Mainstream Economics Is Art, not Science

It is well-known that mainstream economics, in an attempt to attain the status of a 'science', has become unduly obsessed with mathematical formalism. The obvious irony is that this obsession comes at the price of scientific accuracy, since the mathematical models to which it so slavishly adheres often (if not usually) bear little resemblance to reality.

This irony is multilayered; for not only has economics deviated from science, it has actually approached an art form. The models are primarily valued for their elegance and aesthetic appeal rather than for their ability to capture the real world, from which they abstract to the n-th degree. They usually contain a grain of truth - itself often highly stylised - around which they proceed to construct an elaborate system of self-referential relations. To my mind, this methodology is characteristic of art, not science.

Non-Profit Capitalism and Efficient Cooperativism

A burgeoning critique of the voguish ‘law and economics’ field is that, contrary to the conventional wisdom, shareholders do not ‘own’ the firm in any meaningful sense; rather, firms comprise intricate networks of rights and responsibilities between diverse arrays of stakeholders. Accordingly, managers are legally required not to maximise shareholder value, as the common refrain would have it, but rather to do what is best for the company, whatever that may entail.


This critique is usually framed in terms of short- versus long-term profits. Companies that maximise the value of their shares in the short term are likely to skimp on investment, training, and R&D in favour of financial manipulation, asset stripping, and other ‘low-hanging fruit’, thus compromising their ability to generate profits in the long term. For some reason, however, the critique of shareholder primacy is never taken to its logical conclusion, namely that corporations are, legally speaking, non-profit organisations.


In his rigorous book The Ownership of Enterprise, Hansmann distinguishes non-profit firms by the fact that they are not ‘owned’ in the same way as corporations (or cooperatives). In non-profits, according to Hansmann, an independent management board, entrusted with pursuing some express set of objectives, effectively governs the firm. As the shareholder-primacy critique points out, however, even corporations are in fact governed this way. Thus, according to Hansmann’s logic - and contrary to his conclusion that most firms are owned by investors because this entails a singularity of objectives in the form of profit maximisation - corporations are essentially non-profits.


The mere fact that corporations are structured as non-profits is not particularly surprising given that they were originally chartered to fulfil a specific public purpose. Moreover, it is clear that corporations have sharply deviated from their historical and legal ideal; regardless of what they are supposed to do, what corporations actually tend to do is pursue short-term profits, to the detriment of themselves and society. What is remarkable, however, is that capitalism - a system supposedly driven by profit - is based on organisations that are, technically speaking, not-for-profit. In my mind, this is further evidence that a more effective and more humane economy is not out of reach, and can be achieved without the complete abolition of capitalism.
***




What about cooperatives? Aren't they a viable alternative? It is often remarked that, unlike conventional firms - which allegedly contain the sole objective of profit maximisation - cooperatives pursue a multiplicity of objectives, including the various concerns of their members other than share value. To economists, this augurs inefficient governance, which, according to Hansmann, leads many cooperatives to adopt a non-profit style of corporate governance. We have already seen, however, that conventional, 'investor-owned' firms actually feature a broad range of objectives besides profit maximisation, meaning that their distinction on this score is specious.


In fact, the opposite argument can be made, namely that  cooperatives feature a narrower range of objectives than conventional firms. Unlike corporations, which are designed to satisfy the needs of a diverse array of stakeholders, cooperatives are specifically established to cater to their members' interests. Indeed, whereas a corporations will rarely (if ever) be created by the individuals who end up owning its shares, a cooperative will often be created by its members with the express purpose of meeting some clearly defined need.


These considerations turn the world upside down. Corporations are usually praised by economists for their efficient governance systems and scorned by everyone else for neglecting social concerns, while the opposite is the case when it comes to cooperatives. Perhaps this state of affairs should be reversed: in reality, the cooperative governance system might be efficient from an economic perspective but suspect from a social perspective, while the opposite might be true for conventional corporations. Indeed, this inverted view of cooperatives was once the norm, with economists (like Marshall and Mill) and social critics (like Webb and Bakunin) respectively lauding their efficient governance structures and deriding their 'collectively selfish' behaviour.


The truth is that neither extreme tells the full story - even if, for the sake of argument, we accept the unduly simplistic categorisation on which that story is based. In fact, the whole point of this post is to discourage the sort of black-and-white thinking that pervades the topic of corporate governance. If we adopt a more nuanced perspective, moreover, the political implications become more nuanced as well. Neither reactionary conservatism nor radical Marxism holds the answer to our problems: the prevailing model of corporate governance is broken, and needs to be fixed, but we shouldn't throw the baby out with the bath water.


