Socialist Studies Socialist Studies


Modern Economics: Neither respectable nor a science

The degeneration of modern economics

The current economic crisis has also left modern economics in crisis. The Monetarists claimed that control over the money supply by the Bank of England coupled with low inflation would mean no more boom and bust; rising levels of prosperity for everyone, no more boom and bust and a harmonious and self-adjusting market.

The economists were wrong and modern economics has degenerated into a vulgar pseudo-science. To attack Marx's labour theory of value at the end of the nineteenth century, economists created a subjective utility theory of value formed from psychological preferences of individuals, infinite demands, a scarcity postulate and a concept of human nature based on calculating greed and opportunism.

They unsuccessfully tried to block out Marx's revolutionary and scientific insights into the anarchy of commodity production and exchange for profit and in doing so undermined the entire classical economic tradition from Petty through to Smith and Ricardo. For the economists of the 1870’s classical political economy was too dangerous. And with good reason.

William Petty had announced as early as the 17th century that “Labour is the father and active principle of wealth, as lands are the mother” (A TREATISE OF TAXES, AND CONTRIBUTIONS 1662) while the Austrian economist, Professor Freidrich Weiser told his students that “Ricardo led straight to Marx”.

And so worried was Alfred Marshall about Marx’s revolutionary teachings, that the Cambridge economist and tutor of Keynes; exclaimed “Natural non facit saltum” which, as every school child knows, means “Nature makes no leaps” (PRINCIPLES OF ECONOMICS London, Macmillan 1920, motto on the title page)

In the Twentieth Century the degeneration of economics continued unabated. Workers were erroneously blamed for inflation and unemployment (it is currently 3.4 per cent). And banks were supposed to have the power to create credit at a stroke of a pen. Schools of economics came and went with the passing failure of each government economic policy. Economists could no more explain periodic trade depressions than to predict them. Today economists are ridiculed and treated as a joke; a room full of monkeys let loose on typewriters has as much chance of producing meaningful economics as professors of economics.

Truth Will Out

However, science cannot be silenced by ideology. “Truth will out” (Merchant of Venice). Reality will break through mere appearance. The continued failure of capitalist economics supports and vindicates Marx’s critique of political economy. Capitalism can never be made to be run in the interest of all society and is based on class exploitation leading to class struggle.

Socialists, influenced by Marx, have periodically written on banking and inflation to show that wealth is not created by banks but by the exploitation of wage labour in the productive process of commodity production. Surplus value is created in production but realised in circulation as rent, interest and profit.

Likewise Socialists have shown that wealth is not created on the stock exchange where the gambling in shares is a zero-sum game, some winning others losing. And we have shown that inflation is the consequence of governments pushing out more currency into circulation than is needed for trade.

Capitalism has to be understood and rejected in its entirety. Consequently, the main battle of ideas in the class struggle is in the field of economics. The ideas of the capitalist class and their political agents cloud a clear understanding of capitalism since they present conflicting class interests as being harmonious and the economy as capable of being run in the interests of all society.

Capitalists, for example, do not create wealth. Workers do. Workers are not dependent on the capitalist class but could run society in their own interests within common ownership and democratic control. Capitalists are dependent on the exploitation of workers for their wealth and privilege.

Ruling class ideas have to be dealt with however arduous and boring the study of economics happens to be. Capitalism benefits capitalists, not workers and capitalist economics is the employer's set of ideas to keep workers in their place. You will not hear Chancellors of the Exchequer lecturing the CBI to make less profit and give workers higher wages but you will always hear Chancellors telling workers to be more productive and not to take increased pay rises.

Who are these Economists?

And who are all these economists who tell their students not to read Marx because he has no application to the modern world? They are alleged to be the best brains in the country; the cream of the universities. They get knighthoods and peerages; they control what is and what is not constitutes economics; whom to study and whom to ignore. They are offered positions on government committees; give advice to politicians and Ministers and some even receive the Nobel Prize for economics. But one thing they do not have is an understanding of is their own subject matter.

