A Manifesto for Modern Political Economics: Extracts from our new book

05/06/2011 by

For the past few years, Joseph Halevi, Nicholas Theocarakis and your blogger have been working on a book whose twin (megalomaniac) purpose was: (a) To highlight the inherent error that parmeates economic thinking (of all guises and forms) while reclaiming all the lost truths that political economists hit upon at some point or rather, and (b) To make sense of our post-2008 world. Well, this book is now out. It is entitled MODERN POLITICAL ECONOMICS: MAKING SENSE OF THE POST-2008 WORLD. In this post I wish to share with readers the Postscript to the first pasrt of the book, which we call Book 1 and entitle it Shades of Political Economics: Seeking cluse for 2008 and its aftermath in the economists’ theories

It works just as well if one doesn’t believe in it…

Niels Bohr (1885-1962), the Danish physicist behind quantum mechanics, had a horseshoe pinned above the door of his country home. Upon seeing it, a visiting colleague once told him he could not believe that horseshoes ward off evil spirits. Bohr famously replied: “I agree. I have it there because I was told it works just as well if one doesn’t believe in it.” (Pais 1986, p. 210)

Bohr was joking. But his joke, unbeknownst to him, is on us; on the house of political economics. Since formalist neoclassicism scored its triumph in the 1950s, and then took over macroeconomics in the 1970s, no sensible politician or entrepreneur really believes that economic theory offers anything other than an interesting yet deeply impracticable commentary on capitalism. No one deep down thinks that the economists’ recommendations do, on average, more good than harm when taken seriously.

Nonetheless, economists ‘practise’ their trade anyway and politicians speak as if their proclamations are founded on solid, scientific economic truths provided by economists. The powers that be pay heed to economics seemingly convinced that “…it works even if no one really believes in it”.

That it works, there is no doubt. But not in the way a science is meant to. No, it works in the same way organised superstition functions to shore up a priesthood attached to a ruling cohort whose power is enhanced the more the superstition spreads through the community. In Chapter 2 we referred to this as Condorcet’s Secret. Stunning careers are built upon its shenanigans, Nobel Prizes (of sorts) are awarded to its practitioners, countless students are trained to think in its logic (even if fewer and fewer are choosing to major in it); the end result of all this activity being a more unstable capitalism and less comprehension of its instability.

We wrote this book on the conviction that the calamitous events of 2008, which will reduce the life prospects of a whole generation, were due to two interrelated bubbles: The financial Bubble and the Econobubble. The former requires no introductions. Its bursting in 2008 brought financialised capitalism to its knees and, once governments bailed it out, the crisis spread to the rest of the economy where the weakest suffered the most.

Less well known is the role in all this of the Bubble‘s strongest ally: the Econobubble, a frothing of economic theory founded on the certainties of free market faith and propagated by the dynamics of formalist neoclassical economics which took hold in 1950 and came into their own during the time of the Global Minotaur (see Chapter 11).

Now, after the world’s governments took it upon themselves to save the financial sector, and transferred the immense costs of the bail outs to those who lack the clout to be bailed out themselves, the Econobubble is returning. With no compunction, the same theorists who proclaimed the end of capitalist crises prior to 2008, and a new paradigm of perpetual growth (guaranteed by unregulated markets where everything is privatised), are now the authorities which propose to ‘explain’ to the masses… the Crash of 2008.

The Azande sorcerers would have been proud of them! Today’s economic priesthood enjoy, in relative terms, living standards that their pre-modern counterparts could never imagine. Never before have predictive failures of such catastrophic magnitude shored up such enormous social power on behalf of those who make it their business to furnish the failed predictions. And much like Bohr’s horseshoe, they do not even require that the purveyors, or indeed anyone else, believe in them…

The inherent error

Could a different type of economic theory, to that which rose to dominance after the war, deliver enlightenment? No, is our unequivocal (and highly unpopular) answer. In Chapter 1 we foreshadowed this controversial contention by suggesting that, while economic theory is our best shot at understanding social reality, it is an unsafe guide and an exceedingly poor historian. The reason is the inherent error that no economic theory can shed, however well intentioned its practitioners and sophisticated its approach.

