the sad state of orthodox economics

The Sad State of Orthodox EconomicsAuthor(s): Howard ShermanSource: Journal of Economic Issues, Vol. 9, No. 2 (Jun., 1975), pp. 243-250Published by: Association for Evolutionary EconomicsStable URL: http://www.jstor.org/stable/4224414 .

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J eIJOURNAL OF ECONOMIC ISSUES Vol. IX No. 2 June 1975

The Sad State of Orthodox Economics

Howard Sherman

The classical economists, such as Adam Smith and David Ricardo, did not hesitate to present society quite realistically, class conflicts and all. They wrote at the height of the bourgeois rebellion against all feudal notions, in the period from 1776 to the 1830s, beginning with the American and French Revolution and the continuing Industrial Revolu- tion. By the 1840s the possibly subversive implications of some of Ricardo's theory were under attack. J. S. Mill stated a theory for the transitional period of the 1850s and 1860s which claimed to be classic, but greatly modified and narrowed the labor theory of value. Finally, in the 1870s the old value theory was explicitly tossed out and the neoclassicals created a marginal utility-marginal productivity theory which was a perfect apology for capitalism.

Neoclassical theory reflected the Victorian complacency of the new ruling class; it lasted as the dominant paradigm until the shocks of the Great Depression. In that era Keynesianism was born as an attempt to state a more realistic outlook, one that could admit the possibilities of depressions under capitalism, while proposing to solve them within the capitalist system. Even this Keynesian reformism was under attack by conservatives in the 1940s. By the late 1950s and 1960s, however, the rift was healed, and Keynesian theory was mostly integrated into what Paul Samuelson calls the great neoclassical-Keynesian synthesis. This

The author is Professor of Economics, University of California, Riverside. This article was presented at the Annual Meeting of the Association for Evolutionary Economics, San Francisco, California, 27-29 December 1974.

243



244 Howard Sherman

new synthesis admits that government can (and should) take certain steps to bring about full employment, after which all the old neoclassical conclusions about the beauties of capitalism hold sway.

By the mid-1960s, this new synthesis appeared unassailable, and there was a flurry of activity to give it a more and more elegant mathe- matical form. Yet events of the late 1960s and early 1970s-the an- tiwar movement, the rise of the New Left, and a resurgent interest in Marxism-led to a many-sided attack by liberals as well as radicals on this resplendent paradigm. In his Presidential Address to the American Economic Association in 1972, John Kenneth Galbraith said: "Within the last half-dozen years what before was simply called economics in the nonsocialist world has come to be designated neoclassical economics with appropriate overtures to the Keynesian and post-Keynesian development. From being a general and accepted theory of economic behavior this has become a special and debatable interpretation of such behavior."'

The Neoclassical Paradigm

What are the main conservative features of the neoclassical paradigm? First, it does not begin with human relations, but with individual things and individual people. It begins with a mass of commodities with different prices. The neoclassicals make a fetish of each commodity, speaking as if it has an inherent value aside from the particular social relations involved in its production and consumption. The liberal Michael Rea- gan correctly criticizes this isolation or reification of economic concepts, pointing out that "property" is not a tangible thing, but a socially de- fined bundle of rights, based on human relationships: "The hired managers of property . . . exercised rights of use and disposition that in fact affected not just the property holders, but also the employees, the consuming public, and the community in which the firm was located."2

The neoclassical analysis proceeds from the relation of things to things, such as the price of tea to the price of coffee, only as far as the relation of things to individuals, such as the price of tea to consumer demand. The psychology of the individual consumer is taken to be not only fundamental, but also given, that is, its explanation is not considered by the economist. The neoclassical economist assumes that individual consumer preferences come from someplace-from God or innate instincts perhaps-but never considers how society shapes those preferences. It is merely assumed that the highest goal of a well-functioning economy is to follow consumer preferences, not to question their origin. They then proceed to show how consumer preferences in a capitalist



The Sad State of Orthodox Economics 245

economy do indeed determine the prices and amounts produced of all things (given pure and perfect competition and at least sixteen other ri- diculous assumptions according to the most recent careful account3). Thus neoclassical theory makes individual psychology the ultimate source of the value of commodities, whereas Marxist theory sees the value of a commodity as a function of the human relationships involved in producing it.

