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POLITICAL ECONOMY vs. INSTITUTIONAL ECONOMICS

This is my translation of a publication by Russian economist Vladislav I. Loskutov. The post deals with political economy and institutional economics, their difference and compatibility.

As is well-known, institutionalists focus their research on economic institutions, their origin, their evolution, and their role in determining economic behavior of individuals and social groups, as well as governmental policies.

The term “institute”, which gave the name to this school, is defined quite broadly. It includes public organizations, customs, patterns of behavior in social groups, mental stereotypes, and public consciousness. Peculiarities typical of specific institutional systems manifest themselves in economic behavior of social groups as well as interactions in the process of production, distribution, exchange and consumption. Institutionalists rightfully think that, as societies develop, institutions develop with them.

As T. Veblen, the founder of institutionalism, legitimately claims that there is a considerable gap between the marginalist theory and the economic reality. While the theory focuses on harmony and economic equilibrium, the reality sees constant evolution often implemented in the form of a fierce fight for survival. The model of homo economicus – a person constantly comparing utility of various goods with their acquisition costs – is outdated beyond any hope. In fact, human economic behavior depends on many factors and is internally contradictory. It is affected by traditions, patterns of behavior as well as strife for prestige. Thus, scientific economic analysis must consider various forms of “institutes” (norms solidified by traditions) and “institutions” (patterns enforced by law and various establishments). “Institutions” include state, family, moral and legal norms, etc. The main economic institution of the 20-century capitalism, according to Т. Veblen, was a large industrial corporation.

Modern institutionalists see institutions as “rules of the game” – political social and legal norms that create institutional (or normative) conditions for economic activity. Douglass North decidedly separates “institutes” from “organizations”. Institutes are constructions created by human consciousness and designed to regulate human interactions. They create a system of motives and stimuli for interactions in all spheres of human activity.

Organizations, according to D. North, are something different. They also regulate people’s interactions, but these are far away from being “rules of the game” – they are players themselves with their own strategies.

In the process of development, institutionalism has moved very close to classical political economy. Thus, having turned to Karl Marx’s ideas, R. Heilbroner used to emphasize that he relied on concepts from the Marxist theory. He expressed regret at the fact that “most educated Americans as well as most scientists, sociologists and economists are familiar with neither the language nor the basic premises of Marx’s works” [33, page 198].

“The recognition of the influence of environment on individual thinking brings Nort’s position very close to (and even equates it with) the “old” institutionalists”, affirms Hodgson [90, page 11]. But this also brings his position close to that of classical Marxism.

D. North thinks that the key to understanding historical development is institutional changes. Based on that realization, he poses a problem of “developing the authentic science of political economy” [78, page 221], which could help the society to establish property rights (which determine the structure of stimuli for an economic system), and control their enforcement.

The substantiation of the leading role of institutions in determining behavior of individuals and social groups is the most important achievement of institutionalism. But it fails to explain reasons for their emergence and durability. It is obvious, however, that neither people’s desire nor their arbitrary will are enough to bring institutions about. Only the classical Marxist political economy provides that explanation.

Economic institutions, as they are defined by institutionalists, are economic social relations deliberately embraced by people and maintained for a considerably long time. By implication, they are close to “economic relations”, an important concept of political economy, but with the only difference that institutions are products of human consciousness, while economic relations are factors, which are not only unaffected by human will and consciousness, but are also a predeterminant of any deliberate activity.
This does not imply that people engage in economic relations unconsciously. This implies that people under the influence of circumstances create institutions that meet their needs without any information as to what those institutions should be like, thus acting at random, intuitively, gradually, step by step, by trial and error.

“Any order is a relation”, said Aristotle [7, page 224]. Economic relations are an important part of scientific knowledge about the society because in their entirety they represent nothing else but a public order, with which people must coordinate their behavior. In practice, economic relations are developed based on the common rules for creating order in unconscious nature, i.e. by means of accidental collisions of multidirectional particles. Friedrich Engels has described this process as follows: «In history, collisions of innumerable intentions and actions cause a condition identical to that of unconscious nature. While actions have a known and desired objective, results, in fact ensuing from these actions, are not at all desired. At first results do obviously match desired objectives, but they may not all be desired. Thus, we see by and large that chance determines historical phenomena as well”.