In fact, the answer might be right under our noses: corporations can be socially beneficial, just as cooperatives can be economically efficient. The trick is to find a way to get the best of both worlds. So-called 'social cooperatives', which incorporate a range of stakeholders as members, are one possibility, as are the so-called 'community benefit corporations', which return to the original function of the corporate form. We should encourage the further proliferation of these incipient forms of organisation while devising more ways to make business fit for purpose.

Why Has the Old Institutional Economics Not Made a Comeback?

The Anti-Climax of the Old Institutionalism

Thorstein Veblen is an economist that I have admired ever since I was introduced to his work at graduate school; indeed, my research was to a great extent inspired by his ideas. In the past year, I have even come to relate to him on a personal level, since, like him, I have struggled to secure academic employment. Encouragingly for me, Veblen went on to become an influential economist and intellectual, despite having a somewhat troubled career. Veblen arguably founded not one but two schools of economic thought – the Institutionalist and Evolutionary schools – with his ideas also resurfacing in currently fashionable behaviouralist approaches, among others.

Unfortunately, with the ascendancy of Neoclassical Economics, the Institutionalist school with which Veblen is most closely associated suffered a critical defeat from which it has never fully recovered. The new orthodoxy dismissed all rival schools, including Veblen’s, as ‘soft’, insufficiently rigorous, or unscientific – this latter allegation being especially ironic given that, as we will see later, Veblen actually devised a number of his theories as substitutes for what he deemed to be the unscientific foundations of neoclassical economics, particularly its fantasy of homo economicus. Institutionalism was later revived by the self-declared ‘New’ Institutional Economics, but in bastardised, emasculated form that replaced much its distinctive content with the standard tenets of Neoclassical Economics, in much the same way as the Keynesian Compromise was forged.

More recently, in large part thanks to mounting disillusionment both within and without the economics profession, the so-called ‘Old’ Institutionalism has received renewed interest. It nevertheless remains relatively peripheral – not only in the ivory tower of mainstream economics, but even in forums dedicated to economic pluralism, which tend to favour Keynesianism, Marxian approaches, and even minor schools like Feminist Economics. In his celebrated book Debunking Economics, for example, Steve Keen provides a list of possible alternatives to the neoclassical paradigm, consisting of Keynesian, Marxian, Austrian, Complexity, and even Evolutionary Economics, but conspicuously lacking Institutional Economics (unless he treated it as included in or coterminous with Evolutionary Economics, which would be understandable given Veblen’s approach but inaccurate when it comes to the field as a whole).[1]


The Case for the Old Institutional Economics

As a social scientist interested in the economy (which is the definition of an economist in my opinion, although not in the opinion of most economists), and more specifically one who would identify as an Institutionalist if pressed to declare an allegiance, I find this state of affairs astonishing and lamentable. In my opinion, the Old Institutionalism is more relevant than ever, both to the discipline of economics and to the economy itself. To argue this case, I would like to consider some (but not all) of the core principles of Old Institutionalism in turn, focusing mainly on their relevance to current problems in the economy rather than current problems in economics, since the latter has been thoroughly covered by scholars like Geoffrey Hodgson who are sympathetic to the Old Institutionalist tradition.

1) The Technology-Institutions Dichotomy
Probably the most well-known contribution of Veblen’s institutionalism is the dichotomy between technology and institutions[2], which in fact encompasses a number of dichotomies, such as that between ceremonial and instrumental institutions and that between industry and business. The essence of all of these dichotomies is that the correspondence between those institutions that are oriented towards a technological or industrial imperative (“instrumental” institutions) and those that are oriented towards an acquisitive or predatory imperative (“ceremonial” institutions) is imperfect. Whereas instrumental institutions play a “serviceable” role in the community, for example by providing consumers with innovative or lower-cost products, ceremonial institutions are societally detrimental, generating excessive waste, parasitising on common resources, engaging in destructive forms of competition, and obstructing social progress.