During our trek through the thick foliage of political economics, time and again we saw how each and every attempt at systematising our thinking about value and growth ended in tears. At the conclusion of every inquiry (e.g. David Ricardo’s, Karl Marx’s, Piero Sraffa’s, or indeed Alfred Marshall’s and Leon Walras’) we were met with an awful dilemma: choose either a consistent theory of value or a theory of growth; sacrifice time to gain complexity or vice versa; treat capitalism like a series of production sectors bereft of consumers or like an empire of subjective consumer preferences where production is a species of consumption. To paraphrase the Marx Brothers, this ‘science’ of ours, economic theory, may look like an intellectual cul-de-sac; its practitioners may behave as if caught up in an intellectual cul-de-sac; but do not let that deceive you: economic theory is an intellectual cul-de-sac.

The cause of this failure is the inherent error; the inevitable logical inconsistency of any system of ideas whose purpose is to describe capitalism in mathematical or engineering terms. This is not, however, an intellectual failure as such. It is a mere reflection of capitalism’s essence, which only appears to us as logical inconsistency when we try to transplant into political economics an mindframe confined within some fixed ‘geometry’. Imagine a theorist that tries to explain complex evolving ecosystems by means of engineering models. What would result but incongruity and a mindset bent on misunderstanding the essence of the explanandum; a flight from that which craves explanation?

Political economists are that kind of theorist: nuts-and-bolts mechanics trying to defeat indeterminacy and to replace it with ‘closure’; tragi-comic figures struggling to impose a mechanical template upon evolving systems. No matter how skilled as engineers, and irrespectively of how adept we are at machining our tools precisely, our efforts are doomed. If anyone doubts that, it is worthwhile looking at what happened when economists accepted the challenge of incorporating evolutionary mechanisms into their study of capitalism’s historical dynamics: The exciting logic of Darwinian evolution (according to which complex patterns arise spontaneously from very simple underlying mechanisms) was emptied of all content and thrown onto the pyre of the inherent error.[i] Like a latter-day Midas, everything that the mainstream economist touches turns into a glittering, barren ‘thing’, bereft of life and explanatory potential.

This is the stuff of unintended consequences of efforts to transplant a ‘scientific’ approach to political economics. The best intentioned political economists begin with a healthy appreciation of the fact that their models are nothing but provisional forays into structured thinking. David Ricardo, Karl Marx, Alfred Marshall and John von Neumann are excellent examples. However, they are inevitably led astray by the very ambition to model economic phenomena by means of ‘closed’ accounts of all the variables within. As we explained in preceding chapters, this ambition ensures that, before long, the models take over and the provisional terms in which they do their work start regarding themselves as direct reflections of a concrete reality.

Before economists know it, their models auto-reify and turn into totalising ideologies. As if in a bid to reflect the way in which machines ended up subjugating capitalists and workers alike, economic models successfully subjugate the economists, turning them into their ‘staff’. The remarkable turning point, around 1950, which spawned formalist neoclassicism, gave rise to a different category of political economist: the logician who, having liberated himself from any interest in capitalism, is quite happy to spend his working life enmeshed in an abstract universe that he knows to be as beautiful as it is irrelevant.

His abstraction, however, proved functional to the post-war socio-economic order which rewarded handsomely lesser scholars; economists who, against the grain of the abstraction’s internal logic, utilised it in order to dress up particular policy recommendations with a cloak of fraudulent ‘scientific objectivity’. The rest were, meanwhile, confined to the unloved margins. Convinced that they must produce a ‘better’ model than the one used by the powers that be, the ‘dissidents’ followed a good instinct to a path that led nowhere. For as long as they seek truth in well specified models, they too (just like their mainstream rivals) are at the inherent error‘s mercy.

If our diagnosis is correct, the point is not to replace one form of modelling with another. It is, rather, to accept the limits of economic theory; to come to terms with the inherent error; to use our engagement with economic theory as a training ground on which to practise before D-day; before, that is, we attempt to wrestle with our economic and political reality. In this sense, Book 1 was the training ground and Book 2 is our very own D-day [Note for blog readers: I shall be posting extracts from Book 2 soon. Its subject-matter is an account of how the postwar era gave birth to the Crash of 2008].

Attempting to make sense of the post-2008 world, which will be our task in the remainder of this book, would be futile without a serious engagement with economic theory. Equally, the truth about our world does not reside in the theory, its mathematics, or its overall logical structure. On the one hand, we must engage (as we did in Book 1) with every single model furnished by the political economists. But then, before tackling the real issues confronting the real world, we must see each and every one of these models as indispensable but incomplete mental exercises; as necessary errors on the road to the possibility of enlightenment.

