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 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.