The first part of this discussion is in many senses homage to Naomi Klein and her book The Shock Doctrine. I spent the weekend reading the book and this impelled me to formulate some of my ideas on the question of ideology and economic theory. The second part of the diary is an examination of a clear instance of the influence of ideology or political apologetics on economic theory and policy.
I want to apologise for missing last thursday's normal appointment and for publishing this diary so late. My husband sprang a surprise holiday for my birthday and I was not able to publish the diary and attend it.
One more point, much to my pleasure I find that something the dog said has written a diary on ideology, economics and politics, addressing the same point from another angle and permission has been granted to put up the link:
http://www.dailykos.com/...
How does one identify an ideological argument?
The first and most obvious thing that must be said is that economics is not a science. It is a social science and the differing policies advocated by economists are essentially representing differing political choices and positions. That is why, even with an hegemonic economic theory, there are differences between economists on policies and choices (e.g., Austrians, Monetarist versus Keynesian; New Classical versus Neo-Keynesian). Additionally, there are economists who have never agreed with the dominant or hegemonic position and whose arguments are based upon different theories (e.g., Classical, post-Keynesian, Marxist/Marxian, Institutionalist, Sraffian); some of these are sub-sets (not completely whole theories, but concentrate on certain things), some are different approaches (that are consistent with a number of theories) and some are different theories using completely different assumptions and understandings of the economy.
Moreover, even within schools of thought, there are differences in perspective, policies and conclusions. Unlike in hard sciences, economic policies affect different classes and people differently and economic choices reflect those priorities. You can be a communist, socialist, liberal, conservative or fascist politically and accept neoclassical economic theory and want to use that theory to understand the economy and as a basis for policies reflecting your political ideology.
Is Ideology a bad thing in and of itself?
No, all economic and political choices are based upon differing ideologies. We need to recognise that this is the case and to keep an eye out to see whom and what the economic theory and policy is supporting. That is, recognise these things are ideological in nature, but keep an eye on their goals. Some arguments are essentially solely ideological in nature solely advanced with a specific political goal in mind; that is, they have little or no merit except to those who adhere to the political goal. Others are both ideological and theoretical; they don't like certain theories or conclusions and attempt alternative arguments to explain the same phenomena. Others are simply theories on how the economy functions and their policy objectives reflect their political objectives (that is, the theory is neutral ideologically, but the policies derived from these theories certainly are not).
Things that we must look for:
- What is motivating the discussion? Has there been a major or serious problem with previous arguments? Are they generally incorrect and/or inconsistent? Is a new factor entering the discussion that is causing a re-evaluation of previous discussions (e.g., a severe depression, the rise of opposition political movements) as they cannot explain the phenomenon or the phenomenon is considered so threatening that a new approach/perspective is needed?
- Is the argument primarily concerned with theoretical consistency and correctness?
a) that should set up a warning light, but may not be proof of ideological intent; Certainly anyone establishing any kind of theory or hypothesis (economic, political, social, philosophical) is concerned with internal consistency of their argument. Moreover, they will certainly try to ensure that their argument is consistent overall.
b) However, if they are overturning an argument that is historically valid and whose policies have worked supposedly arising from its inconsistency with the theory (e.g., New Classical attacks on Keynesian arguments) and these new arguments have a clear political aim; be very cautious.
The new Classicals were correct, Keynesian arguments are inconsistent with the long-period general equilibrium upon which neoclassical economics is based; but this was evident when Keynes wrote the General Theory and he never coherently developed the theory of effective demand in the long-run. Discussions between Keynes and Sraffa made this point evident and the inconsistency between neoclassical microfoundations and the theory of effective demand was evident. Beginning with Hicks (1937) and consolidated in Modigliani's PhD thesis (1944), Keynes's theory of effective demand was limited to the short-run in mainstream economics.
