because it is compared with labour’s efficiency and one cannot calculate a marginal efficiency over the lifetime of the labourer).10 Marshall’s (and standard neoclassical economics’) equations on exchange do not stand on their own; they must always be put back within the equations on distribution. If people will invest when they foresee more profits to be made than the price to be paid for borrowing money (the exchange equation), they will only do so in a perspective of distribution, or of resource allocation. Thus, Marshall’s entrepreneurs invest because they deem the marginal productivity of capital greater than labour’s and because they expect the returns from their investment also to be greater than the rate of interest paid to borrow the money used to finance it. In this context, the decision to invest is never exclusively a decision to invest; it is inextricably enmeshed with the decision to employ, as a case of allocation of resources (factors of production), and both decisions are translated in transactional terms, in terms of a relation of supply and demand. Keynes escaped the market analogy; capital and labour do not compete as independent factors of production seeking the entrepreneur’s custom. The decision to employ cannot be construed as a decision ‘not to invest’, and the decision to invest as a decision ‘not to employ’. They are independent decisions and by segregating the two Keynes made it possible to envision a new theory of investment much more faithful to the actual process of investing on the part of entrepreneurs, thereby sidestepping the notorious question of allocation of resources and placing economic rationality back within the socio-economic context of economic actors. Keynes regards employment as a short-term consideration; it is linked to the scale of output, itself a function of effective demand, all three functionally related in the short term only, assuming unused capacity of the fixed equipment. How are we then to explain investment? As the purchase of investment goods (i.e., durable goods) involves long-term expectations, the entrepreneur can choose between buying interest-bearing assets and purchasing investor goods. Investor goods will yield a certain level of profits over their life-time, profits that the entrepreneur will compare with the supply price of that capital asset: ‘meaning by this, not the market-price at which an asset of the type in question can actually be purchased in the market, but the price which would just induce a manufacturer newly to produce an additional unit of such assets, i.e. what is sometimes called its replacement cost’ (1973:135). Then, ‘the relation between the prospective yield of one more unit of that type of capital and the cost of producing that unit, furnishes us with the marginal efficiency of capital (p. 135). Entrepreneurs will then go on investing to the point on the investment demand-schedule where the 115

KEYNES’S ECONOMICS: WHAT KIND OF REVOLUTION?

marginal efficiency of capital in general is equal to the market rate of interest (pp. 135–6).11 One could go on piecing together the various parts of that gothic architecture, the General Theory, but my only aim is to squeeze out a cosmology; enough elements have already been assembled to draft a first outline of it. Let us briefly recapitulate. Instead of the transactionalists’ unilateral exchange whenever money is included, we can easily reconstruct a Keynesian economics positing bilateral monetary exchange. If commodities and money are simultaneously traded there is no reason to privilege the commodity in order to draw its supply and demand schedules since money is built in the transaction. Without supply and demand schedules the transaction leaves the centre of the stage and the individual moves back in. Whereas the individuals of neoclassical economics were deduced from the ideal movement of commodities and prices in the exchange-event, here the individual, more precisely the individual acting, suddenly surfaces as the minimal unit in a ‘commodity-neutral’ perspective. As a consequence, economic variables are recombined precisely as they are related within individuals endowed with a specific economic identity (individual producers or entrepreneurs), because it is within individuals that economic decisions and actions are taken. Then, by introducing the macro-economic circularity of exchange one can connect all these economic variables in a set of theories articulating them together without ever invoking markets or intersecting schedules of supply and demand governed by prices. This, I submit, is the only methodological procedure which can account for the manner in which Keynes perceives the functional relationships between macro-economic variables. This is also the only legitimate and sound procedure for an economics of measurable economic variables—for a real economics. Here as in the programme of neoclassical economics and despite Keynes’s claims to the contrary, the whole is to be understood in terms of the behaviour of its minimal units, and its minimal units are truly individual actions. Here, macro-economics is no separate discipline; we are dealing with an integrated economics. But there is much more to it. By retrieving the individual, understanding functional relationships between economic variables as they are related within the thinking and deciding individual and inserting everything within the macro-circularity of exchange, Keynes achieved something radically new which Chick has discerned and dubbed a ‘sectoral approach’. At a first glance, Keynes’s sectoral approach is about language, about searching conceptual discontinuities in the social organization of the economic world rather than in the intrinsic attributes of objects. But I believe it to be also about economic rationality. To neoclassical economics, economic rationality is the same for everyone, from the individual housewife to the Chancellor of the Exchequer: it everywhere consists in maximizing utility 116

KEYNES’S ECONOMICS: WHAT KIND OF REVOLUTION?

functions. In this respect, consumer and producer share the same economic rationality, and from that point of view, the neoclassical cosmos is socially undifferentiated. Keynes transformed all this. First, he linked up economic variables in the manner in which he believed them to be related within the individual’s mind, but not in the mind of an abstract maximizing individual. His individuals act according to their economic identity, that is, according to their position in the social organization of production. In brief, his sectoral approach is not only about language, as we shall examine in greater detail below (Chapter 7, section II and Chapter 8) but also about economic rationality. He reintroduced social differentiation in the economic cosmos, and this directly coloured his understanding of economic rationality. The change in theoretical perspectives and the methodology amounted to no less than a revolution. For the first time since Ricardo, and possibly Smith, the individual emerged as the real atom of economic analysis, but an individual with a social identity; for the first time since the marginalist turn-about, Keynes could recouple decisions to produce and to consume without supposing them rooted in a social relationship. The textbook designations must be rectified accordingly. If neoclassical economic analysis is transactional—albeit in an economic cosmos rid of social differentiation, as I contend it is—Keynes’s economics, on the contrary, is truly individualist and sectoral. It appears to me as one of the greatest paradoxes and one of the saddest ironies in the history of economic ideas that Keynes and neoclassical economists have projected inverted images of themselves. Neoclassical economics openly claimed to anchor economics in the isolated individual, whom it then placed, endowed with his felicific rationality, within the context of market exchanges; in reality, it completely misunderstood monetary exchange and derived from its commodity-biased Panglossian view of markets a dummy individual tailored to fit the mould of its preconceived ideas of how prices in an unhindered (‘free’) market economy reached the only possible level which they could attain according to the ‘laws of nature’. And these prices were arrived at, not through ans individualist methodology, but by summing up transactions, or projecting social relationships at the aggregate level. Because Keynes presumably believed the image the neoclassicists gave of themselves, he presented his own contribution as one completely detached from theirs, and thus avoided references to the individual and to exchanges. Yet he is the only one who genuinely strove to create models that plausibly simulated the process of individual decision-making and who appreciated the true bilaterality of exchange in a money economy, while placing individual economic rationality back in its social setting and integrating it through the macrocircularity of exchange. And because many economists, in turn, have had faith in those inverted images, they are still embroiled in the dichotomies between neoclassical microeconomics and Keynesian macro-economics. 117

KEYNES’S ECONOMICS: WHAT KIND OF REVOLUTION?

If this discussion might have given the impression that Keynes’s revolution was only methodological and theoretical, its message has been misunderstood. Keynes’s methodological and theoretical innovations rested on nothing else than a cosmological revolution.

KEYNES’S ECONOMICS: A GALILEAN REVOLUTION Underneath both economics we have encountered an individual agent: in neoclassical economics this individual was declared the minimal unit but we found it to be grafted ex post facto onto a special transactional and Panglossian view of the economy; in Keynes’s economics the individual was methodologically denied, but we found it to support the whole edifice. But as should now be clear, these individuals differ more than by their methodological positions. We have already fathomed the neoclassical individual and descried him in the final analysis to be an illusion, a patient if not an outright automaton acted upon by the forces of the transcendant, supra-individual market.12 Furthermore, we have discovered him quintessentially inactive, seeking economic rest, resisting labour, production, employment, investment, consumption and saving, while paradoxically spending the whole of his current income as soon as he earned it. In brief, we have concluded to an individual imported from the Bible and mirroring matter in Aristotle’s physics; upon this conclusion we have declared neoclassical economics Aristotelian. Being Aristotelian, neoclassical economics is therefore scholastic. In the context of an Aristotelian cosmology, because of individuals’ natural reluctance to work, to employ, to invest and to save, it follows that the very existence or creation of labour, of production, investment and saving calls for an explanation, just as did the very existence, or creation of movement in Aristotle’s physics. Once created, however, labour, production, investment and saving should then automatically realize their fixed ideal (and uniform) velocity. Between rest and this fixed ideal velocity there are no intermediate gradients. Explaining movement in transactional terms amounts ipso facto to explaining a fixed, ideal (maximal) velocity—namely the prices at which all markets clear, that is, the optimal allocation of existing resources. Against the Aristotelian cosmology Galileo’s most revolutionary step was to posit matter to be ontologically indifferent to either rest or motion and to recognize that motion simply is, and requires no explanation. What begs for an explanation is not the emergence or appearance of motion (i.e., the transition from rest to motion, where rest is understood as ‘absence of motion’), but changes in velocities. This is precisely the Galilean cosmological rupture that Keynes effected. Let us examine Keynes’s individuals. They are intrinsically endowed with movement:’…it is our innate urge to activity which makes the wheels go round, our rational 118

KEYNES’S ECONOMICS: WHAT KIND OF REVOLUTION?

selves choosing between the alternatives as best as we are able, calculating where we can, but often falling back for our motive on whim or sentiment or chance’; and: ‘We do not know what the future holds. Nevertheless, as living and moving beings, we are forced to act.’ (CW, XIV:124). Here, Keynes’s notion of propensity does carry the connotation of proclivity; Keynes’s individuals have been imparted with a natural proclivity to consume, but not to consume the whole of one’s current income immediately. They also naturally make provisions for the future, to provide against uncertainty.13 In other words, saving is as natural a proclivity (propensity) as consumption, the existence of which does not call for explanation; what have to be accounted for are changes in the rates of saving or the propensity to consume. The same obtains with production. Production and labour simply are, their existence is posited as a given, only changes in their levels demand explanation. And the same with investment, for which there is equally a natural proclivity (the notorious ‘animal spirits’). All these key economic variables—consumption, saving, labour (as employment), production (as output) and investment—have with Keynes an ‘inertial state’ no longer assimilated to rest but set at any given velocity; various factors will then act either to inhibit (as in the case of phenomenal interference) or to amplify this velocity, accounting either for deceleration or acceleration. The cosmological rupture is thus complete, and with it, its image of the individual. Indeed, by positing on the part of individuals a natural tendency, not to inactivity but to economic motion, Keynes gives them back their true role of economic agents, of people capable of acting because they have the power to decide, no longer economic automata having blindly to comply with the laws of the market but individuals taking real decisions in the light of real expectations based on the real experience of the past and the present. Hence the new part of expectations in such an economics. With an economic patient expectations are devoid of meaning since the market will decide for the rational individual. The relation of supply and demand will impose a price to which rational agents will have to comply, so that judgement and foresight, and with it the whole dimension of time, are of no essence. They are simply presentational devices. The neoclassical individual has no future and lives in a timeless present, in the false synchronicity of market exchanges tending to perfection. With an economic agent however, every activity results from a decision. Producing, hiring, consuming, investing or saving are all individual actions based on decisions made in the real world of expectations ruled by subjective probability. Once economic agents are given back the power to really act there is meaning in deciding, and expectations must of necessity play a key role. Keynes thus eludes the false synchronicity of a transactional representation to place individuals very firmly in the real time of real decisionmaking—where today’s decisions are taken on the basis of expectations about 119

KEYNES’S ECONOMICS: WHAT KIND OF REVOLUTION?

tomorrow, in the light of yesterday and of the individual’s position in the social organization of production. Keynes did not introduce expectations in economics: he simply introduced the real individual executing real activities in the real time and social space of his decision-making. But let us be quite explicit. This transition from the neoclassical economic patient to the Keynesian agent cannot be reduced to a conscientious infusion of realism. On the contrary, it constitutes a downright case of a ‘classical’ cosmological revolution from a circular to a spiralling research programme. To substantiate this, we will now introduce a second dimension to Keynes’s experimental scenario, one that Keynes uses sparingly and in scattered statements but one which I deem essential to retrieve if we wish to appreciate the revolutionary, and Galilean, character of his contribution. The General Theory harbours two very different sets of statements about economic activities. On the one hand it asserts the unproblematic nature of economic motion (where propensity=proclivity); it is the equivalent of postulating inertial motion. On the other hand it also articulates the various phenomena under study (where propensity=functional relationship). This is where we shall insert the second experimental construct. Galileo discovered both inertial motion and the first law of dynamics (the latter a functional relationship explaining a rate of change) within the experimental conditions of a vacuum. I would submit that Keynes discovered both (economic) inertial motion and his various theories (also functional relationships explaining rates of change) in the experimental construct of a completely monetarized economy to which should be added the experimental condition of certainty.14 Certainty would be to Keynes what the vacuum was to Galileo. If we superimpose the dimension of certainty to the economic cosmos we have already sketched above, what would we find? Keynes gives us an answer in The General Theory of Employment’: If, on the other hand, our knowledge of the future was calculable and not subject to sudden changes, it might be justifiable to assume that the liquidity-preference curve was both stable and very inelastic. In this case a small decline in money income would lead to a large fall in the rate of interest, probably sufficient to raise output and employment to the full. In these conditions we might reasonably suppose that the whole of the available resources would normally be employed; and the conditions required by the orthodox theory would be satisfied. (CW, XIV:119) We would get the same outcome if we started from different parts of Keynes’s theories. With certainty over the future rate of interest, for instance, speculation would lose its raison d’être, the rate would be stable over time and presumably low because wealth-owners would not have to be strongly induced to part 120

KEYNES’S ECONOMICS: WHAT KIND OF REVOLUTION?

with their liquidities. Investment would thus be pressed until it levelled with the rate of interest and that would coincide with full employment. The economy would be moving at its maximum, but uniform, velocity. In brief, given certainty, within the Keynesian theoretical model one would witness full utilization of economic resources. Both neoclassical economics or new versions of the quantity theory do draw similar inferences (full utilization of resources) under conditions of certainty but let us stress that if there is one aberration in the General Theory which surpasses all others, it is the idea that the conditions of neoclassical economics are satisfied when full employment is achieved. No statement of Keynes’s has been more detrimental to his own cause; if on the one hand Keynesian and neoclassical economics do converge on what they perceive as the economic results of operating in conditions of certainty, on the other, the two economics disagree and conflict on every other possible point, and on the manner of reaching this optimal state. Many have appreciated the radical incompatibility between the two economics, and this point cannot be over-emphasized. In its experimental scenario neoclassical economics searched for the hidden reality behind the veil of money and argued on the basis of barter. It reduced everything to (barter) exchange (perceived, in the Marshallian tradition, as a unilateral flow of commodities against satisfaction) and, from this exchange, removed all hindrances to motion (absence of information costs, of transportation costs, omniscience, and so on) to paint a perfect market in which everything could be grasped in terms of transactions between maximizing individuals. It was a world (especially in the Walrasian formulation) of an infinite number of markets (one for each commodity) in which, after instantaneous exchange of information ex ante, all markets cleared ex post and resources were allocated optimally. In this neoclassical perfect world motion belonged first and above all to exchange and markets, and the experimental construct could only be thought of in terms or removing hindrances to motion (to the circulation of commodities). Neoclassical economics’ equivalent of Galileo’s vacuum is the perfect market, a world of perfect exchange in that every transaction should completely maximize one’s utility. In this experimental world neoclassical economists observed the opposite of inertial motion (namely the ‘absence of economic motion’ as the natural state of the individual), ignored rates of change and provided no possible way of reintroducing resistance in order to account for the observable world. When they did (and still do) try to explain the observed behaviour of economic agents they aspired to do so by introducing so-called imperfections in trade, leading to new constructs such as imperfect competition whose own creators (Joan Robinson in the occurrence) have later declared sham and bogus. As I have already mentioned, it is no more possible to reason from the perfect to the imperfect than it is from the infinite to the finite (see p. 93). 121

KEYNES’S ECONOMICS: WHAT KIND OF REVOLUTION?

Now let us look at our Keynesian world in conditions of certainty. First, Keynes does not depict any experimental scenario regarding exchange. Furthermore, in his experimental world money is part and parcel of exchanges; it is a world in which individuals buy and sell money when they purchase and sell commodities, so that under conditions of certainty, one would witness full utilization of resources but within the context of a completely monetarized economy. Money is no disturbing factor but an integral part of the experimental construct.15 In this Keynesian cosmos exchange loses its vital role; it is entrepreneurs who initiate production and price their goods, and who also supply the incomes out of which these goods will be purchased. Everything is depicted from the point of view of individuals, of individuals acting and whose actions are not apprehended within the context of exchange relationships: producing, consuming, saving are not placed back within transactions. They are conceived of in terms of functional relationships rooted in the very manner in which individuals understand their own actions. In short, it is a world devoid of markets (i.e., of markets defined in a neoclassical, transactional, fashion), where economic action is not spontaneously reinserted in a framework of exchange. Under certainty this Keynesian world does not enjoy full utilization of its resources because its agents maximize their individual utility in situations of exchange but because the separate decisions of a multitude of individuals which in conditions of uncertainty have a very low probability of meshing, would suddenly converge and interlock. Introducing certainty clarifies both the manner in which the two economics disagree, and how Galilean Keynes’s economics is. In a vacuum, let us recall, Galileo espied inertial motion and also discovered that a constant force produces a constant acceleration (always remembering that the latter designates a functional relationship accounting for a rate of change). But his law described an acceleration in experimental conditions; it did not account for the observable acceleration of objects in our atmospheric world. For this, he had to bring phenomenal interference back. To recognize the Galilean nature of the Keynesian revolution, it is vital to appreciate that the phenomenal interference which he removed experimentally is uncertainty. In this experimental world of certainty Keynes could then apprehend human beings’ natural proclivity to economic motion as well as experimental cases of changes in motion— more specifically of acceleration (seizing upon functional relationships which accounted for rates of change). In conditions of certainty there are forces at work (such as the multiplier) which act on income, consumption, production, employment and investment, that would accelerate economic motions up to their maximal velocity, namely that of full utilization of all resources. Having repeated the two steps that led Galileo to break with Aristotelian physics, Keynes went on to complete the Galilean exploit; where Galileo could account for the observed, as opposed to the 122

KEYNES’S ECONOMICS: WHAT KIND OF REVOLUTION?

experimental, movement of matter by summoning back phenomenal resistance, Keynes followed suit. If he concluded to inertial motion and discovered the laws of economic acceleration by removing uncertainty experimentally, it is only by reinserting uncertainty that he could unravel the oscillations and changes in economic movement as we experience them in our phenomenal world. Given our economic organization it is uncertainty, not hindrances to the circulation of commodities, that perturbs individuals’ inertial motion—as it is uncertainty that interferes with the uniform acceleration to maximal velocity (full employment of all resources). And whereas it is impossible to reason from the perfect to the imperfect it is within our reach to argue from the certain to the uncertain. The reason is simple. Perfection, like infinity, is an attribute that we impute to the (experimental) world outside. Certainty, Keynes realized, is an attribute of knowledge (Carabelli 1988:212). In a theory of economic decisions and actions, it is only to our subjective universe that we can ascribe absolute values. We ourselves constantly switch from certainty to uncertainty—because it is a subjective dimension—but no one has ever shifted back and forth from perfection to imperfection. Once uncertainty is summoned back—quite an easy step to take—we then recapture the world we know: contracts are necessary to fight against uncertainty, it is impossible to bargain for real wages, the prices of financial assets oscillate so that rates of interests themselves fluctuate, there is speculation, investment is volatile, people have to rely on opinion and convention, we need enterprise, and so on and so forth. Then and only then is it possible to describe and analyse the real world we inhabit, in the light of the experimental one that Keynes constructed. If I join the ranks of those who have espied in uncertainty one of the most fundamental contributions of Keynes, I do so only against the background of still more fundamental ones, namely (a) that he purged economics of transactional representations and for the first time argued within the framework of the best methodological individualism, although he often did so in a confused manner because of his stated aim of doing the contrary, (b) that he posited economic ‘inertial motion’, and (c) understood economics to be about rates of changes in economic movement. None of these neoclassical economics even approached. Both Keynes and the neoclassicists have devised experimental constructs, except that these are set within such dissimilar cosmos, that apart from the condition of certainty and the conclusion that under certainty existing resources would be used optimally, they differ in every other respect. Both Keynes and the neoclassicists have also sought to argue from their experimental scenario back to the phenomenal world; Keynes has partly succeeded, but not completely so. We shall devote the remainder of this book to elucidating why. As to neoclassical economics, it has so far consistently failed to retrieve the world we live in, and from a strictly logical and epistemological point of 123

KEYNES’S ECONOMICS: WHAT KIND OF REVOLUTION?

view, cannot ever succeed. Thus the Galilean Keynes is no theoretician of the phenomenal world and still less a neoclassical economist whose contribution would boil down to instilling a greater dose of realism in otherwise too aprioristic a construct. Like all theoreticians he discerned functional relationships within the framework of purely experimental circumstances, and then relaxed some of those assumptions to repossess the observed. Therefore, and once more despite Keynes’s views on the matter, an unbridgeable cosmological rift forever segregates the two economics, and as explained earlier, no two research programmes camped on opposite sides of a cosmological revolution have ever stood as the general is to the particular. Keynes’s economics brought about a cosmological revolution from a scholastic to a neoclassical science; from an historical point of view, it is hence Keynes’s economics that should be dubbed ‘classical’. Neoclassical economics is scholastic, and neither can one ever encompass the other as the general subsumes the particular, nor can a synthesis ever wed them into a more general framework. They move in cosmologically parallel universes. But, one may justly ask, if Keynes’s economics amounts to a Galilean revolution, why has it not toppled the misnamed neoclassical economics? Because, like Galileo’s, Keynes’s revolution was incomplete. On the one hand its cosmos was not so manifestly what we made it out to be—so that his revolution was both incomplete and imperfect (as Beault and Dostaler 1994; Hutton (1986); Minsky (1976); Shaw (1988), among others, have remarked). On the one hand Keynes could not completely free himself from mechanistic, deterministic modes of reasoning, despite the subjective-probabilistic bend of his thinking, and he repeatedly lapsed into Aristotelian, substantialist and transactional modes of conceptualization. This made it all the easier for his critics to drag him onto the neoclassical battlefields and declare his theory a special case of neoclassical economics. And so was Keynes stood on his own head. If incomplete and imperfect, how can his revolution be perfected and completed? At the most general level, by ferreting out all the neoclassical survivals and appreciating the conceptual and theoretical implications of this revolution. In short, the task is nothing short of herculean, and within the confines of this brief epistemological exploration, can only remain programmatic. In the following chapters I will therefore attempt to identify some of the most crippling Aristotelian and transactional survivals in Keynes’s conceptual framework, and appraise some of the transformations—conceptual as well as theoretical—which such a reading of Keynes could lead to. This, however, is but an epistemological diagnosis; the cure belongs to professional theoreticians of economics. (The reader unfamiliar with technicalities of the General Theory should move to p. 156.) 124

6 KEYNES AND SPECULATION: ARISTOTLE REVISITED

As we shall see, Keynes is at his most confused when he fails to extricate himself from neoclassical ways of thinking. In this chapter we shall bring out survivals of Aristotelian thinking in his treatment of the rate of interest and of user costs. Paradoxically enough, these Aristotelian lapses stem from Keynes’s speculator’s understanding of the economy. In the following chapter we shall concentrate on his transactional and substantialist treatment of effective demand and investment.

KEYNES AND THE RATE OF INTEREST Keynes’s theory of the rate of interest is so intimately wedded to his views on saving and investment that we will have to cover some familiar ground once again.

The classics and Keynes on saving and interest In what one could call his ‘exchange equations’ on saving (as opposed to his views from the point of view of distribution) Marshall had coupled saving directly to investment, as the macro-economic projection of the relationship between lender and borrower, supposing on the part of individuals a natural reluctance to saving (and I take Marshall as representative of the neoclassical position, if we momentarily except the loanable-funds theory). Faced with the uncertainty of the future—which for the classics meant the uncertainty of being alive later on to enjoy one’s income—the individual of neoclassical economics preferred to consume the whole of his current income immediately, resisting the very idea of postponing consumption; such deferment amounted to a cost, a sacrifice for which he had to be rewarded. From his point of view, that reward represented his supply price (the supply price of saving). He had to be baited into saving. Why should individuals save, then? Because others, namely investing 125

KEYNES AND SPECULATION: ARISTOTLE REVISITED

entrepreneurs, or borrowers, ogled their savings, thereby setting their demandprice; rates of interest embodied precisely the reward that investors were ready to pay to compensate individual savers for the cost of waiting. Like any price in transactional economics, rates of interest then brought into equilibrium the demand for saving with its supply, so that experimentally, but not necessarily empirically (allowing for the time lag due to market imperfections for someone like Marshall), the flow of saving would tend to equal the flow of investment. Keynes exploded this transactional representation with his famous second equation. If consumption is an individual decision, linked—within the individual deciding—to the level of his (real and disposable) income, and if investment is similarly related within the individual investing to the marginal efficiency of capital, then saving results from a resolution to save made by the individual (more appositely in the case of Keynes, a ‘decision not to consume’) and is to be understood with reference to the circumstances affecting the individual’s choices to consume and ‘not to consume’, not with reference to a putative relationship with investors. Thus the decisions ‘not to consume’ and to invest are taken separately by different individuals and cannot mutually account for one another. By uniting saving to consumption Keynes was severing the neoclassical bond between saving and investment (or thrift and productivity). If the decision to save is after all nothing but a decision not to consume, it is to be apprehended in the very same terms as the decision to consume, namely in terms of (real and disposable) income. Better then to suppose a ‘propensity to consume, but not the whole of one’s current income’ which (a) takes saving as a given (and does not suppose a force overcoming a resistance to saving) and (b) implies that the marginal propensity to consume is always inferior to the marginal increment of income (by virtue of (a), since for any increment of income, there is a propensity not to consume it all). To these presuppositions Keynes also added a third one, namely that this marginal propensity to consume goes on decreasing as income rises. This propensity to consume, culturally and personally influenced, is first and above all determined by the level of real income. If income determines the level of consumption, given an average and a marginal propensity to consume, it prescribes ipso facto the level of saving; saving is therefore a function of (real) income. Neoclassical theorists would have thus lumped together two separate levels of decisions: The psychological time-preferences of an individual require two distinct sets of decisions to carry them out completely. The first is concerned with that aspect of time-preference which I have called the propensity to consume, which, operating under the influence of the various motives set forth in Book III, determines for each individual how much of his income he will consume and how much he will reserve in some form of command over future consumption [this last italics added]. 126

KEYNES AND SPECULATION: ARISTOTLE REVISITED

But this decision having been made, there is a further decision which awaits him, namely, in what form he will hold the command over future consumption which he has reserved, whether out of his current income or from previous savings. Does he want to hold it in the form of immediate, liquid command (i.e. in money or its equivalent)? Or is he prepared to part with immediate command for a specified or indefinite period, leaving it to future market conditions to determine on what terms he can, if necessary, convert deferred command over specific goods in general? In other words, what is the degree of his liquiditypreference—where an individual’s liquidity-preference is given by a schedule of the amounts of his resources, valued in terms of money or of wage-units, which he will wish to retain in the form of money in different sets of circumstances. We shall find that the mistake in the accepted theories of the rate of interest lies in their attempting to derive the rate of interest from the first of these two constituents of psychological time-preference to the neglect of the second; and it is this neglect which we must endeavour to repair. (CW, VII:166) Herein lies the major innovation. Keynes dissociates the decision to consume from that of not consuming (i.e., to ‘reserve [part of one’s income] in some form of command over future consumption’, where ‘command over future consumption’ can only mean ‘saving’), influenced by the level of the individual’s income, from the individual’s decision to hold his past and current savings in a purely liquid form (hoard it), or to part with it for an indefinite period (purchase financial assets). Using a language alien to Keynes, I submit that the above statement could be retranslated in the following terms: that there is a vast difference (in Keynes’s General Theory, let us recall) between (a) disposing of one’s income which, for Keynes, meant first and above all deciding between consumption and nonconsumption (i.e., ‘saving’ defined residually) and (b) disposing of one’s savings, that is, deciding between hoarding or committing those savings to financial (and, therefore, illiquid) assets. The rate of interest would not operate on the first decision, but on the second. Previous theories associated it to the first, and understood interest as the ‘price of not spending’; when inserted in the second set it emerges as the ‘price of not hoarding’, that is, as the ‘reward of parting with liquidity for a specified period’, a view spelled out clearly in the General Theory (p. 167) as well as in the ‘General Theory of Employment’ (CW, XIV:110, 116) and repeated in ‘Alternative Theories of the Rate of Interest’ (CW, XIV:213). The rate of interest would thus regulate the quantity of money in circulation and as such would be an important tool manipulated by the monetary authorities. Keynes’s rate of interest no longer brings together lender and 127

KEYNES AND SPECULATION: ARISTOTLE REVISITED

borrower, even impersonally, but individual savers and the Central Bank (through the banking system).1 On the other hand, the rate of interest also affects the level of investment since entrepreneurs will only invest as long as the marginal efficiency of capital over the life-time of the capital asset is higher than the prospective money rate of interest over the same time period. The rate of interest thus works both upon the manner of disposing of one’s savings and on the decision to invest, but separately, not in a transactional, market representation. In this way Keynes was able to reunite the rate of interest to the quantity theory of money and retrieve prices in an indirect fashion. It would be difficult to assess which part of Keynes’s writings excited the most passionate responses and most flooded the journals, but I cannot help feeling that the debates stirred by his definition of interest and his theory of its rate must rank close to the top. And yet, once more, they seem to spring from subtle semantic slips. To root out the latter, more will have to be said about Keynes’s rate of interest.

Keynes’s rate of interest: a closer scrutiny Keynes wrote quite explicitly: Thus the rate of interest at any time, being the reward for parting with liquidity, is a measure of the unwillingness of those who possess money to part with their liquid control over it. The rate of interest is not the ‘price’ which brings into equilibrium the demand for resources to invest with the readiness to abstain from present consumption. It is the ‘price’ which equilibrates the desire to hold cash with the available quantity of cash, (CW, VII:167, italics added) In the final analysis, it is the reward for not-hoarding (p. 174). In fact, he squarely assumes on the part of the savers a liquidity-preference, which he also identifies with a ‘propensity to hoard’ (if ‘hoarding’ does not mean ‘an actual increase of cash-holding’, adds Keynes (p. 174); but, stricto sensu, hoarding can never mean this), a stance he unequivocally repeats in 1937 in the Quarterly Journal of Economics’ article on ‘The General Theory of Employment’ (CW, XIV:116–17). With the liquidity-preference, or the propensity to hoard, we hit upon another predicament of Keynes’s economics. By asserting almost axiomatically an ‘unwillingness of those who possess money to part with control over the money in exchange for a debt for a stated period of time’ (p. 167), Keynes tacitly posits a natural proclivity of individual savers to liquidity (their state of inertial motion in monetary matters), and the whole language of ‘unwillingness’ reminds us eerily of the neoclassical language of ‘resistances’. The rate of interest, as a premium to induce people to dishoard, invincibly 128

KEYNES AND SPECULATION: ARISTOTLE REVISITED

calls to mind the sempiternal force overcoming a resistance—that familiar Aristotelian vision of the economic cosmos. Other statements however, would seem to belie this interpretation. Indeed, after having given the world his general theory of interest, Keynes does pause to wonder why people should exhibit such a strange proclivity, and he concludes: There is, however, a necessary condition failing which the existence of a liquidity-preference for money as a means of holding wealth could not exist. This necessary condition is the existence of uncertainty as to the future of the rate of interest, i.e. as to the complex of rates of interest for varying maturities which will rule at future dates. (CW, VII:168) He elucidates further that ‘[t]here is, moreover, a further ground for liquiditypreference which results from the existence of uncertainty as to the future of the rate of interest, provided that there is an organised market for dealing in debts’ (p. 169), this latter condition spurring on speculation. In conditions of certainty, he contends (pp. 168–70), there would be no need for speculation, and knowing with certainty the rates of interest on debts of varying maturities, assuming these rates always to be positive, then ‘it must always be more advantageous to purchase a debt than to hold cash as a source of wealth’ (p. 169). In brief, Keynes reasons that in conditions of certainty (hence in a stationary state) speculation would lose its raison d’être, and apart from keeping money for transactions, individual savers would commit all their savings to (illiquid) financial assets (a point repeated by contemporary commentators: Chick 1983:227–8; Fender 1981:74). This could be read as recognizing that there would be no liquidity-preference in the experimental circumstances of certainty about the future of rates of interest, that is, that human beings would then exhibit a natural proclivity to illiquidity. Liquidity-preference would be generated by phenomenal interference (uncertainty) in our experimental conditions (certainty). This is an utterly Galilean representation, and one I totally concur with. I would indeed suppose a natural proclivity to illiquidity, inhibited by the circumstances of the real world. Would this then invalidate the earlier accusation of Aristotelianism? Yes and no! For, by holding both views, Keynes committed a major logical sin. Indeed, if (a) the rate of interest is the price that must be paid to entice people to part with their liquidity because (b) there is in our world of uncertainty a liquidity-preference and if, (c) in a universe characterized by certainty there would be no liquidity-preference but a natural proclivity towards illiquidity, then, necessarily, there could be no price to pay individuals to part with their liquidities, and therefore, there could be no rate of interest Hence the ambivalence of Keynes’s writings on the subject. Having illogically derived an Aristotelian 129

KEYNES AND SPECULATION: ARISTOTLE REVISITED

definition of the rate of interest as the price of parting with liquidity from a set of truly Galilean premises, his assumptions could simultaneously don a Galilean garb (natural proclivity inhibited by phenomenal resistance) and an Aristotelian one (natural resistance overcome by a force). I do agree with Keynes that under experimental conditions of certainty one would witness a natural proclivity to illiquidity and that under those same conditions rates of interest would still be found. Given those two assumptions, we must then bravely ask the question again: what then are rates of interest, if they are no longer the price of parting with liquidity (by virtue of (c) in the preceding paragraph)? Once more the answer is written black on white in the General Theory but, again, at the cost of further inconsistencies. Before answering the question, however, let us try to disengage the main elements of this tangle. At a first glance we appear to be faced with four separate problems: (a) the definition of interest; (b) the term structure of rates of interest (the longer the commitment, the higher the rate); (c) the speculation arising from the fact that rates of interest vary over time (and the fact that the prices of securities can fluctuate simply because of opinions, without anything having been exchanged: Shackle 1967:154), and (d) the explanation of why rates of interest settle at a particular level (the factors affecting their level; in brief, a theory of changes in the rate of interest, separate from the question of speculation). Questions (a) and (d) are obviously coupled, and will be temporarily left aside. Something more ought to be said about (b) and (c). Let us continue to argue within the experimental scenario of certainty (indefinitely stationary state). In such circumstances Keynes reckons that the rate of interest would immediately reach the level that generated full employment and would stay there (CW, XIV:119). All oscillations would cease and the same rate would persist forever, at full employment. But, as the whole discussion on pp. 168–9 testifies, Keynes also conjectures that under certainty one would still observe a term structure of rates of interest. This I dispute. If individuals enjoyed perfect foresight about the times in their lives when they needed more cash (there could be no surprises such as sudden deaths or sudden advantageous deals in conditions of certainty), there would be absolutely no reason to pay more, the longer the financial commitment. This makes sense in the conditions of uncertainty that underlie liquiditypreference, not in a world of certainty which does away with liquiditypreference. Before defining interest, let us therefore put forth our main conclusions, three points which rid Keynes’s theory of its implicit Aristotelianism and give it back its Galilean lustre. I would posit a natural proclivity towards illiquidity inhibited by the conditions of our phenomenal 130