The function of consciousness in this world of chances conditioned by an incalculable combination of multitudes of objective factors and collisions of multidirectional forces is to grasp objective laws, which stand behind the visible chaos since each time “a game chance is visible on the surface, the chance itself turns out to be subject to hidden internal laws. The point is to discover those laws.” [98, page 306].

Therefore, the ultimate objective of economic sciences is to perceive objective economic laws as profoundly and minutely as possible thus providing the societal practice with opportunities for bringing about economic institutions with the least amount of trials and errors along the way.

Vladislav I. Loskutov
Translated by Boris Anisimov

The Russian version can be found at http://www.loskutov.org/FET/chapt_1.htm.

BOOK OF REVELATION, CHAPTER 18

The chapter describes a collapse of a major economic power, which entails disruptions of international trade as well as negative social and political consequences. To those involved in the economic activity, the collapse was quite unexpected. Please do not draw any parallels.

1
And after these things I saw another angel come down from heaven, having great power; and the earth was lightened with his glory.
2
And he cried mightily with a strong voice, saying, Babylon the great is fallen, is fallen, and is become the habitation of devils, and the hold of every foul spirit, and a cage of every unclean and hateful bird.
3
For all nations have drunk of the wine of the wrath of her fornication, and the kings of the earth have committed fornication with her, and the merchants of the earth are waxed rich through the abundance of her delicacies.
4
And I heard another voice from heaven, saying, Come out of her, my people, that ye be not partakers of her sins, and that ye receive not of her plagues.
5
For her sins have reached unto heaven, and God hath remembered her iniquities.
6
Reward her even as she rewarded you, and double unto her double according to her works: in the cup which she hath filled fill to her double.
7
How much she hath glorified herself, and lived deliciously, so much torment and sorrow give her: for she saith in her heart, I sit a queen, and am no widow, and shall see no sorrow.
8
Therefore shall her plagues come in one day, death, and mourning, and famine; and she shall be utterly burned with fire: for strong is the Lord God who judgeth her.
9
And the kings of the earth, who have committed fornication and lived deliciously with her, shall bewail her, and lament for her, when they shall see the smoke of her burning,
10
Standing afar off for the fear of her torment, saying, Alas, alas that great city Babylon, that mighty city! for in one hour is thy judgment come.
11
And the merchants of the earth shall weep and mourn over her; for no man buyeth their merchandise any more:
12
The merchandise of gold, and silver, and precious stones, and of pearls, and fine linen, and purple, and silk, and scarlet, and all thyine wood, and all manner vessels of ivory, and all manner vessels of most precious wood, and of brass, and iron, and marble,
13
And cinnamon, and odours, and ointments, and frankincense, and wine, and oil, and fine flour, and wheat, and beasts, and sheep, and horses, and chariots, and slaves, and souls of men.
14
And the fruits that thy soul lusted after are departed from thee, and all things which were dainty and goodly are departed from thee, and thou shalt find them no more at all.
15
The merchants of these things, which were made rich by her, shall stand afar off for the fear of her torment, weeping and wailing,
16
And saying, Alas, alas that great city, that was clothed in fine linen, and purple, and scarlet, and decked with gold, and precious stones, and pearls!
17
For in one hour so great riches is come to nought. And every shipmaster, and all the company in ships, and sailors, and as many as trade by sea, stood afar off,
18
And cried when they saw the smoke of her burning, saying, What city is like unto this great city!
19
And they cast dust on their heads, and cried, weeping and wailing, saying, Alas, alas that great city, wherein were made rich all that had ships in the sea by reason of her costliness! for in one hour is she made desolate.
20
Rejoice over her, thou heaven, and ye holy apostles and prophets; for God hath avenged you on her.
21
And a mighty angel took up a stone like a great millstone, and cast it into the sea, saying, Thus with violence shall that great city Babylon be thrown down, and shall be found no more at all.
22
And the voice of harpers, and musicians, and of pipers, and trumpeters, shall be heard no more at all in thee; and no craftsman, of whatsoever craft he be, shall be found any more in thee; and the sound of a millstone shall be heard no more at all in thee;
23
And the light of a candle shall shine no more at all in thee; and the voice of the bridegroom and of the bride shall be heard no more at all in thee: for thy merchants were the great men of the earth; for by thy sorceries were all nations deceived.
24
And in her was found the blood of prophets, and of saints, and of all that were slain upon the earth.