In short, economics’ inherent error cannot be defeated by the power of our Reason. Reason can only overcome it by reaching out to, and engaging with, History.

 Shameful subterfuge: Or how to poison the minds of the young

We finished Chapter 6 with the magnificently prophetic words of Antoine Augustine Cournot. “Cournot’s hunch”, we wrote there, “at a remarkably early stage in the development of contemporary capitalism, was that Walras’ type of political economics was to become the most potent, the most dangerous, blue pill [Here I am referring to thechoice presented to Neo at the beginning of  THE MATRIX-The Movie; a choice between the blue pill of blissful ignorance and the red pill that will wake him up in the actual machine-ruled dystopia that he must rebel against.] That it would lull the world with a Panglossian portrayal of capitalism and would silence the Cassandras whose tragedy was that the more sensible their warnings the less discernible their voices. Meanwhile, the surer the economics profession was becoming of capitalism’s Panglossian properties the nearer it edged to the Great Convulsion.”

How right Cournot was! In the 1950s, Gerard Debreu and Kenneth Arrow, drawing upon John F. Nash, Jr., proved their ‘welfare theorems’ which were to mark the Formalists‘ triumph. It was no more than a formalist proof that Walras’ type of General Equilibrium exists on paper (under particular restrictions). Nothing more nothing less. But let’s see how that proof was interpreted by a prominent economist of our era, as if in order to confirm Cournot’s ancient premonition. The economist in question is Olivier Blanchard, a Frenchman who headed the MIT Department of Economics (which Paul Samuelson had set up almost single-handedly), wrote one of the leading textbooks by which our young learn macroeconomic theory, and is currently Chief Economist of the IMF (the International Monetary Fund).

Blanchard had this to say about the Nash-Debreu-Arrow formalist project and the theorems it spawned:

“More than 200 years ago, Adam Smith explained that in a market economy individual egoisms combined to bring about the best possible outcome for the community. This proposition was so surprising and so full of consequences that it became necessary to understand its nature and its limits. Thanks to Walras at the beginning of the 20th century, and furthermore thanks to economists like Arrow or Debreu fifty years later, and especially thanks to a huge effort of abstraction and to powerful mathematical tools, the conditions of Adam Smith’s theorem have been clarified.”[ii]

Leaving aside serious doubts that Adam Smith would approve of what Walras and the formalists allegedly did in his name,[iii] Blanchard goes on to interpret the Nash-Debreu-Arrow theorems as follows:

Having clarified the necessary conditions required to satisfy the Adam Smith theorem, research has been directed almost entirely into investigating what happens when the conditions are not satisfied. Namely, why some markets work badly, and what type of institutions have to be put in place in order to improve their working.”

Note the leap of undiluted faith from the formalist model to the real world. Blanchard’s claim is that the formalism can help us understand why some real markets work badly. It is as if Gerard Debreu had never issued his legendary warning that “…the theory…is logically entirely disconnected from its interpretations”.

The whole Blanchard argument is a complete non sequitur. No investigation of the circumstances under which a Walrasian General Equilibrium will not obtain can illuminate the causes of real market failures. Why? Because the theory hangs together only under assumptions that push it onto a universe in which real capitalist markets could not, physically, exist. Is it not the duty of a leading textbook writer to spell this out? Anything less, we submit, is intellectual poison, especially for the young minds who treat a famous textbook writer as an authority on the subject-matter.

Alan Kirman (1989), one of formalism’s leading lights, sums up our conclusion thus:

“In conclusion, then, it is worth repeating that recent theoretical work has shown how little the Walrasian model has to say about aggregate behaviour. Economists therefore should not continue to make strong assertions about this behaviour based on so-called general equilibrium models which are, in reality, no more than special examples with no basis in economic theory as it stands.”

