An interview with Naked Capitalism’s Phil Pilkington on our book ‘Modern Political Economics’ – Part A

Naked Capitalism just published a long interview that I gave to Phil Pilkington on the themes of Modern Political Economics: Making sense of the post-2008 world; the book jointly authored by myself, Joseph Halevi and Nicholas Theocarakis. Here is the interview’s first part:

Interview conducted by Philip Pilkington.

Philip Pilkington: Without getting into too much technical detail what is it that you refer to in your book Modern Political Economics: Making Sense of the Post-2008 World the ‘inherent error’ in all economic theories and models?

Yanis Varoufakis: The essence of the economists’ inherent error is that they erred into thinking it is possible to tell a credible story about how values and prices are formed in complex (multi-sector) economies that grow through time. For decades economistsstruggled to produce such a narrative. But all their best laid plans for piecing it together crashed on the shoals of indeterminacy. Put simply, their mathematical models could not be solved. At that point economists did one of two things: Either they accepted that it could not be done, or they introduced hidden (and sometimes not to hidden) assumptions that ‘closed’ their model at the expense of credulity (e.g. an assumption that the economy comprises a lone Robinson Crusoe-like figure, or a single commodity, or that all exchanges occurred in a timeless universe and at a flash of a fleeting moment). The former scholars were forgotten by history, as their papers never saw the light of day. The latter built up careers, sometimes radiant ones. Alas, their economics were riddled with only thinly disguised ‘tricks’ the purpose of which was to disguise economics’ ‘inherent error’.

PP: One consequence of this is that you believe a meaningful theory of value cannot be established, right? In this estimation both the old Marxist/Ricardian labour theory of value is as meaningless as the supposedly sophisticated marginal theory of value. Can you give a gloss on why this is the case and what consequences it has for political economy?

YV: Allow me to be tactful about what our book refers to as the economists’ inherent error (including Ricardo’s and Marx’s): If a theory of value cannot be ‘closed’ properly (or embedded in a mathematically appropriate manner) within a theory of growth, then we have to cut corners to do it.

Neoclassical economists cut corners either by telling stories about how an economy creates relative prices in the absence of time, or by narrating the real-time growth of some single-sector or single-individual economy. Ricardo and Marx, in contrast, allow for different sectors to grow concurrently but introduce a single sector economy through the backdoor by implicitly assuming that the degree of capital utilisation in the same across all sectors (so as to ensure that profit rates are also equal across sectors). In the end, the same inherent error rears its ugly head and pushes economists into interminable debates of little or no value. The consequence of this, for political economics, is that we get absorbed in a self-referential, introverted mindset that allows us to lose sight of a really-existing capitalist reality which refuses stubbornly to fit into well-behaved models.

PP: You mention that economists seem to always want to ‘close’ their models. This appears to me to be a somewhat desperate desire to create a deterministic system. Yet, even in physics determinism is generally recognised to be incomplete and ‘open’. Why are the economists still stuck back in the 19th century in this regard?

YV: All model builders have a natural tendency to ‘close’ their models. When we see a system of equations we immediately wonder whether it can be solved. When (and if) we discover asolution –‘closure’ in other words – we feel a sense of pride and, even, joy. So, yes, if you are in the business of building models, it is natural to aspire to mathematical ‘closure’. This aspiration comes natural to all: mathematicians of course but also economists and physicists (the latter have been, after all, gunning for the Theory of Everything for a long, long while). The difference between economists and physicists lies not in their ambition to ‘close’ their models. It lies in the following:

Physics is blessed with an object of study – let’s call it Nature – that does, normally, not give a damn about the physicists’ theories of it (the Heisenberg Principle excluded). This means that Nature provides an impassionate assessor of the physicists’ models. If their models have been ‘closed’ in a manner that defies logic (i.e. by means of illegitimate hidden axioms), then Nature will expose them. It will defy their predictions in the laboratory (or thought the telescope) in a manner that forces the physicists back to the drawing board. So, if a particular model cannot be ‘closed’ (because it is not solvable), Nature will ensure that the physicists come clean and admit that this is so.

Economics on the other hand, by virtue of being a social science, is caught up in the famous infinite regress problem. What this means is that there exists no neat separation between (a) the economists’ object of study and (b) our theories about it. Indeed, our theories are part and parcel of the world of phenomena that we are trying to theorise about (unlike a theory of thermodynamics which is quite independent of the thermodynamic phenomena under study). Thus, on the one hand, our models can never be properly ‘closed’ (since they are, by construction, ‘open’ theories/beliefs about theories/beliefs etc.) while, on the other hand, when they are illegitimately ‘closed-shut’ by the economists (by means of hidden axioms whose purpose is to ‘close’ the damned models at all cost) there is no objective test that can either confirm or deny the validity of these models. Put differently, the Social Economy can never come to an objective verdict on our economic models (e.g. on some theory of bond markets) simply because these models are an intimate part of our Social Economy (i.e. of the larger game within which agents form beliefs about particular bonds and about the bond market in general).