POLITICAL ECONOMY vs. MARGINALIST ECONOMICS

This is my translation of a publication by Russian economist Vladislav I. Loskutov. The post deals with political economy and marginalist economics, their difference and compatibility.

Scientific circles tend to share a groundless opinion that classical political economy and marginalist economic theory (economics) are incompatible within the framework of the same science. The fallacy of this assumption can be easily established by comparing subjects of these scientific schools. The object of their research is the same, but subjects do differ.

When specifying the subject of their research, marginalists point to three main problems as their focus of interest:
· What goods and services must be produced and in what quantity?
· How should these goods and services be produced?
· For whom should these goods and services be produced?

According to the definition in a book by S. Fischer, R. Dornbusch and R. Schmalensee, «economics is a discipline that studies ways a society with scarce resources decides what, how and for whom it should produce.” [86, page 1]

The economic theory is consistent of micro- and macroeconomics, both of which, within the framework of the same discipline, have the following subjects. Microeconomics is “an element of economics, which deals with choices made by small economic units such as households, firms and governmental agencies... Macroeconomics is an element of economics, which deals with large-scale economic phenomena such as inflation, unemployment, and economic growth.” [15, page 8]
According to C. McConnell and S. Brue, “the subject of economics is in identifying effective ways to use scarce resources in the process of production of goods and services for satisfying material needs.” [47, page 27]. According to a definition by P. Samuelson and W. Nordhaus, economics – while being a combination of two disciplines: micro- and macroeconomics – is a science that studies how a society uses scarce resources for producing valuable goods and distributes them among various groups of people. “There is a great difference between macroeconomics, which studies the functioning of an economy as a whole, and microeconomics, which analyses behavior of separate economic elements like industries, firms and households” [102, page 5].

Marginalists’ acceptance of these questions as fundamental explains their theory’s inability to fathom the essence of social economic relations. In reality, how and for whom to produce is not the initial motive for individual economic behavior. In fact, an individual is concerned about his efficiency (implying minimum expenditure of his own labor and his own property) in satisfying his own constantly growing needs.

But the means, by which needs of a combined group of individuals are satisfied, depends on numerous internal/external and independent conditions. Identifying those conditions is in fact the most important task for a truly scientific economic theory based on historical facts and sociology rather than randomly selected criteria. In particular, history testifies that exchange of goods is far from being the only way of satisfying people’s needs. This goal is often achieved by other means of appropriation and redistribution, which can be implemented by various methods in the social struggle – from brutal violence to legitimate coercion.

Legitimate methods are commonly accepted as civilized. However, they are often stem from manipulation of laws, access of a particular social group to the government apparatus and public finance and respective protection of private interests at the public expense, monopolization of economically important information, behind-the-scene transactions and corruption. Whatever those methods might be, non-market relations within the system of distribution of social goods are its decisive element. The relations of commodity exchange play a secondary, auxiliary role in this system.

The narrowing of the subject of the economic theory down to “an efficient use of scarce resources in production of goods and services” is quite defective. History has shown that when resources are scarce, people are first of all mindful of where additional resources can be obtained, which often implies from whom they can be taken away. Only when obtaining resources by extensive means (i.e. by developing new lands or robbing neighbors) becomes impossible, people turn to the question of how rational is their use of existing resources.

The peculiarity of Marginalism is in its principled disdain for the evolutionary nature of economic relations and the transient nature of social systems. This places Marginalism on the same level with the dogmatic Marxism developed in the USSR. This type of dogmatism is probably what explains why Marxism was easily supplanted in Russia by Marginalism, which became the new governmental ideology in the country’s transition towards market economy.

