A New Economic Theory

On this blog I have been very critical of mainstream economics, to the point that I feel most of it should be thrown out. I believe the orthodox theory of demand, supply, labour theory, wages, recessions, competition and information are fundamentally flawed. The obvious question is, if we are to ditch these unrealistic and useless theories, what do we replace them with? I cannot only criticise and knock down, I also have to create. I believe we should replace the current theory based on graphs of supply and demand with one based on power. The economy is not governed by unseen and unchangeable impersonal forces but by the competition of different sources for power. I believe neo-classical economics has outlived its usefulness and instead should be replaced with “The Theory of Power”.

This is a challenge that will take years or decades to complete and will need more people than just myself. However I intend to take the first step with this post. Keep in mind that this is the beginning and I am still only a 21 year old college student, so there is still time to solve the world yet. This is only a crude rough sketch of ideas I have running around in my head.

There are no inflexible laws of economics that control our actions. Instead the positions held in the economy are based on power. Wages are not set by an interaction of an immeasurable and abstract demand and supply curve, but rather by the relative power of each party. For example, low wage workers get paid so little because they are in a position of weakness. They have little education, few opportunities, are marginally attached to the workforce, are often ethnic minorities and lack confidence to assert their position. Whereas the employer is in a position of strength. They have control over whether or not their employee will make a living or not. It is only in a rare situation that their security and livelihood is threatened. They use this power over their employees to push down wages. Corporate executives get paid obscene wages not because their special demand or supply curve but because they have the power to set their own wages (or influence the board to do so). The only way to offset this is if the workers form a union which grants them a degree of power to balance the employers. Or the government could intervene in the form of a minimum wage.

Prices are not set by demand and supply but by degrees of market power. Ironically, neo-classical economists would agree with me on this as according to them no profits are made in the free market, profits only come from distortions in the market like market power. Monopoly is only the most obvious and visible example of this. Oligopoly is another, as is the use of advertising and branding. I can still remember the awe and esteem in which a group of Southsider teenagers I knew held their Abercrombie clothes. What is conspicuous consumption and fashion but power? Have you ever tried to argue with a bank or an airline? They will listen to you to an extent but only to be polite, after that its tough luck. They know you there is little you can do about it, that they have power over you and that you’re stuck.

Prices are set by the degree of power the firm has. Hotels do not charge extra because they have a unique supply or demand curve, but rather because they know they can get away with it. Inertia will push people towards the easiest option even if it isn’t the cheapest. How can demand, that abstract and immeasurable concept known only to economists, be the setter of prices when few managers have ever heard of it? How can it be claimed that prices are set by demand and supply when economists have never actually measured or found signs of either? The world is far too complex to fit on a graph. Prices are formed from the clash of businesses pushing upwards and consumers pushing downwards. The winner is dependent on the amount of power each has, which is why prices are always different (if it was a question of supply and demand then there would be only one price). So rather than viewing businesses as powerless objects with their hands tied by the market and the consumer as sovereign, they should be seen as countervailing powers constantly pushing against each other.

This theory takes account of the government, not in the abstract let’s-pretend-it’s-not-really-there way like conventional theory, but as a central core of capitalism. Capitalism needs the state. Not just to protect property, but to educate, protect, medically cure the workforce as well as invest in infrastructure and research. Big business has huge power over government through the funding of elections and their wealth. For example here in Ireland, corporations have effectively blackmailed the government into keeping corporation taxes some of the lowest in the world with the threat of “if you don’t we’ll close shop and jobs will be lost”. Across the Eurozone government actions are judged based on how the market reacts, as though it was the supreme judge and ruler of the economy. While some criticise the government bailouts, economic historians are aware of the fact that bailouts are a common feature of capitalism. Whenever major businesses get into serious trouble the government usually comes to the aid. The few times it has not, the result has been a disastrous collapse.

The theory incorporates the media. It is the media that defines our societal values and has a major influence on how we view the world. Our discussions resolve around the dominate media narratives. If something is an issue, then it will be discussed constantly by people, whereas if it is ignored, then people don’t talk about it. Think of how inequality was unspoken of until last year, or how Gaza receives so little attention unless bombs are dropping or how Ireland can go decades with absurd and inhumane abortion laws until someone dies before it becomes an issue. The American Tea Party is essentially based upon delusions and untruths that had become dominant narratives on Fox News. The media is not a monolith speaking with one voice, and it is wrong to ignore the diversity of opinion. The media can also be a force for progressive change and the advancement of liberal ideas, particularly on social issues. But it would be naive to claim there is no set of underlying assumptions or commonly held beliefs that shape reporting. We are all biased in our own ways and it is natural that predominately middle class, white, urban reporters have their own biases separate from other parts of society.

The Theory of Power will link into other concepts such as theories of the elite. The Military-Industrial Complex never went away, other groups simply joined it. It will engage with the power of networks where who you know is as important as what you know. Ireland’s response to the financial crisis and recession has not been based on economic theory, but on power. The governing elite of politicians, bankers, developers (it used to include the Church) and partial support of the media have decided the course of action. It was due to the power that they wielded that the banks got a bailout. It was due to their power that the rich have been protected in successive budgets. The limited strength of trade unions has offered meagre protection for public sector workers, while the unorganised and powerless poor have borne the brunt. It has been the unemployed, the single mothers, the disabled who have taken the hit in repeated social welfare cuts. Until you understand the importance of power in political economy, you cannot understand current Ireland.