This great difference between physics and economics means that, whereas physicists gain their discursive power in society from managing to explain and to predict the world we live in, the economists gain their discursive power exclusively from:

(i) convincing the rest (who are not sophisticated enough to be able to discern that they managed to ‘close’ their models utilising logically incoherent and well hidden axioms) that they managed successfully to ‘close’ their models, and

(ii) the great utility that these models offer to financiers who use similar models in order to pretend to value risky assets (e.g. CDOs)

(iii) the political utility offered by these ‘closed’ models to anyone who wants to argue that capitalism is a socio-economic system as natural as Nature itself, and thus amenable to the 19th century mechanistic approach which helped humanity conquer electromagnetic and other such natural phenomena.

PP: But some might say that the economists DO have a reality to contend with and that reality came screaming back in 2008. This certainly isn’t the first time that a crisis has occurred and yet economists remain evasive or they arrogantly assert that their models can in fact deal with it, when it is clear to any objective observer that they cannot. Does this not indicate that there is something fundamentally different happening in the economics profession?

YV: Economists may very well have a ‘reality’ content, to the extent that they are creatures of this really-existing world. The problem is that their own circumstances, within this reality, are improved significantly the less their own models of this reality has to do with actual… reality. In other words, the economics profession concentrates its rewards (tenured positions, large research grants etc.) onto the economists whose models subscribe to certain norms. The most important of these norms is that the truth of the offered economics be self contained within ‘closed’ models whose ‘solution sets’ are rather narrow. To meet this demand economists must ensure that their models leave no room for inconveniently open-ended phenomena like… crises.

This leads us to the question (that you pose): So, how do economists respond when some real crisis hits? How do their account for the fact that when their model had left no room for it? The fascinating answer is that they assume the crisis to have been the result of a random ‘disturbance’. Something like a meteor falling on an otherwise harmonious Earth; an event that is to be untheorised per se. Then, they employ all their mathematical prowess in order to ‘study’ how the ‘system’ (i.e. capitalism) absorbs this shock. As you may imagine, the result of this ‘recovery’ path is founded on assumptions which can only yield one plausible answer: The process of adjustment to the shock of the crisis is best left to the markets which, prior to the crisis, were assumed incapable of causing a crisis!

PP: That’s really twisted. How do you think students are responding to this chicanery after the crisis? And maybe you could say something about how students are imbued with this mindset in the first place.

YV : There have been some interesting studies that reveal how common decency and ‘other’-regarding norms are weeded out of students of economics very early in their undergraduate career. Take the example of the generalised prisoner’s dilemma below:

Young men and women are given some money (e.g. $10) and asked to contribute (each one separately from the rest, and in perfect anonymity) all or part of it to a common purse. Then, the contents of the purse are multiplied by the factor of, say, three and the contents redistributed among all of them independently of their contribution. Clearly, the best outcome for the group is that each contributes all of his or her windfall to the common purse and, that way, each gets a return three times as large. The problem here is that there is a temptation to let others contribute while you do not (since that way you get your share of three times of their contributions and, to boot, you have also kept your own money).

What we find in experimental studies involving real students, who play the above game with real money, is something quite startling: students of economics were significantly less willing to contribute to the common purse. Moreover they were more pessimistic about the prospects that others would contribute! So the question arose: Is it that economics attracts the less cooperative, more ruthless young persons? Or is it that exposure to economics makes them relatively more ruthless, pessimistic and aggressive?

To find out, the experiments were repeated separately for first semester first year undergraduates (before they were ‘contaminated’ with economics or other subjects) and for students who had just graduated. Guess what: Amongst the fresh(wo)men who played the game, the ones that had chosen to major in economics did not behave differently to the rest. They were equally willing to contribute. Therefore no evidence was found supporting the hypothesis that economics attracts misanthropes. On the other hand, amongst graduates those with an economics training stood out from the rest: they were much less likely to contribute, and more pessimistic about the others. The conclusion is inescapable: a training in economics significantly increases the probability that a person becomes less sociable, more aggressive, less cooperative; in short, miserable.

Why and how is this indoctrination taking place? The answer is simple: Economists are all about creating determinate models; ‘closed’ models that predict behaviour. To do this, they need to assume a particularly narrow minded form of rationality (which I call ‘instrumental rationality’): you are rational to the extent that you deploy your means efficiently in the pursuit of given objectives. When a young person is told repeatedly that to be rational means to be ruthlessly instrumental (i.e. to treat others as a means to one’s own ends), and that contributing in this game is for sissies (or, more ‘scientifically’, irrational), is it any wonder that a training in economics makes young persons more brutish and nastier?

