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The ABCs of Political Economy

318 Pages · 2003 · 1.19 MB · English

  • The ABCs of Political Economy

    The ABCs of Political


    Economy


    A Modern Approach


    Robin Hahnel


    P


    Pluto Press


    LONDON • STERLING, VIRGINIA First published 2002 by Pluto Press


    345 Archway Road, London N6 5AA


    and 22883 Quicksilver Drive,


    Sterling, VA 20166–2012, USA


    www.plutobooks.com


    Copyright © Robin Hahnel 2002


    The right of Robin Hahnel to be identified as the author of this work has


    been asserted by him in accordance with the Copyright, Designs and


    Patents Act 1988.


    British Library Cataloguing in Publication Data


    A catalogue record for this book is available from the British Library


    ISBN 0 7453 1858 4 hardback


    ISBN 0 7453 1857 6 paperback


    Library of Congress Cataloging in Publication Data


    Hahnel, Robin


    The ABCs of political economy : a modern approach / Robin Hahnel.


    p. cm.


    ISBN 0–7453–1858–4 (hardback) –– ISBN 0–7453–1857–6 (pbk.)


    1. Economics. I. Title.


    HB171 .H22 2002


    330––dc21


    2002006491


    10 9 8 7 6 5 4 3 2


    Designed and produced for Pluto Press by


    Chase Publishing Services, Fortescue, Sidmouth EX10 9QG


    Typeset from disk by Stanford DTP Services, Towcester


    Printed in Canada by Transcontinental Printing Contents


    List of Illustrations x


    Preface xi


    Acknowledgements xv


    1 Economics and Liberating Theory 1


    People and Society 1


    The Human Center 2


    The Laws of Evolution Reconsidered 2


    Natural, Species, and Derived Needs and Potentials 4


    Human Consciousness 5


    Human Sociability 6


    Human Character Structures 7


    The Relation of Consciousness to Activity 8


    The Possibility of Detrimental Character Structures 9


    The Institutional Boundary 10


    Why Must There Be Social Institutions? 11


    Complementary Holism 13


    Four Spheres of Social Life 13


    Relations Between Center, Boundary and Spheres 15


    Social Stability and Social Change 16


    Agents of History 17


    2 What Should We Demand from Our Economy? 20


    Economic Justice 20


    Increasing Inequality of Wealth and Income 20


    Different Conceptions of Economic Justice 24


    Conservative Maxim 1 24


    Liberal Maxim 2 28


    Radical Maxim 3 30


    Efficiency 31


    The Pareto Principle 32


    The Efficiency Criterion 33


    Seven Deadly Sins of Inefficiency 37


    Endogenous Preferences 38


    Self-Management 40


    Solidarity 41 vi The ABCs of Political Economy


    Variety 42


    Environmental Sustainability 43


    Conclusion 44


    3 A Simple Corn Model 45


    A Simple Corn Economy 45


    Situation 1: Inegalitarian Distribution of Scarce Seed Corn 49


    Autarky 50


    Labor Market 50


    Credit Market 54


    Situation 2: Egalitarian Distribution of Scarce Seed Corn 57


    Autarky 57


    Labor Market 58


    Credit Market 59


    Conclusions from the Simple Corn Model 60


    Generalizing Conclusions 63


    Economic Justice in the Simple Corn Model 67


    4 Markets: Guided by an Invisible Hand or Foot? 71


    How Do Markets Work? 71


    What is a Market? 71


    The “Law” of Supply 72


    The “Law” of Demand 72


    The “Law” of Uniform Price 75


    The Micro “Law” of Supply and Demand 75


    Elasticity of Supply and Demand 79


    The Dream of a Beneficent Invisible Hand 80


    The Nightmare of a Malevolent Invisible Foot 84


    Externalities: The Auto Industry 85


    Public Goods: Pollution Reduction 88


    The Prevalence of External Effects 91


    Snowballing Inefficiency 96


    Market Disequilibria 97


    Conclusion: Market Failure is Significant 99


    Markets Undermine the Ties that Bind Us 99


    5 Micro Economic Models 103


    The Public Good Game 103


    The Price of Power Game 106


    The Price of Patriarchy 109


    Conflict Theory of the Firm 111 Contents vii


    Income Distribution, Prices and Technical Change 112


    The Sraffa Model 114


    Technical Change in the Sraffa Model 118


    Technical Change and the Rate of Profit 123


    A Note of Caution 125


    6 Macro Economics: Aggregate Demand as Leading Lady128


    The Macro “Law” of Supply and Demand 128


    Aggregate Demand 132


    Consumption Demand 133


    Investment Demand 133


    Government Spending 135


    The Pie Principle 136


    The Simple Keynesian Closed Economy Macro Model 137


    Fiscal Policy 140


    The Fallacy of Say’s Law 141


    Income Expenditure Multipliers 143


    Other Causes of Unemployment and Inflation 147


    Myths About Inflation 150


    Myths About Deficits and the National Debt 152


    The Balanced Budget Ploy 154


    Wage-Led Growth 157


    7 Money, Banks, and Finance 160


    Money: A Problematic Convenience 160


    Banks: Bigamy Not a Proper Marriage 162


    Monetary Policy: Another Way to Skin the Cat 168


    The Relationship Between the Financial and “Real”