Does Olivier Blanchard not know this? He ought to, and we think he does. But such is his ideological inner drive to argue that his policy recommendations are founded on a bedrock of good mathematics, that he is being economical with the truth. More disturbing even than this naked act of dishonesty is what Blanchard and his merry colleagues do in order to arrive at their policy recommendations (e.g. the ones he pushes onto the world community as Chief Economist at the IMF): Given the utter inability of Walrasian or Nash-Debreu-Arrow theorems to say anything tangible about the real world, they return to the single sector or Robinson Crusoe types of economies. There is nothing like strong (often austere) economic policies derived from false premises to inspire sheer horror in the hearts and minds of those in the know.[iv]

 Modern Political Economics: The primacy of radical indeterminacy

Book 1‘s  driving force can be described as an impossibility theorem. Because of the inherent error, we have argued, all models become inconsistent with some crucial aspect of really existing capitalism. When theorists try to squeeze consistency out of their models, the result is failure. While such failure can leave their job prospects unaffected (or even, sometimes, enhanced), eventually it deprives the theory of persuasive power. And when, eventually, the logical incoherence is revealed, the theory is rejected wholesale, the proverbial baby being thrown out together with the bathwater. The result is that which we termed lost truths.

For example, Ricardo’s insistence of squaring his value theory with a theory of growth led to Malthus’ devastating critique; Marx’s desperate attempt to close his model led to the transformation problem and the contorted logic required for its resolution; the marginalists’ insistence of explaining all prices and quantities by means of the equi-marginal principle forced them, eventually, to stick to Robinson Crusoe-like economies, etc. The trouble with these failures was that, once their logical incoherence became apparent, and the political order no longer had uses for them, they led the following generations of economists to drop them wholesale, together with the important insights contained within. And if this has not happened just yet with neoclassicism, because of its continuing political utility, eventually it will.

In the past eight chapters, Book 1 has been consistently pounding this simple point: That the inherent error plaguing all of economic modelling is also responsible for the fact that today’s crop of economists are oblivious to lost truths; insights about capitalism that were, once, better known by their predecessors. So, whereas even right wing economists at the turn of the 20th century benefitted significantly from Marx’s thought (e.g. Joseph Schumpeter who has acknowledged his gratitude to Marx for the development of his idea of ‘creative destruction’), today’s crop has no access to such truths. Oblivious to the lessons learnt by previous generations of political economists, they march straight into their own Waterloos.

What should we do, in view of this repetitive process of theoretical failure, caused by different manifestations of the inherent error, and followed by the loss of important truths? This book has a recommendation so simple and yet so controversial: Adopt Sisyphus’ s optimal strategy! That is, stop pushing the rock up the hill. The might of the inherent error cannot be overcome either through Reason or by the Power of our Will. The impossibility of the task should not give us extra energy to tackle it but ought to grant us pause to think of that which constitutes our real task: To explain the real world and, if possible, to improve upon it.

But this means a complete disengagement from the inherent error which is the same thing as a retreat from the project of discovering the truth about capitalism within some determinate abstraction; within some ‘closed’ model. In methodological terms, this is equivalent to abandoning rigid meta-axioms even if the price we have to pay is radical indeterminacy. Would the latter constitute a serious defeat? As the previous chapters have shown it constitutes no such thing: For even when we impose the most stringent of meta-axioms, radical indeterminacy cannot be avoided. Why then pay the price exacted by the meta-axioms (that is, total historical blindness and a sequence of serious violations of logic) when, in truth, they do not even deliver us from indeterminacy?

Chapter 9 defined the currently dominant variant of political economics in terms of  three meta-axioms (recall Section 9.4). The first meta-axiom is Strong Methodogical Individualism (D). The idea here is that all explanation must be traceable to the level of the individual consumer, worker, entrpreneur. (A little like a mechanical clock whose workings can only be fully explained once every spring and cog is understood.) The second meta-axiom concern the motivation of these people and is called Strong Methodological Instrumentalism (S): Every person or orgnanisation. firm etc. has predetermined, current and soveriegn motives. In short, what each wants comes prior to the socio-economic phenomenon under study. Even if there is a degree of feedback between events and motives, the mechanism of that feedback is given in advance. Finally, the third meta-axiom is that of Strong Methodological Equlibration (E): The theorist focuses exclusively on behaviour (e.g. consumer choices, production, trading etc.) that takes place in equilibrium. In other words, we are only interested in phenomena that have ‘settled’ down in a pattern that no longer possesses a tendency to unravel.

