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C.1 What is wrong with economics?

172–218 minutos

In a nutshell, a lot. While economists like to portray their discipline as "scientific" and "value free",
the reality is very different. It is, in fact, very far from a science and hardly "value free." Instead it
is, to a large degree, deeply ideological and its conclusions almost always (by a strange co-
incidence) what the wealthy, landlords, bosses and managers of capital want to hear. The words of
Kropotkin still ring true today:
"Political Economy has always confined itself to stating facts occurring in society, and
justifying them in the interest of the dominant class . . . Having found [something]
profitable to capitalists, it has set it up as a principle." [The Conquest of Bread, p.
181]

This is at its best, of course. At its worse economics does not even bother with the facts and simply
makes the most appropriate assumptions necessary to justify the particular beliefs of the economists
and, usually, the interests of the ruling class. This is the key problem with economics: it is not a
science. It is not independent of the class nature of society, either in the theoretical models it builds
or in the questions it raises and tries to answer. This is due, in part, to the pressures of the market, in
part due to the assumptions and methodology of the dominant forms of economics. It is a mishmash
of ideology and genuine science, with the former (unfortunately) being the bulk of it.
The argument that economics, in the main, is not a science it not one restricted to anarchists or other
critics of capitalism. Some economists are well aware of the limitations of their profession. For
example, Steve Keen lists many of the flaws of mainstream (neoclassical) economics in his
excellent book Debunking Economics, noting that (for example) it is based on a "dynamically
irrelevant and factually incorrect instantaneous static snap-shot" of the real capitalist economy.
[Debunking Economics, p. 197] The late Joan Robinson argued forcefully that the neoclassical
economist "sets up a 'model' on arbitrarily constructed assumptions, and then applies 'results' from
it to current affairs, without even trying to pretend that the assumptions conform to reality."
[Collected Economic Papers, vol. 4, p. 25] More recently, economist Mark Blaug has summarised
many of the problems he sees with the current state of economics:
"Economics has increasing become an intellectual games played for its own sake and
not for its practical consequences. Economists have gradually converted the subject
into a sort of social mathematics in which analytical rigor as understood in math
departments is everything and empirical relevance (as understood in physics
departments) is nothing . . . general equilibrium theory . . . using economic terms like
'prices', 'quantities', 'factors of production,' and so on, but that nevertheless is clearly
and even scandalously unrepresentative of any recognisable economic system. . .

"Perfect competition never did exist and never could exist because, even when firms are
small, they do not just take the price but strive to make the price. All the current
textbooks say as much, but then immediately go on to say that the 'cloud-cuckoo'
 fantasyland of perfect competition is the benchmark against which we may say
something significant about real-world competition . . . But how can an idealised state
of perfection be a benchmark when we are never told how to measure the gap between
it and real-world competition? It is implied that all real-world competition is
'approximately' like perfect competition, but the degree of the approximation is never
specified, even vaguely . . .

"Think of the following typical assumptions: perfectly infallible, utterly omniscient,

infinitely long-lived identical consumers; zero transaction costs; complete markets for
all time-stated claims for all conceivable events, no trading of any kind at
disequilibrium prices; infinitely rapid velocities of prices and quantities; no radical,
incalculable uncertainty in real time but only probabilistically calculable risk in logical
time; only linearly homogeneous production functions; no technical progress requiring
embodied capital investment, and so on, and so on -- all these are not just unrealistic
but also unrobust assumptions. And yet they figure critically in leading economic
theories." ["Disturbing Currents in Modern Economics", Challenge!, Vol. 41, No. 3,
May-June, 1998]

So neoclassical ideology is based upon special, virtually ad hoc, assumptions. Many of the
assumptions are impossible, such as the popular assertion that individuals can accurately predict the
future (as required by "rational expectations" and general equilibrium theory), that there are a
infinite number of small firms in every market or that time is an unimportant concept which can be
abstracted from. Even when we ignore those assumptions which are obviously nonsense, the
remaining ones are hardly much better. Here we have a collection of apparently valid positions
which, in fact, rarely have any basis in reality. As we discuss in section C.1.2, an essential one,
without which neoclassical economics simply disintegrates, has very little basis in the real world (in
fact, it was invented simply to ensure the theory worked as desired). Similarly, markets often adjust
in terms of quantities rather than price, a fact overlooked in general equilibrium theory. Some of the
assumptions are mutually exclusive. For example, the neo-classical theory of the supply curve is
based on the assumption that some factor of production cannot be changed in the short run. This is
essential to get the concept of diminishing marginal productivity which, in turn, generates a rising
marginal cost and so a rising supply curve. This means that firms within an industry cannot change
their capital equipment. However, the theory of perfect competition requires that in the short period
there are no barriers to entry, i.e. that anyone outside the industry can create capital equipment and
move into the market. These two positions are logically inconsistent.
In other words, although the symbols used in mainstream may have economic sounding names, the
theory has no point of contact with empirical reality (or, at times, basic logic):
"Nothing in these abstract economic models actually works in the real world. It doesn't
matter how many footnotes they put in, or how many ways they tinker around the edges.
The whole enterprise is totally rotten at the core: it has no relation to reality." [Noam
Chomsky, Understanding Power, pp. 254-5]

As we will indicate, while its theoretical underpinnings are claimed to be universal, they are
specific to capitalism and, ironically, they fail to even provide an accurate model of that system as it
ignores most of the real features of an actual capitalist economy. So if an economist does not say
that mainstream economics has no bearing to reality, you can be sure that what he or she tells you
will be more likely ideology than anything else. "Economic reality" is not about facts; it's about
faith in capitalism. Even worse, it is about blind faith in what the economic ideologues say about
capitalism. The key to understanding economists is that they believe that if it is in an economic
textbook, then it must be true -- particularly if it confirms any initial prejudices. The opposite is
usually the case.
The obvious fact that the real world is not like that described by economic text books can have
some funny results, particularly when events in the real world contradict the textbooks. For most
economists, or those who consider themselves as such, the textbook is usually preferred. As such,
much of capitalist apologetics is faith-driven. Reality has to be adjusted accordingly.
A classic example was the changing positions of pundits and "experts" on the East Asian economic
miracle. As these economies grew spectacularly during the 1970s and 1980s, the experts universally
applauded them as examples of the power of free markets. In 1995, for example, the right-wing
Heritage Foundation's index of economic freedom had four Asian countries in its top seven
countries. The Economist explained at the start of 1990s that Taiwan and South Korea had among
the least price-distorting regimes in the world. Both the Word Bank and IMF agreed, downplaying
the presence of industrial policy in the region. This was unsurprising. After all, their ideology said
that free markets would produce high growth and stability and so, logically, the presence of both in
East Asia must be driven by the free market. This meant that, for the true believers, these nations
were paradigms of the free market, reality not withstanding. The markets agreed, putting billions
into Asian equity markets while foreign banks loaned similar vast amounts.
In 1997, however, all this changed when all the Asian countries previously qualified as "free" saw
their economies collapse. Overnight the same experts who had praised these economies as
paradigms of the free market found the cause of the problem -- extensive state intervention. The
free market paradise had become transformed into a state regulated hell! Why? Because of ideology
-- the free market is stable and produces high growth and, consequently, it was impossible for any
economy facing crisis to be a free market one! Hence the need to disown what was previously
praised, without (of course) mentioning the very obvious contradiction.
In reality, these economies had always been far from the free market. The role of the state in these
"free market" miracles was extensive and well documented. So while East Asia "had not only
grown faster and done better at reducing poverty than any other region of the world . . . it had also
been more stable," these countries "had been successful not only in spite of the fact that they had
not followed most of the dictates of the Washington Consensus [i.e. neo-liberalism], but because
they had not." The government had played "important roles . . . far from the minimalist [ones]
beloved" of neo-liberalism. During the 1990s, things had changed as the IMF had urged a
"excessively rapid financial and capital market liberalisation" for these countries as sound
economic policies. This "was probably the single most important cause of the [1997] crisis" which
saw these economies suffer meltdown, "the greatest economic crisis since the Great Depression" (a
meltdown worsened by IMF aid and its underlying dogmas). Even worse for the believers in market
fundamentalism, those nations (like Malaysia) that refused IMF suggestions and used state
intervention has a "shorter and shallower" downturn than those who did not. [Joseph Stiglitz,
Globalisation and its Discontents, p. 89, p. 90, p. 91 and p. 93] Even worse, the obvious
conclusion from these events is more than just the ideological perspective of economists, it is that
"the market" is not all-knowing as investors (like the experts) failed to see the statist policies so
bemoaned by the ideologues of capitalism after 1997.
This is not to say that the models produced by neoclassical economists are not wonders of
mathematics or logic. Few people would deny that a lot of very intelligent people have spent a lot of
time producing some quite impressive mathematical models in economics. It is a shame that they
are utterly irrelevant to reality. Ironically, for a theory claims to be so concerned about allocating
scarce resources efficiently, economics has used a lot of time and energy refining the analyses of
economies which have not, do not, and will not ever exist. In other words, scare resources have
been inefficiently allocated to produce waste.
Why? Perhaps because there is a demand for such nonsense? Some economists are extremely keen
to apply their methodology in all sorts of areas outside the economy. No matter how inappropriate,
they seek to colonise every aspect of life. One area, however, seems immune to such analysis. This
is the market for economic theory. If, as economists stress, every human activity can be analysed by
economics then why not the demand and supply of economics itself? Perhaps because if that was
done some uncomfortable truths would be discovered?
Basic supply and demand theory would indicate that those economic theories which have utility to
others would be provided by economists. In a system with inequalities of wealth, effective demand
is skewed in favour of the wealthy. Given these basic assumptions, we would predict that only these
forms of economists which favour the requirements of the wealthy would gain dominance as these
meet the (effective) demand. By a strange co-incidence, this is precisely what has happened. This
did and does not stop economists complaining that dissidents and radicals were and are biased. As
Edward Herman points out:
"Back in 1849, the British economist Nassau Senior chided those defending trade
unions and minimum wage regulations for expounding an 'economics of the poor.' The
idea that he and his establishment confreres were putting forth an 'economics of the
rich' never occurred to him; he thought of himself as a scientist and spokesperson of
true principles. This self-deception pervaded mainstream economics up to the time of
the Keynesian Revolution of the 1930s. Keynesian economics, though quickly tamed
into an instrument of service to the capitalist state, was disturbing in its stress on the
inherent instability of capitalism, the tendency toward chronic unemployment, and the
need for substantial government intervention to maintain viability. With the resurgent
capitalism of the past 50 years, Keynesian ideas, and their implicit call for intervention,
have been under incessant attack, and, in the intellectual counterrevolution led by the
Chicago School, the traditional laissez-faire ('let-the-fur-fly') economics of the rich has
been re-established as the core of mainstream economics." [The Economics of the
Rich ]

Herman goes on to ask "[w]hy do the economists serve the rich?" and argues that "[f]or one thing,
the leading economists are among the rich, and others seek advancement to similar heights.
Chicago School economist Gary Becker was on to something when he argued that economic
motives explain a lot of actions frequently attributed to other forces. He of course never applied this
idea to economics as a profession . . ." There are a great many well paying think tanks, research
posts, consultancies and so on that create an "'effective demand' that should elicit an appropriate
supply resource."
Elsewhere, Herman notes the "class links of these professionals to the business community were
strong and the ideological element was realised in the neoclassical competitive model . . . Spin-off
negative effects on the lower classes were part of the 'price of progress.' It was the elite orientation
of these questions [asked by economics], premises, and the central paradigm [of economic theory]
that caused matters like unemployment, mass poverty, and work hazards to escape the net of
mainstream economist interest until well into the twentieth century." Moreover, "the economics
profession in the years 1880-1930 was by and large strongly conservative, reflecting in its core
paradigm its class links and sympathy with the dominant business community, fundamentally anti-
union and suspicious of government, and tending to view competition as the true and durable state
of nature." [Edward S. Herman, "The Selling of Market Economics," pp. 173-199, New Ways of
Knowing, Marcus G. Raskin and Herbert J. Bernstein (eds.),p. 179-80 and p. 180]
Rather than scientific analysis, economics has always been driven by the demands of the wealthy
("How did [economics] get instituted? As a weapon of class warfare." [Chomsky, Op. Cit., p.
252]). This works on numerous levels. The most obvious is that most economists take the current
class system and wealth/income distribution as granted and generate general "laws" of economics
from a specific historical society. As we discuss in the next section, this inevitably skews the
"science" into ideology and apologetics. The analysis is also (almost inevitably) based on
individualistic assumptions, ignoring or downplaying the key issues of groups, organisations, class
and the economic and social power they generate. Then there are the assumptions used and
questions raised. As Herman argues, this has hardly been a neutral process:
"the theorists explicating these systems, such as Carl Menger, Leon Walras, and Alfred
Marshall, were knowingly assuming away formulations that raised disturbing questions
(income distribution, class and market power, instability, and unemployment) and
creating theoretical models compatible with their own policy biases of status quo or
modest reformism . . . Given the choice of 'problem,' ideology and other sources of bias
may still enter economic analysis if the answer is predetermined by the structure of the
theory or premises, or if the facts are selected or bent to prove the desired answer." [Op.
Cit., p. 176]

Needless to say, economics is a "science" with deep ramifications within society. As a result, it
comes under pressure from outside influences and vested interests far more than, say, anthropology
or physics. This has meant that the wealthy have always taken a keen interest that the "science"
teaches the appropriate lessons. This has resulted in a demand for a "science" which reflects the
interests of the few, not the many. Is it really just a co-incidence that the lessons of economics are
just what the bosses and the wealthy would like to hear? As non-neoclassical economist John
Kenneth Galbraith noted in 1972:
"Economic instruction in the United States is about a hundred years old. In its first half
century economists were subject to censorship by outsiders. Businessmen and their
political and ideological acolytes kept watch on departments of economics and reacted
promptly to heresy, the latter being anything that seemed to threaten the sanctity of
property, profits, a proper tariff policy and a balanced budget, or that suggested
sympathy for unions, public ownership, public regulation or, in any organised way, for
the poor." [The Essential Galbraith, p. 135]

It is really surprising that having the wealthy fund (and so control) the development of a "science"
has produced a body of theory which so benefits their interests? Or that they would be keen to
educate the masses in the lessons of said "science", lessons which happen to conclude that the best
thing workers should do is obey the dictates of the bosses, sorry, the market? It is really just a co-
incidence that the repeated use of economics is to spread the message that strikes, unions, resistance
and so forth are counter-productive and that the best thing worker can do is simply wait patiently
for wealth to trickle down?
This co-incidence has been a feature of the "science" from the start. The French Second Empire in
the 1850s and 60s saw "numerous private individuals and organisation, municipalities, and the
central government encouraged and founded institutions to instruct workers in economic
principles." The aim was to "impress upon [workers] the salutary lessons of economics."
Significantly, the "weightiest motive" for so doing "was fear that the influence of socialist ideas
upon the working class threatened the social order." The revolution of 1848 "convinced many of the
upper classes that the must prove to workers that attacks upon the economic order were both
unjustified and futile." Another reason was the recognition of the right to strike in 1864 and so
workers "had to be warned against abuse of the new weapon." The instruction "was always with the
aim of refuting socialist doctrines and exposing popular misconceptions. As one economist stated, it
was not the purpose of a certain course to initiate workers into the complexities of economic
science, but to define principles useful for 'our conduct in the social order.'" The interest in such
classes was related to the level of "worker discontent and agitation." The impact was less than
desired: "The future Communard Lefrancais referred mockingly to the economists . . . and the
'banality' and 'platitudes' of the doctrine they taught. A newspaper account of the reception given to
the economist Joseph Garnier states that Garnier was greeted with shouts of: 'He is an
economist' . . . It took courage, said the article, to admit that one was an economist before a public
meeting." [David I. Kulstein, "Economics Instruction for Workers during the Second Empire," pp.
225-234, French Historical Studies, vol. 1, no. 2, p. 225, p. 226, p. 227 and p. 233]
This process is still at work, with corporations and the wealthy funding university departments and
posts as well as their own "think tanks" and paid PR economists. The control of funds for research
and teaching plays it part in keeping economics the "economics of the rich." Analysing the situation
in the 1970s, Herman notes that the "enlarged private demand for the services of economists by the
business community . . . met a warm supply response." He stressed that "if the demand in the market
is for specific policy conclusions and particular viewpoints that will serve such conclusions, the
market will accommodate this demand." Hence "blatantly ideological models . . . are being spewed
forth on a large scale, approved and often funded by large vested interests" which helps "shift the
balance between ideology and science even more firmly toward the former." [Op. Cit., p. 184, p.
185 and p. 179] The idea that "experts" funded and approved by the wealthy would be objective
scientists is hardly worth considering. Unfortunately, many people fail to exercise sufficient
scepticism about economists and the economics they support. As with most experts, there are two
obvious questions with which any analysis of economics should begin: "Who is funding it?" and
"Who benefits from it?"
However, there are other factors as well, namely the hierarchical organisation of the university
system. The heads of economics departments have the power to ensure the continuation of their
ideological position due to the position as hirer and promoter of staff. As economics "has mixed its
ideology into the subject so well that the ideologically unconventional usually appear to
appointment committees to be scientifically incompetent." [Benjamin Ward, What's Wrong with
Economics?, p. 250] Galbraith termed this "a new despotism," which consisted of "defining
scientific excellence in economics not as what is true but as whatever is closest to belief and
method to the scholarly tendency of the people who already have tenure in the subject. This is a
pervasive test, not the less oppress for being, in the frequent case, both self-righteous and
unconscious. It helps ensure, needless to say, the perpetuation of the neoclassical orthodoxy." [Op.
Cit., p. 135] This plays a key role in keeping economics an ideology rather than a science:
"The power inherent in this system of quality control within the economics profession is
obviously very great. The discipline's censors occupy leading posts in economics
departments at the major institutions . . . Any economist with serious hopes of obtaining
a tenured position in one of these departments will soon be made aware of the criteria
by which he is to be judged . . . the entire academic program . . . consists of
indoctrination in the ideas and techniques of the science." [Ward, Op. Cit., pp. 29-30]

All this has meant that the "science" of economics has hardly changed in its basics in over one
hundred years. Even notions which have been debunked (and have been acknowledged as such)
continue to be taught:
"The so-called mainline teaching of economic theory has a curious self-sealing
capacity. Every breach that is made in it by criticism is somehow filled up by admitting
the point but refusing to draw any consequence from it, so that the old doctrines can be
repeated as before. Thus the Keynesian revolution was absorbed into the doctrine that,
'in the long run,' there is a natural tendency for a market economy to achieve full
employment of available labour and full utilisation of equipment; that the rate of
accumulation is determined by household saving; and that the rate of interest is
identical with the rate of profit on capital. Similarly, Piero Sraffa's demolition of the
neoclassical production function in labour and 'capital' was admitted to be
unanswerable, but it has not been allowed to affect the propagation of the 'marginal
productivity' theory of wages and profits.

