Another
Lavoisian Insight about how the Neoclassical and Austrian Traditions are both
Defined by (Inextricable from) the Logic of Scarcity, despite how this Contradicts
(Post-Industrial-Revolution) Reality – with a Concluding Note on Ecology,
Climate Change and Dynamics
As Marc Lavoie
points out on page 6 of Post-Keynesian
Economics: New Foundations, the most accepted definition of economics,
which can be found in all orthodox textbooks, is that of Lionel Robbins (1932,
p. 16) (or a variant thereof). Robbins defined economics as “a science which
studies human behaviour as a relationship between ends and scarce means which
have alternative uses”, which he summed up by the slogan, economics is the
study of “behaviour conditioned by scarcity”. Later in the chapter [22-24],
Lavoie elaborates on what this means, and the implications it has:
“Scarcity is the fulcrum of neoclassical economics. As Parguez
(2012-13, p. 55) points out, scarcity in neoclassical economics plays a role
akin to that of austerity [meaning asceticism] in religion, where austerity is
‘the supreme virtue of renouncing pleasures of wordly life to attain the joy of
the afterlife’. Hayek (1941, p. 373-7), when rejecting Keynes’ economics, is
precisely invoking the crucial importance of scarcity. To proclaim the
existence of an economy of plenty or an economics of abundance, as did Keynes,
was to negate the foundations of orthodoxy. A similar point is made by
Galbraith (1958) in his book The Affluent
Society. In the neoclassical model, the main feature of a capitalist market
economy is the proper allocation of resources, real and financial. Prices, as
emphasized by Hayek, are supposed to provide all the information required to
make the market system function efficiently, because prices are the measure of
scarcity, so that the knowledge of prices allows agents to respond to changes
in scarce resources.
But is this really the case? Certainly, with respect to recent events,
we can assume that prices did misallocate financial resources, as
securitization provided misleading prices and too many financial resources were
put into real estate. This had just been preceded by the stock-market crash of
2000, when stock markets worldwide took a beating, while the NASDAQ in
particular plunged and never fully recovered. And then the real-estate bubble
was immediately followed by the super-high prices in commodities, food products
and oil, with these prices falling sharply just a few months later, thus giving
a strong indication that these prices had risen only as a result of unwarranted
speculative activity rather than as a consequence of changes in fundamentals.
Indeed, it has been argued that high commodities prices have arisen from the
efforts of financial managers to find new conduits that would be uncorrelated
with the returns on bond and equities. Thus high oil, commodities and food
prices result from inflows of funds in the futures markets of these products,
as fund managers follow a strategy of portfolio diversification that leads them
to speculate on futures indices (Wray, 2008; Davidson, 2008). Again, one may
think that these markets for derivatives have no influence on the real world;
but they do, because, being more liquid, they induce economic agents to base
their decisions on these futures markets, with the result that spot prices
depend on futures prices, instead of futures prices being (only) dependent on
spot prices.
Various conditions will be set in orthodox models to preserve scarcity
outside the standard conditions of exchange economies where endowments are
fixed: the stock of money will be assumed to be exogenous; full employment and
full capacity utilization will be assumed at all times. The crucial assumption
in most of modern orthodox macroeconomics, an assumption that drives all the
standard results and policies, is the existence of a unique natural rate of
unemployment (or of a single non-accelerating inflation rate of unemployment,
the NAIRU). Whatever realistic feature is introduced in the model, the assumed
uniqueness of the natural rate of unemployment will remove any room for
alternative policies. The same can be said about the natural rate of interest:
it forbids any imagination in central bank policy.
Scarcity justifies supply and demand analysis. It governs the behaviour
of the economy. It explains why neoclassical economists attach such importance
to the allocation of resources or why so many of them defined the techniques of
constrained optimization as the epitome of orthodox economics and as a
condition for scientific endeavour. When all resources are scarce, they are
fully employed, and therefore all questions revolve around the proper use of
existing resources, rather than around the creation of new commodities.