Table 10.1 below extends this definition to all variants of political economics in this book. The first three columns correspond to neoclassicism’s three meta-axioms. Naturally, the fourth row which corresponds to marginalism-cum-neoclassicism reports ticks in these first three columns. The difference with marginalism (the third row), neoclassicism’s original starting point, is that the marginalists who never espoused the neoclassical penchant for imposing equilibrium (as opposed to explaining convergence toward equilibrium, e.g. Cournot) did not adopt meta-axiom E (notice that there is no tick in the third row third column cell). And since economists of the Austrian persuasion and John Maynard Keynes also locate their roots in that form of marginalism, while steadfastly refusing to assume equilibrium a priori, they too ‘get’ ticks in the first two columns, but not in the third.

In contrast, David Ricardo, the neo-Ricardian Pierro Sraffa and Karl Marx, like all classical economists, make no assumptions about individual agency, and thus get yes’s (see the first two rows under D and S). Of course, courtesy of their imposed assumption that inter-temporal equilibrium prevails in the macro-economy (as the rate of profit tends to equalise across the different sectors; and supply equals demand for all produced commodities), they get a yes in the third column (E).

Strong Meth. Ind. (D)
Strong Meth. Instr.
Meth. Equilibration
Spontaneous Order
Reducibility of human action
Ricardo – Sraffa
Marginalists-cum– Neoclassicists
Austrian Marginalists
Our Modern Political Economics

Figure 10.1 The six meta-axioms of political economics

To sum up so far, the first two columns (meta-axioms D and S, carried intact from Chapter 9) typify an individualist approach to agency. In such accounts, structure is to be explained by an agency located in individual action that is instrumental and comes prior to structure. The next two columns concern the manner in which the theorist comes to firm conclusions about regularity, without which no firm predictions can be made (and regardless of whether the agency boxes are ticked or not).

There are two ways in which we can extract regularity from a theoretical model: The most common one is through the strong meta-axiom of methodological equilibration (E); that is, by assuming equilibrium not only exists but, additionally, that it is the only state of the economy worth studying. Interestingly, both neoclassicists and classical economists, including Marx, took that step. In Chapter 5 we argued that this was a pivotal choice by Marx, motivated by his political agenda and one that led to a logical impasse that has plagued many of his followers ever since. Chapter 9, on the other hand, demonstrated neoclassicism’s grand (though very peculiar) failure as a result of combining the first three meta-axioms (D,S and E).

Meta-axiom E is, arguably, so strong and logically unwarranted, that a number of marginalists refused to espouse it. The first to refuse E was Cournot, who even sounded a warning to the effect that humanity might embark upon a lethal path if E is endorsed, together with D and S. Beyond Cournot, the Austrian school turned E down, perhaps because of the fact that their point of origin was a critique of Marx’s espousal of E. Nevertheless, since they were just as politically driven as Marx (even though they were trying to make precisely the opposite point to his), they too craved regularity. For without regularity, no theory has firm predictions. And without firm predictions, how can a political economist advocate particular policies?

For this reason, the Austrian School came up with an interesting alternative to E: the idea of a spontaneous order that is ‘as good as it gets’. They begin their narrative by endorsing the first two meta-axioms (which define human ontology and the way we must conduct economic ‘science’) but they reject the notion that some equilibrium will result. For if it could, human Reason might be able to work out what that equilibrium would be and, then, socialism might be justifiable (as a system that imposes that very equilibrium).

To render socialism wholly indefensible, they had to argue that equilibrium is neither possible nor desirable. Thus they put forward the hypothesis that, due to the irreducibility of human knowledge to some well defined mathematical function, no central plan and no collective agency (i.e. a state, a municipality, a club) can generate social outcomes. The best humanity can hope for is the social outcome that will emerge spontaneously if people and markets are ‘left alone’. Thus, the Austrians sought regularity in the spontaneous order resulting from free intercourse (a meta-axiom we label O in Table 10.1) between persons (who are to be theorised on the basis of the first two meta-axioms, D and S).

The Austrians were not the only ones to reject E while embarking from an individualist perspective consistent with the first two meta-axioms (D and S). John Maynard Keynes was another such thinker. The difference was that he was not a believer! Indeed, his best work reflects the “We are damned if we know” logic, as outlined in Chapter 7. In short, Keynes did not believe in the inevitability of any kind of regularity; of either the equilibrium (E) or the spontaneous order (O) types. For this reason, Table 10.1 awards him only two ticks, courtesy of his roots in his teachers’ (and in particular Alfred Marshall’s marginalism).[v]

We end our discussion of Table 10.1 with the last column which captures whether the ‘mindframe’ of the thinkers in each different row is predicated upon human reductionism; upon, that is, a readiness to think of men and women, indeed of children too, as analytically equivalent to machines, to a mathematical mapping of outcomes to some index of preference satisfaction, or, at best, to the algorithms running our magnificent computers.