KEYNES AND SPECULATION: ARISTOTLE REVISITED

world (summarized in the concept of uncertainty, including uncertainty about the banks not defaulting and other risks) and would further argue that uncertainty (the equivalent of phenomenal resistance in Galilean physics) does not account for the existence of the rate of interest but explains its term structure as well as the speculation emanating from expectations of changes in the rates. This is in line with all the assumptions of our experimental scenario (where, even under conditions of certainty, rates of interest would still exist). Now, what are interests, if not the reward for saving (not-spending) or for parting with liquidity (not-hoarding)? The answer lies quite conspicuously in Keynes’s notes on mercantilism (Chapter 23). Reviewing the non-classical literature on rates of interest, Keynes approvingly quotes Heckser on the mercantilists: For them [the mercantilists], money was—to use the terminology of today—a factor of production, on the same footing as land, sometimes regarded as ‘artificial’ wealth as distinct from the ‘natural’ wealth; interest on capital was the payment for the renting of money similar to rent for land. (CW, VII:342; from Heckscher 1983 [1935]:200–1) He then moves on to Hobson and Mummery: ‘Hobson and Mummery were aware that interest was nothing whatever except payment for the use of money’ (p. 369). Rates of interest are thus a rental price, like the rent of land, and accordingly interest is the price paid for the use of money. If in the same opus Keynes could simultaneously declare interests to be the ‘price paid for the use of money’ and the ‘price paid for inducing someone to part with liquidity’ he must have believed the two statements to be one and the same thing. And yet they are not, since in a world of certainty, given a natural tendency to illiquidity, there could be no price paid for parting with liquidity but there could be a price paid for the use of money. This adequation would explain the inconsistencies that come out glaringly in the correspondence following the publication of the General Theory but already lay hidden in the General Theory itself. Goaded by various articles on his theory of the rate of interest, mostly from Ohlin, Hawtrey and Robertson, as well as by numerous letters, Keynes was led to incorporate finance among the motives behind liquiditypreference and include the banking system as the source of this finance; he wrote to Robertson in December 1937: ‘In my terminology liquiditypreference relates to the total demand for money for all purposes and not merely to the demand for inactive balances…’ (CW, XIV:223, italics original) and: Thus, under my scheme, liquidity preference is made up of two factors, one depending on the propensity to hoard, and the other on the scale of 131

KEYNES AND SPECULATION: ARISTOTLE REVISITED

planning and activity and the level of costs. It is this total liquidity preference which in conjunction with the supply of money determines the rate of interest. I have many pages explaining this. The confusion between us lies, perhaps, in your taking my liquidity preference to relate solely to the demand for inactive balances. (CW, XIV:224) This stance he reemphasized in an article in the Economic Journal published in June 1938 (CW, XIV:230). This was no mere qualification, but a flagrant denial of interests as ‘the price of parting with liquidity’, or ‘the price of not hoarding’. In numerous sections of his magnum opus as in many other statements following it, as we emphasized above, liquidity-preference unequivocally designates the disposal of savings; otherwise, Keynes would have illogically contrasted his theory of the rate of interest as the ‘price of not hoarding’ (by definition, out of savings, since he had included hoarding within saving) to the neoclassical idea of the ‘price of not spending’ (and, therefore, of not consuming). This was clearly stated again in ‘The General Theory of Employment’, where he identifies hoards with inactive balances. In December 1937 (date of that letter to Robertson) he seems to have changed his mind, for this latest declaration indicates that liquidity preference operates on the disposal of income. It then becomes impossible to depict interest as the ‘price of hoards’ (CW, XIV:214) unless hoards completely lose their original meaning of ‘inactive balances’, and henceforth comprise all money ‘out there’—that is, the very stock of money. It equally precludes defining interest as the price of parting with liquidity. Therefore to declare that liquidity preference and ultimately the rate of interest bear upon the total demand and supply for money blurs the very demarcating line between his definition and that of his opponents, since it makes it impossible to say what interests are the price of. Where did the confusion stem from? From his failure to translate the mercantilist definition of interests as the price of the use of money into that of interests as the price of money’s services. When a landlord rents out his land he is actually selling the labour of his land. Labourers (not labour) and land, as well as equipment, are true means of production (or factors of production). Intrinsically, money may not yield anything, as Keynes openly professes when he pronounces barren money as a store of value (XIV: 115);2 however, in so far as money-credit carries with it interests we can metaphorically treat it as a factor of production. This the mercantilists unashamedly did, and so shall we since this metaphorical extension helps the analysis. Let us therefore go ahead in positing money to be a factor of production; since we can define as labour the use of a factor of production we shall then call ‘labour’ the use of money. Rent would thus be the price of land’s labour, wages the price of person’s labour and rates of interest, 132

KEYNES AND SPECULATION: ARISTOTLE REVISITED

the price of money’s labour. But let us emphasize that the price paid for the use of a factor of production, that is, for its labour, is by definition the price paid for its services, and interests are therefore the price paid for money’s services. Unfortunately, instead of reading the ‘price of money’s services’ in the ‘price of money’s use’ Keynes translated it as ‘the price of parting with liquidity’. It is an easy trap to fall into because the individual saver must part with his or her money if someone else is to use it. But so must the landlord with his land or house when renting them out; this, however, does not make rent the price of relinquishing one’s possessions. How did Keynes fail to see the distinction, especially in the light of his experimental scenario involving certainty? I would impute the evil to his customary habit of overlooking what is actually exchanged when new financial assets are created and of translating all transactions in terms of speculation on old assets. Contemplated from the point of view of securities issued previously it does look as if debts are traded for cash and as if monetary authorities were actually paying individual savers for renouncing their cash when they rose their rates of interest. Thus, when referring to financial assets Keynes often writes of ‘debts’, and of banks as being engaged in the ‘purchase and sale of debts’ (pp. 205– 6). But what does it really involve to ‘purchase a debt? It does ostensibly make a difference whether we are alluding to an old or a new debt, and in order to clarify the matter, we will assume the purchase of new debts. In the mercantilist view of interest it would amount to purchasing money’s labour, or money’s services, but Keynes’s ‘debts’ encompass various types of commodities as he subsumes under this term at least two distinct uses of one’s money. One can part with one’s savings, either for a fixed and certain income (let us generically call such interest-carrying assets procuring their owners a fixed and certain income ‘bonds’) or for a floating and uncertain income (let us generically call assets procuring such an income ‘shares’; they correspond to Chick’s ‘archetypal’ bonds and shares: Chick 1983:186). But as everyone knows, the purchase of new bonds constitutes a straightforward case of lending and borrowing; since the amount of interest is fixed it can be said that the individual buying new bonds is selling the labour of his money, or buying interest, that is, a future income (or, as Keynes expressed it, ‘future command over consumption’). Can we extend the same reasoning to shares? When a company is issuing new shares, what is it simultaneously buying? The individual’s money, or the use of his or her money? When it procures money by selling goods, a company will not return the money should the customer wish it back unless the product is proved faulty and is under guarantee. When buying the services of money, on the other hand, the borrower has to return the capital. What with shares? Although some companies will attract savers by paying dividends, the dividends do not 133

KEYNES AND SPECULATION: ARISTOTLE REVISITED

differentiate shares from bonds. With or without dividends shares remain shares. Unlike bonds, which it is committed to buying back, a company issuing shares does not pledge itself to buying them back should the holders wish to sell them. Hence the company is not buying the services of individual savers’ money, but their very money; it must therefore be trading a good distinct from interest. Since the company is in a sense ‘selling itself, it actually exchanges titles of ownership for money. A gaping divide thus separates archetypal bonds (or the purchase of interests) from archetypal shares (or the purchase of ownership titles): the first bears on the exchange of money’s labour for more money whereas the second pertains to the exchange of money itself for a title which will secure a future income if its value rises. In the latter case the individual saver is exchanging his money for a good, the capital value of which he hopes will ascend; this is an unadulterated instance of speculation. As it happens, these distinctions vanish when analysing the process from the point of view of old assets since one also speculates when purchasing old bonds. When looking at old assets, all transactions in financial assets boil down to speculation, and as we shall argue in greater detail when examining user costs, speculation necessarily leads to an Aristotelian view of the economy. In brief, the Aristotelian element that clouds Keynes’s understanding of rates of interest stems directly from his speculator’s view of economic phenomena. Bonds thus make up what could metaphorically be called a pool of ‘labouring money’, whereas the issuing of new shares is an unadorned case of commodity-trading.3 But Keynes failed to see the difference, and by equating ‘paying for the use of money’ with ‘paying for parting with liquidity’ (for not-hoarding), he slipped from what could be called the ‘stock of labouring money’ to the stock of money itself; instead of perceiving interests as the price of money’s services, or of money’s labour, supposing a supply and demand for money’s labour and ultimately involving lenders and borrowers, he was in the end led to see it in terms of parting with liquidity, supposing a supply and demand for money itself, and ultimately involving individual savers and the monetary authorities. Having confounded money with money’s services he further oscillated between a notion of interests as acting on the disposal of savings only, and that of interests as bearing on the disposal of income. This conflation of money and money’s services actually surfaces most vividly in his treatment of liquidity-preference in the General Theory. When striving to gain an income, I demand money, and the so-called transactionsmotive is nothing but the demand for income—namely for money. It is therefore absurd to number it among the motivations behind liquiditypreference, if liquidity-preference affects the disposal of savings rather than the disposal of income. More prosaically, money kept for transactions (including business transactions) is nothing but money kept aside to pay for 134

KEYNES AND SPECULATION: ARISTOTLE REVISITED

the purchase of consumption or investment goods, or for the services of factors of production. Let us examine the transactions-motive from the point of view of the individual income-earner (and, therefore, the individual saver). The fact of having to keep some money in the bank in order to pay for consumption (because consumption is not instantaneous, but spread over time) is to be regarded as the disposal of an income, not that of savings. In strict logic, only the precautionary and speculative motives should be considered as influencing the disposal of savings. If so, they do not constitute a demand for money, but a demand for holding on to a stock of money already demanded (and got). It is not to be added to the demand for money (the procuring of income); it is no demand at all, in fact, but the simple desire to preserve in liquid form the income earned. Once their income is gained, people may resolve to keep idle balances, but this does not represent a demand for money; it has to do with the uses of money already demanded. Thus, the elements which surfaced in the astonishing statements of 1937 and 1938 already inhabited the General Theory. Once money’s services are actually mingled with money’s uses (and the price of money’s services with the price of using money), it then becomes wholly inconceivable to detach the demand for labouring money from the demand for money. If the two are kept merged and liquidity preference is understood as a demand for money, then logically it has to do with the disposal of income, as well as with the creation of credit by the banks. Then the rate of interest should affect the propensity to consume (since it works on the total demand for money; this is exactly where Keynes lands!4), and consequently, it should bear on the rate of saving. In the end, it must also be equated with the ‘price of not consuming’, since consuming also represents an instance of parting with liquidity and using one’s money. In the end we get a cross between the ‘price of not consuming’ and the ‘price of not hoarding one’s savings’ which transmutes Keynes’s rate of interest into a meaningless entity. In reality, Keynes blended three separate things: (a) the demand for money (the gaining of an income), (b) the demand for money’s services (borrowing) and, (c) from the income gained, the desire to hold part of it in liquid form. Ironically enough, had he not wished to cling on to the concept of saving in order to dissociate the decision not to consume from that of disposing of the money not consumed, and had he considered the fact of using money for private consumption, of hoarding it for whatever reason or of committing it either to bonds or shares all as forms of income disposal (defining income in terms of the purchase of money), Keynes could then have realized that there is only a demand for money and for money’s services, and that the fact that some individuals might wish to reserve a stock of liquid money is no demand at all but a refusal to exchange again for a given period of time. This, I believe, is the point Robertson was driving at (Robertson 1940).5 When reading 135

KEYNES AND SPECULATION: ARISTOTLE REVISITED

everything in terms of income disposal, which I deem the only way of looking at things, Robertson’s critique was right. Does it mean that we have then to revert to the loanable-funds theory? I think not, if I am to believe Fletcher’s portrayal of it (Fletcher 1989). First, the loanable-funds theory displays the same conceptual vices as Keynes’s. Let us take their definition of interest. Following Ohlin, are we to say that the supply and demand for money’s services and the supply and demand for credit are one and the same thing? If we did, we would then logically have to identify ‘credit’ with ‘money’s services’, when the two are not identical. Credit denotes the actual exchange of money’s services. If I define interest as the ‘price of money’s services’, I cannot simultaneously equate it with the ‘price of credit’; credit being already an exchange, namely the exchange of money’s services, the ‘supply and demand for credit’ does not describe anything. It amounts to saying that individuals are trading a transaction and that there is a supply and demand for such a transaction! And the same applies to loans; loans do not describe money’s services, but their exchange.6 If there is a price of credit or bank loans, it is the administrative costs banks will charge for the transaction, but not a definition of interests on money. Hence the answer: money’s services are neither loans nor credit but the commodity exchanged for money when credit or loans are sought and given. Furthermore, as money’s services can appear in many guises— namely as cash, overdraft facilities, straightforward bank loans, bonds, credit cards, interest-free IOUs, and so on—they are not to be limited to bank loans (Hawtrey’s position). So much for the conceptual and semantic framework: defining interests as the price of money’s services does not make it the price of ‘not doing’ anything in particular (the ‘price of not consuming’, or the ‘price of not hoarding’), nor does it identify it with the price of credit or loans. As to the theory erected on the loanable-funds theory’s view of interest, I do not wish to scrutinize it. Taking Fletcher’s critique (1989) as our point of reference (and assuming that a coherent stance united the various economists who have been brought together under the label of ‘loanablefunds theory’), I can only say that it does not elude the Aristotelian element of Keynes’s theory. As long as interests appear as a price for ‘not doing something’, they will always be depicted as a force overcoming a resistance and inducing income-earners into activity, as well as equilibrating a supply and demand for money, or for loanable-funds. I radically repudiate this Aristotelian representation of any economic problem (of problems of economic decisions and actions). In my view interests are not prices to goad income-earners into any economic action since I do not postulate any resistance either to saving (not consuming the whole of one’s income in the current period in which it is earned), or to committing income to binding assets. On the contrary, by positing a natural inclination to illiquidity only hampered by the conditions of the phenomenal world, individuals will 136

KEYNES AND SPECULATION: ARISTOTLE REVISITED

naturally commit their money to illiquid assets when the economic organization does not inhibit their natural proclivity. Thus, a purely mercantilist definition of interest does bring back into the picture Keynes’s abhorred borrowers and lenders without calling back either a loanablefunds theory or a transactional representation of the phenomenon; on the contrary, it retrieves a very explicit, although muddled, thread of Keynes’s own argument. What now of our fourth question, namely ‘what governs the rate of interest?’. This is a theoretical, not a semantic question, and one I am incompetent to answer. If interests are the price of money’s services, all that can be said is that their rate is to be governed (in a non-transactional fashion, need I repeat?) by the supply and demand for those services. But an inflated demand for the services of money could be met in a number of ways. If its demand emanates from borrowers, private and corporate, from banks, municipal authorities and every level of government, its supply also flows from households, firms, banks and the Central Bank. And, in the latter case, borrowing through the issue of bonds also constitutes a means of controlling the quantity of money in circulation. Since I do not hold a transactional view of pricing, under no circumstances do I see rates of interest as adjusting or equilibrating anything.7 Like most prices in a monetary production economy, they are dictated by one side more than the other, in this case by banks and the central government. They do affect the movement of money and investment, but in no mechanical, simplistic, one-to-one relationship. As Fitzgibbons insisted, ‘[t]he theory of interest in the General Theory was meant to prove that interest rates are logically indeterminate’, (1988:113) a theoretical conclusion I fully endorse. Admittedly, we took something for granted throughout this whole discussion. Under conditions of certainty, would there be rates of interest at all? If it is possible to maintain that under (experimental) conditions of certainty the stock of money could provide for all needs, and that therefore the necessity would never arise of purchasing the services of other people’s money, then rates of interest would vanish. This is a possible scenario, one that I am not competent to substantiate in any analytical detail. But even admitting it would not modify our Galilean formulation because everything could be restated in the following terms: in the experimental scenario of certainty individuals would never need to buy the services of money, and rates of interest would not even exist. But given the observable world, the existing quantity of money is never adequate to serve all possible needs and individuals have to purchase the services of other people’s money; rates of interest are the price of those services. Under those circumstances, however, our Galilean axioms still obtain, namely that there is a natural proclivity to illiquidity inhibited by other features of the phenomenal world (namely, uncertainty); uncertainty would then account for the existence of rates of interest, for their term structure, as well as for speculation. 137

KEYNES AND SPECULATION: ARISTOTLE REVISITED

Finally, by eradicating the Aristotelian element undermining Keynes’s theory of the rate of interest and adhering to a strict mercantilist definition, as he himself wished to do, we can further elucidate two other muddled themes related to the rate of interest, namely Keynes’s equations linking the stock of money to liquidity-preference (end of Chapter 15 of the General Theory), and his treatment of money’s own-rate of interest in the notorious Chapter 17.

Keynes and the money stock It will be remembered that Keynes connected the rate of interest to the monetary mass and depicted it as involving not lenders and borrowers of money, but holders and producers of debts (or buyers and sellers of debts)— namely individual savers and the monetary authorities.8 He also discerned various motives behind liquidity-preference, namely the transaction-motive (‘i.e. the need for cash for the current transaction of personal and business exchanges’ (p. 170)), the precautionary-motive (‘i.e. the desire for security as to the future cash equivalent of a certain proportion of total resources’ (ibid.)), and the speculative-motive (‘i.e. the object of securing profit from knowing better than the market what the future will bring forth’ (ibid.). In brief, monies saved will be hoarded and retained in liquid form for the above reasons but, concedes Keynes, ‘the liquidity-preferences due to the transactions-motive and the precautionary-motive are assumed to absorb a quantity of cash which is not very sensitive to changes in the rate of interest as such and apart from its reactions on the level of income’ (p. 171), so that the rate of interest operates mostly on liquidities held for reasons of speculation. On this basis, Keynes separates two ‘compartments’ of the monetary mass, with two liquidity functions: Let the amount of cash held to satisfy the transactions- and precautionary-motives be M1, and the amount held to satisfy the speculative-motive be M2. Corresponding to these two compartments of cash, we then have two liquidity functions L1 and L2. L1 mainly depends on the level of income, whilst L2 mainly depends on the relation between the current rate of interest and the state of expectation. Thus M=M1+M2=L1(Y)+L2(r) (CW, VII:199) Why invoke the state of expectation? Keynes explains: In a static society or in a society in which for any other reason no one feels any uncertainty about the future rates of interest, the liquidity function L2, or the propensity to hoard (as we might term it), will always be zero in equilibrium. Hence in equilibrium M2=0 and M=M1. (CW, VII:208–9) 138

KEYNES AND SPECULATION: ARISTOTLE REVISITED

Given certainty about the future of rates of interest, as we have already emphasized, wealth-owners would have no reason to hoard except for transactions- and precautionary-motives, and all the cash in circulation would serve the latter purposes. This conclusion harbours some astonishing assumptions. First, Keynes lumps together bonds and shares and supposes them substitutable, from a speculative point of view. The fact is, they are not. Second let us assume, as one can legitimately surmise Keynes did, that the cash held in liquid form for motives of transactions and for precautionary measures originates from the individuals’ income, and not from money borrowed. As Keynes rightly infers, if the propensity to hoard is zero in equilibrium (when a rate of interest is certain over the foreseeable future), it would follow that M2=0, and that M=M1, but it should not imply that any part of M2 has been transferred to M1 (by virtue of the first assumption; if it did, it would imply that borrowed money is included among the assets kept liquid for purposes of transaction and precaution). In other words, with a perfectly foreseeable rate of interest, M2 is all committed to illiquid assets and dwindles to nothing. Let us now read those equations with mercantilist spectacles. We would then assume that wherever one finds a rate of interest, there must somewhere be money used by people who do not own it (money that they have not saved out of their own income). One would suspect that this supply of money, the services of which are ready to be purchased and sold, would have been included in M2, as it cannot, by definition, be part of M1. Given certainty in the future of rates of interest, according to Keynes, this M2 shrinks to nothingness. In plainer language, this means that there would be no hoarding except for transactions and precautionary motives, that the price of parting with one’s money would be so certain as to induce everyone to relinquish the portion that they wish to surrender (the money kept for speculation) but that, overall, we would find money neither borrowed nor lent (no money utilized by people other than their owners) since all the money left in circulation (M1, since M=M1 when M2=0) would be used out of savings (transactions- and precautionary-motives). Instead of inviting the use of money by others, perfectly foreseeable rates of interest would simply conjure a large portion of savings away. But where? Presumably, back to the monetary authorities. This however is only possible if all bonds are issued by the central government and if, by openmarket operations, governments act as much upon shares as they do upon bonds. Both assumptions are neither simplifying nor experimental, they are bluntly erroneous. If the future of rates of interest was certain, the mass of hoards kept for speculative motives would indeed disappear, but where? Even in a stationary state bonds would come to maturity,9 and new bonds would constantly have to be produced to commit to financial assets the monies newly released. But 139

KEYNES AND SPECULATION: ARISTOTLE REVISITED

who creates these financial assets? In the case of shares, it is companies, and if the money hoarded for speculation went to buy new shares while investment rose to reach full employment, this money would then filter back into income and into M1, What of bonds? By definition, they are not exclusively issued by the central government, but also by municipal authorities, or any company for that matter. In so far as money from M2 found its way into new bonds as old ones came to maturity, some of it may go back to the Central Bank (but what for? To pay for government debts and expenditures—Leijonhufvud 1968:130), but most of it would swell the fund of labouring money. In other words, with or without the famous finance motive which crept up in later articles, Keynes was mistaken in the first place to divide the monetary mass into those two compartments on the basis of his own definitions—once more because he reasoned from the point of view of the speculator.

Keynes and money In the notorious Chapter 17, on The essential properties of interest and money’, Keynes endeavours to restate the ‘General Theory of Unemployment’ in terms of the rate of interest and money’s intrinsic characteristics. Assuming that for every kind of capital-asset [such as wheat or copper] there must be an analogue of the rate of interest on money’ (p. 222)—which he calls the commodity’s own-rate of interest—then why should these various own-rates not be the same for all commodities? Why does ‘the rate of interest on money [play] a peculiar part in setting a limit to the level of employment?’ Why does it set ‘a standard to which the marginal efficiency of a capital-asset must attain if it is to be newly produced’? (p. 222). Keynes attempts to solve this conundrum by singling out the properties of money which would render it particularly suitable for such a task. He first isolates ‘three attributes which different types of assets possess in different degrees’—namely their yield, their carrying cost, and finally their liquidity, that is, ‘the power of disposal over an asset during a period [which] may offer convenience or security’ (p. 226). Comparing various assets, it then appears characteristic of money That its yield is nil, and its carrying cost negligible, but its liquiditypremium substantial [and that] it is an essential difference between money and all (or most) other assets that in the case of money its liquidity-premium much exceeds its carrying costs, whereas in the case of other assets their carrying costs much exceeds their liquiditypremium. (pp. 226–7) This would still leave unexplained the fact that the production of other capitalassets should stop when their own-rate of interest equals the money-rate of 140

KEYNES AND SPECULATION: ARISTOTLE REVISITED

interest. Keynes discovers the final clues in the fact that money is endowed with a very small elasticity of production, and a zero elasticity of substitution. With these new theoretical tools in hand he then reformulates the General Theory in terms of his theory of money. This theoretical reformulation lies beyond the compass of our epistemological enquiry. What is more disquieting are the sudden declarations that immediately follow this extraordinary tour de force. At the beginning of the chapter Keynes was quite explicit (as he was when discussing liquidity in earlier chapters): liquidity stood for ‘the power of disposal over an asset’, and ‘[t]he amount (measured in terms of itself) which [people] are willing to pay for the potential convenience or security given by this power of disposal (exclusive of yield or carrying cost attaching to the asset), [he called] its liquidity-premium’ (p. 226). However, barely thirteen pages below he warns us that: [A]s a footnote to the above, it may be worth emphasizing what has been already stated above, namely that liquidity and carrying-costs are both a matter of degree; and that it is only in having the former high relatively to the latter that the peculiarity of money consists. (p. 239) These qualifications become increasingly upsetting when we learn that [T]he conception of what contributes to ‘liquidity’ is a partly vague one, changing from time to time and depending on social practices and institutions…[so that] [i]t may be that in certain historic environments the possession of land has been characterized by a high liquidity-premium in the minds of owners of wealth; and since land resembles money in that its elasticities of production and substitution may be very low, it is conceivable that there have been occasions in history when the desire to hold land has played the same role in keeping up the rate of interest at too high a level which money has played in recent times. (CW, VII:240–1) What is not only conceivable but historically true is that the rate of interest on land actually served as the yardstick below which even money-rates of interest were not allowed to fall, and this certainly in agricultural seventeenthcentury England, if not even much later. I find the beginning and end part of this chapter quite inconsistent, and suggest that the discrepancy can be rectified by treating the rate of interest not as a premium for parting with liquidity, but as the price of money’s services. To take but our own society at two different periods, such as the seventeenth and the mid-twentieth centuries, we may wonder why land in the seventeenth century acted as the commodity of which the rate of interest served as a yardstick in that the rate of interest of any other capital asset, even of money, 141

KEYNES AND SPECULATION: ARISTOTLE REVISITED

could not be allowed to fall below that of land, and why the situation was completely reversed three hundred years later? Let us recall that seventeenthcentury England (or France) was an agricultural society in which, nonetheless, a form of money circulated akin to what we now know. In the light of Keynes’s pronouncements, this gives up a number of thorny questions. Are we to suppose that in such an agricultural society land’s liquidity-premium exceeds its carrying costs? If yes, we should then logically regard it as a currency; but land never functioned as a currency in those societies. This throws us back to square one, since there also existed, side by side with land, gold and silver coins which performed all the functions of multi-purpose money as we know it. This currency enjoyed a liquidity-premium in excess of its carrying cost and should therefore have operated both as the currency and as the asset which sets the limit of investment. But it failed in this latter role. And invoking the ‘vagueness’ of the concept of liquidity and the fact that it changes from place to place and through time hardly helps us to lift the fog clouding this issue. Yet, there is an easy answer if we examine money from our point of view (not in terms of liquidity, but in terms of its services), and if we throw in some historical and sociological considerations. As a factor of production, land can be rented out—rent being the price paid for its services, or its labour. And so can money. In seventeenthcentury Europe, however, land’s services were in universal demand because agriculture was the predominant economic activity, and because land was scarce, subject to individual ownership and unequally distributed, and finally because little or no risks were involved in selling its labour (renting it out). There was, however, considerably less demand for money’s labour; furthermore, most money lent went to finance external trade, and money’s labour could only be sold at extremely high risks. Very simply, many rich people with much money to lend might not have found sufficient borrowers, and certainly few borrowers offering low risks, whereas a landowner would always have found someone to rent his land at no, or at negligible, risk. Now, despite the astronomic number of pages devoted to decoding what Keynes really meant by liquidity, it does not strain his original statement to surmise that what he termed money’s ‘power of disposal’ could be said to mean ‘convertibility’ (Chick writes of money’s liquidity as its ‘marketability’ (1983:298), which in my opinion says the same thing10), and that seventeenthcentury money enjoyed as much convertibility as contemporary money, and much more than land. Overall, seventeenth-century England knew of only one currency, and it was not land but money; in addition, this currency shared the very attributes of today’s currency and even more so, in so far as its production was more truly inelastic, since money consisted of solid gold and silver coins. In brief, there was a rate of interest attached to land and also one linked to money, but land’s rate of interest did not make it a currency; it 142

KEYNES AND SPECULATION: ARISTOTLE REVISITED

nonetheless served as a yardstick for all own-rates of interest, including those of money. Had money’s rate of interest fallen below that of land, individuals would have rushed to borrow money with which to buy land which would have yielded a rent superior to what they had to repay their lenders. The situation was inconceivable, and would have led to an increase in the price of land, as everyone then understood. If land’s ownrate of interest was the greatest, it was not because of its convertibility or the power of disposal one retained over it, but because its services were in universal demand and could be sold without any risk. The land could always be retrieved, even if the rent could not, whereas someone who borrowed money could default not only on the payment of interests but on the repayment of the debt itself. In addition to an asset’s convertibility we should therefore also speak of its serviceability (and, correspondingly, of the serviceability-premium associated to it). Everything changed with the Industrial Revolution and the spreading of wage labour. Let us reflect on money’s near-absolute convertibility; it implied that money can be traded for almost anything in normal circumstances (in abnormal circumstances, such as hyperinflation or famine (Sen 1983), it no longer does). Few commodities, save money, are endowed with such attributes. Since money is undifferentiated and unspecialized, and infinitely convertible into differentiated and specialized products, it lends itself more than any other commodity to the circulation of differentiated and specialized goods between differentiated and specialized producers. The more differentiated and specialized the economic agents, therefore, the greater and the more indispensable the use of money becomes, and by extension, the greater its services. In a relatively undifferentiated economy few people need money and the demand, both for money and for its services, is very limited. With an extremely differentiated production the situation is reversed, and the services of the most convertible commodity are those most in demand. Consequently, the significant asset in terms of which all own-rates of owninterests will be measured, will be that asset the services of which are most in demand, because of the predominant type of economic activity and the organizational level of the economy; in brief, it is not intrinsically the asset with the greatest convertibility but that with the greatest serviceability. With industrial production and wage labour, money rose to this rank because such differentiated production, where labour is purchased with money, values immensely a nearly completely convertible commodity. The demand for money itself ascended accordingly, and incited the invention of paper money; with paper money, the production of money becomes completely elastic but must be managed with extreme caution so as not to lower the currency’s value. The monetary authorities thus keep an artificial inelasticity of production, and the demand for money translates itself into a demand for labouring money. Thus over time a swelling demand evolved for labouring money, and a demand 143

KEYNES AND SPECULATION: ARISTOTLE REVISITED

for money’s services far surpassing the demand for the services of any other factor of production, because the organizational developments in the banking system and other economic features considerably lessened the risks of defaulting on the part of borrowers. At the end of this evolution it stands to reason that the rental price of any other asset, or more simply the future income expected from any other asset, must not be allowed to fall below money’s rate of interest; it would then be much easier to sell one’s assets for money, rent the money out at no cost and earn a certain income without doing anything, as one could formerly do with land. The reason is historical: it is the universal and constant demand for money’s services which engendered it, and could not before the advent of an extremely differentiated economy endowed with a solidly reliable banking system. This formulation, simple and prosaic as it is, remains completely coherent with the mercantilist definition of the rate of interest as the price for money’s services. It also avoids all of Keynes’s inconsistencies in his treatment of money, and of money’s liquidity.

KEYNES AND USER COSTS Keynes incorporated ‘user costs’, namely ‘the sacrifice of value involved in the production of A’ (p. 53) into his definition of income. (‘A’ designates the value of an entrepreneur’s output: for a full presentation of user costs the reader is advised to consult the General Theory; the following discussion will assume prior acquaintance with the notion.) He later explained that he had ‘introduced the conception of user costs for formal completeness and in order to get a watertight definition of income [but that he did] not regard it in the least important to [his] theory which only requires that there should be some consistent definition of income’ (CW, XIV:189); but, we may ask, do user costs lead to a watertight definition of income? Chick did emphasize the expectational character involved in user costs, and the difficulties they engender when we realize that income, investment and saving are all ex post concepts (CW, XIV:183; Chick 1983:50). This is nonetheless but one of a myriad of problems bedeviling user costs. In his Appendix on user costs Keynes extends the notion to encompass all capital equipment; they would thus apply, not only to the use of fixed capital, but to that of working capital (purchased from other entrepreneurs, and therefore included in sales-turnover11) and to the sales of finished goods. This latter point Keynes avers quite explicitly when he depicts user costs as the ‘result of having produced and parted with A, after allowing for purchases A1 from other entrepreneurs’ (p. 62, italics added). (Admittedly, this sentence seems to exclude purchases from other entrepreneurs from the calculation of user costs, but as mentioned above, they are by definition included in the notion of sales-turnover.) Parting with finished products is not only a decision to sell 144

KEYNES AND SPECULATION: ARISTOTLE REVISITED

goods but also a decision to purchase money, therefore a case of monetary exchange. Logically, one would then have to impute user costs on any decision to purchase money or, more generally, to exchange, in a monetary economy. Since trading commodities for money describes the gaining of an income we should then infer that one loses something in earning an income, that income is lost in the very process of having been gained, and that this should be computed when evaluating one’s income! In a coherent conceptual framework this should not be limited to entrepreneurs but extended to all those who sell a commodity (such as labour and services). If this is plainly absurd for the individual producer it only makes sense for the entrepreneur if one takes the point of view of a speculator on the economy (on Keynes’s speculative cosmos, friends and foes alike concur—see Coddington 1983:81; Fitzgibbons 1988:90; Minsky 1976:58). This speculative view comes out quite clearly in yet another dimension of user costs. Keynes writes: In deciding the scale of production an entrepreneur has to exercise a choice between using up his equipment now and preserving it to be used later on. It is the expected sacrifice of future benefit involved in present use which determines the amount of the user cost… (CW, VII:70) Thus to evaluate his income the entrepreneur must assess how much he gives up by using his equipment now rather than later, and by selling now rather than later. Entrepreneurs would always compare the future income procured, given a different course of action, to the present income earned, and calculate the difference in estimating today’s income, assuming that one could possibly gain by inactivity. Keynes intimates that it may pay not to use now, not to produce now, and that producing or exchanging in the current period (i.e., gaining an income in the current fiscal year) may involve a sacrifice. This is eminently debatable: if selling goods amounts to purchasing money and defines income, it hardly makes sense to subtract from that income the fact of having decided to earn it today; the idea of user costs on sales-turnover, when read in the perspective of the bilaterality of exchange and of income as the purchase of money, is unmitigated nonsense. A speculative view of the economic cosmos, ironically enough, is fundamentally Aristotelian. It amounts to postulating a resistance to immediate consumption (and therefore to production), to implying that inactivity can pay, and therefore that speculating agents resist immediate economic motion unless spurred by the expectation of a higher income (the price which will incite them to save, to produce, to sell). In a Galilean economics predicated on the postulate of inertial motion it is quite illogical to reward inactivity in the realm of saving (as with the rate of interest), or production and exchange. 145

KEYNES AND SPECULATION: ARISTOTLE REVISITED

This is a straightforward Aristotelian survival, one that we come across every time Keynes wears his speculator’s spectacles. If we reject the idea of user costs calculated on sales, be they all sales or sales of investment goods only, and if we equally dispute the idea of subtracting from present income the difference between discounted future incomes in the absence of production and sales, and present proceeds from production and sales, we are left with one idea only, namely that the scale of output, or the level of use of the fixed equipment, carries with it user costs, and that these user costs should be computed with reference to what the value of the capital equipment would have been in the absence of production. This, once more, flies in the face of a proper Galilean perspective. If we are bent on explaining rates of change of output (and exchange), why evaluate the cost of using fixed capital by comparing a given level of use to the absence of production? By reintroducing the Aristotelian dichotomy between production and its absence (mobility and immobility in dynamics), and supposing that the absence of production might in some circumstances generate more value than production, Keynes takes us back full circle to the question of the emergence, or appearance, of production. Instead of asserting axiomatically that individuals labour and produce, and instead of seeking to understand why they labour and produce more or less, his speculative stance leads him unwittingly to ask: ‘Why do entrepreneurs produce at all?’— surmising that they would remain inactive if they did not expect activity to be more lucrative than inactivity. Here, as with Marshall, they have to be lured out of inactivity into production, a most deplorable repudiation of Galilean axioms. Not only should user costs be defined with respect to fixed capital exclusively, but also solely with respect to rates of changes in the level of production. If we strive to remain coherent with these premises, what do we obtain? First, that user costs consist of purchases of various goods from other entrepreneurs for maintenance (such as oil, lubricants, and so on) and of labour costs (factor costs). When production remains at a constant rate they are automatically incorporated among those two sets of costs. If, however, the fixed equipment is underused and output is stepped up by intensifying its utilization, this heightened output does increase maintenance costs (working capital and factor costs; let us call them maintenance costs). In other words, more intense use entails accelerated replacement of fixed capital, which will be translated in rising maintenance costs. But at any point in time those costs are always excluded when the entrepreneur makes a balance sheet of his proceeds and expenditures in order to estimate his profit at the end of the year. In brief, he never knows whether having spent a bit more on maintenance would have added two or five years to the life expectancy of his fixed equipment, and what he does not know—what in fact no one can ever know— cannot be computed in income. Therefore user costs, in whatever guise—and 146

KEYNES AND SPECULATION: ARISTOTLE REVISITED

there are many in Keynes’s General Theory—are worthless for calculating income. This is why they were eliminated when presenting Keynes in the previous chapter. Since Keynes believed that his ‘theory…only require[d] that there should be some consistent definition of income’ (CW, XIV:189, quoted above), may we be allowed to believe that a more consistent definition can be achieved without user costs? Now, what of supplementary costs? As Keynes himself remarked, supplementary costs are always insurable risks, can always be assessed, and classed as insurance costs. In so far as insurance costs represent payments for services they rank among factor costs, being income to someone else. If supplementary costs are not insurable but expected, as Keynes also emphasizes, why not suppose that they will be quietly included in pricing and therefore tacitly computed. From the point of view of the individual entrepreneur, supplementary costs would certainly be subtracted before estimating profits, or net income. In the aggregate, however, these costs would bring income to someone else, and cancel out. In the definition of income, supplementary costs thus seem as useless an appendage as user costs.

