Economics, Natural Science and Cultural Institution

7/23/2019 Economics, Natural Science and Cultural Institution

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Thesis in Philosophy

Department of Culture and Society

Aarhus University

Economics- Natural Science and Cultural Institution

Characters (ecl! front pa"e# content# a$stract and references%& ')*+ , '# pa"es

Content

Abstract!!!.


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1. Introduction!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!/

'!' Adam Smith invents economics0!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!/

'!) 1acts# values and science+

2. Economics as a natural science!!!''

)!' The neoclassical frame2or3!''

)!) The transformation of value theory!!'.

)!)!' Economic science as the attempt to eliminate value as theoretical entity!'.

)!)!) Utility as a measure of value!'4

)!)!. 5on"6s case study of economic methodolo"y!!)/

)!. The fundamental characteristic of neoclassical theory as natural science.*

)!/ Interpretin" the practice of economics!..

3. Marx and economic development!!!.

.!' Perspective!!!.

.!) The criti7ue of political economy/*

.!. Crises/+

4. What is a capitalist society?!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!+'

. !en"s capability approach!!!!+

+!' 8ey Concepts+

+!) Interpretation and si"nificance!+9

#. $onclusion!:'

%e&erences!:.

A$stract


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This Paper is an attempt to "ive a characteristic of economics as science! This is not to $e

considered as situatin" economics in an encyclopedia of sciences or 2ithin a theoretical

leico"raphy of the same! It is an attempt to analy;e the discipline as a particular attempt to "ain

scientific status! The conclusions form a strin" of criti7ues of certain central conceptions the

discipline holds! The central one is the notion that the move from political economy to neoclassical

economy represents a definitive scientific advance! I consider the status of science to $e defined $y

the a$ility to live up to certain ideals! The move from political economy to neoclassical economics

is reconceptuali;ed as representin" a deficiency 2ith re"ard to the ideal of realism! I 2ill also ar"ue

that this strin" of criti7ues point to an underlyin" continuity in the practice of economics 2hich

arises as a conse7uence of its proper o$


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1.1 Adam !mith invents economics?

Adam Smith did not invent economics# $ut he is the o$e "enerally# indeed# neitherintends to promote the pu$lic interest# nor 3no2s ho2 much he is promotin" it! ?y

preferrin" the support of domestic to that of forei"n industry# he intends only his o2nsecurity= and $y directin" that industry in such a manner as its produce may $e of the"reatest value# he intends only his o2n "ain# and he is in this# as in many other cases#led $y an invisi$le hand to promote an end 2hich 2as no part of his intention! Nor is it

always the 2orse for the society that it 2as no part of it!(Smith! '9*/# I@!)!9# my cursive%

There are several elements here 2hich delineate Smith as a classical political economist! >o2ever#

the central issue 2hich economists identify as pertainin" to economics as a science is the

connection $et2een self-interested $ehavior and some form of success of the society as a 2hole!

There are of course t2o statements in the 7uote! ne is that people often $ehave accordin" to self-

interest! The other is that people# 2ho $ehave accordin" to self-interest# can achieve some form ofcollective success! 5hen economics 2as later touted as natural science# it focused on the latter! As I

2ill sho2# it declared that 7uestionin" the first statement# ie! as3in" ho2 people do $ehave# is

irrelevant for economic theory! The concept of the market comes to si"nify the fact that societal

structures necessarily $uild on a principle of optimal allocation# 2hich its mem$ers Bfind6# even

thou"h they only have their self-interest to "uide them! Some of the central 7uestions this paper

poses are the follo2in" t2o! 5hat does the limitin" $ut alle"edly inessential assumption of self-

interest motives mean for the validity of economic la2s0 In etension# are societal structuresnecessarily to $e analy;ed as if they are formed in this 2ay0 ean2hile# it is clear that Smith did

not have this sort of science of the economy in mind! Apart from his in7uiry into national 2ealth#

Smith also 2rote a theoretical in7uiry into moral sentiments# and he never envisioned the 2ealth of

nations as arisin" independently of a virtuous society 2hich $uilds on these sentiments in a prudent

manner! Smith6s idea of a commercial societyis therefore not somethin" 2hich can $e reduced to

the a$ove concept of the mar3et! Smith6s concept of self-interest# for eample# 2as in this 2ay


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su$ordinate to prudence as a virtue# and 2as not the same as selfishness!' It is important to place

Smiths in7uiry into 2ealth in the contet that he 2rote a"ainst a mercantilist society# 2hich he sa2

as favorin" certain em$edded interests and supportin" unfair practices! >e thou"ht of the

commercial society as providin" the possi$ility for a virtuous society# since people 2ould $e a$le to

attain 2hat he called self-command in etension of their receivin" moral autonomy# $ut this 2as not

as such a "iven# and certainly not 2ithout a prudent "uidance and le"islation! >ence I have

reproduced the 2ord al2ays in the cursive a$ove! The theory of moral sentiments is as such a

theory of the co"nitive capacities for achievin" moral self-development and a virtuous life! Smith

2as $oth optimistic and s3eptical as to 2hether the commercial society 2ill $ecome truly virtuous!).

Smith did not thin3 of commercial society as a someho2 natural foundation of social and economic

life! >e did see it as an opportunity for virtuousness# yet this 2as more as an accidental side-effect!/

This 2as $ecause the "eneral human capacity# sympathy# on 2hich moral virtue had to $e founded#

2here li3ely# in commercial society# to develop some2hat useful $our"eois virtues!

1.2 'acts( values and science

1The theory starts in the follo2in" manner& >o2 selfish soever man may $e supposed# there are evidently

some principles in his nature# 2hich interest him in the fortunes of others# and render their happiness

necessary to him# thou"h he derives nothin" from it# ecept the pleasure of seein" it! f this 3ind is pity orcompassion# the emotion 2e feel for the misery of others# 2hen 2e either see it# or are made to conceive it in

a very lively manner! That 2e often derive sorro2 from the sorro2s of others# is a matter of fact too o$vious

to re7uire any instances to prove it= for this sentiment# li3e all the other ori"inal passions of human nature# is

$y no means confined to the virtuous or the humane# thou"h they perhaps may feel it 2ith the most e7uisite

sensi$ility! (Smith! '9*# I!I!'%

2FAn au"mentation of fortune is the means $y 2hich the "reater part of men propose and 2ish to $etter

their condition! It is the means the most vul"ar and the most o$viousF (Smith! '9*/# II!III!)4%

3To deserve# to ac7uire# and to en


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5hen does economics then $ecome natural science# and in 2hat sense0 This is 2hat I attempt to

sho2 in chapter )! ?ut there are several thin"s to consider in connection 2ith this! In the particular

case of economics# I 2ill ar"ue that there is as such already an economic practice in place at the

time 2hen it proclaims its status as natural science! It is therefore not so much the case# that a

science-theoretical insi"ht allo2s economists to perform economics as natural science! ather# a

purported science-theoretical insi"ht allo2s them claim that their discipline is scientific! 5hat is

this insi"ht supposedly0 The development in theory of science# 2hich economics in this 2ay

latched onto# is called lo"ical positivism! There is pro$a$ly no more common manoeuvre in

academic life than to declare some discipline an instance of lo"ical positivism# and there$y declare

it unscientific or misconceived in some sense! This is not my aim! Jo"ical positivism is not as such

surpassed $y some ne2 theory of all science# and all the discussions in that movement are still

relevant! Neither is it such a simple tas3# as is sometimes the impression# to "ive a coherent account

of the lo"ical positivism# at least to my mind! 5hat I su""est is more modestly that the fact that

economists 2here so enthusiastic in their appropriation of it# as a form of definitive paradi"m of

science# 2hich it never came to $e# reveals some of the issues economics has al2ays "rappled 2ith#

in terms of $ecomin" science! I propose that 2e can ma3e an o$servation of a very "eneral

character# that science as an enterprise commits itself to t2o ideals! 1irst that it must al2ays prove

itself as $elon"in" to science as a cate"ory and delineate itself from non-science! Therefore there isa certain drive in the collected scientific community to provide a conception of science as unified!

Second# science must sho2 that it is a$le to ta3e proper account of its o$


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o$servation! >o2ever# this does not mean that 2e no2 have a theory of 2hatfactsare and ho2 they

are made# 2hich as such renders the positivist pro


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As I 2ill sho2 in chapter )# the definin" characteristic of economics as natural science is the

attempt to deny the need for interpersonal comparisons of utility# 2hile maintainin" that utility can

form the $asic concept in economic eplanation! As such the definition of value o2ever# to appreciate the radical nature

of the science-theoretical revolution Popper set in motion# compare the 7uote $y Ayer in footnote +

2ith this 7uote $y Popper!

