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Commentary :: Economy
Theologians of the Market Economy
Mandeville's thesis that private vices often change inadvertently into collective virtues as a bee collaborates in building a beehive is a literary construction. The market in Smith's explanation is nothing but a religious paradox.
THEOLOGIANS OF THE MARKET ECONOMY
The dogma of blessed competition is unbroken although long empirically refuted
By Jacques Sapir
[This article published in: Le Monde diplomatique, September 2006 is translated from the German on the World Wide Web, www.taz.de/pt/2006/09/15.1/mondeText.artikel,a0035.idx,4]
Political debates are often poisoned today by theoretical economic assertions and “foregone conclusions” that claim to be unquestionable facts and “objective” statements valid across all political borders. As a result, some themes – like protectionist measures and the positive role of public enterprises or government interventions – are left out from the start.
These foregone theoretical economic conclusions cannot be questioned if they have a scientific basis. No one would put the natural laws up for discussion. However if the foundations prove dubious, their significance in the public debate must be regarded as a fraud and arrogance hostile to democracy.
In fact, a minority who has no political responsibility draws up these assertions. But if the discipline of political economy is scientific, it must accept certain rules of verification and ways of argumentation. Neoliberal thinking dismisses social demands (1).
The most important pseudo-evidence of neoliberal thinking concerns the fundamental role of competition justifying the primacy of free trade on the macro-economic level and the primacy of flexibility on the micro-economic level (2). Therefore neoliberals wanted to codify the competition principle as a central principle in the European constitution.
The oldest debates of modern economic theory turned around this principle. This was not so much the question whether competition under certain circumstances and with certain goods is the proper means for harmonizing individual actions. That question would have had a reality reference. Rather neoliberals elevated competition into a dogma above the question about the concrete conditions of its conversion.
PRIVATE VICES AND POLITICAL VIRTUES
The competition dogma goes back to the founding fathers of the classical economy in the 18th century: David Hume, Bernard Mandeville and Adam Smith. They wanted to show that the works of individuals competing with each other and selfishly pursuing their goals spontaneously benefited the public welfare. That was the fundamental meaning of the first general free trade theory by Hume, the bee fable by Mandeville and the famous “invisible hand” in Adam Smith’s theory.
The argumentation of the three authors does not stand up to examination. Hume’s theory of the automatically balanced international trade accepted almost literally by the apologists of the World Trade Organization (WTO) is based on unrealistic assumptions. This is true particularly for the notion that all economic actors always have the same concrete information and that a free balance always occurs between supply and demand. That goods and services can be completely substituted for customers and suppliers is always assumed.
Mandeville’s thesis that private vices (like egoism and ambition) often change inadvertently into “collective virtues” as a bee collaborates in building a beehive without knowing or intending this is nothing but a literary construction. Adam Smith nowhere described the functioning of the “invisible hand” (that is, of the market, coordinating production and consumption to one another spontaneously and better than any earlier system). As the historian Jean-Claude Perrot showed, the market in Smith’s attempted scientific explanation is nothing but a religious paradox (3).
With their formulation of quasi-natural laws, the three authors really pursued political goals. Hume wanted to show that free trade causing the happiness of everyone made inter-state conflicts superfluous (4). Mandeville and Smith referred to an order produced spontaneously by competition to demonstrate that society can manage without enlightened despots and their arbitrariness. One can have sympathy for Hume’s love of peace and the rejection of despotism by Mandeville and Smith. However the instrumentalization of a pseudo-scientific discourse for good ends should not be confused with a well-founded argument.
Since the end of the 19th century, the competition theory has branched out in three schools. The first school has the greatest influence today. In the succession of Leon Walras (1834-1910), this school starts from the assumption that the competition mechanism brings about a balance between the demand of one and the ability of another to satisfy that demand. Wilfredo Pareto (1848-1923) supplemented this with the idea that the economic balance by nature is also a social balance. The same answer to the diverse economic problems appears again and again: competition is optimal on the economic plane and on the social plane – so all further discussion is unnecessary (5).
The second school arose as an answer to the diverse problems resulting from the theories of Walras and Pareto. Authors like Ludwig von Mises and Friedrich von Hayek belong to this “Austrian school.” For them, competition is a neo-Darwinian process for eliminating inefficient solutions, not a spontaneously effective mechanism.