"The most sophisticated practitioners of orthodoxy maintain that the whole structure is
an exercise in pure logic which has no application to real life at all. All the same they
give their pupils the impression that they are being provided with an instrument which
is valuable, indeed necessary, for the analysis of actual problems." [Joan Robinson, Op.
Cit., vol. 5, p. 222]

The social role of economics explains this process, for "orthodox traditional economics . . . was a
plan for explaining to the privileged class that their position was morally right and was necessary
for the welfare of society. Even the poor were better off under the existing system that they would be
under any other . . . the doctrine [argued] that increased wealth of the propertied class brings
about an automatic increase of income to the poor, so that, if the rich were made poorer, the poor
would necessarily become poorer too." [Robinson, Op. Cit., vol. 4, p. 242]
In such a situation, debunked theories would continue to be taught simply because what they say
has a utility to certain sections of society:
"Few issues provide better examples of the negative impact of economic theory on
society than the distribution of income. Economists are forever opposing 'market
interventions' which might raise the wages of the poor, while defending astronomical
salary levels for top executives on the basis that if the market is willing to pay them so
much, they must be worth it. In fact, the inequality which is so much a characteristic of
modern society reflects power rather than justice. This is one of the many instances
where unsound economic theory makes economists the champions of policies which, is
anything, undermine the economic foundations of modern society." [Keen, Op. Cit., p.
126]
This argument is based on the notion that wages equal the marginal productivity of labour. This is
supposed to mean that as the output of workers increase, their wages rise. However, as we note in
section C.1.5, this law of economics has been violated for the last thirty-odd years in the US. Has
this resulted in a change in the theory? Of course not. Not that the theory is actually correct. As we
discuss in section C.2.5, marginal productivity theory has been exposed as nonsense (and
acknowledged as flawed by leading neo-classical economists) since the early 1960s. However, its
utility in defending inequality is such that its continued use does not really come as a surprise.
This is not to suggest that mainstream economics is monolithic. Far from it. It is riddled with
argument and competing policy recommendations. Some theories rise to prominence, simply to
disappear again ("See, the 'science' happens to be a very flexible one: you can change it to do
whatever you feel like, it's that kind of 'science.'" [Chomsky, Op. Cit., p. 253]). Given our analysis
that economics is a commodity and subject to demand, this comes as no surprise. Given that the
capitalist class is always in competition within itself and different sections have different needs at
different times, we would expect a diversity of economics beliefs within the "science" which rise
and fall depending on the needs and relative strengths of different sections of capital. While,
overall, the "science" will support basic things (such as profits, interest and rent are not the result of
exploitation) but the actual policy recommendations will vary. This is not to say that certain
individuals or schools will not have their own particular dogmas or that individuals rise above such
influences and act as real scientists, of course, just that (in general) supply is not independent of
demand or class influence.
Nor should we dismiss the role of popular dissent in shaping the "science." The class struggle has
resulted in a few changes to economics, if only in terms of the apologetics used to justify non-
labour income. Popular struggles and organisation play their role as the success of, say, union
organising to reduce the working day obviously refutes the claims made against such movements by
economists. Similarly, the need for economics to justify reforms can become a pressing issue when
the alternative (revolution) is a possibility. As Chomsky notes, during the 19th century (as today)
popular struggle played as much of a role as the needs of the ruling class in the development of the
"science":
"[Economics] changed for a number of reasons. For one thing, these guys had won, so
they didn't need it so much as an ideological weapon anymore. For another, they
recognised that they themselves needed a powerful interventionist state to defend
industry form the hardships of competition in the open market -- as they had always had
in fact. And beyond that, eliminating people's 'right to live' was starting to have some
negative side-effects. First of all, it was causing riots all over the place . . . Then
something even worse happened -- the population started to organise: you got the
beginning of an organised labour movement . . . then a socialist movement developed.
And at that point, the elites . . . recognised that the game had to be called off, else they
really would be in trouble . . . it wasn't until recent years that laissez-faire ideology was
revived again -- and again, it was a weapon of class warfare . . . And it doesn't have any
more validity than it had in the early nineteenth century -- in fact it has even less. At
least in the early nineteenth century . . . [the] assumptions had some relation to reality.
Today those assumptions have not relation to reality." [Op. Cit., pp. 253-4]

Whether the "economics of the rich" or the "economics of the poor" win out in academia is driven
far more by the state of the class war than by abstract debating about unreal models. Thus the rise of
monetarism came about due to its utility to the dominant sections of the ruling class rather than it
winning any intellectual battles (it was decisively refuted by leading Keynesians like Nicholas
Kaldor who saw their predicted fears become true when it was applied -- see section C.8).
Hopefully by analysing the myths of capitalist economics we will aid those fighting for a better
world by giving them the means of counteracting those who claim the mantle of "science" to foster
the "economics of the rich" onto society.
To conclude, neo-classical economics shows the viability of an unreal system and this is translated
into assertions about the world that we live in. Rather than analyse reality, economics evades it and
asserts that the economy works "as if" it matched the unreal assumptions of neoclassical economics.
No other science would take such an approach seriously. In biology, for example, the notion that the
world can be analysed "as if" God created it is called Creationism and rightly dismissed. In
economics, such people are generally awarded professorships or even the (so-called) Nobel prize in
economics (Keen critiques the "as if" methodology of economics in chapter 7 of his Debunking
Economics ). Moreover, and even worse, policy decisions will be enacted based on a model which
has no bearing in reality -- with disastrous results (for example, the rise and fall of Monetarism).
Its net effect to justify the current class system and diverts serious attention from critical questions
facing working class people (for example, inequality and market power, what goes on in production,
how authority relations impact on society and in the workplace). Rather than looking to how things
are produced, the conflicts generated in the production process and the generation as well as
division of products/surplus, economics takes what was produced as given, as well as the capitalist
workplace, the division of labour and authority relations and so on. The individualistic neoclassical
analysis by definition ignores such key issues as economic power, the possibility of a structural
imbalance in the way economic growth is distributed, organisation structure, and so on.
Given its social role, it comes as no surprise that economics is not a genuine science. For most
economists, the "scientific method (the inductive method of natural sciences) [is] utterly unknown
to them." [Kropotkin, Anarchism, p. 179] The argument that most economics is not a science is not
limited to just anarchists or other critics of capitalism. Many dissident economics recognise this fact
as well, arguing that the profession needs to get its act together if it is to be taken seriously. Whether
it could retain its position as defender of capitalism if this happens is a moot point as many of the
theorems developed were done so explicitly as part of this role (particularly to defend non-labour
income -- see section C.2). That economics can become much broader and more relevant is always
a possibility, but to do so would mean to take into account an unpleasant reality marked by class,
hierarchy and inequality rather than logic deductions derived from Robinson Crusoe. While the
latter can produce mathematical models to reach the conclusions that the market is already doing a
good job (or, at best, there are some imperfections which can be counterbalanced by the state), the
former cannot.
Anarchists, unsurprisingly, take a different approach to economics. As Kropotkin put it, "we think
that to become a science, Political Economy has to be built up in a different way. It must be treated
as a natural science, and use the methods used in all exact, empirical sciences." [Evolution and
Environment, p. 93] This means that we must start with the world as it is, not as economics would
like it to be. It must be placed in historical context and key facts of capitalism, like wage labour, not
taken for granted. It must not abstract from such key facts of life as economic and social power. In a
word, economics must reject those features which turn it into a sophisticated defence of the status
quo. Given its social role within capitalism (and the history and evolution of economic thought), it
is doubtful it will ever become a real science simply because it if did it would hardly be used to
defend that system.

C.1.1 Is economics really value free?

Modern economists try and portray economics as a "value-free science." Of course, it rarely dawns
on them that they are usually just taking existing social structures for granted and building
economic dogmas around them, so justifying them. At best, as Kropotkin pointed out:
"[A]ll the so-called laws and theories of political economy are in reality no more than
statements of the following nature: 'Granting that there are always in a country a
considerable number of people who cannot subsist a month, or even a fortnight, without
earning a salary and accepting for that purpose the conditions of work imposed upon
them by the State, or offered to them by those whom the State recognises as owners of
land, factories, railways, etc., then the results will be so and so.'

"So far academic political economy has been only an enumeration of what happens
under these conditions -- without distinctly stating the conditions themselves. And then,
having described the facts which arise in our society under these conditions, they
represent to us these facts as rigid, inevitable economic laws." [Anarchism, p. 179]

In other words, economists usually take the political and economic aspects of capitalist society
(such as property rights, inequality and so on) as given and construct their theories around it. At
best. At worse, economics is simply speculation based on the necessary assumptions required to
prove the desired end. By some strange coincidence these ends usually bolster the power and profits
of the few and show that the free market is the best of all possible worlds. Alfred Marshall, one of
the founders of neoclassical economics, once noted the usefulness of economics to the elite:
"From Metaphysics I went to Ethics, and found that the justification of the existing
conditions of society was not easy. A friend, who had read a great deal of what are
called the Moral Sciences, constantly said: 'Ah! if you understood Political Economy
you would not say that'" [quoted by Joan Robinson, Collected Economic Papers, vol.
4, p. 129]

Joan Robinson added that "[n]owadays, of course, no one would put it so crudely. Nowadays, the
hidden persuaders are concealed behind scientific objectivity, carefully avoiding value judgements;
they are persuading all the better so." [Op. Cit., p. 129] The way which economic theory
systematically says what bosses and the wealthy want to hear is just one of those strange co-
incidences of life, one which seems to befall economics with alarming regularity.
How does economics achieve this strange co-incidence, how does the "value free" "science" end up
being wedded to producing apologetics for the current system? A key reason is the lack of concern
about history, about how the current distribution of income and wealth was created. Instead, the
current distribution of wealth and income is taken for granted.
This flows, in part, from the static nature of neoclassical economics. If your economic analysis
starts and ends with a snapshot of time, with a given set of commodities, then how those
commodities get into a specific set of hands can be considered irrelevant -- particularly when you
modify your theory to exclude the possibility of proving income redistribution will increase overall
utility (see section C.1.3). It also flows from the social role of economics as defender of capitalism.
By taking the current distribution of income and wealth as given, then many awkward questions can
be automatically excluded from the "science."
This can be seen from the rise of neoclassical economics in the 1870s and 1880s. The break
between classical political economy and economics was marked by a change in the kind of
questions being asked. In the former, the central focus was on distribution, growth, production and
the relations between social classes. The exact determination of individual prices was of little
concern, particularly in the short run. For the new economics, the focus became developing a
rigorous theory of price determination. This meant abstracting from production and looking at the
amount of goods available at any given moment of time. Thus economics avoided questions about
class relations by asking questions about individual utility, so narrowing the field of analysis by
asking politically harmless questions based on unrealistic models (for all its talk of rigour, the new
economics did not provide an answer to how real prices were determined any more than classical
economics had simply because its abstract models had no relation to reality).
It did, however, provide a naturalistic justification for capitalist social relations by arguing that
profit, interest and rent are the result of individual decisions rather than the product of a specific
social system. In other words, economics took the classes of capitalism, internalised them within
itself, gave them universal application and, by taking for granted the existing distribution of wealth,
justified the class structure and differences in market power this produces. It does not ask (or
investigate) why some people own all the land and capital while the vast majority have to sell their
labour on the market to survive. As such, it internalises the class structure of capitalism. Taking this
class structure as a given, economics simply asks the question how much does each "factor" (labour,
land, capital) contribute to the production of goods.
Alfred Marshall justified this perspective as follows:
"In the long run the earnings of each agent (of production) are, as a rule, sufficient only
to recompense the sum total of the efforts and sacrifices required to produce them . . .
with a partial exception in the case of land . . . especially much land in old countries, if
we could trace its record back to their earliest origins. But the attempt would raise
controversial questions in history and ethics as well as in economics; and the aims of
our present inquiry are prospective rather than retrospective." [Principles of
Economics, p. 832]

Which is wonderfully handy for those who benefited from the theft of the common heritage of
humanity. Particularly as Marshall himself notes the dire consequences for those without access to
the means of life on the market:
"When a workman is in fear of hunger, his need of money is very great; and, if at
starting he gets the worst of the bargaining, it remains great . . . That is all the more
probably because, while the advantage in bargaining is likely to be pretty well
distributed between the two sides of a market for commodities, it is more often on the
side of the buyers than on that of the sellers in a market for labour." [Op. Cit., pp. 335-
6]

Given that market exchanges will benefit the stronger of the parties involved, this means that
inequalities become stronger and more secure over time. Taking the current distribution of property
as a given (and, moreover, something that must not be changed) then the market does not correct
this sort of injustice. In fact, it perpetuates it and, moreover, it has no way of compensating the
victims as there is no mechanism for ensuring reparations. So the impact of previous acts of
aggression has an impact on how a specific society developed and the current state of the world. To
dismiss "retrospective" analysis as it raises "controversial questions" and "ethics" is not value-free
or objective science, it is pure ideology and skews any "prospective" enquiry into apologetics.
This can be seen when Marshall noted that labour "is often sold under special disadvantages,
arising from the closely connected group of facts that labour power is 'perishable,' that the sellers
of it are commonly poor and have no reserve fund, and that they cannot easily withhold it from the
market." Moreover, the "disadvantage, wherever it exists, is likely to be cumulative in its effects."
Yet, for some reason, he still maintains that "wages of every class of labour tend to be equal to the
net product due to the additional labourer of this class." [Op. Cit., p. 567, p. 569 and p. 518] Why
should it, given the noted fact that workers are at a disadvantage in the market place? Hence
Malatesta:
"Landlords, capitalists have robbed the people, with violence and dishonesty, of the
land and all the means of production, and in consequence of this initial theft can each
day take away from workers the product of their labour." [Errico Malatesta: His Life
and Ideas, p. 168]

As such, how could it possibly be considered "scientific" or "value-free" to ignore history? It is

hardly "retrospective" to analyse the roots of the current disadvantage working class people have in
the current and "prospective" labour market, particularly given that Marshall himself notes their
results. This is a striking example of what Kropotkin deplored in economics, namely that in the rare
situations when social conditions were "mentioned, they were forgotten immediately, to be spoken
of no more." Thus reality is mentioned, but any impact this may have on the distribution of income
is forgotten for otherwise you would have to conclude, with the anarchists, that the "appropriation
of the produce of human labour by the owners of capital [and land] exists only because millions of
men [and women] have literally nothing to live upon, unless they sell their labour force and their
intelligence at a price that will make the net profit of the capitalist and 'surplus value' possible."
[Evolution and Environment, p. 92 and p. 106]
This is important, for respecting property rights is easy to talk about but it only faintly holds some
water if the existing property ownership distribution is legitimate. If it is illegitimate, if the current
property titles were the result of theft, corruption, colonial conquest, state intervention, and other
forms of coercion then things are obviously different. That is why economics rarely, if ever,
discusses this. This does not, of course, stop economists arguing against current interventions in the
market (particularly those associated with the welfare state). In effect, they are arguing that it is
okay to reap the benefits of past initiations of force but it is wrong to try and rectify them. It is as if
someone walks into a room of people, robs them at gun point and then asks that they should respect
each others property rights from now on and only engage in voluntary exchanges with what they
had left. Any attempt to establish a moral case for the "free market" in such circumstances would be
unlikely to succeed. This is free market capitalist economics in a nutshell: never mind past
injustices, let us all do the best we can given the current allocations of resources.
Many economists go one better. Not content in ignoring history, they create little fictional stories in
order to justify their theories or the current distribution of wealth and income. Usually, they start
from isolated individual or a community of approximately equal individuals (a community usually
without any communal institutions). For example, the "waiting" theories of profit and interest (see
section C.2.7) requires such a fiction to be remotely convincing. It needs to assume a community
marked by basic equality of wealth and income yet divided into two groups of people, one of which
was industrious and farsighted who abstained from directly consuming the products created by their
own labour while the other was lazy and consumed their income without thought of the future. Over
time, the descendants of the diligent came to own the means of life while the descendants of the
lazy and the prodigal have, to quote Marx, "nothing to sell but themselves." In that way, modern day
profits and interest can be justified by appealing to such "insipid childishness." [Capital, vol. 1, p.
873] The real history of the rise of capitalism is, as we discuss in section F.8, grim.
Of course, it may be argued that this is just a model and an abstraction and, consequently, valid to
illustrate a point. Anarchists disagree. Yes, there is often the need for abstraction in studying an
economy or any other complex system, but this is not an abstraction, it is propaganda and a
historical invention used not to illustrate an abstract point but rather a specific system of power and
class. That these little parables and stories have all the necessary assumptions and abstractions
required to reach the desired conclusions is just one of those co-incidences which seem to regularly
befall economics.
The strange thing about these fictional stories is that they are given much more credence than real
history within economics. Almost always, fictional "history" will always top actual history in
economics. If the actual history of capitalism is mentioned, then the defenders of capitalism will
simply say that we should not penalise current holders of capital for actions in the dim and distant
past (that current and future generations of workers are penalised goes unmentioned). However, the
fictional "history" of capitalism suffers from no such dismissal, for invented actions in the dim and
distant past justify the current owners holdings of wealth and the income that generates. In other
words, heads I win, tails you loose.
Needless to say, this (selective) myopia is not restricted to just history. It is applied to current
situations as well. Thus we find economists defending current economic systems as "free market"
regimes in spite of obvious forms of state intervention. As Chomsky notes:
"when people talk about . . . free-market 'trade forces' inevitably kicking all these
people out of work and driving the whole world towards a kind of a Third World-type
polarisation of wealth . . . that's true if you take a narrow enough perspective on it. But
if you look into the factors that made things the way they are, it doesn't even come close
to being true, it's not remotely in touch with reality. But when you're studying economics
in the ideological institutions, that's all irrelevant and you're not supposed to ask
questions like these." [Understanding Power, p. 260]