It seems to me that advanced economies are currently experiencing a critical divergence between technology and institutions, between instrumental and ceremonial institutions, and between industry and business, not dissimilar from Veblen’s own era. The financial crisis is the most egregious example of non-serviceable business running amok, squandering social resources for purposes of private gain without contributing whatsoever to technological progress. More broadly, however, many commentators have declared that capitalism has come to revolve disproportionately around rent-seeking rather than value-creation. Whether or not you completely agree with that diagnosis, you only have to consider issues like exorbitant corporate salaries, tax- and regulation-dodging, patent trolling, financialisation, and share buy-backs – which propagate not only the deplorable levels of inequality but also the distressing degrees of stagnation currently afflicting our economies – to appreciate the aptness of Veblen’s analysis. Indeed, Veblen’s pet peeves included absentee ownership, “conspicuous consumption”, and an obsession with corporate profits, all of which remain salient issues today.

2) Cumulative Causation
A related aspect of Veblen’s framework was his conceptualisation of society (including the economy) as an evolving system akin to the biological systems studied by Darwin. As simple as this idea may sound, it actually flies in the face of most mainstream economics – including the ‘New’ variety of Institutionalism – which tends to espouse a simplistic model of natural selection whereby a single institution, namely the market, allows only those institutions that are fittest in some absolute sense to survive. By contrast, Veblen emphasised that institutions co-evolve through an endogenous, path-dependent process which called “cumulative causation”, whereby the selection mechanisms themselves alter over time. As a result, even completely “imbecile” institutions can persist, despite being undesirable from a technological or social perspective. The static analysis favoured by neoclassical economics is therefore incomplete, and even inappropriate – what matters is the context, the history, the trajectory.

This component of Veblen's work is also pertinent to the economic times in which we live. To be sure, with the rise of the New Institutional Economics, institutional shortcomings have become decidedly vogueish in comparative explanations of economic underperformance. However, Veblen’s theory implies that, contrary to the conventional wisdom, these shortcomings result not from ‘artificial’ interventions in the market mechanism, but rather from quite ‘natural’ processes of cumulative evolution. In fact, Veblen emphasised precisely that “purposeful action” would be required to intercede in these evolutionary forces in order to make society’s institutions more instrumental and less ceremonial. By the same token, his framework implies that the usual prescription of simply adopting so-called ‘good’ institutions – which, to complicate matters further, are not those that Veblen would necessarily identify as instrumental – is unlikely to improve matters, since ceremonial institutions entail “vested interests” which are likely to resist radical change. These interests may even capture the state apparatus itself, according to Veblen, so that public policy comes to perpetuate rather than counteract the status quo.

3) The Critique of Homo Economicus
In my view, Veblen’s critique of homo economicus – the superhumanly rational, purely self-seeking representative agent of mainstream economics – remains one of the most powerful to date. Veblen advocated an interdisciplinary approach to understanding human behaviour, drawing particularly on anthropology (the study of man and civilisation), psychology (the study of mind and behaviour), and evolutionary biology (the study of the evolution of living organisms), which he deemed to be qualitatively more scientific and more suitable to the subject in question than the neoclassical approach characterised by arbitrary assumptions. Veblen’s interdisciplinary synthesis held that humans act according to instincts and habits before even engaging in the sort of demanding calculations assumed by Neoclassical Economics to drive behaviour, and are furthermore motivated by loyalty and workmanship in addition to the self-interest assumed by that school to prevail exclusively. Crucially, Veblen insisted that individuals' means of decision-making and preferences, both of which Neoclassical Economics treats as predetermined, evolve over time through the processes of cumulative causation described above.

This aspect of Veblen’s Institutionalism may appear to be more an academic dispute than a practical tool. In fact, however, the way that human behaviour is conceived affects virtually everything in economic theory, which in turn shapes research and policy agendas. To name just a few applications, whether we consider individuals to be robotic “bundles of desire” or multifaceted “social animals”, to use Veblen's terminology, has an immeasurable bearing on whether we believe that benefit recipients will cheat the system, whether employees must be monitored and incentivised to do their jobs properly, whether markets will automatically self-equilibriate, and whether assets prices always reflect fundamental values – questions that are more pressing than ever, not only for economics, but also for the economy itself.


Explaining the False Dawn

I have made the case that the current neglect of the Old Institutionalism is unjustified. How, though, do we explain this neglect? It seems to me that there are three potential explanations, which are by no means supposed to be mutually exclusive.