>o2ever# my vie2 of the matter# for 2hat it6s 2orth# is that there is no such thin" as alo"ical 2ay of havin" ne2 ideas# or a logical reconstruction of this process.y vie2

may $e epressed $y sayin" that every discovery contains Ban irrational element6# or aBcreative intuition6# in ?er"son6s sense! In a similar 2ay Einstein spea3s of the Bsearchfor those hi"hly universal la2s from 2hich a picture of the 2orld can $e o$tained

$y pure deduction! There is no lo"ical path6# Bleadin" to these la2s! They can only$e reached $y intuition# $ased upon somethin" li3e an intellectual love (BEinfMhlun"6%of the o$


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have a 3no2led"e of nature and a 3no2led"e of culture# ie! $et2een natural sciencesand cultural

sciences! This could $e conceived as the B"rand6 dichotomy# so to spea3# and it 2as to some etent

hostile to2ard the scientific status of cultural sciences! The science-theoretical literature 2hich

$e"an to demolish this dichotomy# follo2in" the descriptive failure of lo"ical positivism and

Popper# can $e rou"hly situated at t2o poles! n one hand# there is that 2hich focuses on a

descriptive study the science-culture (8uhn! '9:) = Shapin Shaffer! '949%! n the other hand# the

literature that focuses on the metaphysical entan"lement of natureLculture and factLvalue in

scientific practice (Sten"ers! '99 = Jatour! '99.%! ean2hile# 2hat is then the si"nificance of the

factLvalue distinction# as opposed to dichotomy0 This is a really "ood 7uestion# 2hich I cannot as

such ans2er! Callin" somethin" normative does si"nify somethin"# some aspect of and in reality!

Putnam# for instance# "oes all the 2ay in inte"ratin" facts and values! >e ma3es his o2n definition

of scientific Bfactual6 practice# of 2hich I 2ill hi"hli"ht three elements (Putnam! )**)# p!'.%! 1irst#

3no2led"e of theory presupposes 3no2led"e of particular facts! This is in opposition to the lo"ical

positivist idea of an operational lan"ua"e (in economics# as I 2ill sho2# the idea of the self-evident

nature of the $asic theoretical frame2or3%! It resonates 2ell 2ith $oth poles in the science-

theoretical community! If there is one outstandin" element in the much of the literature after 8uhn#

apart from the most Bsocially constructivist6# it is the notion that theory develops in a contet 2here

reality also intervenes to transform the theoretical apparatus in a very real sense!4

Second#3no2led"e of facts presupposes 3no2led"e of values! This is under t2o headin"s& '% the activity of


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"rasp! As I said# I do not propose to ans2er these 7uestions# $ut I su""est 2e as3 2hy economics in

particular should $e so adamant in upholdin" a lo"ical positivist position0 f course an economist

may say should have$een# since the discipline no lon"er touts this conception of science! ?ut I

su""est that 2ould to a "reat etent $e rhetorical! >ere is 2hat I 2ill ar"ue for! The practice of

economics is $est understood as an experimental politics of markets# as ri"htly it must $e! This

eperimental politics is as such the perfect eample# if there is any# that facts and values are

entan"led in scientific practice# at least in this cultural science# since that is the cate"ory I 2ould

place it in if forced to choose $et2een Bthe natural6 and Bthe cultural6! It may $e that economics thus

"uards some fundamental political truth a$out the "ood society! ?ut# assumin" my vie2 is correct# it

is certainly not al2ays open a$out doin" so or ho2 it does this!9Chapter ) is an account of the self-

conception economics as natural science# and an investi"ation of 2hether it holds! Chapters . and /

investi"ate the notion of economics as a politics of mar3ets as 2ell as reveal alternative

perspectives on the economic process! 5hat are the central elements0 Is it $iased# and to some

etent the em$odiment of a certain political pro


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)! Economics as a natural science

2.1 )he neoclassical &rame*or+

In this chapter I 2ill ans2er the follo2in" 7uestions&

'% Is there a neoclassical paradi"m in economics0

)% 5hat are the central features of this paradi"m0

.% Is the paradi"m successful in the sense that it fulfills the "oals it sets for itself0

The central 7uestions are 2hat a scientific economic theory is# and it is supposed to function0

Around the $e"innin" of the century and until the post-2ar period it is possi$le to find many

eamples of a $elief that economics is the epression of a unified scientific practice as it is applied

to the economy! There 2ere also several appraisals of economics as usherin" in scientific pro"ress

in the cultural sciences! ppenheim and Putnam formulated a B2or3in" hypothesis6 of this idea of

science as a unified practice (ppenheim Putnam! '9:%! In the end# a fully unified science

2ould entail unity of voca$ulary and unity of eplanatory principles (I$id# p!/%! There are a lot of

7uestion involved in eplicatin" the precise conditions and I 2ill not discuss this articles particular


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the article cites economics as a success# it is accordin" to the criteria it calls micro-reduction (I$id#

p!:%! It is stated that a micro-reduction is a step in the direction of unity of lan"ua"e! If a theoretical

apparatus O' is micro-reduced to O)# O) eplains everythin" 2hich O' does# even if the voca$ularies

cannot $e made strictly commensura$le! The procedure 2ill therefore also involve a reduction of

the total voca$ulary of the increasin"ly unified field of sciences# i!e! the unitary science! This means

that economics is made to serve as an eample of a very stron" reductionist approach to 2hat the

article itself calls the level of social "roups# 2hich is a central domain of cultural sciences (I$id#

p!9%! Economics is seen as capa$le of providin" eplanations 2hich eplain everythin" cultural

sciences do# for at least some su$fields of the entire domain! No2 comes the part 2hich is of

immediate interest in connection 2ith the present chapter! The article states that classical economic

theory# includin" arist theory# is also to $e characteri;ed as a micro-reduction candidate# in that it

too eplains social phenomena in terms of individuals! ?ut it fails or is a lesser success $ecause it

ma3es un2arranted assumptions in the form of an economic man! Neoclassical theory does not

assume an economic man the article states! Instead it is a$le to derive economic la2s= if very weak

assumptions are satisfied (ppenheim Putnam! '9:# p!'# my cursive%! This distinction is up

for discussion in the present chapter! ne o$servation is that neoclassical theory 2as often

associated 2ith the notion that there is $ut one form of scientific practice and that it is successfully

applied in the field! Another o$servation is that neoclassical theory# ta3en as the paradi"maticeample of successful theory in the field of cultural sciences# is assumed to follo2 a hypothetico-

deductive model# 2hich is implicitly posited to further "uarantee the possi$le unity of scientific

practice! 1rom 2ithin Economics itself# the neoclassical theory 2as also often touted an

implementation of thescientific practice! Althou"h there 2ere often some caveats attached to such

statements# and the meanin" of these are not al2ays clear! The form I have encountered a"ain and

a"ain is the statement that 2e must 3eep in mind that economics# as science# only eplains

economic facts# as if this circular reference 2as self-eplanatory!

'*

This 2ill also $e treated in thepresent chapter! >o2ever# the "eneral frame2or3 2hich is under consideration can $e summed up

in the 2ords of Jionel o$$ins# the economist!

>ere# then# is the unity of su$


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from the demand side or the supply sideaffect these ratios! Economics is the science2hich studies human $ehavior as a relationship $et2een ends and scarce means 2hichhave alternative uses! (o$$ins! '9.)# p!':%

Thus the idea is that 2e start from a com$ination of the fact of scarcity and the fact that humans

choose amon" ends for the scarce means! The 3ernel is that 2e from these very simple assumptions

can say somethin" more or less definitive a$out the 2ay in 2hich echan"e is carried out! In this

2ay it is possi$le to $uild up a complete theory of echan"e! (o$$ins! '9/+# p!'.4%

2.2 )he trans&ormation o& value theory

2.2.1 Economic science as the attempt to eliminate value as theoretical entity

5hat is meant $y a theory of value0 In economic tet$oo3s one may encounter the attempt to

distin"uish $et2een economic theories on the $asis of 2hether they employ an o$


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classified as $elon"in" to neoclassical or mainstream economics!''Qet I a"ree 2ith iro2s3i 2hen

he says&

I 2ould venture to thin3 that that the maarvard have made

recorded courses in economics availa$le on the internet# and in these it is invaria$ly made clear in

the first lecture that the discipline rests on the scarcity frame2or3 2hich I 2ill descri$e in this

chapter! If iro2s3i is correct in the o$servation a$ove# there are three possi$ilities! The theory of

value disputes 2hich occurred around the mar"inalist revolution are inconse7uential in relation to

current economic theori;in"= the issues are resolved= the issues are unresolved and conse7uential#

yet not often confronted! I 2ill attempt to provide evidence supportin" the last option! Around the

middle of the t2entieth century# the vie2 that they are resolved 2as often put forth&

5hoever 2ishes to form some idea of the importance of the theory of mar"inal utilityhas only to loo3 at any presentation of the theory of the mar3et in one of the currenttet$oo3s on the su$


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en"er# Revons# and 5alras! There is no period in the history of economics moreimportant than the one in 2hich these thin3ers flourished! >o2ever# 2e reco"ni;emore clearly today than 2as yet possi$le a "eneration a"o that the 2or3 of theclassical economists 2as not useless and that the su$stance of 2hat they accomplished

could $e incorporated into the modern system! In the theory of value# the opposition$et2een su$


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definin" and descri$in" sta$le aspects of the economic process! In classical economics# the

phenomena thou"ht to define the economic process 2here called production# distri$ution and

consumption! I 2ill ar"ue that neoclassical economics is characteri;ed $y an attempt to analytically

su$sume the economic process under one headin" 2hich could $e termed a general process of

exchange! The vie2 von ises has on this development 2ould to my mind and admittedly in the

stron"est possi$le interpretation entail the follo2in"! There are phenomena , production#

distri$ution# consumption - in the economic process# 2hich are someho2 sufficiently 3no2n or