To ignore all that and simply take the current distribution of wealth and income as given and then
argue that the "free market" produces the best allocation of resources is staggering. Particularly as
the claim of "efficient allocation" does not address the obvious question: "efficient" for whose
benefit? For the idealisation of freedom in and through the market ignores the fact that this freedom
is very limited in scope to great numbers of people as well as the consequences to the individuals
concerned by the distribution of purchasing power amongst them that the market throws up (rooted,
of course in the original endowments). Which, of course, explains why, even if these parables of
economics were true, anarchists would still oppose capitalism. We extend Thomas Jefferson's
comment that the "earth belongs always to the living generation" to economic institutions as well as
political -- the past should not dominate the present and the future (Jefferson: "Can one generation
bind another and all others in succession forever? I think not. The Creator has made the earth for
the living, not for the dead. Rights and powers can only belong to persons, not to things, not to
mere matter unendowed with will"). For, as Malatesta argued, people should "not have the right . . .
to subject people to their rule and even less of bequeathing to the countless successions of their
descendants the right to dominate and exploit future generations." [At the Cafe, p. 48]
Then there is the strange co-incidence that "value free" economics generally ends up blaming all the
problems of capitalism on workers. Unemployment? Recession? Low growth? Wages are too high!
Proudhon summed up capitalist economic theory well when he stated that "Political economy --
that is, proprietary despotism -- can never be in the wrong: it must be the proletariat." [System of
Economical Contradictions, p. 187] And little has changed since 1846 (or 1776!) when it comes to
economics "explaining" capitalism's problems (such as the business cycle or unemployment).
As such, it is hard to consider economics as "value free" when economists regularly attack unions
while being silent or supportive of big business. According to neo-classical economic theory, both
are meant to be equally bad for the economy but you would be hard pressed to find many
economists who would urge the breaking up of corporations into a multitude of small firms as their
theory demands, the number who will thunder against "monopolistic" labour is substantially higher
(ironically, as we note in section C.1.4, their own theory shows that they must urge the break up of
corporations or support unions for, otherwise, unorganised labour is exploited). Apparently arguing
that high wages are always bad but high profits are always good is value free.
So while big business is generally ignored (in favour of arguments that the economy works "as if" it
did not exist), unions are rarely given such favours. Unlike, say, transnational corporations, unions
are considered monopolistic. Thus we see the strange situation of economists (or economics
influenced ideologies like right-wing "libertarians") enthusiastically defending companies that raise
their prices in the wake of, say, a natural disaster and making windfall profits while, at the same
time, attacking workers who decide to raise their wages by striking for being selfish. It is, of course,
unlikely that they would let similar charges against bosses pass without comment. But what can you
expect from an ideology which presents unemployment as a good thing (namely, increased leisure --
see section C.1.5) and being rich as, essentially, a disutility (the pain of abstaining from present
consumption falls heaviest on those with wealth -- see section C.2.7).
Ultimately, only economists would argue, with a straight face, that the billionaire owner of a
transnational corporation is exploited when the workers in his sweatshops successfully form a union
(usually in the face of the economic and political power wielded by their boss). Yet that is what
many economists argue: the transnational corporation is not a monopoly but the union is and
monopolies exploit others! Of course, they rarely state it as bluntly as that. Instead they suggest that
unions get higher wages for their members be forcing other workers to take less pay (i.e. by
exploiting them). So when bosses break unions they are doing this not to defend their profits and
power but really to raise the standard of other, less fortunate, workers? Hardly. In reality, of course,
the reason why unions are so disliked by economics is that bosses, in general, hate them. Under
capitalism, labour is a cost and higher wages means less profits (all things being equal). Hence the
need to demonise unions, for one of the less understood facts is that while unions increase wages for
members, they also increase wages for non-union workers. This should not be surprising as non-
union companies have to raise wages stop their workers unionising and to compete for the best
workers who will be drawn to the better pay and conditions of union shops (as we discuss in section
C.9, the neoclassical model of the labour market is seriously flawed).
Which brings us to another key problem with the claim that economics is "value free," namely the
fact that it takes the current class system of capitalism and its distribution of wealth as not only a
fact but as an ideal. This is because economics is based on the need to be able to differentiate
between each factor of production in order to determine if it is being used optimally. In other words,
the given class structure of capitalism is required to show that an economy uses the available
resources efficiently or not. It claims to be "value free" simply because it embeds the economic
relationships of capitalist society into its assumptions about nature.
Yet it is impossible to define profit, rent and interest independently of the class structure of any
given society. Therefore, this "type of distribution is the peculiarity of capitalism. Under feudalism
the surplus was extracted as land rent. In an artisan economy each commodity is produced by a
men with his own tools; the distinction between wages and profits has no meaning there." This
means that "the very essence of the theory is bound up with a particular institution -- wage labour.
The central doctrine is that 'wages tend to equal marginal product of labour.' Obviously this has no
meaning for a peasant household where all share the work and the income of their holding
according to the rules of family life; nor does it apply in a [co-operative] where, the workers'
council has to decide what part of net proceeds to allot to investment, what part to a welfare found
and what part to distribute as wage." [Joan Robinson, Collected Economic Papers, p. 26 and p.
130]
This means that the "universal" principles of economics end up by making any economy which
does not share the core social relations of capitalism inherently "inefficient." If, for example,
workers own all three "factors of production" (labour, land and capital) then the "value-free" laws of
economics concludes that this will be inefficient. As there is only "income", it is impossible to say
which part of it is attributable to labour, land or machinery and, consequently, if these factors are
being efficiently used. This means that the "science" of economics is bound up with the current
system and its specific class structure and, therefore, as a "ruling class paradigm, the competitive
model" has the "substantial" merit that "it can be used to rule off the agenda any proposals for
substantial reform or intervention detrimental to large economic interests . . . as the model allows
(on its assumptions) a formal demonstration that these would reduce efficiency." [Edward S.
Herman, "The Selling of Market Economics," pp. 173-199, New Ways of Knowing, Marcus G.
Raskin and Herbert J. Bernstein (eds.), p. 178]
Then there are the methodological assumptions based on individualism. By concentrating on
individual choices, economics abstracts from the social system within which such choices are made
and what influences them. Thus, for example, the analysis of the causes of poverty is turned
towards the failings of individuals rather than the system as a whole (to be poor becomes a personal
stigma). That the reality on the ground bears little resemblance to the myth matters little -- when
people with two jobs still fail to earn enough to feed their families, it seems ridiculous to call them
lazy or selfish. It suggests a failure in the system, not in the poor themselves. An individualistic
analysis is guaranteed to exclude, by definition, the impact of class, inequality, social hierarchies
and economic/social power and any analysis of any inherent biases in a given economic system, its
distribution of wealth and, consequently, its distribution of income between classes.
This abstracting of individuals from their social surroundings results in the generating economic
"laws" which are applicable for all individuals, in all societies, for all times. This results in all
concrete instances, no matter how historically different, being treated as expressions of the same
universal concept. In this way the uniqueness of contemporary society, namely its basis in wage
labour, is ignored ("The period through which we are passing . . . is distinguished by a special
characteristic -- WAGES." [Proudhon, Op. Cit., p. 199]). Such a perspective cannot help being
ideological rather than scientific. By trying to create a theory applicable for all time (and so,
apparently, value free) they just hide the fact their theory assumes and justifies the inequalities of
capitalism (for example, the assumption of given needs and distribution of wealth and income
secretly introduces the social relations of the current society back into the model, something which
the model had supposedly abstracted from). By stressing individualism, scarcity and competition, in
reality economic analysis reflects nothing more than the dominant ideological conceptions found in
capitalist society. Every few economic systems or societies in the history of humanity have actually
reflected these aspects of capitalism (indeed, a lot of state violence has been used to create these
conditions by breaking up traditional forms of society, property rights and customs in favour of
those desired by the current ruling elite).
The very general nature of the various theories of profit, interest and rent should send alarm bells
ringing. Their authors construct these theories based on the deductive method and stress how they
are applicable in every social and economic system. In other words, the theories are just that,
theories derived independently of the facts of the society they are in. It seems somewhat strange, to
say the least, to develop a theory of, say, interest independently of the class system within which it
is charged but this is precisely what these "scientists" do. It is understandable why. By ignoring the
current system and its classes and hierarchies, the economic aspects of this system can be justified
in terms of appeals to universal human existence. This will raise less objections than saying, for
example, that interest exists because the rich will only part with their money if they get more in
return and the poor will pay for this because they have little choice due to their socio-economic
situation. Far better to talk about "time preference" rather than the reality of class society (see
section C.2.6).
Neoclassical economics, in effect, took the "political" out of "political economy" by taking
capitalist society for granted along with its class system, its hierarchies and its inequalities. This is
reflected in the terminology used. These days even the term capitalism has gone out of fashion,
replaced with the approved terms "market system," the "free market" or "free enterprise." Yet, as
Chomsky noted, terms such as "free enterprise" are used "to designate a system of autocratic
governance of the economy in which neither the community nor the workforce has any role (a
system we would call 'fascist' if translated to the political sphere)." [Language and Politics, p. 175]
As such, it seems hardly "value-free" to proclaim a system free when, in reality, most people are
distinctly not free for most of their waking hours and whose choices outside production are
influenced by the inequality of wealth and power which that system of production create.
This shift in terminology reflects a political necessity. It effectively removes the role of wealth
(capital) from the economy. Instead of the owners and manager of capital being in control or, at the
very least, having significant impact on social events, we have the impersonal activity of "the
markets" or "market forces." That such a change in terminology is the interest of those whose
money accords them power and influence goes without saying. By focusing on the market,
economics helps hide the real sources of power in an economy and attention is drawn away from
such a key questions of how money (wealth) produces power and how it skews the "free market" in
its favour. All in all, as dissident economist John Kenneth Galbraith once put it, "[w]hat economists
believe and teach is rarely hostile to the institutions that reflect the dominant economic power. Not
to notice this takes effort, although many succeed." [The Essential Galbraith, p. 180]
This becomes obvious when we look at how the advice economics gives to working class people. In
theory, economics is based on individualism and competition yet when it comes to what workers
should do, the "laws" of economics suddenly switch. The economist will now deny that competition
is a good idea and instead urge that the workers co-operate (i.e. obey) their boss rather than compete
(i.e. struggle over the division of output and authority in the workplace). They will argue that there
is "harmony of interests" between worker and boss, that it is in the self-interest of workers not to be
selfish but rather to do whatever the boss asks to further the bosses interests (i.e. profits).
That this perspective implicitly recognises the dependent position of workers, goes without saying.
So while the sale of labour is portrayed as a market exchange between equals, it is in fact an
authority relation between servant and master. The conclusions of economics is simply implicitly
acknowledging that authoritarian relationship by identifying with the authority figure in the
relationship and urging obedience to them. It simply suggests workers make the best of it by
refusing to be independent individuals who need freedom to flourish (at least during working hours,
outside they can express their individuality by shopping).
This should come as no surprise, for, as Chomsky notes, economics is rooted in the notion that "you
only harm the poor by making them believe that they have rights other than what they can win on
the market, like a basic right to live, because that kind of right interferes with the market, and with
efficiency, and with growth and so on -- so ultimately people will just be worse off if you try to
recognise them." [Op. Cit., p. 251] Economics teaches that you must accept change without regard
to whether it is appropriate it not. It teaches that you must not struggle, you must not fight. You
must simply accept whatever change happens. Worse, it teaches that resisting and fighting back are
utterly counter-productive. In other words, it teaches a servile mentality to those subject to
authority. For business, economics is ideal for getting their employees to change their attitudes
rather than collectively change how their bosses treat them, structure their jobs or how they are paid
-- or, of course, change the system.
Of course, the economist who says that they are conducting "value free" analysis are indifferent to
the kinds of relationships within society is being less than honest. Capitalist economic theory is
rooted in very specific assumptions and concepts such as "economic man" and "perfect
competition." It claims to be "value-free" yet its preferred terminology is riddled with value
connotations. For example, the behaviour of "economic man" (i.e., people who are self-interested
utility maximisation machines) is described as "rational." By implication, then, the behaviour of
real people is "irrational" whenever they depart from this severely truncated account of human
nature and society. Our lives consist of much more than buying and selling. We have goals and
concerns which cannot be bought or sold in markets. In other words, humanity and liberty transcend
the limits of property and, as a result, economics. This, unsurprisingly, affects those who study the
"science" as well:
"Studying economics also seems to make you a nastier person. Psychological studies
have shown that economics graduate students are more likely to 'free ride' -- shirk
contributions to an experimental 'public goods' account in the pursuit of higher private
returns -- than the general public. Economists also are less generous that other
academics in charitable giving. Undergraduate economics majors are more likely to
defect in the classic prisoner's dilemma game that are other majors. And on other tests,
students grow less honest -- expressing less of a tendency, for example, to return found
money -- after studying economics, but not studying a control subject like astronomy.
 "This is no surprise, really. Mainstream economics is built entirely on a notion of self-
interested individuals, rational self-maximisers who can order their wants and spend
accordingly. There's little room for sentiment, uncertainty, selflessness, and social
institutions. Whether this is an accurate picture of the average human is open to
question, but there's no question that capitalism as a system and economics as a
discipline both reward people who conform to the model." [Doug Henwood, Wall
Street, p, 143]

So is economics "value free"? Far from it. Given its social role, it would be surprising that it were.
That it tends to produce policy recommendations that benefit the capitalist class is not an accident.
It is rooted in the fibre of the "science" as it reflects the assumptions of capitalist society and its
class structure. Not only does it take the power and class structures of capitalism for granted, it also
makes them the ideal for any and every economy. Given this, it should come as no surprise that
economists will tend to support policies which will make the real world conform more closely to the
standard (usually neoclassical) economic model. Thus the models of economics become more than
a set of abstract assumptions, used simply as a tool in theoretical analysis of the casual relations of
facts. Rather they become political goals, an ideal towards which reality should be forced to travel.
This means that economics has a dual character. On the one hand, it attempts to prove that certain
things (for example, that free market capitalism produces an optimum allocation of resources or
that, given free competition, price formation will ensure that each person's income corresponds to
their productive contribution). On the other, economists stress that economic "science" has nothing
to do with the question of the justice of existing institutions, class structures or the current economic
system. And some people seem surprised that this results in policy recommendations which
consistently and systematically favour the ruling class.

C.1.2 Is economics a science?