However, Keynesian policies worked and were successful in limiting the depth and severity of economic crises. The new Classicals advocated a completely de-regulated laissez faire economic argument which had already lead to severe economic crises in the 19th and early 20th centuries; what is the aim of these policies and who will benefit from the elimination of a social welfare state and deregulated capitalist economic system? Why was not the long-period equilibrium itself questioned rather than something which was demonstrated as effective, why not abandon the original argument as defective, why abandon the policy that has worked?
c) A theoretical or policy argument will have some underlying assumptions that enable the construction of the argument and or a general theory as to how the economy works. What we need to watch for is actually the assumptions underlying these arguments; we need to see if they are actually neutral or politically motivated in construction.
d) Are those assumptions so restrictive as to remove any linkage with reality? That is do they exist to ensure that the theory (and hence policy) works (e.g., axioms of choice and production) or do they existence to ensure certain conclusions of the model which pretend to be scientific, but actually may be politically motivated?
e) Or are these assumptions part of the construction of a model where some things are held constant to isolate specific areas of interest. This is normal in the construction of models (often called the laboratories of economics) but we have to be careful of generalisation as we have necessarily abstracted from many things in order to construct the model.
- Does the economic theory or policy describe itself as scientific, but is without reference to any historical accuracy or veracity or does it, in fact, contradict historical evidence?
This can be a serious problem with the theory or it can arise due to the deliberate decision to ignore historical accuracy and evidence. While hard science can run experiments to test models, social sciences rely on history to justify conclusions (and assumptions). An example can be found in Malthus's principle of population; earlier authors on population and demographics actually found that as incomes increased, family size decreased. That is, it is poverty, high maternal, infant and childhood mortality that leads to the creation of larger families. Poorer families have more children not only to work to bring in income, but in the hopes that some will survive to adulthood. Malthus's conclusions (to sustain his arguments on poverty and wages) claimed the opposite: literally, that if we increase wages (and hence lower profits and rents), the poor will just keep on reproducing, and drive their wages back to previous levels; while the landed aristocracy and capitalists will be poorer. In Malthus, income redistribution only serves to impoverish everyone. In the real world, we have actually seen both in the farther past and recent history, the exact same argument.
- Does the argument or its conclusions actually oppose what exists historically or inconsistent with history and evidence? How much of reality is ignored to derive the conclusions of the argument (e.g., in the 1834 Poor Law Amendment commission, they actually ignored evidence contrary to what supported the arguments of political economists (who were part of the commission) and actually ignored the existence of seasonal unemployment in a country in which there was a significant agricultural population).
- Is the purpose of the theoretical argument to actually justify an already held conclusion or a political, social or economic phenomenon? That is, was the argument solely created to justify a policy or does the policy derive naturally from an already existing argument? Were certain historical facts deliberately ignored or eliminated in the construction of a theory? Were historical facts deliberately ignored in the construction of a policy? Is an idea that is known to be inaccurate maintained solely for political reasons (e.g., Say's Law) in spite of a wealth of evidence demonstrating its inaccuracy and its distortion of reality? Has the historically correct and demonstrable argument been relegated to an aberration? Has an argument been constructed solely to justify a situation in response to criticism by political or economic opponents?
What we are going to look at are arguments that were deliberately developed to justify specific political goals and aims (theoretical justifications of the rights of capitalists to earn profits, abstinence theory of profits), arguments which challenged far better discussions and theories in that the original theory provided a more developed, coherent and accurate description of the actual economic phenomena and yet were replaced by inaccurate and limited discussions which served political ends (wages-fund theory and the abstinence theory of profits). We are entering some of the worst economic arguments ever created deliberately ... unsurprisingly, we will find that some of these arguments were revived and/or adapted to fit into modern economics analysis for much the same reason as for why they were originally created ... ideology.
II. General Introduction
The attack against the classical theory of value and distribution should be distinguished into two distinct components. On the one hand, one part of the attack was a legitimate critique against a theory which had problems which were not corrected at the time of Ricardo's death. Specifically, I am referring to the criticism against the analytical components of Ricardo’s theory of value (his determinant of value or labour theory of value and his notion of absolute value). This part of the attack was not politically motivated in general (a possible exception deriving from his own confusions can be seen in the case of Samuel Read whose work I will discuss today), and was really either a difference of opinion as to what determined the exchange values of commodities (Bailey, Malthus), a criticism and an alternative theory put forward (Torrens) or a complete lack of understanding as to what Ricardo was trying to do (the attack on the notion of absolute value, for this see Bailey, Mill, McCulloch, Torrens, Read).