"iven so as to ma3e possi$le a demonstration of the eplanatory superiority in an analytical

su$sumption of these under la2s of this "eneral process of echan"e! Not that the nature of

phenomena must al2ays $e "iven in advance of theoretical eplication# $ut that this eplication

provides a reasona$le interpretation of the su$sumption as a scientific advance! The formulation of

precise criteria for such an interpretation is of course a main science-theoretical issue in a positivist

conception of science# eemplified $y Poppers notion of criteria of falsifia$ility! 1ar from simply

rulin" out the possi$ility that economic phenomena could be a candidate for a stron" realist

pro"ram# I aim for a credi$le interpretation of economics as havin" evolved differently and

accordin" to other standards! That is# I am to demonstrate that economists have $een inspired $y the

positivist conceptions of science in the middle of the t2entieth century# yet in practice they have

never fully adhered to any such pro"ram! 5hat von ises as3s of us is to consider a theory of valueas consistin" of a set of assumptions only! These assumptions 2ould $e applied to the "eneral

process of echan"e! This schema could support a positivist conception of performin" economic

science and "atherin" 3no2led"e of the economy! I ar"ue that there is an irreduci$le interpretive

aspect in the notion of a theory of value! In this vie2# 2hat von ises calls the apparent antinomy

of value is the "eneral pro$lem of esta$lishin" a positivist conception of performin" economic

science! The main interpretive role of the theory of value# 2hich has not $een eliminated# is in

neoclassical economics the role of defining2hat it is a price system does in the "eneral process ofechan"e! This role is the occasion for the caveats I mentioned a$ove! Consider these 7uotes $y

R!?!Say!

Echan"ea$le value# or price# is an inde of the reco"nised utility of a thin"# so lon"only as human dealin"s are eempt from every influence $ut that of the identicalutility& in li3e manner as a $arometer denotes the 2ei"ht of the atmosphere# only 2hilethe mercury is su$mitted to the eclusive action of atmospheric "ravity! (Say! '4++#I!I!9%


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It 2ould $e out of place here to eamine# 2hether or no the value man3ind attach to athin" $e al2ays proportionate to its actual utility! The accuracy of the estimate mustdepend upon the comparative judgment, intelligence, habits, and prejudices of those

who make it. True morality, and the clear perception of their real interests, lead

mankind to the just appreciation of benefits. Political economy takes this appreciationas it finds itas one of the data of its reasonings; leaving to the moralist and the

practical man, the several duties of enlightening and of guiding their fellowcreatures,

as well in this, as in other particulars of human conduct. This position 2ill hereafter$e further illustrated! 1or the present it is enou"h to 3no2# that# 2hatever $e the stateof society# current prices approimate to the real value of thin"s# in proportion to theli$erty of production and mutual dealin"! (Say! '4++# ?oo3 I# n/'! y cursive%

The 7uotes contain the follo2in" t2o statements! '% Echan"e value is an inde of reco"ni;ed

utility# if and only if echan"e is influenced $y identical utility only! )% Echan"e value epresses

real value in proportion to li$erty in echan"e! There is also a description of political economy#2hich states that the discipline treats the value that man3ind attaches to a thin" as data! 1or this to

ma3e any sense# 2e must assume that this value attached to thin"s is the same as echan"e value#

2hich is here ta3en to mean the price! 5hat then is the relation $et2een real value and echan"e

value as 2ell as actual utility and reco"ni;ed utility0 n one hand# the 7uotes can $e understood as

epressin" a $elief that economics investi"ates the necessary causal structurin" of the echan"e

process 2hich is due to an a priori principle# valid assumption or o$serva$le fact that utility is

preserved in echan"e! Qet# $ecause Say 7ualifies the identity $et2een a real value and echan"evalue# the 7uotes could epress a $elief that economics has insi"ht into some rational aspect of the

echan"e process 2hich indeed consists in a true morality#


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>o2ever# there is a "eneral tendency in economics to avoid 7uestions of the metaphysical

interpretation of the $asic postulates! In etension# a pro$lem of theory-choice appears! @on ises

and his contemporaries 2ould often say that economic facts are derived from deductions performed

on self-evident aioms!') In the post-2ar period an instrumentalist interpretation of economic

science too3 over# nota$ly championed $y ilton 1riedman&

@ie2ed as a $ody of su$stantive hypotheses# theory is to $e


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I have ar"ued a$ove that the theory of value in economics has often $een treated $y economists

solely as a pro$lem to $e reduced to a scientific measure! Therefore 2e must pose the 7uestion of

2hat is meant $y a theory of value a"ain and loo3 at the practical attempt to define value as a

measure and relate it to economic laws! iro2s3is am$itious "oal in!ore "eat than #ightis that

to sho2 that different disciplines# nota$ly physics and economics# have co-evolved a concept of

ener"y (iro2s3i! '949# p!'*%! This concept in turn lends support across the disciplinary

$oundaries! n the other hand# he also states that neoclassical economics simply appropriated the

mathematical formalisms created in physics around the concept of ener"y and applied it in their

o2n field! I do not 2ish to discuss 2hether or not iro2s3is theory of a sort of cross-disciplinary

support in terms of validation conflicts 2ith the appropriation thesis! uite simply# iro2s3i

provides ample evidence for the mathematical e7uivalence $et2een neoclassical utility theory and

specific concepts of ener"y in physics! 1urthermore# 2hat is of interest is not the neoclassical

motivation for this appropriation# 2hich can $e more or less reasoned# $ut 2hat it means for

economics if true! >o2ever# if economists have $een more preoccupied 2ith con


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phenomena production 2as seen as creation or source of value# distri$ution 2as preservation of

value and consumption 2as destruction of value (I$id# p!'/.%! No2 it is really more difficult for

iro2s3i to eplicate a metaphorical import from physics in the case of classical theory than in the

case of neoclassical theory $ecause neoclassical theory coincides 2ith the full development of

mathematical economics# 2hereas classical theory 2as not al2ays e7ually concerned 2ith

representin" ideas in formali;ed terms! I su""est that 2e can focus on the neoclassical case $ecause

2e are interested in its specific claim for scientific status! 5e are interested in the specific notion

stated a$ove that the su$


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science! In this sense economists are toutin" an a$ility to identify causes of chan"es! So the

7uestion is ho2 to turn the $asic notion of e7uili$rium in consumer choice into an explanation in

terms of the identification of causes0 In economists terms this is the same as constructin" a "eneral

theory of e7uili$rium for the economic process! As is clearly stated in the last attempt at a "eneral

theory of economic e7uili$rium# it aims at&

('% The eplanation of the prices of commodities resultin" from the interaction of the

a"ents in a private o2nership economy throu"h mar3ets# and&

()% the eplanation of the role of prices in an optimal state of the economy!

(De$reu! '9+9# i%

So 2e must evaluate the success of neoclassical theory as a theory 2hich eplains the "eneral

process of echan"e as defined $y a price system! The pro$lem 2hich appears first is that prices

play a role in the optimal state of the economy! Qet in the "eneric e7uili$rium forces are

uneplained! Economists considered as natural scientists are interested in identifyin" the causes

2hich eplain the movement from one situation# or state of e7uili$rium# to another! Therefore there

is a need for principles of invariance! The pro$lematic appears in economic theory in the form of

either "uaranteein"# or denyin" the concept of# the measura$ility of utility! That is# in 2hich sense

can 2e o$serve preferences as part of the economic process0 Consider ho2 1isher asserts that

economics eplain 2ith facts in the strai"htfor2ard sense of a positivist conception of a

paradi"matic natural science&

The la2s of economics are framed to eplain facts! The conception of utility has itsori"in in the facts of human preference or decision as o$served in producin"#consumin" and echan"in" "oods and services! To fi the idea of utility the economistshould "o no farther than is servicea$le in eplainin" economic facts!(1isher! )**# p!''%

Utility# 2hatever it is# is a concept fied $y facts of the economic process# 2hich are ascertaina$le

$y o$servation of human preference or decision! This conflation of preference and decision may

sound stran"e in the sense that 2e 2ould normally say that decisions are only o$serva$le in the

sense that 2e understand them as meanin"ful in relation to a contet and as epressin" certain aims!

So ho2 can the postulation of utility maimi;ation simplify our eplanations andma3e sure that it


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2

2ill consist in a correct identification of the most relevant causes! 1isher chooses the follo2in"

approach&

The plane of contact $et2een psycholo"y and economics is desire! It is difficult to see2hy so many theorists endeavor to o$literate the distinction $et2een pleasure anddesire! No one ever denied that economic acts have the invaria$le antecedent# desire!5hether the necessary antecedent of desire is pleasure or 2hether independently of

pleasure it may sometimes $e duty or fear concerns a phenomenon in the secondremove from the economic act of choice and is completely 2ithin the realm of

psycholo"y! 5e content ourselves therefore 2ith the follo2in" simple psycho-economic postulate&$ach individual acts as he desires! (1isher! )**! p!''%

To my mind this is 7uite unreasona$le as a psycholo"ical postulate that desire is an invaria$le

antecedent in any transaction 2hich has economic conse7uences! There are indeed also eamples

2here a reco"nition that the postulate is unreasona$le in a psycholo"ical sense prompts the theorists

to 7ualify the use of utility as a measure!'/5e can and should of course try to a$stract from the

apparent normative content in the use of the term! The important thin" to note is that it displays a

loomin" circularity# o2 then can 2e 3no2 2hether utility maimi;ation is somethin" 2e o$serve or simply a

reification of a concept in the lo"ically fallacious sense0 In technical terms this circularity is sou"ht

avoided $y statin" an invariant principle in that preferences are eo"enous to the economic process

(Sti"ler ?ec3er! '9%!'+In section )!'!. $elo2 I 2ill descri$e ho2 this circularity is never truly

avoided and 2hich form the notion of eplanation assumes in e7uili$rium economics! iro2s3i

$elieves that economists have trou$le in follo2in" in the footsteps of physicists for t2o reasons!

