The original publication is available at Forum for Social Economics (http://www.springerlink.com/content/1w885686112kt7r7/), May 2008.
For Soc Econ (2009) 38:53-69
Tools to Return Relevance to Economics
Abstract With the help of planes and solids, this paper presents an enlargement of the field of observation of economic theory. Through this transformation, the distribution of ownership rights to money and wealth assumes a central position in economic analysis. Thus social relevance is returned to economics. The validity of this operation is confirmed by the return of the millenarian field of economic justice to its traditional function as guidance to economic policy. The paper then presents four sets of economic rights and responsibilities that offer the potential of translating principles of economic justice into the complexities of the modern world.
Keywords economic theory, economic policy, economic practice, economic justice, economic rights and economic responsibilities, social relevance.
As problems of human and natural ecology mount up, there is growing in mainstream economics the conception of economics for economics sake. The tendency is to see economics as an autonomous discipline isolated from other sciences, and yet dominating all other social sciences. No matter what concerned people within and without the economics profession maintain, the tendency is to neglect those concerns because mainstream economics has an unstoppable inner force of its own that makes it impossible to change course. This paper assumes that this tendency is due not to the will of any individual economist but to the sheer power of their tools of economic analysis. The action is involuntary. The process is mechanical (cf PAER).
The process is not without consequences. Economic theory has lost control of itself. Perhaps no one has made the case stronger than Alan Blinder (1999), who has said: “…too much of what young scholars write these days is ‘theoretical drivel, mathematically elegant but not about anything real.'” As a direct consequence, economic theory has become splintered into various schools, which vie for their own preferred policies. Because of the current disarray, monetary policy has largely been left to the bankers; fiscal policy to the politicians; and hardly anyone speaks of labor or land or industrial policy any longer. In a word, by becoming detached from reality, both economic theory and policy risk becoming socially ineffective—which does not mean that economic practices are not causing social consequences of their own.
This paper offers a set of new tools that is capable of changing this course of action. Through these tools social relevance reveals itself as an integral part of the constitution of economic theory, policy, and practice. To be specified at the outset, the new tools do not reject but incorporate the old tools of analysis. Using planes and solids in space, in addition to points and lines, economic theory automatically encompasses a larger social reality and returns to the fold of socially relevant sciences with authority to suggest desirable policies and practices.
While the proposed tools in economic theory are the result of forty years of analysis published in Gorga (1982, 2002), desirable policies and practices are distilled from a program of action presented in Gorga (1959, 1964, 1987, 1991a, 1994, 1997, 1999, 2002, and 2007). More extensive treatments can be found in the writings of Benjamin Franklin, Henry George, Louis D. Brandeis, and Louis O. Kelso—with their works, necessarily all their works, read in rapid succession and not any of them as a stand-alone effort. Standing alone, these works are open to debilitating objections. Together, they become an impregnable fortress.
TOOLS TO CONTROL ECONOMIC THEORY
Mainstream economic theory is an impressive intellectual construction with its own internal logic. Its structure is a bastion impervious to any external influence; it has become a mathematical science, and as such it is autonomous of any influence that does not enter into its logical structure. The intellectual apparatus of mainstream economic theory, once deconstructed, revolves around the following tool kit, which we propose to preserve and to build upon.
Existing Tool Kit
As everyone knows, economics is built on the theory of supply and demand. The demand of most everything increases as its price decreases; and the supply of everything increases as its price increases. This is the bare structure of most theories in economics, from the theory of growth to the theory of money. To appreciate the full force of this method of analysis one needs to realize that the lines of supply and demand represent sets of numbers—in turn derived from functions of two variables, prices and costs—and then one must see those schedules in movement. As they move up or down, right or left, they meet each other at different points on the Cartesian grid and determine a specific equilibrium of prices and quantities offered and accepted of any item of wealth in the market, from bread to gold. The basic characteristics of this framework of analysis become evident upon reflection. The focus of attention is on the market exchange; all that goes on before or after the exchange lies outside the purview of the analyst. The mainstream economist qua economist can only analyze, forecast, and report on present or likely future tendencies toward equilibrium of items of wealth that are offered in the market in exchange for other items of wealth, be they currency or pet rocks. The consequences that follow from market exchanges lie mostly outside the purview this framework of analysis. Is the production of items being exchanged in the market causing physical damage, or moral depravation? Is the distribution of ownership rights over items being exchanged causing a concentration of wealth into too few hands? Is the consumption of items being exchanged causing ecological disaster? These are all familiar questions that are at the heart of the economist’s concern. Yet, they can at best be acknowledged by the economist, but they will unavoidably be dismissed as belonging to other fields of analysis such as politics, ecology, morality, and the law, fields that lie outside the expertise and control of the economist.