On the other hand, there is a politically apologetic attack which was put forward and motivated in part by the response of the working class to the writings of the so-called Ricardian Socialists (Thompson, Hodgskin, Grey and Bray) and the rise of working class political movements in the 1820s. An additional consideration was the collapse of an economic boom in 1825 and an economic crash in 1826 which led to a year of falling wages and wide-spread distress. According to Prothero, the period of 1826-32 was characterised by high unemployment and distress which was worsened by high food prices arising from bad harvests in 1829-31 (Prothero, 1979, p. 209).
These politically apologetic attacks actually focused on three distinct, although related issues, the first was the labour source of value (from which the Ricardian socialists derived the exploitation of the working class) and the theory of distribution, which basically argued that the interests of the capitalists and the workers were inherently in conflict (and were seen by the Ricardian socialists as the manner in which exploitation manifested itself). A final argument that derives from apologetic motives was that the introduction of machinery was not harmful to the working class in terms of increasing unemployment and lowering wages.
What we are going to witness is the rise of a justification for the capitalists to earn profits. Earlier discussions never addressed this question they took the economic system for granted. Given the rise of this working class movement with an ideology that placed the burden for the misery of the working class directly on the economic system and the capitalists, arguments began to be advanced trying to reconcile these disparate class interests (e.g., unite the capitalists and workers against the landlords and landed aristocracy in the case of the fight against the Corn Laws) and to justify the rights of capitalists to earn profits (and how this will ultimately benefit the workers).
I am planning on discussing the new theories of distribution (the wages-fund and the abstinence theory of profits) and to discuss the attempt of justifying the capitalists’ right to obtain profits from which the abstinence theory of profit argument derives. I will also address some of the criticisms laid against Ricardo’s discussion of machinery. After this general discussion and the discussion on the justification of the right of capitalists to obtain profits, I am planning on discussing the wages-fund theory. Then I will discuss the 1834 poor law amendment in comparison to the 1795-7 poor law amendment differentiating the underlying theoretical assumptions used in the 2 distinct laws. I will then discuss the abstinence theory of profits, concentrating on Nassau Senior’s work and the implications for the classical theory of distribution.
I am not planning on covering the attack and articulation of new theories of value, unless people tell me that they are really interested in that discussion. It is interesting, but rather technical and the arguments neither influenced the later neoclassical (or marginalist) theory that became the mainstream of economic analysis from the 1870s. However, if you really are interested in alternative theories of value, I will be glad to put up Torren’s capital theory of value, just let me know in a comment (having learned my lesson about the use of polls).
III. The Politically Apologetic Attack Against Classical Economics
A) The Attack Against the Labour Source of Value and the Justification of Profits
In this part we will look at the revisions introduced by James Mill into Ricardian economic theory to provide a justification of the right of the capitalists to obtain profits, which basically required a repudiation of the labour source of value and a redefinition of the notion of capital, and on Thursday we will examine Read's repudiation of the labour source, his criticism of Hodgskin's theory of capital, and his articulation of a capital source of value in an attempt to provide a justification for the right to obtain profits.
1. The Nominal Ricardians: James Mill and J.R. McCulloch
Given the argument of the Ricardian socialists of the right of the worker to the whole produce, what must be done in order to invalidate this argument is the following: 1) repudiate the concept that labour is the source of the value of the surplus; and/or 2) articulate a defence of the right of the capitalists to receive profits based on the natural right of property, i.e., extend the argument granting property rights. It will be shown that Mill and McCulloch actually did this in their revisions of Ricardo's arguments. These revisions of Ricardo's theory of distribution undermine its analytical structure.
a. Mill articulates two arguments, which appear to be a direct response to the arguments of the Ricardian socialists and which appear in the 1824 edition and not in the earlier edition of the Elements of Political Economy in the first section labelled Production. Specifically, he expanded the discussion on labour and capital. In the third edition (1826), he adds a further discussion of the relationship of wages to profits.