The British classical economists embraced human reductionism clearly and knowingly. Adam Smith and David Ricardo left no room in their political economics for economic insights that are uniquely due to the indeterminacy of human nature. In their economic writings, humans appear as machine-like, pre-programmed creatures.[vi] The first political economist to have based an important economic insight on the irreducibility of the human person to a quantifiable, machine-like entity, was of course Karl Marx (recall Chapters 4&5).  But so did the Austrians and, of course, Keynes (thus the x’s in the respective cells in the last column).

The Austrians rejected the idea that information equals knowledge and that it is a technical matter to aggregate it all in one large hard disk-like device. They rejected the notion of some economy-wide equilibrium because they rejected the idea that human knowledge is like grains of sand to be piled up by a process of mechanical aggregation. Similarly, Keynes opposed the view that investors and consumers predict the future in a manner ontologically no different to performing a technically difficult computation. For reasons that are related to their appreciation of the inherent error, both the Austrians and Keynes thought that there is no such thing as a sufficiently narrow set of rational expectations that agents, if clever enough, could home in on.

In summary, Karl Marx, the Austrians, and John Maynard Keynes set themselves apart from the rest of political economists by treating the indeterminate human element as a crucial analytical datum. Of these three, however, only Keynes felt sufficiently liberated from his own ideological imperative to present an argument in favour of, or against, capitalism. He took it for granted that he liked capitalism and did not need to prove its superiority or desirability. What concerned him was capitalism’s capacity for self-suicide. Period.

In this spirit, Keynes embarked upon his General Theory in order to furnish practical advice on how to manage capitalism’s depressive character effectively. For this reason Table 10.1’s penultimate row (dedicated to Keynes) features no ticks in the last three columns: Keynes, having rejected that human reasoning can be reduced to the operations of an algorithm, did not trust capitalism to equilibrate or regulate itself.

Which brings us to Table 10.1’s last row, the one corresponding to this book’s ‘philosophy’. This is our column and its purpose is to act as a brief manifesto for our Modern Political Economics. It is a simple four word manifesto: No meta-axioms please. ‘Closed’ models are destined to fall prey of the inherent error and the inherent error is what stands between us and a decent grasp of reality. The only scientific truth about capitalism is its radical indeterminacy, a condition which makes it impossible to use science’s tools (e.g. calculus and statistics) to second guess it. The more we feel we have capitalism’s number, the closer we get to the moment when it will astonish us with (what our ‘closed’ models told us was) an almost zero probability event. When the improbable becomes fact, our only hope is that the casualties will not be too numerous.

But what are the sources of the radical indeterminacy? Keynes answered that question partially. In multi-sector, financialised capitalist economies, consumers and investors lack the data that would allow them, even if they possessed God’s own computing capacities, to construct a determinate mathematical expectation of what the future holds. Like ships with de-magnetised compasses sailing in a starless night, they tend to follow one another along self-confirming paths. Even if captained by supremely experienced sailors, they may make it safely to port or they may all be led astray, ending up marooned on shoals from which they cannot extricate themselves.

In summary, because of the impossibility of uniquely rational answers to pressing questions such “How much should I save?” and “Should I invest now?”, consumption and investment are at the mercy of the Cunning of Reason (which Keynes mislabelled animal spirits). But there is another source of radical indeterminacy that Keynes ignored, possibly because he was unwilling to recognise its location in the veins of a class of people whom he was conditioned to look down upon: Human labour which (as Karl Marx taught us) is the life-giving force that runs through capitalism bestowing value and even life upon mere ‘things’, albeit only as long as it remains indeterminate; irreducible, that is, to an electricity-like force. It is this vivifying, indeterminate energy that creates capital out of mere machines; a relatively newfangled force with the astonishing capacity both to liberate and to enslave the humans that work it and the humans that own it alike.

In brief, without a grasp of the dialectical nature of both labour and capital  it becomes impossible to understand:

(a) the dynamics of a capitalist economy, and

(b) the ways in which irrepressibly free humans become increasingly enslaved by their artefacts.