In the 19th century Marx spoke of the control of the means of production. In the 21st century it is control of the means of power that matter. Whatever you want to call them, the rich, wealthy, 1%, oligarchs, plutocrats etc have control of power in America. They dominate the government to a frightening extent. Campaign funding has reached the level of buying politicians. America has fallen from government by the people to government by interest group and lobbyists. Politicians run on platforms of who will help businesses the most, as though they were the only sector of the economy. The media is dependent on advertising giving it a strong incentive not to rock the boat.

The most powerful realm of all is the power of an idea. You can convince few people to do things that do not directly affect themselves without referencing an idea. People will live and die for an idea. They will put up with all sorts of misery and suffering for an idea they believe in. It is ideas that raise armies, build cities and create nations. It used to be the idea of religion and God that drove societies. In the 19th century it was the idea of nationalism that shaped destiny. In the 20th century it was political ideologies of Fascism, Communism and Capitalism. These ideas shape our societies and govern how we think and view the world.

The current dominant idea governing economics has shaped our economy hugely. The idea of the free market has as a great an effect as the idea of Jesus. The idea that the free market is the best outcome and solution to all problems permeates every discussion around the world. The idea of competition is good and government is bad not only dominates the world of economics but also the world of government and the media.  You cannot explain the crash without explaining how the free market idea dominated economics, government and the media in a self-reinforcing loop. This triad drove the actions of the rest of the economy. The idea that the market is always right lies behind the economic crash and the ills of society. It is the excuse that justifies festering poverty and inequality. Our actions are determined by our ideas and the current apathy and inertia is based on the idea that problems naturally sort themselves out.

The Theory of Power puts the role of the government in a new light. Instead of viewing the government as ineffective interveners who make the problem worse, they can be seen as necessary counter balance. Power must rest in some hands and it is best to leave it in those who will abuse it least. Governments are prone to capture by ideologies and interests, it is important to ensure it is the right one. The government imposes rules and regulations upon the market in effect to control the beast. There is a saying that the market is like fire. If controlled it is good and can be used to cook food and keep you warm. But if it is not controlled then it can burn your house down. The government is necessary to prevent business from running wild. Unions too play a crucial role in this, which is why the decline of unions has been so disastrous. Community organisations and pressure groups also have a role as does the media. The economy should not be seen as rigid lines on a graph, but rather as competing powers pushing against each other.

To understand the world, you must understand who has power and how they use it. History does not march in a straight line across the globe. Rather the pendulum swings back and forth from different forces and kings are often dethroned. The economy takes its form from the struggle between sources of power in business, labour, government and the media. Unlike supply and demand, there is no one rule or result, but rather wide varieties dependent on history, culture, religion and social norms, which determine each factors strength. To conclude, we are not helpless against market forces, we are not trying to push back the sea. Instead the current wealth and power of the economy originates in the struggle for power. If it can be built then it can be destroyed. The Oligarchs of today may have come from dust, so it is possible that to there they will return. It is all to play for.

44 thoughts on “A New Economic Theory”

  1. The basic reason that corporations have the edge is because they own production. Hence, everyone else is dependent on being granted resources by them – both as workers with wages, and as consumers with food and so forth. Since the corporations own the resources, they can hold out longer than anyone else (a point made by Adam Smith).

    In neoclassical economics, the individual is free to choose whether or not he buys something (or ‘sells’ his labour power). But that these are often things which are either naturally or socially necessary is overlooked.

    1. Exactly. Corporations have control of production which gives them power over the rest of society. The workers, with no production of their own, are relatively powerless and dependent on the employers.

      (I just realised that sounds quite Marxist. How strange my views have evolved.)

      I completely agree that the major flaw of neo-classical economics is to ignore power relations. Employers and employees are not two individuals making a fair and balanced agreement that benefits the two. The employee must work, while the employer is nowhere as desperate. I remember the absurdity of sitting in a labour economics lecture about workers “choosing” how much they wish to work in a week, at a time when unemployment is 15%

      1. Corporations have no power without govt influence. Similarly unions.

        The employer and employee relationship is symbiotic….the employer is nothing without his workers.

        1. To the contrary, government is the only limit on corporate power. Also corporations manipulating the government for their own ends is not a critique of the government (which where I fell you were going)

          1. Interesting point….however, how can you manipulate a government with limited power?

            Also without govt growth and attainment of power to bar trade and competition monopolies are difficult to create. A corporation is only as good as the people working there (ie its management and other levels of staff), who can out compete other corporations….in so doing, providing better or cheaper goods and/or services which allows them to grow through value provided to others.

            1. Small government is weak government and easier to manipulate. Most regulations limit corporate power which is why they always oppose them and campaign to weaken them. Weaker government means stronger corporations.

              The power of competition should not be overstated. As I’ve discussed on this blog, there are many limits to it. Don’t forget that corporations can use advertising and product differentiation to manipulate demand and hamper competition.

  2. I agree that power relations is a neglected area of study.

    But it seems to me that the purpose of economics is to understand how to utilize the available means for the purpose of human ends. It doesn’t seem to me that a study of power relations helps explain how well certain means can be used to attain a given end (or goal).