In contrast to economics, which views the economy from the prism of market or commodity relations, political economy (both in its classical form as well as in its Marxist variation) concerns itself with the study of all economic relations. Therefore, as to the range of study, political economy correlates with economics “not as equal disciplines, but as a whole correlates with its part”, which allows us to define “economic theory” as “political economy with economics as its mathematical supplement” [66, page 21]. Mr. V.A. Biryukov is among economists who share the same view. He states that political economy and Marginalism “are not antagonistic and parallel, but are objectively complementary thus representing the same edifice of the general economic theory within the framework of the market economy. In other words, they are synthesizable!” [10, page 550. Italics added by the author].

Biryukov wrote: “Our goal is to prove blood relations between neoclassical economics with Marx’s authentic political economy of capitalism!” [10, page 552]. And I cannot but agree. Prior to that, economics must be purged of its claims to be the original theoretical school and its most odious theoretical constructions based on speculative hypotheses, which have very little to do with the economic reality. Those include the indifference curves, the exchange value without a connection to value as well as property rights without a connection to economic relations of ownership.

The fundamental difference of classical Marxist political economy from economics is in its systemic approach, which allows analyzing not only internal interrelations of economic systems, but their relations with their surroundings. Even though systemic thinking was not typical of the 19th century, the dialectical method of classical marxism is, in essence, a prototype of the contemporary systemic method. As J. Schumpeter pointed out quite rightfully, the advantage of marxism before other scientific schools is in the “understanding of economic evolution as a process necessitated by the economic system itself.” [93, page 53].

By limiting the range of the economic theory down to the three questions (what, how and for whom to produce), we thus bring it down to the level of applied sciences of a technical, managerialist nature. Even since the times of Aristotle, it is accepted that “knowing the cause is essential for knowledge.” [6, page 283]. Therefore, in order for an economic theory to claim its fundamentality with a social and political essence, it must address the question of why production occurs within specific social relations. It must focus on the following tasks:
· Studying objective laws of economic systems’ development;
· Assessing efficiency of the existing systems of economic relations;
· Identifying ways to change existing economic relations in accordance with known objective laws as the economic system’s environment changes.

Classical Marxist political economy is capable to handle these tasks as well as many others in terms of people’s interaction in the process of their economic activity in an ever-changing natural and social environment.

The limitations typical of the marginalist theories should not serve as an excuse for criticism or disdain. They are quite within the frameworks of the general economic science, but only as applied theories. In terms of modern economic practices as well as macroeconomic management, they are of an unconditional scientific value. But they are mostly pointless for explaining laws of economic evolution, while the talk of an “enduring” nature of capital and commodity relations together with the identification of economy with market is simply absurd. It is impossible to agree with those who insist that neither primitive, slave-owning, feudal societies nor Soviet Russia in the period of military communism “in fact had any economy in the strict sense of this word”. Neither historical nor theoretical grounds can be found for the opinion that “economy occurs when production of economic goods is “managed” through price signals mechanisms, i.e. market price fluctuations, profit and loss dynamics”. The same is true for the statement that “the strict sense of the word implies that economy is synonymous not with production, but – market.” [33, page 45]

Human behavior in the economic sphere among others is determined not by market factors only, but by the entire range of needs as well as interests and objectives conditioned by them. Thus, purely market theories are incapable of giving a scientific explanation of people’s actual economic thinking and economic behavior, and all their explanations eventually turn out to be inconsistent. That is why economics is utterly unsuitable to account for fundamentals of economic phenomena. It is quite consistent as an applied science which teaches how businessmen and economic entities make effective decisions in conditions of scarce resources and opportunities. It is obvious that, for entrepreneurs and managers, this portion of the economic theory is an absolute must.

Thus, in the strict sense, economics is a science, which deals with entrepreneurial economy (i.e. economic relations of entrepreneurs among themselves and other people in conditions of developed commodity production) and views the economy and society as a whole from the standpoint of entrepreneurial interests, through the prism of entrepreneurial thinking. Microeconomics is more in line with this definition. However, it must be noted that the consumer behavior and attitudes towards expenditure of resources as described by microeconomics is typical of enterprise-minded individuals only. Macroeconomics meddles with spheres where non-market relations are quite common, if not predominant. It lacks consistency and is prone to eclecticism because it is designed provide market interpretation to non-market phenomena such state-monopolies and public sectors.

