Freedom in our contemporary global economy

What is freedom? It seems that this question has become very important in the age of neoliberal decline of civic society. Recently, in an interview with the Guardian newspaper, the marxist philosopher Slavoj Zizek discussed freedom in our age of the Arab Spring and the Occupy movement. Zizek is as usual rather fuzzy about what exactly freedom is, but he points out a very valid point, namely that the ultimate form of freedom is to question the institutions that determine our society and economy.

I want to elaborate a bit on this by enhancing the discussion and linking this form of institutional freedom with the type of freedom that so dominates our economic and neoliberal perspective on our economy, namely individual freedom. In fact, I distinguish three related notions of freedom:

Individual freedom

The most basic form of freedom is the one that prevails in our thinking since enlightenment and the industrial revolution: The ability to be allowed to freely choose between multiple alternatives. This individual form of freedom is seen rather primitively and linked strongly with the acts of consumption or production. But it is never truly satisfactorily considered in the discussion in economics beyond these rather straightforward considerations.

Indeed, what exactly does this individual freedom mean? If it is simply the act of selecting freely from a set of alternatives, then it can be rather meaningless. What if the set of alternatives is very small? This important aspect of individual freedom is usually avoided.

A simple thought experiment clarifies here: Consider an individual completely by herself in a desert. She can do anything she wants and as such is completely individually free. But this setting renders this freedom meaningless, since it is not in context of interaction with other humans. Thus, freedom only has meaning in a social context. So, individual freedom should only be considered in the context of a society. In fact, the size of the set of alternatives that one can choose from is usually determined socially; it are institutional settings and actions of others that determine what one can actually choose from.
So, the discussion of individual freedom is really one that goes far beyond the individual and considers the social and institutional environment of the individual rather than just the individual herself.

Social freedom

This brings us to think about a second form of freedom, namely one that goes beyond individualism: A form of freedom considering an individual in her social environment. Social freedom refers to the freedom to engage with other individuals and freely build one’s social networks. Thus, this form of freedom is really about influencing others’ choice sets and to give up some of one’s individual freedom by restricting one’s choice sets to create new choice or choice sets.

Engaging with another human being usually means that one restricts choice, simply by spending time and effort to engage, excluding other uses of that time and effort. However, other choices might emerge from this engagement, which were not possible before that engagement. For example, engaging with a potential business partner or collaborator reduces one’s productive time, but creates new opportunities to build a business venture or to develop a common project. Social freedom in all respects is the antithesis to individual freedom.

Institutional freedom

The highest form of freedom stands above the two forms of freedom that I discussed thus far. Institutional freedom directly addresses and confronts the institutional environment in which one exercises these individual and social freedoms. It is this form of freedom that Zizek debates in the Guardian interview.

Institutions determine individuals’ ability to exercise their individual and social freedoms and provide a framework that constrains as well as liberates people. What form of these institutions should we strive for and implement in our society? How far can we go in restricting individuals’ exercise of their individual and social freedoms? How far can one go in modifying the institutions that form the basis of society?

It is these important questions that are asked in the exercise of one’s institutional freedom. The ability to question and debate is exactly what institutional freedom facilitates. And is exactly this form of freedom that has always been important during enlightenment and more recently in our contemporary global economy. It is the erosion of this highest form of freedom in our western societies with the rise of the security state that should worry us.

Modern Political Economics: Chapter 6

I continue to read “Modern Political Economy: Making sense of the post-2008 world” by Yanis Varoufakis, Joseph Halevi and Nicholas Theocarakis, published in 2011 by Routledge. Here I discuss Chapter 6.

Chapter 6 is a very critical assessment of marginalism and neo-classical economics that came forth from the marginalist “revolution” in economic theorizing in the 1870s. The marginalists (Jevans, Menger and Walras) deviced a subjective theory of value. This approach argues that the value of a commodity is the outcome of interaction between demand and supply for that commodity in a perfectly competitive market. This reasoning was extended into a broader theory referred to as neo-classical economics and, ultimately, into a general theory of market systems, which can be referred to as the neo-Walrasian paradigm in economics.

The authors mainly criticise marginalism from their perspective on the “inherent error”. The critique mainly focusses on the inherent problem that a subjective theory of value does not allow the development of a proper theory of growth.

No mention here of a “lost truth”, even though marginalism itself has morphed into the neo-Walrasian paradigm and more recently into a broad theory of subjective interactive decision making, called game theory, that now extends these fundamental subjective principles to all decision making processes. (Think “Freakonomics” here.)

In my opinion this chapter shows how limited the critical perspective of the authors is. It mainly restricts itself to a very classical viewpoint on what economics should be and is, therefore, very Marxian in nature. I think that marginalism’s main construction error is the required commodification of all economic interaction and the exclusion of value-generating interaction (such as most services) from its perspective. Using marginal valuation, requires that the traded substance is in principle measurable using a continuous scale. Most things that we do in our real lives are not subject to such simplistic measurement; they are naturally “discrete”.