Scarcity is particularly obvious in pure exchange models. The supplementary
hypotheses that can be found in the various sophisticated neoclassical
production models are, however, being introduced precisely to safeguard all the
main conditions and results of the pure exchange model (Rogers, 1983; Pasinetti,
2007, p. 20). Production in neoclassical economics is a form of indirect
exchange, between individual consumer agents who own resources that transit to
the same individual agents, then christened producers. These producers are
nothing but arbitragistes attempting to benefit from existing scarcities.
In the heterodox research programme, in particular in the
post-Keynesian tradition, the notion of scarcity is put aside, while that of
reproducibility is put to the forefront (Roncaglia, 1978, p. 5; Painetti, 1981,
p. 24). With their emphasis on production, heterodox economists embark on the
tradition of the classical economists, with their concern for the causes of
progress and accumulation. In his review of the Cambridge critique, Rymes
(1971, p. 7) makes clear that the Sraffian concern for reproducibility is in
the lineage of the economic thought of Robinson, Kaldor and even Harrod. As
pointed out by Pasinetti (1981, p. 7), classical authors, in particular
Ricardo, focused on the permanent feature of reproducibility, considering that
produced goods could be multiplied without limits, and thus judging that,
besides land, scarcity conditions could only be of a temporary nature. Thus,
for post-Keynesians, prices are not an index of scarcity in general; rather,
prices reflect the unit costs of producing these reproducible goods or services
[plus mark-ups].
In post-Keynesian models where output is not disaggregated, the
emphasis on production appears through the assumption that in general neither
capital goods nor labour is fully employed. In this sense, resources are not
scarce. The major problem is not how to allocate them, but how to increase
production or the rate of growth. It is generally possible to increase the rate
of utilization of capacity and there are reserves of labour. The principle of
scarcity is replaced by the principle of effective demand. The true constraint
is not supply, but effective demand. As Kaldor (1983b, p. 6) says, ‘for
production to be demand-determined, excess capacity must exist as well as
unemployed labour’. Arestis (1996, p. 112) concurs: ‘Effective demand in
post-Keynesian analysis implies that it is scarcity of demand rather than
scarcity of resources that is to be confronted in modern economics, so that
output is ordinarily limited by effective demand, although it is recognised
that supply constraints are present in modern capitalist economies.’
I would be prepared to argue that, if orthodox economics is the
research programme of a world of scarcity, heterodox economics is the research
programme of a world of abundance (sometimes in the midst of poverty). John
Weeks (2012) has put things in a more striking fashion: ‘The economics of
scarcity is pernicious foolishness. By contrast, the economics of idle
resources addresses reality. It is the same as the difference between alchemy
and chemistry, astrology and astronomy, evolution and creationism.’”
Of course, Lavoie doesn’t mention the ecological reasons to think that wealthy
nations may face more ultimate constraints of supply in future (as opposed to
the merely contingent constraints of supply that occur in the modern world when
people can’t afford goods that do exist for them to consume without completely
impoverishing others). Climate change, pollution and overpopulation will make
(have made) the logic of scarcity more economically relevant, and will bring Hayek’s
notion of price-as-a-measure-of-scarcity a little more in line with reality for
at least a subset of important goods: we have already seen seafood prices rise
simply through scarcity over the last several decades; chocolate prices will
continue to rise over the next few decades because of scarcity; there are
certain important elements and compounds with limited accessible reserves on
our planet, like helium, whose price will continue to rise the more we deplete
its stocks; if important agricultural areas in America and Australis suffer
serious degradation as a result of climate change, that will cause a big rise
in the price of food which has nothing to do with demand; and if our global
supply of clean water continues to decline, the price of water may also rise
significantly.