147

7 MORE SUBSTANCE AND TRANSACTIONS

In Chapter 5 I isolated what I consider to be Keynes’s most fundamental contributions, namely the individualist (non-transactional) and Galilean nature of his economics and the fact that this innovation yielded a sectoral approach to economic language and rationality. We have already witnessed some of the damages that Aristotelian survivals inflicted to some parts of his thinking; we shall here analyse the transactionalism still latent in his definitions of effective demand and investment and the substantialism that plagues his definition of investment. In this last section on investment, we shall evaluate some of the main hurdles that still lie in the way of achieving this nontransactional, sectoral approach.

KEYNES AND EFFECTIVE DEMAND When inspecting the supply side of Keynes’s economic universe we remarked that he united employment to output, and output to entrepreneurs’ decisions to produce. And we saw that entrepreneurs decided to produce by comparing the proceeds expected from the sale of their goods (from output) to those anticipated from the income they provided, an income which would be partly spent on purchasing their goods. It was by recognizing the entrepreneur’s pivotal role, we insisted, that Keynes created yet another economic notion, that of ‘effective demand’. In Book I, Chapter 3 on ‘The Principle of Effective Demand’, Keynes writes:’…the aggregate supply price [designated as Z] of the output of a given amount of employment is the expectation of proceeds which will just make it worth the while of the entrepreneurs to give that employment’ (p. 24), to which he adds ‘…the amount of employment, both in each individual firm and industry and in the aggregate, depends on the amount of the proceeds which the entrepreneurs expect to receive from the corresponding output’ (p. 24, italics added). In the following paragraph, Keynes continues, ‘let Z be the aggregate supply price of the output from employing N men’ (p. 25), failing 148

MORE SUBSTANCE AND TRANSACTIONS

to mention that the aggregate supply price was earlier introduced as the expectation of proceeds making it worth employing N men. Keynes then defines the relationship between the proceeds expected from the employment of N men (hence Z), and the number of men employed (N), as the aggregate supply function, formalized as Z=f (N). To Z is then contrasted D, as ‘the proceeds which entrepreneurs expect to receive from the employment of N men’ (p. 25), formalized as D=f(N). If employment is the purchase of labour (hence the sale of entrepreneurial money) and output its purchase (where output implies the sale of goods), it makes sense that Z should stand as the expectation of proceeds from the output of N employed men, and D as the expectation of proceeds from the employment of N men, for the simple reason that entrepreneurs produce and sell commodities, and in the process employ people who thus secure an income with which they procure the goods that entrepreneurs manufacture (distinguishing here ‘commodities’ from ‘labour and services’ for the sake of convenience). This, we emphasized earlier, departed radically from transactional economics in that it pictured supply from the entrepreneurs’ point of view and also placed demand on their very side, so to speak, thereby apprehending the problem of production in a truly individualist manner, in terms of expectations. However, two problems plague this formulation, one methodological, the other semantic, the two intimately intertwined. Asimakopulos has brilliantly explained the methodological problem. In the General Theory, Keynes would have been Concerned with the factors determining the offers of employment by a large number of competitive firms, offers that must be based on their expectations of prices for their products…. The prices for these products will be determined, given the firms’ supply decisions, by demand conditions in their markets. Keynes’s presentation of these features at an aggregate level, for the economy as a whole, was confused and inconsistent with the competitive microfoundations of his theory. (Asimakopulos 1991:20) Initially using a single firm in trying to define effective demand, he would then argue is if firms globally assessed aggregate demand ‘from the perspective of…a single economy-wide firm. It is only for the latter firm that expectations of aggregate demand can play a role in determining employment’ (Asimakopulos 1991:21). The semantic imbroglios that this methodological inconsistency have spawned have been analysed with great acuity by Chick. Chick notes that it is sometimes difficult to tell effective demand and aggregate demand apart, further pointing out that aggregate demand describes a schedule, referring either ‘to the aggregate of consumers’ and investing firms’ expenditure plans’, or ‘to the aggregate of estimates of spending which 149

MORE SUBSTANCE AND TRANSACTIONS

firms make in determining the appropriate volume of output’ (Chick 1983:64). She also adds: Effective demand, in contrast to aggregate demand, is not a schedule— it is the point on the schedule of firms’ anticipation of aggregate demand which is ‘made effective’ by firms’ production decisions. It is the volume of output they decide to produce, valued at their asking price; it is the value of anticipated sales. Effective demand is an unfortunate term, for it really refers to the output that will be supplied. (Chick 1983:65) From this, she emphasizes that ‘the behavioural basis of aggregate demand is properly specified in units different from those used to specify aggregate supply’ (1983:67): [T]he ‘true’ determinants of consumption is, by hypothesis, real income. But to be comparable with aggregate supply, not only does one or other function have to be translated from real to money terms or vice versa, but consumption must be related to employment, not income. (1983:68) These are but a few points of Chick’s masterly analysis, but indispensable ones to assay Keynes’s treatment of effective demand. Fully to fathom the semantic trap ensnaring his definitions, Keynes’s own formulations will have to be examined very closely. Let us provisionally leave aside the question of aggregate supply and demand for output as a whole. If we presented as revolutionary Keynes’s notion of effective demand, we will regrettably witness this revolutionary novelty denied in the rest of his chapter on The Principle of Effective Demand’ and in the rest of his argumentation in general. In the paragraph following the passage quoted above, Keynes moves on to specifying what he means by ‘effective demand’: Now if for a given value of N the expected proceeds are greater than the aggregate supply price, i.e. if D is greater than Z, there will be an incentive to entrepreneurs to increase employment beyond N and, if necessary, to raise costs by competing with one another for the factors of production, up to the value of N for which Z has become equal to D. (CW, VII:25) from which he derives his definition of effective demand: The value of D at the point of the aggregate demand function where it is intersected by the aggregate supply function [where Z=D], will be called the effective demand’ (p. 25, italics original). I submit that this inference, and the definition of effective demand, do not cohere. 150

MORE SUBSTANCE AND TRANSACTIONS

In the first formulation (quoted above, from CW, VII:24) both Z and D designated expected proceeds; in the latter one only D is so understood and contrasted to the aggregate supply price. Here, possibly, Z would no longer denote expectations of proceeds but a simple schedule relating costs to levels of employment. But let us look more closely at those two functions. First, we have classified output, employment and consumption among additive economic magnitudes. If macro-economic additive magnitudes directly result from individual actions, one can sum up expenditures on consumer goods on the part of consumers (or private-income earners) and elicit an observable magnitude, namely aggregate private consumption. Similarly, one can compute expenditures on investor goods on the part of entrepreneurs and obtain another observable, namely aggregate entrepreneurial expenditures on investment goods. In Keynes’s presentation of effective demand, however, we are not contemplating the results of actions, not even of plans; we are dealing with expectations (or estimates, according to Chick)—but expectations, as Hawtrey rightly commented, resist all attempts at summation.1 Let us temporarily forget expectations to concentrate on Keynes’s relationship to neoclassical theory. Keynes informs us that effective demand lives at the intersection of an aggregate supply and an aggregate demand function (where Z=D). If this aggregate demand function is not observable it should be a schedule, but a schedule can only exist in the heads of those who are about to perform the action and are in the process of deciding; it should be drawn from the point of view of consumers and investors as people who will purchase consumer and investor goods. Let us focus on the aggregate consumption demand (D1) in Keynes’s later equations (pp. 28–30), since it is the only aspect of consumption relevant for a theory of output of the current period (Chick 1983:67). According to Keynes’s own definition of effective demand, aggregate consumption demand does not allude to consumers’ plans to consume but to entrepreneurs’ expectation of private consumers’ plans to consume. But such a variable can never be aggregated, and perforce, can never intersect any aggregate supply function, since the two functions are so to speak located within the same heads. To deduce that the entrepreneurs’ expectations of proceeds (prompting their own determination to produce) intersect their own extrapolation of other people’s expectations to consume is an utterly vacuous statement. And yet, this is precisely the garden path that Keynes’s effective demand leads us up. What has happened? How did we stray from entrepreneurs’ expectations to intersecting aggregate supply and demand functions? Through a subtle shift in perspectives. In the opening paragraphs of the chapter the supply and demand functions are united in the heads of entrepreneurs themselves, as the intersection between the expectation of proceeds from output derived from employing N men, and from the employment of these N men. As the chapter 151

MORE SUBSTANCE AND TRANSACTIONS

and the book unfold however, ‘Z’ and ‘D‘ no longer stand as two variables located within the same individuals, but as two functions describing the schedules of two different sets of individuals. Keynes begins swerving towards the latter position as he contrasts his stance to that of neoclassical economists. There he writes: The classical doctrine, on the other hand, which used to be expressed categorically in the statement that ‘Supply creates its own Demand’ …involves a special assumption as to the relationship between these two functions. For ‘Supply creates its own Demand’ must mean that f(N) and f(N) are equal for all values of N, i.e. for all levels of output and employment; and that when there is an increase in Z… corresponding to an increase in N, D(=f(N)) necessarily increases by the same amount as Z. The classical theory assumes, in other words, that the aggregate demand price (or proceeds) always accommodates itself to the aggregate supply price; so that, whatever the value of N may be, the proceeds D assume a value equal to the aggregate supply price Z which corresponds to N. That is to say, effective demand, instead of having a unique equilibrium value, is an infinite range of values all equally admissible; and the amount of employment is indeterminate except in so far as the marginal disutility of labour sets an upper limit. (CW, VII:25–6) I wrote earlier as if Keynes’s and the neoclassical representation of the relation of supply and demand ran counter to one another—the one individualist, the other transactional. In this quotation, however, he avers that the two theories only differ in that neoclassical economics would assume effective demand (Z=D) for any value of N, having thus an infinite range of values, whereas Keynes supposes it to have only one equilibrium value. If the situation were as neoclassical theory describes it, Competition between entrepreneurs would always lead to an expansion of employment up to the point at which the supply of output as a whole ceases to be elastic, i.e. where a further increase in the value of the effective demand will no longer be accompanied by an any increase in output. Evidently this amounts to the same thing as full employment. (CW, VII:26) Thus, Keynes’s theory of effective demand would depart from neoclassical theory in a second way, namely in that effective demand could be reached at less than full employment. In this last statement Keynes still oscillates between two points of view. On the one hand he does not question the manner in which neoclassical theory understands its aggregate supply and demand functions, and leaves 152

MORE SUBSTANCE AND TRANSACTIONS

us under the impression that both he and neoclassical economists presume supply and demand functions to intersect. In other words, both the neoclassical economists and Keynes would share a comparable notion of effective demand and both would comprehend similarly the questions of supply and demand (in transactional terms, according to our own interpretation); Keynes would only hold ‘special assumptions’ about their interconnection. In his own eyes, he clashes with neoclassical economists on the question of effective demand in what I would deem a much less novel way: where neoclassical theory posits effective demand for any level of employment but views the market in such a way that effective demand cannot settle at less than full employment (Say’s law), Keynes holds that the aggregate demand price will not necessarily accommodate itself to the aggregate supply price for any level of employment and that one might find that Z=D (effective demand) at less than full employment. (According to his own definitions, we should thus conclude that there is not necessarily effective demand at any given level of employment.) Even price oscillations would not ensure that supply always finds its equal demand, and when it does, it may be at less than full employment; and why? Keynes discovers the main reason in the fact that the marginal propensity to consume is less than unity. In brief, where neoclassical theory concluded necessarily to full consumption and full employment, Keynes infers possible equilibrium involuntary underemployment. On the other hand, when describing neoclassical theory Keynes still perceives the aggregate demand price in terms of expectations of proceeds (although the aggregate supply price is no longer an expectation of proceeds, let us recall), and therefore from the entrepreneurs’ view-point; if so, he is quite mistaken in espying any convergence between his stance and that of neoclassical theory. But the slip is complete (and so is the line separating the two theories) when we reach the first full formulation of his general theory (pp. 27–32). For there, ‘[t]he effective demand associated with full employment is a special case, only realised when the propensity to consume and the inducement to invest stand in a particular relationship to one another’ (p. 28, italics added), and furthermore, ‘[t]he relationship between the community’s income and what it can be expected to spend on consumption, designated by D l , will depend on the psychological characteristic of the community, which we shall call its propensity to consume’ (p. 28). In other words D (=D1+D2) here can only aver to the schedules of individuals about to spend on consumer and investor goods. If we fix our attention on D1, we are no longer dealing with proceeds expected from sales by entrepreneurs, but with the aggregate demand schedule of consumers. From supply and demand for output as a whole being related within the head of one and the same individual, namely the entrepreneur, we have veered towards the old transactional view of supply and demand as the schedules of separate individuals standing on the two 153

MORE SUBSTANCE AND TRANSACTIONS

sides of an exchange relationship. Here D1 no longer bespeaks of expected proceeds on the part of entrepreneurs, but expresses the sum of consumer schedules. Effective demand then comes to depict the situation in which private consumers and investors decide to consume and invest exactly the amount that entrepreneurs had resolved to produce, on the expectation of a given level of private consumption on the part of the individuals they employ, and given the level of individual incomes they provide through employment. ‘Z’ and ‘D’ have mysteriously been detached as entrepreneurs from consumers. If Keynes thought that, unlike anything neoclassical, effective demand is the demand schedule for output as a whole (CW, XIV:85), he was senselessly jumping from the frying pan into the fire. As Chick has observed, effective demand should be a point, not a schedule, and as Asimakopulos has indicated, demand for output as a whole only makes sense for an economy-wide firm. Either way, we do not stray very far from the problem as we see it (as a transition from an individualist to a transactional perspective): from two complementary perspectives within the heads of entrepreneurs (although not ‘intersecting’ ones, for this is simply absurd), we have come back full circle to the neoclassical transactional representation. Effective demand now surfaces as a disguised social relationship between entrepreneurs and consumers. This is expressed most unequivocally in The General Theory of Employment’ (1937). Immediately after having once more insisted that neoclassical theory had neglected the ‘theory of the demand and supply of output as a whole’ for more than a hundred years because it assumed full employment, Keynes declares: My own answer to this question involves fresh considerations. I say that effective demand is made up of two items—investment expenditure determined in the manner just explained and consumption expenditure. (CW, XIV:119, italics added) Here, in perhaps one of the latest statements on the question, effective demand does not refer to anything ex ante, be they plans, estimates, expectations or whatnot. It tells of expenditures, that is, of ex post magnitudes generated by the actions of two sets of separate individuals.2 Overall, the semantic snares which seem to have trapped Keynes and some of his interpreters is but a surface manifestation of a hidden structural vice in Keynes’s conceptualization. The semantic slips only betray a concealed transition from a truly individualist perspective on employment to a submerged transactional one, since when De(N) becomes D(Y), one has sidled from sets of estimates within entrepreneurs’ heads to schedules in consumers’ heads; in the end we are setting entrepreneurs opposite consumers in the neoclassical transactional fashion and transmuting effective demand into a dull variant of the neoclassical transactional view of the 154

MORE SUBSTANCE AND TRANSACTIONS

relation of supply and demand; only the proposition relating to the marginal propensity to consume separates them, and ensures that there can be unemployment equilibrium. What was a major epistemological rupture then revolves around a questionable theoretical point. What is most astonishing about this episode is that Keynes could have deduced ex definitione his thesis about equilibrium involuntary unemployment without having to add on to it the convoluted, heavy and often dubious superstructure of the ‘General Theory’, had he stuck to his innovative approach to the question of consumption and output. Indeed, the very individualist phrasing of the problems of consumption and production in terms of the separate decisions of private income-earners to consume on the one hand, and of entrepreneurs to produce on the other, outside of any transactional representation in terms of intersecting supply and demand functions, make both full consumption and full employment the result of good fortune. Let us revert to a proper individualist formulation. At time ‘X’, privateincome earners expect a given income and plan their consumption accordingly, deciding to consume as we move from time ‘X’ to time ‘X+l’. Separately, entrepreneurs settle the scale of their output on the basis of their extrapolation of private consumers’ planned expenditures. Over the period both will resolve—the ones to consume, the others to produce. In an individualist formulation, there is nothing which pre-contains either full consumption or full employment. On the contrary, the likelihood that entrepreneurs will conjecture precisely what consumers anticipate to consume on the income they expect to receive would be a most fortuitous coincidence, and yet more marvellous and wonderful the probability that the two sets of decisions should match perfectly at full employment! In brief, an individualist real economics is necessarily probabilistic and, in a probabilistic (non-mechanistic) capitalist industrial universe, full consumption or full employment are both very improbable events, and the combination of full consumption and full employment yet a much more improbable one. For this, Keynes did need a concept resembling the misnamed effective demand, and one which could have been stated in a straightforward, no-nonsense manner, as Chick does: It is in the nature of the business of producing for sale on the market that the choice of what and how much to produce, and how to price things, must be made on the basis of estimates of costs and a forecast of demand. Because production takes time, the producer has no choice but to estimate the demand for his product and proceed according to this estimate, even though he is far from certain about it, and even though he may be wrong about it. Both costs and demand rise with the volume of output, but for a time, so do profits. Firms are assumed to choose to produce whatever 155

MORE SUBSTANCE AND TRANSACTIONS

volume of output they believe will maximise their profits, given their cost estimate and demand forecasts, and they will hire just enough labour to enable them to produce that output. The Principle of Effective Demand is the generalisation of this microeconomic proposition to the determination of output as a whole. (Chick 1983:62–63) With the above I utterly concur, except for the last sentence, as I do not believe it feasible to aggregate such estimates for output as a whole. And, although I wholly agree with Chick that Keynes’s analysis of effective demand did not serve him well, I would go much further in completely ridding economics of this transactional construct, except for the minimal individualist statement quoted from Chick’s book. Further, let there be no delusion about the probabilistic nature of a truly individualist economics. I do not suppose that economic actions will be based on an objective probability calculus, but I do believe that when contemplating the aggregate results of those actions, we will have to introduce probabilistic reasoning even if our models, as tools for thinking, are expressed in terms of functional relationships. The probability lies in the results reaching a given level, rather than in the individual thought processes. The difference is fundamental.

KEYNES AND INVESTMENT To my knowledge, Chick was the first to identify and emphasize Keynes’s sectoral approach when she contrasted his definitions of income and investment to that of other economists. Where all other definitions would have singled out the intrinsic attributes of goods to distinguish consumer from investor goods (what we defined as substantialist thinking, see Chick 1983:41–6), Keynes would have circumscribed them by the economic identity of the buyer, whether firms or households. This, she christens his ‘sectoral approach’. But Chick also notices some of the discrepancies that beset Keynes’s own procedure, notably on the topic of investment. Whereas Chapter 6 of the General Theory looks at income and investment from the point of view of plans and expectations, stresses the volitional aspect of investment and applies a sectoral approach (Chick 1983:54), Chapter 7 would deal with income, consumption and investment as ex post magnitudes, take the point of view of National Income statistics and contradict the volitional character of investment by incorporating within investment the unintended increases in stocks due to failures of selling output. She further recognizes that ‘[i]n Chapter 7, Keynes blurs the sharp distinction offered by the sectoral approach when he attempts to accommodate popular usage by defining investment as the purchase of any asset, real of financial (G.T., p. 75)’ (Chick 1983:54). 156

MORE SUBSTANCE AND TRANSACTIONS

I have already emphasized that it is most of the time impossible to imprint the necessary conceptual discontinuity for a rigorous economic discourse by focusing on intrinsic attributes of objects because few such attributes exhibit the necessary discreteness and that clearer demarcations can best be found in socio-economic discontinuities. Keynes did intuit it, and according to Chick, would have achieved it in Chapter 6 but denied it in Chapter 7. I shall argue that he denied it throughout the General Theory because of a lingering substantialist mode of thought, and that at his most ‘sectoral’, namely in Chapter 6 of the General Theory, he still lapsed into a transactional thinking incompatible with a sectoral approach.

Investment or investor goods? In fact, the sectoral approach is vitiated at the outset, partly for the reasons that Chick mentions, but more fundamentally, because we have to identify an activity associated to an economic identity if we are to define ‘investor goods’ or ‘consumer goods’ according to the economic identity of the individual (his place in the social organization of the economic world). This is the major hurdle we encounter in the General Theory, and for two reasons. First of all, three separate activities are mentioned, none of which Keynes uses to identify entrepreneurs, and more especially entrepreneurs as investors. This failure redirects him to the goods themselves, and their intrinsic attributes. As I explained in Chapter 5, the two ‘Cs’ in the first two equations of page 63 have to denote consumption goods purchased and sold; if they do, we then have to invert the traditional reading of those equations. Indeed, if in the first equation consumption betokens the sale of consumption goods, then for the equation to add up, ‘I’ must designate the sale of investment goods. But as we noted earlier, Keynes equates income with the value of output in the first equation, so that ‘I’ alludes only to the output of investment goods. From the outset, Keynes thus implicitly defines investment either as the output (production) of investment goods, or the output and sale of investment goods. However, he fails to use production and sale to delineate a clear entrepreneurial identity and shifts the attention on investment goods. In the discussion of the marginal efficiency of capital, he goes one step further and assimilates investment with the purchases of investment goods (p. 135). Investing becomes the purchase of a ‘capitalasset’. Moreover, this capital-asset must be newly produced (if only because the marginal efficiency of a capital-asset is calculated in terms of its supply price; therefore it must be newly produced). In places (Chapter 11) it is confined to ‘fixed capital’, but when discussing a society’s net income (pp. 98–104), he includes houses among capital-assets (see also CW, XIV:57). Further, in The General Theory of Employment’ (see particularly CW, XIV: 113) and his whole correspondence with 157

MORE SUBSTANCE AND TRANSACTIONS

H.Henderson (CW, XXIX:223 ff.) he intimates that his theory of investment applies to the production of durable goods, something also manifest in his discussion of the own-rates of interest of capital-assets (Chapter 17). Thus, any newly produced durable good would constitute a capital-asset, and its purchase an investment. Elsewhere, capital assets also encompass financial assets (Chapter 12, on the discussion on long-term expectations). As Joan Robinson noticed, Keynes mingled the investor (in capital goods) with the speculator: ‘His discussion of the “rate of long-term expectations” is devoted to the Stock Exchange rather than to the accumulation of means of production’ (Robinson 1971:31–2). Thus, incapable of identifying anyone behind the action of investing, Keynes fell back on investment goods demarcated by their intrinsic attributes (durability, fixed or working capital, period of production, real or financial assets). Did he succeed in escaping from this predicament in Chapter 6, as Chick claims, and argue in a clearly sectoral approach?

Sectoral or transactional approach? Keynes spells out this new approach in Chapter 6, when he writes: Expenditure on consumption during any period must mean the value of goods sold to consumers during that period, which throws us back to the question of what is meant by a consumer-purchaser. Any reasonable definition of the line between consumer-purchasers and investor-purchasers will serve us equally well, provided that it is consequently applied…. The criterion must obviously correspond to where we draw the line between the consumer and the entrepreneur. Thus when we have defined A1 as the value of what one entrepreneur has purchased from another, we have implicitly settled the question. It follows that expenditure on consumption can be usnambiguously defined as S(A–A1), where SA is the total sales made during the period and SA1 is the total sales made by one entrepreneur to another. (CW, VII:61–2) As this statement suggests and as Chick has commented, the identity of the buyer would actually define the nature of the good, and this would characterize the sectoral approach. However, is this exactly what Keynes accomplished in this chapter? Not quite. Let us ponder what it implies to declare that ‘when we have defined A1 as the value of what one entrepreneur has purchased from another, we have implicitly settled the question’ as ‘to where we draw the line between the consumer and the entrepreneur’ (CW, VII:62, italics added). Strictly speaking, in this perspective it is not the identity of the buyer (firms or households) that defines investment goods, but the identity of the 158

MORE SUBSTANCE AND TRANSACTIONS

exchanging partners. And this digs more pitfalls on the road to conceptual precision. For if one entrepreneur invests (purchases investment goods) when buying from another entrepreneur, what is the ‘other’ entrepreneur then doing, and what establishes him as an entrepreneur? Is it the fact that he purchases from other entrepreneurs? If so, this would involve us in an infinite regress; furthermore, consumers also buy from entrepreneurs. Is it then the fact that he sells investment goods to other entrepreneurs? This would now involve us in a vicious circle, since the type of good would draw the line between entrepreneurs and consumers when the sectoral approach advocates the reverse procedure. Moreover, what name shall we give to the entrepreneur’s action when he sells investment goods to other entrepreneurs? Is he investing because he produces and sells investment goods? According to Keynes, he disinvests if he sells inventories unsold in the current period in which they were produced, and from the famous equations of page 63 of the General Theory, he invests if he sells newly produced assets. An entrepreneur would thus be defined by the fact that he invests by purchasing from another entrepreneur—the latter defining himself as an entrepreneur because he sells newly produced investment goods! Further, introducing the time periods in which goods were produced to distinguish investment from disinvestment thrusts in a most unwelcome asymmetry: from the seller’s point of view the period of production becomes relevant in determining the nature of his economic activity, whereas from the point of view of the buyer, the time dimension loses all relevance, since by definition he is always buying new goods within the current time period (although not necessarily newly produced ones). Keynes’s sectoral approach, even at its most sectoral, is not so sectoral after all. Instead of bringing back everything to the individual acting and deciding, and instead of defining this individual’s economic identity in terms of activities that involve him and him alone, Keynes leaves the individual behind and falls back onto the notorious relationship. He does not confine himself to classifying goods according to the social identity of their purchasers because he surreptitiously summons relationships back. And so, according to his very definitions, whoever purchases commodities from another entrepreneur is classed as an entrepreneur, but so is the one providing an entrepreneur with goods. As with the perennial transactional formulation, Keynes still beholds individuals exchanging and sees only non-monetary commodities (investor goods) circulating between them. Money and the individual have again disappeared behind transactions and a unilateral view of exchange: it is goods and their exchange that define entrepreneurs, and the identity, as well as the nature of the action of the people they are associated with through the exchange of goods. We are then trapped in a fully circular set of definitions tossing us back and forth from the attributes of the objects to the identity of exchanging partners. 159

MORE SUBSTANCE AND TRANSACTIONS

How can we sidestep these problems and erect a true sectoral approach? As Keynes’s semantic muddles illustrate, it will have to be defined outside of any reference to exchange relationships. Whether or not we choose to call a commodity an ‘investment good’ should have nothing to do with the intrinsic properties of this commodity, but with the uses the individual wishes to put it to. And those uses must be related to his own economic identity (qua entrepreneur or not). Finally, his identity shall not fix that of his exchange partner, nor shall the nature of the good (produced during the current or a previous period) dictate the nature of that partner’s action. If I purchase a used house with entrepreneurial designs in mind, I am investing, but the individual selling me the house is not necessarily disinvesting. In brief, to retrieve some discontinuity and rigour in those concepts we will have to extricate ourselves from a transactional perspective and rigorously adhere to a strictly non-transactional, sectoral one.

160

8 FROM A GALILEAN COSMOLOGY TO A GALILEAN ECONOMICS

FROM COSMOLOGY TO LANGUAGE Despite the host of Aristotelian, transactional and substantialist elements in Keynes’s cosmology—and the ones we have unearthed are only the most glaring—we have also uncovered in the General Theory a different economics, one that described economic phenomena in non-transactional (individualist) and monetary terms, one that placed economic rationality back within the social context of the economic actor (his sectoral identity), and one which posited economic activity as given in order to focus on rates of change. These we identified as the main ingredients of a Galilean cosmology, one that should permit the formulation of the language we are looking for in that it evades the utilitarianism and the reification of neoclassical modes of thought and rids itself of its substantialism, seeking to anchor its language in a sectoral approach. Although here and there intrinsic attributes will help to define economic phenomena when the latter display real discontinuities, this new language will nonetheless seek to root most of its concepts in social discontinuities while giving back to economic activities (investing, disposing of an income, and so on) their true individualist (non-transactional), probabilistic and sectoral meanings. Let us briefly survey what such a language could look like.

The social discontinuity of exchange Admittedly, if we have earlier defined commodities in terms of exchangeentitlements (Chapter 5, note 6), the definition of money may in the last resort have to rely on intrinsic attributes, a question too formidable to tackle at the end of this disquisition. I will therefore suppose money defined, and declare it to be a commodity with a difference. We could then argue that the very fact of monetary exchange and the social identity of the buyers can provide a first means of distinguishing commodities, namely the notorious investment and consumption goods. In fact, classifying commodities according 161

GALILEAN COSMOLOGY TO GALILEAN ECONOMICS

to the social identity of the buyer necessarily raises the question of their use, and further, of their integration in the circuit of exchange. But before developing this idea, let us digress a last time on the topic of consumption. I have earlier submitted that the perspective taken on monetary exchange defines consumption or income; I further intimated how problematic this view was because in a monetary economy the term ‘consumption’ subsumes two different realities, namely purchases (or expenditures) and use. One may indeed link consumption to monetary exchange and define it as the conversion of money into goods or services, or one may on the contrary relate it to objects and to the person having purchased it, implicitly denoting use. The two dimensions overlap but beg to be dissociated. When an individual buys durable goods, he or she may go on using them for his or her own satisfaction without implying that he or she goes on ‘consuming’. If we want to endow consumption with any meaning at all in an experimental model of complete monetarization we must restrict it to the situation of exchange. In fact, it is this very distinction between consumption as the ‘purchase of money’ and as ‘use’ which enables us to mark off various types of commodities, because in the final analysis, the economic identity of the buyer, the use of the commodity and its insertion in the macro-circular circuit of exchange are but three inseparable ways of distinguishing commodities. From a purely semantic point of view, they define a sectoral approach. Indeed, when commodities (here encompassing goods, labour and services but excluding money) are used by entrepreneurs qua entrepreneurs, in the exercise of their function, they ought to be called corporate goods. When purchased for their own private satisfaction they ought to be designated as private, or even domestic goods. Thus, instead of goods being intrinsically producer or consumer goods, the same commodity can either be private or corporate according to its use by the purchaser.1 These definitions comply with the strictest desiderata of a sectoral approach, in that commodities are henceforth differentiated through the social identity of the person who purchases them, in that this identity suggests a certain type of use, and in that the movement of commodities in the circuit of exchange defines their use: if I buy a television set for domestic use (not planning further insertion in the network of exchange), it will be classified as a domestic good. If I insert it back in the network of exchange by selling its ‘services’ (I rent televisions out), I am then using them qua entrepreneur and they should be catalogued as corporate goods. When goods move out of the circuit of exchange (are no longer sold for money, nor serving in the execution of activities leading to the sale of services or goods for money, thus no source of further income), they will be declared ‘domestically used’ (or scrapped!). If they reintegrate into the circuit of exchange—in that they, or their services, or the services and goods that they serve to market will be sold back to purchase money (and thus earn an income), they will be considered ‘corporately used’. 162

GALILEAN COSMOLOGY TO GALILEAN ECONOMICS

What shall we then call investment? When does an entrepreneur invest? According to a sectoral perspective we should understand investment to be but the purchase of corporate goods, hence corporate consumption. From the individual as well as the collective point of view, however, we must be able to tell apart a stationary state from a situation of growth, or one of contraction. This, once again, is one of the many sources of confusion surrounding Keynes’s treatment of investment. Indeed, by defining current investment as ‘the current addition to the value of the capital equipment which has resulted from the productive activity of the period’ (CW, VII:62), Keynes also declared investment in Chapter 6 to be the intentional output, either of investment or of consumption goods. This, however, conjures up formidable difficulties. For any idea of addition evokes a rate of change, and accordingly a comparison between two points in time (beginning and end of the period), whereas the set of equations on page 63 speaks of ex post magnitudes at the end of the current period. From this set of equations it is impossible to infer anything about rates of change. Let us briefly look at investment in terms of positive rates of change (acceleration of production). If ex post the global amount of investments is but the sum of individual acts of investment (p. 63), we must investigate it first from the individual entrepreneur’s perspective. If he is planning to enlarge his inventories (and Keynes considers this investment) he must be intending to accelerate his output.2 Within this perspective, let us imagine that I acquire a house in order to rent it out; by so doing, I have increased the quantity of that commodity called ‘house rental’ that I can dispose of. Let us call investment such an increase. After I have initially invested in such a house, or to be more accurate, in the following fiscal year, I must then acquire both goods and services to keep it in good serviceable order; from the point of view of the services that I sell, no increase or decrease has been recorded. My production of such services has remained constant, and yet to keep it such, I must procure corporate commodities necessary to counteract dilapidation. Therefore, viewing investment simply as the purchase of newly produced capital assets does not enable us to infer whether the individual buying the newly produced capital asset is in fact replacing an old one (the entrepreneur having resolved to keep his output constant) or acquiring it in addition to his stock of capital equipment in order to accelerate output. If by investment we mean purchases of capital assets aiming at intensifying production we cannot equate it with the purchase of newly produced capital assets, for many a newly produced capital asset will be purchased simply to replace old, obsolete ones. This balancing act, in which investment simultaneously denotes the purchase of investment goods and a positive rate of change in capital, constantly clouds the General Theory. And yet it is crucial to clarify it. 163

GALILEAN COSMOLOGY TO GALILEAN ECONOMICS

From the point of view of the individual enterprise there is thus a certain quota of corporate consumption necessary to keep output constant; we must however be in a position to mark such situations off from those where the same individual consciously acquires more corporate goods than usual—with the explicit aim of increasing the sales of his goods or services and therefore his income—and from circumstances when he chooses to reduce the scale of his output by selling some of his corporate goods. I would personally reserve the term ‘investment’ to denote increased corporate consumption (corporate overconsumption) aiming to step up output, and ‘disinvestment’ the opposite decision (that of reducing the scale of operations). Investment would then signify corporate consumption in excess of that necessary to counter depreciation, dilapidation, obsolescence and the like (one could perhaps write of a ‘marginal propensity to consume corporate goods’, called investment when positive, and disinvestment when negative). Further, although an entrepreneur invests in order to raise an output which he hopes to sell in order to gain an income, he may not succeed. Therefore an enlarged output does not spell income, and unsold inventories should be considered as ‘potential income’. These definitions are built into the ‘volitional aspect’ Chick referred to when discussing investment in Chapter 6 of the General Theory, and this volitional element precludes watertight definitions. It should not, however, lead to a defeatist pessimism. It is important to remember that definitions are arbitrary demarcations imposed on reality in order to comprehend it better, and that no set of definitions will make up a perfect grid since reality, even social, does not share the discontinuity of our conceptualizations; there will always be blurred zones and hybrid cases. True, some individuals purchase houses which they occupy in the hope of selling them as soon as their value has climbed sufficiently. Others will buy with the intention of renting out but will end up occupying it for want of tenants, and no set of concepts can both encompass and discriminate the complete tangled variety of human circumstances. But, as scientists used to say (before Chaos theory…), science neglects the negligible, and if we aim at developing a macro-economics dealing with complex societies, we should emulate scientists in this respect. In most cases good approximations will suffice. In the case of house purchases it would therefore seem an adequate approximation for economic calculations to treat houses occupied by their owner as private goods, regardless of their true and profound intentions, and to regard as entrepreneurial goods houses not occupied by their owners and rented out. What shall we do of the person who buys fine wines because they increase in value? If they ultimately go to fill his or her stomach they constitute private goods, and investment if he or she resells them. Again, apart from professional wine merchants, most wines bought are used by the purchaser for his or her private satisfaction, and once more it seems a good enough approximation to regard them as private goods. 164

GALILEAN COSMOLOGY TO GALILEAN ECONOMICS

We could refine the analysis by stating that he who buys fine wines en primeur because it ends up much cheaper in the long run is actually increasing his real income, as is anyone who simply bulk-buys for the same reasons. What, finally, of paintings or works of art? The case is more difficult, but to all practical intents and purposes I also deem it a satisfactory approximation to see them as private goods when purchased out of private incomes, and as investment when purchased out of corporate incomes and treated as one’s office furniture vis-à-vis the Inland Revenue. Let us now return to the main thrust of our argument. In this nontransactional sectoral approach, corporate consumption, investment and disinvestment are all decisions of the same individual, to be defined with respect to one another within the individual, and not in terms of exchanging partners. When brought back to the individual and his economic identity, moreover, we can further understand his economic rationality in sectoral terms as well.