The second major conservative feature of neoclassical economics is its emphasis on the harmonious and optimal outcome of market competition for all individuals, ruling out any class conflict. The center of neoclassical analysis is the mechanism by which the market functions to reach a goal of optimal equilibrium. This is similar to functionalism in sociology (although the economists' equilibrium approach came earlier), a theory which emphasizes those institutions which function to maintain the stability of the status quo. One liberal discussing functionalism in economics says: "Functional theory commonly predisposes analysis to those equilibrating forces which make for co-operation and harmony.... The stress of functional theories on goal-maintenance markedly reduces their capacity for dealing with conflict-ridden systems."4 In other words, neoclassicals see nothing but a Panglossian world of harmony and equilibrium and totally ignore the social conflicts, such as racism, sexism, or exploitation.

An example of this outlook may be seen in the marginal productivity theory of income distribution, first promoted by John Bates Clark.5 In Clark's version, still repeated in many current textbooks, each class (providers of land, labor, and capital) is paid according to that factor's marginal product, and this constitutes its fair share. It was shown long ago, most delightfully by George Bernard Shaw, that the ideological conclusion does not follow from the technical theory. Even if a piece of capital receives only "its" marginal product, a piece of capital is not the same as a capitalist. Again, neoclassical economics substitutes relations between things for relations between people. On the technical side, the marginal productivity theory has been shown to be either false or mean- ingless in the recent vast flood of literature called the "capital contro- versy."6

In addition to its distribution theory, the basic neoclassical paradigm leaves no room for power or conflict in its picture of the functioning of the political economy. The economy is not run by the monopoly corporations; on the contrary, the pattern of production is forced on the firm through the market which reflects the preferences of consumers who vote via their monetary demands (never mind that one person may have a thousand times the vote of another). The state is not ruled by the



246 Howard Sherman

economic power of the capitalist class; on the contrary, decisions are made by the votes of the citizens (and never mind that one citizen may spend millions of dollars to influence a campaign directly and through ownership of the media). Galbraith points out that this flaw in neoclassical or neo-Keynesian theory is fatal. Because it lacks knowledge of power or conflict, it "offers no useful handle for grasping the economic problems that now beset the modern society.... Rather in eliding power-in making economics a nonpolitical subject-neoclassical theory ... destroys its relation with the real world."7 Indeed, realistic political economy died when neoclassical theory became "economics" and left "politics" for political scientists, with neither "science" concerned with the economic bases of political conflicts.

One last example of the prohibition on discussion of conflict in economics is the sad state of so-called welfare economics. In the nineteenth century and up to the 1920s, liberal economists, even such fa- mous neoclassicals as A. C. Pigou, argued that an additional dollar to a millionaire is worth less than an additional dollar to an unemployed worker, so more equal distribution of income may increase total social utility or happiness. This subversive view was eliminated by the modern argument that no two people have the same psychology. In welfare economics, "interpersonal comparisions are verboten."8 Today, even if we could take ten dollars from Nelson Rockefeller and give ten dollars to a starving child, the neoclassical economist would say there is no ''scientific" way to tell whether total utility or happiness is increased. Since there is no way to compare different income distributions, so- called welfare economics takes it as given, and concentrates its sole energy on the goal of "efficiency." This amounts to exactly the same goal as the functionalist goal of making the present system run better or smoother or more stably. Class interests and the possibility of change cannot be considered.

Resistance to consideration of change is the third pillar of the neoclassical paradigm. Whether they look at a primitive New Guinea society or at the modern U.S. economy, neoclassicals see only the possibilities of optimal efficiency through achieving equilibrium in the market. There will always be a market! Since the alternative is chaos, only small incremental changes may be made. The motto of the father of neoclassical economics, Alfred Marshall, was: "Nature makes no leaps"-and, he believed, neither should society.