The late Mr Leigh-Pemberton, when he was appointed Governor of the Bank of England on 5th April 1990 told the media that he did not know anything about the job. In fact his background was law but he could have been a theologian for what it was worth. He said that he noticed that the Bank of England continued to produce learned papers on how to dampen inflation but the general price level continued to go up.

Leigh-Pemberton had a brainwave; he asked people to write in to him with their own ideas of what the Bank should do. However, this carries with it a warning since it is a criminal offence to send offensive letters through the post. What suggestion the Bank of England received is anyone’s guess but it would have been a waste of time.

How could economists advise Ministers that the game was up and the only course of action would be for the working class to abolish capitalism and establish Socialism? Economists expressing the views of Marx would not have very good career prospects. Is it not that modern economics has no application to the real world?

Part of the reason for Mr Leigh-Pemberton’s ignorance and desperation is the fact that the Bank of England claims that there is no satisfactory definition of money. They say all definitions of money are arbitrary.

This, though, was not the case when the Bank of England was founded in 1694 when a definition of money to means notes and coins backed by a gold standard was widely held until Keynes muddied the monetary water in the 1930’s.

And of course Marx gave a valid and sound definition of money. He said:

The commodity that functions as a measure of value and, either in its own person or by a representative, as the medium of circulation, is money” (CAPITAL VOL. 1 Chapter 3, Money, or the Circulation of Commodities Penguin p 227).

Marx then went on to give a detailed account of money in relation to hoarding, means of payment, and its function on the world market.

And elsewhere Marx quoted from the then Chancellor of the Exchequer, William Gladstone, who in a speech to the House of Commons said:

…not even love has made so many fools of men as pondering the nature of money

Economists up to Keynes knew what caused inflation and knew what governments had to do to get it down again. Modern day economists only have to read David Ricardo’s tract THE HIGH PRICE OF BULLION, A PROOF OF THE DEPRECIATION OF BANK NOTES (London, 1810) to understand inflation and what needs to be done to bring it down. Cannan dedicated Ricardo’s tract to the Treasury Library but it seems it was never read although Cannon’s note is still in the book where he had placed it eighty odd years ago.

The foolish confusion among economists about money reached its climax with the rise of Monetarism in the 1970’s. Then we had M0 and M1 to refer to coins and notes in circulation and other money equivalents. M2 includes M1 plus short-term time deposits in banks and 24-hour money market funds. M3 includes M2 plus longer-term time deposits and money market funds with more than 24-hour maturity. M4 includes M3 plus other deposits. And the term broad money is used to describe M2, M3 or M4, depending on the local practice. And now some economists want to include stocks and shares and housing in the definition of money.

Professor Cannan, writing in the 1930’s, warned that once money became to be seen as more than notes and coins in circulation then economists would keep adding and adding to what they perceived to be “money” so that money ended up as a vulgarized concept meaning all things to all men. That stocks and shares, and housing are now being considered as money by some economists means that Cannan’s prophecy has come to pass; money and credit have collapsed into mysticism.

Panglossian Fools.

Thomas Carlyle once remarked about the “Respectable Professors of the dismal Science” of political economy. That was in the 1850’s.

What about today’s economists? Instead of Carlyle we should turn to Marx. He said that the economists after Smith and Ricardo were vulgar and superficial. They were Panglossian “yes men” exclaiming that capitalism is the best of all possible worlds. In other words mere hired gunslingers:

…who only flounder around within the apparent framework of those relation (of production), ceaselessly ruminate on the materials long since provided by scientific political economy, and seek there plausible explanations of the crudest phenomena for the domestic purposes of the bourgeoisie…the vulgar economists confine themselves to systematizing in a pedantic way, and proclaiming for everlasting truths, the banal and complacent notions held by the bourgeois agents of production about their own world, which is to them the best possible one” (CAPITAL VOLUME I Chapter 1 The Commodity note 34 pp174-175 Penguin)

An accurate description by Marx of Modern economics! Neither respectable nor a science.

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