The end result is that youngsters with a heightened sense of civic responsibility either drop out of economics, in a bid to retain it, or manage gradually to shed it; to adopt ‘instrumental rationality’ in their own daily life and mindset. Suddenly, the models begin to shape the modellers, rather than the other way round. It is a subtle process of change that turns economists into simulacra of themselves in a hopeless pursuit of ‘closed’ models that validate their own sad ‘conversion’. Seen from a different perspective, what we have here is a remarkable Darwinian process that guarantees the survival and dominance, within economics departments, of the anti-social, aka instrumentally rational, fools.

As for the Crisis and its effects on economics students and departments, I am afraid it has done nothing to ameliorate this Darwinian mechanism within existing economic departments. The norms of instrumental reasoning are so powerful that not even the earthquake of the Crisis has had the power to unsettle them. I have a hunch, however, that what the Crisis will do is speed up further the rate of decline in the number of youngsters interested in studying economics. This is the good news. The bad news is that they will not turn to other social studies but to pseudo-disciplines like marketing, business, advertising etc.

PP: That’s fascinating, let’s continue to run with this for a moment. If what you say is true – and I believe the evidence is unquestionable in this regard – then economics is not a science whatsoever. It more so resembles a school of morality or even a philosophical cult. The old Greek Stoics spring to mind. They were a school of philosophy that not only taught certain ideas but demanded that their followers live these ideas in their day-to-day lives. But in economics the students aren’t even told that they’re signing up for a moral vision, a sort of religion or belief system, they’re told that they’re being initiated into an objective science. Perhaps you could reflect a little in that direction and its implications?

YV: Quite so. It is a priesthood that truly believes it is not a priesthood but, rather, a community of scientists. How do they manage to maintain this delusion? The simple answer is because their incantations involve rather advanced mathematics and their rituals are steeped in statistical tests and projections.

Indeed, in aesthetic terms, the economists’ papers, models, presentations seem indistinguishable from those of physicists, bio-statisticians etc. The only difference is that, unlike the latter, economists generate nothing more than analytical propositions about economic variables which are, as Popper would have pointed out, profoundly non-falsifiable. And here is the rub. Once their non-falsifiable (and thus non-verifiable) propositions are expressed, the statistical tests that follow (usually referred to as econometrics) give economists a great excuse to imagine that their models have been tested. But tested they never are!

Let me explain this in more detail, as it goes to the heart of your question: The economist first builds a model – say: M – that seeks to explain one or more variables (e.g. wages and employment). Once that complex mathematical model is ‘solved’ (just like a system of two equations in two unknowns, y and x, can be solved by means of a function that links y to x; e.g. y = 3x+5), a so called ‘reduced form’ equation (or system of equations) is derived from that solution. Let’s call this R. What economists are good at doing is demonstrating that R corresponds to M (i.e. when the mathematical relationship R holds, this is consistent with the solution of model M). The virtue of R is that is can be checked statistically: data is collected and used to show that, indeed, there is no evidence that R does not hold in real life. At that point, the economist celebrates with yelps of joy: “My model M has been proven to be consistent with reality.” Alas, what the economist forgets to add is the crux of the matter. And what is that? Two crucial facts:

(a) There is a plethora of models, in addition to M, that are also consistent with R. Which means, naturally, that there has been no demonstration whatsoever that model M has been verified (since an infinity of alternatives could explain R just as competently). Now, of course this is also true in non-experimental sciences like astronomy. Yet, economics is unique. This is why:

(b) Model M, like all possible economic models, can only squeeze their ‘reduced form’ R out of their edifice if dodgy assumptions are made regarding time and/or complexity; i.e. only if they axiomatically dismiss what I call the economists’ ‘inherent error’. The practical importance of this is that the imposition of these assumptions may have succeeded in deriving R out of M but that success is bought at the price of having lost any capacity to predict what a complex economic phenomenon will generate (as outcomes) in the future (recall that if you account properly for both complexity and time in model M, no R is possible). It is in this sense that, as I claimed above, no test of M’s predictive capacity (regarding events unfolding in real time) is possible.

This is a most peculiar failure: The hapless economist uses the same tools as acclaimed physicists and astronomers. She has trained for years to speak precisely the same language as them, to understand the same advanced mathematics, to deploy most complex statistical methods which are an essential part of the scientific toolbox. It is, understandably, incredibly difficult to accept that her work is a form of higher order superstition; a religion couched in the language of mathematics and statistics. Tragically, this is precisely what it is. Come to think of it, what is it that separates science from mythology? The fact that scientific propositions are not self-referential. That, in science (unlike in mythology), when the facts clash with the theory it is too bad for the theory.