In a word, no. If by "scientific" it is meant in the usual sense of being based on empirical
observation and on developing an analysis that was consistent with and made sense of the data, then
most forms of economics are not a science.
Rather than base itself on a study of reality and the generalisation of theory based on the data
gathered, economics has almost always been based on generating theories rooted on whatever
assumptions were required to make the theory work. Empirical confirmation, if it happens at all, is
usually done decades later and if the facts contradict the economics, so much the worse for the
facts.
A classic example of this is the neo-classical theory of production. As noted previously, neoclassical
economics is focused on individual evaluations of existing products and, unsurprisingly, economics
is indelibly marked by "the dominance of a theoretical vision that treats the inner workings of the
production process as a 'black box.'" This means that the "neoclassical theory of the 'capitalist'
economy makes no qualitative distinction between the corporate enterprise that employs tens of
thousands of people and the small family undertaking that does no employ any wage labour at all.
As far as theory is concerned, it is technology and market forces, not structures of social power,
that govern the activities of corporate capitalists and petty proprietors alike." [William Lazonick,
Competitive Advantage on the Shop Floor, p. 34 and pp. 33-4] Production in this schema just
happens -- inputs go in, outputs go out -- and what happens inside is considered irrelevant, a
technical issue independent of the social relationships those who do the actual production form
between themselves -- and the conflicts that ensure.
The theory does have a few key assumptions associated with it, however. First, there are
diminishing returns. This plays a central role. In mainstream diminishing returns are required to
produce a downward sloping demand curve for a given factor. Second, there is a rising supply curve
based on rising marginal costs produced by diminishing returns. The average variable cost curve for
a firm is assumed to be U-shaped, the result of first increasing and then diminishing returns. These
are logically necessary for the neo-classical theory to work.
Non-economists would, of course, think that these assumptions are generalisations based on
empirical evidence. However, they are not. Take the U-shaped average cost curve. This was simply
invented by A. C. Pigou, "a loyal disciple of [leading neo-classical Alfred] Marshall and quite
innocent of any knowledge of industry. He therefore constructed a U-shaped average cost curve for
a firm, showing economies of scale up to a certain size and rising costs beyond it." [Joan Robinson,
Collected Economic Papers, vol. 5, p. 11] The invention was driven by need of the theory, not the
facts. With increasing returns to scale, then large firms would have cost advantages against small
ones and would drive them out of business in competition. This would destroy the concept of
perfect competition. However, the invention of the average cost curve allowed the theory to work as
"proved" that a competitive market could not become dominated by a few large firms, as feared.
The model, in other words, was adjusted to ensure that it produced the desired result rather than
reflect reality. The theory was required to prove that markets remained competitive and the
existence of diminishing marginal returns to scale of production did tend by itself to limit the size
of individual firms. That markets did become dominated by a few large firms was neither here nor
there. It did not happen in theory and, consequently, that was the important thing and so "when the
great concentrations of power in the multinational corporations are bringing the age of national
employment policy to an end, the text books are still illustrated by U-shaped curves showing the
limitation on the size of firms in a perfectly competitive market." [Joan Robinson, Contributions to
Modern Economics, p. 5]
To be good, a theory must have two attributes: They accurately describe the phenomena in question
and they make accurate predictions. Neither holds for Pigou's invention: reality keeps getting in the
way. Not only did the rise of a few large firms dominating markets indirectly show that the theory
was nonsense, when empirical testing was finally done decades after the theory was proposed it
showed that in most cases the opposite is the case: that there were constant or even falling costs in
production. Just as the theories of marginality and diminishing marginal returns taking over
economics, the real world was showing how wrong it was with the rise of corporations across the
world.
So the reason why the market become dominated by a few firms should be obvious enough: actual
corporate price is utterly different from the economic theory. This was discovered when researchers
did what the original theorists did not think was relevant: they actually asked firms what they did
and the researchers consistently found that, for the vast majority of manufacturing firms their
average costs of production declined as output rose, their marginal costs were always well below
their average costs, and substantially smaller than 'marginal revenue', and the concept of a 'demand
curve' (and therefore its derivative 'marginal revenue') was simply irrelevant.
Unsurprisingly, real firms set their prices prior to sales, based on a mark-up on costs at a target rate
of output. In other words, they did not passively react to the market. These prices are an essential
feature of capitalism as prices are set to maintain the long-term viability of the firm. This, and the
underlying reality that per-unit costs fell as output levels rose, resulted in far more stable prices than
were predicted by traditional economic theory. One researcher concluded that administered prices
"differ so sharply from the behaviour to be expected from" the theory "as to challenge the basic
conclusions" of it. He warned that until such time as "economic theory can explain and take into
account the implications" of this empirical data, "it provides a poor basis for public policy."
Needless to say, this did not disturb neo-classical economists or stop them providing public policy
recommendations. [Gardiner C. Means, "The Administered-Price Thesis Reconfirmed", The
American Economic Review, pp. 292-306, Vol. 62, No. 3, p. 304]
One study in 1952 showed firms a range of hypothetical cost curves, and asked firms which ones
most closely approximated their own costs. Over 90% of firms chose a graph with a declining
average cost rather than one showing the conventional economic theory of rising marginal costs.
These firms faced declining average cost, and their marginal revenues were much greater than
marginal cost at all levels of output. Unsurprisingly, the study's authors concluded if this sample
was typical then it was "obvious that short-run marginal price theory should be revised in the light
of reality." We are still waiting. [Eiteman and Guthrie, "The Shape of the Average Cost Curve", The
American Economic Review, pp. 832-8, Vol. 42, No. 5, p. 838]
A more recent study of the empirical data came to the same conclusions, arguing that it is
"overwhelming bad news . . . for economic theory." While economists treat rising marginal cost as
the rule, 89% of firms in the study reported marginal costs which were either constant or declined
with output. As for price elasticity, it is not a vital operational concept for corporations. In other
words, the "firms that sell 40 percent of GDP believe their demand is totally insensitive to price"
while "only about one-sixth of GDP is sold under conditions of elastic demand." [A.S. Blinder, E.
Cabetti, D. Lebow and J. Rudd, Asking About Prices, p. 102 and p. 101]
Thus empirical research has concluded that actual price setting has nothing to do with clearing the
market by equating market supply to market demand (i.e. what economic theory sees as the role of
prices). Rather, prices are set to enable the firm to continue as a going concern and equating supply
and demand in any arbitrary period of time is irrelevant to a firm which hopes to exist for the
indefinite future. As Lee put it, basing himself on extensive use of empirical research, "market
prices are not market-clearing or profit-maximising prices, but rather are enterprise-, and hence
transaction-reproducing prices." Rather than a non-existent equilibrium or profit maximisation at a
given moment determining prices, the market price is "set and the market managed for the purpose
of ensuring continual transactions for those enterprises in the market, that is for the benefit of the
business leaders and their enterprises." A significant proportion of goods have prices based on
mark-up, normal cost and target rate of return pricing procedures and are relatively stable over time.
Thus "the existence of stable, administered market prices implies that the markets in which they
exist are not organised like auction markets or like the early retail markets and oriental bazaars" as
imagined in mainstream economic ideology. [Frederic S. Lee, Post Keynesian Price Theory, p.
228 and p. 212]
Unsurprisingly, most of these researchers were highly critical the conventional economic theory of
markets and price setting. One viewed the economists' concepts of perfect competition and
monopoly as virtual nonsense and "the product of the itching imaginations of uninformed and
inexperienced armchair theorisers." [Tucker, quoted by Lee, Op. Cit., p. 73f] Which was exactly
how it was produced.
No other science would think it appropriate to develop theory utterly independently of phenomenon
under analysis. No other science would wait decades before testing a theory against reality. No
other science would then simply ignore the facts which utterly contradicted the theory and continue
to teach that theory as if it were a valid generalisation of the facts. But, then, economics is not a
science.
This strange perspective makes sense once it is realised how key the notion of diminishing costs is
to economics. In fact, if the assumption of increasing marginal costs is abandoned then so is perfect
competition and "the basis of which economic laws can be constructed . . . is shorn away," causing
the "wreckage of the greater part of general equilibrium theory." This will have "a very destructive
consequence for economic theory," in the words of one leading neo-classical economist. [John
Hicks, Value and Capital, pp. 83-4] As Steve Keen notes, this is extremely significant:
"Strange as it may seem . . . this is a very big deal. If marginal returns are constant
rather than falling, then the neo-classical explanation of everything collapses. Not only
can economic theory no longer explain how much a firm produces, it can explain
nothing else.

"Take, for example, the economic theory of employment and wage determination . . .
The theory asserts that the real wage is equivalent to the marginal product of labour . . .
An employer will employ an additional worker if the amount the worker adds to output
-- the worker's marginal product -- exceeds the real wage . . . [This] explains the
economic predilection for blaming everything on wages being too high -- neo-classical
economics can be summed up, as [John Kenneth] Galbraith once remarked, in the twin
propositions that the poor don't work hard enough because they're paid too much, and
the rich don't work hard enough because they're not paid enough . . .

"If in fact the output to employment relationship is relatively constant, then the neo-
classical explanation for employment and output determination collapses. With a flat
production function, the marginal product of labour will be constant, and it will never
intersect the real wage. The output of the form then can't be explained by the cost of
employing labour. . . [This means that] neo-classical economics simply cannot explain
anything: neither the level of employment, nor output, nor, ultimately, what determines
the real wage . . .the entire edifice of economics collapses." [Debunking Economics,
pp. 76-7]

It should be noted that the empirical research simply confirmed an earlier critique of neo-classical
economics presented by Piero Sraffa in 1926. He argued that while the neo-classical model of
production works in theory only if we accept its assumptions. If those assumptions do not apply in
practice, then it is irrelevant. He therefore "focussed upon the economic assumptions that there were
'factors of production' which were fixed in the short run, and that supply and demand were
independent of each other. He argued that these two assumptions could be fulfilled simultaneously.
In circumstances where it was valid to say some factor of production was fixed in the short term,
supply and demand could not independent, so that every point on the supply curve would be
associated with a different demand curve. On the other hand, in circumstances where supply and
demand could justifiably be treated as independent, then it would be impossible for any factor of
production to be fixed. Hence the marginal costs of production would be constant." He stressed
firms would have to be irrational to act otherwise, foregoing the chance to make profits simply to
allow economists to build their models of how they should act. [Keen, Op. Cit., pp. 66-72]
Another key problem in economics is that of time. This has been known, and admitted, by
economists for some time. Marshall, for example, stated that "the element of time" was "the source
of many of the greatest difficulties of economics." [Principles of Economics, p. 109] The founder of
general equilibrium theory, Walras, recognised that the passage of time wrecked his whole model
and stated that we "shall resolve the . . . difficulty purely and simply by ignoring the time element at
this point." This was due, in part, because production "requires a certain lapse of time." [Elements
of Pure Economics, p. 242] This was generalised by Gerard Debreu (in his Nobel Prize for
economics winning Theory of Value ) who postulated that everyone makes their sales and
purchases for all time in one instant.
Thus the cutting edge of neo-classical economics, general equilibrium ignores both time and
production. It is based on making time stop, looking at finished goods, getting individuals to bid for
them and, once all goods are at equilibrium, allowing the transactions to take place. For Walras, this
was for a certain moment of time and was repeated, for his followers it happened once for all
eternity. This is obviously not the way markets work in the real world and, consequently, the
dominant branch of economics is hardly scientific. Sadly, the notion of individuals having full
knowledge of both now and the future crops up with alarming regularly in the "science" of
economics.
Even if we ignore such minor issues as empirical evidence and time, economics has problems even
with its favoured tool, mathematics. As Steve Keen has indicated, economists have "obscured
reality using mathematics because they have practised mathematics badly, and because they have
not realised the limits of mathematics." indeed, there are "numerous theorems in economics that
reply upon mathematically fallacious propositions." [Op. Cit., p. 258 and p. 259] For a theory born
from the desire to apply calculus to economics, this is deeply ironic. As an example, Keen points to
the theory of perfect competition which assumes that while the demand curve for the market as a
whole is downward sloping, an individual firm in perfect competition is so small that it cannot
affect the market price and, consequently, faces a horizontal demand curve. Which is utterly
impossible. In other words, economics breaks the laws of mathematics.
These are just two examples, there are many, many more. However, these two are pretty
fundamental to the whole edifice of modern economic theory. Much, if not most, of mainstream
economics is based upon theories which have little or no relation to reality. Kropotkin's dismissal of
"the metaphysical definitions of the academical economists" is as applicable today. [Evolution and
Environment, p. 92] Little wonder dissident economist Nicholas Kaldor argued that:
"The Walrasian [i.e. general] equilibrium theory is a highly developed intellectual
system, much refined and elaborated by mathematical economists since World War II --
an intellectual experiment . . . But it does not constitute a scientific hypothesis, like
Einstein's theory of relativity or Newton's law of gravitation, in that its basic
assumptions are axiomatic and not empirical, and no specific methods have been put
forward by which the validity or relevance of its results could be tested. The
assumptions make assertions about reality in their implications, but these are not
founded on direct observation, and, in the opinion of practitioners of the theory at any
rate, they cannot be contradicted by observation or experiment." [The Essential
Kaldor, p. 416]
C.1.3 Can you have an economics based on individualism?
In a word, no. No economic system is simply the sum of its parts. The idea that capitalism is based
on the subjective evaluations of individuals for goods flies in the face of both logic and the way
capitalism works. In other words, modern economists is based on a fallacy. While it would be
expected for critics of capitalism to conclude this, the ironic thing is that economists themselves
have proven this to be the case.
Neoclassical theory argues that marginal utility determines demand and price, i.e. the price of a
good is dependent on the intensity of demand for the marginal unit consumed. This was in contrast
to classic economics, which argued that price (exchange value) was regulated by the cost of
production, ultimately the amount of labour used to create it. While realistic, this had the political
drawback of implying that profit, rent and interest were the product of unpaid labour and so
capitalism was exploitative. This conclusion was quickly seized upon by numerous critics of
capitalism, including Proudhon and Marx. The rise of marginal utility theory meant that such
critiques could be ignored.
However, this change was not unproblematic. The most obvious problem with it is that it leads to
circular reasoning. Prices are supposed to measure the "marginal utility" of the commodity, yet
consumers need to know the price first in order to evaluate how best to maximise their satisfaction.
Hence it "obviously rest[s] on circular reasoning. Although it tries to explain prices, prices [are]
necessary to explain marginal utility." [Paul Mattick, Economics, Politics and the Age of
Inflation, p.58] In the end, as Jevons (one of the founders of the new economics) acknowledged,
the price of a commodity is the only test we have of the utility of the commodity to the producer.
Given that marginality utility was meant to explain those prices, the failure of the theory could not
be more striking.
However, this is the least of its problems. At first, the neoclassical economists used cardinal utility
as their analysis tool. Cardinal utility meant that it was measurable between individuals, i.e. that the
utility of a given good was the same for all. While this allowed prices to be determined, it caused
obvious political problems as it obviously justified the taxation of the wealthy. As cardinal utility
implied that the "utility" of an extra dollar to a poor person was clearly greater than the loss of one
dollar to a rich man, it was appropriated by reformists precisely to justify social reforms and
taxation.
Capitalist economists had, yet again, created a theory that could be used to attack capitalism and the
income and wealth hierarchy it produces. As with classical economics, socialists and other social
reformists used the new theories to do precisely that, appropriating it to justify the redistribution of
income and wealth downward (i.e. back into the hands of the class who had created it in the first
place). Combine this with the high levels of class conflict at the time and it should come as no
surprise that the "science" of economics was suitably revised.
There was, of course, a suitable "scientific" rationale for this revision. It was noted that as
individual evaluations are inherently subjective, it is obvious that cardinal utility was impossible in
practice. Of course, cardinality was not totally rejected. Neoclassical economics retained the idea
that capitalists maximise profits, which is a cardinal quantity. However for demand utility became
"ordinal," that is utility was considered an individual thing and so could not be measured. This
resulted in the conclusion that there was no way of making interpersonal comparisons between
individuals and, consequently, no basis for saying a pound in the hands of a poor person had more
utility than if it had remained in the pocket of a billionaire. The economic case for taxation was
now, apparently, closed. While you may think that income redistribution was a good idea, it was
now proven by "science" that this little more than a belief as all interpersonal comparisons were
now impossible. That this was music to the ears of the wealthy was, of course, just one of those
strange co-incidences which always seems to plague economic "science."
The next stage of the process was to abandon then ordinal utility in favour of "indifference curves"
(the continued discussion of "utility" in economics textbooks is primarily heuristic). In this theory
consumers are supposed to maximise their utility by working out which bundle of goods gives them
the highest level of satisfaction based on the twin constraints of income and given prices (let us
forget, for the moment, that marginal utility was meant to determines prices in the first place). To do
this, it is assumed that incomes and tastes are independent and that consumers have pre-existing
preferences for all possible bundles.
This produces a graph that shows different quantities of two different goods, with the "indifference
curves" showing the combinations of goods which give the consumer the same level of satisfaction
(hence the name, as the consumer is "indifferent" to any combination along the curve). There is also
a straight line representing relative prices and the consumer's income and this budget line shows the
uppermost curve the consumer can afford to reach. That these indifference curves could not be
observed was not an issue although leading neo-classical economist Paul Samuelson provided an
apparent means see these curves by his concept of "revealed preference" (a basic tautology). There
is a reason why "indifference curves" cannot be observed. They are literally impossible for human
beings to calculate once you move beyond a trivially small set of alternatives and it is impossible
for actual people to act as economists argue they do. Ignoring this slight problem, the "indifference
curve" approach to demand can be faulted for another, even more basic, reason. It does not prove
what it seeks to show:
"Though mainstream economics began by assuming that this hedonistic, individualist
approach to analysing consumer demand was intellectually sound, it ended up proving
that it was not. The critics were right: society is more than the sum of its individual
members." [Steve Keen, Debunking Economics, p. 23]

As noted above, to fight the conclusion that redistributing wealth would result in a different level of
social well-being, economists had to show that "altering the distribution of income did not alter
social welfare. They worked out that two conditions were necessary for this to be true: (a) that all
people have the same tastes; (b) that each person's tastes remain the same as her income changes,
so that every additional dollar of income was spent exactly the same way as all previous dollars."
The former assumption "in fact amounts to assuming that there is only one person in society" or that
"society consists of a multitude of identical drones" or clones. The latter assumption "amounts to
assuming that there is only one commodity -- since otherwise spending patterns would necessary
change as income rose." [Keen, Op. Cit., p. 24] This is the real meaning of the assumption that all
goods and consumers can be considered "representative." Sadly, such individuals and goods do not
exist. Thus:
"Economics can prove that 'the demand curve slows downward in price' for a single
individual and a single commodity. But in a society consisting of many different
individuals with many different commodities, the 'market demand curve' is more
probably jagged, and slopes every which way. One essential building block of the
economic analysis of markets, the demand curve, therefore does not have the
 characteristics needed for economic theory to be internally consistent . . . most
mainstream academic economists are aware of this problem, but they pretend that the
failure can be managed with a couple of assumptions. Yet the assumptions themselves
are so absurd that only someone with a grossly distorted sense of logic could accept
them. That grossly distorted sense of logic is acquired in the course of a standard
education in economics." [Op. Cit., pp. 25-7]