The first argument appears in the context of an attempt by Mill to justify the right of the capitalist to receive the product and to obtain profits. Mill argues that as the capitalist pays for the services of labour during the production period, he should be seen as owning the labour of the workers. In this situation, the labour becomes the property of the capitalist for the production period. It is upon this argument that Mill attempts to justify the right of the capitalist to the whole product. Both the labour and capital used in production are the property of the capitalist and hence, the product of his property belongs to him.
The labourer, who receives wages, sells his labour for a day, a week, a month, or a year, as the case may be. The manufacturer, who pays these wages, buys the labour for the day, the year, or whatever the period may be. He is equally therefore the owner of the labour, with the manufacturer who operates with slaves. [...] Being equally, however, the owner of the labour, so purchased, [...], the produce, which is the result of this labour, combined with capital, is all equally his own. [...] the capitalist is the owner of both instruments of production: and the whole produce is his. (James Mill, 1826, p. 21-2).
Second, this argument, in combination with his view that the wages are advanced prior to production, literally results in labour, capital and wages being identical. In Mill, like Ricardo, wages are clearly a part of the capital advanced for production. Mill uses this to argue that since the workers have been paid prior to production, they have already received their contribution to production and, hence, have no claims on the rest of product. However, Mill's argument that the labour of the workers is owned by the capitalist, results in labour and wages being a part of capital. In this situation, it is impossible to distinguish between profits and wages, as both constitute a return to capital. Moreover, Scrope actually notes this difficulty (See, Scrope, 1833, p. 142, footnote) and he criticizes Mill and McCulloch for equating labour and capital, which results in the inability to distinguish wages from profits.
Mill's justification for the right of the capitalist to obtain the whole social product -- arising from his view that the labourers have already been remunerated for their contribution to production due to wages being advanced prior to the production period -- is tantamount to a rejection of the Ricardo's concept that labour is the source of the value of the surplus product.
The labourer can not be seen to be creating the value of the surplus product in this argument, as Mill has already argued that they have received their recompense for their contribution to production. Profits, or the value of the surplus must arise from somewhere, it can not be labour, or the labourer would still be entitled to the whole product. Profits must implicitly be deriving from capital. The argument articulated by Mill to justify the existence of profits, that is, that the labour used in production is a part of the capital advanced and that the value of the surplus product arises in production, lends credence to Torrens's argument that capital is the source of the value of the surplus product.
McCulloch continues the retreat from Ricardo's theory of distribution. His interpretations and revisions can, without question, be postulated to be politically apologetic. McCulloch's first contribution is the extension of the natural right of property argument to cover capital goods. Specifically, he argues that property is not only that which has been produced, but also that which has been accumulated.
The natural right of property now protects and ensures the security of the capitalist's stock of capital and the right to obtain profits, in addition to the right of the workers to the product of their labour (McCulloch, 1825, p. 47).
He attempts to show in opposition to the arguments of Rousseau and the Ricardian socialists, that the right of property is not responsible for the existence of the poverty of the workers instead he states the right of property has benefited everyone in the society. The right of property does not guarantee equality of the distribution of wealth it only ensures that each person will be remunerated for their labour (McCulloch, 1825, p. 50). Finally, he concludes this discussion by arguing in support of the inequality of the distribution of wealth, basing that inequality upon "fortune, frugality and industriousness of each individual"(McCulloch, 1825, p. 50). It should be noted that Scrope will use this exact argument in order to justify profits based upon the abstinence of the capitalists (Scrope, 1833, pp. 145-150).
b. Second, the Ricardians view the capitalist-labour relationship in terms of an exchange between labour and capital. Essentially, arising from his attempt to repudiate the argument of the Ricardian socialists that the labourer produces the value of the surplus product and, hence, is entitled to the whole product, McCulloch argues that in order for profits to exist, the commodity is sold for more labour than it actually contains. In this situation, the workers are remunerated for their contribution to production, the wage is seen as comprising the value they have contributed to the production of the commodity. He has thus abandoned Ricardo's concept that labour is the source of the value of the surplus product. The value of the surplus, which will constitute profits, is seen as an addition to the quantity of labour embodied, and as such to derive from capital itself.