1irst 2e can of course say that to the etent that the ener"y concept has $een of use in physics# it

could simply $e due to the application of eperiment! In eperiment all the conditions of the la2s

14It cannot $e too much insisted that to measure directly# or per se# either desires or the satisfaction 2hich

results from their fulfillment is impossi$le# if not inconceiva$le! If 2e could# 2e should have t2o accounts to

ma3e up# one of desires# and the other of reali;ed satisfactions GH The t2o direct measurements then mi"htdiffer! ?ut as neither of them is possi$le# 2e fall $ac3 on the measurement 2hich economics supplies# of the

motive or movin" force to action& and 2e ma3e it serve# 2ith all its faults# $oth for the desires 2hich prompt

activities and for the satisfactions that result from them! (arshall! )**9# s!4%!

155e can also note a curious feature of this tactic! In spite of all the tal3 of su$


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3

postulated on invariant principles are "iven some concrete interpretation# $ut in economics there is

perhaps no clear 2ay of specifyin" the circumstances under 2hich la2s hold! Eperiments put the

ener"y concept to 2or3 in a monitored environment! ?ut the more principled reason trou$le arises

in economics as natural science is that economists are not really a2are to 2hat etent their mode of

eplanation relies on invariant principles! Invariant principles are therefore posited in an ad hoc

fashion and


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4

economic profit and competition are completely reversed in neoclassical theory in the sense that

economic profit is an anomaly arisin" in the a$sence of perfect competition! Instead there is a

concept of normal profit as epressin" the opportunity cost of the entrepreneur! Perfect competition

is not the same as Ba lot of competition6 in the classical sense# rather the opposite! Perfect

competition assumes the a$ility of utility maimi;ers to freely transverse the "aps in society# such

as $et2een 2a"e earner and capitalist! r 2e could say that the notion of perfect competition treats

all income as a type of "eneric 2a"e! At the moment 2e are not considerin" the plausi$ility of one

or the other notion of competition! If iro2s3i is correct# different physical metaphors and their

first point of application can result in different frame2or3s 2hich can seem intuitively plausi$le in

different applications! The neoclassical frame2or3 seems the least plausi$le in treatin" the

phenomenon production# 2here the classical frame2or3 is perhaps more plausi$le! There are t2o

less relative and more meanin"ful o$servations to ma3e! 1irst of all there are important "eneral

characteristics 2hich chan"e! 1or eample# neoclassical theory is at the outset much more

a""ressively reductionist $ecause it eplicitly states a foundation in individual $ehavior! ?ut the

main o$servation is methodolo"ical! Economics more than anythin" attempts to adopt a method of

producin" eplanations! Qet the discipline is am$ivalent to2ard eplicatin" the conditions of the

method! Consider production a"ain! 5hat 2ould constitute a neoclassical la2 of the 2ay utility

translates into commodities0':

A"ain 2e can say 2ith von ises that a modified concept of cost insu$o2ever# iro2s3i

ar"ues that he can identify at least ei"ht different historical attempts# after the mar"inalist

revolution# at incorporatin" a notion of production into neoclassical theory (I$id# p!)4+%! These

attempts are different versions of invariant principles 2hich each 2ould maintain the lo"ical

consistency of the inte"rated model# not considerin" its eplanatory po2er! Qet not all principles

could $e inte"rated into one and the same overall model 2ithout lo"ical inconsistency!

16The utility inde associated 2ith any commodity $undle is a metric putatively independent of the

commodity metric= the utility is virtual in the sense that it is purportedly identical e ante and e post= and

the field is conserved in the sense that the ma"nitude of utility is path-independent! The translation ofcommodities into their utility potential is a one-2ay street# implyin" that the issue of the reverse translation

of utility into commodities need never arise in the course of theoretical eplanation! In $rief# the utility field

is portrayed as analytically prior to the economic process! The metaphorical failure of tet$oo3 theories of

production is that there is no compara$le 2arrant 2hen it comes to the portrayal of a technolo"y field!

(iro2s3i! '949# p!.'.%


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2.2.3 Won-"s case study o& economic methodolo-y

In this section I 2ill relate an investi"ation# carried out $y Stanley 5on"# of the methodolo"y

involved in circumventin" the measura$ility of utility! Jet us say 2e 2ant to arrive at a la2 ofdemand! That is# ma3in" demand eplica$le as a function of a determinate aspect of the "eneral

process of echan"e! The "eneral model# 2hich follo2s from the adoption of the metaphor from

physics# is that consumers maimi;e somethin" 2hich is su$ic3s and Allen!


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The pro"ram initially sets a "oal for itself# 2hich is to arrive at an eplanation of consumer

$ehavior# includin" a la2 of demand! >o2ever# it also limits itself in that its concepts must $e

o$servational! >ic3s and Allen state that Pareto Bdiscovered6 that o$serva$le conduct ma3es it

possi$le to derive a theoretical construct consistin" in a scale of preferences# $ut not a particular

7uantifia$le utility function! Economists say that there is a distinction $et2een conceptions of

cardinal (7uantifia$le% and ordinal (ran3a$le% utility! So# since cardinal utility is not o$serva$le#

>ic3s and Allen $elieve that the a$ove form of derivation is ille"itimate and must $e replaced $y a

derivation $ased on an ordinal concept of utility (I$id# p!'9%! >o2 eactly it ma3es sense to say that

a preference structure# ordinal or cardinal# is o$serva$le is to my mind


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The $lue line represents the $ud"et constraint# "iven $y prices# and the red lines represent the

$undles of and y 2hich the consumer is indifferent to2ard! The point 2here the $ud"et line is

tan"ent to an indifference curve is conceived as the $undle the consumer $uys! r rather# any

$undle $ou"ht is conceived to epress a uni7ue e7uili$rium! The $end in the red line# and hence the

uni7ueness of e7uili$rium# follo2s from the assumption of DS! 5ith re"ard to a la2 of demand#

2e say that t2o effects are deduci$le from this $asis! The su$stitution effect is that if the price of

falls# more of 2ill $e demanded due to the diminishin" mar"inal rate of su$stitution! The income

effect is that 2ith a chan"e in the price of # demand for chan"es# $ecause the real income of the

consumer chan"es! >o2ever# since 2e cannot 3no2 the preference scale in a 7uantifia$le sense# 2e

cannot 3no2 2hether the income effect is a rise or a fall in demand! The empirically rare cases

2here the demand for a "ood increases 2hen price increases is called a Kiffen "ood! ne could

discuss ho2 rare these cases are! Speculation is a possi$le instance and so is @e$len6s notion of

conspicuous consumption! ?ut the point of "ivin" the separate name Kiffen "ood is precisely that

this derivation of a la2 of demand states the possi$ility of such cases# i!e!the non-universal

application of the la2! An opposite income effect could $e stron"er than the su$stitution effect!

Thus 2e arrive at a reoccurrin" phenomenon in economic theori;in"! In replacin" assumptions

2hich seem to har$or traces of human psycholo"y , that is# >ic3s and Allen o$ic3s does not stateany2here that the theoretical construct of an ordinal scale of preferences can $e deduced from

o$servation of consumer $ehavior! Instead he states that only an ordinal concept of utility is

necessary to eplain consumer $ehavior! So the constraints on the research pro"ram that concepts

must $e o$servational and that utility is immeasura$le are dropped! 5on" con


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pro$lem is avoidin" circularity'! This am$i"uity in the research pro"ram prompts a reconsideration

of the sense in 2hich postulatin" an e7uili$rium provides eplanation# if not $y direct

correspondence to reality0 Consider 1i"!'! In a cardinal utility conception# the conveity of the

indifference curve 2ould $e derived from the principle of diminishin" mar"inal utility! This

principle corresponds to an Bo$vious6 psycholo"ical truth! The principle (in economics often

referred to as a la2% DS plays the correspondin" role in the ordinal utility conception! Any set of

coordinates in the fi"ure represents a com$ination or $undle of "oods! The $ud"et constraint

o$viously rules out the purchase of any $undle a$ove the strai"ht line! 5ithout the DS the

indifference curve could loo3 li3e it does in 1i"ure )&

1i"ure )

Thus# presumin" a truth content in DS# it is a lo"ically consistent eplanation that the consumer

$ou"ht Oand not O'$ecause the consumer maimi;es utility! 5ithout the DS# the consumer

could $uy O# O'or On2ith the strate"y of maimi;in" utility! No2 the 7uestion is 2hat the DS

is0 Is it a psycholo"ical postulate0 In the ori"inal formulation of the research pro"ram it 2as

17If o$servations of mar3et $ehaviour are used to construct a scale of preferences# it turns ordinal utility

theory into a circular eplanation of consumer $ehaviour& consumer mar3et $ehaviour is eplained in terms

of the individual6s scale of preferences# or ordinal utility function# 2hich# in turn# is eplained $y his mar3et

$ehavior! (5on"! )**:# p!)+%


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important that it should $e o$servational! The only thin" 2e can say a$out the principle 2ithin the

frame2or3 in %alue and &apitalis that its truth content is assumed in order to preserve the lo"ical

consistency of usin" utility maimi;ation as an eplanation! '4The Btruth6 of the la2 is Bic3s states that e7uili$rium points# i!e! points 2here

DS holds# eist $ecause people do decide on purchases! This is of course circular reasonin"&

The lin3 $et2een the eistence of e7uili$rium and the fact that people do $uy is theimplicit assumption that people al2ays $uy the $undle that maimi;es theirsatisfaction# "iven the material circumstances of price and income! Thus to assert theeistence of e7uili$rium points is e7uivalent to the assertion that the >ic3s-Allentheory of consumer $ehaviour is true! (5on"! )**:# p!)4%!