Modern Political Economics: Chapter 5

I continue to read “Modern Political Economy: Making sense of the post-2008 world” by Yanis Varoufakis, Joseph Halevi and Nicholas Theocarakis, published in 2011 by Routledge. Here I discuss Chapter 5.

This chapter considers and restates Marxist theories of the classical capitalist economy. Clearly, it continues from the previous chapter. As usual in the Marxist approach, the focus is completely on production processes and neglects the consumption side of the economy. This chapter is written in the same somewhat cumbersome style as the previous chapter.

The chapter opens with a discussion of the dual nature of labour. A producer purchases in the market labour time or labour power, while the worker contributes labour input, which is uncontrollable by the producer through the labour contract. So, while labour time or power can be traded in a market, the value-generation labour input occurs after the labour time has actually been acquired by the producer. In modern terms, the latter refers to the principal-agent problem of the labour relationship. The dual nature of labour explains economic profit in Marx’s theory. Profit is a permanent and essential feature of capitalism that signifies its dynamism. The dual nature of labour allows producers to claim the residual value of its inout every time that labour time is traded. Thus, profit is based on the difference between its use value (labour input) and its exchange value (labour time or power). The capitalist reaps the generated surplus and covers rents and interest from it.

This theory of labour results into an explanation of economic cycles, which in turn goes to the centre of the Marxian argument that economic crises are necessary episodes in capitalist development. Indeed, mechanisation of the production processes results into higher wages, leading to lower residuals for capitalists. This triggers layoffs and higher unemployment and ultimately an economic crisis. During the downswing wages fall and profits rise again.

The flaws of this reasoning are well recognised: the analysis omits the effects on the demand or consumption side of the economy and the socio-economic institutions. The authors also reason that if the analysis is extended to amore realistic multi-sector model, the results are less straightforward and do not lead to the desired political conclusions as aimed for by Marx.

Next, the authors embark on the usual link of the failure of Marxian economics and the issue of”inherent error”. Marx tried to build a theory that combines an explanation of value and economic dynamics and development. His failure is another example of this problem of inherent error in economics. But important insights from his analysis were subsequently forgotten, in particular the idea that capitalism is inherently unstable and subject to natural crises and the insight that labour has a dual nature.

I would like to add a few of my own observations to this about the theories that have been discussed in the chapters in this book thus far. First, all theories rest on the dogma that a single commodity has a unique price, reflecting its “true value”. This implies there is a global trade platform in which this price is established, presumably the “market”. There is no empirical evidence for that. In fact, goods are infinitely differentiated and trade at many different prices.

Second, if we take this differentiation as given, then it follows that power structures in economic organisations are infinitely diverse as well. Any model of capitalism indeed needs to take into account all sectors in the global economy simultaneously. This was also recognised by Marx in the third volume of “Capital” as pointed out by the authors.

Therefore, our understanding of capitalism needs to be amended with an understanding of economic organisations and human embeddedness in these organisations. Economic organisations are dualistic in nature as well: They facilitate interaction, but simultaneously they constrain our freedom to act. More advanced economies with higher productivity require more complex, deeper organisations. These deeper organisations are indeed facilitating larger wealth creation, but at the same time they are more constraining through the exercise of control (“power”). Thus, tragically human enterprise constantly faces a battle between facilitation or freedom and organisational functionality or power. This duality also might be viewed as a fundamental cause for economic and political crises in our societies. Our economy is founded on a perpetual pendulum between empowerment and freedom.

Modern Political Economics: Chapter 3

I am currently reading “Modern Political Economy: Making sense of the post-2008 world” by Yanis Varoufakis, Joseph Halevi and Nicholas Theocarakis, published in 2011 by Routledge. In this and next posts I will collect my comments, chapter by chapter. Here I discuss Chapter 3.

Condorcet’s Secret refers to the fact that the complicated economic organisation of society obscures or veils the distribution of power. In feudal society there is the least veiling of power, since land owners take their share post-production rather than pre-production. In an industrial society this is different due to the complication of reward before and during completion of trading process; supply chains need to be supported by an advanced social financial organisation based on debt instruments.

French Physiocrats introduced the idea of surplus related to exploitation of a single productive sector, namely the agricultural sector. This neglects the role of cities as essential hubs in the networks founded on advanced social division of labour.