1) Absorbed by the New Institutional Economics
One possible reason for the non-appearance of the Old Institutional Economics is that all of its meaningful material has already been been absorbed by its ‘New’ counterpart, as proponents of the latter indeed claim. I have already contended, however, this is not the case. On the contrary, the Old Institutionalism is needed at present precisely as a counterweight to the New variety, which, with its autistic assumptions, market veneration, liberal philosophy, Western prejudice, and conservative bias - to name a few of its faults - has engendered a dangerously lopsided economic paradigm.

2) Filtered into Other Schools
A second possibility is that the insights of Old Institutionalism have been variously adopted by other schools, which have in turn experienced a resurgence. This is the position of Geoffrey Hodgson, for example, who in his 2007 article entitled ‘the Revival of Veblenian Institutional Economics’ expounded the widespread influence of Veblen’s thought on contemporary economics, including the closely related Evolutionary school, ‘trendy’ fields like Behavioural Economics, and even relatively mainstream areas like game theory. It remains to be explained, however, why the Old Institutionalism itself has not re-emerged as a cohesive school, since there are elements in the work of Veblen and his successors apart from their ideas on behaviour and evolution that are essentially Institutionalist – not least the various dichotomies described above – which cannot be completely distilled into other schools.

3) Limited Applicability 
Another potential explanation is that the Old Institutional Economics, even in terms of its distinctive dichotomies, does not provide a comprehensive framework for understanding the economy. A comparison to this effect might be made with Austrian Economics, which has suffered a similar fate. While I would certainly agree that the Old Institutionalism is no panacea, the same is true for any school of economic thought; in fact, for the reasons submitted above, I would argue that the Old Institutionalism is one of the most widely applicable, offering a radical alternative to Neoclassical Economics. The Austrian school, by contrast, really does consist of a range of specific arguments relating to specific economic problems, and while it definitely offers an alternative perspective to the mainstream, it arrives at some of the same key conclusions and implications.

4) Overshadowed by Marxianism
The obvious reply to the foregoing is that the Old Institutionalism is neither comprehensive nor radical when compared to its Marxian cousin.  It could be argued, in particular, that the Old Institutionalism is just a counterfeit, diluted form of Marxianism that neglects the crucial dimension of class conflict. Indeed, Veblen borrowed extensively from Marx despite repeatedly (and often mistakenly) criticising his writings; even the Institutionalist dichotomies bear a striking resemblance to Marx’s distinctions between the forces and relations of production and between the social and technical relations. By the same token, the Old Institutionalism offers one of the only serious alternatives for those who would assume a radical perspective on society without placing class at its centre – indeed, Veblen deliberately conceived it as such. It is true that Veblen’s programme never received the same degree of traction as that of Marx, the latter of which has been continually expanded, clarified, and – dare I say – improved by subsequent adherents; but that only begs the question.


Concluding Remarks

In lieu of a conclusion, I would like to propose a research agenda based on the Old Institutionalist school which I have argued is unduly neglected in modern discourse. Veblen believed that economists should be concerned with identifying which of society’s institutions (or which aspects of a given institutions) are instrumental and which are ceremonial, and with devising ways to elevate the former over the latter. This seems as good a place as any to resume the Old Institutionalist programme, recognising that many have already taken it upon themselves to do so. Veblen’s own admittedly whacky idea – which, to his great credit, he attempted to implement in practice while at the New School in New York – was for a technocratic “soviet” of engineers to seize (or inherit) control of capitalism from the errant businessmen that he so harshly lambasted. This no longer seems feasible or even desirable, if ever it was; but perhaps, like Veblen, we can dare to challenge prevailing dogmas - or “habits of thought”, as he called them - in our pursuit of a better society.


Notes

[1] I admit that I have not provided much evidence to support my assertion that Old Institutionalism is neglected in pluralist circles, which is mainly based on my own anecdotal experience. I’m sure that others have had differing experiences in this regard.
[2] It is debatable whether Veblen ever really proposed such a dichotomy, which is more clearly embraced by Veblen’s disciple, Clarence Ayres. The subsidiary dichotomies, however, are indisputably Veblenian.

The Democratic Economy: a Hope and a Danger

Winston Churchill famously quipped that "democracy is the worst form of government, except all those other forms that have been tried from time to time". An analogous statement can be made regarding capitalism, which, for all its faults, basically works - at least, better than any other system that has yet been tried.