It’s also important to note that this idea that price is largely a
measure of scarcity is not as obviously wrong in poor or weak societies with
insufficient wealth to import large quantities of goods, relatively primitive
agricultural technology and a backward industrial sector – these countries are
more akin to pre-industrialised Europe, when scarcity was certainly a major
determinant of prices of food and the absence of machinery and large factories
(that is, mass production, economies of scale) meant that it was much harder to
produce all commodities, which in
turn meant that a sudden rise in demand couldn’t immediately spur a sudden
increase in production but would just lead to shortages. The difference, of
course, is that food prices in the poor countries of the present, even in drought-afflicted East Africa,
are not ultimately measures of
scarcity (even if they are often practically,
when one takes a narrow perspective on scarcity within the country),
because if Ethiopians simply had more wealth, then they would be able to take
more of the agricultural surplus from countries which produce such a surplus
(like my own, Australia). People from Hong Kong eat very well, after all
(despite producing no food).
Incidentally, anti-capitalists like to say that world hunger has very
little to do with hard constraints of ecology, and a lot to do, when it comes down
to it, with the failure of our political and economic system to equitably
distribute resources. This is more or less true as it stands – but my point is
simply that it will become less and less true. Silly Libertarians and
economists like to say that there’s very little to worry about because innovations
in agricultural technology have consistently risen to the challenge of rising
population over the past few decades, making a fool of the earth-worshipping
doomsaysers and ‘Malthusians’. I say they’re silly – in fact, dangerously insane – because they don’t
understand basic physics (Thermodynamics): all production necessarily generates
waste and pollution (generates more disorder than the order it creates), and
that waste and pollution doesn’t disappear. Our planet is not only not infinite,
but extremely finite. And the simple fact is that it is completely idiotic to have confidence in induction to assess future
trends on an extremely finite, ever-more-polluted planet. Long-term exponential growth
does not exist in nature; you get sigmoid curves instead, or rapid curves that
are rapidly shorn off, like when you’re drawing a line on a Cartesian plane and
you hit the edge of the page. That we are nearing an ecological precipice is a
serious possibility, especially as the feedback effects of climate change begin
to seriously kick in. And, as I say, pollution doesn’t disappear. Ecosystems
take millions of years to create, and one for a modern capitalist firm to
destroy. How do you get rid of the millions of tonnes of plastic in
the ocean? How long does it take for the levels of CO2 in the atmosphere reach
a non-dangerous level? How long does it take to remove the noxious gases and
particulates from the air? How do you remove the run-off, pesticide and toxic
chemicals from river systems? How do you remove all the lead from soil laced
with it? How do you unbleach the Great Barrier Reef? How do you regrow precious
rainforest ecosystems? How do you bring
back species from extinction?[1]
Don’t hold your horses that we’re going to manage to escape to Mars
either. For the foreseeable future, that remains a total pipedream, and this
article explains one of the major reasons why: http://fivethirtyeight.com/features/space-sex-is-serious-business/.
The final thing I want to say is this: the effect of context on the
relative importance of supply and demand as ultimate causes of prosperity and
on price theory clearly shows that pretensions of universalism in economics (as
in social science in general) are stupid. You can’t even necessarily apply the
same price theory across different countries, let alone different times.
Now, this is not to say that the same patterns don’t apply across
different societies: two of my favourite examples are Michael Hudson’s
historical work on debt build-ups in ancient societies, and Peter Turchin’s grand
historical theory of cycles, as best outlined in his wonderful 2005 book, War and Peace and War. But it is to say
that an economics without time is fucking insane – and that’s what neoclassical
economics is! Neoclassical economics is economics without change, economics
which assumes that complex systems naturally return to equilibrium, that
capitalist economies are like self-lubricating machines. It dismisses the
entire basis for human existence – ecology, the planet, the environment – as
“an externality”. It will become increasingly clear to everyone over the coming
decades that the environment is not “an externality”.
Au contraire, it is the most fundamental internality of all.
[1]
Don’t give me bullshit about the woolly mammoth. Nobody knows how to bring back
a woolly mammoth; they only know how to bring back a furry elephant (the
reporting has been misleading).
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