This reasoning was extended through the work of Adam Smith and David Ricardo. The latter resorted to a single sector “corn model” to solve this inherent error problem. Both classical thinkers based their theory of value on labour inputs, due to their contemporary situation in which all economic value was clearly underpinned to the subsistence compensation of labour in terms of foodstuffs. Hence, all economic commodities and activities were directly linked to corn as a means to replicate labour. This links again directly to Ricardo’s corn model as a metaphor for economic thought. Even today our thinking is very much tainted by thinking about the economy as a single commodity or sector. Extension to multiple sectors turns out to be impossible, as is the case with the corn model. This again refers to the Inherent Error in economics, which still remains clouded and unexplained, even though the authors spend quite a bit of space on debating it again in this chapter.

Modern Political Economics: Chapter 2

I am currently reading “Modern Political Economy: Making sense of the post-2008 world” by Yanis Varoufakis, Joseph Halevi and Nicholas Theocarakis, published in 2011 by Routledge. In this and next posts I will collect my comments, chapter by chapter. Here I discuss Chapter 2.

This chapter reiterates the book’s main theme that economics is tainted by inherent problems:

Inherent error, the inability to soundly and properly combine a theory of value with a theory of growth. This is due to the nature of the subject area of economics, namely that the theories affect the matters NE consideration. Hence, economists are fully embedded and their theorising affects the subject studied. So, any theory of value affects the conditions of growth and vice versa. In particular, value can never be independent of the distribution of social power over the surplus produced by human labour and ingenuity. As such the value of things is determined socially through power structures. This in turn affects how an economy develops and grows. Hence, economic theory is directly affecting its subject of study.

Inherent error leads to lost truths. Past theorists understood certain basic truths better than later theorists; knowledge was lost in the development or history of economic theorising. Authors point to Aristotle’s “telos” as the perceived goal of an action. If the goal is socially just, then the action is valuable; if the action has no perceived socially productive or useful goal, the action is not justifiable. (Similarly, I remark that the classical economists’ notion of a social division of labour as a source of wealth creation has been lost in contemporary economics.)

The authors make an interesting error by linearising history as so many other economists do as well. History is a progression from hunter-gatherer via agricultural to industrial economies. That ancient empires from the Mesopotamian Empire (Uruk), China, Egypt, and to the Roman Empire signify a much more non-linear development line is neglected. I refer to Ian Morris’s development index that shows the quality of life in ancient Rome to be equivalent to that in Victorian London.

Also, the history of financial instruments has the common economists’ mistakes: barter is followed by money and subsequently followed by banking due to complication of short versus long term financing of production processes. There is clear evidence that there first was government and a bureaucracy of registration of debt before money actually came into existence. (Graeber, 2011)

Modern Political Economics: Introduction

I am currently reading “Modern Political Economy: Making sense of the post-2008 world” by Yanis Varoufakis, Joseph Halevi and Nicholas Theocarakis, published in 2011 by Routledge. In this and next posts I will collect my comments, chapter by chapter. These notes also form the foundation for a reading club initiated at Queen’s University Management School at Belfast.

This volume consists of two “books”. The first book reports on the theories developed by some of the major historical economic thinkers. Their ideas are discussed in the context of their contemporary socio-economic environment and assessed in the light of the financial crisis of 2007-08 and its aftermath. The second book develops a view of the world that was also debated in the single-authored book by Varoufakis on “The Global Minotaur”. This book was a more popular account of this world view.

The discussion of historical thinkers in Book I is centred around the theme of Inherent Error as the main deficiency of economics. As such economics is not really a science, but more a pursuit that always will remain unfulfilled. The notion of inherent error essentially refers to the impossibility of telling a credible story about how economic values (prices) are determined in a complex growing economy.

Unfortunately, the authors do not really build a convincing explanation why this is the case. Of course, if one knows the cause of this inherent deficiency, then one can remedy it. The main argument seems to be that economists are fully embedded in their subject and cannot take a fully objective external position in relation to its object of study as is the case with the natural sciences. But this remains a rather unsatisfactory argument. Is it really impossible to device a theory of value that would be outside the governance system of the economy without in turn affecting the growth patterns of this economy? I hope to have more insight after reading the subsequent chapters.

Nevertheless it seems true that economic reasoning is subject to this inherent error and its consequences. None of the theories and models developed in economics are fully inclusive and have full explanatory power; there always remain deficiencies and holes that require patching. In this regard economics is subject to its own incompleteness problem in the sense of Goedel. Similarly, it is subject to amnesia, since economists apparently lose valuable insights from previous generations. This is a secondary theme that runs through Book I of this treatise. In that regard economics does not seem to make true progress.

I want to add to this a third deficiency that has been pointed out by multiple authors which is closely linked to the perceived inherent error: Economics is dogmatic and is more akin to religion than science. (Backhouse, 2010) This is actually shown in the absolute lack of responses to the main economic events in the past decades, in particular the financial crisis of 2007-08 and it’s aftermath. Instead of throwing out most of our theories as complete drivel, economists just continue as if nothing has happened. The unresponsiveness of economics shows that it violates the most basic of scientific processes.