E.E. Evans-Pritchard (the famous anthropologist) once offered a brilliant insight into the social success of the priesthood within the Azande society. The question he asked is similar to yours (regarding economists): If they get it so wrong so often, how should we explain their continuing dominance? When the Azande priests and oracles failed to predict or avert disasters, why did people continue to believe them? His explanation of the Azande’s unshakeable belief in witchcraft, oracles and magic goes like this:

Azande see as well as we that the failure of their oracle to prophesy truly calls for explanation, but so entangled are they in mystical notions that they must make use of them to account for failure. The contradiction between experience and one mystical notion is explained by reference to other mystical notions. Evans-Pritchard in his Witchcraft, Oracles and Magic among the Azande, 1937

Economics, I submit to you, is not much different. Whenever it fails to predict properly some economic phenomenon (which is more often than not), that failure is accounted for by appealing to the same mystical economic notions which failed in the first place. Occasionally new notions are created in order to account for the failure of the earlier ones. For instance, the notion of natural unemployment was created in order to explain the failure of the market to engender full employment and of economics to explain that failure. More generally, unemployment and excess demand (or supply) is ‘proof’ of insufficient competition which is to be fought by the magic of deregulation. If deregulation does not work, more privatisation will do the trick. If this fails, it must have been the fault of the labour market which is not sufficiently liberated from the spell of unions and government social security benefits. And so on. The fact that these ex post rationalisations of theoretical failure are narrated in mathematically complex language, and accompanied by myriad statistical ‘tests’, adds to their social power to silence critics without and doubts within.

32 thoughts on “An interview with Naked Capitalism’s Phil Pilkington on our book ‘Modern Political Economics’ – Part A

  1. Pingback: Γιάννης Βαρουφάκης @ naked capitalism : Ιερατείο Οικονομολόγων | Dimitris Papadopoulos

  2. @ yanisv, March 4, 2012: 04:37.

    Rents are surely a realist category that can explain actual profits, but what kind of factors could enter a model that abstracts from rents and tries to accommodate profits under perfect competition? I ask this because I don’t want to regress to the way so-called Neo-Keynesian models introduce profits: through the assumption of imperfect-competition.

    This is important – the main driving force in economics (pursuit of profit) cannot be left out of the most abstract model we can think of (perfect-competition). Otherwise, we our model posits that the main force is in some way a ‘mistake’.

  3. Pingback: Economic Theory | Pearltrees

  4. What would be the usefulness of fitting a theory of value into a therory of growth? It would be like trying to fit a theory of elementary particles into the Newtonian theory of dynamics.The latter has been usefull for a long time and continues to be so without the former. Attempts to make such a fit seem like something members of a priesthood would do. I remember a historical story with a similar flavour.

    In the year 1453 thwe last bastion of thwe Bizantines, the city of Constantinopol was taken by Ottaman forces lead by Sultan mehmet. To take the city he had to ashift strategy and move 100 warships overland, over the hills from the north shore of the Marmara Sea i9nto the Golden horn. When he enters the center of the Orthodox church he finds a group of high ranking priests absorbed in a very serious discussion, so much that they do not see him arriving. The Sultan inquiries abot the subject of discussion: thwey were determining the number of angles that could sit on a pinhead! The Sultan lets them be and decides that as long as rthere are 3000 greeks living there, the Orthodox church and their priests can stay in the city and practice their religion. With the sort of useless thinking he has hear4d they will not be a threat to his rule.

    Trying to fit a theory of value into a theory of growth sounds very much like trying to count the number of angles. Because one is trying to undeerstand a truly complex system, diving straight into the mixcro level and then building up pieces to the macro level will be difficult and quite possibly impopssible.

    Yanis, you have yopur finger on something important, capital flows. If iot is identified with energy flows then it will be the first step in the use of the methods of dissipative structures. There are random fluctuations just about everywhere. An isolated system which does not exchange energy with the outside, will be driven by the second law o of thermodynamics to uqilibrium, to complete chaos, random fluctuations and dweaTH. oRDER AND STRUCTURE ARE DRIVEN AND MAINTAINED BY ENRGY FLOWS IN METASTABLE STATES.

    tHERE WILL BE PROBABLY SIGNIFICANT GAINS FROM PHENOMENOLOGICAL RELATIONS BASED on emperically determinedmacro varioabnles foundedn on objective data. Such relations will be intermideate between micro and macro levels.One woukld be then in a position to take advantge of methodas developed bt Ilya Prigogine and his followers at the Free university of Brussels.

    Also one can learn fromthe approach takenby Ian Morris9Stanford university) in understanding development of human history over many centuries. he has made the assumption that human beings act pretty much the same way in all cultures and countries in the world, and has used only four parameters based on objective data in his book “Why the West Rules- Now`. is economics more complex to study then human historical developmentÉ Complexiotyid often in the mind of the beholder. Einstein wopuild have been happy with him and prigogine, thei theoriwes are simple but not too simple.

    There are excioting times ahead for all sciences, including political economy and social sciences.

    Opportunities are usefull to thoase who can recognize them.

    My bert whishes.