Our hypothesis is that to make sense of capitalism we need to capture (a) and (b), and to combine them with Keynes’ successful escape from the inherent error. The task is equivalent to introducing into political economics, as ‘data’, the two sources of radical indeterminacy:

(i) the irreducibility of labour input, and thus capital, to some well defined metric; and

(ii) the irreducibility of human forecasts to a well defined mathematical expectation function.

As long as (i) and (ii) are combined with a determination to assume neither equilibrium (which was Marx’s error) nor spontaneous order (as is the Austrians’ religious wont), we stand a chance of grasping our present moment in history. Moreover, the events of 2008 are better understood as our collective punishment for the economists’ greatest sin: the assumption that radical indeterminacy can be tamed by means of formalist meta-axioms at one level and simple pricing formulae at another level, the one on which financialisation procured its splendid fantasies.

Epilogue: Making sense of the post-2008 world

To make sense of anything, let alone of something as complex as the post-2008 capitalist reality, two lethal enemies must be evaded. One is relativism, the philosophical rejection that anything can be known objectively about the reality ‘out there’. The other is determinism, an ambition to create some ‘closed’ system of mutually consistent components that provide each other’s cause.

Relativism, in its various guises (ranging from ancient Greek Sophism to contemporary Postmodernism) rejects theory as anything more than yet another (slightly more pompous) narrative. Determinism, on the other hand, stakes a claim to having reduced reality to its bare essentials; and then of having put it back together in the form of a ‘closed’ model of reality. Our brand of political economics appropriates the epithet modern to reflect (a) our disavowal of postmodern relativism and (b) our repudiation of determinism, primitive modernism’s trademark.

Question:       Is there an objective economic reality ‘out there’ to be understood rationally?

Answer:          Absolutely!

Question:       Can we understand it by means of determinate abstractions or ‘closed’ models?

Answer:          Absolutely not!

To broaden our point, let us for a moment dip into Niels Bohr’s world of quantum mechanics. In that weird and wonderful universe, where everything is pregnant with its contradiction, a photon can pass through two different gates at once. Light can behave like a string of particles one moment and like a mass-less wave the next. Quanta turn out to be deeply indeterminate, in the sense that it is ontologically impossible (as opposed to just difficult) to determine at once where they are, their mass, and the speed at which they are travelling. And if that were not enough, the unfolding phenomena (on which our macro world is built) can never be approached by determinate models (not even by models incorporating randomness and probabilities). Why? Because our attempts to observe them alter the very phenomena in radically unpredictable ways.

In physics this is known as the Heisenberg Principle. In political economics, a similar idea appeared in Chapter 7 as the We are damned if we know principle. The reader may even recall our parable (see Box 7.5) of macroeconomic forecasting as weather prognostication on a planet where the weather responds to our average weather forecasts. In that world, much like in that of quantum mechanics, no determinate model can tell you what will happen. To entertain genuine rational expectations is to expect the unexpected.

The point of dipping into quantum mechanics is to demonstrate that to admit to radical indeterminacy is not to yield to the sirens of Postmodernism, whose objective is to lull us into a renouncement of the idea of a reality ‘out there’ and the loss of any ambition to approach it rationally. Just like physicists have not given up on their attempts to understand the microcosm of quanta, we have no intention of forfeiting the ambition to rationalise capitalism.

But how should we do that? Book 1 has presented different theories, often enthusiastically, but concluded that each was, at best, a necessary error. Was it a waste of time? Do we now have to make sense of the post-2008 world without any genuine assistance from theory? Have we returned to the beginning, no wiser than when we started? We leave it to the poet to find the perfect words to answer these questions on our behalf:

We shall not cease from our exploration
And at the end of all our exploring
Will be to arrive where we started
And know the place for the first time[vii]

Our study of ‘closed’ models in Book 1 did, indeed, lead to their rejection. But, though we may feel we have returned to our point of embarkation empty-handed, the truth is that we can now recognise in it features that were opaque to our eyes before. We are now able to know the ‘place’ in a profound way like never in the past. Yes, we labelled all models errors; but we also called them necessary. Without them, our discussion of capitalism would not differ from that of second rate journalists. The models in the preceding chapters yielded false views, like the one we get when looking a stick that is half submerged in water from an angle. From our viewpoint, it looks bent. From another viewpoint, it also looks bent, only the discontinuity seems to come at a different angle and to occur at a different point in relation to the stick’s apparent mid-point. Physicists refer to this as the parallax. The stick is real and straight but, while submerged, it looks bent depending on our standpoint.[viii]

In Box 4.10 we summoned the dialectic as a device for overcoming unhelpful binary oppositions on the way to coming to grips with the underlying reality. We do the same here to suggest that capitalism is like the proverbial parallax stick and our models of it, the necessary errors, are different viewpoints. Each leads to an erroneous conclusion but when taken together they have the potential to become the raw materials which our Reason can synthesise into a decent grasp of reality.