    1. “But it seems to me that the purpose of economics is to understand how to utilize the available means for the purpose of human ends”

      (a) This is a decision, not a necessity

      (b) If said means are affected by power, it is very relevant.

    2. I suppose the aim of economics is up for debate, but I would see it as an attempt to describe how the economy works, just as a biologist describes how the body works. Its also true that understanding something helps you to control and change it. I find the traditional definition of “the best use of scarce resources” as dated and too limited.

  3. Really interesting approach to study the fundamental interactions of the economics agents. I usually think in those terms (the different degree of power in both parts) when i want to think about the results we see in the real world.

    It can be very fructiferous.


  4. I’ve read this twice now, will probably have to read it for a third time tomorrow. That’s not such a bad thing, it’s a great article. In the meantime, what’s your idea about measuring this ‘power’? How do we represent it in numeric form? Is it subjective, or can it realistically be objectively represented?

    1. Thanks glad you like it. I don’t think power can be measured, to me its a subjective term like beauty. I don’t believe we can put a number on it, or at least I haven’t yet thought of a way of doing so. A current problem with economics at the moment is its obsession with putting a number on everything. Its almost as though if it can’t be measured, it doesn’t exist.

      To me, power is the ability to get what you want. People can misuse it and not get what they wanted or the wrong thing. To me its a very subjective term.

  5. You can’t make much of a working predictive model of human behaviour at all because of free will. If you’re not convinced, maybe have a look at John Serle’s Reith Lecture of ’84(?), published as Minds, Brains and Science, it’s only 100 pages or so.
    That said…
    Maybe try modelling a system where the person taking a decision on someone else’s wages has x degree of empathy with them and will vary their pay within a range of.possible scale
    So 0% empathy, bottom of the possible wage scale for your traditional homo economicus, 100% empathy, top of the pay scale for themselves or an identical twin.
    So what becomes important is the degree of identification that those who have the power to make decisions and those who are affected by them.
    Merry xmas, and goodluck with it.

    1. I personally despise the concept of utility as it is useless, immeasurable and irrelevant. The key to the Theory Of Power is that it is not an absolute iron law but rather something we can control and change. So unlike utility which is treated almost as a law of science that only fools try to go against, power can be challenged. The Theory of Power makes us masters of our destinies.

      1. From an analytical point of view, though, it seems to me that economics, broadly speaking, has already answered the question of why people enjoy different amounts of what you refer to as “power”. “Power” is never defined in your article. It is assumed that we should know what it means, but the meaning is never actually given to us.

        If I simply replace every mention of “power” with “marginal utility”, then your article makes far more sense to me. Unskilled labour is in plentiful supply, and therefore the marginal supply of an additional quantity does not experience heavy demand. On the other hand, those who are capable of employing others are a minority in society and therefore they experience heavy demand for wages. Of course hotels, corporate executives and anybody else will charge “whatever they can get away with”; you charge what the market will bear in the context of the demand for a marginal unit of what you are supplying. It is good and proper that this is the case; it is what incentives and allocates the supply of the most urgently demanded goods and services.

        It seems as if the search for logical consistency is leading you toward full-blown Marxism. Without being much of an expert on Marxism, I would agree that it is probably far more logically consistent than mainstream economics and political philosophy. But it is still false. The labour theory of value is false, along with every other “objective” theory of value. All value is subjective. Furthermore, value (or “utility”) can only be assigned to marginal units of particular goods and services, not to classes of goods. This is because, economically, value only makes sense in the context of the scales of preferences held by individuals, and in particular in the context of decisions which demonstrate the preferences of these individuals.

        I hope you continue to attack mainstream economics, but there is a risk that you will continue to throw out all basic sense with it too. Economic laws are not rigid rules which are supposed to shackle us, but are theorems which should enrich our understanding of reality. If they fail to do that, they should be abandoned, yes. But the quest for truth should not be sacrificed out of a youthful desire for change.

        1. By power I mean the ability to get what you want, to further your interests. Utility is a measure of the pleasure or enjoyment, so I don’t see how they are linked. I wrote that media and government uses power to influence the market and can counter balance or support capital. I don’t see how substituting utility for power gives the same result. I’m not sure it could be claimed that the 1% have ‘utility’ over society.

          I agree that there are hints of Marxism in my discussion of power. However this is not because I am a Marxist but rather because they are the only ones who discuss power relations. I respect Marxists for the questions they ask while disagreeing with the answers they get. The labour theory of value is a powerful rhetorical political idea but it is not an accurate economic one. Nor do I believe a proletarian revolution is inevitable or necessarily desirable.

          This theory is still a seed and will undoubtedly greatly change. It will incorporate some of the old and a lot of the new. It remains to be seen how much.

          1. Marginal utility – the usefulness/pleasure/enjoyment produced by the supply of an additional unit of a particular good or service. Unskilled labour is in plentiful supply, and is of non-negligible but severely limited usefulness, and therefore offers low marginal utility. Compare with the ability to pay wages or to run a business. Happy Christmas.

            1. (Those you describe as lacking power are really those who offer low marginal utility to others, and those with power are those who offer high marginal utility to others.)