>ic3s is of course interested in the la2# or principle# DS in order to arrive at a theory 2hich

eplains $ehavior! Simply# to deduce and use la2s eplainin" chan"es! The la2 of demand is

understood as providin" an eplanation of 2hy a consumer $uys a specific $undle instead of all

other $undles! The methodolo"y no2 $ecomes one of postulatin" principles 2hich rule out the

eistence of multiple e7uili$ria! r stated differently# every e7uili$rium must $e sta$le! >ic3s

simply states that a consumer could not ta3e up a position 2hich 2ould $e an unsta$le e7uili$rium

(I$id# p!)4%! 5hy not0 5ell# there is really no reason 2hy not! The la2 of demand is in this sense

Bderived6 from a principle# 2here the truth of the principle is ta3en to consist in the fact that a

consumer canact in accordance 2ith the principle 2hile maimi;in" utility (I$id# p!)9%! In this 2ay

economists $e"an Bderivin"6 the central characteristics of ordinal utility theory from increasin"ly

simple aioms# culminatin" in the 2ea3 aiom of revealed preference 2hich is more or less the

simplest possi$le 2ay of aiomatically statin" that a person reveals his eo"enous preferences in

any choice of consumption!'9No2# I am not relatin" this procedure in order to declare it unscientific

out of hand! I su""est that the 7uestion of 2hat constitutes scientificity in any discipline should $e

approached 2ith due consideration of its o$o2ever# 2e can 7uestion 2hether it is

18 >ic3s see3s the


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productive or simply an academic eercise in hed"in" the la2 of demand0 5e can ma3e t2o

o$servations! 1irst# 2e can o$serve that the procedure does not live up to its eplicit aim! The use of

non-o$serva$les is not truly eliminated and the derivation is not strictly a deduction! Second# $y the

time Samuelson introduces the 2ea3 aiom# it is also 2ith an intention shared $y many of his

contemporaries! evealed preference should render economic theory testa$le to some etent! This

intention is of course in line 2ith the aim of producin" eplanations in the sense of statements

deduced from o$serva$les! >o2ever# as Sen o$serves& To chec3 2hether the 2ea3 aiom holds for

the entire field of all mar3et choices# 2e have to o$serve the persons choices under infinitely many

price-income confi"urations! (Sen! '9.# p!)/.%! The eplicit intention may $e testa$ility# $ut there

seems to an implicit intention of immuni;in" the theory a"ainst the need for tests! This leads Sen to

the reasona$le conclusion that& 1aith in the aioms of revealed preference arises# therefore# not

from empirical verification# $ut from the intuitive reasona$leness of these aioms interpreted

precisely in terms of preference! (Sen! '9.# p!)/.%! The first o$servation is the central one to 3eep

in mind! If the derivation 2as le"itimate# it could $e said# that the fact that the la2 of demand

conformed 2ith so many intuitively pleasin" if indemonstra$le premises spo3e for its validity!

2.3 )he &undamental characteristic o& neoclassical theory as natural science

I no2 2ant to "ive a summary of some characteristics of neoclassical economic theory 2hich I have

so far found to $e central! 1irst# it is appropriate to reco"ni;e some "eneral features of performin"

economic science 2hich have not $een the immediate focus of the present chapter! Jet us assume

that economic theory indeed mana"es to capture the core 2or3in"s of the economic process! Even

so# there seems to $e "reat effort involved in ali"nin" the 2orld and the theory! To my mind this

further indicates that there is somethin" to $e "ained $y considerin" economics as a cultural

science! There are several aspects 2hich could open ne2 2ays of comprehendin" the practice ofeconomics in such a consideration# nota$ly the incessant need for postulatin" of the value-neutrality

of economic theory! It is also appropriate to reco"ni;e that I have only $een directly en"a"in" the

practice of a small su$set of the community of people 2ho are performin" economics! f course 2e

all perform the economy so to spea3# even in the sense that stoc3s# contracts# money# mar3ets and so

on 2here in no 2ay created in a practice 2hich 2as la$eled Bscience6 in the same sense as nuclear

$om$s# steam en"ines and other thin"s 2hich $ecome central to human cultures! There is under any

circumstances a lon" 2ay from the hi"hly theoretical discipline of e7uili$rium economics to the


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practice of the chiefs of central $an3s# the I1 and so on# not to spea3 of consumers! Qet# the

distance is traversed in some sense as to ma3e for influences and form a culture# ie! the practice of

seein" the collected 2or3in"s of a society as the economy! And finally# 2e must ac3no2led"e that

there are economic schools 2hich are to some etent o2ever# 2e can still say that methodological individualismis an

essential feature of neoclassical theory! Any economic phenomenon must $e analy;ed solely asconstituted $y actions of individuals! A second essential feature is methodological instrumentalism

(I$id# p!4%! People6s actions are understood as maimi;in" satisfaction accordin" to preference!

There is one connection economists have $een tryin" to shed in this re"ard and that is to the

apparent psycholo"ical vesti"es in utilitarian calculus! In constructin" economic models# this 2ish

to eradicate the connection is manifested in the attempt to construct models 2hich do not display

eo"enous preferences!)*>o2ever# as I ar"ued $y relatin" 5on"6s analysis# all these attempts at

sheddin" features are constrained $y the main essential feature axiomatic imposition of e'uilibrium!Thus the article states 2ith immaculate precision 2hat I attempted to ar"ue in the precedin" section&

The point here is that# even after methodolo"ical individualism turned intomethodolo"ical instrumentalism# prediction at the macro (or social% level 2as seldomforthcomin"! Determinacy re7uired somethin" more& it re7uired that a"ents6instrumental $ehaviour is coordinated in a manner that a""re"ate $ehaviour $ecomessufficiently re"ular to "ive rise to solid predictions! Thus# neoclassical theoretical

201or eample the attempt to construct an endo"enous utility function on the $asis of a concept of personal

accumulation of human capital! (Davis! )**.# p!++%


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eercises $e"in $y postulatin" the a"ents6 utility functions# specifyin" theirconstraints# and statin" their Binformation6 or B$elief6! Then# and here is the cru# they

pose the standard 7uestion& 5hat $ehaviour should 2e epect in e'uilibrium0 The7uestion of 2hether an e7uili$rium is li3ely# let alone pro$a$le# or ho2 it mi"ht

materiali;e# is treated as an optional etra= one that is never central to the neoclassicalpro


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3

$ecause there 2ould $e no 2ay of arrivin" at anythin" other than transient common"round! (iro2s3i! '99*# p!*+%

There is not much help here if 2e 2ant to eplain chan"es in the economic process $y the criteria

put forth $y economists! >o2ever# I $elieve iro2s3i does point to the fundamental feature 2hich

hinders economics in achievin" the desired eplanation! Determinacy at the macro-level re7uires

that a"ent6s instrumental $ehavior is coordinated as stated in the 7uote a$ove! In this re"ard I ar"ue

that an essential feature of neoclassical economics is that ecludes any reflections upon the concrete

nature# or 2e could say cultural conditions# of this coordination! I tried to illustrate this $y

contemplatin" the notion of competition! Scarcity is of course one of the conditions for human

culture! Individual 2ants are of course active in shapin" the economic process! ?ut 2here indeed

does the $uc3 stop0 The 7uote su""ests that 2e see valuations as cultural artifacts and value in the

sin"ular# such as the echan"e value of commodities# as institutions! In this sense 2e could say that

value arises in a purpose-oriented or simply meanin"ful or"ani;ation of and $y a"ents! The a"ents

use value as a concept to represent somethin" to each other# that is# to si"nify and interpret! This is

the contet in 2hich 2hat 2e call the cultural sciences# such as sociolo"y# are influenced $y

economics as a reductive method! There arises a de$ate concernin" 2hether or not the function of

institutions can $e understood $y reduction to a $asic unit of individual action! 1rom thisperspective# the rationalism in economics is tantamount to an essentialist conception of the

individual! So far 2e can o$serve that there are other sciences apart from economics 2hich deal

2ith some of the same phenomena# and that these sciences sometimes claim to $e a$le to

comprehend these in a different fashion! The 7uestion is 2hether or not the cultural sciences offer

insi"hts 2hich could disprove# amend or in any 2ay en"a"e economics! This is 2here opinions

differ on the relation $et2een ar and economics! 5e pose the 7uestion of 2hat the value of a

commodity is0 In one possi$le readin" ar is reduced to representin" economics in the moststandard sense and he infers the value of the commodity from an invariant principle in the form of

la$or time! In another possi$le readin"# ar6 dialectic approach to the phenomenon of commodity

production itself is essentially different from the economists approach to the economic process and

offers a perspective on the practice of economics!