The analysis becomes more complex daily by the sheer weight of accumulated data; hence equations multiply, econometric applications become more sophisticated, and theorems concerning the characteristics of economic relationships become more and more subtle; indeed, there now seems to be a model for every economic activity—and, lately, for many non-economic activities as well; and if the information is missing or it does not quite fit the case, there is the stand-by option of “as if” assumptions. Impressive as these techniques are, beyond all refinements in the state of the art of mainstream economic analysis, most economists admit to its basic limitations; not only that, they also admit that economic theory has been in a state of crisis at least since the publication of Keynes’ General Theory in 1936. (What did Keynes say is a question that has plagued the profession ever since.) Three of the most recent recognitions of the crisis span the arc from acknowledgment of the limits of mainstream economics (Mankiw 2006) to criticism about the relevance of mainstream economic theory (Manicas 2007) to the belief that economic theory has improved and that it is expected to improve over time (Warsh 2006).
As the history of minor and major theoretical revolutions and counterrevolutions proves, economists are ready to try nearly any stop-gap measure to resolve the crisis—provided the proposed measure does not affect the structure of the theory. This position is non-negotiable; and it is not the purpose of this paper to negotiate it. What is presented for discussion is a far simpler proposition: if we want more comprehensive and more accurate results, we need different tools of analysis. In addition to points and lines, we shall be using planes and solids in space: at first, only rectangles and spheres.
The consequences of this transformation are far-reaching. Rather than attempting to create an improved mainstream theory, we shall incorporate its vital and functioning core into a new framework of analysis which, for a number of consilient reasons, this writer likes to call Concordian economics: as we will see below, the structure makes room for the perspective of each one of the various schools dominating today’s economic analysis; it opens its doors to inputs from various other intellectual disciplines; and it extends itself in a seamless web to cover economic policies and economic practices.
New Tools in Economic Theory
Through laborious logico-mathematical steps (Gorga 2002: 41-158), one obtains a restructure of mainstream economic theory (Gorga 1982) and its gradual transformation into Concordian economics. While the book presents a description of that transformation with its resultant new mathematical models (Gorga 2002: 25, 38, 71, 74-6, 121-25, 129-37, 153-58, 168-70, 264, 303-20), the present paper reproduces the core of that ground with primary assistance from geometry; thereafter, it extends the analysis to cover economic policy as well as economic practices for implementation of selected economic policies.
The key results of Concordian economic analysis are these. In order to eliminate a set of innate logical contradictions at the very foundation of economic analysis, the nexus between saving and investment is broken and it is replaced by the complementary relation between Investment defined as all productive wealth and Saving defined as all nonproductive wealth—a term that is better replaced with Hoarding.1 The analysis starts anew on the basis of the proposition that Investment is Income minus Hoarding. Furthermore, since money and financial instruments are not wealth, but only represent wealth, in macro, as distinguished from microeconomics, one cannot add money to real wealth.2 The two entities have to be kept separate. And then the question arises: What is the relationship between the two? From Aristotle to the Doctors of the Church there was no doubt as to the answer to this question. During this long stretch of time, much economic analysis was built on the equivalence of money and goods in the exchange. It was the distinction between the two and their linkage in the relation of equivalence that provided the objective base for the determination of conditions of justice in the exchange of wealth. If we accept this answer, to satisfy well-known requirements of the principle of equivalence, we search for a third element to link monetary and real wealth together and we find it in the set of rules and regulations that in every society governs the distribution of ownership rights over real and monetary wealth—and we do not stray away from pure economic theory, because we are presented with the monetary value of those rights. The following diagram (Gorga 2002: 36, 163, 314) incorporates these results; it represents the integration of these values on one plane, in this fashion:
Figure 1. The Economic Process
In this figure, the values of “production”, namely the values of all real wealth produced over a specified unit of time are assembled into one category of thought that is recognized as aggregate supply. (It is to be noticed that this unit is “pure” because it contains only stocks of real wealth and no monetary wealth. It is also to be noted that in a more complete treatment this value ought to be observed from the point of view of demand as well as supply: thus we ought to have an analysis of the demand and supply of the production of all real wealth.) We follow the same procedure for the values of monetary wealth, thus firmly separating real wealth from monetary wealth, and we call the result “consumption” or aggregate demand. (Ditto for the treatment of all monetary values, which here are not observed from the point of view of supply: The question of the quantity of monetary values created lies outside the scope of this presentation.) We finally repeat the procedure for the aggregate values of ownership rights over real and monetary wealth, and we call the result “distribution” of ownership rights. (At this juncture we assume that the values of ownership rights over real wealth are identical to the values over monetary wealth). In sum, we have enlarged our field of observation from points and lines to planes and interactions among planes; and, rather than leaving the question of the interaction between demand and supply open (cf. Klein 1970: 143), we have continuously specified—and distinguished one from the other—the demand and supply of (a) real goods, (b) monetary instruments, and (c) values of ownership rights over real and monetary wealth.