  5. You have a ststement ‘ thie aspiration …. economists and physicists (the latter have been after all gunning for the the Theory of Everything for a long long while’ would make physics appear mechanistic and simplistic in undertanding the workings of a complex world. Physics has made also significant progress for a long,long time also. Two statements from Albert Einstein may shade some light: `the best legacy for a theory is a more comprehensive theory in which it lives on` and `a theory must be simple but not too simple`. Conceptually complex theories are not desirable because any set of facts can be explained by making the story more complex, something the priesthood would peroduce. There is also a sense of aesthetics in simplicity used effectively. The ultiment compliment a phyasicist can meke to anothwer is `beautiful`and,or èlegent`

    i can criticise physics but it would take a longer explation.

  6. @yanisv

    Of course Apple’s or Google’s profits cannot be explained solemnly in terms of surplus value but they can be explained by the Marxist political economy. Marx distinguished two types of rent: differential rent and absolute ground rent. The first arises when for example a company introduces a new labor saving technique . But before this new technique (we can add here the introduction of a new product or an imagined new product created by successful marketing) spreads to the hole sector this first company will exert a surplus profit relative to the others that did not yet introduced this new technology. When they do and they are forced to do because of the competition, then this will have the impact to lessen the socially necessary labor time that is needed to produce the goods of the concerned sector (lessening of their exchange values) which will reduce the total profits. But before this happens the first will reap extra profits. The absolute ground rent explains situations of classic monopolies, companies that control certain markets because of the luck or inefficient competition.

    Bearing this in mind we can explain the profits of Apple and Google. Apple earns extra profits because of the first type of rent (new products or more technologically advanced), but of course this cannot last for long (a few years back it was Nokia in its place although not that successfully). Google’s profits on the other hand are product of both types of rent. New and more innovative products and monopolization of a market. And of course both companies extract an unknown amount of surplus labor from their employees. In the end these companies are the tip of the iceberg, mind their p.r. we cannot say that they represent the hegemonic pattern of modern capitalism, even in the West. The vast majority of the workers (white or blue collar) earn a living from classic capitalist corporations that earn almost all of their profits from extracting surplus value from them (as an average of course and not measured exactly in each company).

    If we generalize the example of Google or Apple we risk the danger to enlist the bulk of western workers/employees to the so called salaried bourgeoisie which collectively along the capitalists, extract rents from the workers of the third world, as Zizek does in one of his last bombastic essays…

  7. @yanisv

    In the third volume of Capital Marx acknowledges that the various industries have different organic compositions of capital which complicate and alter the value relations of commodities into price of production relations. From this arises the well known in the Marxist circles, “transformation problem” from values to production and then market prices. At the same time Marx analyzes that monopolies (natural, artificial or random) introduce further alternations into relative prices. So you see Marx does not need to assume axiomatically an equal organic composition of capital in the various branches. He is perfectly capable to include in his system the extraction of “rents”, as you say, or super profits as he would have had it, from various industries. But he also pointed out that these super profits were nothing more than an above the average profit of some industries because of their monopoly position, or their relative lower organic composition of capital. But that was an unstable position, either because other capitals would flow in to take advantage of the higher rates of profit, thus rising, in the medium to long term the organic composition, or, in the case of monopolies with various ways of substitution (new products with the same function) or with political pressure to break up them (like the anti monopoly legislation in the USA at the beginning of the 20th century) etc. Needless to say that these “rents” are nothing more than an above the average part (which means that other capitals earn below the average) from the pool of surplus labor that the productive (in capitalist terms) labor produces. If we don’t accept some kind of labor theory of value the we have to explain how value and profits in general are produced (not the specific cases of monopoly profits). Unless we don’t want to end up with the assumption that capital, in some magic way, creates value and profit.

    • I agree that Marx’s attempt to bypass the problem by positing some common pool of surplus value that is somehow redistributed courtesy of central monopoly capital power is both intriguing and ingenuous. Yet it is utterly untheorised and unexplained. A desperate attempt to carry on assuming that profit reflects nothing more than surplus labour. Another case when the theorist’s needs overcome logic. Ask yourself something simple: Can Apple’s or Google’s profits did adequately explained in this manner? I submit to you that the honest answer is no.

  8. @Yanis Varoufakis

    “I said that, in assuming equalisation of profit rates, he can only ‘solve’ his value system (in a manner that is consistent with the axiom that profits reflect surplus values) if and only of the organic composition of capital is the same in each sector”

    But in the interview you mention capital utilization which is not the same as the organic composition of capital. Anyway, Marx was writing about a a tendency of equalization of profit rates between different sectors produced by competition and it is this tendency that exerts a pressure for the equalization of the organic composition of capital in each sector. That does not mean that the organic composition among the various sectors is always or at any particular time, the same. Besides one of the ways that Marx explained capitalist crisis was the dis proportionality between the different sectors, for example between department I (means of production) and department II (means of consumption) which means that he was perfectly capable to acknowledge different rates of profit and organic compositions among the various sectors of the economy .

    Of course you don’t have to accept this if you believe that profits reflect something different than surplus values. If that is the case I would like to know your opinion about the sources of value (and profit). From what I’ve read of yours I assume you do not accept the marginal theory of value.

