Table Of Content

The ABCs of Political Economy A Modern Approach Robin Hahnel P Pluto Press LONDON • STERLING, VIRGINIA First published 2002 by Pluto Press 345 Archway Road, London N6 5AA and 22883 Quicksilver Drive, Sterling, VA 20166–2012, USA www.plutobooks.com Copyright © Robin Hahnel 2002 The right of Robin Hahnel to be identified as the author of this work has been asserted by him in accordance with the Copyright, Designs and Patents Act 1988. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library ISBN 0 7453 1858 4 hardback ISBN 0 7453 1857 6 paperback Library of Congress Cataloging in Publication Data Hahnel, Robin The ABCs of political economy : a modern approach / Robin Hahnel. p. cm. ISBN 0–7453–1858–4 (hardback) –– ISBN 0–7453–1857–6 (pbk.) 1. Economics. I. Title. HB171 .H22 2002 330––dc21 2002006491 10 9 8 7 6 5 4 3 2 Designed and produced for Pluto Press by Chase Publishing Services, Fortescue, Sidmouth EX10 9QG Typeset from disk by Stanford DTP Services, Towcester Printed in Canada by Transcontinental Printing 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 6 Macro Economics: Aggregate Demand as Leading Lady128 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 List of Illustrations 1.1 Human Center and Institutional Boundary 12 1.2 Four Spheres of Social Life 14 2.1 Gini Coefficients for US Household Income 1947–93 23 2.2 The Efficiency Criterion 33 4.1 Supply and Demand 73 4.2 Inefficiencies in the Automobile Market 87 5.1 Price of Power Game 107 5.2 Transformed Price of Power Game 109 x Preface The ABCs of Political Economy: A Modern Approach is an accessible introduction to modern, radical, political economy. It draws on the work of Karl Marx, Thorstein Veblen, John Maynard Keynes, Michael Kalecki, Piero Sraffa, Joan Robinson, and other great political economists, but requires no prior familiarity with political economy, and concentrates on modern concepts and models best suited to understanding economic issues today. The ABCs provides readers who are dissatisfied with the economics of competition and greed and mistrustful of conventional economic theory with the essential tools they need for a critical evaluation of the major economic institutions and policies of our day. The ABCsalso teaches readers who want to make our economies more democratic, equitable, sustain- able and efficient what they need to know to evaluate how effective different policies and institutional reforms are likely to be at accom- plishing their goals. In other words, The ABCs of Political Economy empowers people who are dissatisfied with today’s economies and mainstream theories to think through how we can move from the destructive economics of competition and greed toward an economics of equitable cooperation. No previous economics background is assumed, and everything is explained verbally in eight core chapters. Simple theoretical models that illustrate the logic of key relationships are confined to three chapters which are not necessary to follow the rest of the text. Even the models in these three chapters require no mathematical skills beyond arithmetic and high school algebra. But while technique has been reduced to a minimum, and confined to chapters that can be skipped or postponed, there is much to be learned about important aspects of modern economies and policy debates from the simple political economy models in chapters 3, 5, and 9. I urge readers who want to empower themselves as economic thinkers, that is, readers who want to be able to analyze economic issues and debates for themselves rather than always look to others to provide them with a “politically correct” conclusion, to invest the time to explore the simple models in these three chapters. These chapters help you to become a “player” rather than a “spectator” in the game of modern political economy. xi