But what really has been tried? With the end of the Cold War and the fall of the Berlin Wall, it was widely proclaimed that the 'End of History' had been reached; capitalism had won a categorical victory against its arch-rival system of communism, which had proven to be unviable. It should not be forgotten, however, that the centrally-planned, authoritarian system of the Soviet Union was a far cry from the communist utopia envisaged by Marx, just as the corporatist, oligopolistic version of capitalism that predominates today is a far cry from the free-market utopia envisaged by neoliberals.

Indeed, just as the Left has struggled to find a concrete alternative on which to ground its identity since that momentous day 1989, the traumatic events of 2008 and their enduring aftermath have led many on the Right to grapple for their own alternative to the present system. In reality – and despite what many a sensationalist airport-book author would have you believe – modern capitalism continues to stagger on virtually unchallenged, with no definitive indication that it will collapse any time soon; but it is nevertheless clear that its problems are mounting, and that the solutions offered so far have been inadequate to avert further catastrophe.

There is, then, a growing a sense that neither corporate capitalism nor state socialism are fit for purpose, and that some alternative system is called for. Neither Left nor Right have managed to substantively imagine (or at least compellingly describe) what this alternative might be, and to the extent that they have, their formulations are in some ways diametrically opposed. There are, nevertheless, some common threads.

I would particularly draw the reader’s attention to the cross-cutting agreement that, in some way, shape, or form, society needs to be more democratic. One of the peculiar traits of neoliberalism – and indeed, one of its most impressive victories – has been its ability to convince the masses that democratic participation need only inhere in the political sphere, with labour-market choice sufficing to ensure equivalent freedoms in the economic sphere. Although many discontented right-wingers (especially of the libertarian ilk) buy into the false premise that ‘free markets’ are inherently democratic, and would thus have market forces permeate even more of our social relations, it is has become increasingly apparent that the economy is constituted by more than just the market. Indeed, most economic activity occurs within organisations like firms, which must therefore be explicitly democratised if the economy is to even remotely approximate the hallowed value of freedom supposedly intrinsic to markets.

Meanwhile on the Left, the rubric of ‘community participation’ has acted as a backstop for hopes of a fairer, more decent, and generally better socio-economy. Although this vision is often vaguely and incoherently articulated through a disparate range of permutations – unlike their libertarian counterparts, socialist dissidents lack a unitary idol like the market around which to centre their ideology – real-world examples have proliferated in recent times, or at least grown in prominence. The late Nobel prize-winner Elinor Ostrom, for example, compellingly demonstrated that communities are, directly contrary to the predictions of mainstream economic theory, often the best stewards of common resources, which may otherwise be depleted through overuse if managed by either private owners or public administrators. Solidarity/social economies, cooperatives of various sorts, transitional towns and more have all added to the repertoire of evidence that some kind of ‘communism’, defined loosely and without the authoritarian connotations, may be possible after all.

Opposite extremes of the political spectrum therefore converge, or at least overlap, in their aspirations for a democratic economy. In this vein, it is interesting to note that cooperatives often transcend traditional ideologies, appealing to thinkers and activists of all stripes and none but also repulsing mainstream party politics. Perhaps the only global ideology that has historically embraced cooperatives without reservations (for example relating to trade unions or 'private property') has been anarchism, which, as a political philosophy that can be formulated from both left- and right-wing perspectives (or from neither perspective), is itself located in the ‘no man’s land’ of political economy.

The allusion to anarchism is not coincidental, for so far the institution of the state has been conspicuously absent from our discussion; and it is here that the promise of a democratic economy becomes a danger. While freedom from government interference is a familiar mantra of reactionaries, it should not be forgotten that the dissolution of the state was an explicit objective of many communists, not least Vladimir Lenin. Of course, Lenin’s famous avowal was not borne out by the actual experience of the Soviet Union – quite the opposite, in fact. However, that same experience demonstrates the perils of mindlessly retrenching the state. The overnight liberalisation recommended by neoliberal economists ('shock therapy') led not the emergence of a free-market utopia propelled by citizen-entrepreneurs, but rather to a coup-d’économie by a select group of oligarchs, leaving the post-Soviet countries in a situation not far removed from the runaway inequality of Western capitalism.

Cooperatives again provide a microcosm of this danger. Despite their progressive potential, cooperatives have been increasingly co-opted by conservative politicians as a means of privatising social services through a more palatable back door – particularly in the UK, where their not-so-hidden agenda of dismantling the welfare state has taken root under the pretext of austerity.

The ambition to create a democratic economy is noble, and, given its cross-cutting allure, may just about be attainable. The road to reform, however, is fraught with peril. 