    • Capital utilization is the same, to all intents and purposes, to the organic composition of capital. Sure, Marx, like all the classical economists, argued in terms of the tendency of profit rates to equalize. And that made perfect sense. The problem is that there is no reason why the organic composition of capital should equalize or even tend toward equalization. Marx ought to have conceded that they do not equalise and therefore that profit rates do not just reflect surplus values but also other factors influencing the capacity of capitalists to extract rents.

  9. Although in principle I agree with your views on closed models, the exemplar of models in physics may not be representative of all the natural sciences. This is because when any particular topic or discipline is of interest to politicians and big business (either positively or negatively) they will start to interfere with that part of academia in the same way as they do with social science.

    For positive examples, we could cite development of the atomic bomb, decoding and early computer programming in WW2, or even the military rationale behind the development of the Internet. For negative examples, one is reported in some detail today (concerning the science of global warming). It’s worth reading in order to understand how vulnerable independent research is in all countries of the world — involving legal, political and violent terrorist acts against individual scientists who do not understand that socio-political forces are expected to trump scientific honesty.

    http://www.guardian.co.uk/science/2012/mar/03/michael-mann-climate-change-deniers

  10. Hey Yanis. Like several other commenters, I’d like to hear more about your objections to the labor theory of value, and about this comment specifically: “Ricardo and Marx, in contrast, allow for different sectors to grow concurrently but introduce a single sector economy through the backdoor by implicitly assuming that the degree of capital utilisation in the same across all sectors. ”

    More broadly: assuming that all “closed” economic models are (as you argue) essentially mythologies, how would the *lack* of such a model be any less mystifying? It seems to me that if we throw up our hands and assert that no theory can accurately explain growth in complex economies, we’ve replaced the worship of the theory with the (equally fetishistic) worship of capital itself. Wasn’t the claim that the system was “too complex to understand” precisely the excuse utilized by financial “experts” in the wake of the financial crisis?

    Otherwise put: how do we combat economic injustice without some underlying economic theory?

    • Let’s not get too mystical here. If I were to present you with a system of equations that has no solution, there would be nothing mystifying about that. Similarly, the point we make in our book is that the system of dynamic equations that we need to solve in order to pinpoint the time path of values in a model of capitalism cannot be solved. Both Ricardo and Marx overcome this problem by ignoring it.

  11. Mr Varoufakis, I can’t accept your main conclusion that value (and by implication economics in general) is an unknowable subject. I will briefly summarize my position here, a more elaborate version can be found at:

    http://votersway.com/2012/03/02/economic-chaos/

    First, the economic system is created by law, this is something we create, it’s our choice how to do it. To claim that the economy is unpredictable is to declare ourselves dumb, corrupt or both… BEYOND REPAIR.

    Second, the “math models can’t describe economics” stance smacks on lack of understanding of the subject. Math models can’t make a chaotic system stable, but then there is nothing better. The problem is, of course, why the system is chaotic to begin with.

    Third, economics as a science assumes the declared effects of regulations instead of analyzing the real effects – taking into account the loopholes and conflicts of interest. Today, such effects prevail over the market, so little wonder the economy doesn’t behave as it “should”. If you included them in the equations, all would be well.

    Crises are not “open-ended phenomena”, they are consequences of other phenomena, like regulations… Many knew well in advance about the banking crisis of 2008, check Dorgan”s speech at the repeal of Glass Steagall, given in 1999.. Only the economists didn’t know… Regulation quality is the key.

    Lastly, economics in its present form isn’t a religion, it’s a political cult. There are important differences. Again, this state of affairs is due to purely subjective choices. If analysis of regulations was a proper and a serious part of economics, it would be nearly as accurate as physics. Removing the secrecy from banking could even make economics more precise than physics (assuming the regulatory loopholes were removed).

    There is something very disturbing in the idea that we accept as normal the chaos in our own creations. A minute of thinking would convince you that such a position can be used to excuse crimes of monumental proportions.

    • First you say this: “To claim that the economy is unpredictable is to declare ourselves dumb, corrupt or both…”
      Then you say: ” (…) instead of analyzing the real effects – taking into account the loopholes and conflicts of interest.”

      In the 1st phrase you seem to oppose the idea of declaring that we are corrupt (and even dumb).Then you say we are not taking into account these loopholes…which exactly proove how corrupt we are…

      No system can work properly and thus be predictable if we dont choose to abide by its rules even when we know that we can avoid doing so.All systems can fulfill their goals and all systems can fail to fulfill them because it always comes down to the human factor.