              1. By marginal utility you seem to be referring to productivity, but ignores the central question of why do wages differ so much from productivity? Productivity has risen hugely in America over the last 40 years yet wages haven’t risen since the 70s. How is this the case? CEOs pay themselves enormous wages unrelated to their productivity. I believe the answer to these questions is that the two groups have different levels of power not utility.

                1. Technological goods (phones, TVs, etc) are of far superior quality and are far cheaper versus wages than they were in the 70s. Commodity prices have been volatile but haven’t moved so considerably when you consider the dramatic debasement of the dollar since that time. House prices too have been manipulated higher by government policy. I would need to analyse the specific empirical reasons why you think that wages differ radically from productivity, but I am sceptical.

                  By the way, the phrase “CEOs pay themselves” is highly misleading, which I think you are aware of.

                  1. Sure technology has advanced but that is beside the point. It is acknowledged by all economists bar a fringe that wages have not risen in decades and it is only due to women joining the workforce that income has risen.

                    CEOs do pay themselves. Or at least are part of a cosy relationship with their board that amounts to the same. There is no market rate for CEOs and their sky-rocketing wages has not been linked to productivity. It is down to the level of power they posses, not their marginal level of productivity.

                    1. Again, I would prefer to see a specific paper or a specific set of evidence to have a discussion around. To discuss America, I would say that there are several factors which have held back its productivity over the last 40 years. Number one is the monetary policy track which it has pursued, occasionally behaving in a more responsible fashion, but usually behaving in an irresponsible manner, causing booms and busts and a whole range of economic distortions along the way. The monetary policy which it has reached today is now totally depraved and causing a rapid decapitalisation of the economy. It is inevitable that productivity and real wages will be held back in this environment. Against this, technological advances and Asian production have provided some relief.

                      Remember that in 1970, America was still a huge heavy-hitter in manufacturing and one of the biggest creditor nations of all time. During the 1980s, it started to become a debtor nation and it is now the biggest debtor nation of all time by some margin. It is a prime example of a decapitalised economy, reliant on borrowing and consumer spending to maintain former patterns of GDP growth. Instead of manufacturing new products for the rest of the world to enjoy, employment growth relies on the federal government, healthcare, education and the service sector. It’s hard to argue that productivity has improved so very much.

                      Finally, with respect to CEOs, “a cosy relationship with their board” amounts to a cosy relationship with their employer, which is something that everybody aspires to. Now you might say that corporate governance is not of superbly high quality in very many cases and I would actually agree with you on that point. On the other hand, executive pay does rely on shareholder approval of the remuneration report, and the Board themselves rely on election by the shareholders too. It is the people who own the company who ultimately set executive pay, which is as it should be. Contrast that with the mechanisms which determine the pay of politicians and bureaucrats, and ask yourself who is really “paying themselves”.

        2. I know I’m quite a bit late to this discussion, but I’d like to chime in as well. The problem with the concept of marginal utility and its relation to power, beyond some of those outlined by Robert and other economists, is that it’s too narrow, and only a small part of the story. Personally, I believe that they are two distinct concepts that may interact, but are in no way equivalent.

          To use your own example with unskilled labor, thinks of sweatshops in poor countries, with horrific working conditions and badly mistreated employees. The marginal utility of unskilled workers isn’t all that variable; a seamstress from, say, Armenia is likely to perform just as well as one from the France with a sewing machine, or a needle and a thread. That an Armenian seamstress costs much less would apparently raise her marginal utility compared to a French employee, yet working conditions in France are arguably superior in every way to those in Armenia. Why won’t those who run sweatshops there ensure a minimum of socially acceptable working conditions and care? Because they can get away with it. They can waive such matters and mistreat their employees, and not have any consequences to deal with. Nobody constrains them to, and nobody incentivizes them to do so. In most countries where sweatshops operate, either labor protection laws are as good as non-existent or, if they exist, the government’s ability to enforce them is very weak for a variety of reasons (e.g. corruption, bureaucracy, inadequate controls etc.).

          In France, employees benefit from a very strong legal protection for their rights and status, and are typically well represented by trade unions which can wield impressive power. How much would it cost a company in a country like Armenia or Mexico anyway to ensure a humane working environment? Much, much less than they would gain in the short run, but they don’t because they can afford not to. That’s one of the distinctions between power and marginal utility: power includes liberties and constraints, while marginal utility is only one of the many factors that go into calculating power.

          This is where one could reply that the Armenian seamstress doesn’t have many options compared to her French counterpart, since the latter can most likely change jobs much more easily than the former, and as such the hypothetical clothes manufacturer has a much greater marginal utility in Armenia than in France. That, however, would be besides the point because it’s merely a numbers’ game; as far as the individual seamstress is concerned, her job options are limited to sewing or related jobs, whether it be in France or Armenia, and it’s not so much competition that creates this asymmetry, but the playing field itself and its rules. Supposing there were 200 seamstresses in Armenia and France, and 50 clothes manufacturers operating in Armenia and only 10 in France; heck, let’s go the extra mile and say that the French seamstresses don’t have any other job options besides those 10 companies. Things wouldn’t change one bit; it wouldn’t matter for the Armenian seamstress that there are 50 different companies with job opportunities, since all have the liberty to not care about ensuring minimally decent working standards, while in France it would be extremely difficult for any employer to pull off something like that with the local workforce, so seamstresses in France will still enjoy substantially better working conditions than seamstresses in Armenia. The power asymmetry here, therefore, has less to do with the relative values brought by the supply of an additional employer/employee and more with their relative degrees of freedom.