The modern neoclassical, George Stigler, boasts that economic training brainwashes all young economists into conservatism: "He is drilled in the problems of all economic systems and in the methods by which a price system solves these problems.... He cannot believe that a change




in the form of social organization will eliminate basic economic problems."9 Thus, even if a neoclassical economist has liberal sympathies to a welfare program, such as national health care, his training (and he graduates only if he is saturated in it) makes him uncomfortable and suspicious of such a wild leap to an inefficient (by assumption) nonmar- ket form. Neoclassical economics is certainly the most elegant and elaborate of the conservative paradigms in the social sciences. "The only trouble is that it amounts to an ideology inherently hostile to significant change and implicitly friendly to all handy status quos."'10

Let us look at some examples of ahistorical, functionalist (equilibrium and efficiency) approaches by neoclassicals. First, Gordon Tul- lock argues that legal rights should not be decided by ethics, but by efficiency;" therefore, to speed up the functioning of the legal process, he would end many of the procedural safeguards the poor need so badly against the police and prosecutors. Second, conservatives in international economics know all about money and commodity exchange ratios, but have never heard of unequal imperialist power relationships between countries. Third, for a century and a half conservatives have accepted Say's Law, which "proves" that general unemployment is impossible because any level of supply generates its own demand; workers are unemployed because they are lazy and "prefer" unemployment compensation and less work. Fourth, if we ask why so few blacks and women are em- ployed in high-wage positions, conservatives such as Gary Becker tell us this merely reflects the preferences of employers for white males,'2 or the preferences of blacks and women for less demanding jobs, or the "fact" that blacks and women are less qualified. Milton Friedman goes further:'3 If an employer does not choose the most qualified people because of his irrational preferences, then he will lose money, and competition will put him out of business. Therefore, capitalism automatically eliminates discrimination and produces the best of all possible worlds.

Liberals and Institutionalists

Whereas most of the conservatives are neoclassicals, most of the more liberal economists are institutionalists, such as Galbraith, Alan Gruchy,14 or Kenneth Boulding. They explicitly reject the ahistorical, harmony assumptions of neoclassical economics to a large degree. Their own paradigm, however, does not pose a consistent and theoretically com- plete alternative and ultimately does not escape from the neoclassical assumptions. They recognize that consumer preferences are socially determined. They recognize that competition is long gone and we live in a nation of monopoly capitalism. They even emphasize that monopoly



248 Howard Sherman

economic power leads to dominant political power through both major parties, control of elections, the media, and many other institutions. They believe evolutionary change is possible and necessary.

Yet all of the institutionalists remain within narrow limits; they can conceive of major reforms in capitalism, but can see no reason to end it. Their economics thus has a peculiarly weak half-way feeling in analysis, but especially in proposals. Monopoly should be broken up or regu- lated-only Galbraith goes so far as to say a few corporations might be nationalized-by the same capitalist state which is dominated by the monopolies. Drastic reforms in favor of minorities, women, and workers may be achieved by reforming the Democratic Party, electing good non- partisan people to Congress, and reforming congressional decision-making procedures. And what happens to the dominant power of monopoly capital over the parties and Congress? What happens to its vested interests that are under attack? Those relations, those interests and conflicts, are conveniently forgotten. An example of the neglect of class conflict and the adoration of the market is Boulding's naive statement that "if Allende had understood Marshall, the history of Chile might have been much happier."'15 If Allende had lived to read the congressional hearings on ITT and the CIA in Chile, he would have learned more than from Marshall.

In the institutionalist view, incremental evolutionary changes are achieved by education, consciousness raising, and convincing the elites. For example, some liberals see discrimination as the result of irrational preferences so strong as to overcome the profit motive. One liberal economist says that capitalists discriminate against women because "it feels so good to have women in their 'place.'""16 Galbraith even implies that the mistaken analyses of neoclassical economics are the major cause of continuing sex discrimination.17 When neoclassical economics is demolished and "we" educate women and employers to raise their consciousness (and reform the Democratic Party), then sex discrimination will be ended voluntarily and by law. Never does Galbraith recognize the need to clash with the vested interests of monopoly capitalism in the exploitation of women and minorities and other workers.

The Radical Paradigm

The radical methodology first directs the researcher to social relations, not individual preferences. In the United States (and in Chile) this means recognition of the vested interests and political-economic power of the capitalist class. Second, the researcher should ask if these relations involve conflicts. In the U. S. economy, many problems can be




clarified only in the light of the exploitive relations of capitalists to workers. Third, every such conflict should be approached in the context of its historical origins, its evolutionary development (for example, the emergence of monopoly and imperialism in the late nineteenth century), and the possibility of drastic revolutionary change in the future when those conflicts become insoluble within the system.'8

On the basis of these methodological directives, radicals have carried out intensive research in many areas, including the role of capital in production and the resulting distribution of income,19 the labor market and problems of poverty and discrimination,20 the relation of political to economic power and the role of government,2' the intensification of capitalist recessions and inflations resulting from the increase in monoploy power,22 and the function of multinational corporations in U. S. imperialism.23 Radical research has revealed that a capitalist government cannot be expected to enforce antitrust laws, regulate monopolies, close tax loopholes, or end the exploitation of cheap minority and female labor. If such a government establishes wage and price controls, it always will al- low huge loopholes to raise monopoly prices while holding down wages (contrary to Galbraith's desires and expectations).

