The ABCs of Political Economy

318 Pages · 2003 · 1.19 MB · English

  • The ABCs of Political Economy

    The ABCs of Political


    A Modern Approach

    Robin Hahnel


    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


    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



    10 9 8 7 6 5 4 3 2

    Designed and produced for Pluto Press by

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    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.


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