ECONOMIC ACTIONS AND THEIR SYMMETRICALLY INVERSE COUNTERPARTS We have earlier alerted the reader to the transactionalism hidden in Keynes’s representation of some economic actions (investment, saving); it is however, more acutely present in their ‘negative’ counterparts (disinvesting, dissaving, etc). Against this transactional understanding of investment, whereby an entrepreneur is said to disinvest when selling investment goods to another entrepreneur (who thereby invests), a proper individualist sectoral perspective inverts the terms of the problem. Instead of a transaction, we see individuals deciding and acting and we select them as our true isolated minimal units; instead of one type of non-monetary commodity (investment goods, for instance) we posit an exchange between money and non-monetary commodities (monetary exchange). We then displace the transaction to the level of objects, so to speak, by postulating the bilaterality of monetary exchange, and drive the individual out of the transaction. Then, and only then, is it possible to redefine all our concepts always with reference to exchange, and to time periods within the individual’s own life. Once more, Chick clearly assessed the importance of identifying time periods (or income periods) to assess whether money is ‘idle’ or ‘active’ (1983:197). I simply wish to generalize this notion of intra-and extra-temporal dimensions of economic activity in the definition of their ‘symmetrically inverse counterparts’. Whether the individual consumes, hoards, invests, disinvests or dishoards, therefore, is always to be considered from his own individual point of view, outside of any relationship, and within the time horizons of his decisions. What he does never defines the action of his exchanging partner. If he invests, it does not follow that his partner disinvests; if he consumes it does not mean 165

GALILEAN COSMOLOGY TO GALILEAN ECONOMICS

that someone else produces or disconsumes. If they are not apprehended outside any transactional framework, individual actions can never be summed up. Let us now examine how these new individualist desiderata alter some basic definitions. Having circumscribed consumption and investment, what are we to define as their symmetrically inverse counterpart? As suggested, they can only be properly differentiated if brought back to the individual deciding, and with respect to this individual, if we add on yet another discontinuity, that of time, of the time intrinsic to the individual’s economic action. Why? Because consumption, investment and saving designate activities, namely the activities of consuming, investing and saving—activities sometimes described as ‘flow’ variables to emphasize their temporal dimension. In themselves, the activities of consuming or selling an output are ‘punctual’ or relatively so; but by regarding them as flow variables we have to imagine them as processes and impose a certain time discontinuity on what are in fact reiterative exchanges. These are the discontinuities of social time, and in our own monetary economy, these temporal boundaries normally correspond to those of the income year, best defined as a fiscal year. (I wish to emphasize, however, that there is no homogeneous time period for all economic actions. For income, consumption and production, the fiscal year is sometimes the most useful frame of reference, but not always necessarily so.) Therefore, to remain coherent with this time dimension and its artificial divisions, different concepts will have to be devised to match the various types of exchanges. Within the present fiscal year I gain an income by selling goods, labour or services, I consume privately by purchasing domestic goods, and so on. But what happens when I look at these exchanges across our time divisions? Let us start with the consumption of domestic durable goods. When a music-lover sells his old sound system in order to buy a new, more sophisticated one, he is trading a good in order to purchase money; is he then earning income? Strictly speaking he is not, because in this transaction he is disposing of a good produced and ‘consumed’ domestically in a previous income year. Therefore, if one consumes when buying domestic goods for one’s own use during the current fiscal year we shall say that one ‘disconsumes’ when reexchanging the goods once purchased back for money. Admittedly, this individual will also gain an income if he sells dearer than he bought, and if so, this will be counted among windfall gains. These windfall gains do not transform the original purchase into an instance of speculation; it still was a plain case of domestic consumption, followed by disconsumption to which accrued unexpected windfall gains. Let us consider another possibility, namely the purchase of goods with the express intent of gaining an income either by transforming them into different goods (production) or by selling their services. Supposing that their original acquisition represented a case of investment, is their sale ipso facto to be 166

GALILEAN COSMOLOGY TO GALILEAN ECONOMICS

deemed an instance of disinvestment? As we argued, it is not the type of good that defines investment, but the rate of change in output. If I sell a corporate asset it can be considered disinvestment only if it slows down the scale of my operations. If for instance the owner of a television rental business sells the old television sets which he can no longer rent out to procure new ones, the sale cannot be reckoned as disinvestment but as corporate disconsumption. In and of itself the sale of an old corporate good never amounts to disinvestment, but to corporate disconsumption; it becomes disinvestment if the entrepreneur is actually (and wilfully) lessening the scale of his operations through these exchanges. By definition, therefore, one who sells corporate goods without curtailing his output indulges in corporate disconsumption, and he disinvests if this disconsumption slows down his output. By definition, disconsuming and disinvesting straddle fiscal years, and are sales of old, that is, used, or second-hand goods.3 We could go on with the notions of borrowing and repayments, saving and dissaving as well as the different types of investments, but we will not unduly prolong this tedious semantic exercise since it was never our plan to tackle the daunting task of elaborating a new conceptual framework. I stressed earlier that this small sketch is but an initial step, sufficient I believe to support my central thesis, namely that it is possible to develop a non-transactional sectoral approach to economics, that all the ingredients of such an approach are already stored up within Keynes’s General Theory, and that concepts so defined will adequately describe our own economy.

FROM LANGUAGE TO THEORY Languages are not transformed without seriously shaking the theories erected upon them. Throughout this book I have constantly harped on the fact that my exploration was epistemological, not theoretical, but at this stage some minor theoretical corollaries can hardly be avoided. In so far as Keynes’s General Theory presents itself as a set of definitions and of theories built upon them, little remains of the original theories if the definitions are undermined. In fact, even the global thesis, that of equilibrium involuntary unemployment, might be seriously rattled in the process. Let us examine some of those theoretical alterations. Let us begin with the notorious equality between saving and investment. On this as on so many issues Chick draws the right conclusions, namely that Keynes was intent upon proving that the Classics wrongly assumed that all savings automatically flowed into investments, and that it was miraculous that ‘his argument prevailed, despite the massive confusion…caused by his insistence that saving and investment were separate but equal. What he was driving at was not helped by his definitions of saving and investment’ (1983:180). And, as the rest of her argument reveals, the classical solution to 167

GALILEAN COSMOLOGY TO GALILEAN ECONOMICS

the equality of aggregate savings and investment in terms of ex ante and ex post does not agree with the rest of Keynes’s economics. In fact, there is no solution to that equality because there is no equality. It did not arise out of Keynes’s misapprehension of the ex ante and ex post dimensions, nor out of his confusion over the notion of equilibrium, nor of his mixing of time horizons; the latter inconsistencies certainly did not help, but at the root of it all lies a semantic problem. First, Keynes mingled income and hoarding. If hoarding is perceived as an acquisition of cash, then hoards can be counted as financial assets (and this is what it amounts to when Keynes declares that saving (under which he classifies hoards) can mean the acquisition of cash (CW, VII:82). The acquisition of cash, it will be recalled, is the gaining of an income). But by no stretch of the imagination can hoarding properly understood be so defined (i.e., when understood as withdrawing an income from further exchange). Thus, when hoards are included within savings the very equality must by definition crumble. However, we could experimentally assume the absence of hoards. In that case, would the equality hold? No, and for a more fundamental reason. In a truly individualist perspective saving must first and foremost be a micro-economic behaviour, and as such, will always have to do with income disposal. And disposing of an income (in the experimental absence of hoards, let us recall), apart from consumption and various domestic factor costs, automatically involves the purchase of financial assets in an economy where the money that goes into financing investment does not come from the entrepreneurs themselves. Whether assets are financial or not, their purchases and sales constitute an act of exchange. What of investment? As we have seen, it has to do with the purchase of corporate goods in excess of those needed to keep output constant, in order to increase output, whether or not that output is sold; by itself, investment says nothing about exchange (or, more specifically, income; admittedly, it implies corporate consumption, but not trading of the finished product). Therefore, if ‘S’ in Y=C+S spoke of income (and exchange, if there was no hoarding), ‘I’, on the contrary, speaks of output (excluding income and exchange), and the two cannot add up. Investment and saving might be equal in specific historical circumstances. Let us suppose a situation in which all entrepreneurs invested their own money, there being no other source of finance; by definition we would then find an equality, albeit an utterly useless one, since it would be tantamount to calling the same thing by two different names. To say that a rich entrepreneur building a new plant was saving, amounts to stating that a half-full glass is actually half empty—an observation that belongs more to theological discussions than to economic debates. In brief, investment could equal saving in hypothetical circumstances where they are so by definition, and the so-called equilibrium would then be a mere definitional identity, as it already is at the aggregate level, where, Chick 168

GALILEAN COSMOLOGY TO GALILEAN ECONOMICS

observed, one of the two notions (aggregate saving and investment) is conceptually and analytically redundant (1983:56). But when we introduce hoards, the notorious identity crumbles, and all the more so when financial assets come on stage. That equality is neither definitional nor one of adjustment through income; it is a regrettable by-product of equations built upon blurred concepts, the remnants of an Aristotelian cosmology. If the notion of saving also disappears under the more general one of income disposal, and if interest is the price of money’s services, it follows that Keynes’s theory of the rate of interest—and even his theory linking consumption to saving and investment through the multiplier—should be slightly modified. For one, the rate of interest can no longer act as the cornerstone upon which rests the whole theoretical edifice of the General Theory, considered first and above all as a theory of involuntary unemployment. Second, I also have great qualms in stoically accepting a straightforward notion of a decreasing marginal propensity to consume. Since I demur at Keynes’s manner of arguing from the macro-economic level downward and believe in the contrary methodology—we have to enquire what happens when domestic incomes ascend? We might discover that domestic consumption shifts from less durable to more durable goods (and, on average, better quality ones): from a Timex watch to a Longines; from a Ford Escort to a BMW or a Mercedes; from posters on the wall to paintings; from the rental to the purchase of flats, and then houses—to mention the obvious. We could thus postulate an increasing marginal propensity to consume better-quality domestic goods (in general, synonymous with more durable ones). Admittedly, if I satisfy tomorrow’s needs by using what I consumed today I will refrain from consumption tomorrow. In reality, there is always a hierarchy of goods such that I can easily discard or disconsume what I consumed yesterday to purchase yet more expensive items. I do not deny the existence of a decreasing marginal propensity to consume, but one severely qualified with detailed examinations of the behaviour of domestic income-earners. Similar problems seem to beset Keynes’s stance on saving. In neoclassical theory, saving simultaneously satisfies future consumption, thereby creating more demand. To this naïvely optimistic view Keynes opposed a gloomily pessimistic one. Saving would on the contrary signal an absence of consumption, and a higher level of saving could herald a contraction of demand. Between those two extremes stands what may appear as a more realistic, if not a happier, medium. When apprehending most domestic economic decisions in terms of income disposal the question takes on a different complexion. First, more could be spent on betterquality domestic goods as income swells. Also, with higher incomes, we might witness a tendency to move from the most liquid among financial assets to the most illiquid ones, and from financial assets to real ones. Indeed, one could surmise that the more satisfied the need for durable 169

GALILEAN COSMOLOGY TO GALILEAN ECONOMICS

high-quality goods and the more elevated the income—in brief, the more cushioned-off one is from private needs in the foreseeable future—the greater the risks one is ready to take by committing one’s money to more illiquid assets. Ultimately, as income rises still further or as rates of interest drop drastically, individuals with very high incomes might even move to straightforward investment: they might purchase houses, farms or race horses, or even lend money to young entrepreneurs who come up with promising ideas—acting as silent partners, to use Marshall’s expression. This type of investment would be intimately related to changes in income and be equally affected, but only indirectly, by rates of interest. Overall, what could then be the effect on demand? If this domestic financial investment consists in the purchase of new entitlements it spells fattened income to entrepreneurs, who can then allocate it either to domestic or to corporate expenditures, unless, admittedly, they themselves think fit to sink it back into financial investment. If on the other hand it sees its way into new bonds, it must then feed someone else’s need for money’s services. If it is old bonds that are traded the suppliers will recover their money and assign it, either to the purchase of new assets, or to private consumption (assuming, as I do, that money earmarked for speculation does not lie idle for long). Finally comes all the money not invested in binding assets such as bonds or shares but simply deposited in bank accounts carrying relatively low interests. If this supply swells it is removed from any type of consumption, private or corporate, but it only expands as a result of contracting incomes, not of an increasing propensity to save. This money will inflate the stock of labouring money; admittedly, changes in the stock of labouring money will not immediately adjust the rate of interest to equilibrate two flows since I do not see rates of interest as equilibrating anything. Nonetheless, relentlessly expanding stocks of labouring money would eventually tend to lower the rate of interest. Would it automatically stimulate investment? Not much if incomes were so depressed that entrepreneurs did not forecast a very promising effective demand. In this case, however, it is not saving that would have inhibited investment, but diminishing incomes. In the long run, however, if the rate of interest drops substantially, it could ultimately rekindle both consumption and investment, although there is no simple correspondence between the two as Keynes’s theory of investment should make clear. In other words, the lower the income, the more domestic financial investment is channelled into the most liquid of financial assets (savings account); the higher the income, the more it is invested in bonds and shares, when not in real goods, transforming part of private income into investment proper. Whichever way we look at it, the key variable would not be saving but the level of income and the manner of allocating it; higher incomes would not widen the gap between consumption and saving, quite the opposite. It is the national portion of lower (real and disposable) incomes, and the manner 170

GALILEAN COSMOLOGY TO GALILEAN ECONOMICS

in which they see their way into savings accounts when not consumed, that may cause all the trouble. But here we are moving around in circles. When low-income earners shy away from consumption to commit their money to a savings account, it is that they themselves entertain dim prospects about their future income. Otherwise, the Keynesian assumption holds: lower incomes are mostly spent on consumption. This line of reasoning takes us back to the entrepreneur. Expectations of falling incomes normally result from slackening entrepreneurial activity, which itself emanates from depressed effective demand. We get back to a theory of trade cycles, but one in which saving is no longer denounced as the main culprit. Investment, that volatile activity, now bears the brunt. This would link up with another problem surrounding the causal connection in Keynes’s argumentation. At the beginning of the General Theory Keynes first formulates his theory of equilibrium involuntary unemployment on the assumption of a rise in income (and of a greater gap between saving and consumption due to the decreasing marginal propensity to consume; if this gap is not filled with new investment, equilibrium involuntary unemployment will then set in), without suggesting why income should be the first variable to change. Although income and investment are intimately bound, one must posit one of the two as the main dynamic factor in moving the economy, and Keynes himself acknowledges that income cannot rise without a prior expansion in employment, output, and initially, in investment (CW, VII:180). If entrepreneurs increased incomes by investing, it is likely that they have already provided for a stepped-up demand in corporate goods and in labouring money as well (credit), and that this planned investment, as it gets executed, would actually swallow up the increased savings created by the decreasing marginal propensity to consume. Saving would appear not only conceptually useless, but also theoretically so. In its overall architecture, the General Theory is first made up of a number of dispersed and restricted theories of consumption, of saving, of investment, of money, of the rate of interest, of wages and of prices, brought together into an overarching theory of underemployment. As many of those theories are in need of severe qualifications in the light of a new set of definitions, and as others actually founder, little is left of the overall architecture itself. As a theory, Keynes’s theory of equilibrium involuntary unemployment seems riddled with unsurmountable problems (and here I completely step out of the debates surrounding the very definition of involuntary unemployment, and therefore of its very existence; see Coddington 1983). But this is no cause for despair, for in a classical cosmological space theories ought to come and go rather than agglutinate. What Keynes provided were the key ingredients of a classical cosmological revolution; that some of the theories he elaborated in the process might not stand the test of time is relatively unimportant, as long 171

GALILEAN COSMOLOGY TO GALILEAN ECONOMICS

as his mode of conceptualization remains. This is the very manner in which sciences progress in their spiralling stage, and so it should be. Qualifying or even supplanting some of his restricted theories does not imply toppling his greatest and ever-lasting achievement, nor does it entail reverting to neoclassical or Marxist theses. It means going on with the business of science and thinking up new explanatory models when old ones ought to be discarded. In fact, one could even maintain that this overarching architecture (the theory of equilibrium involuntary unemployment) was premature, and smacked of mechanistic thinking (probably because of the still powerful influence of the quantity theory on Keynes’s thinking). In this all-encompassing macroeconomic theory Keynes does imitate the mechanistic approach of the classics and neoclassical economists; all the parts of the system interlock and reciprocally affect one another so as to generate underemployment. To that extent I do consider Keynes’s theory of equilibrium involuntary unemployment to be a premature generalization, although a necessary point of departure to explode neoclassical economics. Hanging on to all of Keynes’s specific theories may in the long run be as pernicious as clutching on to neoclassical economics. Macro-economics does need a general model of the economy, but only as a tool to think with and to throw away whenever new developments prove it to be inadequate; at the same time, it needs theories—numerous theories— linking various aspects of reality in order precisely to enrich, complexify and perfect its macro-economic models.

172

CONCLUSION

A proper history of post-Keynesian economic literature has only recently been undertaken (Beault and Dostaler 1994) and this conclusion is no place to repeat what has been admirably executed. Its overwhelming message, however, is sobering: economic theory is in a state of disarray, a message already conveyed in other recent works (Davidson 1991; Mirowski 1991). The facts are plain to see: the interpretations and the ‘schools’ proliferate, each camp firing what it judges to be the final blast on the others. Keynes aspired to topple the neoclassical paradigm, especially in its Marshallian incarnation, and presumably believed he had succeeded. But barely one year after the publication of the General Theory came Hicks’s article on ‘Keynes and the Classics’ (Hicks 1937) with its IS-LM rendering of Keynes which ultimately inspired the Neoclassical Synthesis. But Hicks reneged his own model, or recognized that it moulded Keynes in the Procrustean bed of neoclassical economics, and by now generations of authors have denounced it as an infertile hybrid. The so-called Post-Keynesians (especially Robinson and Kaldor) were among the first to stress the incompatibility between Keynesian and neoclassical economics, but they in turn have been accused of distorting Keynes by bringing in Ricardo and Marx (Fitzgibbons 1988:134). The search for microfoundations to macro-economic theory led to the emergence of the New Classical Macro-economics, of the ‘disequilibrium theories’ and of the New Keynesian school. Needless to say, to any Keynesian the New Classical Macro-economics suffers from the very defects of neoclassical economics, as does another neoclassical variant, the ‘rational expectations theory’: it removes uncertainty (Chick 1983:4; Hutton 1986:62– 3) and therefore obliterates the future (Davidson 1991:37). Like neoclassical economics, Rational Expectations Theory also perpetuates a form of Social Darwinism (Davidson 1991:37). As to Patinkin, Clower, Leijonhufvud and the ‘disequilibrium theorists’ in their wake, they would have reasserted the ‘loanable-funds theory’ (in the case of Leijonhufvud particularly: Chick 1983:193, note 12), and would be fundamentally non-Keynesian because of the intrusion of neoclassical elements 173

CONCLUSION

(Asimakopulos 1991:123; Coddington 1983:105 ff.; Fitzgibbons 1988:150– 2; Shaw 1988:10–21; for a more detailed and thorough presentation and overall critique, see Barrère 1983). Such is the price of mistaken identities. It can be restated in very simple terms: all economics which in one way or another espouse neoclassical postulates or endeavour to mingle neoclassical postulates with those of the General Theory are, in my opinion, utterly amiss. Since I deem all transactional and Aristotelian representations of the economic cosmos to be irretrievably flawed and quintessentially incompatible with an individualist and Galilean outlook, it follows that any attempt, either to sustain neoclassical views, or to wed them to Keynesian ones, are doomed to failure. This immediately condemns the New Classical Macro-economics or Rational Expectations Theory, but so does it ban the New Classical Synthesis, as well as the various attempts to portray Keynes in market terms or in terms of disequilibrium (implicitly derived from the Walrasian general equilibrium). Keynes’s macroeconomics can no more be erected on neoclassical (or choice-theoretic) microelements than Galilean dynamics could be founded upon Aristotelian premises. As a result of this misunderstanding, economics now lives the predicament of other social sciences, that of grand theories piling up on top of one another rather than supplanting one another. My conclusion is therefore written in my premises. If Keynes’s economics is what I make it out to be, the main challenge facing economists would therefore consist in completing and perfecting it. But what does this amount to? At the most basic level, it implies ferreting out every Aristotelian and substantialist survival to devise a purely Galilean conceptual framework. And, as we have seen, it means elaborating and developing a sectoral approach. As I have repeatedly suggested however, this sectoral approach will straddle both language and economic rationality. In this book I have confined myself to language, but if economic rationality is also sectoral (in that economic rationality can only make sense from the point of view of the individual’s insertion in the social organization of the economic world), it follows that ‘completing and perfecting’ Keynes’s revolution will also mean ‘complexifying’ what Keynes simplified, and relaxing some of the conditions of his experimental constructs. It would therefore involve moving back from the entrepreneur to the diversity of firms, and possibly, from the private-income earner to the diversity of households. In brief, it would amount to reinserting the complexity of social organization and looking at economic decisionmaking and acting within this multiplicity of environments. This calls to mind the views of Peterson (1977), who drew parallels between the trajectories of Keynes and institutionalism. Keynes would be no institutionalist, he claims, although his analysis could be deemed institutional. It is possible to move one step further. The fundamental axiom of institutionalism, as I understand it, is that economic rationality is essentially 174

CONCLUSION

contextual (see Hodgson 1985). Now I firmly believe that Keynes did abide by such a creed. In his economics producers and consumers are concerned with different prices (Chick 1983:169), and separate models are called for distinct types of decision (Chick 1983:23). Keynes took account of a plurality of logics, according to the various economic groups concerned (Carabelli 1988:236–37) and he gave institutions and financial mechanisms their due attention, especially in the Treatise (Minsky 1976:ix, 11). In brief, we could rephrase the problem. Keynes embraced the basic axiom of all institutionalism but had to reduce economic rationality (or the logic of economic action) to very few and very simplified contexts because of the demands of theoretical argumentation and of its experimental constructs. In this light, institutionalism is no alternative to Keynesian economics; on the contrary, it amounts to perfecting and completing it, first by complexifying its simplifying assumptions, and second, by introducing more ‘phenomenal resistance’ in the model. The more complexification, the more phenomenal interference—in a word the more institutional considerations, the more the model will retrieve the specificity of the social organization of economic institutions in our own society. If so, we shall kill more birds with the same stone. If we accept Boland’s thesis that rationality does not describe a psychological state but merely denotes strategies and the explanations economic agents give of them (1985:38), it follows that the more contextual economic analysis will become, the better it will capture economic rationality. Our study of Keynes takes us where many of the new generation seem to be, to the idea that economics ought to get back to individuals within their social context, and, in sociological fashion, apprehend from the inside the reasons they give of their actions. This, according to Lavoie, is what Machlup himself was advocating against Lester, although the history of economics has chosen to interpret the debate the other way around (Lavoie 1990; Lester 1946; 1947; Machlup 1946; 1947). This is where the New Keynesians seem to be heading, accompanied by the likes of Mirowski and many other young Turks (see e.g. Akerlof and Yellen 1985; Azariadis 1975; Caplin and Spulber 1987; Katz 1986; Parkin 1986). This is already where much of economics is at in its institutionalist and behavioural studies, albeit in a scattered fashion, and in opposition to both neoclassical microeconomics and Keynesian macroeconomics. In a Galilean reading of Keynes all these oppositions vanish: not only is institutionalism merely a complexification of Keynesian economics, but the search for the microfoundations of Keynes’s economics can only be within institutionalism. If economics’ micro-foundations allegedly tell us of the rationality of economic agents, if this rationality is necessarily contextual, it follows that only institutionalism can provide the micro-foundations to Keynes’s macro-economics. In this research programme, micro-economics, macro-economics and institutionalism no longer clash with one another; there is only one possible macro-economics—it is Keynes’s, but its microfoundations 175

CONCLUSION

will be built upon institutional analyses. This would be the research programme of an integrated economics, one where the social organization of production, of management, of the forms of exchange (markets) and other economic activities, even of households, would account for the economic strategies of individuals.1 Finally, perfecting and completing Keynes’s economics should equally lead to reinstating probabilism in economic thought. Keynes’s mode of thinking in economics contained all the elements of probabilistic thinking, and why he failed to develop his economics in this direction is a complex problem in the psychology of science. If we retrieve this necessary element we should also be able to link Keynes’s economics to recent developments in complexity theory (Arthur 1990; Waldrop 1993). If we start from the individual truly deciding and acting, replace his or her rationality in its organizational setting and then seek the macro-economic results of their decisions, we should logically be able to connect institutionalism at the micro-economic level to probabilistic thinking at the macro-economic level, however unlikely such a wedding may appear. I embarked on this disquisition because I believed this interpretation of Keynes’s theory could provide an epistemological justification for contemporary explorations in institutionalism and complexity theory, as well as going some way towards laying their cosmological and conceptual substructure. By so doing, it might help contribute to reconcile micro- to macro-economics and to assist in the development of an integrated economics, one in which one classical research programme reigns until a post-classical coup comes to topple it. But before thinking of post-classical revolutions it might be apposite to start working at a classical one. This Keynes did, but most unfortunately, he voiced his message in such a way that it was all too easily misunderstood.

176

Appendix 1 MIROWSKI ON SCIENCE AND ECONOMICS

MIROWSKI AND THE HISTORY OF SCIENCE Mirowski departs from the habitual analogies that historians of thought have drawn between classical and neoclassical economics on the one hand, and Newtonian science on the other, by selecting a different genealogy within the history of physics, one which starts with Descartes, and through Leibniz, leads to the slow formulation of the principles of conservation of energy. By suddenly unearthing from the history of economic thought the search for conservation principles, Mirowski is then led to argue most brilliantly that the model that inspired and guided neoclassical economics was not Newtonian science but the field formalism of proto-energetics. The thesis is brilliant and daring but rests on a questionable reading of the history of science and of economics. By selecting the path leading from Descartes to Leibniz to the nineteenthcentury ‘discoverers’ of the principle of conservation of energy, Mirowski wilfully plays down the Galilean-Newtonian connection. In fact, he seems to go further and omit them altogether. Against this exclusion there is cause to demur. Imbued with Meyersonian epistemology, Mirowski strives to reinterpret much of the history of physics in terms of the discovery of conservation principles and implicitly places Descartes at the fount of it. What were those Cartesian laws of conservation? (1) The conservation of modes of bodies, including motion and rest, in the absence of disturbing factors; (2) conservation of the total quantity of ‘force of motion’ in collisions between bodies; and (3) the determination of this force of motion to act in a straight line tangent to the path of the body. (from Schuster quoted in Mirowski 1991:17) In fact, these can be reduced to two, namely that in the absence of disturbing factors bodies would conserve their motion and move in a straight line (rectilinear inertial motion) and that, globally, the quantity of ‘force of motion’ 177

APPENDIX 1

in the world must have remained constant since creation; therefore, it must also be constant ‘locally’, between colliding bodies. Let us examine both in turn. Although Descartes was the first explicitly to formulate the basic axiom of rectilinear inertial motion, Galileo had already derived the notion of inertial motion. This stretches the genealogy back to the great Italian scientist and to what the Galilean Revolution (culminating in Newton’s synthesis) meant and implied. Positing inertial motion amounted to postulating a new conservation principle. Yet, for Galileo as well as for Descartes, such a conservation principle only applied in the experimental conditions of the vacuum. This summons back a crucial element studiously omitted from Mirowski’s interpretation of the history of economic thought, namely experimentation. Experimentation happens to be one of the principal ingredients of the Galilean Revolution. Galileo discovered the laws of nature, not in the observed phenomena permanently disturbed by the numerous ‘hindrances to motion’, but in the thought-experimental construct of the vacuum. It is by imagining the movement of matter in a vacuum—which, according to some historians of science, Galileo did not even believe existed in nature—that he inferred inertial motion. I submit that this radically novel, Platonic approach to the laws of nature (Koyré 1966b), together with the use of mathematics and other methodological improvements introduced by Newton, was at the conscious level a critical element of what both classical and neoclassical economists were seeking to emulate when endeavouring to make their discipline a science. It is this experimental procedure, above all Galilean in nature, which prodded them to search for the laws of economic phenomena not at the surface level, but behind the appearances, and which convinced them that laws could only be discerned when phenomenological disturbances were removed. Consequently, to set aside the inspiration behind their experimental scenarios and leap directly to their discoveries misses, I believe, a most important link. Admittedly, we could narrate the whole story of Galileo’s cosmological revolution in terms of a search for conservation principles (causal invariance) behind phenomenological change, as Mirowski does for the history of economic thought. This could yield startling inversions of common wisdom, as it does with mercantilism and classical political economy in Mirowski’s hands. In Aristotelian physics, movement can only spring from the action of a force greater than matter’s resistance (that of the object’s own mass, as well as that of the surrounding media). As soon as the force ceases, movement should stop, and yet it does not in the flight of an arrow, for instance. This problem haunted Aristotle and he solved it with the most unconvincing sophistry, so unconvincing that the Schoolmen in the late Middle Ages were forced to think up an alternative explanation, namely the ‘impetus theory’. If the arrow goes on flying, something must have been imparted to it, they 178

APPENDIX 1

reasoned, something which it conserves although this entity (the impetus) ultimately expends itself. We could descry in this medieval dynamics the first unsteady groping towards the notion of inertial motion and argue that Galileo unlocked the riddle and freed himself from the Aristotelian and scholastic acrobatics by defining movement in such a way that it intrinsically implied its own conservation. If we are to relate the whole story in terms of conservation principles however, we would be unfair to Aristotle. For all inertial states imply conservation principles. By declaring rest to be matter’s inertial state Aristotle was in fact asserting that matter seeks to conserve its state of rest. He would have been the first to grasp the idea of a conservation principle and the Schoolmen could be portrayed as relatively clueless scientists, blind to the necessity of postulating conservation principles. This would make for an interesting history of dynamics, but would somewhat stretch Meyerson’s thesis (Meyerson 1962). And yet I contend that this is precisely what Mirowski achieves in his reappraisal of free-trade mercantilists (especially William Petty) and of classical political economy (and especially Adam Smith). This innovative assessment of physics would hardly do justice to the Schoolmen, let alone to Galileo. By intuiting inertial motion Galileo was not just appending yet another conservation principle to Aristotle’s, but radically denying the Aristotelian one. Moreover, Galileo’s achievement was no simple extension of impetus theory, for the latter was also well implanted in an Aristotelian cosmology, one in which movement had to be explained. In brief, whether translated in terms of conservation principles or not, Galileo accomplished no less than a complete cosmological revolution, one in which matter has no inherent tendency to reach its natural place and thereafter to resist movement, one where matter is intrinsically mobile (some historians of science claim that Galileo regarded rest as infinitesimally slow motion); where rest itself is defined as a rate of change of space over time, and where the key problem of dynamics is henceforth to explain rates of change in motion (acceleration and deceleration). In this cosmological upheaval the question of acceleration (in the guise of the free fall of bodies) nestles at the heart of the so-called Scientific Revolution, and it is Galileo who gave the formulation (and solution, the inverse-square law) that launched scientific dynamics. Also, when it comes to dealing with acceleration, what are we to do with Descartes’s conservation principles? This lays open the whole question of the Cartesian cosmology. In the story that takes us from the first clear formulation of uniform acceleration by the Merton scholars in the fourteenth century to its final solution by Newton, Descartes plays a strange role. On the one hand he is the one, who assuming an indefinite world (and not infinite—see Koyré 1967), fully appreciated that inertial motion should be rectilinear, and not circular, as Galileo had erroneously inferred. On the other hand, Burtt contends that the manner in which Descartes filled space with matter and spatialized movement by 179

APPENDIX 1

removing from its representation the action of all forces, would have inhibited the development of a scientific dynamics. Ironically enough, it is this very cosmology which in other ways made him ponder problems of conservation relatively alien to Galileo. By filling the world with matter and envisioning a world without the action of forces such as gravity (which smacked of occultism) he found in collisions (impact) the only answer to the question of acceleration. In fact, to write of the problem of acceleration with Descartes somewhat overstates the case. True, Descartes did seize upon the idea that if matter in its inertial state tends to move in a straight line one must account for the existence of circular motion, but he did not couch the new conundrum as forcefully in terms of acceleration as did Galileo—to whom a constant force did not create a constant speed, but constant acceleration. Without forces, acceleration could not but appear in a watered-down version. In a world full of matter, however, the collisions of particles spawned a new question: if a quantity of movement was lost at every collision the whole world would relentlessly lose some of its global quantity of movement and would inevitably come to rest. Hence the necessity of postulating the conservation of the ‘force of movement’ both locally and globally, and a train of thought which through Leibniz, ultimately fathered all those cogitations related to energy. One could almost claim that Descartes’s cosmological failure on the road to a scientific dynamics was the source of his success on the road to protoenergetics. Whatever may be the case, his second main conservation principle, namely that the quantity of movement in the world is constant (and so it must be locally, during collisions), flows from cosmological premises that ruled out a scientific dynamics! Hence we owe him one-and-a-half of the three main conservation principles that support Newtonian physics (one-and-a-half because Galileo had reached a hybrid position on the question of inertial motion), but within a cosmology that simultaneously impeded the Newtonian developments. I do not for one moment doubt that through his physics and his physiology, not to mention his philosophy and mathematics, Descartes immensely influenced those who wanted to import the Scientific Revolution to the study of other phenomena (as is the case with Hobbes, for instance, as I have demonstrated elsewhere: Verdon 1982) and that, as Foley has evidenced, Quesnay and Smith are better understood in terms of Cartesian than Newtonian analogies (Foley 1973, 1976). This, however, does not entail that one could only emulate Descartes by overlooking Galileo. On the contrary I maintain that strong Galilean elements pervade the same works and that it may be more important to appreciate why economic thinkers could mingle elements of such disparate cosmologies rather than single out the Cartesian influence at the exclusion of all others. Admittedly, if one downgrades the Scientific Revolution to a question of mechanistic and deterministic endeavours to decipher the universe’s riddles, human, social, as well as natural, then Descartes indisputably stands as its 180

APPENDIX 1

apical ancestor. From the cosmological point of view adopted in this book however, the revolution was first and above all Galilean, and is epitomized in the Platonic assumption that the true laws of movement are not to be espied at the level of observed phenomena, and in its thought-experimental corollary (that of imagining motion in a vacuum). This, to many epistemologists of the history of science, captures the essence of the Galilean revolution; the mathematization of movement is but a by-product. (We could say the opposite, without changing much to the story: that if mathematization was the aim, the cosmological revolution was a necessary means. But the aim surfaced long before the cosmological upheavals that made it possible.) It is against this singular reading of the history of science that we shall examine Mirowki’s understanding of mercantilism and political economy.

