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Hahnel ABCs of Political Economy Modern Primer

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Contents

List of Illustrations

x

Preface

xi

Acknowledgements

xv

1 Economics and Liberating Theory

1

People and Society

1

The Human Center

2

The Laws of Evolution Reconsidered

2

Natural, Species, and Derived Needs and Potentials

4

Human Consciousness

5

Human Sociability

6

Human Character Structures

7

The Relation of Consciousness to Activity

8

The Possibility of Detrimental Character Structures

9

The Institutional Boundary

10

Why Must There Be Social Institutions?

11

Complementary Holism

13

Four Spheres of Social Life

13

Relations Between Center, Boundary and Spheres

15

Social Stability and Social Change

16

Agents of History

17

2 What Should We Demand from Our Economy?

20

Economic Justice

20

Increasing Inequality of Wealth and Income

20

Different Conceptions of Economic Justice

24

Conservative Maxim 1

24

Liberal Maxim 2

28

Radical Maxim 3

30

Efficiency

31

The Pareto Principle

32

The Efficiency Criterion

33

Seven Deadly Sins of Inefficiency

37

Endogenous Preferences

38

Self-Management

40

Solidarity

41

vi The ABCs of Political Economy

 

Variety

42

Environmental Sustainability

43

Conclusion

44

3 A Simple Corn Model

45

A Simple Corn Economy

45

Situation 1: Inegalitarian Distribution of Scarce Seed Corn

49

Autarky

50

Labor Market

50

Credit Market

54

Situation 2: Egalitarian Distribution of Scarce Seed Corn

57

Autarky

57

Labor Market

58

Credit Market

59

Conclusions from the Simple Corn Model

60

Generalizing Conclusions

63

Economic Justice in the Simple Corn Model

67

4 Markets: Guided by an Invisible Hand or Foot?

71

How Do Markets Work?

71

What is a Market?

71

The “Law” of Supply

72

The “Law” of Demand

72

The “Law” of Uniform Price

75

The Micro “Law” of Supply and Demand

75

Elasticity of Supply and Demand

79

The Dream of a Beneficent Invisible Hand

80

The Nightmare of a Malevolent Invisible Foot

84

Externalities: The Auto Industry

85

Public Goods: Pollution Reduction

88

The Prevalence of External Effects

91

Snowballing Inefficiency

96

Market Disequilibria

97

Conclusion: Market Failure is Significant

99

Markets Undermine the Ties that Bind Us

99

5 Micro Economic Models

103

The Public Good Game

103

The Price of Power Game

106

The Price of Patriarchy

109

Conflict Theory of the Firm

111

Contents

vii

Income Distribution, Prices and Technical Change

112

The Sraffa Model

114

Technical Change in the Sraffa Model

118

Technical Change and the Rate of Profit

123

A Note of Caution

125

6Macro Economics: Aggregate Demand as Leading Lady 128

The Macro “Law” of Supply and Demand

128

Aggregate Demand

132

Consumption Demand

133

Investment Demand

133

Government Spending

135

The Pie Principle

136

The Simple Keynesian Closed Economy Macro Model

137

Fiscal Policy

140

The Fallacy of Say’s Law

141

Income Expenditure Multipliers

143

Other Causes of Unemployment and Inflation

147

Myths About Inflation

150

Myths About Deficits and the National Debt

152

The Balanced Budget Ploy

154

Wage-Led Growth

157

7 Money, Banks, and Finance

160

Money: A Problematic Convenience

160

Banks: Bigamy Not a Proper Marriage

162

Monetary Policy: Another Way to Skin the Cat

168

The Relationship Between the Financial and “Real”

 

Economies

171

8 International Economics: Mutual Benefit

 

or Imperialism?