Figure 1 reads as follows. When real goods and services pass from producers to consumers, monetary instruments of a corresponding value pass from consumers to producers. Then one cycle of the economic process is completed—and it is accompanied by the silent exchange of values of ownership rights over monetary and real wealth. Both money and goods change hands. The unit of account can be the economy of one person, one nation, or the world. In macroeconomics, the exchange occurs neither between two insignificant commodities (cf. Schumpeter 1936) as in microeconomics nor between any two forms of financial instruments as in the economics of Wall Street. In macroeconomics, fully respecting the laws of supply and demand the total production of real wealth is exchanged for the total availability of financial resources—as in Keynes’ principle of effective demand (see Brady 1996). Finally, in this figure the exchange visibly occurs under a regimen of social and legal relationships: ownership is apportioned at the moment of creation of wealth; and only owners can legally exchange wealth.
An effective way to analyze the instantaneous relationships captured by Figure 1 is to reduce it all to the economics of only one person. A person who snaps the apple from a tree, vs. gathering seeds, for instance, while respecting as always the rules of supply and demand commits an act of production. This person automatically apportions the ownership of the apple to the self, which means that this person is legally empowered, as it were, to sell the apple to the self. Thereafter, this person is free to eat the apple—or sell it to others. One of the merits of Figure 1 is that it describes the economic process as a whole. Everything is instantaneously related to everything else. Thus we run away from the shattered world of the schools and go back to the world of Classical economists who knew that economics is composed of the integration of Production, Distribution, and Consumption of wealth. This integration can be made more specific by a more extensive and updated reading of the terms, along these lines: The Theory of Production—namely a pure and robust production function—is concerned with the production of real goods and services (as might be studied by Supply-Side economists); the Theory of Distribution is concerned with the distribution of the value of ownership rights over real and monetary wealth (as might be studied by Institutionalists); and the Theory of Consumption is concerned with the consumption—or expenditure—of monetary, i.e., financial instruments (as might be studied by Demand-Side economists). More importantly, by recognizing that Figure 1 is the flat image of a sphere we bring the mathematics and geometry of economics up to the standards that prevail among modern engineers and scientists (see, e.g., Thompson 1986: 36), namely:
Synthetic Model of the Economic System as a Whole
(From Gorga 1991b)
p· = fp(p,d,c)
d· = fd(p,d,c)
c· = fc(p,d,c)
p· stands for rate of change in total production
d· for rate of change in the values of distribution of ownership rights
c· for rate of change in total expenditure.
And, most important for our immediate purposes, we can see that the theory of distribution of income and wealth now occupies a very central position in economics. All that relates to the distribution of ownership of income and wealth becomes an immediate and integral concern of economic theory—no longer an afterthought or an issue placed at the margins of economic science. Related issues of social relevance of economics can no longer be shunned aside by the economist on the assumption that they are external to economic theory. These are indeed issues that lie at the very core of economic theory; and one does not stray away from mathematical and quantifiable theory either. What is to be measured and evaluated is the economic value of ownership rights over income and wealth—and the different economic effects of different patterns of distribution of income and wealth. Decisions relative to these issues are taken during the very process of production and exchange of wealth; they are not something to be concerned with only after the more impellent problems of production and exchange are resolved, as assumed in Keynesian economics and, mutatis mutandis, in mainstream economics, see, e.g., Klein ( 1968: 187). The concern about the social relevance of economics—as all Institutionalists have devoutly wished—is now brought within the purview of the economist.
Issues of distribution of economic values of income and wealth are not givens; they lie at the very core of the economic process and are determined by the inner workings of this process. On Mars the situation might be different; on earth, people create not only real or physical wealth—they also assign values to this wealth. Indeed, it is economists (and accountants) who, assisted by the laws of supply and demand, assign these values as best they can. Lawyers only validate these statements by transforming them in negotiable legal instruments that are called ownership rights. These rights might belong to an individual person, to a corporation, or to the state; but they legally belong to someone. And an exchange of real wealth for monetary wealth involves at the same time an exchange of the value of ownership rights over real and monetary wealth. It is thus that, no matter the disclaimer by many economists, economic values are created and are created at the very core of the economic process.