MIROWSKI AND THE MERCANTILISTS Mirowski (1991) distinguishes two brands of mercantilism, namely the balance-of-trade school, and the free-trade school (the latter occupying the scene from 1660 to 1700, and the first both before and after (from approximately 1600 until Quesnay and Smith)). The first school would have witnessed ‘the first appearance [albeit not terribly explicit] of a conservation principle in Western economic thought. Here the aggregate of value is thought to be conserved in the sphere of commodity exchange conducted entirely with the national currency’ (p. 148), and would have claimed legitimacy from the body/motion/value triad stemming from the writings of Harvey, Hobbes and Descartes. The second school would have laid claim to the same descent but would have lacked: the recourse to perceived methods of natural philosophy and the connected metaphors of body/motion/value. For instance, when the free-trade mercantilists denied that money was a central value substance, they went so far as to deny the need for any value principle at all. (pp. 150–1) Not understanding the need for a conservation principle, ‘their program was a dead end’ (p. 151), and this would nowhere be clearer than in the writings of William Petty. Although Mirowski admits that ‘[o]ne could, in retrospect, regard his entire corpus as a search for an alternative value principle rooted in natural relations’, and that ‘[v]ery early on, he had conceived of his quest as a search for the connective natural principles that lay behind appearance’ (p. 151), he would have failed miserably, despite the subsequent acclaim of historians of economic thought, ‘because it was the balance-of-trade school, and not Petty and his comrades, who possessed the clearer understanding of 181

APPENDIX 1

how to construct a theoretical system of accounts that would imitate the causal explanations of the natural philosophers’ (p. 152). Petty would have looked on the combined action of land and labour as a source of value behind monetary prices. He would have ‘admitted that what is required is a natural value substance with fixed ratios of transformation, which would perform all the functions of money’ (p. 152), but he ‘could not carry this program forward’ (p. 152), unable as he was to identify a conserved value substance. Therefore, ‘no conservation principle meant no quantification and therefore no valid physical analogy. For this reason it is misleading for Petty to be heralded as some sort of early prophet of quantification and a scientific economics’ (p. 153). So much for the free-trade mercantilists; they were barking up the wrong tree, and concluding his review of mercantilism Mirowski observes that: [r]ather than basing their analysis exclusively upon either equivalence or nonequivalence, most economic writers of the eighteenth century chose to encapsulate the contradiction by a proliferation of concepts. Starting with Petty and Richard Cantillon it became common to postulate a distinction between intrinsic value, naturally determined and fundamentally stable, and market price, an epiphenomenon of the myriad conjunctures of the historically specific market. (p. 154) Most interestingly, this interpretation can itself be overturned, as it strives to turn common historical wisdom upside down. Undoubtedly the balance-oftrade mercantilists were mixing metaphors of value and body, if only because they perceived trade as an activity taking place between ‘bodies politic’, and because such a view merely extended the Aristotelian notion of trade as an activity linking bounded, almost self-sufficient households. To that extent, the mercantilists’ state is analogous to the household and both call forth images of the body (the ‘body politic’). Since the trading units were ‘organic wholes’ so to speak, metaphors of the body necessarily crept in. Once this is acknowledged, then the economic question amounts to understanding the movement of goods and money outside these ‘bodies politic’; on this topic, the balance-of-trade mercantilists envisaged the conservation of value more by analogy with body and health than with motion. As money enters the ‘body politic’ and circulates inside, its movement evokes conservation principles inspired by medical considerations rather than by the conservation of movement. It is most interesting that they perceived trade solely in terms of the circulation of currency (gold and silver) and that they held the ‘substance’ conserved to be the quantity of that currency. This calls to mind contemporary medical ideas about health—namely that a body should contain a given amount of blood and that this quantity should be kept constant, except in instances of instability. During growth one should increase the quantity of 182

APPENDIX 1

blood through nutrition, and during sickness, one should evacuate the bad blood through bloodletting. But if the organism is mature and healthy, any increase or decrease in the quantity of blood should be immediately counterbalanced. We could thus turn the argument upside down: by the time of the balanceof-trade mercantilists the body metaphor had long been attached to social theory—since the household, or the nation, had long been compared to the body in the Christian tradition. Having chosen the nation as the unit of analysis (the unit of exchange) it follows that these mercantilists envisaged trade from the point of view of body metaphors, having mostly to do with health, and resulting from contemporary medical beliefs and practices, even if the language can sometimes be that of motion (or circulation). From this point of view Petty and Cantillon did not blindly struggle in their search for conservation principles, but on the contrary endeavoured to emulate the Galilean revolution in the study of motion by attempting to find the ‘experimental conditions’ under which to observe and study the laws of economic motion. Like Galileo (and even Descartes) they held that conservation principles cannot be discerned at the level of observable phenomena, disturbed by the many hindrances to motion; they thus dissociated the observable price from the experimental (intrinsic) value of commodities, and assumed that laws can be detected at the level of (intrinsic) value only, in experimental conditions outside the ‘phenomenal’ market—the latter always disturbed by the conditions of the empirical world. By refusing to discern equivalence and laws beheld at the phenomenal level, in the simple flow of gold, Petty heralds a new age. Admittedly it was easier to postulate an experimental situation (a hidden reality) than to discover its laws. Hence the long struggle, and the unsatisfactory solution Petty found. That he did not hit upon the law (and its underlying conservation principle) does not disprove the main thesis, namely that he was the first to look for them behind the observable, phenomenal level of reality, and that he was trying to emulate Galileo’s achievement with the vacuum. To that extent Mirowski’s stance is most paradoxical, in that it leads to praise of those who espied equivalences at the phenomenal level, and in this, displayed a completely Aristotelian turn of mind, even in Mirowski’s understanding of this term. And he performs the same disquieting inversions with classical economists.

MIROWSKI AND POLITICAL ECONOMY According to Mirowski, ‘[t]he economic analogue of the rise of the Cartesian school of rational mechanics, with its resulting reification of motion into a conserved quantity was the rise of the physiocratic school of political economy in France’ (p. 154), associated with the name of Quesnay and of his followers: 183

APPENDIX 1

who accomplished what the mercantilists could not: They combined advocacy of free trade and the natural basis of the market economy with a reification of a natural value substance in motion—blé, best translated as ‘corn’ or ‘wheat’—and a hostility to money as an adequate value principle. (p. 154) Inspired by the work of Foley (1973, 1976) and also of Pribram (1986), Mirowski elaborates on the Cartesian analogies in Quesnay, seeing in the latter’s Tableau Economique ‘the purest instance of the classical substance theory of value’ (p. 155). The achievement was spectacular, establishing economics on a par with science in the eyes of its protagonists. This new conviction ‘that the economy was a law-governed sphere unto itself…prompted…the first coherent theoretical account of equivalence in trade [namely, that in exchange, commodities of equivalent value are exchanged; this is also known as the trade of equivalents]’ (p. 158). In this physiocratic schema, which Mirowski extends to the whole of classical political economy, ‘production is well defined as the locus of the increase of the value substance; trade or circulation as where the value substance is conserved, and finally, consumption as the locus of value destruction’ (p. 159). Compared to Quesnay, Smith surfaces as a bit of a babbling idiot: he would have wished to espouse physiocratic principles but could not ‘countenance [the physiocrats’] primal value precept that only the agricultural sector was productive of value’ (p. 165); furthermore, he would have wished to import Cartesian metaphors in a society and at a time where Newtonian science occupied the whole scene. As a result: Smith cooked up a weakened form of physiocracy, simmered it in a watered-down Cartesianism, moulded it into a cosmology adapted from early Epicurean physics, and served it up in a great bed of digressions consisting of everything from a paragraph on why dogs don’t talk to an appendix on the herring bounty. (p. 165) Smith’s theory of value would thus be a ‘weakened version of physiocracy’ (p. 165). Why? Because ‘Smith’s disdain for the country peasant and the agricultural economy probably led him to attenuate much of the body component of the triad [what in the Mirowskian language is known as the ‘body/labour/motion simplex], leaving only the most tenuous links between labor and value’ (p. 165). As a result, using the merchant as his arbiter, he could not offer an adequate alternative. Was ‘wealth’ the value substance produced and transmitted? If so, it should ‘also exhibit “substantial properties” and possess a “natural” 184

APPENDIX 1

unit of measurement’ (p. 166). But merchants measured wealth in money prices. This left Smith with a quandary: One could not go behind the veil of money looking for the real substance of value using what was indisputably a monetary measure’ (p. 166). Hence, after meandering for a few hundred pages, Smith would have offered his solution—that value is to be found in stocks. In other words, Smith would have ‘avoided the value conundrum’ (p. 167), but ‘[i]f one accepts stock as a primitive value substance, then much of the latter two-thirds of The Wealth of Nations becomes intelligible’ (p. 167). Striding along, Mirowski further observes that: [i]t is a little-noticed fact that Smith never once locates the increase of stock in the activities of labor per se. Instead, the increase of stock is always attributed to parsimony. Everything that is saved from revenue is equivalently turned into new capital. This new capital creates an expansion of stock, and hence of value, at the rate of profit. (Mirowski 1991:168) He also notices that the only possibility for the diminution of value in Smith’s economy would be ‘in the category of unproductive expenditure out of revenue’ (p. 169). And: [i]n order that this avenue of disruption not severely compromise the ‘simple system of natural liberty’, Smith associates unproductive expenditures with the famous litany that includes menial servants, ballet dancers, and others of that ilk. In effect, Smith shades the meaning of ‘unproductive’ over into ‘insubstantial’, and from there into ‘frivolous’, essentially exiling this category from the realms of the economic. (p. 169) Finally, Ricardo would have located in human labour that value substance, although introducing labour would have modestly amounted to retrieving the body metaphor that Smith had tried to eradicate from his economics (p. 172). Of Ricardo, I shall not say more of Mirowski’s interpretation, since my comments bear almost exclusively on his treatment of Quesnay and Smith. Before appreciating what is at stake in this new version of the history of classical political economy let us briefly mention what is implicit but never quite spelled out in calling this whole episode Cartesian. Descartes was a man of many talents and interests, and among other things, dabbled in physics (mostly dynamics and optics, not excluding meteorology!)—the principles of which he tried to extend to physiology. This implied a certain stance on human psychology as well. He is also well known for his work on mathematics, not to mention philosophy. Interestingly enough, Mirowski’s story starts with Descartes the physicist, but when it comes to identifying Cartesian elements 185

APPENDIX 1

in Quesnay or Smith, the physicist has disappeared and we encounter Descartes the physiologist in the case of Quesnay, and psychological corollaries of Descartes’s physiology in the passage quoted from Smith’s early ‘Essay on the History of Ancient Physics’ (p. 164). These are minor points, with major repercussions. Let us take a closer look at Quesnay. In true Galilean fashion he left money aside for blé, but why? Because blé should give us a better insight into the ‘natural’ laws of economics. Let us experimentally substitute the ‘natural’ blé to the artificial money. In this perspective, what is blé? It is what circulates through the economic body, it is what carries the value substance, but something quite distinct from the underlying substance giving value to commodities. In fact I submit that Quesnay understood land’s labour to be the substance both embodied in blé and transmitted through it to all the parts of the economic body. As a point of fact I submit that Mirowski misconstrued the nature of the substance transmitted because he ignored the Galilean analogy. Blé would then plainly be, like blood, what enables the nutrients to reach the various parts of the body. It embodies the nutrients, but nutrients that come from the soil, from land. It is thus no coincidence that he chose blé instead of money, since land’s labour is fixed in blé, labour being the ultimate source of value. With Quesnay, therefore, we would encounter a restricted labour theory of value, one which would culminate in Ricardo. Mirowski would have been oblivious to this fact because he does not pay any attention to the distinction between the observed and the experimental that runs through the whole of economic literature from at least Petty onward, and thus locates the value substance at the phenomenal (surface) level only. He sees the value substance as blé with Quesnay or stocks with Smith, when in fact these are but the surface phenomena, the economic realities embodying the value substance. It is with Smith, however, that Mirowski’s blindness to the experimental mode of argumentation leads to what I consider the greatest distortions. Where Quesnay left money for its equivalent in wheat, Smith moved from money to prices. To Smith money is merely the outward expression of prices and prices are the main focus of investigation on the way to understanding problems of acceleration. But money prices are only observable prices, namely market prices, constantly disturbed by supply and demand and by other hindrances to the motion of economic agents. From the outset Smith regards supply and demand as disturbing factors inhibiting the scientists from discerning the natural laws governing the economic universe. As a result nothing can be learned from an examination of exchange and market transactions (surface phenomena). Behind market prices must therefore lie natural prices which express the intrinsic, natural, value of commodities. On this topic, as we have just seen when presenting Smith, the Scottish economist holds two complementary views, which when properly assessed, 186

APPENDIX 1

contradict Mirowski’s pronouncement that the quarrel over whether Smith confused labor-embodied and labor-commanded value (Dobb 1973) is, for our purposes, beside the point, when value theory is construed in the larger sense explained above’(p. 166). On the contrary I deem it extremely relevant, for with Smith as with Quesnay, Mirowski confuses the substance transmitted with the transmitter. Smith’s ‘stocks’ are not the substance transmitted, but the means through which the value substance circulates because stocks are priced. And what is the substance transmitted? It is, whatever one might say, human labour, despite Smith’s inconsistencies on this topic. When Smith moves from egalitarian to non-egalitarian societies, societies in which the producers are separated from the ownership of the means of production, he does lose track of the substance transmitted because he is faced with a concoction of unlike things, namely labour and claims. Hence his quandary and ultimate retreat: in the final analysis, he does mention the source of value and restricts himself to its measure. Since in his tripartite society prices result from claims, or entitlements—the entitlements of the labourer, the capitalist and the landlord— we can at least measure labour-entitlements (the so-called labour-embodied theory of value, which is in fact a theory of the measurement of value). And, pace Mirowski, measurement is of the essence if the key question is to assess whether national wealth is moving at a constant velocity, or is changing its speed (accelerating or decelerating). It is in fact of the utmost interest that Quesnay, borrowing the physiological analogy from Descartes (Quesnay was a physician), does not raise the question of acceleration, as Mirowski himself recognizes. Admittedly, if acceleration is about motion, and if motion with Quesnay is mostly associated with circulation in the body, acceleration could only stem from faster trade—a meaningless statement, especially when the ultimate source of value resides in land, not in trade. It is to be noted, however, that trade is quintessential to Quesnay’s Tableau, in that it is precisely the vehicle trough which blé circulates and that circulation to Quesnay does not refer to motion, but to a physiological process. With Smith, the perspectives are completely reversed. Trade actually perturbs our apprehension of the natural laws governing value and prices. Prices are not the expression of exchange but of social stratification (of the various claims of the diverse classes). Ignoring trade to fix his eyes on national wealth, Smith can then raise the question of acceleration and retrieve the analogy from dynamics. Acceleration no longer denotes a faster circulation (or speeded-up exchange), but an increase in stocks. And here we indirectly recover what had been swept under the carpet because of the complications that social stratification introduces in the study of the natural value of commodities: we do recoup labour. Indeed, I deny ‘that Smith never once locates the increase of stocks in the activities of labor per se’ (p. 168), because on the contrary, only a labour theory of value can make sense of his distinction between productive and 187

APPENDIX 1

unproductive activities. As a matter of fact, the movement of stocks hinges completely upon the ratio of expenditures in productive and unproductive activities. Why? Because, as we have seen in our presentation, Smith’s ‘productive activities’ are precisely those that transmit labour by fixing it in a Vendible commodity’. If labour is not the substance transmitted, Smith’s distinction between productive and unproductive activities loses all meaning, and it is certainly not Mirowski’s rather disparaging metaphorical interpretations that will help retrieve it. I therefore submit that Smith perceives the increase of stocks as a question of acceleration, and that such an increase is only possible if more value substance (in the occurrence labour) is fixed in tangible commodities. Hence the paradox of his economics: labour is the value substance transmitted and therefore the source of value, but in a stratified society it can no longer serve as the unit of measure of value. In this perspective, there is still some truth to the ‘internalist’ view of the history of economic thought. Petty would have been the first to grapple with the idea of a measurable and invariant source of value, and would have found it in the combination of land and labour. Quesnay would have located it in land’s labour, whereas Smith, wishing to find it in human labour, would have found it too difficult to reconcile with social stratification and would have wavered between various positions. It was left to Ricardo to be naïve enough to believe that it could exclusively be sited in human labour. To conclude, I would submit that Mirowski’s theses are a physiocratic reading of the history of classical political economy. The reason is simple. He seeks to interpret its whole history in terms of what he calls the simplex of body, motion and value, and in his opinion, Quesnay would have fused better than anyone else the metaphors of body, motion and value. Remove the simplex and labour no longer stands for a metaphor of the body; further, labour is found as the fount of the value substance in Quesnay as well, although in his Tableau Economique it is land that labours; farmers only assist land’s labour, in the same manner that landlords assist farmers with their advances.

188

Appendix 2 MARX’S ECONOMICS: SUCCESSES AND FAILURES

MARX AND CLASSICAL ECONOMICS: A CRITICAL DISTANCE The first section of Book I of the Capital repeats much of the Critique of Political Economy; hardly a coincidence, since all of Marx’s cogitations after the Critique sprang from his early understanding of commodities, exchange and money (all references to Marx’s work are to the French edition in La Pleïade). In one significant way, it is tempting to see Marx’s main divergences with classical economics evolving from his appreciation of the role of money. To classical economists money was but a ‘wheel of commerce’—some kind of transparent medium of exchange, a convenient ‘stuff that played for economists the role that the ether played for nineteenth-century physicists. This is something which can practically be overlooked in the analysis, so that monetarized exchange can be analytically compared to barter. If an exchange partner sells a commodity for money and uses this money to buy another commodity (the famous sequence C—M—C, which to Marx describes monetarized exchange), and if one looks at the end result, this individual would have ultimately traded a commodity for a different commodity, so that the cycle can be compressed into C—C, or simple barter. The barter interpretation of exchange arose out of the need to denounce the economics of mercantilism, and to replace it with an economics of industrial capitalism. Profits, the new (classical) economists held, and therefore the very accumulation of capital, could not emanate from the circulation of goods because the mere movement of goods could not generate additional value; only the labour invested in production could. One should thus distinguish the real value of commodities—derived from the cost of producing them—from their market prices, the latter resulting from commonplace oscillations due to supply and demand. Only the production of new goods could create more value, and by extension, profits and the accumulation of capital. 189

APPENDIX 2

To Marx, classical economists would have correctly realized that only production can add value, but would have incorrectly concluded to the barter interpretation of exchange. (By ‘classical economics’ will here be meant a post-mercantilist, pro-industrial capitalism economics rooted in a labour theory of value and starting more or less with Petty.) Why incorrectly? Because the barter interpretation robbed money of any role, and by extension, bolstered a somewhat optimistic and apologetic view of industrial capitalism. It spawned the wages-fund theory, a view of wages as the fair price of labour and of profits as the fair share of the capitalist’s contribution. It led to exonerating the contemporary state of wages and profits, that is, the distribution of incomes, and to disbelieving that one class accumulated wealth as the other one lost or, more appositely, that it benefited at the expense of another. It also dissociated profits from wages and made them appear as if they were natural consequences of what one invests in production. By disconnecting the two it blinded itself to the reality of exploitation, to class antagonisms and their origins in the differential, nay, in the discontinuous access to means of production, and by extension, to wealth. Marx discerned very early that recoupling wages to profits on the one hand, and capital accumulation to labour exploitation on the other, could not be reconciled with a barter interpretation of exchange. To give money back its critical role amounted to exploding the barter myth, and with it the classical theories of wages and profits. The challenge was formidable: how could one repudiate a barter interpretation of exchange while preserving a labour theory of value? To appreciate fully the extent of the paradox, let us briefly repeat some of the corollaries of a labour theory of value. It meant that labour costs, or labour investments, embody the ultimate measure of a commodity’s value. Let us illustrate with monetarized exchange. When people trade they resort to money, a universal equivalent, precisely in order to make sure that true equivalents are exchanged—that the commodities traded contain the same amount of socially necessary labour. In a labour theory of value, people could not merely exchange commodities of equivalent value, because in reality, they exchanged equivalent quanta of labour (a thesis abundantly hammered by Mirowski). Hence the impossibility of making profits out of the circulation of things. Since, ex definitione, only equivalent quanta of labour could be swapped (hence commodities of equal value), the circulation of commodities could not add to their value. From the equal value of commodities exchanged (from the perspective of labour quanta) followed necessarily the equality of exchanging partners. If exchanging partners can only give and take commodities of equal value, then none could extort more than the good’s worth in exchange. There could be no haggling, no rapport de force imposing an unjust price. Thus a necessary sequence connects the labour theory of value to the equal value of commodities exchanged, and to the equality of exchanging partners. 190

APPENDIX 2

This much Marx took over from classical economics, and this much he endorsed. Hence the daunting paradox. From the postulate of the equality of exchanging partners classical economists easily demonstrated the fairness of capitalism; capitalist and labourer contracted as free and equal partners, exchanging goods of equal value, and therefore, profits could not logically arise from the free and equal exchange between them. They had to stem from the capitalist’s own merits, from his capacity to influence production, and from an ownership of capital that naturally accrued to him as a result of thrift. Intuitively Marx knew that profits had to emerge from this contract, that they originated from the economic inequality between capitalist and labourer, and he had to prove this exploitation by first assuming equality between the two contractors! It reminds one of the classical problem of Cartesian and Newtonian physics: how to demonstrate the omnipresence of curvilinear trajectories of matter if we postulate matter’s inertial state to be rectilinear uniform motion? How could extortion arise out of equality? How could one establish that the circulation of commodities could not add any value onto commodities, and yet be the source of all profits? The answer: to refute the barter interpretation of exchange. This Marx achieved by probing into the very notion of exchange. What does exchange imply, to Marx? That different goods be compared and measured, so that a given quantity of one can be converted in a given quantity of another. It calls for an equivalent into which things can be translated, and the very logic of exchange dictates that this equivalent ultimately becomes a universal equivalent, or money. Money is no simple convenience ordered by human convention; it is pre-contained in the very definition of exchange (arising out of production for exchange). And yet, to make possible this measurement and this comparison, money has to operate a critical transformation in the objects themselves, transmuting their use value into exchange value. The comparison with a universal equivalent, and mostly the imposition of this universal equivalent to all exchanges (obligatory monetarized exchange), brought about a metamorphosis which classical economists had failed to recognize because it would fly in the face of their barter view of exchange. What, then, happens to goods once they are absorbed into monetarized exchange. To be matched, they have to be measured. And how are they most easily measurable? By the amount of labour time fixed in their production. This quantum of labour investments would enable us to compare them from a quantitative point of view. In the process, however, the very notion of labour is remodelled. When goods are considered with respect to their use value, the time an individual invests in producing goods is individual, concrete labour. From the point of view of an individual’s relationship to the goods he produces himself to consume, one’s labour is qualitatively distinct from another’s. Once goods enter 191

APPENDIX 2

monetarized exchange, however, the need to compare quantitatively equivalent quanta of labour refashions this individual concrete labour into abstract, social labour. In other words, in order to obtain quantitatively equivalent amounts of labour in exchange one has to match qualitatively comparable labour. Monetarized exchange thus transmutes a quantitative equivalence into a qualitative one. To measure (and compare) thus demands a qualitative uniformity between economic realities previously dissimilar. In the end only such abstract, social labour can confer upon goods an exchange value; by so doing, it transforms goods into commodities. Hence, by transfiguring labour, exchange (or more so monetarized exchange) recasts, or metamorphoses things, so that the sequence C—M—C can never be shrunk to C—C without distorting reality because money is no passive medium, but an active agent. From this active agency of money, built into the very fact of monetary exchange, Marx derives the active agency of capital. In the process, however, he gently and methodically obliterates human intervention. Economists who demote monetary exchange to barter would understand money as a mere human convention, notes Marx, as the result of human intervention; by granting money its original power Marx does away with human intervention. Money is a necessary corollary of exchange; and capital, as we shall see, a necessary corollary of monetary exchange. Indeed, if exchange cannot be deflated to barter, the C—M—C sequence can be shown to contain the seeds of the M—C—M’ cycle, which encapsulates the very definition of profits. If a trader uses money to buy commodities to sell them again for money, it stands to reason that he is expecting a greater sum of money at the end of the transaction than at the beginning. This sequence (M—C—M’), like its converse (C—M—C), is an instance of exchange; yet the first bespeaks of profits, when its axioms rule it out. How can one exchange sequence generate profits if exchange in general cannot? In one, and only one way, namely through the selling and purchasing of labour. The circulation of commodities does not beget profits, but the fact that labour circulates against money does. How? Classical economists would have been blind to it because of the confusion surrounding labour. If one aspires to appraise the value of a good by the amount of labour time embodied in it, one does have to enquire how the value of this labour can be assessed. To this question the labour theory of value would offer no cogent answer, since it absurdly supposes the value of labour to be equal to the quantity of labour involved in producing labour. If humans can produce labour, labour itself cannot beget labour. Hence the theoretical impasse: if the labour theory of value declares that the labourer sells his labour, it can only proffer vacuous statements as to the value of this labour. It may aver that the price of the provisions necessary to maintain and reproduce the labourer dictates the value of labour, but it would then confuse 192

APPENDIX 2

labour with the labourer. To be utterly consistent with the labour theory of value Marx eradicates both absurd statements and contradictions: the labourer does not sell his labour as classical economists claim, he sells his labour power. With these clarifications Marx was fully equipped to solve his forbidding paradox. When the labourer sells his labour power and the capitalist purchases it, equivalent values are indeed bartered. From the point of view of the exchange of commodities, the equivalence of things traded (or of their value) and the equality of exchanging partners are not challenged. The labourer receives the exchange value of his labour power; where does profit come from, then? From the dissociation between a commodity’s exchange value and its use value. When I have procured a commodity by paying the equivalent of its full exchange value in money, I then personally resolve what its use value will be for me. I can choose to use it normally, to under-use or over-use it. Once the capitalist has disbursed the amount necessary to maintain and reproduce labour power for a period of time, let us say a day, he can then decide what use he will make of this labour power for this period of time. Let us assume, as Marx constantly does, that six hours of a labourer’s labour time is sufficient to produce a quantity of provisions equivalent to that necessary to maintain and reproduce his labour power. This represents the minimal number of hours that he must work in a day to earn the value of his wages. But the capitalist has not purchased six hours of his labour; he has bought the use of his labour power for a whole day. If he employs it for less than six hours he loses money; he will therefore not allow the working day to be less than six hours. Above, however, he is only limited in his utilization by some maximal number of working hours beyond which his use of labour power would jeopardize its maintenance and reproduction, and would renege the very terms of the contract. Let us theoretically set at twelve hours this maximal limit. If, having paid labour power’s exchange value, the capitalist then employs it for twelve hours, the labourer ends up working six hours for nothing. Therein lies the source of the capitalist’s surplus value, or profits. Money spontaneously becomes capital as it generates surplus-value, and it can only beget surplus-value as it is exchanged for labour power. Capital naturally and necessarily emanates from monetary exchange, as soon as labour power is traded for money and becomes a commodity. Once spawned, and out of the necessity of its own logic, capital then breeds more and more capital so that capital accumulation flows perforce from profits. From this point on Marx demonstrates the intrinsic necessity of capital—how it comes to rule labourers’ lives; how it leads to extracting more and more surplus-value; how it can achieve this through a variety of means, such as lengthening the working day to the point of overuse and in full breach of contract, or increasing the intensity of the work exacted, or raising the productivity of labour. The latter yields mechanization, a mechanization which in turn triggers off a long sequence of social and 193

APPENDIX 2

economic evils, and more control of the labourers’ lives by capital, to the complete denial of the individual. In this respect, Marx’s performance was a genuine tour de force. While staying within the bounds of classical economics he turned its conclusions upside down by following its premises more coherently. With his set of definitions he could show exchange to involve equivalent entities and yet engender inequality. Faithful to the labour theory of value he could evince that profits, or surplus-value, can only arise out of labour investments. They do so, however, not because of the capitalist’s own work, but because of the manner in which he uses the labour power he purchases. Profits and wages are thus intimately connected, in that profits spring directly out of the surplusvalue extracted from the labourers’ labour power. In this demonstration, Marx subtly and astutely avoids putting the blame on the capitalist himself. Had he argued around economic agents rather than economic categories he would have intimated that capitalists over-use labour power, that they act in full knowledge of the fact and are therefore disowning the exchange contract as they enter it, thereby gaining more out of the exchange than they put in. This Marx could not logically and tactically do. By shifting the argument onto economic categories he erased any hint of blame, presented economic events as flowing from an economic necessity beyond individuals’ responsibility. The over-use of labour power followed logically and necessarily from the very properties of capital, not from the malicious intents and deeds of capitalists. In the final analysis, capital swells as labour power works an increasingly greater part of its day for nothing. Capital produces an increasingly greater discrepancy in the economic circumstances of capitalists and labourers. This, however, is but one side of the coin. Capital fosters inequality because labour power circulates as a commodity, and it does so for want of choice. It is a basic disparity in the access to capital which impels labourers to sell their own labour power. Capital may generate greater disparities in wealth out of its own logic, but it presupposes an uneven access to capital which is no intrinsic property of capital, but a purely historical contingency. This takes us to a radically different aspect of Marx’s departure from classical economics. If we call those statements which pertain to systems of explanations theoretical, and epistemological those which pertain to the concepts used in theoretical propositions, the above theoretical construction encapsulates for me the essence of Marx’s main theoretical divergence with classical economics, of what one could call his main theoretical critique. This theoretical critique, however, is wedded to an important epistemological one, of which there are two main components. On the one side, I would place Marx’s attempt to elaborate a more rigorously scientific economics, an economics which explained economic phenomena from other economic phenomena without invoking the interfering and correcting hand of Man. The method may be Hegelian, but the aim is positivist. Marx starts with 194

APPENDIX 2

economic categories—those of value, of labour, of commodities, of exchange, circulation, wages, profits, and so on—and seeks to deduce all economic laws as well as all observable economic phenomena from considerations of these categories in themselves, from a close understanding of their meaning, and through it, of their own logic and contradictions. This yields the ‘dialectical’ reconstruction of the ‘genesis’ of the economic categories of capitalism. As we have mentioned, previous economists had to summon human action and volition to explain the origins of money. Completely consistent with the materialist premises of a true science of economics, Marx searches for the laws of motion and acceleration of capital in the truest mechanicist fashion, from an examination of economic categories themselves, without resorting to the interference of human agents. The material conditions of production dictate economic laws. Money logically derives from exchange, and necessarily brings about its own transformation into capital. Money and capital are no passive tools in human hands, they are themselves active agents, autonomous, obeying laws of their own, so that capitalism heralds the rule of capital, not of capitalists. Capitalists have to comply with capital’s intrinsic necessity, as much as labourers. In this regard, Marx is more coherent and systematic in his scientific posture than were his predecessors. Science searches for laws, and laws bespeak necessity, a necessity which bends individuals to its rule. Capitalism is not the machination of evil individuals called capitalists; it is the necessary corollary of monetarized exchange, leading inexorably to merchant capitalism, and further to industrial capitalism, finally to succumb under the weight of its own contradictions and give way to socialism. Paradoxically, Marx pushes to its furthest the scientific logic of classical economics, while denouncing the contingency behind the necessity that such a scientific discourse implies. Classical economists would have done good scientific work, but a work both imperfect and incomplete. Imperfect in that it understood the necessity of capitalism as a natural necessity, and its truths as eternal truths. It unveiled the mechanisms of a world governed by commodities, and regarded this order as a natural one. In this, classical economists would have been victims of an illusion because the world they studied was also the one they lived in. They would have lacked critical distance. Their economics would be relatively satisfactory to depict the rule of capital, but would remain naïve in not realizing that the laws of capital are those of capitalism only, of a purely historical product preceded by dissimilar forms of economy, and doomed to be supplanted by yet more contrary ones. More specifically, it would be a peculiarity of capitalism to subordinate social relationships to relationships between things. It will be recalled that monetarized exchange transforms goods into commodities by converting individual into social labour. The social character of labour thus emanates from the agency of 195

APPENDIX 2

money, so that the social relationships of exchange in the capitalist mode of production actually flow from the exchange of things. Social relations are governed by the exchange of commodities because this exchange refashions individual into social labour. By describing relationships between commodities, and assuming that the laws regulating these relationships are eternal, classical economists fell victim to the fetishism of commodities: to the fact that, through monetarized exchange, commodities become detached from their producers who, on the contrary, appear attached to commodities which move and relate to one another. For this to happen, Marx observes, some social and historical conditions are necessary, such as the isolation of so-called free producers. Having driven to its logical limit the study of classical economics’ categories and extracted the theory of surplus-value and capital accumulation from them, Marx then recognized that these economic categories themselves are the product of specific historical and social conditions. They result from the social relations of production specific to capitalism. Hence his dual materialism: it is historically determined social relations of production which in turn command both the economic reality (money, capital, and so on), as well as the categories evolved to analyse them. But Marx assumes implicitly (and in places quite openly) that those categories faithfully represent the reality they serve to describe and analyse. The failure of classical economists did not lie in wrongly connecting its categories to the world it studied; it partially inhered in not linking them enough (invoking human interference), but mostly in not appreciating that their own categories, as well as the realities they sought to describe and analyse, were both historically specific products. Classical economics’ truths would thus be historically contingent, although Marx’s history contains its own necessity. Ensnared by the fetishism of commodities, or by the particular mode of operation of capitalism, classical economics is thus imperfect; failing to be entirely logical with its own premises, and failing to attach profits to wages and accumulation of capital to pauperization of the labour force and to class antagonisms, it is also incomplete. This would account for Marx’s two-pronged endeavour in economics: to perfect classical economics by providing the historical sketch leading to the emergence of capitalism and following capitalism’s development, and consequently to complete it with his theory of exchange, of money, of wages, leading to the theory of surplus-value and capital accumulation, the two movements merging into one when dealing with the development of capitalism itself.