175

Why Trade Can Increase Global Efficiency

176

Comparative, Not Absolute Advantage Drives Trade

177

Why Trade Can Decrease Global Efficiency

180

Inaccurate Prices Misidentify Comparative

 

Advantages

181

Unstable International Markets Create Macro

 

Inefficiencies

182

Adjustment Costs Are Not Always Insignificant

183

Dynamic Inefficiency

183

viii The ABCs of Political Economy

 

 

Why Trade Usually Aggravates Global Inequality

184

 

Unfair Distribution of the Benefits of Trade Between

 

 

Countries

185

 

Unfair Distribution of the Costs and Benefits of

 

 

Trade Within Countries

187

 

Why International Investment Can Increase Global

 

 

Efficiency

190

 

Why International Investment Can Decrease Global

 

 

Efficiency

191

 

Why International Investment Usually Aggravates

 

 

Global Inequality

193

 

The Balance of Payments Accounts

198

 

Open Economy Macro Economics and IMF

 

 

Conditionality Agreements

201

9

Macro Economic Models

208

 

Bank Runs

208

 

International Financial Crises

211

 

International Investment in a Simple Corn Model

212

 

Banks in a Simple Corn Model

216

 

Imperfect Lending Without Banks

216

 

Lending With Banks When All Goes Well

217

 

Lending With Banks When All Does Not Go Well

218

 

International Finance in an International Corn Model

219

 

Fiscal and Monetary Policy in a Closed Economy Macro

 

 

Model

220

 

IMF Conditionality Agreements in an Open Economy

 

 

Macro Model

225

 

Wage-Led Growth in a Long Run, Political Economy

 

 

Macro Model

231

 

The General Framework

231

 

A Keynesian Theory of Investment

235

 

A Marxian Theory of Wage Determination

235

 

Solving the Model

236

 

An Increase in Capitalists’ Propensity to Save

238

 

An Increase in Capitalists’ Propensity to Invest

240

 

An Increase in Workers’ Bargaining Power

240

10

What Is To Be Undone? The Economics of

 

 

Competition and Greed

242

 

Free Enterprise Equals Economic Freedom – Not

242

Contents ix

Free Enterprise is Efficient – Not

248

Biased Price Signals

249

Conflict Theory of the Firm

249

Free Enterprise Reduces Economic Discrimination – Not

251

Free Enterprise is Fair – Not

253

Markets Equal Economic Freedom – Not

254

Markets Are Fair – Not

257

Markets Are Efficient – Not

258

What Went Wrong?

261

11 What Is To Be Done? The Economics of Equitable

 

Cooperation

265

Not All Capitalisms Are Created Equal

265

Taming Finance

266

Full Employment Macro Policies

267

Industrial Policy

268

Wage-Led Growth

270

Progressive Not Regressive Taxes

270

Tax Bads Not Goods

272

A Mixed Economy

272

Living Wages

274

A Safe Safety Net

276

Worker and Consumer Empowerment

277

Beyond Capitalism

278

Replace Private Ownership with Workers’

 

Self-Management

279

Replace Markets with Democratic Planning

280

Participatory Economics

282

Reasonable Doubts

284

Conclusion

291

Index

293

1Economics and Liberating Theory

Unlike mainstream economists, political economists have always tried to situate the study of economics within the broader project of understanding how society functions. However, during the second half of the twentieth century dissatisfaction with the traditional political economy theory of social change known as historical materialism increased to the point where many modern political economists and social activists no longer espouse it, and most who still call themselves historical materialists have modified their theory considerably to accommodate insights about the importance of gender relations, race relations, and the “human factor” in understanding social stability and social change. The liberating theory presented briefly in this chapter attempts to transcend historical materialism without throwing out the baby with the bath water. It incorporates insights from feminism, national liberation and antiracist movements, and anarchism, as well as from mainstream psychology, sociology, and evolutionary biology where useful. Liberating theory attempts to understand the relationships between economic, political, kinship and cultural activities, and the forces behind social stability and social change, in a way that neither over nor underestimates the importance of economic dynamics, and neither over nor underestimates the importance of human agency compared to social forces.1

PEOPLE AND SOCIETY

People usually define and fulfill their needs and desires in cooperation with others – which makes us a social species. Because each of us assesses our options and chooses from among them based on our

1.For a fuller treatment see Liberating Theory (South End Press, 1986) by Michael Albert, Leslie Cagan, Noam Chomsky, Robin Hahnel, Mel King, Lydia Sargent, and Holly Sklar.