Finally, the third school understands competition first of all as an innovation dynamic in whose course older solutions disappear and new more suitable solutions gain acceptance. A balance is no longer emphasized. Competition acts as an instrument of the permanent upheaval of economic activity described as “creative destruction.” Joseph Schumpeter (1853-1950) who contributed most to this theory had the same goal as his predecessors in the 18th century. He also wanted to de-politicize the economy and saw immanent “laws” at work in place of the conscious and concerted actions of individuals (6).
The theoretical references of these three schools cannot be reconciled. If one takes the standpoint of Kenneth Arrow and Gerard Debrev who brought the models of Walras and Pareto from the 1940s and 1950s in a more modern form, neither the “Austrian” nor the Schumpeterian competition theories can be accepted. Whoever adopts Hayek’s assumptions bids farewell to the balance theory. The three theories do not fit together but exclude one another.
THE COMPETITION THEORY REGARDS EVERYBODY AS ALL-KNOWING
The initial hypothesis causes headaches. The assumption of a complete and comprehensive informed state of economic actors necessary for the balance theory is absurd since it describes all these actors as omniscient. This assumption is of central importance. The markets no longer function efficiently as soon as imperfections and asymmetries in the informed state of the economic actors are allowed. Competition is then de-stabilizing and state incursions are necessary. This has been known for a long time in theory through the works of Nobel Prize winner Joseph E. Stiglitz. (7)
Other assumptions of the three theoretical schools also prove untenable. For example, the Arrow-Debrev model assumes that the preferences of individuals remain stable and constant independent of the situation. If we prefer product A to product B and product B to product C, this should be true under all circumstances. With identical elective possibilities, we will always decide the same. That the assumed preferences remain the same in the long run is also implied in Hayek’s selection process. Selection presupposes that our individual experiences are completely comparable with one another and our likings are not influenced by new experiences. That every experience – whether yesterday or tomorrow – leaves behind the same recollection is also assumed. Expressed mathematically, Hayek assumes that our reaction represents an average of our experiences and not some extreme value.
The Schumpeter model presupposes that the shocks caused by innovations have no consequences for our preference structure. Thus we either prefer profit to security or vice versa. The degree of our satisfaction always remains the same, even if the use spectrum of new goods differs greatly from the older goods.
All these assumptions about human conduct were extensively reviewed in the 1970s. (8) They were unanimously refuted in repeated standardized tests under strict scientific conditions. Our preference between two medical treatment procedures depends strongly on whether the treatment result is counted as a post-operative life expectancy or as a likely death.
Whether we prefer profit or security can change abruptly… In a medical examination, we forget a frequent short pain more quickly than medium lasting pains. These test results refute the assumptions of the neoclassical model (stable preferences and action strategies) and the hypotheses underlying the models of Hayek and Schumpeter.
In reality, our preferences are determined by the decision’s context (framing effect) or our material wealth (endowment effect). Our cognitive apparatus reacts to extreme experiences more strongly than to gradual developments where new experiential elements constantly feed our option models.
The refutation of the models that start from a situation-independent calculability of action for the economic subject is one of the most important achievements of the last thirty years for the social sciences. Most economists follow the strategy of simply ignoring these research results in order not to doubt their models. They show they have long bid farewell to their scientific claim. (9) Consequently, the fundamental role of competition for organizing economic life proves to be a quasi-religious dogma, not a hypothesis.
At the beginning of the 21st century, we fall back to the level of the ending 18th century. A legitimate scientific project – the analysis of the process of production, exchange and consumption in human societies – is made subservient to pure ideological ends. Given the scandals in which diverse “experts” were entangled in the privatization of the Russian economy (10) or the affairs around Enron, WorldCom and Parmalat (11), these ideological goals seem much less noble than the ends in which Hume, Mandeville and Adam Smith were oriented.
Certain economists are culpable in a double way when they prostitute their subject – whether out of lust for power or greed for money. On one hand, they violate the principles of democracy when they present a myth with catastrophic social consequences as scientific truth and an unquestionable “foregone conclusion.” On the other hand, they violate the principles of scientific research and discredit the legitimacy of a real scientific exploration of economic questions.
FOOTNOTES
(1) Dazu Daniel M. Hausman, "The Inexact and Separate Science of Economics", Cambridge/GB (Cambridge University Press) 1994, insbesondere Kapitel 13: "On dogmatism in ectoproctes: the case of preference reversals".