Rather than produce a "social indifference map which had the same properties as the individual
indifference maps" by adding up all the individual maps, economics "proved that this consistent
summation from individual to society could not be achieved." Any sane person would have rejected
the theory at this stage, but not economists. Keen states the obvious: "That economists, in general,
failed to draw this inference speaks volumes for the unscientific nature of economic theory." They
simply invented "some fudge to disguise the gapping hole they have uncovered in the theory." [Op.
Cit., p. 40 and p. 48] Ironically, it took over one hundred years and advanced mathematical logic to
reach the same conclusion that the classical economists took for granted, namely that individual
utility could not be measured and compared. However, instead of seeking exchange value (price) in
the process of production, neoclassical economists simply that made a few absurd assumptions and
continued on its way as if nothing was wrong.
This is important because "economists are trying to prove that a market economy necessarily
maximises social welfare. If they can't prove that the market demand curve falls smoothly as price
rises, they can't prove that the market maximises social welfare." In addition, "the concept of a
social indifference curve is crucial to many of the key notions of economics: the argument that free
trade is necessarily superior to regulated trade, for example, is first constructed using a social
indifference curve. Therefore, if the concept of a social indifference curve itself is invalid, then so
too are many of the most treasured notions of economics." [Keen, Op. Cit., p. 50] This means much
of economic theory is invalidated and with it the policy recommendations based on it.
This elimination of individual differences in favour of a society of clones by marginalism is not
restricted to demand. Take the concept of the "representative firm" used to explain supply. Rather
than a theoretical device to deal with variety, it ignores diversity. It is a heuristic concept which
deals with a varied collection of firms by identifying a single set of distinct characteristics which are
deemed to represent the essential qualities of the industry as a whole. It is not a single firm or even
a typical or average firm. It is an imaginary firm which exhibits the "representative" features of the
entire industry, i.e. it treats an industry as if it were just one firm. Moreover, it should be stressed
that this concept is driven by the needs to prove the model, not by any concern over reality. The
"real weakness" of the "representative firm" in neo-classical economics is that it is "no more than a
firm which answers the requirements expected from it by the supply curve" and because it is
"nothing more than a small-scale replica of the industry's supply curve that it is unsuitable for the
purpose it has been called into being." [Kaldor, The Essential Kaldor, p. 50]
Then there is neoclassical analysis of the finance market. According to the Efficient Market
Hypothesis, information is disseminated equally among all market participants, they all hold similar
interpretations of that information and all can get access to all the credit they need at any time at the
same rate. In other words, everyone is considered to be identical in terms of what they know, what
they can get and what they do with that knowledge and cash. This results in a theory which argues
that stock markets accurately price stocks on the basis of their unknown future earnings, i.e. that
these identical expectations by identical investors are correct. In other words, investors are able to
correctly predict the future and act in the same way to the same information. Yet if everyone held
identical opinions then there would be no trading of shares as trading obviously implies different
opinions on how a stock will perform. Similarly, in reality investors are credit rationed, the rate of
borrowing tends to rise as the amount borrowed increases and the borrowing rate normally exceeds
the leading rate. The developer of the theory was honest enough to state that the "consequence of
accommodating such aspects of reality are likely to be disastrous in terms of the usefulness of the
resulting theory . . . The theory is in a shambles." [W.F Sharpe, quoted by Keen, Op. Cit., p. 233]
Thus the world was turned into a single person simply to provide a theory which showed that stock
markets were "efficient" (i.e. accurately reflect unknown future earnings). In spite of these slight
problems, the theory was accepted in the mainstream as an accurate reflection of finance markets.
Why? Well, the implications of this theory are deeply political as it suggests that finance markets
will never experience bubbles and deep slumps. That this contradicts the well-known history of the
stock market was considered unimportant. Unsurprisingly, "as time went on, more and more data
turned up which was not consistent with" the theory. This is because the model's world "is clearly
not our world." The theory "cannot apply in a world in which investors differ in their expectations,
in which the future is uncertain, and in which borrowing is rationed." It "should never have been
given any credibility -- yet instead it became an article of faith for academics in finance, and a
common belief in the commercial world of finance." [Keen, Op. Cit., p. 246 and p. 234]
This theory is at the root of the argument that finance markets should be deregulated and as many
funds as possible invested in them. While the theory may benefit the minority of share holders who
own the bulk of shares and help them pressurise government policy, it is hard to see how it benefits
the rest of society. Alternative, more realistic theories, argue that finance markets show endogenous
instability, result in bad investment as well as reducing the overall level of investment as investors
will not fund investments which are not predicted to have a sufficiently high rate of return. All of
which has a large and negative impact on the real economy. Instead, the economic profession
embraced a highly unreal economic theory which has encouraged the world to indulge in stock
market speculation as it argues that they do not have bubbles, booms or bursts (that the 1990s stock
market bubble finally burst like many previous ones is unlikely to stop this). Perhaps this has to do
the implications for economic theory for this farcical analysis of the stock market? As two
mainstream economists put it:
"To reject the Efficient Market Hypothesis for the whole stock market . . . implies
broadly that production decisions based on stock prices will lead to inefficient capital
allocations. More generally, if the application of rational expectations theory to the
virtually 'idea' conditions provided by the stock market fails, then what confidence can
economists have in its application to other areas of economics . . . ?" [Marsh and
Merton, quoted by Doug Henwood, Wall Street, p. 161]

Ultimately, neoclassical economics, by means of the concept of "representative" agent, has proved
that subjective evaluations could not be aggregated and, as a result, a market supply and demand
curves cannot be produced. In other words, neoclassical economics has shown that if society were
comprised of one individual, buying one good produced by one factory then it could accurately
reflect what happened in it. "It is stating the obvious," states Keen, "to call the representative agent
an 'ad hoc' assumption, made simply so that economists can pretend to have a sound basis for their
analysis, when in reality they have no grounding whatsoever." [Op. Cit., p. 188]
There is a certain irony about the change from cardinal to ordinal utility and finally the rise of the
impossible nonsense which are "indifference curves." While these changes were driven by the need
to deny the advocates of redistributive taxation policies the mantel of economic science to justify
their schemes, the fact is by rejecting cardinal utility, it becomes impossible to say whether state
action like taxes decreases utility at all. With ordinal utility and its related concepts, you cannot
actually show that government intervention actually harms "social utility." All you can say is that
they are indeterminate. While the rich may lose income and the poor gain, it is impossible to say
anything about social utility without making an interpersonal (cardinal) utility comparison. Thus,
ironically, ordinal utility based economics provides a much weaker defence of free market
capitalism by removing the economist of the ability to call any act of government "inefficient" and
they would have to be evaluated in, horror of horrors, non-economic terms. As Keen notes, it is
"ironic that this ancient defence of inequality ultimately backfires on economics, by making its
impossible to construct a market demand curve which is independent on the distribution of income .
. . economics cannot defend any one distribution of income over any other. A redistribution of
income that favours the poor over the rich cannot be formally opposed by economic theory." [Op.
Cit., p. 51]
Neoclassical economics has also confirmed that the classical perspective of analysing society in
terms of classes is also more valid than the individualistic approach it values. As one leading neo-
classical economist has noted, if economics is "to progress further we may well be forced to
theorise in terms of groups who have collectively coherent behaviour." Moreover, the classical
economists would not be surprised by the admission that "the addition of production can help"
economic analysis nor the conclusion that the "idea that we should start at the level of the isolated
individual is one which we may well have to abandon . . . If we aggregate over several individuals,
such a model is unjustified." [Alan Kirman, "The Intrinsic Limits of Modern Economy Theory", pp.
126-139, The Economic Journal, Vol. 99, No. 395, p. 138, p. 136 and p. 138]
So why all the bother? Why spend over 100 years driving economics into a dead-end? Simply
because of political reasons. The advantage of the neoclassical approach was that it abstracted away
from production (where power relations are clear) and concentrated on exchange (where power
works indirectly). As libertarian Marxist Paul Mattick notes, the "problems of bourgeois economics
seemed to disappear as soon as one ignored production and attended only to the market . . . Viewed
apart from production, the price problem can be dealt with purely in terms of the market."
[Economic Crisis and Crisis Theory, p. 9] By ignoring production, the obvious inequalities of
power produced by the dominant social relations within capitalism could be ignored in favour of
looking at abstract individuals as buyers and sellers. That this meant ignoring such key concepts as
time by forcing economics into a static, freeze frame, model of the economy was a price worth
paying as it allowed capitalism to be justified as the best of all possible worlds:
"On the one hand, it was thought essential to represent the winning of profit, interest,
and rent as participation in the creation of wealth. On the other, it was thought
desirable to found the authority of economics on the procedures of natural science. This
second desire prompted a search for general economic laws independent of time and
circumstances. If such laws could be proven, the existing society would thereby be
legitimated and every idea of changing it refuted. Subjective value theory promised to
accomplish both tasks at once. Disregarding the exchange relationship peculiar to
capitalism -- that between the sellers and buyers of labour power -- it could explain the
 division of the social product, under whatever forms, as resulting from the needs of the
exchangers themselves." [Mattick, Op. Cit., p. 11]

The attempt to ignore production implied in capitalist economics comes from a desire to hide the
exploitative and class nature of capitalism. By concentrating upon the "subjective" evaluations of
individuals, those individuals are abstracted away from real economic activity (i.e. production) so
the source of profits and power in the economy can be ignored (section C.2 indicates why
exploitation of labour in production is the source of profit, interest and rent and not exchanges in
the market).
Hence the flight from classical economics to the static, timeless world of individuals exchanging
pre-existing goods on the market. The evolution of capitalist economics has always been towards
removing any theory which could be used to attack capitalism. Thus classical economics was
rejected in favour of utility theory once socialists and anarchists used it to show that capitalism was
exploitative. Then this utility theory was modified over time in order to purge it of undesirable
political consequences. In so doing, they ended up not only proving that an economics based on
individualism was impossible but also that it cannot be used to oppose redistribution policies after
all.

C.1.4 What is wrong with equilibrium analysis?

The dominant form of economic analysis since the 1880s has been equilibrium analysis. While
equilibrium had been used by classical economics to explain what regulated market prices, it did not
consider it as reflecting any real economy. This was because classical economics analysed
capitalism as a mode of production rather than as a mode of exchange, as a mode of circulation, as
neo-classical economics does. It looked at the process of creating products while neo-classical
economics looked at the price ratios between already existing goods (this explains why neo-
classical economists have such a hard time understanding classical or Marxist economics, the
schools are talking about different things and why they tend to call any market system "capitalism"
regardless of whether wage labour predominates of not). The classical school is based on an
analysis of markets based on production of commodities through time. The neo-classical school is
based on an analysis of markets based on the exchange of the goods which exist at any moment of
time.
This indicates what is wrong with equilibrium analysis, it is essentially a static tool used to analyse
a dynamic system. It assumes stability where none exists. Capitalism is always unstable, always out
of equilibrium, since "growing out of capitalist competition, to heighten exploitation, . . . the
relations of production . . . [are] in a state of perpetual transformation, which manifests itself in
changing relative prices of goods on the market. Therefore the market is continuously in
disequilibrium, although with different degrees of severity, thus giving rise, by its occasional
approach to an equilibrium state, to the illusion of a tendency toward equilibrium." [Mattick, Op.
Cit., p. 51] Given this obvious fact of the real economy, it comes as no surprise that dissident
economists consider equilibrium analysis as "a major obstacle to the development of economics as
a science -- meaning by the term 'science' a body of theorems based on assumptions that are
empirically derived (from observations) and which embody hypotheses that are capable of
verification both in regard to the assumptions and the predictions." [Kaldor, The Essential Kaldor,
p. 373]
Thus the whole concept is an unreal rather than valid abstraction of reality. Sadly, the notions of
"perfect competition" and (Walrasian) "general equilibrium" are part and parcel of neoclassical
economics. It attempts to show, in the words of Paul Ormerod, "that under certain assumptions the
free market system would lead to an allocation of a given set of resources which was in a very
particular and restricted sense optimal from the point of view of every individual and company in
the economy." [The Death of Economics, p. 45] This was what Walrasian general equilibrium
proved. However, the assumptions required prove to be somewhat unrealistic (to understate the
point). As Ormerod points out:
"[i]t cannot be emphasised too strongly that . . . the competitive model is far removed
from being a reasonable representation of Western economies in practice. . . [It is] a
travesty of reality. The world does not consist, for example, of an enormous number of
small firms, none of which has any degree of control over the market . . . The theory
introduced by the marginal revolution was based upon a series of postulates about
human behaviour and the workings of the economy. It was very much an experiment in
pure thought, with little empirical rationalisation of the assumptions." [Op. Cit., p. 48]

Indeed, "the weight of evidence" is "against the validity of the model of competitive general
equilibrium as a plausible representation of reality." [Op. Cit., p. 62] For example, to this day,
economists still start with the assumption of a multitude of firms, even worse, a "continuum" of
them exist in every market. How many markets are there in which there is an infinite number of
traders? This means that from the start the issues and problems associated with oligopoly and
imperfect competition have been abstracted from. This means the theory does not allow one to
answer interesting questions which turn on the asymmetry of information and bargaining power
among economic agents, whether due to size, or organisation, or social stigmas, or whatever else. In
the real world, oligopoly is common place and asymmetry of information and bargaining power the
norm. To abstract from these means to present an economic vision at odds with the reality people
face and, therefore, can only propose solutions which harm those with weaker bargaining positions
and without information.
General equilibrium is an entirely static concept, a market marked by perfect knowledge and so
inhabited by people who are under no inducement or need to act. It is also timeless, a world without
a future and so with no uncertainty (any attempt to include time, and so uncertainty, ensures that the
model ceases to be of value). At best, economists include "time" by means of comparing one static
state to another, i.e. "the features of one non-existent equilibrium were compared with those of a
later non-existent equilibrium." [Mattick, Op. Cit., p. 22] How the economy actually changed from
one stable state to another is left to the imagination. Indeed, the idea of any long-run equilibrium is
rendered irrelevant by the movement towards it as the equilibrium also moves. Unsurprisingly,
therefore, to construct an equilibrium path through time requires all prices for all periods to be
determined at the start and that everyone foresees future prices correctly for eternity -- including for
goods not invented yet. Thus the model cannot easily or usefully account for the reality that
economic agents do not actually know such things as future prices, future availability of goods,
changes in production techniques or in markets to occur in the future, etc. Instead, to achieve its
results -- proofs about equilibrium conditions -- the model assumes that actors have perfect
knowledge at least of the probabilities of all possible outcomes for the economy. The opposite is
obviously the case in reality:
 "Yet the main lessons of these increasingly abstract and unreal theoretical constructions
are also increasingly taken on trust . . . It is generally taken for granted by the great
majority of academic economists that the economy always approaches, or is near to, a
state of 'equilibrium' . . . all propositions which the pure mathematical economist has
shown to be valid only on assumptions that are manifestly unreal -- that is to say,
directly contrary to experience and not just 'abstract.' In fact, equilibrium theory has
reached the stage where the pure theorist has successfully (though perhaps
inadvertently) demonstrated that the main implications of this theory cannot possibly
hold in reality, but has not yet managed to pass his message down the line to the
textbook writer and to the classroom." [Kaldor, Op. Cit., pp. 376-7]

In this timeless, perfect world, "free market" capitalism will prove itself an efficient method of
allocating resources and all markets will clear. In part at least, General Equilibrium Theory is an
abstract answer to an abstract and important question: Can an economy relying only on price signals
for market information be orderly? The answer of general equilibrium is clear and definitive -- one
can describe such an economy with these properties. However, no actual economy has been
described and, given the assumptions involved, none could ever exist. A theoretical question has
been answered involving some amount of intellectual achievement, but it is a answer which has no
bearing to reality. And this is often termed the "high theory" of equilibrium. Obviously most
economists must treat the real world as a special case.
Little wonder, then, that Kaldor argued that his "basic objection to the theory of general equilibrium
is not that it is abstract -- all theory is abstract and must necessarily be so since there can be no
analysis without abstraction -- but that it starts from the wrong kind of abstraction, and therefore
gives a misleading 'paradigm' . . . of the world as it is; it gives a misleading impression of the
nature and the manner of operation of economic forces." Moreover, belief that equilibrium theory is
the only starting point for economic analysis has survived "despite the increasing (not diminishing)
arbitrariness of its based assumptions -- which was forced upon its practitioners by the ever more
precise cognition of the needs of logical consistency. In terms of gradually converting an
'intellectual experiment' . . . into a scientific theory -- in other words, a set of theorems directly
related to observable phenomena -- the development of theoretical economics was one of continual
degress, not progress . . . The process . . . of relaxing the unreal basis assumptions . . . has not yet
started. Indeed, [they get] . . . thicker and more impenetrable with every successive reformation of
the theory." [Op. Cit., p. 399 and pp. 375-6]
Thus General Equilibrium theory analyses an economic state which there is no reason to suppose
will ever, or has ever, come about. It is, therefore, an abstraction which has no discernible
applicability or relevance to the world as it is. To argue that it can give insights into the real world is
ridiculous. While it is true that there are certain imaginary intellectual problems for which the
general equilibrium model is well designed to provide precise answers (if anything really could), in
practice this means the same as saying that if one insists on analysing a problem which has no real
world equivalent or solution, it may be appropriate to use a model which has no real-world
application. Models derived to provide answers to imaginary problems will be unsuitable for
resolving practical, real-world economic problems or even providing a useful insight into how
capitalism works and develops.
This can have devastating real world impact, as can be seen from the results of neoclassical advice
to Eastern Europe and other countries in their transition from state capitalism (Stalinism) to private
capitalism. As Joseph Stiglitz documents it was a disaster for all but the elite due to the "market
fundamentalism preached" by economists It resulted in "a marked deterioration" in most peoples
"basic standard of living, reflected in a host of social indicators" and well as large drops in GDP.
[Globalisation and its discontents, p. 138 and p. 152] Thus real people can be harmed by unreal
theory. That the advice of neoclassical economists has made millions of people look back at
Stalinism as "the good old days" should be enough to show its intellectual and moral bankruptcy.
What can you expect? Mainstream economic theory begins with axioms and assumptions and uses a
deductive methodology to arrive at conclusions, its usefulness in discovering how the world works
is limited. The deductive method is pre-scientific in nature. The axioms and assumptions can be
considered fictitious (as they have negligible empirical relevance) and the conclusions of deductive
models can only really have relevance to the structure of those models as the models themselves
bear no relation to economic reality:
"Some theorists, even among those who reject general equilibrium as useless, praise its
logical elegance and completeness . . . But if any proposition drawn from it is applied to
an economy inhabited by human beings, it immediately becomes self-contradictory.
Human life does not exist outside history and no one had correct foresight of his own
future behaviour, let alone of the behaviour of all the other individuals which will
impinge upon his. I do not think that it is right to praise the logical elegance of a system
which becomes self-contradictory when it is applied to the question that it was designed
to answer." [Joan Robinson, Contributions to Modern Economics, pp. 127-8]

Not that this deductive model is internally sound. For example, the assumptions required for perfect
competition are mutually exclusive. In order for the market reach equilibrium, economic actors
need to able to affect it. So, for example, if there is an excess supply some companies must lower
their prices. However, such acts contradict the basic assumption of "perfect competition," namely
that the number of buyers and sellers is so huge that no one individual actor (a firm or a consumer)
can determine the market price by their actions. In other words, economists assume that the impact
of each firm is zero but yet when these zeroes are summed up over the whole market the total is
greater than zero. This is impossible. Moreover, the "requirements of equilibrium are carefully
examined in the Walrasian argument but there is no way of demonstrating that a market which
starts in an out-of-equilibrium position will tend to get into equilibrium, except by putting further
very severe restrictions on the already highly abstract argument." [Joan Robinson, Collected
Economic Papers, vol. 5, p. 154] Nor does the stable unique equilibrium actually exist for,
ironically, "mathematicians have shown that, under fairly general conditions, general equilibrium
is unstable." [Keen, Debunking Economics, p. 173]
Another major problem with equilibrium theory is the fact that it does not, in fact, describe a
capitalist economy. It should go without saying that models which focus purely on exchange cannot,
by definition, offer a realistic analysis, never mind description, of the capitalism or the generation of
income in an industrialised economy. As Joan Robinson summarises:
"The neo-classical theory . . . pretends to derive a system of prices from the relative
scarcity of commodities in relation to the demand for them. I say pretend because this
system cannot be applied to capitalist production.