    Economies 171


    8 International Economics: Mutual Benefit


    or Imperialism? 175


    Why Trade Can Increase Global Efficiency 176


    Comparative, Not Absolute Advantage Drives Trade 177


    Why Trade Can Decrease Global Efficiency 180


    Inaccurate Prices Misidentify Comparative


    Advantages 181


    Unstable International Markets Create Macro


    Inefficiencies 182


    Adjustment Costs Are Not Always Insignificant 183


    Dynamic Inefficiency 183 viii The ABCs of Political Economy


    Why Trade Usually Aggravates Global Inequality 184


    Unfair Distribution of the Benefits of Trade Between


    Countries 185


    Unfair Distribution of the Costs and Benefits of


    Trade Within Countries 187


    Why International Investment Can Increase Global


    Efficiency 190


    Why International Investment Can Decrease Global


    Efficiency 191


    Why International Investment Usually Aggravates


    Global Inequality 193


    The Balance of Payments Accounts 198


    Open Economy Macro Economics and IMF


    Conditionality Agreements 201


    9 Macro Economic Models 208


    Bank Runs 208


    International Financial Crises 211


    International Investment in a Simple Corn Model 212


    Banks in a Simple Corn Model 216


    Imperfect Lending Without Banks 216


    Lending With Banks When All Goes Well 217


    Lending With Banks When All Does Not Go Well 218


    International Finance in an International Corn Model 219


    Fiscal and Monetary Policy in a Closed Economy Macro


    Model 220


    IMF Conditionality Agreements in an Open Economy


    Macro Model 225


    Wage-Led Growth in a Long Run, Political Economy


    Macro Model 231


    The General Framework 231


    A Keynesian Theory of Investment 235


    A Marxian Theory of Wage Determination 235


    Solving the Model 236


    An Increase in Capitalists’ Propensity to Save 238


    An Increase in Capitalists’ Propensity to Invest 240


    An Increase in Workers’ Bargaining Power 240


    10 What Is To Be Undone? The Economics of


    Competition and Greed 242


    Free Enterprise Equals Economic Freedom – Not 242 Contents ix


    Free Enterprise is Efficient – Not 248


    Biased Price Signals 249


    Conflict Theory of the Firm 249


    Free Enterprise Reduces Economic Discrimination – Not 251


    Free Enterprise is Fair – Not 253


    Markets Equal Economic Freedom – Not 254


    Markets Are Fair – Not 257


    Markets Are Efficient – Not 258


    What Went Wrong? 261


    11 What Is To Be Done? The Economics of Equitable


    Cooperation 265


    Not All Capitalisms Are Created Equal 265


    Taming Finance 266


    Full Employment Macro Policies 267


    Industrial Policy 268


    Wage-Led Growth 270


    Progressive Not Regressive Taxes 270


    Tax Bads Not Goods 272


    A Mixed Economy 272


    Living Wages 274


    A Safe Safety Net 276


    Worker and Consumer Empowerment 277


    Beyond Capitalism 278


    Replace Private Ownership with Workers’


    Self-Management 279


    Replace Markets with Democratic Planning 280


    Participatory Economics 282


    Reasonable Doubts 284


    Conclusion 291


    Index 293 List of Illustrations


    1.1 Human Center and Institutional Boundary 12


    1.2 Four Spheres of Social Life 14


    2.1 Gini Coefficients for US Household Income 1947–93 23


    2.2 The Efficiency Criterion 33


    4.1 Supply and Demand 73


    4.2 Inefficiencies in the Automobile Market 87


    5.1 Price of Power Game 107


    5.2 Transformed Price of Power Game 109


    x Preface


    The ABCs of Political Economy: A Modern Approach is an accessible


    introduction to modern, radical, political economy. It draws on the


    work of Karl Marx, Thorstein Veblen, John Maynard Keynes, Michael


    Kalecki, Piero Sraffa, Joan Robinson, and other great political


    economists, but requires no prior familiarity with political economy,


    and concentrates on modern concepts and models best suited to


    understanding economic issues today. The ABCs provides readers


    who are dissatisfied with the economics of competition and greed


    and mistrustful of conventional economic theory with the essential


    tools they need for a critical evaluation of the major economic insti-


    tutions and policies of our day. The ABCsalso teaches readers who


    want to make our economies more democratic, equitable, sustain-


    able and efficient what they need to know to evaluate how effective


    different policies and institutional reforms are likely to be at accom-


    plishing their goals. In other words, The ABCs of Political Economy


    empowers people who are dissatisfied with today’s economies and


    mainstream theories to think through how we can move from the


    destructive economics of competition and greed toward an


    economics of equitable cooperation.


    No previous economics background is assumed, and everything is


    explained verbally in eight core chapters. Simple theoretical models


    that illustrate the logic of key relationships are confined to three


    chapters which are not necessary to follow the rest of the text. Even


    the models in these three chapters require no mathematical skills


    beyond arithmetic and high school algebra. But while technique has


    been reduced to a minimum, and confined to chapters that can be


    skipped or postponed, there is much to be learned about important


    aspects of modern economies and policy debates from the simple


    political economy models in chapters 3, 5, and 9. I urge readers who


    want to empower themselves as economic thinkers, that is, readers


    who want to be able to analyze economic issues and debates for


    themselves rather than always look to others to provide them with


    a “politically correct” conclusion, to invest the time to explore the


    simple models in these three chapters. These chapters help you to


    become a “player” rather than a “spectator” in the game of modern


    political economy.


    xi


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