(2) Dazu Frédéric Lordon, "Der Augenblick der Wahrheit", Le Monde diplomatique, Mai 2005.
(3) Jean-Claude Perrot, "Une histoire intellectuelle de l'économie politique", Paris (Editions de l'EHESS) 1992, S. 141 f.
(4) David Hume, "Political Discourses" (1752). Siehe auch den Kommentar Jean-Claude Perrots zum Dialog Hume - Turgot, a. a. O., S. 237-255.
(5) Siehe Jacques Sapir "Les trous noirs de la science économique", Paris (Albin Michel) 2000.
(6) Siehe( )Jacques Généreux, "Les vraies lois de l'économie", Paris (Seuil) 2000.
(7) Siehe etwa Sandford J. Grossman und Joseph E. Stiglitz, "On the Impossibility of Informationally Efficient Markets", American Economic Review 44 (2), Pittsburg 1980, S. 451-463.
(8) Daniel Kahneman, "New challenges to the rationality assumption", und Amos Tversky, "Rational Theory and Constructive Choice", in: Kenneth J. Arrow, Enrico Colombatto, Mark Perlman und Christian Schmidt (Hrsg.), "The Rational Foundations of Economic Behaviour", New York (Saint Martin's Press) 1996.
(9) Daniel M. Hausman, "The Inexact and Separate Science of Economics", a. a. O., Kapitel 13. Dazu Hazel Henderson, "Prix Nobel, l'imposture", Le Monde diplomatique, Februar 2005.
(10) Dazu Nina Bachkatov, "Russland: Patrioten und Oligarchen", Le Monde diplomatique, Dezember 2003.
(11) Dazu Thomas Frank, "Enron: Elvis singt hier nicht mehr", Le Monde diplomatique, Februar 2002.
Aus dem Französischen von Bodo Schulze
Jacques Sapir ist Forschungsleiter an der Ecole des Hautes Etudes en Siences Sociales und Autor unter anderem von "Les économistes contre la démocratie", Paris (Albin Michel) 2002, sowie "La fin de l'euro-libéralisme", Paris (Seuil) 2006.
Le Monde diplomatique Nr. 8075 vom 15.9.2006, 394 Zeilen, Jacques Sapir
The dogma of blessed competition is unbroken although long empirically refuted
By Jacques Sapir
[This article published in: Le Monde diplomatique, September 2006 is translated from the German on the World Wide Web, www.taz.de/pt/2006/09/15.1/mondeText.artikel,a0035.idx,4]
Political debates are often poisoned today by theoretical economic assertions and “foregone conclusions” that claim to be unquestionable facts and “objective” statements valid across all political borders. As a result, some themes – like protectionist measures and the positive role of public enterprises or government interventions – are left out from the start.
These foregone theoretical economic conclusions cannot be questioned if they have a scientific basis. No one would put the natural laws up for discussion. However if the foundations prove dubious, their significance in the public debate must be regarded as a fraud and arrogance hostile to democracy.
In fact, a minority who has no political responsibility draws up these assertions. But if the discipline of political economy is scientific, it must accept certain rules of verification and ways of argumentation. Neoliberal thinking dismisses social demands (1).
The most important pseudo-evidence of neoliberal thinking concerns the fundamental role of competition justifying the primacy of free trade on the macro-economic level and the primacy of flexibility on the micro-economic level (2). Therefore neoliberals wanted to codify the competition principle as a central principle in the European constitution.
The oldest debates of modern economic theory turned around this principle. This was not so much the question whether competition under certain circumstances and with certain goods is the proper means for harmonizing individual actions. That question would have had a reality reference. Rather neoliberals elevated competition into a dogma above the question about the concrete conditions of its conversion.
PRIVATE VICES AND POLITICAL VIRTUES
The competition dogma goes back to the founding fathers of the classical economy in the 18th century: David Hume, Bernard Mandeville and Adam Smith. They wanted to show that the works of individuals competing with each other and selfishly pursuing their goals spontaneously benefited the public welfare. That was the fundamental meaning of the first general free trade theory by Hume, the bee fable by Mandeville and the famous “invisible hand” in Adam Smith’s theory.