"The Walrasian conception of equilibrium arrived at by higgling and haggling in a

market illuminates the account of prisoners of war swapping the contents of their Red
Cross parcels.
 "It makes sense also, with some modifications, in an economy of artisans and small
traders . . .

"Two essential characteristics of industrial capitalism are absent in these economic

systems -- the distinction between income from work and income from property and the
nature of investments made in the light of uncertain expectations about a long future."
[Collected Economic Papers, vol. 5, p. 34]

Even such basic things as profits and money have a hard time fitting into general equilibrium
theory. In a perfectly competitive equilibrium, super-normal profit is zero so profit fails to appear.
Normal profit is assumed to be the contribution capital makes to output and is treated as a cost of
production and notionally set as the zero mark. A capitalism without profit? Or growth, "since there
is no profit or any other sort of surplus in the neoclassical equilibrium, there can be no expanded
reproduction of the system." [Mattick, Op. Cit., p. 22] It also treats capitalism as little more than a
barter economy. The concept of general equilibrium is incompatible with the actual role of money
in a capitalist economy. The assumption of "perfect knowledge" makes the keeping of cash reserves
as a precaution against unexpected developments would not be necessary as the future is already
known. In a world where there was absolute certainty about the present and future there would be
no need for a medium of exchange like money at all. In the real world, money has a real effect on
production an economic stability. It is, in other words, not neutral (although, conveniently, in a
fictional world with neutral money "crises do not occur" and it "assumed away the very matter
under investigation," namely depressions. [Keynes, quoted by Doug Henwood, Wall Street, p.
199]).
Given that general equilibrium theory does not satisfactorily encompass such things as profit,
money, growth, instability or even firms, how it can be considered as even an adequate
representation of any real capitalist economy is hard to understand. Yet, sadly, this perspective has
dominated economics for over 100 years. There is almost no discussion of how scarce means are
organised to yield outputs, the whole emphasis is on exchanges of ready made goods. This is
unsurprising, as this allows economics to abstract from such key concepts as power, class and
hierarchy. It shows the "the bankruptcy of academic economic teaching. The structure of thought
which it expounds was long ago proven to be hollow. It consisted of a set of propositions which bore
hardly any relation to the structure and evolution of the economy that they were supposed to
depict." [Joan Robinson, Op. Cit., p. 90]
Ultimately, equilibrium analysis simply presents an unreal picture of the real world. Economics
treat a dynamic system as a static one, building models rooted in the concept of equilibrium when a
non-equilibrium analysis makes obvious sense. As Steven Keen notes, it is not only the real world
that has suffered, so has economics:
"This obsession with equilibrium has imposed enormous costs on economics . . . unreal
assumptions are needed to maintain conditions under which there will be a unique,
'optimal' equilibrium . . . If you believe you can use unreality to model reality, then
eventually your grip on reality itself can become tenuous." [Op. Cit., p. 177]

Ironically, given economists usual role in society as defenders of big business and the elite in
general, there is one conclusion of general equilibrium theory which does have some relevance to
the real world. In 1956, two economists "demonstrated that serious problems exist for the model of
competitive equilibrium if any of its assumptions are breached." They were "not dealing with the
fundamental problem of whether a competitive equilibrium exists," rather they wanted to know what
happens if the assumptions of the model were violated. Assuming that two violations existed, they
worked out what would happen if only one of them were removed. The answer was a shock for
economists -- "If just one of many, or even just one of two [violations] is removed, it is not possible
to prejudge the outcome. The economy as a whole can theoretically be worse off it just one
violation exists than it is when two such violations exist." In other words, any single move towards
the economists' ideal market may make the world worse off. [Ormerod, Op. Cit., pp. 82-4]
What Kelvin Lancaster and Richard Lipsey had shown in their paper "The General Theory of the
Second Best" [Review of Economic Studies, December 1956] has one obvious implication, namely
that neoclassical economics itself has shown that trade unions were essential to stop workers being
exploited under capitalism. This is because the neoclassical model requires there to be a multitude
of small firms and no unions. In the real world, most markets are dominated by a few big firms.
Getting rid of unions in such a less than competitive market would result in the wage being less than
the price for which the marginal worker's output can be sold, i.e. workers are exploited by capital.
In other words, economics has itself disproved the neoclassical case against trade unions. Not that
you would know that from neoclassical economists, of course. In spite of knowing that, in their own
terms, breaking union power while retaining big business would result, in the exploitation of labour,
neoclassical economists lead the attack on "union power" in the 1970s and 1980s. The subsequent
explosion in inequality as wealth flooded upwards provided empirical confirmation of this analysis.
Strangely, though, most neoclassical economists are still as anti-union as ever -- in spite of both
their own ideology and the empirical evidence. That the anti-union message is just what the bosses
want to hear can just be marked up as yet another one of those strange co-incidences which the
value-free science of economics is so prone to. Suffice to say, if the economics profession ever
questions general equilibrium theory it will be due to conclusions like this becoming better known
in the general population.

C.1.5 Does economics really reflect the reality of capitalism?

As we discussed in section C.1.2, mainstream economics is rooted in capitalism and capitalist social
relations. It takes the current division of society into classes as both given as well as producing the
highest form of efficiency. In other words, mainstream economics is rooted in capitalist assumptions
and, unsurprisingly, its conclusions are, almost always, beneficial to capitalists, managers,
landlords, lenders and the rich rather than workers, tenants, borrowers and the poor.
However, on another level mainstream capitalist economics simply does not reflect capitalism at
all. While this may seem paradoxical, it is not. Neoclassical economics has always been marked by
apologetics. Consequently, it must abstract or ignore from the more unpleasant and awkward
aspects of capitalism in order to present it in the best possible light.
Take, for example, the labour market. Anarchists, like other socialists, have always stressed that
under capitalism workers have the choice between selling their liberty/labour to a boss or starving
to death (or extreme poverty, assuming some kind of welfare state). This is because they do not
have access to the means of life (land and workplaces) unless they sell their labour to those who
own them. In such circumstances, it makes little sense to talk of liberty as the only real liberty
working people have is, if they are lucky, agreeing to be exploited by one boss rather than another.
How much an person works, like their wages, will be based on the relative balance of power
between the working and capitalist classes in a given situation.
Unsurprisingly, neoclassical economics does not portray the choice facing working class people in
such a realistic light. Rather, it argues that the amount of hours an individual works is based on their
preference for income and leisure time. Thus the standard model of the labour market is somewhat
paradoxical in that there is no actual labour in it. There is only income, leisure and the preference of
the individual for more of one or the other. It is leisure that is assumed to be a "normal good" and
labour is just what is left over after the individual "consumes" all the leisure they want. This means
that working resolves itself into the vacuous double negative of not-not-working and the notion that
all unemployment is voluntary.
That this is nonsense should be obvious. How much "leisure" can someone indulge in without an
income? How can an economic theory be considered remotely valid when it presents
unemployment (i.e. no income) as the ultimate utility in an economy where everything is (or should
be) subject to a price? Income, then, has an overwhelming impact upon the marginal utility of
leisure time. Equally, this perspective cannot explain why the prospect of job loss is seen with such
fear by most workers. If the neoclassical (non-)analysis of the labour market were true, workers
would be happy to be made unemployed. In reality, fear of the sack is a major disciplining tool
within capitalism. That free market capitalist economists have succeeded in making unemployment
appear as a desirable situation suggests that its grip on the reality of capitalism is slim to say the
least (here, as in many other areas, Keynes is more realistic although most of his followers have
capitulated faced with neoclassical criticism that standard Keynesian theory had bad micro-
economic foundations rather than admit that later was nonsense and the former "an emasculated
version of Keynes" inflicted on the world by J.R. Hicks. [Keen, Op. Cit., p. 211]).
However, this picture of the "labour" market does hide the reality of working class dependency and,
consequently, the power of the capitalist class. To admit that workers do not exercise any free
choice over whether they work or not and, once in work, have to accept the work hours set by their
employers makes capitalism seem less wonderful than its supporters claim. Ultimately, this fiction
of the labour market being driven by the workers' desire for "leisure" and that all unemployment is
"voluntary" is rooted in the need to obscure the fact that unemployment is an essential feature of
capitalism and, consequently, is endemic to it. This is because it is the fundamental disciplinary
mechanism of the system ("it is a whip in [the bosses'] hands, constantly held over you, so you will
slave hard for him and 'behave' yourself," to quote Alexander Berkman). As we argued in section
B.4.3, capitalism must have unemployment in order to ensure that workers will obey their bosses
and not demand better pay and conditions (or, even worse, question why they have bosses in the
first place). It is, in other words, "inherent in the wage system" and "the fundamental condition of
successful capitalist production." While it is "dangerous and degrading" to the worker, it is "very
advantageous to the boss" and so capitalism "can't exist without it." [Berkman, What is
Anarchism?, p. 26] The experience of state managed full employment between (approximately)
1950 and 1970 confirms this analysis, as does the subsequent period (see section C.7.1).
For the choice of leisure and labour to be a reality, then workers need an independent source of
income. The model, in other words, assumes that workers need to be enticed by the given wage and
this is only the case when workers have the option of working for themselves, i.e. that they own
their own means of production. If this were the case, then it would not be capitalism. In other
words, the vision of the labour market in capitalist economics assumes a non-capitalist economy of
artisans and peasant farmers -- precisely the kind of economy capitalism destroyed (with the help of
the state). An additional irony of this neoclassical analysis is that those who subscribe to it most are
also those who attack the notion of a generous welfare state (or oppose the idea of welfare state in
all forms). Their compliant is that with a welfare state, the labour market becomes "inefficient" as
people can claim benefits and so need not seek work. Yet, logically, they should support a generous
welfare state as it gives working people a genuine choice between labour and leisure. That bosses
find it hard to hire people should be seen as a good thing as work is obviously being evaluated as a
"disutility" rather than as a necessity. As an added irony, as we discuss in section C.9, the capitalist
analysis of the labour market is not based on any firm empirical evidence nor does it have any real
logical basis (it is just an assumption). In fact, the evidence we do have points against it and in
favour of the socialist analysis of unemployment and the labour market.
One of the reasons why neoclassical economics is so blasé about unemployment is because it argues
that it should never happen. That capitalism has always been marked by unemployment and that this
rises and falls as part of the business cycle is a inconvenient fact which neoclassical economics
avoided seriously analysing until the 1930s. This flows from Say's law, the argument that supply
creates its own demand. This theory, and its more formally put Walras' Law, is the basis on which
the idea that capitalism could never face a general economic crisis is rooted in. That capitalism has
always been marked by boom and bust has never put Say's Law into question except during the
1930s and even then it was quickly put back into the centre of economic ideology.
For Say, "every producer asks for money in exchange for his products only for the purpose of
employing that money again immediately in the purchase of another product." However, this is not
the case in a capitalist economy as capitalists seek to accumulate wealth and this involves creating a
difference between the value of commodities someone desired to sell and buy on the market. While
Say asserts that people simply want to consume commodities, capitalism is marked by the desire
(the need) to accumulate. The ultimate aim is not consumption, as Say asserted (and today's
economists repeat), but rather to make as much profit as possible. To ignore this is to ignore the
essence of capitalism and while it may allow the economist to reason away the contradictions of
that system, the reality of the business cycle cannot be ignored.
Say's law, in other words, assumes a world without capital:
"what is a given stock of capital? In this context, clearly, it is the actual equipment and
stocks of commodities that happen to be in existence today, the result of recent or
remote past history, together with the know-how, skill of labour, etc., that makes up the
state of technology. Equipment . . . is designed for a particular range of uses, to be
operated by a particular labour force. There is not a great deal of play in it. The
description of the stock of equipment in existence at any moment as 'scare means with
alternative uses' is rather exaggerated. The uses in fact are fairly specific, though they
may be changed over time. But they can be utilised, at any moment, by offering less or
more employment to labour. This is a characteristic of the wage economy. In an artisan
economy, where each producer owns his own equipment, each produces what he can
and sells it for what it will fetch. Say's law, that goods are the demand for goods, was
ceasing to be true at the time he formulated it." [Joan Robinson, Collected Economic
Papers, vol. 4, p. 133]