A commodity produced by a certain quantity of labour will, in the state of the market now supposed, uniformly exchange for, or buy any other commodity produced by the same quantity of labour. It will never, however, exchange for, or buy exactly the same quantity of labour that produced it. (fn: In point of fact, it will always exchange for more; and it is this excess that constitutes profits. No capitalist could have any motive to exchange the produce of a given quantity of labour already performed for the produce of the same quantity of labour to be performed. This would be to lend without receiving any interest on the loan.) (McCulloch, 1825, p. 120).
I will leave the response to Marx, who says the following about this argument:
And the total decline of the Ricardian system into twaddle - a decline which prides itself on being its most consistent exposition - has been accepted by the mob, [...], as the conclusion of the Ricardian system carried too far, to its extreme limit; they thus believe Mr. McCulloch that the Ricardian mode of 'coughing and spitting', which he uses to conceal his helpless, thoughtless and unprincipled eclecticism, is in fact a scientific attempt to set forth Ricardo's system consistently (Marx, Theories of Surplus Value, Part III, p. 170).
I will stop at this point and discuss the anti-Ricardian argument on the justification of profits and the right of the capitalists to control the product and means of production. The argument of Samuel Read is a direct and clear response to the writings of Hodgskin and Thompson; which he states openly in the book.
Further Reading and Referenced Pieces
Hicks, H (1937) Mr. Keynes and the Classics: A Suggested Interpretation, Econometrica, Vol. 5, No. 2. (Apr., 1937), pp. 147-159.
Marx, K Theories of Surplus Value, Volumes I-III International Publishers, 1971.
McCulloch, J. R. (1825) Principles of Political Economy, Ward, Lock and Co.
McCulloch, J.R. (1854) A Treatise on the Circumstances which Determine The Rate of Wages and the Conditions of the Labouring Classes, AM Kelley, 1967.
Mill, James, (1821) Elements of Political Economy, Elibron, 2003.
Mill, James (1824) Elements of Political Economy, Baldwin, Craddock and Joy.
Mill, James (1826) Elements of Political Economy, George Olms, Verlag, 1971.
Modigliani, F. (1944) "Liquidity Preference and the Theory of Interest and Money", Econometrica.
Pashkoff, S (1993) "Two Contributions to the Decline of Ricardian Economics Samuel Read and George Poulett Scrope," Contributions to Political Economy, Vol. 12, pp. 47-69.
Prothero, I (1979) Artisans and Politics in Early Nineteenth Century London: John Gast and his Times, Dawson.
Read, Samuel (1829) An Inquiry into the Natural Grounds of Right to Vendible Property or Wealth, AM Kelley, 1976.
Scrope, G.P (1833) Principles of Political Economy deduced from the Natural Laws of Social Welfare and Applied to the Present State of Britain, AM Kelley, 1969.
Senior, N. (1831) Three Lectures on the Rate of Wages, AM Kelley, 1966.
Senior, N. (1836) An Outline of the Science of Political Economy, AM Kelley, 1965.
Stirati, A. (1994) The Theory of Wages in Classical Economics, Edward Elgar.
Torrens, R. (1821) An Essay on the Production of Wealth.
Earlier diaries which will clarify this discussion are the following. The most relevant discussions for today’s diary are the Ricardian socialists:
Wages: http://www.dailykos.com/... http://www.dailykos.com/... http://www.dailykos.com/... http://www.dailykos.com/... http://www.dailykos.com/...
Value and Profits:
http://www.dailykos.com/... http://www.dailykos.com/... http://www.dailykos.com/...
Ricardian Socialists: http://www.dailykos.com/... http://www.dailykos.com/... http://www.dailykos.com/... http://www.dailykos.com/...