To achieve full employment and stable prices-as well as end discrimination and imperalist adventures-a minimal necessary condi- tion is the establishment of public ownership of the economy by a dem- ocratically elected government. Neither political democracy (in the narrow sense of political forms) nor socialism (in the narrow sense of government ownership) are sufficient conditions to achieve these goals; both are necessary. Ending capitalism is necessary to prevent domination of government by a wealthy elite; democratic processes are necessary to prevent domination by a self-appointed and self-perpetuating bureaucratic elite. Political democracy and economic democracy are vital to each other and to achievement of these goals that are in the interests of most of the population.

Notes

1. John Kenneth Galbraith, "Power and the Useful Economist," American Economic Review 63 (March 1973): 1.

2. Michael Reagan, The Managed Economy (New York: Oxford Univer- sity Press, 1963), p. 55.

3. See J. De V. Graaff, Theoretical Welfare Economics (London: Cam- bridge University Press, 1967), passim.

4. Sherman Krupp, "Equilibrium Theory in Economics," in Functionalism in the Social Sciences, ed., Don Martindale (Philadelphia: American Academy of Political and Social Science, 1965), pp. 65 and 78.



250 Howard Sherman

5. J. B. Clark, The Distribution of Wealth, 1899 (Clifton, N. J.: Augustus Kelley, 1966).

6. See E. K. Hunt and Jesse Schwartz, Critique of Economic Theory (London: Penguin, 1972).

7. Galbraith, "Power," p. 2. 8. Robert Lekachman, "The Conservative Drift in Economics," Transac-

tion (Fall 1973): 307. 9. Quoted in ibid., p. 300.

10. Ibid., p. 307. 11. Gordon Tullock, The Logic of the Law (New York: Basic Books,

1971). 12. Gary Becker, The Economics of Discrimination (Chicago: University

of Chicago Press, 1957), p. 5. 13. See Milton Friedman, Capitalism and Freedom (Chicago: University of

Chicago Press, 1957), pp. 108 ff. 14. See Alan Gruchy, Contemporary Economic Thought, the Contribution

of Neo-institutional Economics (Clifton, N. J.: Augustus Kelley, 1972). 15. Kenneth Boulding, "Notes on the Present State of Neoclassical

Economics," Journal of Economic Issues 9 (June 1975): 223-28. 16. Barbara Bergmann, "The Economics of Women's Liberation," Chal-

lenge 16 (May/June 1973): 14. 17. See John Kenneth Galbraith, Economics and the Public Purpose (Bos-

ton: Houghton-Mifflin, 1973). 18. The methodology is briefly discussed, the whole paradigm tentatively

sketched, and an extensive bibliography given in Howard Sherman, Ra- dical Political Economy (New York: Basic Books, 1972). The methodology is presented fully in Oskar Lange, Political Economy, vol. 1 (New York: Pergamon Press, 1963).

19. See, for example, E. K. Hunt and Jesse Schwartz, eds., Critique of Economic Theory (London: Penguin, 1971).

20. See, for example, David Gordon, Theories of Poverty and Unemploy- ment (Lexington: Lexington Books, 1972).

21. See, for example, Ralph Miliband, The State in Capitalist Society (New York: Basic Books, 1969).

22. See, for example, Michael Kalecki, Theory of Economic Dynamics (London: George Allen and Unwin, 1954). Also see Howard Sherman, Profits in the United States: An Introduction to a Study of Economic Concentration and Business Cycles (Ithaca: Cornell University Press, 1968).

23. See, for example, Harry Magdoff, Age of Imperialism (New York: Monthly Review Press, 1969). Also see entire issue, Review of Radical Political Economics 3 (Spring 1971); this journal carries current arti- cles on imperialism and all other radical theoretical work.



the sad state of orthodox economics

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