As Keen notes, Say's law "evisage[s] an exchange-only economy: an economy in which goods exist
at the outset, but where no production takes place. The market simply enables the exchange of pre-
existing goods." However, once we had capital to the economy, things change as capitalists wish "to
supply more than they demand, and to accumulate the difference as profit which adds to their
wealth." This results in an excess demand and, consequently, the possibility of a crisis. Thus
mainstream capitalist economics "is best suited to the economic irrelevance of an exchange-only
economy, or a production economy in which growth does not occur. If production and growth do
occur, then they take place outside the market, when ironically the market is the main intellectual
focus of neoclassical economics. Conventional economics is this a theory which suits a static
economy . . . when what is needed are theories to analyse dynamic economies." [Debunking
Economics, p. 194, p. 195 and p. 197]
Ultimately, capital assets are not produced for their own stake but in expectation of profits. This
obvious fact is ignored by Say's law, but was recognised by Marx (and subsequently acknowledged
by Keynes as being correct). As Keen notes, unlike Say and his followers, "Marx's perspective thus
integrates production, exchange and credit as holistic aspects of a capitalist economy, and therefore
as essential elements of any theory of capitalism. Conventional economics, in contrast, can only
analyse an exchange economy in which money is simply a means to make barter easier." [Op. Cit.,
pp. 195-6]
Rejecting Say's Law as being applicable to capitalism means recognising that the capitalist
economy is not stable, that it can experience booms and slumps. That this reflects the reality of that
economy should go without saying. It also involves recognising that it can take time for
unemployed workers to find new employment, that unemployment can by involuntary and that
bosses can gain advantages from the fear of unemployment by workers.
That last fact, the fear of unemployment is used by bosses to get workers to accept reductions in
wages, hours and benefits, is key factor facing workers in any real economy. Yet, according to the
economic textbooks, workers should have been falling over themselves to maximise the utility of
leisure and minimise the disutility of work. Similarly, workers should not fear being made
unemployed by globalisation as the export of any jobs would simply have generated more economic
activity and so the displaced workers would immediately be re-employed (albeit at a lower wage,
perhaps). Again, according to the economic textbooks, these lower wages would generate even
more economic activity and thus lead, in the long run, to higher wages. If only workers had only
listened to the economists then they would realise that that not only did they actually gain (in the
long run) by their wages, hours and benefits being cut, many of them also gained (in the short term)
increased utility by not having to go to work. That is, assuming the economists know what they are
talking about.
Then there is the question of income. For most capitalist economics, a given wage is supposed to be
equal to the "marginal contribution" that an individual makes to a given company. Are we really
expected to believe this? Common sense (and empirical evidence) suggests otherwise. Consider Mr.
Rand Araskog, the CEO of ITT in 1990, who in that year was paid a salary of $7 million. Is it
conceivable that an ITT accountant calculated that, all else being the same, the company's $20.4
billion in revenues that year would have been $7 million less without Mr. Araskog -- hence
determining his marginal contribution to be $7 million? This seems highly unlikely.
Which feeds into the question of exploding CEO pay. While this has affected most countries, the
US has seen the largest increases (followed by the UK). In 1979 the CEO of a UK company earned
slightly less than 10 times as much as the average worker on the shop floor. By 2002 a boss of a
FTSE 100 company could expect to make 54 times as much as the typical worker. This means that
while the wages for those on the shopfloor went up a little, once inflation is taken into account, the
bosses wages arose from £200,000 per year to around £1.4m a year. In America, the increase was
even worse. In 1980, the ratio of CEO to worker pay 50 to 1. Twenty years later it was 525 to 1,
before falling back to 281 to 1 in 2002 following the collapse of the share price bubble. [Larry
Elliott, "Nice work if you can get it: chief executives quietly enrich themselves for mediocrity," The
Guardian, 23 January, 2006]
The notion of marginal productivity is used to justify many things on the market. For example, the
widening gap between high-paid and low-paid Americans (it is argued) simply reflects a labour
market efficiently rewarding more productive people. Thus the compensation for corporate chief
executives climbs so sharply because it reflects their marginal productivity. The strange thing about
this kind of argument is that, as we indicate in section C.2.5, the problem of defining and measuring
capital wrecked the entire neoclassical theory of marginal factor productivity and with it the
associated marginal productivity theory of income back in the 1960s -- and was admitted as the
leading neo-classical economists of the time. That marginal productivity theory is still invoked to
justify capitalist inequalities shows not only how economics ignores the reality of capitalism but
also the intellectual bankruptcy of the "science" and whose interests it, ultimately, serves.
In spite of this awkward little fact, what of the claims made based on it? Is this pay really the result
of any increased productivity on the part of CEOs? The evidence points the other way. This can be
seen from the performance of the economies and companies in question. In Britain trend growth
was a bit more than 2% in 1980 and is still a bit more than 2% a quarter of a century later. A study
of corporate performance in Britain and the United States looked at the companies that make up the
FTSE 100 index in Britain and the S&P 500 in the US and found that executive income is rarely
justified by improved performance. [Julie Froud, Sukhdev Johal, Adam Leaver and Karel Williams,
Financialisation and Strategy: Narrative and Number ] Rising stock prices in the 1990s, for
example, were the product of one of the financial market's irrational bubbles over which the CEO's
had no control or role in creating.
During the same period as soaring CEO pay, workers' real wages remained flat. Are we to believe
that since the 1980s, the marginal contribution of CEOs has increased massively whereas workers'
marginal contributions remained stagnant? According to economists, in a free market wages should
increase until they reach their marginal productivity. In the US, however, during the 1960s "pay and
productivity grew in tandem, but they separated in the 1970s. In the 1990s boom, pay growth
lagged behind productivity by almost 30%." Looking purely at direct pay, "overall productivity rose
four times as fast as the average real hourly wage -- and twenty times as fast in manufacturing."
Pay did catch up a bit in the late 1990s, but after 2000 "pay returned to its lagging position." [Doug
Henwood, After the New Economy, pp. 45-6] In other words, over two decades of free market
reforms has produced a situation which has refuted the idea that a workers wage equals their
marginal productivity.
The standard response by economists would be to state that the US economy is not a free market.
Yet the 1970s, after all, saw the start of reforms based on the recommendations of free market
capitalist economists. The 1980s and 1990s saw even more. Regulation was reduced, if not
effectively eliminated, the welfare state rolled back and unions marginalised. So it staggers belief to
state that the US was more free market in the 1950s and 1960s than in the 1980s and 1990s but,
logically, this is what economists suggest. Moreover, this explanation sits ill at ease with the
multitude of economists who justified growing inequality and skyrocketing CEO pay and company
profits during this period in terms of free market economics. What is it to be? If the US is not a free
market, then the incomes of companies and the wealth are not the result of their marginal
contribution but rather are gained at the expense of the working class. If the US is a free market,
then the rich are justified (in terms of economic theory) in their income but workers' wages do not
equal their marginal productivity. Unsurprisingly, most economists do not raise the question, never
mind answer it.
So what is the reason for this extreme wage difference? Simply put, it's due to the totalitarian nature
of capitalist firms (see section B.4). Those at the bottom of the company have no say in what
happens within it; so as long as the share-owners are happy, wage differentials will rise and rise
(particularly when top management own large amounts of shares!). It is capitalist property relations
that allow this monopolisation of wealth by the few who own (or boss) but do not produce. The
workers do not get the full value of what they produce, nor do they have a say in how the surplus
value produced by their labour gets used (e.g. investment decisions). Others have monopolised both
the wealth produced by workers and the decision-making power within the company (see section
C.2 for more discussion). This is a private form of taxation without representation, just as the
company is a private form of statism. Unlike the typical economist, most people would not consider
it too strange a coincidence that the people with power in a company, when working out who
contributes most to a product, decide it's themselves!
Whether workers will tolerate stagnating wages depends, of course, on the general economic
climate. High unemployment and job insecurity help make workers obedient and grateful for any
job and this has been the case for most of the 1980s and 1990s in both America and the UK. So a
key reason for the exploding pay is to be found in the successful class struggle the ruling class has
been waging since the 1970s. There has "been a real shift in focus, so that the beneficiaries of
corporate success (such as it is) are no longer the workers and the general public as a whole but
shareholders. And given that there is evidence that only households in the top half of the income
distribution in the UK and the US hold shares, this represents a significant redistribution of money
and power." [Larry Elliott, Op. Cit.] That economics ignores the social context of rising CEO pay
says a lot about the limitations of modern economics and how it can be used to justify the current
system.
Then there is the trivial little thing of production. Economics used to be called "political economy"
and was production orientated. This was replaced by an economics based on marginalism and
subjective evaluations of a given supply of goods is fixed. For classical economics, to focus on an
instant of time was meaningless as time does not stop. To exclude production meant to exclude
time, which as we noted in section C.1.2 this is precisely and knowingly what marginalist
economics did do. This means modern economics simply ignores production as well as time and
given that profit making is a key concern for any firm in the real world, such a position shows how
irrelevant neoclassical economics really is.
Indeed, the neo-classical theory falls flat on its face. Basing itself, in effect, on a snapshot of time its
principles for the rational firm are, likewise, based on time standing still. It argues that profit is
maximised where marginal cost equals marginal revenue yet this is only applicable when you hold
time constant. However, a real firm will not maximise profit with respect to quantity but also in
respect to time. The neoclassical rule about how to maximise profit "is therefore correct if the
quantity produced never changes" and "by ignoring time in its analysis of the firm, economic theory
ignores some of the most important issues facing a firm." Neo-classical economics exposes its
essentially static nature again. It "ignores time, and is therefore only relevant in a world in which
time does no matter." [Keen, Op. Cit., pp. 80-1]
Then there is the issue of consumption. While capitalist apologists go on about "consumer
sovereignty" and the market as a "consumers democracy," the reality is somewhat different. Firstly,
and most obviously, big business spends a lot of money trying to shape and influence demand by
means of advertising. Not for them the neoclassical assumption of "given" needs, determined
outside the system. So the reality of capitalism is one where the "sovereign" is manipulated by
others. Secondly, there is the distribution of resources within society.
Market demand is usually discussed in terms of tastes, not in the distribution of purchasing power
required to satisfy those tastes. Income distribution is taken as given, which is very handy for those
with the most wealth. Needless to say, those who have a lot of money will be able to maximise their
satisfactions far easier than those who have little. Also, of course, they can out-bid those with less
money. If capitalism is a "consumers" democracy then it is a strange one, based on "one dollar, one
vote." It should be obvious whose values are going to be reflected most strongly in the market. If we
start with the orthodox economics (convenient) assumption of a "given distribution of income" then
any attempt to determine the best allocation of resources is flawed to start with as money replaces
utility from the start. To claim after that the market based distribution is the best one is question
begging in the extreme.
In other words, under capitalism, it is not individual need or "utility" as such that is maximised,
rather it is effective utility (usually called "effective demand") -- namely utility that is backed up
with money. This is the reality behind all the appeals to the marvels of the market. As right-wing
guru von Hayek put, the "[s]pontaneous order produced by the market does not ensure that what
general opinion regards as more important needs are always met before the less important ones."
["Competition as a discovery process", The Essence of Hayek, p. 258] Which is just a polite way
of referring to the process by which millionaires build a new mansion while thousands are homeless
or live in slums or feed luxury food to their pets while humans go hungry. It is, in effect, to dismiss
the needs of, for example, the 37 million Americans who lived below the poverty line in 2005
(12.7% of the population, the highest percentage in the developed world and is based on the
American state's absolute definition of poverty, looking at relative levels, the figures are worse).
Similarly, the 46 million Americans without health insurance may, of course, think that their need to
live should be considered as "more important" than, say, allowing Paris Hilton to buy a new
designer outfit. Or, at the most extreme, when agribusiness grow cash crops for foreign markets
while the landless starve to death. As E.P. Thompson argues, Hayek's answer:
"promote[s] the notion that high prices were a (painful) remedy for dearth, in drawing
supplies to the afflicted region of scarcity. But what draws supply are not high prices
but sufficient money in their purses to pay high prices. A characteristic phenomenon in
times of dearth is that it generates unemployment and empty pursues; in purchasing
necessities at inflated prices people cease to be able to buy inessentials [causing
unemployment] . . . Hence the number of those able to pay the inflated prices declines
in the afflicted regions, and food may be exported to neighbouring, less afflicted,
regions where employment is holding up and consumers still have money with which to
pay. In this sequence, high prices can actually withdraw supply from the most afflicted
area." [Customs in Common, pp. 283-4]
Therefore "the law of supply and demand" may not be the "most efficient" means of distribution in
a society based on inequality. This is clearly reflected in the "rationing" by purse which this system
is based on. While in the economics books, price is the means by which scare resources are
"rationed" in reality this creates many errors. As Thompson notes, "[h]owever persuasive the
metaphor, there is an elision of the real Relationships assigned by price, which suggests . . .
ideological sleight-of-mind. Rationing by price does not allocate resources equally among those in
need; it reserves the supply to those who can pay the price and excludes those who can't . . . The
raising of prices during dearth could 'ration' them [the poor] out of the market altogether." [Op.
Cit., p. 285] Which is precisely what does happen. As economist (and famine expert) Amartya Sen
notes:
"Take a theory of entitlements based on a set of rights of 'ownership, transfer and
rectification.' In this system a set of holdings of different people are judged to be just (or
unjust) by looking at past history, and not by checking the consequences of that set of
holdings. But what if the consequences are recognisably terrible? . . .[R]efer[ing] to
some empirical findings in a work on famines . . . evidence [is presented] to indicate
that in many large famines in the recent past, in which millions of people have died,
there was no over-all decline in food availability at all, and the famines occurred
precisely because of shifts in entitlement resulting from exercises of rights that are
perfectly legitimate. . . . [Can] famines . . . occur with a system of rights of the kind
morally defended in various ethical theories, including Nozick's. I believe the answer is
straightforwardly yes, since for many people the only resource that they legitimately
possess, viz. their labour-power, may well turn out to be unsaleable in the market,
giving the person no command over food . . . [i]f results such as starvations and
famines were to occur, would the distribution of holdings still be morally acceptable
despite their disastrous consequences? There is something deeply implausible in the
affirmative answer." [Resources, Values and Development, pp. 311-2]

Recurring famines were a constant problem during the lassiez-faire period of the British Empire.
While the Irish Potato famine is probably the best known, the fact is that millions died due to
starvation mostly due to a firm believe in the power of the market. In British India, according to the
most reliable estimates, the deaths from the 1876-1878 famine were in the range of 6-8 million and
between 1896 and 1900, were between 17 to 20 million. According to a British statistician who
analysed Indian food security measures in the two millennia prior to 1800, there was one major
famine a century in India. Under British rule there was one every four years. Over all, the late 1870s
and the late 1890s saw somewhere between 30 to 60 million people die in famines in India, China
and Brazil (not including the many more who died elsewhere). While bad weather started the
problem by placing the price of food above the reach of the poorest, the market and political
decisions based on profound belief in it made the famine worse. Simply put, had the authorities
distributed what food existed, most of the victims would have survived yet they did not as this
would have, they argued, broke the laws of the market and produced a culture of dependency. [Mike
Davis, Late Victorian Holocausts ] This pattern, incidentally, has been repeated in third world
countries to this day with famine countries exporting food as the there is no "demand" for it at
home.
All of which puts Hayek's glib comments about "spontaneous order" into a more realistic context.
As Kropotkin put it:
"The very essence of the present economic system is that the worker can never enjoy the
well-being he [or she] has produced . . . Inevitably, industry is directed . . . not towards
 what is needed to satisfy the needs of all, but towards that which, at a given moment,
brings in the greatest profit for a few. Of necessity, the abundance of some will be based
on the poverty of others, and the straitened circumstances of the greater number will
have to be maintained at all costs, that there may be hands to sell themselves for a part
only of what which they are capable of producing; without which private accumulation
of capital is impossible." [Anarchism, p. 128]

In other words, the market cannot be isolated and abstracted from the network of political, social
and legal relations within which it is situated. This means that all that "supply and demand" tells us
is that those with money can demand more, and be supplied with more, than those without. Whether
this is the "most efficient" result for society cannot be determined (unless, of course, you assume
that rich people are more valuable than working class ones because they are rich). This has an
obvious effect on production, with "effective demand" twisting economic activity and so, under
capitalism, meeting needs is secondary as the "only aim is to increase the profits of the capitalist."
[Kropotkin, Op. Cit., p. 55]). George Barrett brings home of evil effects of such a system:
"To-day the scramble is to compete for the greatest profits. If there is more profit to be
made in satisfying my lady's passing whim than there is in feeding hungry children, then
competition brings us in feverish haste to supply the former, whilst cold charity or the
poor law can supply the latter, or leave it unsupplied, just as it feels disposed. That is
how it works out." [Objections to Anarchism, p. 347]

Therefore, as far as consumption is concerned, anarchists are well aware of the need to create and
distribute necessary goods to those who require them. This, however, cannot be achieved under
capitalism and for all its talk of "utility," "demand", "consumer sovereignty" and so forth the real
facts are those with most money determine what is an "efficient" allocation of resources. This is
directly, in terms of their control over the means of life as well as indirectly, by means of skewing
market demand. For if financial profit is the sole consideration for resource allocation, then the
wealthy can outbid the poor and ensure the highest returns. The less wealthy can do without.
All in all, the world assumed by neo-classical economics is not the one we actually live in, and so
applying that theory is both misleading and (usually) disastrous (at least to the "have-nots"). While
this may seen surprisingly, it is not once we take into account its role as apologist and defender of
capitalism. Once that is recognised, any apparent contradiction falls away.

C.1.6 Is it possible to a non-equilibrium based capitalist

economics?
Yes, it is but it would be unlikely to be free-market based as the reality of capitalism would get the
better of its apologetics. This can be seen from the two current schools of economics which, rightly,
reject the notion of equilibrium -- the post-Keynesian school and the so-called Austrian school.
The former has few illusions in the nature of capitalism. At its best, this school combines the valid
insights of classical economics, Marx and Keynes to produce a robust radical (even socialist)
critique of both capitalism and capitalist economics. At its worse, it argues for state intervention to
save capitalism from itself and, politically, aligns itself with social democratic ("liberal", in the
USA) movements and parties. If economics does become a science, then this school of economics
will play a key role in its development. Economists of this school include Joan Robinson, Nicholas
Kaldor, John Kenneth Galbraith, Paul Davidson and Steven Keen. Due to its non-apologetic nature,
we will not discuss it here.
The Austrian school has a radically different perspective. This school, so named because its
founders were Austrian, is passionately pro-capitalist and argues against any form of state
intervention (bar, of course, the definition and defence of capitalist property rights and the power
that these create). Economists of this school include Eugen von Böhm-Bawerk, Ludwig von Mises,
Murray Rothbard, Israel Kirzner and Frederick von Hayek (the latter is often attacked by other
Austrian economists as not being sufficiently robust in his opposition to state intervention). It is
very much a minority school.
As it shares many of the same founding fathers as neoclassical economics and is rooted in
marginalism, the Austrian school is close to neoclassical economics in many ways. The key
difference is that it rejects the notion that the economy is in equilibrium and embraces a more
dynamic model of capitalism. It is rooted in the notion of entrepreneurial activity, the idea that
entrepreneurs act on information and disequilibrium to make super profits and bring the system
closer to equilibrium. Thus, to use their expression, their focus is on the market process rather than
a non-existent end state. As such, it defends capitalism in terms of how it reacts of dis-equilibrium
and presents a theory of the market process that brings the economy closer to equilibrium. And fails.
The claim that markets tend continually towards equilibrium, as the consequence of entrepreneurial
actions, is hard to justify in terms of its own assumptions. While the adjustments of a firm may
bring the specific market it operates in more towards equilibrium, their ramifications may take other
markets away from it and so any action will have stabilising and destabilising aspects to it. It strains
belief to assume that entrepreneurial activity will only push an economy more towards equilibrium
as any change in the supply and demand for any specific good leads to changes in the markets for
other goods (including money). That these adjustments will all (mostly) tend towards equilibrium is
little more than wishful thinking.
While being more realistic than mainstream neo-classical theory, this method abandons the
possibility of demonstrating that the market outcome is in any sense a realisation of the individual
preferences of whose interaction it is an expression. It has no way of establishing the supposedly
stabilising character of entrepreneurial activity or its alleged socially beneficial character as the
dynamic process could lead to a divergence rather than a convergence of behaviour. A dynamic
system need not be self-correcting, particularly in the labour market, nor show any sign of self-
equilibrium (i.e. it will be subject to the business cycle).
Given that the Austrian theory is, in part, based on Say's Law the critique we presented in the last
section also applies here. However, there is another reason to think the Austrian self-adjusting
perspective on capitalism is flawed and this is rooted in their own analysis. Ironically enough,
economists of this school often maintain that while equilibrium does not exist their analysis is
rooted on two key markets being in such a state: the labour market and the market for credit. The
reason for these strange exceptions to their general assumption is, fundamentally, political. The
former is required to deflect claims that "pure" capitalism would result in the exploitation of the
working class, the latter is required to show that such a system would be stable.
Looking at the labour market, the Austrians argue that free market capitalism would experience full
employment. That this condition is one of equilibrium does not seem to cause them much concern.
Thus we find von Hayek, for example, arguing that the "cause of unemployment . . . is a deviation
of prices and wages from their equilibrium position which would establish itself with a free market
and stable money. But we can never know at what system of relative prices and wages such an
equilibrium would establish itself." Therefore, "the deviation of existing prices from that
equilibrium position . . . is the cause of the impossibility of selling part of the labour supply." [New
Studies, p. 201] Therefore, we see the usual embrace of equilibrium theory to defend capitalism
against the evils it creates even by those who claim to know better.
Of course, the need to argue that there would be full employment under "pure" capitalism is
required to maintain the fiction that everyone will be better off under it. It is hard to say that
working class people will benefit if they are subject to high levels of unemployment and the
resulting fear and insecurity that produces. As would be expected, the Austrian school shares the
same perspective on unemployment as the neoclassical school, arguing that it is "voluntary" and the
result of the price of labour being too high (who knew that depressions were so beneficial to
workers, what with some having more leisure to enjoy and the others having higher than normal
wages?). The reality of capitalism is very different than this abstract model.
Anarchists have long realised that the capitalist market is based upon inequalities and changes in
power. Proudhon argued that "[t]he manufacturer says to the labourer, 'You are as free to go
elsewhere with your services as I am to receive them. I offer you so much.' The merchant says to the
customer, 'Take it or leave it; you are master of your money, as I am of my goods. I want so much.'
Who will yield? The weaker." He, like all anarchists, saw that domination, oppression and
exploitation flow from inequalities of market/economic power and that the "power of invasion lies
in superior strength." [What is Property?, p. 216 and p. 215] This is particularly the case in the
labour market, as we argued in section B.4.3.
As such, it is unlikely that "pure" capitalism would experience full employment for under such
conditions the employers loose the upper hand. To permanently experience a condition which, as we
indicate in section C.7, causes "actually existing" capitalism so many problems seems more like
wishful thinking than a serious analysis. If unemployment is included in the Austrian model (as it
should) then the bargaining position of labour is obviously weakened and, as a consequence, capital
will take advantage and gather profits at the expense of labour. Conversely, if labour is empowered
by full employment then they can use their position to erode the profits and managerial powers of
their bosses. Logically, therefore, we would expect less than full unemployment and job insecurity
to be the normal state of the economy with short periods of full unemployment before a slump.
Given this, we would expect "pure" capitalism to be unstable, just as the approximations to it in
history have always been. Austrian economics gives no reason to believe that would change in the
slightest. Indeed, given their obvious hatred of trade unions and the welfare state, the bargaining
power of labour would be weakened further during most of the business cycle and, contra Hayek,
unemployment would remain and its level would fluctuate significantly throughout the business
cycle.
Which brings us to the next atypical market in Austrian theory, namely the credit market. According
to the Austrian school, "pure" capitalism would not suffer from a business cycle (or, at worse, a very
mild one). This is due to the lack of equilibrium in the credit market due to state intervention (or,
more correctly, state non-intervention). Austrian economist W. Duncan Reekie provides a summary:
"The business cycle is generated by monetary expansion and contraction . . . When new
money is printed it appears as if the supply of savings has increased. Interest rates fall
and businessmen are misled into borrowing additional founds to finance extra
 investment activity . . . This would be of no consequence if it had been the outcome of
[genuine saving] . . . - but the change was government induced. The new money reaches
factor owners in the form of wages, rent and interest . . . the factor owners will then
spend the higher money incomes in their existing consumption:investment
proportions . . . Capital goods industries will find their expansion has been in error and
malinvestments have been incurred." [Markets, Entrepreneurs and Liberty, pp. 68-9]