2.4 Interpretin- the practice o& economics


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4

I no2 retreat from these considerations of 2hat a science of the economic process could $e to a

consideration of 2hat economics does! I 2ill start $y postulatin" that any science necessarily

confronts itself 2ith some minimal demand for attainin" realism! 5e can initially state this as the

demand that any realistic theory eplains $y identifyin" the relevant causes in a domain! >o2ever

there is some contin"ency in this statement 2hich 2ould need clarification# hence the eistence of

attempts at constructin" "eneral criteria for evaluatin" theories! 1irst 2e can consider ho2

economics can $e characteri;ed in relation to the eplicit "oal neoclassicism 2as $orn 2ith! In this

case I a"ree 2ith 8aldor6s description of e7uili$rium economics as irrelevant!

E7uili$rium economics has $ecome a ma


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5

utility functions# demonstratin" he 2as 2ell a2are of the pro$lems involved! )) >o2ever# even

thou"h he thin3s that economic la2s are only natural la2s in a 7ualified sense# they are someho2

very useful and 2e may use them to etract 2ell-esta$lished propositions and ma3e enli"htened

policy choices!

The statesman 2ho said (&eteris paribus$e damnedF has a lar"e and enthusiastic

follo2in" amon" the critics of Economics No$ody in his senses 2ould hold that the

la2s of mechanics 2ere invalidated if an eperiment desi"ned to illustrate them 2ere

interrupted $y an earth7ua3e! Qet a su$stantial ma


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sometimes ma3e it a correct decision to politically implement tariffs! In particular# if the effects are

ausman! '99)# p!9/-9+%

I find the phrase particular problems interestin"! Qes# economics is indeed concerned 2ith

particular pro$lems! It is a practical discipline as >ic3s eventually admitted (>ic3s! '94.%! Qet

>ic3s admitted this in a rather stran"e 2ay! >is vie2 is that economics can simply $e applied to any

practical 7uestion! I as3 on 2hat conditions0 Is economics unified0 5ell# perhaps in a purely

23See Sti"lit;! )**:# chapter .


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methodolo"ical sense! Can it $e considered complete if it is simply a particular formal methodolo"y

applied 2ithout an interpretation of the o$


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8

2hereas 2e have seen the neoclassical frame2or3 "radually a$stractin" from concrete

interpretations of individual identity throu"h time# 2hile maintainin" the concept of methodolo"ical

individualism# ar see3s to "ive meanin" a notion of individual identity in the economic process!

As a 2ay of framin" the relation $et2een ar and economics as a productive discussion# 2e may

initially consider a concept 2hich ehi$its a point of incompati$ility! I choose the epression

eploitation! It is difficult to "ive meanin" to the eistence of such a phenomenon in neoclassical

terms! Production really has no definite meanin" in the neoclassical frame2or3 as ar"ued in chapter

)! Even so 2e can say that a neoclassical theory of production 2ould $e a theory of the e7uili$rium

costs of the inputs or factors of production# land# la$or and capital# 2hich do not initially have any

special characteristics! 5e can say that there is one "eneric mar3et# 2hich is the mar3et for land#

la$or and capital at once! Each factor of production 2ould per definition cost# ie! the 2a"e 2ould $e

e7ual to# its mar"inal contri$ution to a collected product (>ic3s! '9.)# p!4%! Neoclassical theory

attempts to reduce economic theory to a universally applica$le theory of choice! The notion that

la$orers and capitalists could ta3e up essentially different relations as individuals to the economic

process# live different economic lives# does not fit the frame2or3 2ell! ather# 2or3 and the

ac7uisition of capital assets must $e analy;ed as epressin" certain preferences! 5or3 is the

preference-derived decision $et2een income and leisure# and the mar3et for la$or allocates these!

Qet the realities of economic development demand some eplanation of the role of interest oncapital! As Schumpeter says&

1inally there is $y far the most difficult 7uestion# 2hich may $e descri$ed as thecentral pro$lem of interest on capital& ho2 does it happen that this stream of "oodsflo2s permanently# that interest is a net income 2hich one may consume withoutimpairing one)s economic position0 (Schumpeter! '94.# p!'+9# my cursive%

5hen economists do "ive an eplicit definition of capital accumulation# it is cast in terms of capital

o2ners displayin" some valua$le a$ility! Schumpeter is critical of the description of capital interest

as a 2a"e of capitalists (Scumpeter! '94.# p!':*%! Instead he proposes the concept of

entrepreneurial profit arisin" from innovation! The Entrepreneurial profit 2ould not arise in 2hat he

calls the circular flo2 of economic life# $y 2hich he eplicitly means a "eneral e7uili$rium (I$id#

p!'*%! Thus 2e are faced 2ith the tantali;in" prospect that a concept of economic profit could $e

"iven definite meanin" in a neoclassical frame2or3! I do not thin3 Schumpeter accomplishes this

thou"h# if this is indeed the aim! 1irst of all he distin"uishes sharply $et2een the functions of the

entrepreneur and the capitalist! The entrepreneur ma3es possi$le a temporary profit $ecause of


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9

innovative use of the production apparatus! Therefore it is a form of 2a"e! The capitalist merely

lends the money! That technical innovation is a source of profit is uncontroversial in $oth

neoclassical theory and ar! In neoclassical theory it is simply a temporary la" in the mar3et#


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ihm ver"e"enstndlicht oder materialisiert ist! 5ie nun die KrVWe seines 5ertsmessen0 Durch das uantum der in ihm enthaltenen F2ert$ildenden Su$stan;F# derAr$eit! Die uantitt der Ar$eit sel$st miWt sich an ihrer Xeitdauer# und die Ar$eits;eit

$esit;t 2ieder ihren aWsta$ an $estimmten Xeitteilen# 2ie Stunde# Ta" us2! (ar#

'9:4# p!+.# y Cursive%

Accordin" to ar# to assert that la$or as 7uantity is the measure of echan"e value in capitalist

production is not the same as assertin" that la$or as 7uantity is the measure of use value!)/Contrary

to the neoclassical reception of the concept# ar6s approach to eploitation is therefore not some

form of ethical


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values# or re7uire different 7uantities of la$our for their production# they must fetchdifferent prices in the la$our mar3et! To clamour for e7ual or even e7uita$leretri$ution on the $asis of the 2a"es system is the same as to clamour for freedom onthe $asis of the slavery system! 5hat you thin3


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layered $et2een acts of interpretation and si"nification# and that there is no o$


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there the Rourney 2ould have to $e retraced until I had finally arrived at thepopulation a"ain# $ut this time not as the chaotic conception of a 2hole# $ut as the richtotality of many determinations and relations! (ar! '99.# p!'**%

No2# this is 2here it all $ecomes some2hat pro$lematic! 5hat I su""est is that the criti7ue is

immediately relevant# since 2hat 2e have $een concerned 2ith is the lac3 of eplicit theoretical

content in the $asic economic cate"ories# 2hile they are at the same time assumed to $e directly

applica$le to reality! And the ar"ument so far has simply $een that economics does not escape the

conditions under 2hich political economy 2as carried out# $y a move to2ard true scientific status!

Qet# the interestin" part is of course ho2 this retracin" of the a$stractions to an understandin" of the

2hole of society as a totality of many determinations 2ould 2or30 In the end ar states that inorder to arrive at and understandin" of comple economic phenomena# such as the market and

economic crises# 2e do have to start from 2hat he calls "eneral a$stract determinants 2hich o$tain

in more or less all societies! ?ut immediately 2e have to "ive such notions , ar "ives the

eample that Smith mana"ed to Bthro2 out every limitin" specification6 of la$or as a 2ealth-

creatin" activity , cate"orical form in terms of the Binner structure6 of the particular society (ar!

'99.# p!'*/= p!'*4%! >o2 eactly 2e are to understand this line of in7uiry# 2hich 2ould correspond

to ar6 method# is 2hat he attempts to sho2 in the very compounded and intricate second section

of the introduction (I$id# pp!44%! >ere ar runs throu"h all the lar"er cate"ories in economics!