          We may also take a purely theoretical example of two countries with similar populations, economic performances and job market situations and legislation, with the distinction that in country A, firing an employee is extremely difficult without good reasons and evidence, while in country B one can terminate employment for any reason and without notice. Who enjoys more power and a better ability to bargain for more benefits like paid vacations or better health insurance? The employees in country A, not because they offer superior marginal utility compared to the citizens from B, or because employers in country B possess a higher marginal utility, but because the differences in legal frameworks between A and B mean that the playing field is skewed in favor of employers in B, and the workforce from B has a narrower margin for error.

          As we can see, none of the situations and imbalances described above overlap much with the definition of marginal utility as “usefulness/pleasure/enjoyment produced by the supply of an additional unit of a particular good or service”, and cannot be explained by that alone. We can be generous and grant, Robert’s objections notwithstanding, that marginal utility isn’t altogether a useless concept to be done away with, despite its subjectivity and, to my knowledge, impossibility to be measured in any meaningful way; let’s say it’s a concept that helps enrich our understanding of reality. There would still be a fundamental difference between what power describes and marginal utility describes. The concept of power would deal, among others, with an entity’s liberties and constraints, into which marginal utility would play the role of only one factor out of many. At best, it may describe one very particular type of power in particular circumstances, but wouldn’t coincide with power in general beyond those limits.

  6. Robert
    This is a very good article. Identifying the conflicting interests of centres of power is probably where any theory of political economy should begin.
    My background is engineering. The comparison of a macro economic system to an engineering control system is an obvious one for me. In the latter, to achieve a desired outcome with numerous input variables, those variables must be appropriately balanced & weighted, & their input pure & uncorrupted by unwanted interferences.
    If we take the desired macro economic outcome to be that which is in the best interests of the vast majority of citizens – as in ‘democracy for the people …’ etc. – then a number of competing concentrations of power can be readily identified.
    The 1st & most obvious ones are, as Marx described (frankly a statement of the obvious), the largely opposite interests of Capital & Labour. It’s axiomatic that Labour will always occupy the vast majority of citizens in any society. It also follows (& empirical evidence is surely also obvious) that Capital, occupying a minority (& with massive resources) are naturally very able to concentrate power & work in their common interest. Whereas Labour, being numerous, diverse & lacking in individual resources are not. Ergo, the first and fundamental job of (democratic) Government should be to counter balance the interests of Capital on behalf of the majority of citizens – Labour.
    Yet what do we actually see in the structure & practice of Government, both historically & especially in the present times? Corruption, small & big ‘c’, in pretty much every area of Government & public service institution. Most basic to this, is the fact that nearly all the positions of power within the structure provide remuneration that allows significant additional income, often in due course all income, to be derived from ownership of Capital, not the individual’s labour. Indeed, when it comes to elected officials, existing wealth is a considerable advantage in gaining power. Certainly those at the top have the expectation of becoming full members of the Capital owning club within their careers.
    From an engineering systems point of view, this seems the most obvious flaw, signal interference, working against the stated desired outcome of the system of Government. The very people making decisions have an inbuilt, conscious or otherwise, personal bias. More often than not, we are expecting them to make decisions that are exactly +opposite+ to their own interests. Seriously, what outcome did we expect? (Party politics add in another undesirable concentration of power & control.)
    Against this, some will say that trades’ union promotion of political candidates offers sufficient counter balance. Tho’ those same people are usually trying to also diminish it, whilst also trying to convince us that the the power of Capital has little effect, when it clearly does, both inside & external to Government.
    However, whilst trades unionism certainly brought about great gains in democratic governance in the early days, they are not a substitute for proper Government representation of Labour’s interests. Apart from the obvious corruption of their leading officials also becoming members of the Capital owners club, unions individually are inherently sectoral and have come to represent ever narrower interests. Such that in Ireland, they only now represent public sector labour & very little private sector labour at all.
    Well, you can see where this going. Essentially, if we want Government to actually represent the majority of citizens, then the decision makers & influencers must live & earn their living as Labour does – not significantly from ownership of Capital. Treat public service as a special vocation, which cannot be a route to wealth. In return society can offer a guaranteed minimum income and pension for life.
    Sure, it may be unrealistic to imagine such a system being introduced to the degree ‘engineering’ would like – & certainly not if we rely on the present incumbents. But we could do considerably better than we do now.
    And we should also note Marx’s ever more prescient warning about unregulated Capitalism – the logical conclusion of ever increasing returns to Capital is ultimately economic collapse, or perhaps a neo-feudal system of slavery to a ‘financialised’ economy, as Professor Michael Hudson describes.

    Merry Christmas!

    1. Great comment. I’m not sure what I can say because you said everything so well, I’m not sure if there’s anything I can add. You covered everything really well, I’m definitely going to take notes. The role of Capital is certainly a crucial role that is woefully under discussed. I find it ironic reading debates from when democracy was being introduced (I studied political theory) everyone was convinced the poor would vote to rob the rich. They took the view that the working class were essentially all socialists and would vote accordingly. Funny how it didn’t quite turn out that way. The ability of the rich to convince the poor to vote for them is one of the great mysteries of politics.