1

2The ABCs of Political Economy

evaluation of their consequences we are also a self-conscious species. Finally, in seeking to meet the needs we identify today, we choose to act in ways that sometimes change our human characteristics, and thereby change our needs and preferences tomorrow. In this sense people are self-creative.

Throughout history people have created social institutions to help meet their most urgent needs and desires. To satisfy our economic needs we have tried a variety of arrangements – feudalism, capitalism, and centrally planned “socialism” to name a few – that assign duties and rewards among economic participants in different ways. But we have also created different kinds of kinship relations through which people seek to satisfy sexual needs and accomplish child rearing goals, as well as different religious, community, and political organizations and institutions for meeting cultural needs and achieving political goals. Of course the particular social arrangements in different spheres of social life, and the relations among them, vary from society to society. But what is common to all human societies is the elaboration of social relationships for the joint identification and pursuit of individual need fulfillment.

To develop a theory that expresses this view of humans – as a selfconscious, self-creative, social species – and this view of society – as a web of interconnected spheres of social life – we first concentrate on concepts helpful for thinking about people, or the human center; next on concepts that help us understand social institutions, or the institutional boundary within which individuals function; and finally on the relationship between the human center and institutional boundary, and the possible relations between four spheres of social life.

THE HUMAN CENTER

Except for creationists most consider the laws of evolution straightforward and non-controversial. Unfortunately popular interpretations that emphasize the advantages of aggression and strength, but neglect equally important factors for passing on one’s genes like good parenting skills and successful cooperation, sprinkle more ideology over the scientific basis of Darwin’s theory of evolutionary biology than most realize.

The laws of evolution reconsidered

Human nature as it now exists was formed in accord with the laws of evolution under conditions pertaining well before recorded

Economics and Liberating Theory 3

human history. Fossils discovered in Ethiopia and Kenya now date human ancestors back at least 5 or 6 million years. Distinctly human species arose in Africa at least 2 million years ago, while present evidence indicates that modern humans are only about 100,000 years old. Therefore the conditions relevant to which genetic mutations were advantageous and which were not are the conditions prevailing in central Africa between 6 million and 100,000 years ago. It is often noted that the last 10,000 years of human history – so called “historic time,” the time period we know much about – has been fraught with war, conquest, genocide, and slavery. And it is often speculated that under those conditions people with a genetic disposition to aggression and vengeance, for example, might have been well suited to survival. But historic time is only a tenth of the time modern humans have roamed the earth, and is only an evolutionary instant compared to the 6 million years during which the human species evolved from our common ancestry with apes and chimpanzees. This means it is impossible for the historical conditions we know something about to have selected genetic characteristics significantly different from those humans already had 100,000 years ago. Therefore, it is not possible that the human history we know something about – our history of war, oppression, and exploitation

– has made our genetic “nature” hopelessly aggressive, vindictive, or power hungry. Throughout the 10,000 years of recorded history we have been, and remain, genetically what we were at the outset. To believe otherwise is to believe that a baby plucked from the arms of its mother, moments after birth, 10,000 years ago, and time-traveled to the present would be genetically different from babies born today. And this is simply not the case.

But what is the relevance of this to perceptions about “human nature?” The point is that whether conditions during the past 10,000 years favored survival of the more aggressive and vindictive, or survival of those who cooperated more successfully, is irrelevant to what “human nature” is really like. Because the conditions during known history played no role in forging our genetic nature. The relevant conditions for speculations concerning genetic traits promoting survival were the conditions that prevailed in Africa 6 million to 100,000 years ago. And whether or not the conditions human ancestors lived in during that lengthy period favored genetic traits conducive to aggression any more than traits conducive to successful cooperation, is very much an open question.