This analysis is based on their notion that the interest rate reflects the "time preference" of
individuals between present and future goods (see section C.2.6 for more details). The argument is
that banks or governments manipulate the money supply or interest rates, making the actual interest
rate different from the "real" interest rate which equates savings and loans. Of course, that analysis
is dependent on the interest rate equating savings and loans which is, of course, an equilibrium
position. If we assume that the market for credit shows the same disequilibrium tendencies as other
markets, then the possibility for malinvestment is extremely likely as banks and other businesses
extend credit based on inaccurate assumptions about present conditions and uncertain future
developments in order to secure greater profits. Unsurprisingly, the Austrians (like most
economists) expect the working class to bear the price for any recession in terms of real wage cuts
in spite of their theory indicating that its roots lie in capitalists and bankers seeking more profits
and, consequently, the former demanding and the latter supplying more credit than the "natural"
interest rate would supply.
Ironically, therefore, the Austrian business cycle is rooted in the concept of dis-equilibrium in the
credit market, the condition it argues is the standard situation in all other markets. In effect, they
think that the money supply and interest rates are determined exogenously (i.e. outside the
economy) by the state. However, this is unlikely as the evidence points the other way, i.e. to the
endogenous nature of the money supply itself. This account of money (proposed strongly by, among
others, the post-Keynesian school) argues that the money supply is a function of the demand for
credit, which itself is a function of the level of economic activity. In other words, the banking
system creates as much money as people need and any attempt to control that creation will cause
economic problems and, perhaps, crisis. Money, in other words, emerges from within the system
and so the Austrian attempt to "blame the state" is simply wrong. As we discuss in section C.8,
attempts by the state to control the money during the Monetarist disasters of the early 1980s failed
and it is unlikely that this would change in a "pure" capitalism marked by a totally privatised
banking system.
It should also be noted that in the 1930s, the Austrian theory of the business cycle lost the
theoretical battle with the Keynesian one (not to be confused with the neoclassical-Keynesian
synthesis of the post-war years). This was for three reasons. Firstly, it was irrelevant (its conclusion
was do nothing). Secondly, it was arrogant (it essentially argued that the slump would not have
happened if people had listened to them and the pain of depression was fully deserved for not doing
so). Thirdly, and most importantly, the leading Austrian theorist on the business cycle was
completely refuted by Piero Sraffa and Nicholas Kaldor (Hayek's own follower who turned
Keynesian) both of whom exposed the internal contradictions of his analysis.
The empirical record backs our critique of the Austrian claims on the stability of capitalism and
unemployment. Throughout the nineteenth century there were a continual economic booms and
slumps. This was the case in the USA, often pointed to as an approximately lassiez-faire economy,
where the last third of the 19th century (often considered as a heyday of private enterprise) was a
period of profound instability and anxiety. Between 1867 and 1900 there were 8 complete business
cycles. Over these 396 months, the economy expanded during 199 months and contracted during
197. Hardly a sign of great stability (since the end of world war II, only about a fifth of the time has
spent in periods of recession or depression, by way of comparison). Overall, the economy went into
a slump, panic or crisis in 1807, 1817, 1828, 1834, 1837, 1854, 1857, 1873, 1882, and 1893 (in
addition, 1903 and 1907 were also crisis years). Full employment, needless to say, was not the
normal situation (during the 1890s, for example, the unemployment rate exceeded 10% for 6
consecutive years, reaching a peak of 18.4% in 1894, and was under 4% for just one, 1892). So
much for temporary and mild slumps, prices adjusting fast and markets clearing quickly in pre-
Keynesian economies!
Luckily, though, the Austrian school's methodology allows it to ignore such irritating constrictions
as facts, statistics, data, history or experimental confirmation. While neoclassical economics at least
pretends to be scientific, the Austrian school displays its deductive (i.e. pre-scientific) methodology
as a badge of pride along side its fanatical love of free market capitalism. For the Austrians, in the
words of von Mises, economic theory "is not derived from experience; it is prior to experience" and
"no kind of experience can ever force us to discard or modify a priori theorems; they are logically
prior to it and cannot be either proved by corroborative experience or disproved by experience to
the contrary." And if this does not do justice to a full exposition of the phantasmagoria of von
Mises' a priorism, the reader may take some joy (or horror) from the following statement:
"If a contradiction appears between a theory and experience, we must always assume
that a condition pre-supposed by the theory was not present, or else there is some error
in our observation. The disagreement between the theory and the facts of experience
frequently forces us to think through the problems of the theory again. But so long as a
rethinking of the theory uncovers no errors in our thinking, we are not entitled to
doubt its truth" [emphasis added, quoted by Homa Katouzian, Ideology and Method in
Economics, pp. 39-40]

In other words, if reality is in conflict with your ideas, do not adjust your views because reality must
be at fault! The scientific method would be to revise the theory in light of the facts. It is not
scientific to reject the facts in light of the theory! Without experience, any theory is just a flight of
fantasy. For the higher a deductive edifice is built, the more likely it is that errors will creep in and
these can only be corrected by checking the analysis against reality. Starting assumptions and trains
of logic may contain inaccuracies so small as to be undetectable, yet will yield entirely false
conclusions. Similarly, trains of logic may miss things which are only brought to light by actual
experiences or be correct, but incomplete or concentrate on or stress inappropriate factors. To ignore
actual experience is to loose that input when evaluating a theory.
Ignoring the obvious problems of the empirical record, as any consistent Austrian would, the
question does arise why does the Austrian school make exceptions to its disequilibrium analysis for
these two markets. Perhaps this is a case of political expediency, allowing the ideological supporters
of free market capitalism to attack the notion of equilibrium when it clearly clashes with reality but
being able to return to it when attacking, say, trade unions, welfare programmes and other schemes
which aim to aid working class people against the ravages of the capitalist market? Given the self-
appointed role of Austrian economics as the defender of "pure" (and, illogically, not so pure)
capitalism that conclusion is not hard to deny.
Rejecting equilibrium is not as straightforward as the Austrians hope, both in terms of logic and in
justifying capitalism. Equilibrium plays a role in neo-classical economics for a reason. A
disequilibrium trade means that people on the winning side of the bargain will gain real income at
the expense of the losers. In other words, Austrian economics is rooted (in most markets, at least) in
the idea that trading benefits one side more than the other which flies in the face of the repeated
dogma that trade benefits both parties. Moreover, rejecting the idea of equilibrium means rejecting
any attempt to claim that workers' wages equal their just contribution to production and so to
society. If equilibrium does not exist or is never actually reached then the various economic laws
which "prove" that workers are not exploited under capitalism do not apply. This also applies to
accepting that any real market is unlike the ideal market of perfect competition. In other words, by
recognising and taking into account reality capitalist economics cannot show that capitalism is
stable, non-exploitative or that it meets the needs of all.
Given that they reject the notion of equilibrium as well as the concept of empirical testing of their
theories and the economy, their defence of capitalism rests on two things: "freedom" and anything
else would be worse. Neither are particularly convincing.
Taking the first option, this superficially appears appealing, particularly to anarchists. However this
stress on "freedom" -- the freedom of individuals to make their own decisions -- flounders on the
rocks of capitalist reality. Who can deny that individuals, when free to choose, will pick the option
they consider best for themselves? However, what this praise for individual freedom ignores is that
capitalism often reduces choice to picking the lesser of two (or more) evils due to the inequalities it
creates (hence our reference to the quality of the decisions available to us). The worker who agrees
to work in a sweatshop does "maximise" her "utility" by so doing -- after all, this option is better
than starving to death -- but only an ideologue blinded by capitalist economics will think that she is
free or that her decision is not made under (economic) compulsion.
The Austrian school is so in love with markets they even see them where they do not exist, namely
inside capitalist firms. There, hierarchy reigns and so for all their talk of "liberty" the Austrian
school at best ignores, at worse exalts, factory fascism (see section F.2.1) For them, management is
there to manage and workers are there to obey. Ironically, the Austrian (like the neo-liberal) ethic of
"freedom" is based on an utterly credulous faith in authority in the workplace. Thus we have the
defenders of "freedom" defending the hierarchical and autocratic capitalist managerial structure, i.e.
"free" workers subject to a relationship distinctly lacking freedom. If your personal life were as
closely monitored and regulated as your work life, you would rightly consider it oppression.
In other words, this idealisation of freedom through the market completely ignores the fact that this
freedom can be, to a large number of people, very limited in scope. Moreover, the freedom
associated with capitalism, as far as the labour market goes, becomes little more than the freedom to
pick your master. All in all, this defence of capitalism ignores the existence of economic inequality
(and so power) which infringes the freedom and opportunities of others. Social inequalities can
ensure that people end up "wanting what they get" rather than "getting what they want" simply
because they have to adjust their expectations and behaviour to fit into the patterns determined by
concentrations of economic power. This is particularly the case within the labour market, where
sellers of labour power are usually at a disadvantage when compared to buyers due to the existence
of unemployment as we have discussed.
As such, their claims to be defenders of "liberty" ring hollow in anarchist ears. This can be seen
from the 1920s. For all their talk of "freedom", when push came to shove, they end up defending
authoritarian regimes in order to save capitalism when the working classes rebel against the
"natural" order. Thus we find von Mises, for example, arguing in the 1920s that it "cannot be
denied that Fascism and similar movements aiming at the establishment of dictatorships are full of
the best intentions and that their intervention has, for the moment, saved European civilisation. The
merit that Fascism has thereby won for itself will live eternally in history." [Liberalism, p. 51]
Faced with the Nazis in the 1930s, von Mises changed his tune somewhat as, being Jewish, he faced
the same state repression he was happy to see inflicted upon rebellious workers the previous decade.
Unsurprisingly, he started to stress that Nazi was short for "National Socialism" and so the horrors
of fascism could be blamed on "socialism" rather than the capitalists who funded the fascist parties
and made extensive profits under them once the labour, anarchist and socialist movements had been
crushed.
Similarly, when right-wing governments influenced by the Austrian school were elected in various
countries in the 1980s, those countries saw an increase in state authoritarianism and centralisation.
In the UK, for example, Thatcher's government strengthened the state and used it to break the
labour movement (in order to ensure management authority over their workers). In other words,
instead of regulating capital and the people, the state just regulates the people. The general public
will have the freedom of doing what the market dictates and if they object to the market's "invisible
hand", then the very visible fist of the state (or private defence companies) will ensure they do. We
can be sure if a large anarchist movement developed the Austrian economists will, like von Mises in
the 1920s, back whatever state violence was required to defend "civilisation" against it. All in the
name of "freedom," of course.
Then there is the idea that anything else that "pure" capitalism would be worse. Given their
ideological embrace of the free market, the Austrians attack those economists (like Keynes) who
tried to save capitalism from itself. For the Austrian school, there is only capitalism or "socialism"
(i.e. state intervention) and they cannot be combined. Any attempt to do so would, as Hayek put it in
his book The Road to Serfdom, inevitably lead to totalitarianism. Hence the Austrians are at the
forefront in attacking the welfare state as not only counterproductive but inherently leading to
fascism or, even worse, some form of state socialism. Needless to say, the state's role in creating
capitalism in the first place is skilfully ignored in favour of endless praise for the "natural" system
of capitalism. Nor do they realise that the victory of state intervention they so bemoan is, in part,
necessary to keep capitalism going and, in part, a consequence of attempts to approximate their
utopia (see section D.1 for a discussion).
Not that Hayek's thesis has any empirical grounding. No state has ever become fascist due to
intervening in the economy (unless a right-wing coup happens, as in Chile, but that was not his
argument). Rather, dictatorial states have implemented planning rather than democratic states
becoming dictatorial after intervening in the economy. Moreover, looking at the Western welfare
states, the key compliant by the capitalist class in the 1960s and 1970s was not a lack of general
freedom but rather too much. Workers and other previously oppressed but obedient sections of
society were standing up for themselves and fighting the traditional hierarchies within society. This
hardly fits in with serfdom, although the industrial relations which emerged in Pinochet's Chile,
Thatcher's Britain and Reagan's America does. The call was for the state to defend the
"management's right to manage" against rebellious wage slaves by breaking their spirit and
organisation while, at the same time, intervening to bolster capitalist authority in the workplace.
That this required an increase in state power and centralisation would only come as a surprise to
those who confuse the rhetoric of capitalism with its reality.
Similarly, it goes without saying Hayek's thesis was extremely selectively applied. It is strange to
see, for example, Conservative politicians clutching Hayek's Road to Serfdom with one hand and
using it to defend cutting the welfare state while, with the other, implementing policies which give
billions to the Military Industrial Complex. Apparently "planning" is only dangerous to liberty when
it is in the interests of the many. Luckily, defence spending (for example) has no such problems. As
Chomsky stresses, "the 'free market' ideology is very useful -- it's a weapon against the general
population . . . because it's an argument against social spending, and it's a weapon against poor
people abroad . . . But nobody [in the ruling class] really pays attention to this stuff when it comes
to actual planning -- and no one ever has." [Understanding Power, p. 256] That is why anarchists
stress the importance of reforms from below rather than from above -- as long as we have a state,
any reforms should be directed first and foremost to the (much more generous) welfare state for the
rich rather than the general population (the experience of the 1980s onwards shows what happens
when reforms are left to the capitalist class).
This is not to say that Hayek's attack upon those who refer to totalitarian serfdom as a "new
freedom" was not fully justified. Nor is his critique of central planning and state "socialism"
without merit. Far from it. Anarchists would agree that any valid economic system must be based on
freedom and decentralisation in order to be dynamic and meet needs, they simply apply such a
critique to capitalism as well as state socialism. The ironic thing about Hayek's argument is that he
did not see how his theory of tacit knowledge, used to such good effect against state socialist ideas
of central planning, were just as applicable to critiquing the highly centralised and top-down
capitalist company and economy. Nor, ironically enough, that it was just as applicable to the price
mechanism he defended so vigorously (as we note in section I.1.2, the price system hides as much,
if not more, necessary information than it provides). As such, his defence of capitalism can be
turned against it and the centralised, autocratic structures it is based on.
To conclude, while its open and extreme support for free market capitalism and its inequalities is, to
say the least, refreshing, it is not remotely convincing or scientific. In fact, it amounts to little more
than a vigorous defence of business power hidden behind a thin rhetoric of "free markets." As it
preaches the infallibility of capitalism, this requires a nearly unyielding defence of corporations,
economic and social power and workplace hierarchy. It must dismiss the obvious fact that allowing
big business to flourish into oligopoly and monopoly (as it does, see section C.4) reduces the
possibility of competition solving the problem of unethical business practices and worker
exploitation, as they claim. This is unsurprising, as the Austrian school (like economics in general)
identifies "freedom" with the "freedom" of private enterprise, i.e. the lack of accountability of the
economically privileged and powerful. This simply becomes a defence of the economically
powerful to do what they want (within the laws specified by their peers in government).
Ironically, the Austrian defence of capitalism is dependent on the belief that it will remain close to
equilibrium. However, as seems likely, capitalism is endogenously unstable, then any real "pure"
capitalism will be distant from equilibrium and, as a result, marked by unemployment and, of
course, booms and slumps. So it is possible to have a capitalist economics based on non-
equilibrium, but it is unlikely to convince anyone that does not already believe that capitalism is the
best system ever unless they are unconcerned about unemployment (and so worker exploitation)
and instability. As Steve Keen notes, it is "an alternative way to ideologically support a capitalist
economy . . . If neoclassical economics becomes untenable for any reason, the Austrians are well
placed to provide an alternative religion for believers in the primacy of the market over all other
forms of social organisation." [Keen, Debunking Economics, p. 304]
Those who seek freedom for all and want to base themselves on more than faith in an economic
system marked by hierarchy, inequality and oppression would be better seeking a more realistic and
less apologetic economic theory.