      Thanks for such a detailed and interesting comment which is worthy of its own post. You have knowledge that would be impressive to hear from an economist and is quite stunning for an engineer. Thank you and I hope you don’t mind if I take some of your points and use them for myself 🙂

      1. In my very humble opinion, Marx is dead wrong on capital and labour having opposite interests. On the contrary, wages are a deeply related function of capital employed: without machine tools, factories, etc., labour is useless. It’s only when capital has been saved, invested and deployed that there is any reason to pay wages to anybody in the first place. Furthermore: the more advanced the machine tools, the more productive is unskilled labour and the higher that wages will rise. Remember that employers compete against each other and against the demand for leisure time to get unskilled labourers to work for them. Capital and labour should be thought of as part of an integrated whole. And the State – the coercive monopoly defined by its exclusive ability to violate property rights – has no positive role to play here. By violating property rights, it can only retard the process of capital accumulation and thereby stunt the general increase in real wages which would otherwise be possible.

        Re: democracy, it’s not simply the poor robbing the rich. It’s the millions of people who live off the State, in one way or another, voting to rob everybody else. (“The state is that great fiction by which everyone tries to live at the expense of everyone else” ) Strangely enough, it turns out that many people do quite well living off the State, and are richer than the people whose taxes they vote to receive (this would be considered a conflict of interest in any other context). If you removed all net tax recipients from the electoral rolls, I’m sure you’d get very different outcomes. If you adjusted it further and allowed people to vote only in proportion to the amount of net taxes paid, it would be different again.

      2. Robert
        Thanks! And you’re most welcome to use anything I’ve written as you wish. (If I know anything, it is because I’m a stowaway on the shoulders of giants who have freely shared their own knowledge.)

        I think you are terribly confused there, throwing out all sorts of ‘opinions’ like a scattergun without developing any kind of coherent argument for any.

        As regards the competition between the interests of Capital & Labour, I suggest you take a look at a company’s financial statements, noting particularly the relative position of such things as employee ‘wages’, ‘profits’, ‘dividends’ etc. & start thinking again from there 😉

        But as with anyone wishing to consider Marx’s seminal analysis of Capitalism, as an economic system (leaving aside all the wrongly attributed rubbish suggesting that Marx ‘proscribed’ much in the way of alternatives – which is what most people think, sadly), there is a modern phenomenon that Marx could not have foreseen (& did not).

        Marx’s critique was all based around the activities of the ‘real’ economy – provision of tangible goods & services – particularly the burgeoning industrial economy, in the period thru’ which he lived.

        However, as Michael Hudson (& others) write extensively about, there is a new layer of ‘Capital’ over and above that involved in the real economy, which serves no productive purpose whatever. That which Hudson terms the ‘financialised’ economy. Most people (including many so called economists) do not even realise it exists, far less that it has come to utterly dwarf & dominate the real, productive, economy, within barely more than 20 years.

        It is what the financial, banking sector, previously merely a service industry to the productive sector, has become. All the securitisation, derivatives & multitude of ‘financial products’ that is now ‘worth’ in the region of $700 trillion, or about 12 times global GDP. Trading at its base in existing assets (not creating any new ones) – the money-commodity-money circulation that Keen & others describe – but also leveraging up this trade in what can only really be described as gambling bets in a casino routinely rigged by the major players. (Libor is just the tip of the iceburg, cf William K Black & others.)

        This activity, as Hudson states, is the root cause of the present global crisis. There is only one source of real wealth creation – the real economy of goods and services – and it cannot possibly sustain exponentially rising claims for returns to this new source of ‘Capital’ (behaving similarly to that in Marx’s analysis). Nevertheless, rather than follow the most common & painless means to resolution that similar crises have historically (ultimately) followed – debt cancellation or credit ‘system reset’ – the new financialised economy is attempting to avoid few, if any, realised losses. Aided and abetted by the variously corrupt & ignorant political leadership, they are trying to push all the losses, via debt transfer, onto the real economy of ordinary citizens. Giving us all a mortgage, if you will, that none of us actually agreed to, or wanted.

        If the assets (near all unproductive), now sitting on banks’ etc. balance sheets, were ‘marked to market’ (as they arguably should be in any audited ‘fair’ view of financial position), then near all the world’s major financial institutions & banks would be obliged to declare their insolvency & be wound up. Certainly all those in the US and Europe.

        However, they claim, as banks are also responsible for the payments system of the real economy, that such a move would also bring financial Armageddon down on everybody. Some economists and banking experts disagree, tho’ no-one denies that there would be some damaging disruption. But some economists, like Keen, Hudson & others, argue that a way must be found, as recovery within in any acceptable time scale is not possible. The risks of social implosion are indeed high (Greece, Spain on the way) – ie we should not kid ourselves that what led to WWII could not happen again after the last time – an actually smaller, debt terms – similar event occurred. When indeed, precisely the same mistakes were made as are being made now.

        Anyhow, this comment is getting very long. But I will say this this.

        Key to understanding the macro economic solutions lies in properly understanding the monetary system we now have. Any real semblance of money as a ‘commodity’ was left behind decades ago (1971) when the Gold Standard’ (or Bretton Woods) was ditched. MMT describes modern money as ‘scorecard’. Anyone who does not understand why, does not have the intellectual framework to produce solutions. Sadly, most economists have not understood. Most work directly for financial institutions & have been well rewarded for their endeavours. Academe (in the mainstream) is also similarly captured (to use Chomsky’s expression).