4The ABCs of Political Economy

This does not mean that our 10,000-year history of war, oppression, and exploitation has had no impact on people’s attitudes and behavior today. These aspects of our history have had important effects on our consciousness, culture, and social institutions that cannot be ignored or “willed away.” But the point is that known history has left ideological and institutional residues, not genetic residues. Only conditions in Africa 6 million years ago had any influence on genetic selection. So it is perfectly possible that under institutional conditions that are very different from those we have today, and the different expectations that go with them, that human behavior – the combined product of our genetic inheritance and our institutional environment – could be quite different than it is presently. This simple fact is something apologists for capitalism ignore when they argue that people are doomed to the economics of competition and greed by “human nature.” Instead it is just as plausible that an economics of equitable cooperation is compatible with our genetic make-up, and perfectly possible under different institutional conditions – popular opinion to the contrary, not withstanding.

Natural, species, and derived needs and potentials

All people, simply by virtue of being human, have certain needs, capacities, and powers. Some of these, like the needs for food and sex, or the capacities to eat and copulate, we share with other living creatures. These are our natural needs and potentials. Others, however, such as the needs for knowledge, creative activity, and love, and the powers to conceptualize, plan ahead, evaluate alternatives, and experience complex emotions, are more distinctly human. These are our species needs and potentials. Finally, most of our needs and powers, like the desire for a particular singer’s recordings, or the need to share feelings with a particular loved one, or the ability to play a guitar or repair a roof, we develop over the course of our lives. These are our derived needs and potentials.

In short, every person has natural attributes similar to those of other animals, and species characteristics shared only with other humans – both of which can be thought of as genetically “wiredin.” Based on these genetic potentials people develop more specific derived needs and capacities as a result of their particular life experiences. While our natural and species needs and powers are the results of past human evolution and are not subject to modification by individual or social activity, our derived needs and powers are subject to modification by individual activity and are very

Economics and Liberating Theory 5

dependent on our social environment – as explained below. Since a few species needs and powers are especially critical to understanding how humans and human societies work, I discuss them before explaining how derived needs and powers develop.

Human consciousness

Human beings have intellectual tools that permit them to understand and situate themselves in their surroundings. This is not to say that everyone accurately understands the world and her position in it. No doubt, most of us deceive ourselves greatly much of the time! But an incessant striving to develop some interpretation of our relationship with our surroundings is a characteristic of normally functioning human beings. We commonly call the need and ability to do this consciousness, a trait that makes human systems much more complicated than non-human systems. It is consciousness that allows humans to be self-creative – to select our activities in light of their preconceived effects on our surroundings and ourselves. One effect our activities have is to fulfill our present needs and desires, more or less fully. But another effect of our activities is to reinforce or transform our derived characteristics, and thereby the needs and capacities that depend on them. Our ability to analyze, evaluate, and take the human development effects of our choices into account is why humans are the “subjects” as well as the “objects” of our histories.

The human capacity to act purposefully implies the need to exercise that capacity. Not only can we analyze and evaluate the effects of our actions, we need to exercise choice over alternatives, and we therefore need to be in positions to do so. While some call this the “need for freedom,” it bears pointing out that the human “need for freedom” goes beyond that of many animal species. There are animals that cannot be domesticated or will not reproduce in captivity, thereby exhibiting an innate “need for freedom.” But the human need to employ our powers of consciousness requires freedom beyond the “physical freedom” some animal species require as well. People require freedom to choose and direct their own activities in accord with their understanding and evaluation of the effects of that activity. In chapter 2 I will define the concept “selfmanagement” to express this peculiarly human species need in a way that subsumes the better known concept “individual freedom” as a special case.

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