  12. “Στα μέσα της δεκαετίας του 1990, οι φίλοι ενός διακεκριμένου καθηγητή Θεολογίας του Harvard τον προέτρεψαν να εξοικειωθεί με κάποιες βασικές αρχές των σύγχρονων οικονομικών, προκειμένου να αποκτήσει μια σφαιρικότερη αντίληψη για τις διεθνείς εξελίξεις. Εκείνος συγκατατέθηκε, καίτοι απρόθυμα. Με το θεωρητικό του οπλοστάσιο να το απαρτίζουν κατά κύριο λόγο διανοητικά εργαλεία από το πεδίο της Θεολογίας, ο Harvey G. Cox εισήλθε σε έναν χώρο που υποψιαζόταν ότι θα αποτελούσε terra incognita για τον ίδιο, κι έτσι προετοιμάστηκε να αντιμετωπίσει «ένα καινούριο και δυσνόητο λεξιλόγιο». Προς μεγάλη του έκπληξη, ωστόσο, βρέθηκε σε γνώριμα νερά. Σύντομα αντιλήφθηκε ότι το ιδίωμα που χρησιμοποιείτο από τα κορυφαία οικονομικά έντυπα του καιρού μας θύμιζε σε πολλά τη γλώσσα της «Γένεσης», την «Επιστολή Προς Ρωμαίους» και την Πολιτεία του Θεού διά χειρός Αγίου Αυγουστίνου. Διαπίστωσε ότι οι οικονομικές συνταγές για τη μεταρρύθμιση της αγοράς, οι νομισματικές πολιτικές και τα συνήθη ερμηνευτικά σχήματα που επιστρατεύονται για να εξηγήσουν τις διακυμάνσεις του Dow Jones δεν συνιστούν παρά «αμυδρώς συγκεκαλυμμένα» στοιχεία μιας μεγάλης θεολογικής αφήγησης για το απόκρυφο νόημα της Ιστορίας (μύθοι καταγωγής), για τα αίτια πίσω από την οικονομική παρακμή (θρύλοι περί πτώσης) και για τους τρόπους εξυγίανσης της οικονομίας (δόγματα περί αμαρτίας και λύτρωσης). Ο Cox ουσιαστικά εντόπισε την εσωτερική λογική μιας συνεκτικής «οικονομικής θεολογίας» που είναι «συγκρίσιμη σε εμβέλεια, αν όχι σε εμβρίθεια, με τη θεολογία του Θωμά Ακινάτη ή του Karl Barth.

    Προχωρώντας στην αποδόμηση της στο περιοδικό The Atlantic, ο θεολόγος του Harvard διέκρινε την ύπαρξη όλων εκείνων των οικείων στοιχείων που περιέχονται και στο λόγο του Ευαγγελίου: «Τα αφηγήματα για τους τρόπους δημιουργίας του πλούτου και για τους σαγηνευτικούς πειρασμούς του κρατισμού, για την παγίδευση σε απρόσωπους οικονομικούς κύκλους και, τελικά, για τη σωτηρία που μπορεί να εξασφαλισθεί από την έλευση των ελεύθερων αγορών, με μια πιο μικρή δόση ασκητικής λιτότητας στην πορεία». Στα κείμενα που χρησιμοποιούσαν αυτό το ιδίωμα εντόπισε «ως και ιερά μυστήρια που εμφυσούν μια ψυχοσωτήρια δύναμη στους απολωλότες, ένα εορτολόγιο αγίων εμφορούμενων από το επιχειρηματικό πνεύμα, αλλά κι αυτό που οι θεολόγοι αποκαλούν «εσχατολογία» – μια διδαχή περί του τέλους της Ιστορίας». Καταλήγοντας, παρατήρησε ότι δεν απομένει παρά να συστηματοποιηθεί περαιτέρω η θεολογία αυτή, προκειμένου «να σχηματιστεί μια εντελώς νέα Ιερά Σύνοψη». Μολονότι οι διαπιστώσεις του Cox δημοσιοποιήθηκαν όταν ο οικονομικός φιλελευθερισμός μεσουρανούσε, και, συνεπώς αντιμετωπίστηκαν ως τα σκαλαθύρματα ενός θεολόγου, σύντομα η ουσία του μηνύματός του θα προσλάμβανε νέα δυναμική”.

    Από τον πρόλογο του Γιώργου Καλπαδάκη στο βιβλίο του Ha-Joon Chang, «23 αλήθειες που δεν μας λένε για τον καπιταλισμό» (Καστανιώτης, Ιούνιος 2011).

  13. Why do you say that Marx introduces a single sector economy through the backdoor by presupposing an equalization of the rates of profit between different sectors? Marx argues that there is a tendency for the equalization of the rate of profit among the different sectors of production which is produced from the forces of competition, not that the rates of profit (across different sectors) are always (or at any particular time) equal.

    Besides the labor theory of value of Marx is not the same as the one of Ricardo since the later was writing about concrete labor and not about abstract, as the first. The marxian theory of value does not try to measure prices but to demonstrate the social character of value (capital as a relation) and its private appropriation by the owners of capital.