Consider the rather special epression Bima"ined concrete6! If 2e for eample loo3 at the relation

$et2een production and consumption# ar lumps he"elian dialectics to"ether 2ith my eample in

section )!)!'# Say! In $oth cases production and consumption are seen as immediately identical! ):

This is an ima"ined concrete relation ar 2ould say! So the "oal is to concreti;e thou"ht in a

someho2 more real 2ay! ar therefore attempts to delineate his approach $oth from political

economy and versions of dialectics! 5hether or not ar truly represents an alternative to >e"elian

dialectics is a matter of de$ate# 2hich I 2ill not "o into! ?ut it is clear that he thou"ht of his

approach as different!)Jet me s3etch ho2 I understand the "eneral vie2 of the economic process

ar arrives at! Production does $ecome the overarchin" cate"ory# understood as the livin" human

activity of creatin"! ?ut this is


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activity! Production is the overarchin" cate"ory# in the sense that the la$orin" activity also produces

and reproduces the structures of distri$ution! This is ho2 ar critici;es the classical political

economy! >ere the "eneral preconditions of production are cast as natural la2s# 2hich "ives the

impression that& In distri$ution# $y contrast# humanity has alle"edly permitted itself to $e

considera$ly more ar$itrary (I$id# p!4%! Consider a"ain the o$vious# trite cate"orical distinctions&

Production is determined $y "eneral natural la2s# distri$ution $y social accident# and the latter

may therefore promote production to a "reater or lesser etent= echan"e stands $et2een the t2o as

a formal social movement (I$id# p!49%! The correct perception# ar says# is to see that distri$ution

is an ori"inal moment in production# that is# to someho2 ta3e into consideration that the la$orin"

activity produces and reproduces the distri$utive structures!)4Echan"e is not a Bformal6 or naturally

"iven social movement# $ecause $efore distri$ution is distri$ution of products# it is distri$ution of

the means of production and $y etension distri$ution of the mem$ers of society in the productive

process (I$id# p!9:%! So to recapitulate# this criti7ue of the naturali;ation of certain historical modes

of production is 2hat I thin3 is applica$le to $oth political economy and modern economics! 5ith

re"ard to academic economic 2or3s# it is as ar says& Immediately stri3in" that everythin" in

them is posited dou$ly (I$id! p!9/%! So for eample# 2a"e-la$or is posited as 2a"es in the cate"ory

distri$ution and la$or in the cate"ory production! ?ut# it is correct to note that& If la$our 2ere not

specified as 2a"e la$our# then the manner in 2hich it shares in the products 2ould not appear as2a"es= as# for eample# under slavery (I$id# p!9+%! Therefore# to ans2er the 7uestion stated at the

$e"innin" of this section# value receives theoretical content and assumes an operational si"nificance

27The most "eneral o$servation is that ar thin3s that >e"el6s notion of dialectic posits an essential

identity in all Bmoments6 of the dialectic movement# 2hich is speculative! 1or eample# in treatin" the

phenomenolo"y of self-consciousness# ar interprets >e"el thus& The eternal character of this a$stract

thou"ht!!! nature as it is for this a$stract thou"ht! Nature is eternal to it# its loss of self= it "rasps nature

eternally# as a$stract thou"ht# $ut as alienated a$stract thou"ht! 1inally mind# 2hich is thou"ht returnin" to

its $irthplace and 2hich as anthropolo"ical#phenomenolo"ical# psycholo"ical# moral# artistic-reli"ious mind#is not valid for itself until it finally discovers and affirms itself as a$solute 3no2led"e and therefore as

a$solute# i!e!# a$stract mind# receives its conscious and appropriate eistence! 1or its real eistence is

a$straction GH 5hen# for eample# >e"el conceives 2ealth# the po2er of the state# etc!# as entities estran"edfrom the $ein" of man# he conceives them only in their thou"ht form!!! They are entities of thou"ht# and

therefore simply an estran"ement of pure , i!e!# a$stract , philosophical thou"ht! Therefore# the entire

movement ends 2ith a$solute 3no2led"e (ar! )**)# p!4-9%!

28To eamine production 2hile disre"ardin" this internal distri$ution 2ithin it is o$viously an empty

a$straction= 2hile conversely# the distri$ution of products follo2s $y itself from this distri$ution 2hich forms

an ori"inal moment of production! (ar! '99.# p!9:%


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throu"h an analysis of the historical forms it assumes! The relations of production are o$


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de$ate a$out the nature of ar6s analysis considered apart from $ein" a criti7ue of political

economy! Is it $ased in a certain anthropolo"ical analysis of productive 2or3 as self-reali;ation0

Does he conceive of history# in >e"elian fashion# as a "iant dialectical movement 2here man is

alienated in his productive 2or3# and then it is precisely this alienation 2hich allo2s the

emancipation of the individual# throu"h a socially mediated re-appropriation of his la$or forces0 )9

As I have already stated# I do not aim at presentin" an interpretation of the inte"rated ar so to

spea3! I ar"ue his criti7ue of political economy points at the sore spots in the self-conception of

economics! There is# unfortunately# a 2idespread reception of ar 2hich amounts to the vie2 that

the relevance of all his 2or3 stands or falls alon" 2ith the credi$ility of this sort of master-narrative

of history and sociality!.*This vie2 is assumed 2ith pronounced crudity in economics! >ere the

story more or less "oes that since the 2estern capitalist countries are not populated $y scores of

destitute# hun"ry# homeless 2or3ers# toilin" a2ay in a dar3 mine# ar6s criti7ue of economics can

$e of no relevance! I $elieve this is simply a "ross misrepresentation of the vie2s ar had on

economic development!

3.3 $rises

In order to sho2 that ar6s analysis of economic development is relevant for understandin" themore concrete phenomena in a capitalist economy# I proceed to consider ho2 it applies to current

affairs! A recurrin" phenomenon in the economy is ta3in" place and has $een su$onneth 2ould call his economic analysis of

history (>onneth! )**:# pp!'4%!

30See for instance (1oucault! '9*# pp!):*%!


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character of the initial misery! Some people have miscalculated some ris3s 2e are told# and this is

2hat ultimately caused the later development into economic and de$t crises! The notion that

miscalculation can lead to pro$lems is of course not stran"e as such# yet it is still the connection

$et2een virtual and real 2hich stifles the mind! The received vie2 does not tell us that 2e


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I am ma3in" here is $et2een different perspectives! All the main conceptions of crises 2hich appear

in economics have the implicit "oal of identifyin" in more or less detail the precise moments in time

2here some action 2ould have preserved the function of the economy! ther conceptions of

economic crisis assume the perspective of understandin" 2hy crisis is an inevita$le and central part

of a capitalist economy! In ar6s theory the economic crisis is caused $y the ina$ility of capital to

reproduce itself as capital via the mar3et! That is# the capital-la$our relation in production itself is

2hat is in a state of systemic crisis! I 2ish to sho2 a 2ay in 2hich the real economic development

can $e interpreted more in the line of a repetition of an inherent contradiction of capital

accumulation! The accuracy and even meanin" of certain economic measures# especially inflation

and 2hat it really is# is a matter of much dispute! So the factual points 2ill $e some of the most

uncontroversial! The $i""est pro$lem in identifyin" central aspects of an economic crisis is the fact

that the system of production of course spans many individual economies and the crisis is

international 2hile the pu$lic discourse on the health of the economy is centered on domestic

accountin"! Therefore the factual points 2ill also $e those 2hich manifest in a 2ide array of

domestic economies 2hich are nevertheless lar"e in a "lo$al perspective# althou"h the focus 2ill $e

on the US economy! y eposition of development is identical to o$ert eich6s in terms of the

factual content (eich! )**# chapter .%! I propose 2e can identify t2o ma


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the crisis 2as a crisis of employment! The other source of data providin" a perspective on the events

is the data on income ine7uality collected $y Pi3etty and Sae;! They started presentin" this data in

an article in )**. (Pi3etty Sae;! )**.%! They have continued to $uild on these data (At3inson#

Pi3etty Sae;! )*''%! 5hat this data clearly sho2s is that income stratification in the US economy

2as "ettin" more and more pronounced immediately precedin" the t2o maence capital accumulation stops and the means of

production are no lon"er utili;ed! f course one could as3 2hether this interpretation could not $eapplied to any sort of economic crisis0 5ell# it can indeed $e applied to most crises specifically in a

capitalist system! The main point is that it does not epress some technical incident# $ut an

inherently contradictory form of social and economic development# 2hich is discerni$le already

from the *6s in the form of a clear trend! 1rom '9/-'9. real family income "ro2th 2as hi"h in

all income 7uintiles in the US population# $ut hi"hest in the $ottom fifth! 1rom '9/-)**/ the

"ro2th 2as comparatively lo2er in all 7uintiles $ut almost non-eistent in the $ottom fifth (eich!

)**# p!'*:%! 8ennedy coined the famous epression that Ba risin" tide lifts all $oats6# and as suchthe 2hole period from the second 2orld 2ar vindicates this epression in terms of real income!