MARX AND CLASSICAL ECONOMICS: A CRITICAL FAILURE It is in matters epistemological that Marx in many ways led the way, and that some parts of our analyses superficially converge; superficially only, for the differences far outweigh the similarities. 196

APPENDIX 2

Marx understood that classical economics describes the economic universe in terms of relationships between things rather than in terms of relationships between individuals, but he believed this classical representation to be accurate, supposing it to be a corollary of a capitalist economy to subordinate social relationships to the movement of commodities. On the contrary, I hold this as an instance of reification, I deem that this reification of social relationship distorts reality, and I hold economists responsible for this disfiguration. Marx does not write of reification (a way of conceptualizing) but of social relationships having come to be mediated through things (a social reality); in brief, he observes the subordination of social relations to things where I espy reification, and he considers this subordination to flow from capitalism, whereas I understand reification to be a manner of representing the economic universe.1 As a result, Marx shares the very conceptual handicaps that plague Marshall’s Principles, and which surface as early as Ricardo, if not long before. Marx may appreciate that economic categories emanate from historical and social conditions, without putting these observations to good conceptual use. Like his predecessors he is concerned, if not obsessed, with the question of value, and adopts its labour theory variant, together with its inherent substantialism. Further, of social relationships and groups there is no more in the Capital than in Ricardo’s or Marshall’s Principles; we find a discourse about things, albeit a discourse purporting to be about social relationships and groups, as with Ricardo and Marshall, and as with the latter, equally reifying. To appreciate its subtle operations in the Capital, let us start where Marx begins, namely with exchange. On this topic, Marx’s first writings depart considerably from his later ones. In Misère de la philosophie and Capital et travail salarié he apprehends exchange as a bilateral activity. From the Critique onward, he no longer does; the theoretical reasons are obvious and shall not detain us here. The epistemological ones, on the other hand, will. In the Critique, as in Book I of the Capital, Marx starts with exchange as an empirical phenomenon and does appreciate its social premises (the ‘free individual’) in a capitalist economy, but he immediately leaves them behind to move on to the meaning of commodities for the people involved in exchange. Both opuses open with an analysis of commodities, or more specifically with cogitations on how the commodity as a category implicitly appears in an exchange relationship, and both books immediately focus on the relationships between commodities themselves. Hence his ambivalence. On the one hand he recognizes that it is not an intrinsic property of things to exchange themselves, and on the other, he quite openly admits that in monetary exchange things get to exchange themselves, so that an economic study of capitalism must therefore start from the exchange and circulation of things, before grafting individuals onto them. 197

APPENDIX 2

In the process, the same distortions that we witnessed in the Principles emerge. Exchange, as a bilateral activity linking two individuals, is absent from both the Critique and the Capital. Individuals do not exchange things; things exchange themselves (‘Les choses s’échangent entre elles’, writes Marx in the French translation, which he reviewed and edited himself, and which he recommended in 1875 over the first German edition). But this transaction should in no circumstances be construed as a form of barter. What may superficially be comprehended as the exchange of things presupposes its decomposition into two antithetical actions, namely selling and buying. But whereas these two activities were still apparently bilateral (adding up to four activities) in Misère de la philosophie, they no longer are from the time of the Critique; from that moment onward, we discern the very mode of representation prevalent in Marshall. From the Critique onward, the bilaterality of exchange has vanished; rather, it has been translated in the most curious fashion. Where in monetary exchange an individual simultaneously sells money and buys a commodity, whereas his exchanging partner sells a commodity and purchases money, Marx sees only two non-reciprocal activities, namely selling and buying. He further decomposes purchases and sales into two separate ‘moments’ however, presenting two separate sets of relationships—albeit between economic quantities, or measurable economic categories: thus, sales surface as ‘relationships between commodities and money’ (the first C—M segment of the C—M—C sequence) andS purchases as ‘relationships between money and commodities’ (the M—C segment). As a result, Marx methodically exiles individuals from his study of exchange, so much so that everything is portrayed in the language of electromagnetism: commodities attract and repel one another, the chain of their exchanges (described as metamorphoses) amounting to their circulation. Thus instead of positing that monetary exchange is made up of one sequence only, namely C—M, which simultaneously amounts to a sale and purchase of money and of a commodity, Marx furtively invites the notorious barter back by adding another commodity to the chain, and dividing the chain in two segments (where classical economists saw only one) because of the metamorphosing power of money. Overall, let no one be deluded; it is Marx himself who translates social relationships into relationships between objects, not capitalism. But Marx’s reification of economic organization is not confined to exchange; it also extends to the study of labour. If it is possible to disect exchanges into isolated sales and purchases, the case is different with labour. Labour results from the activity of labouring. As with exchange, Marx (as do the classical and neoclassical economists) sunders this activity in two components: labour in its virtual form—that is, in the labouring agent—and labour in its actualized form—that is, in the product in which it is embodied. 198

APPENDIX 2

In reality, labour is neither reducible to the labouring agent nor to its product; it links agents to products but exists independently. Economists, however, and Marx paramount among them, seem unable to steer away from this reductionism. Let us examine the first part of this assimilation, namely that between labour and the labourer. By treating labour as a factor of production, classical and neoclassical economists confused in fact labour and the labourer; Marx discerns it among his predecessors, and although more cogent on the topic, carries it on himself. In reality, renting a machine out is not selling it, and a machine, as something potentially capable of labour, is also distinct from its labour. In writing about machines one could evoke ‘labour power’ as a euphemism to describe the machine itself; and so it is with the labourers’ labour power. It denotes the ‘means of production as virtually capable of labour’, that is, the individual himself as labourer. By selling their labour power, labourers would therefore be selling themselves; this Marx posits very candidly, and draws from it another metaphoric reification. From the metaphoric expression that factory labour is like slavery’, and in some cases worse than slavery, Marx conceptually equates wage labour with slavery (Schumpeter did recognize that Marx considered that the capitalist more or less buys the labourer [1954:649]). This assimilation springs from a general confusion about labour. To understand it, let us use an analogy with machines; if I rent a machine out, I sell its labour, that is, the use of its labour power (hence renting a machine out=selling the use of its labour power=selling its labour), but I do not sell its labour power itself, since I would then be selling the machine. When a labourer rents himself out (sells his labour), he is trading the use of his labour power for money, and the employer is purchasing this use, not the labour power; labour is here synonymous with ‘use of labour power’—the actualization of a potential. It is neither the potential agent (labour power), nor the actualized product. Therein lies the confusion: from the metaphorical equation between wage labour and slavery Marx draws an ontological one: one no longer sells one’s labour, one sells oneself. Here, as with Marshall, the labourer is merged with his labour. This reification of labour, however, is but one half of the problem. The other comes out in its starkest relief in his discussion of exchange and money. Marx portrays money, let us recall, as an active agent metamorphosing goods into commodities. Thus, labour endows things with value; or, more specifically, exchange brings out the labour content in goods because it imposes comparison and measurement, and by this very process transmutes the labour contained in goods and metamorphoses the goods themselves into commodities. Value is here synonymous with exchange value. In his study of value, intimately wedded to that of exchange, Marx singles out the relationship between labour and its product and assimilates the two, 199

APPENDIX 2

seeing the product as embodied labour: the product is therefore labour. Having demoted the labourer to his labour and assimilated labour to its products, Marx then goes on to study their circulation, and from this movement, draws further inferences about labour. Let us follow this more closely. In the Critique and the Capital, it is clearly the movement of products which affects and transfigures labour (from individual to social labour), thereby affecting and altering its products themselves (from goods to commodities). To put it differently, the emergence of widespread monetary exchange metamorphoses things by transmuting its labour content. In the end Marx’s dialectics amounts to saying that the movement of things modifies them, or that things are ontologically sensitive to being compared and measured, especially through a universal equivalent called money. Not satisfied with reifying social relationships, Marx compounds the reification by endowing his hypostatized categories, be they money or capital, with a power of their own. This is a case of compounded fetishism. Not only does he unwittingly espouse the reifying mode of thought slowly established by classical economists, not only does he add to it his own metaphorical reifications, but he raises them to a higher power, so to speak, by investing money with this truly alchemical power. He is thus doubly guilty, because he had already identified part of the problem. Unfortunately, the transcendental power of money and capital is a creation of Marx’s economics, which in this respect amounts more to a phenomenology of our own cultural experience than have previous and ulterior economics. Having breathed life into what others saw as simply quantifiable economic categories (money, capital, and so on), Marx then reasons that classical economists were victims of these active economic categories. In the Critique and the Capital Marx displaces the locus of economic action; it would inhere in the economic categories themselves, which live a life of their own and lord it over individuals. Unable to recognize this, classical economists would have presented economic action in terms of natural laws. Marx would have discovered that categories such as money and capital were historically determined, and that it was not Nature which governed capitalist production but money and capital themselves, blessed with a power and a dynamics of their own. There thus breathes in Marx’s economics the same amount of necessity and laws, not laws of nature but laws of the movement of these particular historical creations, money and capital. This classical economists would have been blind to, describing scientifically the action of money and capital, but as if they were but the surface phenomena of an underlying, immutable and eternal nature. In this critique, Marx inverts reality. He animates economic categories, going further than anyone else in withdrawing individuals from the workings of capitalism, then to incriminate other economists of having been duped by 200

APPENDIX 2

those categories, assuming that capitalism itself (already a reification) caused this fetishism. Shall we rather say that Marx has been taken in by the logic of his own positivist objectives, of his need to indict capitalism without appearing to denounce capitalists, and of the Hegelian bend of his own modes of thought? The result is economic animism, as distinct from classical and neoclassical economics’ reification of social reality. But what happens to individuals in the Capital, and to the social dimension in Marx’s economics? Through the metaphorical excesses he is extremely fond of, Marx gives the individual the place which he understands him to occupy in capitalist production itself. The Marxian individual in the Capital is either a ‘labour power-holder’ or a ‘capitalholder’: since both labour power and capital are commodities to Marx, the individual is but a commodity-holder, and commodities rule his life. Marx’s economics is one where individuals literally see themselves attached to things (as commodity-holders), or linked to one another through things (through their relationship to commodities exchanged, or to capital, or to machines). Things pervade Marx’s economics, in direct relationship to individuals, or mediating all relationships, and it is their impact on individuals’ lives which he studies. The Capital thus portrays passive individuals on the one hand—simple excrescences of the material world—and classes on the other—the class being but an arithmetic summation of individuals. In between the two, relationships and groups are as absent as they are in Marshall’s economics. Marx’s manufacture or factory, for instance, is no group of production, but sums of individuals relating to one another through specific means of production and through their specific relation to these means of production; this, however, does not constitute a group. If Marx studiously avoids the classical self-interested maximizing individual, his failure adequately to grasp relationships and groups condemns him to a variant of classical economics’ reifying economics. In between the isolated individual and the arithmetic class there can only be strange connections to the social dimension. When he offers his very fine studies of the social implications of various economic phenomena, he shows himself to be a sociological economist at its best, but interestingly enough, he can only recapture the individual through things— through the movement of money and capital in its various historical guises. There is a sociology in the Capital no doubt, but a sociology added on to a reifying economics; one needs more to achieve a true sociological economics. Marx’s epistemological critique thus stops short of being fully epistemological. He observes that classical economics is about things, and accepts that it should be so if it aims at being scientific. He does not suppose distortion on the part of classical economists, but naïvete, more than anything else, the naïve faith that capitalism’s truths are eternal ones. 201

APPENDIX 2

Classical economics, Marx thought was an adequate, although a naïve representation of reality, which could be perfected and completed; this he strove to accomplish. In this, he ranks among the classical economists, perhaps the greatest, and of this economics he shares the main structural vices, namely its Aristotelianism and its concomitant substantialism and reifying proclivity, which rule out the very possibility of it being perfected and completed.

202

NOTES

INTRODUCTION 1 Dates in parentheses indicate the edition consulted, dates in square brackets indicate the original publication date. For ease of reference, both dates will be given at the first instance, thereafter only the date of the edition consulted will be given.

1

A BACKGROUND TO THE NEOCLASSICAL COSMOLOGY

1 In the light of Howey (I960), Streissler (1973) and especially Mirowski’s work (1991), one can truly wonder whom to place at the origin of the Austrian school, and I shall place Wieser at the origin of the Austrian marginalist school, without any personal commitment on my part. 2 An analogy, however, is no homology. If the spirit of the New Science pervades The Wealth of Nations, and if much of its formulation betrays the inspiration from dynamics, Adam Smith was nonetheless more of a moralist than a physical scientist, and he did not appreciate the distinction between inertial motion and acceleration. He therefore struggled to explain both why production was ‘set in motion’ and why it was accelerated. In dynamics, the two problems are the same. 3 In fact, this severely qualifies the influence that Mirowski believes Comte to have enjoyed in the history of economic thought (1991:355). Despite the fact that he originally called the analysis of society ‘social physics’ Comte did not propose a Galilean, Cartesian or Newtonian model for its study. On the contrary, he suggested a biological model, and an unambiguously ‘synthetic’ approach. To that extent, and in so far as Comte influenced Mill, the marginalist revolution could only reject his message. 4 On this topic, a word of caution is necessary. Blaug distinguishes methodological individualism from ontological individualism; the former one would decree that there is more in the whole than the sum of its parts, but would try to understand the whole by starting with the behaviour of its parts, whereas the latter would hold that there is nothing in the whole but the sum of its parts, and that the laws are to be found in the behaviour of the parts. The distinction is logically valid and does apply in some cases (such as the anthropology of Tylor), but it must be handled with extreme caution because it originated with Comte and it has retained the connotation he attached to it. With 203

NOTES Descartes and Newton, for instance, there is no doubt that the whole (solar system) exhibits features radically different from the parts. Particles are assumed to move freely in a straight line, whereas orbital movement is coerced and elliptic. Nonetheless, the New Science postulated that no laws could obtain for the whole, that did not also obtain for the part. Fundamentally, the only laws were those which regulated the movement of particles, so that even though the whole did possess features dissimilar from those of the parts, those features were to be explained in terms of the laws governing the parts. This stands in marked contrast to the tenets of vitalism in nineteenth-century biology, and the distinction between ‘analytical’ and ‘synthetic’ stems from this contrast. As I have demonstrated elsewhere, Hobbes stands at the origin of so-called ‘individualist’ theories in the social sciences. He assumed that the State of Society displayed characteristics extremely different from the State of Nature but that, nonetheless, its existence was to be deduced from the laws of motion of the parts (the individuals in the State of nature) (Verdon 1982). According to Blaug this would amount to an instance of methodological individualism, but from the point of view of the development of social sciences it came to be equated with ‘individualism’; its inspiration was that of the New Science, as it culminated in Newtonian physics. Comte initiated this bifurcation, and from this point on ‘individualist’ theories (those of Hobbes, of the rationalists, Utilitarians and others) came to be opposed to holistic ones. Holism has since meant that the laws ruling the whole are separate from those ordering the parts, and that sociological analysis must therefore proceed from the whole to the parts. Although some rare instances of ontological individualism can be found in the social sciences, the distinction between ontological and methodological individualism might easily lead to confusing methodological individualism with holism. Historically speaking, most individualist (or social action) theories have only espoused methodological individualism, and ontological individualism is better left aside and mentioned only when the analysis requires this special distinction. 5 Bachelard argued that science achieved a completely relational view of the world only from Einstein onward (Bachelard 1934, 1940), but Newtonian science can be presented as a first step towards this relational understanding of nature. Although Mirowski sees in classical political economy the discovery of conservation principles in the transmission of a substance and in neoclassical economics a transition from Cartesian to proto-energetics metaphor, he never relates the two in terms of substantialist and relational definitions. I prefer to look at the problem in standard Bachelardian terms, since the contrast already lives in the works of Jevons and Marshall, among others. 6 The historians who see Marshall as someone who translated Mill’s economics in a differential calculus (Bharadwaj 1978; Schumpeter 1954) completely ignore the passages where Marshall inveighs against Mill’s theory of distribution. Mill declared that distribution completely escaped the rule of natural laws, and Marshall openly sough to belie him on this point and show the law-like behaviour of distribution. This, actually, seems to me the key element to understand most of the peculiarities of Marshall’s economics. 7 It should be mentioned that the 1938 reprint of the eighth (1920) edition of the Principles has been used for this study. When no dates are mentioned in discussing the Principles, references will automatically be to that edition. Furthermore, I am aware of Schumpeter’s pronouncement that he who only knows Marshall’s Principles does not know Marshall; I simply do not agree with it. For the purpose of an epistemological study, the economics of Marshall is that of the Principles. The reasons will become clear as the argumentation develops. 204

NOTES 2 PROBING THE NEOCLASSICAL COSMOLOGY 1 Stigler identified the germs of alternative cost theory in the Principles (it would underlie Book V: 1968:66) and Tiwari beholds it in Marshall’s treatment of rent (1982:l6l). Strictly speaking, to Marshall the cost of money is not the sacrifice of an opportunity lost, but that of alternative commodities lost. It may sound exactly the same but it stands midway between Jevons’s case of barter and the full-fledged theory of alternative costs. We shall therefore refer to it as a quasi-opportunity cost formulation. 2 In this presentation, openly aiming at plumbing the cosmological substructure, I neglect what I consider to be technical details, which are admirably discussed by Blaug (1985). For instance, I wilfully ignore the question of the ceteris paribus in Marshall’s definition of demand, whether it is contradictory because, as prices increase, real income dwindles (argued by Knight, mentioned in Fouraker 1958:277) and Friedman’s alternative interpretation of Marshall’s demand (Friedman 1949) to keep constancy of real income. I also completely avoid the whole discussion of the measure of utility, whether utility functions should be general or additive, whether utility measurement should be ordinal or cardinal, whether Marshall’s demand schedules should be considered sales function (Blaug 1980:405), in contrast to Walras’s supply and demand curves, and so on. These details are epistemologically peripheral and relatively irrelevant. 3 This can easily be illustrated with a group of production. Let us take a society where father and unmarried sons work the land together, the women being spared agricultural tasks; more precisely still, let us imagine a given group of production composed of a father and of his three unmarried sons. Although the group may be described in terms of social relations, it cannot be defined as its sum; one cannot add the relationship between brothers A and B to that between brothers A and C, to that between brothers B and C and to those between each son and the father, to reach a general definition of groups of production in this society. In our more specific illustration, one cannot sum up six relationships to demarcate a group of four persons. And yet, this is universal practice in social sciences. How can social scientists presuppose groups to be the sum of social relationships? Because they observe this group of four persons, for instance, depict its composition in terms of relationships, and infer the group to be but their sum. This, however, is empirically and methodologically erroneous. The only way of generalizing about the social organization of production in our illustrative case is to abstract from those descriptions criteria of membership. From our paradigmatic group we could thus infer that groups of production in this society recruit on the basis of the following criteria: patrifiliation, male gender and the celibacy of sons. If a man has no son, he will produce alone; in that particular instance, the group would be composed of a single individual. This is no simplification, but an operational corollary of this set of definitions. On the other hand, if individuals fall in this category (male gender, unmarried and legitimate children of that man) they can join the group’s ranks. More abstractly, in order to define groups rigorously, and properly to delineate the social organization of a society, groups and networks are best described in terms of the recruitment of single individuals meeting some criteria, or falling in some categories. These criteria often include relationships (patrifiliation, siblingship, kinship, and so on) but the group’s minimal components are individuals, not social relations, and no intermediate step is to be found between individual and group, in so far as its composition is concerned. 205

NOTES 4 Because of the extraordinary confusion surrounding the relationship of micro-to macro-economics, and whether neoclassical economics does have a macroeconomic counterpart outside quantity theory, I will provisionally assume that whenever individual variables are summed up we get a macro-economic magnitude, until we can reach a clearer stance on this matter. However, I shall as much as possible avoid using ‘macro-economic’ itself and will strive to replace it with synonyms. 5 I put bargaining in brackets because it is absent in Marshall’s economics, and neoclassical economics in general; what Marshall superficially depicts as bargaining, and very rarely so, is in fact the tâtonnement towards equilibrium price, the process whereby the exchange partners find the equilibrium price at which equivalent marginal utilities are exchanged. 6 Whether one starts with Marshall’s naïve pseudo-empiricism or with sophisticated indifference curves, the outcome is the same: prices must ultimately result from an exchange. Blaug openly recognizes that the demand schedule of consumers is the marginal rate of substitution schedule (1985:341); since in and of itself a demand schedule cannot determine a price, it must intersect something else. Would it be a ‘budget line’ or ‘budget constraints? Tsiang has demonstrated that the so-called ‘budget constraints’ introduced to by-pass the intersecting curves of supply and demand are but a euphemism for ‘fair exchange constraint’ (Tsiang 1966). We could also mention Arndt’s comment that budget lines and income constraints are completely contradictory within the context of indifference curves, since they introduce as explanans what is to be explained (Arndt 1984:157). 7 My analysis here converges with Arndt’s, but not completely. Arndt separates demand from consumption as the physical from the economic. From his point of view, if consumption (as ‘enjoyment’ of a good) can be defined in terms of utility, it refers to a physical reality (assessed in terms of needs, desires and satisfaction). But, as he writes, ‘[g]oods are not ‘given’ to [households or consumers]; they must be demanded on the market before they can be “enjoyed”’ (1984:29–30), from which he concludes: ‘The consumption of free goods is determined by pleasure: in this case, everyone can be guided solely by his needs. Demand for economic goods, on the other hand, is regulated by economic scarcity, and scarcity is not an individual but a social phenomenon’ (p. 30). Economists would thus have confused demand with consumption, a point also stressed by Chick, who remarked that in the utility approach to consumption it is impossible to distinguish consumption from purchasing (1983:45). Although I totally endorse Arndt’s (and others’) critiques, I wish to retranslate it in terms of activities. The advantage of focusing on activities, rather than on the notion of scarcity, will impose itself when discussing Keynes. 8 Chick sees this definition as a subset of another, namely that of equilibrium as ‘a point of rest; [where] forces leading to change are either absent or counter-vailing’ (1983:21), which neoclassical economics would conflate with the first. This notion of equilibrium as rest will be provisionally left aside, since I have reserves about the adequacy of its formulation. 9 I do regard money as a commodity, but a commodity endowed with very specific attributes, and which thus needs to be distinguished from ‘nonmonetary’ commodities. For the sake of simplicity and elegance however, the term ‘commodity’, when not qualified, will be used to denote a ‘non-monetary commodity’. 10 With an important difference, however, in that Jevons’ barterers evaluate the commodity acquired in terms of commodities sacrificed, not of opportunities. This is but a first step towards the formulation of alternative cost theory. 206

NOTES 11 This is also in need of qualification. The marginal utility of money spent can only result from the activity of spending it, therefore from concrete activities of exchange. It could only be derived from actual transactions. But individual demand curves do not depict in any manner anything that happened, that is, the results of activities (actual purchases), but map out an individual order of preference. To that extent, it is also completely erroneous to write of the marginal utility of money spent, since that money has never been spent; it would better be described as the ‘marginal utility of hypothetical purchases’. 12 Walras would have himself admitted that what he called the marginal utility of numéraire was nothing but Marshall’s marginal utility of money (Mirowski 1991:245). 13 As Walras and Jevons themselves believed. See in particular Jevons 1931 [1870]: 86. 14 It should be stressed, however, that Marshall does introduce the asymmetry of bargaining between labourers and employers, but hastens to add that this asymmetry, as well as many other ‘realistic’ features, are mere ‘peculiarities’ which act as ‘disturbances’ in the experimental model, but do not invalidate it. In fact, he will write that they have to be omitted if we want properly to perceive the ‘laws’ governing the price of labour. 15 Thus, writes Hutchison, ‘Professor Morgenstern has shown that such a postulate may give a nonsensical indeterminate situation the very reverse of equilibrium’ (Hutchison 1965:94), and he concludes: ‘A game of chess or bridge with all players having perfect expectations of one another’s play and then adjusting their own, could not be played’ (1965:97; see also Shackle 1972:156). 16 Arndt develops this theme most thoroughly but contends that neoclassical economics eliminates both time and space. I believe that it evacuates time but internalizes space, however meaningless an ‘internal space’ may be. I see this notion of ‘internal space’ to be related to the field formalism that Mirowski has uncovered in neoclassical economics. 17 In the second passage where the word ‘exchange’ does occur, Marshall betrays his unspoken premises: it is objects that exchange themselves, not individuals exchanging objects: In this case [of an imaginary world in which everyone owns the capital that aids him in his labour—hence of an equal distribution] the problem of value is very simple. Things exchange for one another in proportion to the labour spent in producing them. If the supply of any one thing runs short, it may for a little time sell for more than its normal price: it may exchange for things the production of which had required more labour than it had. (p. 511, italics added) 18 The superficial reader who would confuse this epistemological analysis with Marx’s critique of political economy about classical economics and the fetishism of commodities should not fail to consult Appendix 2. 19 Out of the thousands of quotations that could be adduced to substantiate this thesis, I have chosen the following one at random, from an undisputed classic: commenting on von Wieser, Stigler writes: ‘This principle does not operate in the case of resources which are used in only one product. Here the possibility of competition between products is absent…’ (Stigler 1968:162, italics added).

207

NOTES 3

STRANGE COSMOLOGICAL BEDFELLOWS

1 On the topic of costs, money also makes a difference. Jevons’s barterers did not sacrifice opportunities but commodities, and we are at best dealing with an embryonic OCT. With Marshall, however, the consumer actually evaluates the opportunities (or competing uses) lost by committing money to this rather than that commodity—and we are in this instance coming very close to an OCT formulation. 2 Parsons, in his famous article of 1931, had already argued that the whole of Marshall’s social philosophy and vision of man led him to stress activities over wants. This, however, does not agree with the general unfolding of the Principles. In the first three books, wants, consumption and demand indisputably stand as the motive causes, the forces which set production in motion. It is only further along, after having introduced the long-run experimental period, that Marshall had to contradict himself and present activities as being endowed with their own intrinsic dynamism, pulling wants in their wake. 3 Examining Fisher’s table of analogies between economics and the theory of the field, Mirowski notices some discrepancies, such as the fact that Fisher preserved the notion of disutility as negative effort (in the most orthodox Mill-JevonsMarshall tradition) without really explaining it (Mirowski: 1991:230). When one looks at the problem in terms of economic activities and sees the Aristotelian survivals, it is then quite obvious that Fisher still straddled the two worlds of economic motion: motion of value, and motion of economic agents (activities). When dealing with the latter, he could not escape the Aristotelian fold. 4 Let us take the alternative cost formulation. Does it differ in any significant way? Not in the least. In it, the individual also lacks any inner propensity to labour, produce, employ, save or invest, and will be prodded to do so only if the marginal revenue to be expected from the goods acquired is greater than the costs arising from the opportunities foregone. There always lurks a hidden disutility, merely the opportunity foregone, which has to be overcome in order for both spatial and economic motion to happen. The result is exactly the same; interest, wages or rent are indispensable, as prices, to set services in motion. In and of himself, no agent harbours any proclivity to movement. Thus, behind opportunity costs breathes the same Aristotelianism, perhaps slightly veiled by the distinction between spatial and functional movement. Every activity incurs a cost because something is always sacrificed and nothing gets displaced, and therefore nothing moves functionally, unless this movement affords a reward greater than the sacrifice. A force must always surmount a resistance for any economic motion to take place. Neoclassical economics, be it of the Marshallian, the Austrian or the Walrasian vein, is quintessentially an economics of resistance to movement, with some quantum elements thrown in because of the timelessness. Indeed, either things resist movement, or they instantaneously accelerate and then move at a maximum velocity from which they oppose further movement; in between rest and ‘movement at equilibrium’, however contradictory this proposition, there is no in-between velocity. This Aristotelian legacy highlights once more the paradoxes of perfection. Neoclassical economics’ perfect market was so conceived as to remove from it all hindrances to movement, social and physical. It is a strange irony that the obstacles, ousted from the outside world, were simply displaced and implanted within the individual. Hindrances to motion henceforth flowed from within, not without. If there is an intellectual opportunity cost in the history of neoclassical economics, this must be it. 5 Does not marginal analysis belie these assertions? At a first glance, and as most neoclassical historians of economic thought relentlessly hammer away 208

NOTES (especially Schumpeter), marginal calculus is theory-free, an innocent tool which can be applied to any economic problem, to any type of economy, be it capitalist or socialist. It would further rest on a set of relational definitions, like Galileo’s very definition of velocity as a rate of change between space and time (ds/dt). This view, however, overlooks a critical dissimilarity. In Galileo’s dynamics time and space are two dimensions within which objects move, both necessary to measure this movement. Velocity is a rate of change, but of two independent dimensions; one dimension does not influence the other, does not interact with it. Calculus at the margin also pretends to compute rates of change, but rates of change with a difference. In marginal analysis the two variables are not independent; they are related like the dimensions of movement within Aristotelian science. Admittedly, this calls for an explanation. In Galilean dynamics the role of time is not to overcome space. Space is no ‘resistance to movement’ which would have to be conquered by a force called time. In and of themselves, space and time are devoid of forces; forces have to be brought from outside (they are exogenous) to explain acceleration but do not enter the calculations themselves. In Newtonian dynamics the second derivative of space over time measures the impact of a force (knowing the mass), but does not describe that force. Force reappears in a different equation (F=ma), where a, defined as the second derivative, measures the extent of the force, given the mass. But the force itself is no part of a rate of change; it is the cause of a rate of change of a rate of change. Marginalism does not exhibit anything similar because the force itself is part of the equation expressing a rate of change. It is not manifest at a first glance, especially when the rate of change is defined in terms of costs and numbers, when the first derivative is said to express the increase in costs following an increase in numbers. But the equations veil the fact that the increase in numbers must logically be pondered by a price. This is concealed in the formulation of the problem: given an increase in a quantity (of labour units employed, of output, of consumption), what will be the corresponding increase in costs? Stated in those terms the problem may seem to express a true Galilean-like rate of change, but only because the most important element has been struck out. The full question should be: how far will the individual (hiring, producing, purchasing) go on executing this activity? And the answer can be found only by weighting the quantities by prices, thus laying bare the true underlying equation: the quantity-times-price can then be seen as a force overcoming the resistance (costs). Then the rate of production, or employment, will increase (accelerate) until the costs have risen to a level that matches the quantity-times-price. In other words, the complete formulation of the problem (rather than the abstract formalization which veils the most crucial elements) always involves a force (quantity×prices) necessary both to set the activity in motion and to accelerate it, but with resistance (costs) increasing all the way and ultimately grinding it to a halt (or a uniform velocity). Behind the marginal calculus an individual always hides (hence the absurdity of simple rates of change of quantity over costs) and, the instant the individual is put back where he belongs, we uncover an illusion of a rate of change, an illusion covering up a most Aristotelian formulation, that of a ratio between a force and a resistance, where F/R=v, if and only if F>R. Marginal analysis is thus no unimpeachable tool; it is a technique fully anchored in a very specific cosmology. The tool is more than adequate, in fact, for what it is meant to accomplish because it is the cosmology in which it is imbedded which is 209

NOTES irredeemably flawed and can never provide the leaven from which a true science of economic dynamics will grow.

4

FROM COSMOLOGY TO LANGUAGE

1 Pace Stigler (1968) and even Hutchison (1953), I concur with Joan Robinson who contends that all the refinements achieved in order to expunge economics of the notion of utility have not freed economics from its metaphysics (Robinson 1964:50)—what I would call its cosmology—and that utility still lives hidden behind the indifference curves and their attendant marginal rates of substitution. 2 Marshall’s restatement of the Ricardian theory of rent is too well known to require detailed exposition here. Capital and labour will be applied to any piece of land out to a margin of cultivation, both intensive and extensive, at which the last dose of capital-and-labour produces an additional product just sufficient to cover the cost of the dose. The marginal application measures the return to capital-and-labour; rent is a residual. (Stigler 1968:90) 3

The term Quasi-rent will be used in the present volume for the income derived from machines and other appliances for production made by man. That is to say, any particular machine may yield an income which is of the nature of rent, and which is sometimes called a Rent; though on the whole there seems to be some advantage in calling it a Quasi-rent. (Marshall 1938:74)

4 What are we to do with labour? Labour can never be a factor of production: it is the service of a factor of production, namely the labourer. Therefore in so far as labourers cannot be supplied in the short term, their ‘returns’ (wages) should also partake of the rent! 5 Once more, the superficial reader who could mistake these conclusions with Marx’s critique of classical economy should consult Appendix 2. 6 Checkland has shown that Marshall was implicitly defending capitalism’s inequalities by clinging on to the law of diminishing returns, and that he was overtly against the redistribution of incomes (Checkland 1957:338–9, 341). 7 This casuistry begins with the so-called ‘progenitors’ of marginalism themselves, who would have either been slightly left of centre (Walras) or would never have heard of Marx. For the hard of hearing, the evidence will be briefly reviewed: J.S.Mill questioned the distribution of capitalism, and Jevons (as well as Marshall) almost neurotically used Mill directly as their target. Walras had not only read Proudhon but wrote a book against him and openly wished to erect economics upon new foundations to fight socialist ideas (Samuelson, A. 1990:140). As to Menger, the following lines should speak for themselves: It may well appear deplorable to a lover of mankind that possession of capital or a piece of land often provides the owner a higher income for a given period of time than the income received by a labourer for the most strenuous activity during the same period. Yet the cause of this is not immoral, but simply that the satisfaction of more important human needs depends upon the services of the given amount of capital or piece of land 210

NOTES than upon the services of the labourer. The agitation of those who would like to see society allot a larger share of the available consumption goods to labourers than at present really constitutes, therefore, a demand for nothing else than paying labour above its value. (Menger, Principles of Economics: 174, quoted in Fisher 1986:185)

5

KEYNES’S ECONOMICS: WHAT KIND OF REVOLUTION?