Money as Socialised Credit

I have been reading quite a lot recently on the nature of money (e.g. Felix Martin's Money: the Unauthorised Biography and various bits by David Graeber). The question of 'what is money?' intrigues me because, as an economist, I was long taught that money isn't really a thing - it is simply an index of value, a way of circumventing the inefficiencies of direct barter. Yet, it quite patently is a thing, for all sorts of reasons - it confers social status, is subject to hoarding, causes financial crises, etc. For me, the main problem with the economists' view of money lies in in its fiat property: unlike commodity or representative money, money in modern economies is literally created out of thin air by central and private banks, which doesn't sit well with the notion that money exists as some kind of 'natural law' of society.

Of course, it could be argued that the inflation brought about by money creation, by increasing prices of all goods by the same proportion, still retains an equivalence of relative value between those goods. Even if that is true, however, money creation and its consequences do have distributive consequences - for example between creditors and debtors in the case of inflation, or between asset-holders and everyone else in the case of quantitative easing. This, I believe, is where the heterodox definition of money excels - according to both Martin and Graeber, money is, by its very nature, a form of credit. In particular, I would say that it is a claim on society (and, for that matter, the natural environment) - its resources, its labour, or whatever.

The definition of money as socialised credit allows us to challenge the economic status-quo, along with its plethora of social disorders, in a way that is not possible with the definition of money as an immutable law of value. Take inequality, for example, perhaps the most prominent economic issue of our time. If we espouse the standard defintion of money, our ability to question the distribution of wealth and income is limited. We can still implement redistributive policies, of course, but there is a sense in which we are defying some kind of 'natural law' (such as c>g, perhaps!) in the process, unless we claim to be rectifying some previous infringement such as monopoly. If we espouse the definition of money as socialised credit, however, we can ask the fundamental question of whether society really 'owes' this person billions of dollars' worth of its resources or labour. What has that person contributed to society that commands such a hefty price tag? Has that person really contributed millions of times more (or, for that matter, anything more) than the average worker, whose wage has been stagnant for decades? Can we really justify a situation in which the 99% is in 'social debt' to the 1%?

Speaking of which, the issue of debt offers another lucid example of the contrasting definitions of money. From Germany's perspective, Greece must repay its debts, because it would be cheating not to - that's just the way that money works. When we conceive money as socialised credit, however, it becomes clear that such an assumption is moot in the context of the Eurozone, in which the mechanisms by which credit is socialised (such as a coordinated fiscal policy that could redistribute surpluses to deficit regions) are critically deficient and unfairly rigged.

In reality, of course, these examples are tremendously complex, involving numerous interacting elements; but how we understand money is surely one of the most consequential.

Cooperatives in the Organisation Economy

In previous posts discussing the relationship between cooperatives and archetypal economic systems (viz. communism and capitalism), I drew what I believe to be an important distinction between ownership of enterprises and coordination between them. I argued, moreover, that it is primarily the former criterion that defines these archetypal systems – capitalism consists of ownership (of the means of production, property rights, or whatever) by capital, whereas communism entails ownership by the community (broadly conceived). Cooperative ownership, I suggested, can be conceived as a variant of either of these ideal-types, or perhaps as a ‘third way’ between them - workers may be their own/each other’s capitalists, and/or they may circumscribe ‘the community’ to the level of the enterprise. I also proposed that the coordination criterion, while significant (especially given its interaction with the ownership criterion), is less consequential, because, crucially, it would be theoretically possible for common ownership to be coupled with market coordination in a sort of ‘market socialism'.

This point is made all the more clear when we consider that ‘actually existing capitalism’ is a far cry from the free-market utopia eulogised by neoliberal ideologues and the perfect-competition model depicted in economics textbooks. In fact, the market is not the primary means of coordination in modern capitalist economies; rather, most allocative decisions are made within organisations (such as firms, governments, and universities), or between them through non-market means (such as long-term agreements, joint ventures, and implicit collusion). As Herbert Simon once remarked, real-world capitalist economies are more accurately described as ‘organisation economies’ than ‘market economies’.