        It also follows from this that having having introduced a deeply flawed system of shared currency, the Eurozone in particular is in dire straights, as evidenced, despite the media’s best efforts to cod us otherwise.

        Well, just one more thing. People of Robert’s age are going to witness, in their lifetimes, a world very different from any that has gone before. One in which human society has run headlong into its ecological limits on planet Earth. It is already beginning.
        One thing I conclude is that humanity will likely only survive, in any sense we now have, if the natural spirit we have for co-operation can reassert itself and come to the fore of our (global) affairs. The nascent, laudable efforts toward greater community, in the micro scale, will not be sufficient. This is not to deny that some competition among us does not have its place. In political economy terms, the private sector has its important role. But it must not in future dominate to the extent it does now. In a system defined by ecological limits, its logical conclusion is conflict & all the associated destruction of life on an ever increasing scale. I believe we will reach a point where fudging & can kicking – some middle ground – will no longer be an option.

        One of the most important things that attracts me to the MMT, Post Keynesian, school, is its agnostic stance on size & extent of state involvement in the economy. Beyond the inclusive & stabilising principal of a universal (strictly voluntary for participants) minimum wage Job Guarantee, it proscribes nothing whatever as regards the state’s role. Merely, explaining the facts of working parameters and, properly, ascribing such decisions of appropriate balance to the democratic process, unencumbered by false & ideologically motivated supposed economic (& monetary!) constraints.

        Happy new year! (ever hopeful)

        1. But the fact that wages and profits are both sourced from revenues does not imply that they are in opposition. Again, they are part of an integrated whole. Without the possibility of making profits and having a sustainable business, there are only charitable reasons to pay wages in the first place. The relationship is deeper than that, however: the marginal utility of labour, and hence the level of real wages in a competitive market, depends entirely on the capital stock available. The genesis of this capital stock is in the ability and willingness of investors to create it.

          Let me explain the concept with a very simple example. Imagine a world where farmers have access to medieval ploughs, and suppose that an unskilled labourer can produce 10 units of food per day, after costs, with one of these ploughs. How much will a farmer be willing to pay in wages to an unskilled labourer to work this plough? His breakeven point is up to an equivalent of 10 units of food in real wages.

          Now suppose that farmers have access to combine harvesters, which an unskilled labourer can use to produce 1,000 units of food per day (after costs). The breakeven point is now the equivalent of 1,000 units of food per day.

          Does this mean that wages will automatically rise from the equivalent of 10 units of food to the equivalent of 1,000 units? Of course not. However, it does mean that the real demand for unskilled labour will rise. A farmer who continues to pay plough-wages to his workers runs the risk of losing them to rival farmers. If all pre-existing farmers continue to pay plough-wages, non-farmers may notice the huge profits available in the industry, and enter it by investing in agricultural land and combine harvesters too – and then bidding away workers from those farmers still paying wages at the old rates.

          Today, an unskilled labourer in the developed world can find a job in a supermarket, on a factory floor, on a building site, etc, where modern technology and sophisticated processes make his labour valuable and necessitate relatively high wages to prevent him from choosing another employer (so long as his employer can overcome the obstacles of labour regulation, minimum wage laws, etc). This is in contrast to the labourer’s position if he landed in a typical poor country, where far less efficient uses of his labour would be available to employers and where therefore real wages would only be a tiny fraction of what he could receive in the wealthy economy.

          Following on from this analysis, it should be seen that high real wages for unskilled labour require the accumulation of ever more advanced forms of capital. Note that the capitalist seeks profits yes, but to do that he cannot steal labour from other capitalists: he must attract labour to work for him instead of for other capitalists or for nobody. This means finding more profitable uses for that labour than the other capitalists can find. And this means acquiring the advanced forms of capital which are capable of providing thoses uses. In this way, we see that capital and labour are part of an integrated whole. They require and complement each other.

          I could talk about the financialisation of our economies at very great length too, but I think I’ll leave it there for now. Happy New Year.

          1. GM
            The problem with your argument is that on this planet, the real world simply does not work like that. Employers regard wages as a cost which diminishes their profits, and attempt to do all in their power to reduce that cost. Up to and including buying macro economic influence and peddling the kind of some-other-world nonsense that you are writing here.
            For a start the kind of event – disruptive innovation – in your micro founded example is extremely rare in the real world & therefore offers no rational basis, even leaving aside the multitude of other factors which any observant person would want to consider.
            You continue in the same vein with numerous flawed conclusions and hidden assumptions. The most egregious of these, for people like you who clog up blogs with these spurious arguments, being that markets always clear & that micro always scales to macro.
            If you cannot, or refuse to, view the most obvious empirical evidence, we have nothing discuss.
            It might be of more interest were you to actually state some macro views (you did notice the blog topic was macro?) – lay your cards on on the table in some honest fashion – rather than some tedious & long winded attempt to imply some spurious at best macro conclusions from micro foundations. If my recognition of the form is anything to go by, I’d guess at some neoclassical/Austrian concoction? You know, near zero role for the state beyond some magical property laws, zero concern for the unemployed, & some mythical nostalgia for a metal backed currency that never functioned as peddled even in its own terms?
            Happy New Year to you 😉

  7. This is too broad of a topic for my to respond to meaningful in the short time I have, so I may revisit and comment more than once.