1 In the rest of this book the following convention has been followed. All quotations from the General Theory have been taken from the Collected Works, volume VII, published by the Macmillan Press in 1973. When only a page number is indicated, it will automatically refer to this volume. When quoting excerpts from the prefaces to various editions (paginated in roman numbers in volume VII), I shall then include the volume number (VII:xx, for instance), and I shall also do so at the end of indented quotations. Finally, all other quotations will mention the volume number and the page, preceded by the initials CW (Collected Works). 2 In the General Theory, he also avers: ‘So far as I know, everyone is agreed that saving means the excess of income over expenditure on consumption’ (p. 61, italics added)—where consumption is necessarily ex post, and where it inevitably encompasses the consumption goods purchased out of private incomes (and therefore sold by entrepreneurs). The same applies to saving. In the correspondence following the publication of the General Theory Keynes repeatedly mentions that there is nothing corresponding to ex ante saving. Further, he declares that income, investment and consumption are ex post magnitudes (CW, XIV:183). 3 And not of the micro-economic and macro-economic perspectives (Chick’s thesis), as I shall argue. Whether from the individual or the collective point of view, it is dangerous to confuse increases in the value of capital with increases in the number and value of sales. 4 Minsky also dismisses it, arguing that Clower would have missed ‘the distinguishing feature about the role of money in a capitalist economy. In a world with private financial liabilities which are used to acquire control or ownership of assets, these financial liabilities are what “buys” capital assets’ (Minsky 1976:73). Without belittling Minsky’s otherwise brilliant exegesis I would nonetheless protest at this assessment of Clower. Without anticipating too much on ulterior conclusions I would nevertheless point out that in a world of capitalist finance it is always money that buys goods, although this money itself may be borrowed. To call borrowed money ‘liability’ and infer that liabilities ‘buy’ goods overlooks one link in the transaction structure, and ultimately amounts, in neoclassical fashion, to the assumption that it is goods that buy goods. Goods no more buy goods than do liabilities, since liabilities are simply the purchase of the services of someone else’s money. It is not the services of money that will pay for the goods, but money itself, although the one who has bought the services of money will have to pay back both that money and the price of its use (interest). 5 As Chick mentions, variations in financial assets (hence gains stemming from speculation, more generally) are not counted in aggregate income (1983:40). The same would follow from the above set of definitions. 6 Note that money, together with goods, labour and services, constitute commodities; of the latter I shall use Sen’s notion of ‘entitlement’ and define a commodity as 211

NOTES anything to which are attached exchange-entitlements (Sen 1983). Commodities thus defined, the key question then becomes one of differentiating money from non-monetary commodities, but this task is too formidable to be tackled in this short treatise. I will therefore suppose an intuitive, spontaneous understanding of what money is in our economy. 7 Machlup has raised a most important point about such equations. He distinguishes equations from what he calls pure ‘classifications’. For instance, we could divide all births into ‘live births’ and ‘still births’ and write B=L+S, achieving no more than a ordinary classification. It could however be argued that the equality sign in Keynes’s first equation is no simple listing (no mere definitional identity), and that it expresses the bilaterality of monetary exchange. This basic fact saves it from Machlup’s critique. Also, the distinction between investor and consumer goods is no simple classification, as Victoria Chick has already observed, but a sectoral division referring to the social identity of buyers (firms or households). This alone implies a model of the economy, and no plain classification of goods, as if one divided output by the weight of the goods produced. 8 It seems to me that Clower’s ‘dual-decision hypothesis’ implicitly agrees with my reading of Keynes and the bilaterality of monetary exchange. When purchasing a good, every agent is selling money, and must make sure that he or she has either bought it beforehand, or is about to acquire it to compensate what he or she is selling. This does not result from a peculiarity of money but from the fact that Keynes brings back those decisions to the individual. They are related in the model as they are in reality, within the deciding individual. Thus, if one integrates both the bilaterality of monetary exchange—assuming money to be a special commodity—and the fact that the various decisions relating to exchange take place within the individual, one retrieves Clower’s interpretation, but with a major difference. One recovers the fact that the individual who sells money must be concerned about buying it (the dual-decision retranslated in terms of the sale and purchase of money) or, in other words, that he or she can only dispose of an income already earned or about to be. On the other hand, my interpretation does away with markets, the other major innovation of Keynes’s economics. By translating his dual-decision hypothesis within the framework of markets, I believe Clower shrouds this major dimension of Keynes’s revolution. Clower is nonetheless far from being alone in depicting Keynes in transactional (market) terms, as the list includes all disequilibrium theorists (on this topic, I refer the reader to Barrère’s masterly critique (Barrère 1983)), and most general commentators, such as Fender (1981), or Herland (1981). The same idea underlies all interpretations in terms of flow-adjustments (Barrère 1990), or quantity-adjustments (Clower 1969; Hutton 1986; Leijonhufvud 1968). Since Arndt has already described neoclassical economics as positing the entrepreneur as a price-taker, and therefore as someone who can only adjust to market demands through quantity-adjustments (Arndt 1984), this manner of representing Keynes’s economics might be dangerously doubleedged. 9 I will temporarily neglect the loanable funds theory, about which more will briefly be said at the end of the chapter on the rate of interest. Suffice it to say that where the stock of money is fixed, the conclusions of the loanable funds theory are exactly those one finds in Marshall (Chick 1983:185). When one adds changes in the stock of money, as Fletcher brilliantly argued (Fletcher 1989), one piles up one contradiction upon another. I leave the reader to Fletcher’s brilliant criticism. 212

NOTES 10 Here, once more, I ignore historical considerations, such as ‘erratic variants’. Wicksell himself, it would seem, had already separated saving from investment—a view taken up by his Swedish disciples. Irving Fisher, moreover, had developed a theory of the marginal efficiency of capital comparable to Keynes’s, although some authorities see important divergences between the two (Carabelli 1988:209). 11 According to Hicks, there are two meanings to the rate of interest in the General Theory, and the one that Keynes employs in his theory of investment is a particular rate: ‘the rate of interest at which a sound borrower, of unimpeachable credit, can raise a long-term loan on the market, that is, the rate of interest on long-term government bonds’ (Hicks 1974:33). 12 It is yet another irony of the history of economic thought that the one economics that proclaims itself individualist postulates supra-individual market forces and is implicitly transcendentalist whereas the economics that declares itself almost transcendentalist by severing the whole from its parts and assuming the autonomy of macro-economic thinking is clearly individualist. 13 On the topic of uncertainty the marginalist position reveals itself at its most aberrant. There are two main dimensions about the future, namely (a) those of income and consumption, and (b) those of the individuals consuming. Uncertainly about future consumption flows from two sources, namely (i) those relating to income, and (ii) those connected to the existence of the consumer. Admittedly, the consumer is capable of choices tomorrow only if he is still alive, but the most pedestrian layman spontaneously knows that uncertainty about tomorrow’s consumption does not stem from the uncertainty of surviving until then, but from the uncertainty of being able to consume tomorrow because tomorrow might not bring an income. Marshall’s (and neoclassical) axioms imply that we are more concerned about being alive tomorrow than we are about being able to consume, and that because of this uncertainty about our own survival, we are ready to consume everything today—making more uncertain tomorrow’s income and consumption! 14 Although this is pure reconstruction on my part, Keynes argues repeatedly in terms of certainty, especially when dealing with the rate of interest, and more clearly still when spelling out the specificity of his own method (pp. 293–4 of the General Theory are essential on this matter). Further, the fact that he constantly reasoned within the context of the short period, that he appropriated the concept of equilibrium and supposed in the short term that expectations were always realized, could all also be construed as assuming ‘certainty in the short run’. This would explain many of the paradoxes and the confusion of time-horizons. 15 Fitzgibbons shows that Keynes did not consider that commensurability was possible in a non-monetary economy (1988:127). In the light of this scenario, I would deny Shackle’s claim that money is at the root of the uncertainty which causes unemployment (1967:141–2) and completely reject Minsky’s claim that without uncertainty and cyclicity Keynes is reduced to neoclassical economics; they both reach similar conclusions (optimal allocation of resources), but through utterly divergent logic. Fitzgibbons mentions that Keynes associates money to uncertainty (1988:116) but this, to me, is a rather unclear statement. I would rather submit that he did see them as related, in that money was precisely what helped individuals fight uncertainty, the main tool to relieve them of this special plight—a view already expressed by Joan Robinson: ‘Uncertainty, not money, is the cause of all the trouble’ (Robinson 1971:65).

213

NOTES 6 KEYNES AND SPECULATION: ARISTOTLE REVISITED 1 Admittedly, Keynes changed his mind in his articles and in his correspondence following the General Theory, recognizing that the supply of money could be endogenous, coming from the banking and financial system. This, however, does not alter the fact that he never retranslated the question of interest as one involving lenders and borrowers. Perhaps he had to persist in connecting it to the quantity of money in order to retrieve prices through the old quantitativist mode of argumentation. 2 A statement denied in other passages, especially in his discussion of money’s own-rate of interest where money is held to be an asset (as someone wrote, an asset always has a yield), or when he declares that ‘[t]o deny productivity to money is the opposite of my view’ (CW, XIV:92). 3 Could we call loanable funds’ this pool of labouring money? I see no objection to it, if it is decisively understood (1) that the loanable funds of the ‘Loanable Funds Theory’ (LFT) encompass much more than what has been described as labouring money (in addition to labouring money it incorporates shares, idle reserves (only potentially labouring money, as opposed to money already labouring, i.e. already lent), and increases in the stock of money, and (2) that my definition of interest, and explanation of its rate, depart radically from those of LFT. 4 As he wrote in ‘Mr Keynes’s Consumption Function: Reply’, published in The Quarterly Journal of Economics, August 1938: Nor, may I add, do I assume that the propensity to consume is independent of the rate of interest. On the contrary, I explain that the rate of interest is one of the factors which influence it. But after some discussion I conclude that it is difficult to generalise as to the source of this influence. (CW, XIV:268)

5

Needless to say, if the rate of interest influences the propensity to consume, it must by definition affect the propensity not to consume (hence to save), and therefore be somehow also a price for not spending. I will quote Coddington’s brief summary of Robertson’s argument: The point, as it turns out, is a purely logical one: that whatever something is, there are many things that it is not; and it hardly makes much sense to say, of the various things that it is not, that of one of them rather than another is what it really isn’t. Yet this is what Keynes was claiming: that there can be such priorities. The individual trader may dispose of his money income by allocating it between the following three exhaustive and mutually exclusive categories: (1) spending (on commodities); (2) net lending, i.e. buying bonds; (3) hoarding, i.e. additions to money holding. In the light of this classification, let us turn to the controversy over the determination of interest rates. The ‘classical’ idea was that interest is the reward for not-spending, i.e. it is the inducement to refrain from spending. In apparent contrast, the Keynesian doctrine is that interest is the reward for not hoarding, i.e. it is the inducement to part with liquidity. 214

NOTES The resolution of this apparent conflict between the ‘classical’ and the Keynesian doctrine now emerges. In terms of our categories for the disposal of income, the resolution is that lending is, at one and the same time, both not-spending and not-hoarding […] (Coddington 1983:76) 6 In calling interests the ‘price of money loans’ (Minsky 1976:78), and declaring that the rate of interest has to do not with the supply and demand for money, but for money loans (Asimakopulos 1991:94; Hutton 1986:125), we get back to Keynes’s idea, that in borrowing, what is exchanged is money for debts. As I will not tire of repeating, what is traded is money for money’s services, and the money thus exchanged is itself interests. Therefore interests cannot be the price of money loans since it is the money sold by the borrower in order to purchase the services of the lender’s money. This, it might not have been noted, completely inverts Keynes’s position, as well as that of his critics. When Keynes asserts that cash is traded for debts, he assumes that the individual saver sells cash and buys debts whereas the borrower buys cash and sells debts. A mercantilist definition which respects the bilaterality of monetary exchange stipulates exactly the contrary. When money’s services are sold, the individual lender sells services and buys money (interests, i.e., the price paid for the services of his money), whereas the borrower sells money and buys the services of money. In this perspective, it goes without saying that interests cannot either be the ‘cost of borrowing’ (Chick 1983:233). 7 Prices are the result of pricing, and there are many reasons why, even with increased demand for the services of money, banks should wish to not change the rate of interest and rather create money in the form of credit, without adding on to the stock of money. Among those reasons might be precisely the desire not to lose good customers, not to frighten investors away in times of depression, and so on and so forth. 8 I am quite aware that some of Keynes’s pronouncements on liquidity-preference openly contradict his presentation of the two liquidity functions (see Chick 1983:220). I am also aware that after having incorporated the finance motive within the reasons behind liquidity preference, the following equations about the ‘two compartments’ of the stock of money should have been obsolete (Barrère 1990:199). Nonetheless, I attach some importance to examining the discussion about the two liquidity functions in the light of a truly mercantilist definition of interest because of the epistemological lessons they teach us. 9 Assuming, like Keynes, and for the sake of argument, that there would be debts of varying maturities in a stationary state, although denying that different rates of interest would be attached to them. 10 As with every statement in the economic literature on Keynes one can indeed unearth a diametrically opposite interpretation. Hicks, for instance, argues that it is not money’s convertibility that makes it a store of value, but its liquidity, thereby contrasting liquidity to convertibility. He bases his argument on the fact that in conditions of hyperinflation money loses its liquidity and no longer serves as a liquid asset. Why? Because liquidity would be that quality of an asset that gives one time to think, not to commit oneself (Hicks 1974:57). This understanding of liquidity yields strange conclusions. First of all, interpreted literally, it could entail that land and houses are also liquid assets, for assuming their (relative) value to remain constant enough, they would give one time to think before selling them back to gain money back. But when one chose to consume, one would have to sell the land or the house, and might not be able to convert it back into money. 215

NOTES Convertibility thus creeps back in. Second, I also sense a certain circular reasoning in this line of thought. Indeed, it would seem that it is the fact that money is a store of value which gives its owner the time to think; therefore, unless we identify ‘store of value’ with ‘liquidity’, we are involved in a vicious circle. Now, assuming ‘store of value’ and ‘liquidity’ to mean one and the same thing implies that we could completely do away with one of the two concepts. Let us then rid ourselves of the most nebulous, namely liquidity (since we could say of something that it is ‘more or less liquid’ whereas it is more difficult to claim that it is ‘more or less a store of value’). We would then have to posit that money is a store of value, and we would infer that individuals prefer a store of value because it gives them time to think between making two decisions. But, as I have argued, houses and land are also stores of value. Therefore, if this store of value (money) was not eminently convertible (or marketable), people would not prefer it. It is consequently the convertibility of this particular store of value (always money) which confers such attraction upon it. In times of hyperinflation money does lose both its convertibility and its very nature as a store of value. I therefore find Chick’s interpretation of liquidity—as marketability or, as I prefer to write, as convertibility—not only closest to that of Keynes’s notion of liquidity, but also the most logical one. Finally, I cannot help feeling that this whole tradition of seeing money as a means of separating two transactions (and therefore not as something purchased and sold itself), presents a monetary economy in terms of ‘deferred barter’ and invites back the barter argument. This appears clearly with Shackle, and even with Chick, who sees that money allows the separation between the selling and the purchasing of goods, and introduces ‘indirect exchange’ (1983:5). On this assumption, a neoclassical economist would rightly point out that money only emerges because of phenomenal disturbances, and that it can be experimentally removed since in the final analysis, it is goods which are exchanged. 11 A point clearly reiterated by Chick, who states that user costs encompass raw materials (1983:54), and also by Barrère and Asimakopulos, for whom user costs include purchases from other entrepreneurs (A1 in Keynes’s equations). If user costs apply to goods purchased from other entrepreneurs, it would imply a cost to the lack of economic integration. If this is so, one would have to conclude that the division of labour carries a price—a rather ridiculous conclusion.

7

MORE SUBSTANCE AND TRANSACTIONS

1 In the short run, besides, decisions on how much to produce (and, therefore, on how many individual producers to hire) do tell us of expectations of proceeds since they are allegedly their outward manifestation (or materialization). Thus we do not need an expectational function to assess aggregate demand from the point of view of entrepreneurs, since decisions to produce (and hire) express these very expectations (Asimakopulos 1991:21). This is especially true when we further assume, as does Keynes, that short-term expectations by entrepreneurs are actually realized. 2 Once more, Chick had recognized the problem: Keynes did not elaborate on the process by which [entrepreneurs’] estimates [of other people’s demand] were made…. Rather, Keynes proceeded to discuss, in his chapters on consumption and investment behaviour, the determinants of aggregate demand as planned by consumers and investing entrepreneurs rather than as estimated by the 216

NOTES producers of consumer and capital goods. This tactic follows from the assumption, maintained throughout most of the first Book of the General Theory (Chapter 5 is the exception), that firms’ estimates of planned aggregate demand are essentially correct. (Chick 1983:64) In other words, as she concludes on the next page, the curves of aggregate supply and demand for output as a whole intersect because Keynes assumed that planned aggregate demand was accurate in the short run (1983:65). At this juncture, I beg to differ. By this statement Chick implicitly assumes that if ‘firms’ forecasts of aggregate demand were broadly correct’ (1983:71, italics original); if so, we must logically derive D e (N)=D*(N) or, more precisely, assume that in those circumstances D=De (N)=D*(N). Let us now restrict this to consumption demand: hence D1=D1e (N)=D1*(N). From other statements of Keynes we also know that D1=D1(Y); bringing the two sets of equations together, we are subtly led to assume an equivalence between D1*(N) and D1*(Y) and, therefore, to suppose that D1e (Y)=D1(Y). Hence the difficulties that Chick discerns: the units in the two cases are not the same (entrepreneurs demand money, and consumers demand goods), so that in order to move from a real variable (employment) to a monetary one (income), we must translate from real to money terms, or vice versa (1983:67–8). This I believe to be a non sequitur, rooted in the confusion that the above equivalences suggest. For there is no such equivalence; even if the entrepreneurs’ estimates of aggregate consumption demand were correct, and therefore found ex post to be realized, it can never follow that D1e (Y)=D1(Y). In other words, consumption can only be related to employment from the entrepreneurs’ point of view, and there is no need to translate real into monetary terms, and vice versa. True, individual consumers demand the entrepreneurs’ goods. From the entrepreneurs’ point of view, however, that demand is an offer of money, and the entrepreneur also extrapolates aggregate demand in monetary terms; this is clearly Barrère’s assumption, who does not sense any discrepancy between the units (Barrère 1990:135 ff.). In brief, the problems Chick detected stem from the erroneous supposition that correct estimates of consumers’ demand by entrepreneurs could be substituted to the actual demand schedules of consumers. In this I believe Chick to have unwittingly fallen victim to Keynes’s own aggregate demand schizophrenia.

8

FROM A GALILEAN COSMOLOGY TO A GALILEAN ECONOMICS

1 Note a major difference with the neoclassical utility approach. In neoclassical economics one and the same good can simultaneously be consumer and producer good, as Fraser brilliantly argued. In a non-transactional sectoral approach on the other hand, although the same type of good (e.g. houses or televisions) can be private or corporate according to their use by firms or households, the same good (my television) cannot simultaneously be both. It can be phenomenologically, but not conceptually (and analytically). Phenomenologically, there are few discontinuities. Discontinuities belong to the realm of words (and more specifically to the realm of rigorous discourse), more rarely to that of things. 2 From the point of view of Keynes’s general theory, this leaves us with a somewhat loose overall articulation. Let us remember that Keynes separates analytically his 217

NOTES theory of output and employment from his theory of investment. In a way, one could say Keynes holds that the decision to produce determines output and employment whereas the decision to invest governs the purchase of investor goods. They are related, no doubt, but the question I put is a semantic one: how are we to know investment when we see it? If investment spells a positive rate of change in output, then all that is needed is a theory of such changes, and this the Principle of Effective Demand would provide. One could then retort that we are mixing two different time horizons. On the one hand, the theory of output and employment would obtain in the (Marshallian) short run and would rule out the purchase of new fixed capital (since existing fixed capital would be underused), whereas the theory of the marginal efficiency of capital would apply to the long run and involve long-term expectations. Surely this does not answer our question, since even within the short run, a decision to increase output has already been declared investment. Investment would thus mean one thing in the short run, and another in the long run. Invoking different time horizons does not solve our problem; it simply adds to the list of denotations of the term. 3 If one aimed at completeness (which I am not), one would have to distinguish within ‘investment’ an increased output resulting in an augmentation in the consumption of working capital only, from cases which involve additions of fixed capital. In the latter case, it goes without saying that the fiscal year is radically inadequate.

CONCLUSION 1 Hence the egregious paradox: in order to account for the computable results of economic actions (real magnitudes), I submitted earlier, we will have to connect the variables in the very manner in which they are linked within individuals’ minds, but in the final analysis, the manner of this connection can best be explained in organizational terms. Thus the divergence between methodological individualism and holism is but a red herring since they relate to procedures which, when correctly appreciated and applied, are necessarily complementary. Any holistic approach which would not help understand the manner in which individuals explain their economic actions (and, by extension, the concrete results of such actions) would be as useless as an individualist method which endeavoured to relate various economic parameters as they appear associated in the individuals’ models without appealing to the organizational features of these individuals’ social landscape. The two methods complement one another, and in the end, both aim to achieve the same result. In a properly integrated economics, therefore, there is nothing surprising in claiming that the microfoundations will have to be institutional, because true decisions and actions bridge the individual and the organizational levels.

APPENDIX 2 1

In this perspective, classical economics may be an imperfect and incomplete discourse about capitalism, in that it might have failed to discover some of its laws, but not an erroneous one; it simply awaits to be perfected and completed. In the Critique he openly declares Ricardo’s analysis scientific; a science which, like all sciences, would need constant rectifications and reformulations of 218

NOTES hypotheses, but a science all the same: that is, a discourse erected on a language which does not distort reality and permits the identification of invariants between phenomena. Thus the barter interpretation of exchange, or the theory of profits as the rightful price of the capitalist’s services would be theoretical errors arising from a fetishist delusion specific to capitalism, but not sequels of conceptual distortions. Schumpeter himself, among others, declared Marx a Ricardian economist (1954:390).

219

BIBLIOGRAPHY

Ackley, G. (1961) Macroeconomic Theory, New York: Macmillan. Aggarwala, K.C. (1948) ‘Marshall’s concept of quasi-rent’, Indian Journal of Economics 28:555–61. Akerlof, G.A. and Yellen, J.L. (1985) ‘A near-rational model of the business cycles, with wage and price inertia’, Quarterly Journal of Economics 100, Supplement: 828–38. Arndt, H. (1984) Economic Theory vs Economic Reality, East Lansing: Michigan University Press. Arthur, W.B. (1990) ‘Positive feedbacks in the economy’, Scientific American (February): 92–9. Asimakopulos, A. (1991) Keynes’s General Theory and Accumulation, Cambridge: Cambridge University Press. Attali, J. and Guillaume, M. (1990) L’anti-économique, Paris: Presses Universitaires de France. Azariadis, C. (1975) ‘Implicit contracts and underemployment equilibria’, Journal of Political Economy 83:1183–202. Bachelard, G. (1934) Le nouvel esprit scientifique, Paris: Presses Universitaires de France. ——(1940) La philosophic du non, Paris: Presses Universitaires de France. Barber, W. (1967) A History of Economic Thought, London: Pelican Books. Barrère, A. (1983) Déséquilibres économiques et contre-révolution keynésienne, Paris: Economica. ——(1990) Macroéconomie keynésienne, Paris: Dunod. Beault, M. and Dostaler, G. (1994) La pensée économique depuis Keynes, Paris: Seuil. Bharadwaj, K. (1978) ‘The subversion of classical analysis: Alfred Marshall’s early writings on value’, Cambridge Journal of Economics 2:253–71. Black, C., Coats A.W. and Goodwin C.D.W. (eds) (1973) The Marginal Revolution in Economics, Durham, North Carolina: Duke University Press. Blaug, M. (1980) The Methodology of Economics, Cambridge: Cambridge University Press. ——(1985) Economic Theory in Retrospect, Cambridge: Cambridge University Press. Boland, L.A. (1982) The Foundations of Economic Method, London: George Allen & Unwin. ——(1985) ‘The foundations of Keynes’ methodology: the General Theory’, in T. Lawson and H.Pesaran (eds) Keynes’ Economics. Methodological Issues, London and Sydney: Croom Helm. 220

BIBLIOGRAPHY Brunner, K. and Meltzer, A.H. (1971) The uses of money: Money in the theory of an exchange economy’, American Economic Review 61:784–805. Burtt, E.A. (1932) The Metaphysical Foundations of Modern Science, (2nd edn) London: Routledge & Kegan Paul. Cairnes, J.E. (1965) The Character and Logical Method of Political Economy, London: Frank Cass. Caplin, A.S. and Spulber, D.F. (1987) ‘Menu costs and the neutrality of money’, Quarterly Journal of Economics 102:703–25. Carabelli, A.M. (1988) On Keynes’s Method, London: Macmillan. Checkland, S.G. (1957) ‘Marshall and the wages-wealth paradox’, The Economic Journal 67:330–3. Chick, V. (1983) Macroeconomics after Keynes, Cambridge, Mass.: MIT Press. Clark, J.B. (1938) [1889] The Distribution of Wealth, New York: Macmillan. Clower, R.W. (1969) Readings in Monetary Theory, London: Penguin Books. ——(1971) ‘Theoretical foundations of monetary policy’, in G.Clayton, J.C.Gilbert and R.Sedgwick (eds) Monetary Theory and Monetary Policy in the 1970s, Oxford: Oxford University Press. Coddington, A. (1972) ‘Positive economies’, Canadian Journal of Economics 5:1–15. ——(1983) Keynesian Economics: The Search for First Principles, London: George Allen & Unwin. Crosser, P.K. (1969) Economic Fictions. A Critique of Subjectivistic Economic Theory, New York: Greenwood Press. Davenport, H.J. (1905) Outlines of Economic Theory, New York: Macmillan. Davidson, P. (1991) Controversies in Post-Keynesian Economics, Aldershot: Edward Elgar. Deane, P. (1978) The Evolution of Economic Ideas, Cambridge: Cambridge University Press. Dobb, M. (1973) Theories of Value and Distribution since Adam Smith, Cambridge: Cambridge University Press. Edgeworth, F.Y. (1891) ‘Review of the second edition of Marshall’s Principles of Economics’, in J.C.Wood (ed.) (1982) Alfred Marshall: Critical Assessments, Vol. II, London: Croom Helm. Fender, J. (1981) Understanding Keynes, Brighton: Wheatsheaf Books. Fisher, I. (1926) Mathematical Investigations into the Theory of Value and Prices, New Haven: Yale University Press. Fisher, R.M. (1986) The Logic of Economic Discovery, New York: New York University Press. Fitzgibbons, A. (1988) Keynes’s Vision. A New Political Economy, Oxford: Clarendon Press. Fletcher, G.A. (1989) The Keynesian Revolution and Its Critics, London: Macmillan. Foley, V. (1973) ‘An origin to the Tableau Oeconomique’, History of Political Economy 5:121–50. ——(1976) The Social Physics of Adam Smith, West Lafayette: Purdue University Press. Fouraker, L.E. (1958) ‘The Cambridge didactic style’, in J.C.Wood (ed.) (1982) Alfred Marshall: Critical Assessments, London: Croom Helm. Fradin, J. (1976) Les fondements logiques de la théorie néoclassique de I’échange, Grenoble: Presses Universitaires de Grenoble et Maspéro. Fraser, L. (1937) Economic Thought and Language, London: A.Black. Friedman, M. (1949) ‘The Marshallian demand curve’, Journal of Political Economy 58:463–95. ——(1953) Essays in Positive Economics, Chicago: University of Chicago Press. Green, F. (1977) Empiricist Method and the Development of Economic Thought, London: Thames Polytechnic. 221

BIBLIOGRAPHY Guillebaud, C.W. (1937) ‘Davenport on the economics of Alfred Marshall’, in J.C. Wood (ed.) (1982) Alfred Marshall: Critical Assessments, Vol. II, London: Croom Helm. ——(1952) ‘Marshall’s Principles of Economics in the light of contemporary economic thought’, Economica N.S. 19:111–30. Guitton, Henri (1979) De I’imperfection en économie, Paris: Calmann-Lévy. Hausman, D.M. (ed.) (1984) The Philosophy of Economics: an Anthology, Cambridge: Cambridge University Press. Herland, Michel (1981) Keynes, Paris: 10/18. Heckscher, E.F. (1983) [1935] Mercantilism, 2 Vols, New York: Garland. Hicks, J.R. (1930) ‘Edgeworth, Marshall and the indeterminateness of wages’, in J.C. Wood (ed.) (1982) Alfred Marshall: Critical Assessments, Vol. III, London: Croom Helm. ——(1937) ‘Mr Keynes and the “Classics”: a suggested interpretation’, Econometrica 5:147–59. ——(1939) Value and Capital. Oxford: Clarendon Press. ——(1974) The Crisis in Keynesian Economics, Oxford: Basil Blackwell. Hodgson, G. (1985) ‘Persuasion, expectations and the limits to Keynes’, in T. Lawson and H.Pesaran (eds) Keynes’ Economics. Methodological Issues, London and Sydney: Croom Helm. Hollis, M. and Nell, E.J. (1975) Rational Economic Man. A Philosophical Critique of Neo-classical Economics, Cambridge: Cambridge University Press. Howey, R.S. (1960) The Rise of the Marginal Utility School, Lawrence: University of Kansas Press. Hutchison, T.W. (1953) A Review of Economic Doctrines, 1870–1929, Oxford: Clarendon Press. ——(1965) [1938] The Significance and Basic Postulates of Economic Theory, New York: Augustus Kelly. ——(1977) Keynes versus the ‘Keynesians’…?, Lancing, West Sussex: The Institute of Economic Affairs. Hutton, W. (1986) The Revolution That Never Was. An Assessment of Keynesian Economics, London and New York: Longman. Jaffé, W. (1972) ‘Léon Walras’s role in the “marginal revolution” of the 1870s’, in R.D.Collison Black, A.W.Coats and C.D.W.Goodwin (eds) (1973) The Marginal Revolution in Economics, Durham, North Carolina: Duke University Press. Jevons, W.S. (1931) [1871] The Theory of Political Economy, London: Macmillan. Katz, L. (1986) ‘Efficiency wage theories: a partial evaluation’, NBER Macroeconomics Annual: 235–76. Keynes, J.M. (1930) A Treatise on Money, New York: Harcourt & Brace. ——(1937) ‘The general theory of unemployment’, in J.M.Keynes (1973) The General Theory and After. Part II: Defence and Development, The Collected Writings of John Maynard Keynes, Vol. XIV, London: Macmillan. ——(1938) ‘Mr Keynes’s consumption function’, in J.M.Keynes (1973) The General Theory and After. Part II: Defence and Development, The Collected Writings of John Maynard Keynes, Vol. XIV, London: Macmillan. ——(1951) [1933] Essays in Biography, London: Mercury Books. ——(1973) [1936] The General Theory of Employment, Interest and Money, The Collected Writings of John Maynard Keynes, Vol. VII, London: Macmillan. ——(1973) The General Theory and After. Part II: Defence and Development, The Collected Writings of John Maynard Keynes, Vol. XIV, London: Macmillan. ——(1979) The General Theory and After. A Supplement, The Collected Writings of John Maynard Keynes, Vol. XXIX, London and New York: Macmillan and Cambridge University Press. 222

BIBLIOGRAPHY Keynes, J.N. (1955) [1891] The Scope and Method of Political Economy, New York: Kelley & Millman. Klein, L.R. (1966) [1947] The Keynesian Revolution, New York: Macmillan. Koyré, A. (1961) La révolution astronomique, Paris: Hermann. ——(1965) Newtonian Studies, London: Chapman & Hall. ——(1966a) Etudes galiléennes, Paris: Gallimard. ——(1966b) Etudes d’histoire de la pensée scientifique, Paris: Hermann. ——(1967) From the Closed to the Infinite Universe, Baltimore: The Johns Hopkins University Press. Kregel, J.A. (1973) The Reconstruction of Political Economy, London: Macmillan. Kuhn, T. (1959) The Copernican Revolution, Cambridge, Mass.: Harvard University Press. Lackman, C.L. (1977) ‘The modern development of classical rent theory’, American School of Economics and Sociology 36:51–63. Lange, O. (1948) [1938] On the Economic Theory of Socialism, edited by B.E. Lippincott, Minneapolis: University of Minnesota Press. Lavoie, D. (1990) ‘Hermeneutics, subjectivity, and the Lester/Machlup debate: Toward a more anthropological approach to empirical economics’, in J.W. Samuels (ed.) Economics as Discourse, Dordrecht: Kluwer Academic. Leijonhufvud, A. (1968) On Keynesian Economics and the Economics of Keynes, New York: Oxford University Press. ——(1973) ‘Effective demand failures’, Swedish Journal of Economics 75:27–48. Lester, R.A. (1946) ‘Shortcomings of marginal analysis for wage-employment problems’, American Economic Review 36:63–82. ——(1947) ‘Marginalism, minimum wages and labor markets’, American Economic Review 37:135–48. Lovejoy, A.O. (1936) The Great Chain of Being, Cambridge, Mass.: Harvard University Press. Lowe, A. (1977) On Economic Knowledge. Towards a Science of Political Economics (2nd edn), White Plains: M.E.Sharpe. Machlup, F. (1946) ‘Marginal analysis and empirical research’, in F.Machlup (1963) Essays on Economic Semantics, Englewoods Cliffs: Prentice-Hall. ——(1947) ‘Rejoinder to an anti-marginalist’, American Economic Review 37:148–54. ——(1963) Essays in Economic Semantics, Englewood Cliffs: Prentice-Hall. ——(1978) Methodology of Economics and Other Social Sciences, New York: Academic Press. Marshall, A. (1938) [1920] Principles of Economics (8th edn), London: Macmillan. Marx, K. (1847) Misère de la philosophie, in K.Marx (1965) Oeuvres. Economie I, Paris: Gallimard, Collection La Pleïade. ——(1849) Travail salarié et capital, in K.Marx (1965) Oeuvres. Economie I, Paris: Gallimard, Collection La Pleïade. ——(1857) Introduction générale à la critique de l’économie politique, in K.Marx (1965) Oeuvres. Economie I, Paris: Gallimard, Collection La Pleïade. ——(1859) Critique de l’économie politique, in K.Marx (1965) Oeuvres. Economie I, Paris: Gallimard, Collection La Pleïade. ——(1865) Salaire, prix et plus-value, in K.Marx (1965) Oeuvres. Economie I, Paris: Gallimard, Collection La Pleïade. ——(1867) Le capital (Livre premier), in K.Marx (1965) Oeuvres. Economie I, Paris: Gallimard, Collection La Pleïade. ——(1864–79) Le capital (Livres deuxième et troisième), in K.Marx (1965) Oeuvres. Economie II, Paris: Gallimard, Collection La Pleïade. Ménard, C. (1978) La formation d’une rationalité économique: A.A. Cournot, Paris: Flammarion. 223

BIBLIOGRAPHY ——(1990) The Lausanne tradition: Walras and Pareto’, in K.Hennings and W.J. Samuels (eds) Neoclassical Economic Theory, 1870 to 1930, Dordrecht: Kluwer Academic. Menger, C. 1950 [1871] Principles of Economics, Glencoe, Illinois: The Free Press. Meyerson, E. (1962) Identity and Reality, New York: Dover. Mill, J.S. (1848) Principles of Political Economy, in J.M.Robson (ed.) (1967) Collected Works. Essays on Economy and Society, Toronto: University of Toronto Pres, Vol. 4. Minsky, H.P. (1976) John Maynard Keynes, London: Macmillan. Mirowski, P. (1991) More Heat Than Light, Cambridge: Cambridge University Press. Mises, von, L. (1978) The Ultimate Foundation of Economic Science: An Essay on Method (2nd edn), Kansas City: Universal Press Syndicate. Morishima, M. (1977) Walras’s Economics: A Pure Theory of Capital and Money, Cambridge: Cambridge University Press. ——(1980) ‘W.Jaffé on Léon Walras: a comment’, Journal of Economic Literature 18:550–8. Ogilvie, F.W. (1930) ‘Marshall on rent’, Economic Journal 40:1–24. Ohlin, B. (1937) ‘Some notes on the Stockholm theory of savings and investment’, Economic Journal 47, 1 and 2:53–69, 221–40. Parkin, M. (1986) ‘The output-inflation trade-off when prices are costly to change’, Journal of Political Economy 94:200–4. Parsons, T. (1931) ‘Wants and activities in Marshall’, Quarterly Journal of Economics 46:101–40. Patinkin, D. (1965) Money, Interest, and Prices (2nd edn), New York: Harper & Row. ——(1982) Anticipations of the General Theory? And Other Essays on Keynes, Chicago: University of Chicago Press. Peterson, W.C. (1977) ‘Institutionalism, Keynes and the real world’, Journal of Economic Issues 11:201–21. Pribram, K. (1986) Les fondements de la pensée économique, Paris: Economica. Quesnay, F. (1969) [1758] Tableau économique des physiocrates, Paris: CalmannLévy. Ricardo, D. (1987) [1817] The Principles of Political Economy and Taxation, London and Melbourne: Dent, Everyman’s Library. Robbins, L. (1935) An Essay on the Nature and Significance of Economic Science, London: Macmillan. Robertson, D.H. (1940) ‘Mr Keynes and the rate of interest’, in D.H.Robertson (1966) Essays in Money and Interest, London: Fontana. Robinson, J. (1964) Economic Philosophy, Harmondsworth: Penguin Books. ——(1971) Economic Heresies, London: Macmillan. Rogin, L. (1936) ‘Davenport on the economics of Alfred Marshall’, in J.C.Wood (ed.) (1982) Alfred Marshall: Critical Assessments, Vol. II, London: Croom Helm. Rosenberg, A. (1976) Microeconomic Laws. A Philosophical Analysis, Pittsburgh: University of Pittsburg Press. Samuels, W.J. (ed.) (1990) Economics as Discourse, Dordrecht: Kluwer Academic. Samuelson, A. (1990) Les grands courants de la pensée économique, Grenoble: Presses Universitaires de Grenoble. Samuelson, P.A. (1948) The Foundations of Economic Analysis, Cambridge: Harvard University Press. Schoeffler, S. (1955) The Failures of Economics: A Diagnostic Study, Cambridge: Harvard University Press. Schumpeter, J.A. (1954) History of Economic Analysis, New York: Oxford University Press. 224

BIBLIOGRAPHY Sen, A. (1983) Poverty and Famines, Oxford: Clarendon Press. Shackle, G.L.S. (1967) The Years of High Theory, Cambridge: Cambridge University Press. ——(1972) Epistemics and Economics, Cambridge: Cambridge University Press. Shaw, G.K. (1988) Keynesian Economics. The Permanent Revolution, London: Edward Elgar. Shove, G.F. (1942) ‘The place of Marshall’s Principles in the development of economic theory’, in J.C.Wood (ed.) (1982) Alfred Marshall: Critical Assessments, Vol. II, London: Croom Helm. Shuster, J. (1977) Descartes and the Scientific Revolution, unpublished PhD thesis, Princeton University. Smith, A. (1986) [1776] The Wealth of Nations, London: Penguin Classics. Stewart, I.M. (1979) Reasoning and Method in Economics. An Introduction to Economic Methodology, London: McGraw-Hill. Stigler, G.J. (1962) ‘Marshall’s Principles after Guillebaud’, in J.C.Wood (ed.) (1982) Alfred Marshall: Critical Assessments, Vol. III, London: Croom Helm. ——(1968) [1941] Production and Distribution Theories, New York: Agathon Press. Streissler, E.W. (1973) ‘To what extent was the Austrian school marginalist?’ in R.D. Black, R.D. Coats and C.D.W.Goodwin (eds) The Marginal Revolution in Economics, Durham, North Carolina: Duke University Press. Tiwari, J.N. (1982) [1945] ‘Marshall and the theory of the rent’, in J.C.Wood (ed.) (1982) Alfred Marshall: Critical Assessments, Vol. III, London: Croom Helm. Tobin, J. (1980) Asset Accumulation and Economic Activity: Reflections on Contemporary Macroeconomic Theory, Oxford: Basil Blackwell. Tsiang, S.C. (1966) ‘Walras’s law, Say’s law and liquidity preference in general equilibrium analysis’, International Economic Review 7:329–45. Verdon, M. (1982) ‘On the laws of physical and human nature: Hobbes’s physical and social cosmologies’, Journal of the History of Ideas 43:653–63. Waldrop, M.M. (1993) Complexity, Harmondsworth: Penguin Books. Walker, D. (1987) ‘Walras’s theory of tatonnement’, Journal of Political Economy 95:658–74. Walras, L. (1926) Elements of Pure Economics, or the Theory of Social Wealth (4th and definitive edn, 1954) trans. W.Jaffe, Homewood, Illinois: Irwin. Wicksteed, P.H. (1949) [1910] The Common Sense of Political Economy and Selected Papers and Reviews on Economic Theory, edited by Lionel Robbins, London: Routledge. Wolff, J. (1981) Les grandes oeuvres économiques. III—Walras et Pareto, Paris: Editions Cujas.