The argumentation of the three authors does not stand up to examination. Hume’s theory of the automatically balanced international trade accepted almost literally by the apologists of the World Trade Organization (WTO) is based on unrealistic assumptions. This is true particularly for the notion that all economic actors always have the same concrete information and that a free balance always occurs between supply and demand. That goods and services can be completely substituted for customers and suppliers is always assumed.
Mandeville’s thesis that private vices (like egoism and ambition) often change inadvertently into “collective virtues” as a bee collaborates in building a beehive without knowing or intending this is nothing but a literary construction. Adam Smith nowhere described the functioning of the “invisible hand” (that is, of the market, coordinating production and consumption to one another spontaneously and better than any earlier system). As the historian Jean-Claude Perrot showed, the market in Smith’s attempted scientific explanation is nothing but a religious paradox (3).
With their formulation of quasi-natural laws, the three authors really pursued political goals. Hume wanted to show that free trade causing the happiness of everyone made inter-state conflicts superfluous (4). Mandeville and Smith referred to an order produced spontaneously by competition to demonstrate that society can manage without enlightened despots and their arbitrariness. One can have sympathy for Hume’s love of peace and the rejection of despotism by Mandeville and Smith. However the instrumentalization of a pseudo-scientific discourse for good ends should not be confused with a well-founded argument.
Since the end of the 19th century, the competition theory has branched out in three schools. The first school has the greatest influence today. In the succession of Leon Walras (1834-1910), this school starts from the assumption that the competition mechanism brings about a balance between the demand of one and the ability of another to satisfy that demand. Wilfredo Pareto (1848-1923) supplemented this with the idea that the economic balance by nature is also a social balance. The same answer to the diverse economic problems appears again and again: competition is optimal on the economic plane and on the social plane – so all further discussion is unnecessary (5).
The second school arose as an answer to the diverse problems resulting from the theories of Walras and Pareto. Authors like Ludwig von Mises and Friedrich von Hayek belong to this “Austrian school.” For them, competition is a neo-Darwinian process for eliminating inefficient solutions, not a spontaneously effective mechanism.
Finally, the third school understands competition first of all as an innovation dynamic in whose course older solutions disappear and new more suitable solutions gain acceptance. A balance is no longer emphasized. Competition acts as an instrument of the permanent upheaval of economic activity described as “creative destruction.” Joseph Schumpeter (1853-1950) who contributed most to this theory had the same goal as his predecessors in the 18th century. He also wanted to de-politicize the economy and saw immanent “laws” at work in place of the conscious and concerted actions of individuals (6).
The theoretical references of these three schools cannot be reconciled. If one takes the standpoint of Kenneth Arrow and Gerard Debrev who brought the models of Walras and Pareto from the 1940s and 1950s in a more modern form, neither the “Austrian” nor the Schumpeterian competition theories can be accepted. Whoever adopts Hayek’s assumptions bids farewell to the balance theory. The three theories do not fit together but exclude one another.
THE COMPETITION THEORY REGARDS EVERYBODY AS ALL-KNOWING
The initial hypothesis causes headaches. The assumption of a complete and comprehensive informed state of economic actors necessary for the balance theory is absurd since it describes all these actors as omniscient. This assumption is of central importance. The markets no longer function efficiently as soon as imperfections and asymmetries in the informed state of the economic actors are allowed. Competition is then de-stabilizing and state incursions are necessary. This has been known for a long time in theory through the works of Nobel Prize winner Joseph E. Stiglitz. (7)
Other assumptions of the three theoretical schools also prove untenable. For example, the Arrow-Debrev model assumes that the preferences of individuals remain stable and constant independent of the situation. If we prefer product A to product B and product B to product C, this should be true under all circumstances. With identical elective possibilities, we will always decide the same. That the assumed preferences remain the same in the long run is also implied in Hayek’s selection process. Selection presupposes that our individual experiences are completely comparable with one another and our likings are not influenced by new experiences. That every experience – whether yesterday or tomorrow – leaves behind the same recollection is also assumed. Expressed mathematically, Hayek assumes that our reaction represents an average of our experiences and not some extreme value.
The Schumpeter model presupposes that the shocks caused by innovations have no consequences for our preference structure. Thus we either prefer profit to security or vice versa. The degree of our satisfaction always remains the same, even if the use spectrum of new goods differs greatly from the older goods.