    • I did not say that. I said that, in assuming equalisation of profit rates, he can only ‘solve’ his value system (in a manner that is consistent with the axiom that profits reflect surplus values) if and only of the organic composition of capital is the same in each sector. This is, effectively, the same as assuming that all sectors collapse to one…

    • Just cutting and pasting my comment from “Naked Capitalism”:

      With all due respect for the formidable Prof. Varoufakis, is that really true of Marx. In Vol. 1 the “organic composition of capital” is equal across sectors because the question hasn’t come up and because a different problem-set, explaining the preconditions for industrial commodity production and the sources of profits, is at issue. But the “transformation problem” in Vol. 3 is all about addressing the issue of differing sectoral capitals and offers a rather complex account of price formation. Of course, the analytic assumption that the rate-of-profit long-run tends to equalize across sectors and that equalization amounts to an optimalization of investment and output is the most basic classical theorem of all economics. But Marx is using it to demonstrate the long-run dynamic disequilibria that result from that static assumption.

      So are you really challenging Marxian LTV or repeating something that, “pre-formally” in “literary” terms, he was already indicating?

      Further, it is hard to see, “philosophically” or epistemically speaking, how any scheme of economic explanation can do without some conception of “economic value”, both as a means/unit of accounting and as an “anchor” for the differential terms of explanation. (Surely, the neo-classical attempt to explain nominal prices in terms of nominal prices verges on tautology, non-explanatory explanation, and what would be its standard of “value”? Opportunity costs? But is there always and everywhere a competing bid? Similarly, I think it can be shown that a physicalist standard, say, energy returns on energy investment, fails, not because there aren’t ecological/resource constraints, but because such resources must be “traded-off” against each other).

      Now, it might be that after 300 years of debate over the question of “economic value”, it remains unresolved. It might just be that the “nature” of economic value remains a great secular mystery. But even if it can’t be “solved” within a formally closed economic model, it doesn’t follow that the question, rather than the answer, hangs over the whole enterprise/project of economic explanation. The absence of a calculable “solution” doesn’t render the question uninteresting or nugatory.

    • I have no qualms with the Classical Assumption, namely that the profit rate tends to equalise across sectors. Vol. 1 features a single sector economy. A corn model of sorts. Then in Vol 3 Marx tries to show that his insights carry through in a multisector economy. But to prove that, when profit rates equalise, values reflect labour inputs and profits reflect surplus values he MUST assume that the organic composition of capital is the same in each sector. Alas, there is no reason why they ought to be. In fact, assuming that they are is tantamount to collapsing the many sectors into a single one: back to Vol 1….

    • Doesn’t Marx contend that profits tend to equalise due to a change in the price of commodities and not because the organic composition is the same in each sector.

      Apologies, I haven’t read your book, yet.

    • Sure. But he cannot solve for prices without also assuming a parallel equalization of the organic composition of capital…

  14. Ok, I’m now officially fed up enough with reading snippets/digests of what is in the big book that I am going to have to buy it…. If it turns out that the criticism of the Marxist labour theory of value as a closd system amount to “the transformation problem” I am going to be unhappy about my newly acquired commodity… but I am sure it will nonetheless have a value even if the price does not accurately reflect that at the moment I buy it…

  15. Kudos. I read it earlier on Naked Capitalism. As ever, your analyses are crystal-clear and jargon-free. They are accessible to the educated layperson yet cover much very theoretical material. The lure of mathematical models and the prestige of hard science and the precision of mathematics has captivated folks for close to 100 years with the positivists’ dream of a unified science and the hoped-for possibility of reducing it all to math and physics, as you make clear. I wait for the remaining part(s) in anticipation of more insights that provoke me to deeper thought.

  16. Nice one Yanis.

    Just to make one thing clear: Do you believe that it is impossible to have a concrete theory of value in line with a relevant growth theory in principal, or that economists haven’t articulated any convincing proposal yet but it’s a feasible task?

    • This is a quite pessimistic conclusion there dear professor. Your interview would well be renamed “the end of economics”. I can’t think of any economic theory that doesn’t incorporate a theory of value. From Marx and Riccardo to Sraffa and Korkotsides, a theory of value is the cornerstone of any serious attempt to explain the economic system. I’m not too fused about actual measurability -since that leads to instrumental rationality as you mentioned yourself-, but the absence of a value theory even in a philosophical level is quite disturbing.

  17. Benedetto Croce and Vilfredo Pareto had a very clearifying debate on economics approx 100 years ago. In substance; Croce won, Pareto lost. For some strange reason the opposite is generally assumed to be the case. What a pity! People should read Croce or his contemporary German neokantians. They were serious scientists and true philosophers. Since then, we have not seen much of neither.

  18. I was very intrigued with this interview as I was with the “Complexity Fetishism” posts. One thing I didn’t understand: Is the labor theory of value wrong per se or the mathematics models that derive from it? If it is the theory that is wrong, is there a more plausible theory of value or this is an impossibility due to the nature of the object?

  19. good morning! thanx for the follow up on twitter…
    Reading once again this first part of your interview, having read of course the MPE reference book, am I correct that you are going to author a seperate one defining and describing in more detail the meta axioms? If yes, when will it be available?

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