>o2ever# it seems that real income as a 2hole "ro2s the most 2hen the income of the 2or3in"

class "ro2s! ecently# the I1 has $e"un to eamine the statistical lin3 $et2een income e7uality

and "ro2th# and have found a positive correlation (?er" stry! )*''% = (?er"# stry

Xettelmeyer! )**4%! The technical incident thesis of course re"ards amon" other thin"s the so-called

331or a 2al3-throu"h of the different statistics in the productivity-compensation "ap# see (1lec3# Klaser

Spra"ue! )*''%


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toic loans to NINRA6s (people 2ith no income#


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economic theory $ecomes pu$lic economic doctrine! The idea is that free mar3et policies promote

social mo$ility $y not restrictin" competition# 2hereas the opposite relation holds in reality! 1rom

ar6s perspective# all these ideas# such as the free mar3et as a catalyst for social mo$ility# are


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ne issue 2hich has implicitly emer"ed in the precedin" sections is of course the notion of

ideolo"y! This notion can $e understood $oth in a simple sense# as a purposively s3e2ed conceptual

representation# and in another sense as the perhaps purposive# and perhaps unconscious#

accommodation of reality to ideas! That is# there may $e a real ideolo"ical aspect to all thou"ht!

ar of course represents a central fi"ure in the history of this concept# and his notion of ideolo"y

has "iven rise to different interpretations and etrapolations! I propose that it is possi$le and fruitful

to avert a philosophical discussion of the nature of ideolo"y# and simply as3 the 7uestion# does the

difference $et2een 2hat economics says it is about# ho2 it "rasps its o$


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2ith a political pro


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the economy emer"e as a self-re"ulatin" system of socia$ility! ather# state practice construes this

mana"ea$le su$


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services! As an anthropolo"ist# Krae$er of course a$out the study of society in a different manner#

and therefore his point of departure $ecomes the fact that people have al2ays descri$ed the

economic relations they en"a"e in in moral terms! In this moral contet# he identifies three "eneral

2ays in 2hich that 2hich economic livin" is carried on! These are not each applica$le to a

particular culture! Instead they are contet-related modes of interaction! The first he calls $aseline

communism# since it is the predominant mode of interaction in 2hat 2e 2ould call a small

community# and $ecause it is as such the foundation of all human socia$ility! 5e could say it is ho2

2e learn to $e communal! Krae$er identifies this mode 2ith the 3no2n slo"an from each

accordin" to their a$ilities# to each accordin" to their needs (I$id# p!9/%! At the 2or3place# 2e

simply help each other to 2hatever is re7uired! 1ello2 smo3ers 2ill B$um6 ci"arettes as a matter of

principle# 2hereas as3in" for the e7uivalent sum of money may $e considered asocial! Communistic

relations have to $e maintained# or they may slip into hierarchy# another mode of interaction (I$id#

p!'*9%! This is $ecause people6s a$ilities and needs are often disproportionate! In the Inuit

community# 1reuchen o$served# a successful hunter is li3ely to ma3e fun of and understate his

achievements!.9 In the same manner# anthropolo"ists have o$served that "ift-"ivin" can turn

competitive! The anthropolo"ists themselves sometimes cannot tell 2hether they are supposed to

turn do2n a "ift# or if it is considered rude to "ive "ifts! The echan"e relation is the rarest mode of

interaction! People 2ill usually avoid echan"e $ecause it does indeed entail that they must try tosee3 maimal material advanta"e# or run the ris3 of $ein" eploited! 1or echan"e to $ecome a

commonplace occurrence# there has to $e a minimal amount of trust on $ehalf of all parties!

Echan"e has historically occurred $et2een potential enemies# such as rival tri$es# and tends to

$ecome rituali;ed in different 2ays precisely $ecause it is potentially a dan"erous situation!/*

Echan"e is chiefly characteri;ed $y $ein" impersonal! >o2ever# as 2e all 3no2# there is also in

395hen the successful hunter returns to his settlement# this is 2hat happens& The old man lau"hed! Some

people don6t 3no2 much! I am such a poor hunter and my 2ife a terri$le coo3 2ho ruins everythin"! I don6thave much# $ut I thin3 there is a piece of meat outside! It mi"ht still $e there as the do"s have refused it

several times! This 2as such a recommendation in the Es3imo 2ay of $ac32ards $ra""in" that everyone6s

mouths $e"an to 2ater! (Krae$er! )*')# p!'':%

40In Denmar3# ha""lin" has $een somethin" of a sportin" tradition# $ut a dyin" one! ?ac3 2hen people

2here more accustomed to ha""lin"# the local economy 2as institutionali;ed throu"h local Btallies6 on the

villa"e tally-stic3# and accounts 2here settled in cash each year under "reat discussion! After2ard the money

could $e used for common purchases# or alternatively $e consumed in the form of $eer# 2hereupon a ne2

account 2ould commence (1eil$er"! '949# p!'.%! ?arter 2as usually conducted $et2een men from different

villa"es!


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our time a certain rituali;ation of friendship involved $efore echan"e can occur! Echan"e is in a

sense the very $oundary of social relations# it happens at the frin"es of socia$ility! >ierarchy is of

course a relation in 2hich one party is superior! >o2ever# $oth echan"e and hierarchy is usually

conceptuali;ed in the a$stract as reciprocal relations! Communistic relations are not necessarily

reciprocal and there is not much need to conceptuali;e them as such# since they eist in a contet#

2here it is assumed that the relation 2ill $e maintained indefinitely! So hierarchy is conceptuali;ed

as the peasant provides food# the lords provide protection (I$id# p!'*9%! In reality# the social

relation of hierarchy is one-sided and is usually


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societies democracies and there$y feel that state po2er is of a completely different nature%# and also

at the 2or3place! >o2ever# the echan"e relation is made to eist in particular contets# that is# it is

a morally# technically and "overnmentally conceptuali;ed aim# 2hich is part of a political pro


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2ould in effect amount to a some2hat different system! Then 2e should of course also note that 2e

have indeed reali;ed the commercial society in a "reat many contets# such as the consumer sphere#

althou"h not everyone lead the same form of eistence in that sphere either!//n the $asis of the

o$servations so far# I therefore conclude that economics# considered as one discipline 2ith t2o

polar etremes in pure economic theory and political economy# is insepara$le from the construction

of cultural institutions in many incarnations# 2hich implement a political pro


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e7uili$rium is Pareto optimal (on a lot of conditions%# and that every Pareto optimal situation is a

perfectly competitive e7uili$rium (on some other conditions%! >o2ever# as Sen notes# applyin"

Pareto results presents a 2hole ne2 set of pro$lems!

Even if the necessary lump-sum transfers 2ere identifia$le and aslo economicallyfeasi$le GH that result can $e of real use only as a part of some Brevolutionary6shand$oo36# transformin" the o2nership of means of production $efore "ettin" themar3et to do the rest! If radical redistri$utions of o2nership 2ere not possi$le#movements to2ards overall social optimality 2ill re7uire mied mechanisms of a 3indnot covered $y the Bfundamental theorem6! (Sen! '944# p!.4%

I 2ill let this 7uestion of implementation stand untouched so far and simply proceed to introduce

some of the central concepts in the capa$ility approach# considered only as an alternative $asis of

evaluation! That is# alternative to an evaluation $ased on the concept of utility! I have already

discussed the ethereal nature this concept assumes# as 2ell as the pro$lem of interpersonal

comparison in terms of utility! So the Capa$ility approach# as an approach to evaluation# consists of

the follo2in" elements! 2unctionings# 2hich are constitutive of a person6s $ein"# can $e anythin"

from $ein" happy# or havin" self-respect# to $ein" a$le to play foot$all (Sen! '99)# p!.9%!

&apabilities# represent the a$ility of a person to achieve functionin"s he or she values! So# if 2e

posit a metric of 2ell-$ein" 2hich consists in the achievement of valued functionin"s# 2e can# forinstance# consider freedom as the real opportunity# the capa$ility# to achieve different functionin"s!

This su$stantive notion of freedom is called wellbeing freedom (I$id# p!/*%! So capa$ility#

considered as a measure# differs from utility# since it refers also to a person6s alternative possi$le

functionin"s! Sen as3s us to thin3 of people as havin" a Bcapa$ility set6 in the same sense as they

have a B$ud"et set6 representin" possi$le commodity $undles! Sen6s aim is to demonstrate that the

capa$ility approach is superior to standard 2elfare economics# and utilitarian approaches in "eneral#

in terms of social evaluation! As he sees it# these approaches distort concepts such as freedom ande7uality! Also theories of


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maimi;ation of mar"inal utility 2ould no2 lead us to distri$ute more income to ?# since 2e see3

to optimi;e total mar"inal utility su$


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despite there $ein" no primary "oods deprivation ($ecause he has the "oods that others have% (I$id#

p!)'4%! Sen therefore thin3s of the capa$ility approach as a ne2 interpretation of needs and interests

in terms of capa$ilities! >e sees it as a natural etension of a2l6s primary "oods# only 2ith focus

on 2hat "oods do to human $ein"s!

.2 Interpretation and si-ni&icance

No2 as for interpretin" the nature and si"nificance of this $road conception of a capa$ility

approach# I return to the issue of 2hether it is a sort of reform of economics! Seen purely as a

2elfare-economic tool# there is much de$ate as to its applica$ility! There has $een some concern

a$out the possi$ility of creatin" a sort of $asic capa$ility measure# or tool! /+>o2ever# I $elieve Sen

is reluctant to this# and I also $elieve that his 2or3 is indeed si"nificant in another 2ay! ne can say

that Sen attac3s modern economics on t2o flan3s at once! A$ove# I have $een concerned 2ith the

normative dimension# $ut much of Sen6s 2or3 is concerned 2ith the descriptive poverty and

eplanatory ina$ility of economics# or rather# it is al2ays apparent as an inte"ral aspect! /: The

com$ined si"nificance of Sen6s 2or3 is that it is a criti7ue of the reductionist character modern

economics has assumed! As such it represents an appreciation of the fact that economics must still

$e# and still is# classical political economy! Consider# for instance# the postulate in the 7uote a$ovethat a $asic concept such as needsis not treated ade7uately! This 2ould certainly rin" true to ar#

2ho as 2e sa2# refused to separate the nature of needs from the human productive activity! In the

same 2ay# Smith al2ays ima"ined that economics as a practical discipline should develop the

commercial society accordin" to some more comprehensive appreciation of human flourishin"! //4

f course# modern economics and Sen tal3 past each other# so to spea3# and Sen does not present an

inte"ra

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