All these assumptions about human conduct were extensively reviewed in the 1970s. (8) They were unanimously refuted in repeated standardized tests under strict scientific conditions. Our preference between two medical treatment procedures depends strongly on whether the treatment result is counted as a post-operative life expectancy or as a likely death.
Whether we prefer profit or security can change abruptly… In a medical examination, we forget a frequent short pain more quickly than medium lasting pains. These test results refute the assumptions of the neoclassical model (stable preferences and action strategies) and the hypotheses underlying the models of Hayek and Schumpeter.
In reality, our preferences are determined by the decision’s context (framing effect) or our material wealth (endowment effect). Our cognitive apparatus reacts to extreme experiences more strongly than to gradual developments where new experiential elements constantly feed our option models.
The refutation of the models that start from a situation-independent calculability of action for the economic subject is one of the most important achievements of the last thirty years for the social sciences. Most economists follow the strategy of simply ignoring these research results in order not to doubt their models. They show they have long bid farewell to their scientific claim. (9) Consequently, the fundamental role of competition for organizing economic life proves to be a quasi-religious dogma, not a hypothesis.
At the beginning of the 21st century, we fall back to the level of the ending 18th century. A legitimate scientific project – the analysis of the process of production, exchange and consumption in human societies – is made subservient to pure ideological ends. Given the scandals in which diverse “experts” were entangled in the privatization of the Russian economy (10) or the affairs around Enron, WorldCom and Parmalat (11), these ideological goals seem much less noble than the ends in which Hume, Mandeville and Adam Smith were oriented.
Certain economists are culpable in a double way when they prostitute their subject – whether out of lust for power or greed for money. On one hand, they violate the principles of democracy when they present a myth with catastrophic social consequences as scientific truth and an unquestionable “foregone conclusion.” On the other hand, they violate the principles of scientific research and discredit the legitimacy of a real scientific exploration of economic questions.
FOOTNOTES
(1) Dazu Daniel M. Hausman, "The Inexact and Separate Science of Economics", Cambridge/GB (Cambridge University Press) 1994, insbesondere Kapitel 13: "On dogmatism in ectoproctes: the case of preference reversals".
(2) Dazu Frédéric Lordon, "Der Augenblick der Wahrheit", Le Monde diplomatique, Mai 2005.
(3) Jean-Claude Perrot, "Une histoire intellectuelle de l'économie politique", Paris (Editions de l'EHESS) 1992, S. 141 f.
(4) David Hume, "Political Discourses" (1752). Siehe auch den Kommentar Jean-Claude Perrots zum Dialog Hume - Turgot, a. a. O., S. 237-255.
(5) Siehe Jacques Sapir "Les trous noirs de la science économique", Paris (Albin Michel) 2000.
(6) Siehe( )Jacques Généreux, "Les vraies lois de l'économie", Paris (Seuil) 2000.
(7) Siehe etwa Sandford J. Grossman und Joseph E. Stiglitz, "On the Impossibility of Informationally Efficient Markets", American Economic Review 44 (2), Pittsburg 1980, S. 451-463.
(8) Daniel Kahneman, "New challenges to the rationality assumption", und Amos Tversky, "Rational Theory and Constructive Choice", in: Kenneth J. Arrow, Enrico Colombatto, Mark Perlman und Christian Schmidt (Hrsg.), "The Rational Foundations of Economic Behaviour", New York (Saint Martin's Press) 1996.
(9) Daniel M. Hausman, "The Inexact and Separate Science of Economics", a. a. O., Kapitel 13. Dazu Hazel Henderson, "Prix Nobel, l'imposture", Le Monde diplomatique, Februar 2005.
(10) Dazu Nina Bachkatov, "Russland: Patrioten und Oligarchen", Le Monde diplomatique, Dezember 2003.
(11) Dazu Thomas Frank, "Enron: Elvis singt hier nicht mehr", Le Monde diplomatique, Februar 2002.
Aus dem Französischen von Bodo Schulze
Jacques Sapir ist Forschungsleiter an der Ecole des Hautes Etudes en Siences Sociales und Autor unter anderem von "Les économistes contre la démocratie", Paris (Albin Michel) 2002, sowie "La fin de l'euro-libéralisme", Paris (Seuil) 2006.
Le Monde diplomatique Nr. 8075 vom 15.9.2006, 394 Zeilen, Jacques Sapir
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