    To me, the treatment labour theory gets has always been particularly strange in economics, especially with it being treated as a commodity—perfectly competitive—factor.

    When discussing labour theory and power, I feel it is important—in addition to being in control of means of production—to bring in risk profiles: an employer naturally has more power as s/he has the advantage of being risk neutral whilst more employees (or potential employees) are risk averse, which creates at the onset an imbalance in the ability to negotiate.

    On the consumer front, it is interesting that you portray them as powerless—and I agree that many feel that way—, but the fact is that in a demand-driven economy, consumers hold all of the cards, though it is a sticky wicket. It is more a solidarity problem that might be best evaluated using game theory.

    Given that there is some interaction between supply and demand—even if not quite the textbook portrayal—, if consumers stopped demanding, prices would fall, and suppliers could either drop prices or go out of business. In a consumption-based economy, though, people as consumers create demand for product, and this demand provides wages to people as workers, as these goods need to be produced. So if people are too successful at voting with their wallets, they could be left out in the cold.

    At a more fundamental level, a problem lies in the obsession with the need to work and with the notion of full employment. Given historical trends, most people—and not only in industrialised nations—should be able to work 20 – 30 hours a week and be able to enjoy the rest as leisure time. This would also provide opportunities for others who are currently unemployed to fill in the gaps. However, with the current dysfunctional need to keep up with the Joneses—and one-up them—, we are never quite satisfied with enough.

    1. Consumers are not entirely powerless and you rightly point out that if organised they could control the economy. However the sheer difficulty of organising so many people makes the task almost impossible. In fact I don’t know of any consumer unions. There is also (as you mentioned) game theory problems such as uncertainty over a boycott, as one consumer may deny themselves the benefit of a good but the boycott may fail, so they lose without gain. Therefore there are serious free rider problems.

      In a way consumers are like cattle (that’s sounds deeply insulting but it isn’t really). If organised cows could overwhelm the farmer whom they heavily outnumber. If they even refused to move they could stall and even bankrupt the farm. Likewise, in theory, consumers have enormous power. However due to the dispersion of their numbers and the fact that (like cattle) they are so used to be lead that they don’t think about it.

  8. Oops! Didn’t mean to submit my previous post here, and I am unable to delete it.

    However, I would like to add that the Military-Industrial Complex is kept alive by the larger Military-Media-Industrial Complex. Without the Media component, it would not have such a strong hold.

  9. Many universities once upon a time called their economics departments, departments of political economy. I think your idea of power is very interesting, and really is common sense. It is a more realistic view of what actually happens.
    However, there are other factors not so much related to power as to influence. For example, I don’t think we yet have a good understanding of how the Internet and digital communications have affected our economies and our economic behavior. More information is available to more people about more subjects than ever before, yet we seem to be more ignorant. Behavior is more irrational, especially political behavior. Witness what is happening today in the U.S.
    I am a former CEO, journalist, and entrepreneur writing a book about the economy and things that could be done to improve it. Later today, or tomorrow I’m going to be posting on my blog, and FB page, a chapter on my idea that the minimum wage should be doubled. My argument tracks closely with yours, but with some additional wrinkles.
    One note about CEO pay that most people do not know about. In the U.S. back in the early 1990s the SEC imposed regulations that tied CEO pay to stock performance. Compensation above $1 million a year was not tax deductible to the corporation unless it was tied to stock performance. That, combined with the explosion of the 401-K, caused corporate CEOs to focus almost entirely on quarter to quarter stock performance. The change in corporate strategies has been enormous. They became very short-term. Good performance led to much higher CEO compensation. Disappointing performance led to corporate mergers and takeovers, and massive consolidation within industries into the huge multinationals that dominate our economy today.

  10. I’m no way an economist, but whatever the basis of the theory- it should work in a simple hunter type society as well as an extremely complex one. My opinion is something based on risk and reward; In this case, power might be one ‘tool’ to lessen risk.

    1. To the contrary, I would believe that it is impossible to have such a general sweeping theory that would hold in such widely divergent situations. Modern economies are so different that awareness must be made of their uniqueness.

  11. Economics is the study of how people respond to material incentives. I think this is a perfectly valid area of study. Robert, I don’t think you wasted your time studying economics.

    The problem with economics, or rather with certain over-confident economists, is that economics is too one-dimensional to provide a complete explanation of human behavior. For this you need political science, sociology, anthropology, psychology and the study of literature and culture.

    Your power theory explores a dimension of human interaction that is not explained by the law of supply and demand, but power relationships, too, are just one aspect (although a very important aspect) of human behavior.

    In looking at my own life, I can see how some aspects are governed by material incentives and some by power relationships, but other aspects of my live are governed by culture, public opinion, personal emotion, personal conviction, etc.

    I don’t see anything wrong with your power theory (which you are not the first to discover – see Bertrand Russell’s POWER written in 1938). I just don’t think that any one theory is a complete explanation of human interaction. Actually, I don’t think you do, either.

    I’d like to add that I admire the clarity with which you raise fundamental issues and elicit thoughtful discussion.

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