225

INDEX

‘animal spirits’: as natural proclivity to invest 119 Ackley, G. 105 activities: deflated to mental operations in OCT 63; individual by definition 24; must fall within compass of economics 38; ruled out by perfect market 53; socially visible or not 23–4; vary according to contexts 24 Aggarwala, K.C. 84 aggregate individual income, Keynesian: simple summation 108 aggregate variables, Keynesian: related functionally as are linked in individuals’ heads 109, 116; related in terms of socially differentiated individuals 109 aggregate variables, neoclassical: articulated ‘socially’ 90 Akerlof, G.A. and Yellen, J.L. 175 analogies: admixture of 71, 74; economy as firm (Marshall) 51; Mirowski’s theses 7; misunderstood 70–1; reveal cosmologies; see also neoclassical economics analytical sciences 13 Aristotle’s cosmology 1–2; and classical economics 73; his dynamics 2, 68–9; and Marshall 69–73; theory of natural places 2, 69; time and space 1 Aristotle 69, 70–1, 94, 178–9 Arndt, H. 31, 45, 54 Arthur, W.B. 176 Asimakopulos, A. 96, 149, 154, 173 assets: see also debts Attali, J. and Guillaume, M. 3 Azariadis, C. 175

banks: scant treatment in G.T. 102 Barber, W. 108 bargaining: absent from neoclassical economics 46 Barrère, A. 74, 96, 101, 111, 174 Beault, M. and Dostaler, G. 124, 173 Bentham, J. 15 Bharadwaj, K. 28, 31, 65 Blaug, M. 5, 10, 30, 40, 41, 42, 43, 45, 54, 59, 73 Böhm-Bawerk, E. 59 Boland, L.A. 5, 45, 175 bonds in G.T.: lumped with shares 139 bonds, archetypal: definition 133; as ‘labouring money’ 134 Brunner, K. and Meltzer, A.H. 97 Burtt, E.A. 1–2, 3, 179–80 Cairnes, J.E. 5 Cantillon, R. 182, 187 capital: competing with labour 86–7, 89; labour plus ‘a lot of waiting’ 89 capitalism, Marx: rule of capital, not capitalists 195; subordinates social relations to relationships between things 195–6 Caplin, A.S. and Spulber, D.F. 175 Carabelli, A.M. 123, 175 Cartesian cosmology 179–81 certainty: analogous to Galileo’s vacuum for Keynes 120; attribute of knowledge 123; enables Keynes to replicate Galileo’s achievements 122; Keynes’s second experimental scenario 120–1, 210; Keynesian economy under 122; and neoclassical economics 121; rules out speculation

226

INDEX 129; yields full use of resources 120–1; yields full use of resources in neoclassical economics equally 121; see also rates of interest, Keynesian Checkland, S.G. 23 Chick, V. 34, 44, 62, 99, 101, 102, 105, 111, 116, 129, 133, 142, 144, 149, 150, 154, 155–6, 158, 164, 165, 167, 169, 173, 175, 217 choice: no virtual activity 54; ruled out by timeless market 53–4 Clark, J.B. 17 classical economics: Aristotelian 73; imperfect and incomplete (Marx) 196; its shortcomings to Marx 190; Keynes’s understanding of 96; no orthodoxy 8; scientific (Marx) 200, 201, 218–19; see also Smith, A.; Ricardian economics Clower, R.W. 97, 105, 173, 212 Coddington, A. 5, 97, 145, 171, 173 commodities: as exchange-entitlements 211–12 competition, neoclassical: belongs to objects not individuals 57 completely monetarized economy: Keynes’s first experimental scenario 101 complexity theory: and G.T. 176 Comte, A. 13, 203 conceptual discontinuity: to be found mostly in social organization 95 consumption, neoclassical 117–18; absorption of utilities 75; as negative production (Marshall) 50 consumption, Keynes’s theory of: coupled to income theoretically 110, 126; coupled to income definitionally 107; detached from production 110; linked to output outside any market representation 111; linked to output through macro-circularity of exchange 110; as purchase of money 107 consumption, reappraised: a pragmatist view 164; sale of money for goods 107; two meanings 162 consumption goods: sectorally defined as domestic goods 162 cosmology: affects definition of concepts 4; definition 1; leads to different questions 5; medieval 1–2; most explicit in initial statements 5–6; no theory of its link to theories

3–4; of classical science 1–2; some preclude science 3, 97; underlies all theories 3–4; as world-view 3; see also analogies cosmology, neoclassical 91–2; precludes description of any economy 93; see also neoclassical economics; perfect market; perfect competition Cournot, A.A. 13, 37 credit: wrongly conflated with money’s services 136 Crosser, P.K. 43 Davenport, H.J. 60 Davidson, P. 97, 173 Deane, P. 6, 23, 65, 94 debts, Keynesian: encompass all financial assets and exclude real capital 102; old distinct from new 133; old spell speculation 133, 134 demand: its two compartments in G.T. 103; Marshall’s definition 30; must be coupled to exchange 33; subjective in neoclassical economics 30 demand schedules, neoclassical: additive 30; cannot intersect supply schedules 33; ex ante preferences 31; imaginary 31; their construction 29 Descartes, René 74, 98, 177–8, 181, 185–6 disconsumption 166 disequilibrium theorists 173 disinvestment 159; sectoral and nontransactional 164, 167 Dobb, M. 8, 9, 12, 46, 187 dual-decision hypothesis 212 economic rationality: socially differentiated in G.T. 109; socially undifferentiated in neoclassical economics 116–17 Edgeworth, F.Y. 15, 19–20, 38, 55 effective demand 149–56; can settle at less than full employment 152, 155; cannot represent intersection 151; cannot be aggregated 151; cannot apply to output as a whole 156; Chick’s confusion about 217; confused with aggregate demand 149; definition 112; ends up transactional and ex post 152–4; an entrepreneur’s consideration 112;

227

INDEX intersection of aggregate supply and demand functions 150; Keynes and neoclassical economics on 152–3; no-nonsense definition 155–6; originally expectational and nontransactional 148–9; presupposes a single economy-wide firm 149; refers to output that will be supplied 150; as theory of output 112 employment, Keynes’s theory of: linked to output in the short run 112; nontransaction representation 112; short-term consideration 115 entrepreneurs, Keynesian: definition 158–9; receive private incomes 104 entrepreneurs, neoclassical: deflated to managers 51 epistemology: and history of science 3; not philosophy of science 5 equilibrium: bars strategy and speculation 45; exiles trade 45; at intersection of supply and demand prices (Marshall) 22; precludes time 44; as rest 206; rules out profits 45; various meanings of 34–5 equilibrium, general: definition 35; underlies Marshall’s treatment of distribution 22 equilibrium, partial: basis of Marshall’s theory of exchange 22; definition 35 equilibrium prices: corollary of perfect market 33; and maximization 33 equimarginal distribution 51; defined as management 51; equated with principle of substitution 51, 87 equivalence: see also trade equivalents ex ante/ex post: impossible to argue from either one to the other 32–3 exchange, neoclassical: asymmetrical when money introduced 46–7; collapsed to individual’s equimarginal distribution of his income 49; collapsed to a mental operation in OCT 63; definition 39; deflated to relationship between individuals and commodities 48–9; illusory 49; internal to the individual 48–9; macro-circular in monetarized economy 34–5; nothing but choice 49; source of laws in OCT 66–7; unilateral flow of commodities 47 exchange: dyadic and bilateral 39; not pricing 39

exchange, monetary: bilateral in G.T. 105; bilaterality avoided by Keynesians 105–6; implies sale and purchase of money 39; transforms goods into commodities (Marx) 192; transmutes individual into social labour (Marx) 191–2; transmutes a quantitative into a qualitative equivalence (Marx) 192 expectations: corollary of Keynes’s vision of the individual 119–20; ruled by subjective probability 119 felicific calculus 15; in Marshall 20 Fender, J. 97, 105, 129 field formalism: internalization of space 63; linked to anti-utilitarian stance 18, 20, 49, 63; post-1900 development 18; see also Mirowski field cosmos: see field formalism firms: equated with markets 51–2; as management units 51; in OCT and Walrasian economics 67; paradigm to analyse all organizational levels of economy 51 Fisher, I. 20 Fisher, R.M. 7, 9, 13, 38, 44, 88 Fitzgibbons, A. 96, 97, 99, 100, 101, 137, 145, 173, 174 Fletcher, G.A. 96, 106, 136 flows: as reiterative exchanges 107, 166; require time discontinuities 166 Foley, V. 180, 184 Fradin, J. 30 Fraser, L. 5, 75–6, 77, 78, 95 Friedman, M. 5 Galileo, G. 36, 69, 93, 94, 98; and experimentation 2; and inertial motion 2; and medieval cosmos 1; revolutionary dynamics 2, 69, 118, 120, 122, 178–80; and space and time 2; and the vacuum 2 goods: confused with labour (Marx) 199; corporate 162; domestic and private 162 government: role ignored in G.T. 102 Green, F. 5 groups: absent from the Capital 201; not composed of social relationships 24, 25; not sums of social relationships 205

228

INDEX Guillebaud, C.W. 6, 19 Guitton, H. 31, 35, 37, 44, 54, 61 Hausman, D.M. 5 Hawtrey, R.G. 131, 136, 151 Heckscher, E.F. 131 Hegelianism: in Marshall’s treatment of substitution 87 Hicks, J.R. 43, 73, 173, 215–16 history: arbitrary source of capitalist income distribution 9, 12; transverse approach to 9 hoarding: conflated with income in G.T. 168 Hobbes, T. 180, 181 Hobson, J. 131 Hodgson, G. 98, 175 Hollis, M. and Nell, E.J. 31, 33, 38, 45, 46, 53 Hutchison, T.W. 5, 38, 44, 53, 55, 98 Hutton, W. 98, 124, 173 ideology, capitalist: cause of neoclassical economics’ survival 94–5; root of neoclassical economics 210 illiquidity: under certainty, natural tendency to 129 imperfect markets: absurd 92–3; impossible to derive from perfect markets 93; sham and bogus 121 income, entrepreneurial: goods sold for money 108; sale of goods 107 income, individual: sale of labour and services to entrepreneurs 107–8; see also aggregate individual income, Keynesian income, Keynesian: absurd as value of output 103–4; conflated with hoarding 168; definitional problems 102–3; as flow 107; focal variable 110–11; not ‘revenue’ 107; as purchase of money 105; value of output sold to avoid contradictions 103–4 income disposal 104; meaning of second equation 103 income rises, reappraised: do not spell more saving 169–70; narrow gap between consumption and saving 170 incomes, neoclassical: all merge into one another 83–5; defined in a substantialist way 80–5

individual, Keynesian: intrinsically moving 118–19; socially differentiated 116–17; true minimal unit 108–9, 116; truly decides and acts 109, 116–17; see also Keynes’s cosmology individual, Marxian 201 individual, neoclassical: ambiguous 56; averse to economic action 69–70, 118, 119; biblical 70; defined teleologically 56; an illusion 56; a micro-firm 51; passive 55; a patient, not an agent 56; reluctant to save 125; simple carrier of goods 56, 80; as smallest market 48–9; socially undifferentiated 56 inertial motion in G.T. 118–19 institutionalism: implicit in G.T. 174–5; to complete Keynes’s economics 175–6; residual category 4 investment, Keynesian: badly articulated to theory of output 218; conflated with speculation 158; detached from saving 114; discrepancies 156, 157; involves long-term expectations 115; natural proclivity to 119; nontransactional representation 115; sometimes positive rate of change, sometimes not 163; substantialist survivals 157–8 investment, neoclassical: linked to employment 115; Marshall’s two views 114–15; transactional 115 investment, sectoral: as acceleration of output 164; as corporate consumption 163; definitional identity when equal to saving 168–9; inhibited by decreasing incomes 170; not equal to saving 168–9; a pragmatist view 164; should be cause of involuntary unemployment 171 investment goods: defined by identity of exchanging partners in G.T. 158; sectorally redefined as corporate goods 162 IS-LM rendition of Keynes 173 Jaffé, W. 74 Jevons, W.S. 6, 8, 14, 15, 16, 17, 37, 38, 40, 41, 42, 45, 47, 48, 58 Kaldor, N. 173 Katz, L. 175

229

INDEX Keynes, J.N. 5 Keynes’s cosmology 109–10, 116, 117, 121; Galilean 161; sectoral 116; under certainty 122 Keynes’s economics: and complexity theory 176; economics of a ‘monetary production economy’ 101; its experimental scenarios 101–2, 120ff.; experimental (no theory of phenomenal world) 124; Galilean 118–24; imcompatible with neoclassical economics 120–1, 123–4, 174; and institutionalism 174–6; mechanistic in places 175; non-transactional 111, 116; premature generalization 172; retrieves money at theoretical level only 101; sectoral 116; true to methodological individualism 109–10, 116, 123; would be pure macroeconomics 98, 108; would reduce neoclassical economics to a special case 96, 97–8, 120 Klein, L.R. 99 Koyré, A. 2–3, 68, 178, 179 Kregel, J.A. 97 Kuhn, T. 94 labour: competing with capital 86–7, 89 labour: confused with labourer 199; not a factor of production 210 labour power: means the labourer 199; phenomenon sui generis 199; source of capitalists’ profits 193; labour theory of value: against mercantilism 189; equality of exchanging partners 190; not analytical 14; substantialist 14; subsumes profits under interest 35; and trade equivalents 35, 190 Lackman, C.L. 20 land: own-rate of interest once greatest because of its serviceability-premium 142–3 Lange, O. 55 Lauderdale, Earl of 12 Lavoie, D. 175 Leibniz, G.W. 177, 180 Leijonhufvud, A. 97, 98, 99, 105, 140, 173 Lester, R.A. 175 liquidity: as convertibility 142; not convertibility (Hicks) 215–16; power of disposal over an asset 141;

varies in degrees 141; varies in time and space 141; see also liquidity preference liquidity functions 138 liquidity preference: definition 127; motives behind 138; natural tendency 114, 128; no demand for money 135; partly Aristotelian 128–9; price of money’s services 132–3; ‘propensity to hoard’ 128, 138; relates to total demand for money 131; stems from uncertainty 129 liquidity preference, total 131–2 liquidity-premium 141 loanable-funds theory 214; Aristotelian 136; conceptually vitiated 136; neoclassical 212 loans: wrongly equated with money’s services 136 Longfield, M. 12 Lovejoy, A.O. 93 Lowe, A. 5 Machlup, F. 5, 35, 175 macro-circularity of exchange: avoids tautology at aggregate level 110–11; enables Keynes to avoid transactional representation of the market 116 management, neoclassical: as allocation of scarce resources to alternative uses 52; always conditional 53; encompasses all economic functions 52; equated with equimarginal distribution (Marshall) 51, 87 marginal calculus: Aristotelian 208–9 marginal efficiency of capital: dictates investment, against rate of interest 115–16; not Marshall’s marginal productivity of capital 114 marginal utility 16 marginal propensity to consume 126; decreases as incomes rise 126; determined by level of real income 126; questioned 169 marginalism: justification of capitalism 13, 15; revolution 8; the three brands (see also neoclassical economics) 8 market: transactional representation absent from G.T. 111; understood as firm (Marshall) 51–2

230

INDEX Marshall, A. 6, 9 14, 15, 16, 17, 19, 27, 31, 34, 36, 37, 38, 39–44, 47–50, 58, 64–8, 80–5, 86–90, 197 Marshall’s economics: against Mill on distribution 65, 81; Aristotelian 69–73; bias towards production 21, 47; conflates exchange and distribution 89; labourer assimilated to labour 86; laws to be discovered in conditions of supply 66–7; markets appear imperfect 64, 68; reifying 86; and rent 81; and time 44, 64, 67; transactional 28–9; weds Jevons’s separate perspectives on exchange 58 Marx: all economic categories hypostatized 199–200; animist 201; capital hypostatized 193–4; classical economics would be scientific 197; does not escape barter representation 198; epistemological critique 195–6; exchange breeds money 191; excludes groups and social relationships 197; income disparities historical 194; introduces money to explode barter myth 190; labourer sells his labour power 193; mechanicist 195; positivist 194–5; profits flow from trading of labour power 193; reifies 197–8, 200; shortcomings of classical economics 190, 195, 196; substantialist thinker 197; see also exchange, monetary; labour theory of value; trade equivalents Marx, K. 6, 9, 12, 17, 86, 189–202 Maxwell, C. 98 Ménard, C. 5, 37, 38, 43, 46, 54, 55, 56, 73, 92 Menger, C. 6, 8, 20 mercantilists: seek to imitate Galilean revolution 183; see also Mirowski and mercantilism (Appendix 1) methodological individualism: ‘analytical’ 14; applies only to isolated activities 26; applies to empirical sciences only 25; implications for comparison 26; leads to terminal tautology in neoclassical economics 27; not ontological methodologism 203–4; at root of Marshall’s economics 23; should lead to holism 218; should lead to probabilistic thinking 155, 156; true version in G.T. 109, 116,

123; its unavoidable constraints 23–7; underlies construction of supply and demand schedules 29–30; working definition 25 Meyerson, E. 179 Mill, J.S. 6, 9, 12, 65, 73, 86; capitalist distribution of incomes 9, 12, 65 (see also Marshall’s economics); how appeared to Jevons 9; precursor of Marshall 9; utility theory of value 12 Minsky, H.P. 124, 145, 175, 190, 211 Mirowski, P. 7, 11, 14, 19, 20, 23, 31, 34, 37, 44, 49–50, 62, 63, 74, 76, 77, 78, 80, 95, 173, 177–88; and history of science 177–8; and mercantilism 181–3; omits experimentation from history of science 178; and political economy 183–8 mistaken identities 117, 213; their price 174 money: definition avoided 161, 212; greatest serviceability-premium after Industrial Revolution 143; necessary corollary of exchange (Marx) 191, 192; undifferentiated and unspecialized 143 money, Keynesian: characteristic attributes of 140; orients exchange 106; as serviceability-premium corrects Keynes’s inconsistencies 142–4; its services conflated with its use 133–5; should be implanted at conceptual level 106; small elasticity of production 141; theoretical role only 101, 106; uniqueness of its own-rate of interest 140; zero elasticity of substitution 141 money, marginal utility: contradiction in terms 42; in Marshall 39–44; nothing but marginal utility of money expenditures in general 42; why Marshall imported it 43 money, neoclassical: cannot be exchanged 47–8; cannot be a commodity 21–2; cannot have utility 22; its cost is that of saving 22; deflated to utility 80; an illusion 40; Marshall avoids mentioning it 21; nothing but numéraire 43; subsumed under capital 22 money, stock: confused with labouring money’ in G.T. 134–5; contradictions in G.T. 138–40

231

INDEX Morishima, M. 74 motion: both spatial (displacement) and economic (activities) 61 motion, economic 61–2; constant at equilibrium in OCT 62 motion, spatial: resisted at equilibrium in OCT 62; takes place within the mind 62 Mummery, A.F. 131 Myrdal, G. 96 national income: definition 104; definitional identity with national output rejected 105; definitional identity with national output 105; as sum of personal incomes 104 nature/culture contrast: at heart of Marshall’s distinction of supply and demand 84 neoclassical economics: ‘analytical’ science 14; ‘socializes’ relationships of aggregate real variables 90; analogies from proto-energetics (see also Mirowski and field formalism) 7; analogies from Galileo and Newton 7, 13, 15, 17, 20, 38, 85, 91–2; Aristotelian 6, 69–73; biblical 70; denies the reality of exchange 48–9; felicific 80; individual its building-block 17, 27; legitimates capitalism 94; Marshall’s Principles justifiably representative 6; methodologically individualist 17; Panglossian 95; precludes time 44; predicated on perfect market 36–8; reifies 85–90; rules out choices 53; rules out activities 53; scholastic 118; special case of Keynes’s General Theory 98, 120; three traditions 6, 8; transactional 80, 85, 91 (see also Marshall); utilitarian 80, 210; would be relational 15, 75–6; see also perfect market;perfect competition; equilibrium neoclassical theory of value: and quantity theory 99; see also theory of value networks 24–5 New Classical Macro-economics 173 Newton, I. 70, 71, 98, 178 numéraire 43; an illusion of money 44; no fiction 43–4; no source of greater realism 44

OCT: its cosmological achievements 63; defines supply as ‘reverse demand’ 39; deflates all activities to mental operations 63; discovers laws in conditions of demand 66–7; internalizes space 62–3; inverted mirror image of Marshall’s economics 63–4; locates motion within the mind 62; its prices are demand prices 59; rules out activities, choices and individuals 64; rules out money 59–60; timeless 61; see also opportunity costs Ogilvie, F.W. 84 Ohlin, B. 131, 136 ontological individualism 203–4 opportunities: immaterial and timeless 61 opportunity costs: as displacement costs 60; implies motion of illusory commodities in a timeless space 61 output, Keynesian: determined by entrepreneurs through effective demand 112; inseparable from employment 112; linked to employment in non-transactional manner 112 Pareto, V. 9, 73 Parkin, M. 175 Patinkin, D. 173 perfect competition: imposes prices 54; and omniscience 38; and perfect expectation 38; and perfect rationality 38; predicated on perfectly homogeneous (socially undifferentiated) agents 37, 45–6; presupposes action of monopolist 55; presupposes perfectly divisible products 37; presupposes independence of producer and consumer 37; see also equilibrium; perfect market perfect market: analogous to Galileo’s vacuum 36–7, 121; communication free and instantaneous 37; defined in negative terms 92; homogeneous and isotropic space 37; lack of price differentials 37; and simultaneous equations 34; thought-experimental 36; underpins all static equilibrium analysis 38; where prices settle at equilibrium 38; see also perfect competition

232

INDEX perfection: can never yield imperfection 93; described in negative terms 92; spells infinity 93; a theological construct 93 Peterson, W.C. 174 Petty, W. 179, 181–2, 183, 188 physiocrats: see Mirowski and political economy (Appendix 1); Quesnay potential income 164; unsold goods 104 Pribram, K. 7, 8–9, 45, 65, 184 prices, Keynesian: irrelevant in the aggregate 112; lose pivotal role 111 prices, Marshallian: are above all supply prices 20; definition 19; demand prices 20–1, 22; if coherent, all prices rooted in labour theory of value 22; indication of utility 19; supply prices defined in real costs 20, 22 prices, neoclassical: articulate inconsistent neoclassical cosmologies 74; articulate supply to demand 28; demand prices in OCT 59; include and exclude others in exchange 74, 79; pivotal to research programme 90–1; regulate transactions 28 prices, neoclassical theory: in reality substantialist 77; would be relational 77 pricing: completely internal with Jevons 41; an isolated, derivative and virtual activity 39 probabilistic thinking: flows from methodological individualism 155, 156, 176 production and consumption: not symmetrical in reality 32; objective manifestations of neoclassical supply and demand 32 production, Marshallian: deflated to management 51; encompasses trading 50; as rearrangement of matter 50 profits: connected to wages (Marx) 194; as fair earnings of businessmen 87; stem from exchange of labour power for money (Marx) 192; subsumed as interest by labour theorists 35 propensity: various meanings in G.T. 111–12 propensity to consume: enables Keynes to by-pass prices in theory of consumption 112; related to income 111

Proudhon, P.J. 12 quantity theory: and neoclassical theory of value 99 quasi-rent: conflated with interest 83; conflated with rent 83; contradictions 83; Marshall’s definition 82–3 Quesnay, F. 10, 11, 88, 110, 180, 181, 184, 186, 187; physiological, not dynamic analogy 187; would hold labour theory of value 186 rate of interest, classical and neoclassical: brings forth flow of saving 114; Marshall’s definition of 81; price of putting off consumption (saving) 22, 126; returns to free capital in exchange equations 81; returns to investments in distribution equations 81; returns to capital 35; supply price of saving 125 rate of interest, Keynesian: acts on disposal of savings 114, 128; affects investment through marginal efficiency of capital 115–16, 128; confusions 134; contradictions 135; involves Central Bank 128; logical flaw in Keynes’s reasoning 129; logically indeterminate 137; price paid for money’s use 131; price of not hoarding 114, 127, 128; regulates quantity of money in circulation 114, 127; rental price of money 131; reward for parting with liquidity 128; would remain stable at full employment in conditions of certainty 130 rate of interest, reappraised: conditions of certainty 137; do not equilibrate anything 137; not price for ‘not doing something’ 136; not price of money loans 215; pure mercantilist view right one 137; true mercantilist view inverts Keynes’s perspective 215 Rational Expectations Theory 173 real analysis 23 real costs: aspect of realistic Marshall 60; ‘historical’ costs 60, 67; suppose real time and activities 60; see also Marshall’s economics real magnitudes 23

233

INDEX realistic Keynes: danger of so representing 96–7, 100–1 reification: definition 86; in Marshall’s theory of employment 86; in neoclassical economics 85–90 relational thinking 204; in neoclassical economics 14–15, 75–6; in Newton 14, 76 rent: according to Ricardo and Marshall 81–2; both natural and cultural surplus 84; contradictions 82–3; defined at the margin 81–2; predicated on law of diminishing returns 82; is price-determined 82; reified representation since Ricardo 89 research programmes: cannot be all simultaneously valid 4–5; circular 97; economies’ three 4; spiralling 97 revealed preference theory 33 revenue: not income 107 Ricardian economics: justifies industrial capitalism 12; labour theory of value 11–12; its manner of reasoning 11–12, 17; radicalist implications 12–13; see also classical economics Ricardo, D. 6, 9, 12, 65, 81–2, 88, 89, 117, 185, 197 Robbins, L. 5, 49, 53 Robertson, D.H. 96, 131, 136, 158 Robinson, J. 5, 33, 74, 97, 121, 173, 210 Rogin, L. 14 Rosenberg, A. 5 Samuelson, A. 37, 43, 44, 46, 54, 108 Samuelson, P. 5 saving, Keynesian: decision not to consume 114, 126; equality with investment 102, 104; natural proclivity to 119; no longer brings borrowers and lenders 113; not related to investment 126; related to income 114, 126 saving, neoclassical: equals flow of investment 126; as ‘waiting’ 89 saving, reappraised: does not inhibit investment 170; equal to investment by definitional identity only 168; as income disposal 169; no equality with investment 168–9; theoretically useless 171; would result from decreasing incomes 170 Schoeffler, S. 5

Schumpeter, J.A. 6, 8, 9, 12, 23, 31, 44, 45, 58, 65, 88, 199 scientific revolutions: mostly cosmological 3; various types 97 Scrope, G.P. 12 sectoral approach: about economic rationality 116–17, 174; about language 116; contradictions because transactional 158–9; investment 156; Keynes’s definition of 158; necessary to include time discontinuities 165–6; should not be transactional 160, 165; to be defined with respect to circuit of exchange 162 Sen, A. 143 Senior, N. 12, 89 Shackle, G.S. 37, 38, 45, 53, 54, 65, 99, 102, 130 shares, archetypal 133–4 shares: see bonds Shaw, O.K. 124, 174 Shove, G.F. 6, 20, 23, 28, 65 Shuster, J. 177 simultaneous equations: exclude time 45; underlie perfect market 34 Sismondi (de), J.C.L. 12 Smith, A. 6, 9–12, 17, 61, 73, 117, 179, 180, 184–5, 186–8 Smith, A.: accumulation as acceleration 9; causes and laws of production and accumulation 10–11; market as phenomenal hindrance 10; productive and unproductive activities 11; theory of value 10–11 social differentiation: at heart of Keynes’s macroeconomic thinking 109, 116 social relationships: cannot be summed up 25–6; delineate networks 24 social undifferentiation: corollary of perfect market 45–6; in neoclassical economics 116–17; of neoclassical individual 56; rules out bargaining 46; rules out exploitation 46 space, neoclassical: an illusion in OCT 62; internalized 62 speculation: applies to all old financial assets 133; cause of Keynes’s confusion over rates of interest 132–3; colours Keynes’s view of economic world 133, 140, 145; as gambling on time 45; and investment 158; leads to Aristotelian view of the

234

INDEX economy 134, 135; see also equilibrium Stewart, I.M. 5 Stigler, G.S. 6, 81 Streissler, E.W. 9 substantialism: Aristotelian 14, 69; blurs definitions of incomes 80–5; in classical economics 75–6; corollary of utilitarianism 81; corollary of theory of value 76; definition 78–9; inhibits conceptualization 75, 78–9; in labour theory of value 14; in neoclassical economics 77–8 substitution, principle of (Marshall): equated with equimarginal distribution 51, 87; equated with market competition 52, 87; operates in Hegelian fashion 87; special case of survival of the fittest 87 supplementary costs 147 supply: as ‘reversed demand’ in OCT 59 supply, Keynesian: determined by effective demand 112; determined by income 112; is entrepreneur’s privilege 112; as theory of output 112 supply schedules: cannot intersect demand schedules 33; their construction 30 supply and demand, neoclassical: asymmetrical 32–3; aggregate projections of social relationships 28; posited as symmetrical 31; synonymous with production and consumption 31; their articulation in Marshall 27–8 synthetic sciences: 13, 203; see also Comte, A. tâtonnements: problems surrounding 55 teleology: medieval 1; in neoclassical economics 56; not in modern science 1 theory of value: cause of substantialism in economics 76, 78 time: Aristotelian 1; in classical science 2; excluded in neoclassical economics 44–5; illusory in neoclassical economics 45; and Marshall 44 Tobin, J. 97 trade equivalents: in labour theory 35; in marginalism 36–7 trade: ruled out by perfect market 45

transactional: see neoclassical economics; Marshall’s economics transactions-motive: as income disposal 135 Tsiang, S.C. 206 uncertainty: aberrant in neoclassical economics 213; its economic implications 123; enables Keynes to move from experimental to observed 123; and neoclassical economics 125; phenomenal interference to Keynes 122; possible to move from certainty to 123; wrong theses about 213 unemployment equilibrium: could have been deduced from purely individualist-probabilistic premises 155 user costs 144–7; absurd when applied to sales of finished goods 144–5; Aristotelian survival 145–6; encompass all capital equipment 144; expectational 144; Keynes believes necessary for definition of income 144; predicated on idea of gains from inactivity 145; proper redefinition 146; results from speculative view of economy 145; useless to calculate income 146–7 utilitarianism: necessary corollary of an Aristotelian economics 80; necessarily felicific 80 utility theory of value: felicific 15; focalizes on consumption 16; must be wedded to marginal utility 16; places value in market exchanges 15–16; is relational 16 Verdon, M. 180 von Mises, L. 5, 6 wage-fund theory: contradicts Marshall’s theory of wages 89; as primitive theory of labour market 88; as theory of labourers’ demand for capital 88 Waldrop, M. 176 Walker, D. 74 Walras, L. 6, 8, 9, 38, 55, 73–4, 110; shares the neoclassical cosmology 73–4 Wicksteed, P.H. 49, 59 Wieser, F.V. 6, 20 Wolff, J. 74

235