With this in mind, it is a moot point as to whether or not cooperatives can thrive in a purely market-based economy – the question that commentators on the subject usually pose – because such an economy is a fiction. Indeed, there are compelling reasons to believe that even capitalist firms would not be able to function effectively, or at all, in such an economy. For one thing, as Ronald Coase famously postulated in 1937, firms themselves represent ways to circumvent market transactions, the costs of which (owing to asymmetric information and whatnot) would prohibit economic activity. Coase actually understated his case, because firms intentionally avoid (and manipulate) the market even to coordinate with each other. At any rate, without firms – that is, in a situation characterised by sole entrepreneurs buying inputs and selling outputs – there would be nothing for capital to own; indeed, the distinction between capitalist and labourer would disappear. After all, from a Marxian perspective, it is precisely through the employment and agglomeration of workers that capitalists extract surplus value. From a Schumpeterian perspective, meanwhile, it is precisely the pursuit of monopolistic rents – which, by definition, cannot exist in a state of perfect competition – that propels innovation in a capitalist system.

How, then, would cooperatives fare in an organisation economy? To answer this question, we should first remember that, although both Marx and Schumpeter extolled (organisational) capitalism for its unparalleled ability to create wealth, they also bemoaned its tendency to stimulate individualistic behaviour, induce unemployment, and prevent workers from attaining their intellectual and moral potentials. Cooperatives, by contrast, have been repeatedly shown to generate employment, foster trust, and develop workers’ skills. Rent-seeking is also associated with other undesirable activities – such as extortionate pricing, regulatory corruption, and wasteful advertising – which cooperatives are supposed to eschew thanks to the principle of ‘concern for the community’ enshrined by the International Co-operative Alliance. Indeed, cooperatives have been widely lauded for integrating marginalised social groups, revitalising declining regions, and otherwise contributing to their local communities.

These positive spillovers would be magnified in an organisational economy dominated by cooperative ownership. For starters, the complementary principle of ‘inter-cooperation’ – that is, cooperation between cooperatives – would ensure that relations between firms are productively cooperative rather than wastefully competitive or collusive (although some degree of competition would undoubtedly be required) (Gregory 2013: 62; Bruni and Zamagni 2004; Zamagni and Zamagni 2008). This would essentially be what is often referred to as a 'solidarity economy' - a notion that is not as far-fetched as it would first appear when the organisational nature of economic coordination in existing economies is considered. Crucially, in such an economy, the rents that drive innovation would not vanish, but would rather be pursued in a more socially-beneficial manner. They would, moreover, accrue to cooperative worker-members, which would have far-reaching consequences given the relative immobility of labour: rents will tend to be reinvested within firms rather than siphoned off into private accounts, and will not be concentrated within the small section of society that happens to own capital.

In sum, the fact that modern economies are primarily coordinated through organisations rather than the market strengthens my case that cooperatives offer a means to harness the productive powers of capitalism while avoiding its adverse effects.



References

Gregory, D. (2013) 'Towards a New Economy Based on Co-operation' in Harrison, R. (ed) People Over Capital: the Co-operative Alternative to Capitalism (Oxford: New Internationalist Publications)

Bruni, L. and Zamagni, S. (2004) Economia Civile (Bologna: il Mulino)

Zamagni, S. and Zamagni, V. (2008) La Cooperazione (Blogna: il Mulino)

The Methodological Division of Labour in Economics

My very first post on this blog discussed the mathematical imperialism that has recently infiltrated the discipline of economics. In that post, I distinguished between pluralism in subject matter (e.g. paying more attention to issues like inequality) and pluralism in methodology (e.g. accepting historical approaches as legitimate), and argued that, at present, ‘New Economic Thinking’ relates primarily to the former. I promised, moreover, to explain in a subsequent post why I think that methodological diversity is also crucial to the renaissance of economics. Over ten posts later, that is precisely what I intend to do now, albeit by way of analogy, and in a rather tongue-in-cheek fashion.

Following Adam Smith, who is widely considered to be the ‘father of modern economics’, I accept that some degree of specialisation – in this case, with regard to methodology – is acceptable, and even desirable. Mathematics and econometrics (hereafter ‘MAE’) certainly have their place, and it stands to reason that the field of economics benefits when certain economists choose to specialise in using these tools. Smith (1776, Book I, Chapter 1), after all, argued that specialisation would increase productivity by improving workers’ dexterity and by facilitating innovations at each stage of production [1]. Specialisation in MAE thus produces better mathematicians/econometricians and better maths/econometrics. For a number of reasons, however, Smith’s logic also implies that this specialisation should not proceed indefinitely.