In this vein, to make sense of the post-2008 world we need to transcend our models, not eliminate them. It was important that, first, we looked at their meta-axioms and, thus, understood their architecture and the particular error toward which each of the meta-axioms pushed us. Now that we have a good sense of the limits of fixed geometry explanations, we are free to break, cleanly and resolutely, from all meta-axioms, in the same way the human mind, at some point, realises that the half submerged stick is straight, even though our eyes tell it differently.         

How does our Reason overcome the appearance to grasp the reality when all of its ‘viewpoints’ are partial and, effectively, misleading? The simple answer is: It combines the contradictory views from the different observation points by means of a reasoning process irreducible to the empirical evidence derived at each viewpoint. A pluralist disposition (i.e. one that causes us to devour all sorts of different models without becoming hostage to any of them) therefore becomes the foundation of a rational, modern, political economics.

Thus we arrive at our next task: Equipped with the necessary, but erroneous, viewpoints provided by the different shades of political economics in the preceding pages, we shall now attempt to synthesise them into a theory of 2008 and its aftermath; to an understanding of late capitalism that is the equivalent to the realisation that the stick is straight.

Almost certainly, our conclusion will be more jagged and far less convincing than the physicist’s rational overcoming of the parallax view. But we take solace from the fact that capitalism generates complexity of a higher order than anything a stick and a volume of water can produce. Our ambition is, anyhow, no greater than to take a wobbly first step toward a worthy path. Hopefully, others will follow down that path, along a thoroughly modern political economics leading to a helpful rationalisation of our stunningly irrational socio-economic order.


[i] The inherent error, naturally, keeps returning every time economists attempt to ‘close’ their model (‘evolutionary’ or not) through the importation of the usual meta-axiom. Evolutionary Game Theory is a good example of how formalism uses up evolutionary ideas before emptying them of content and consigning them to the dustbin, once it has justified its own ‘solution’ concepts by giving them a (fake) evolutionary interpretation. (For more details on this, see Varoufakis, 2008.)  But there is nothing new here. Karl Marx ended up emptying his own formidable dialectics of content when he tried to ‘close’ his model of capitalist growth and value – see Chapter 5. It is the price every economist pays for replacing indeterminacy with ‘closure’.

[ii] Olivier Blanchard, in the French newspaper Libération, 16th October 2000. The article is entitled ‘En défense de la science économique’. Our translation.

[iii] Although, to be fair to Walras, Debreu and Arrow, they never in fact claimed to be mathematising Smith’s argument, but Mas-Colell et al. (1995) do.

[iv] Kirman (1989) adds the following to capture the neoclassicists’ recoiling behind simplistic models: “It is not mere chance that one assumption that leads to strong results as to uniqueness and stability is that society should behave like an individual…. There is no more misleading description in modern economics than the so-called microfoundations of macroeconomics which in fact describe the behaviour of the consumption or production sector by the behaviour of one individual or firm.”

[v] These are, naturally, broad brushstrokes by which to paint the portrait of major intellectuals. One might plausibly argue, for instance, that by the time Keynes had finished his General Theory very few of his roots in Marshall’s marginalism remained, at least when thinking of the macroeconomy. In this sense, the two ticks in Keynes’ row ought to be fainter than the corresponding ticks in the rows of the Austrians or the Marginalists.

[vi] This is not to say that they did not acknowledge the special features of human nature in other writings. Adam Smith, for instance, did so extensively in his Moral Sentiments. Our point here is that human labour and decision making is rendered mechanistic in their writings on political economics.

[vii] T.S. Eliot, “Little Gidding” (1942), the last of his Four Quartets.

[viii] The Oxford Concise Dictionary defines the parallax phenomenon as follows: “Apparent displacement of object, caused by actual change of point of observation.” See also Žižek (2006) in which the author makes a similar point with regard to debates regarding binary oppositions in political philosophy.

Cookies help us deliver our services. By using our services, you agree to our use of cookies. More Information