The political damage inflicted by economics to a democratic society rests in its undeclared objectives – it fails to analyze inconsistencies and deficiencies of the existing social-economic system, it fails to encourage development of the system and instead seeks the most rational adaption to it. This “science” is aimed at suppressing civic consciousness and instilling obedience to the dominant regime even if its collapse is imminent.

Vladislav I. Loskutov
Translated by Boris Anisimov

The Russian version can be found at http://www.loskutov.org/FET/chapt_1.htm.

DEPENDANCE ON FOREIGN DEMAND


Production specialization in a globalized economy makes manufacturers dependant on foreign demand. What gives transnational corporations their comparative advantages over local manufacturers on global markets is their ability to break up their production chains and move respective portions into different countries depending on costs. Thus, production within a particular country ends up focusing on specific technological processes (e.g. assembling car seats instead of manufacturing whole cars, etc.) since full-cycle production within a single country offer less competitive advantages than transnational division of labor.

Transnational corporations enter local markets with intent to hire local companies, which would carry out those specific operations. But the employment created thereby is dependent on foreign demand since local markets have too few clients interested in specialized products alone. Should the global demand shift, entire industries and even countries will have to go under.

No longer driven by domestic demand, economies take severe blows from unpredictable gales of globalization. But I realize quite perfectly that protectionism is not always a good solution –when local markets are already too narrow, relying on their consumption will be impractical. Closing all doors and windows, figuratively speaking, may be good for a season or two, but is detrimental as a long-term strategy. That is why those looking far ahead talk of the need to maintain a balance between the national and transnational economic developments simply because globalization is quite ambiguous and we cannot foresee all of its underlying trends right now.

Boris Anisimov

ECONOMY AS A SOCIAL SYSTEM


An economy is a system, and a social system at that. A basic definition of the word system found in the Webster dictionary is “a regularly interacting or interdependent group of items forming a unified whole”. Thus, an economy contains certain units, responsible for specific functions of the entire system, which interact in an interdependent environment thus allowing the economy to operate as a single whole.

An economy operates within specific models, whether formed spontaneously or deliberately imposed by influential circles. Those models depend on endogenous and exogenous factors, both types of factors subject to a constant change together with social changes within a society. This raises the question of durability of economic models. As factors change, economic activity in its interdependent environment must change proportionally.

In order for an economic system to produce specific output, there must be specific input. As output cannot come from nowhere, neither can input. In order for someone to have something, someone else must produce it first (or take from some third party) in order to give it to him/her. It only points to the social origin of wealth and its distribution. It also points to the social origin of production in particular and economy in general.

Thus, the social aspect of an economy has to do with the way its operation affects the society. The above-mentioned Webster dictionary defines economics as a social science concerned chiefly with description and analysis of the production, distribution, and consumption of goods and services. But in today’s era of financialization, economics is rapidly losing its social relevance as the system turns to serving the needs of a limited circle of people instead of the society in general. But let me address this a bit later.

It must be mentioned that political economy has a serious issue with the above definition and argues that the description of the economic activity is what the current economic theory based on neoclassical microeconomic postulates does best, while the analysis is quite superficial and mainly based on a limited number of factors. This explains why mainstream economists kept ignoring obvious disproportions of the global economy and were defiantly insistent on optimistic scenarios prior to the current crisis.

As certain units within the framework of a capitalist economic system begin to dominate (e.g. income distribution disparity, transnationalization vs. national economic development, financialization, etc.), the entire system becomes extremely unstable and consequently faces two options: a collapse or an extensive expansion in order to identify new economic resources to sustain the hypertrophied development of the dominating elements.

In my opinion, although the ultimate collapse of capitalism claimed possible by some can be ruled out for now, the current world economy is having serious troubles with the second option.

Boris Anisimov