First, there are clearly limits – or at least diminishing returns – to the productivity gains that can be accrued by further specialisation in a given task or methodology. You can only get so good at casting or filing a pin (clearly, I don’t remember the actual stages of production involved in pin-making described by Smith), or, for that matter, doing MAE. Although innovations in casting or filing can surpass these limits, they are not costless – you might get away with paying a worker the same wage to do more work (or more productive work) in a given amount of time, but machines have to be built, purchased, operated, and serviced. The result is that a whole production process, including its own division of labour, emerges to focus on improving the particular task of casting or filing. A parallel in economics, for example, is that teachers require an increasingly higher level of training in MAE. Meanwhile, textbooks must be continually rewritten to reflect mathematical and econometric ‘advances’, giving rise to a vast industry in its own right, just as peer-reviewed journals must expand, change focus, or multiply to keep apace. At some point, the costs of this sub-division of labour must outweigh any benefits to economics of marginally superior (and increasingly less-superior) MAE.

A more glaring problem with unlimited specialisation in maths and econometrics, however, is that the whole point of specialisation, according to Smithm is to allow for more production to occur for a given amount of manpower. What we see in economics, by contrast, is the exponential proliferation of economists specialising in MAE. This proliferation, moreover, does not simply reflect the proliferation of the discipline itself, which would not necessarily defy Smith’s logic; rather, it is occurring to detriment of other methodologies. This relates to a third problem, which is that specialisation in a given task is only beneficial within a broader division of labour. After all, if specialisation in MAE is beneficial, then specialisation in other methodologies must be also [2].

In my initial post, I alluded to the proverb of the man with a hammer (i.e. skills in MAE) who thinks that everything is a nail. What we observe in economics is a vast population of workers, each equipped with a state-of-the-art hammer with which she has been trained to the level of expert. All of these workers are huddled around a single worktable, each trying desperately to push their way to the front so that they can impress the boss by hitting something (and don’t come at me with the benefits of competition, which Smith also emphasised – the whole point of a firm, at least according to mainstream economics, is to internalise transactions that would normally occur through the market). Meanwhile, all (at least most) of the other work stations are undermanned, laden with untapped potential for improvements in productivity. Thus, in a sort of reverse Lewis-model scenario, workers are flooding into the surplus-labour ‘MAE sector’, adding little in the way of productivity, despite other sectors remaining underpopulated. Furthermore, those work stations that are enjoying a much-needed increase in manpower, such as behavioural economics, remain disconnected from the other stages of production, with the lamentable result that the mainstream continues to rely on demonstrably false assumptions in order to facilitate hammering (i.e. modelling). The gross inefficiencies of this factory of economics are reflected in the quality of its final product, with which its consumers – that is, students, employers, and the like – are increasingly dissatisfied.

Finally, it should be noted that, despite singing the praises of specialisation within a division of labour, Smith also warned against its adverse effects on individual workers. Indeed, he (1776, Book V, Chapter 1, para. 178) went so far as to state that repetitively performing a narrowly-defined task would render a worker not only “stupid and ignorant”, but also “incapable of…conceiving any generous, noble, or tender sentiment”, even to the point of adversely affecting her “private life”. At the risk of (severe) generalisation, this is indeed what we observe in economics – flocks of idiot-savants who succeed in degrading the subject to a mere branch of mathematics, so devoid of any real-world foundation or application that academics and students alike have called for a ‘post-autistic economics’. Even specialists in MAE must have some knowledge of actual economies, as well as economic history, economic thought, and other methodologies. Indeed, Smith (ibid.) was so concerned about the adverse effects of specialisation on workers’ mental health that he believed government intervention would be required to curb it. Perhaps something similar is required in economics!

Notes:

[1] Another channel by which specialisation would increase productivity, according to Smith, was by eliminating the time wasted by transitioning between stages of production. This channel does not apply to the current discussion except insofar as time is required to learn new methodologies, which could be spent using the methodologies in which each economist is already proficient.

[2] Obviously, I am assuming here that other methodologies are useful, which is precisely what I am trying to argue. As stated at the outset, this is (admittedly circular) argument by analogy, not deduction. Incidentally, the exclusive use of deductive logic to the neglect of inductive approaches has been identified to be one of the major pitfalls of contemporary economics.


Reference:

Smith, A. (1904 [1776]). An Inquiry into the Nature and Causes of the Wealth of Nations (5th ed.). London: Methuen & Co. Retrieved from http://www.econlib.org/library/Smith/smWNCover.html