Andrew McCleod's Co-op Blog
http://coopgeek.wordpress.com/
He will be in Detroit Nov. 8.
US Steelworkers and Mondragon: An Australian Response
My FaceBook response to the US Steelworkers/Mondragon Agreement announcement was as follows: This is incomparably the most exciting positive news story I've seen in a very long time. The massive complex of worker-owned manufacturing, retail, financial and civil engineering co-operatives at Mondragon in the Basque region of Spain is reflective of an integrated industrial and political philosophy that has lessons for all of us, not least here in Australia. My 1999 book 'Jobs of Our Own: Building a Stakeholder Society' - long since sold out its Australian and European editions and only very recently back in print in a US Distributist Review Press edition that's available through Amazon.com - is about where the ideas behind Mondragon came from, how the system works and the reasons for its stunning success. And I'm currently writing about how something similar might have been achieved in Australia, and why it didn't happen. Is it too much to hope that, now the US Steelworkers have shown the way, individual unions, Trades and Labour Councils and the Australian Council of Trade Unions will sit up and take notice? And might not Kim Carr, Martin Ferguson and other federal Ministers detour in the course of their overseas travel for a visit to Mondragon, and see for themselves what it has to offer us?
Steelworkers see the Light!
Steelworkers Form Collaboration with MONDRAGON, the World’s Largest Worker-Owned Cooperative
http://talkingunion.wordpress.com/2009/10/28/uswmondragon/
Pittsburgh (Oct. 27, 2009)—The United Steelworkers (USW) and MONDRAGON Internacional, S.A. today announced a framework agreement for collaboration in establishing MONDRAGON cooperatives in the manufacturing sector within the United States and Canada.. The USW and MONDRAGON will work to establish manufacturing cooperatives that adapt collective bargaining principles to the MONDRAGON worker ownership model of “one worker, one vote.”
“We see today’s agreement as a historic first step towards making union co-ops a viable business model that can create good jobs, empower workers, and support communities in the United States and Canada,” said USW International President Leo W. Gerard. “Too often we have seen Wall Street hollow out companies by draining their cash and assets and hollowing out communities by shedding jobs and shuttering plants. We need a new business model that invests in workers and invests in communities.”
The Dialog Between Veritas and Caritate
The following is my address to the American Maritain Association Convention
In his latest encyclical, Caritas in Veritate, Pope Benedict covers much ground that had been addressed by his predecessors, particularly the point that the virtue of justice is necessary to economic science. But Benedict kicks the rhetoric up a notch by insisting not just on the natural virtue of justice, but on the supernatural virtue of love, caritas. Moreover, he insists that caritas is not confined merely to the level of personal affections, but that is has systemic and practical consequences and must be embodied in human systems of trade and government. Benedict therefore confronts us with the question posed by that great theologian, Tina Turner, namely, “What's love got to do with it?”
Benedict insists on a dialogic relationship between truth and love. What is implied by this statement is that there is a dialogic relationship between theology, the Queen of the Sciences, and economics, or indeed every other humane science. However, since each science is the master of its own methods, theology must speak to each science in terms intelligible to that science. This places a double burden on the theologian to learn his own language and to be able to translate it into another tongue. However, it is a burden that theology cannot refuse; She must comment on the mundane affairs of the world in terms intelligible to the world, or She must abdicate her responsibilities and lose her social utility. Theology must, on the one hand, exercise sovereignty over the other sciences, and on the other hand, humbly learn from every other science. This sovereign humility is a burden theology cannot refuse without making the gospel of no effect in the world, without reducing it to a mere academic specialty or literary curiosity.
The economic scientist tends to view such claims with great skepticism. He is, after all, a scientist and feels perhaps that he should no more be required to consult the theologians than should the physicist or the chemist. Questions about the movements of the markets, no less than questions about the movements of the stars, should be left to those who actually know something about these subjects. Hence he sees no need to enter into this dialog, to subject himself to the sovereignty of theology, no matter how humble that sovereignty might be. So the question is, “Can we, as theologians, present the economic scientist with compelling reasons for entering into Benedict's dialog?”
I believe we can. What I will attempt to show is that economic order, that is, the rough balance between supply and demand known as equilibrium, is dependent upon equity, that is, upon distributive justice. Indeed, it is the very lack of equity that makes equilibrium impossible and inefficiency inevitable, and the failure to recognize this makes economic science incomplete. Then we must show that even justice is insufficient, but must be completed in love, in Benedict's principle of gratuitousness. But before we can address either of these tasks, we must first situate economic science within the hierarchy of the sciences.
Science, Normative and Positive
Some wag somewhere has remarked that economists suffer from “physics envy.” Sciences like physics have no need for concepts like justice. Hence, if one attempts to model the movement of markets in the same way as the movement of molecules, then terms like “justice” can only be an embarrassment which compromises the purity of the science, while equity could only compromise the efficiency of markets.
Underlying such a claim is the so-called “positive-normative” duality, wherein economics is merely a positive or descriptive science, one in which normative considerations have no place. But this is a false dichotomy. Every science, insofar as it is a science, must be both positive and normative. Every science, insofar as it is a science, must be “normalized” to some criteria of truth. These truths will arise from two sources, an internal and an external source. The internal criteria involve a science's proper subject matter and methodology. But these criteria are insufficient to found any science as a science. In addition, there must be external criteria of truth, and these truths can only come from one or more of the higher sciences. In the absence of such an “external” check, the “science” will merely be circular, dependent on nothing but its own axioms and unconnected to the hierarchy of truth. Thus, for example, biology is responsible to chemistry and chemistry to physics. No biologist can violate the laws of chemistry, and no chemist can reach a conclusion contrary to physics. Thus every science is responsible to its own methodology (and therefore "positive") and to the higher sciences (and therefore "normative"). Every science has, therefore, both its own proper autonomy, based on its subject matter and methodology, and its own proper connection to the near sciences, based on the hierarchy of truth.
Without submitting itself to this hierarchy of truth, no truth can be called a “scientific” truth. Without this proper scientific humility, no study can find its proper place in the hierarchy. Merely being mathematical, or empirical, or axiomatic is not enough, no matter how precise the mathematics, how careful the observations, or how certain the axioms. An astrologer, for example, will make observations as precise as you like, will draw charts as complex as you like, and make predictions as specific as you like. And all of it will be consistent with astrology's own axioms. However, these axioms are never subject to the judgment of any other science; lacking the requisite scientific humility, astrology can never be a science. It may be, for all I know, God's own truth; it can never be man's own knowledge. It must be accepted or rejected sola fide; no scientific judgment can ever be made because it can never be science.
So the proper question is not whether economics is positive or normative; since it is a science it is both. The question is, “To which of the higher sciences is it subject?” The physical sciences normally terminate in physics, but the humane sciences—the sciences of human relations—terminate in some view of man and particularly in some view of justice. It is justice that regulates human relationships, not only in the moral sense, but in the practical sense as well. That is, an economics that has no sense of justice will make no sense at all; it simply will not work. Justice is not some arbitrary “value” imposed on the science, but a principle of practical reason that keeps things reasonable. Therefore, some theology must be the ultimate source of truth for economics with some intermediate stops at psychology and sociology. It would seem to be self-evident that a complete view of man would involve the sources of knowledge about man, yet this view is not at all universally (or even generally) accepted by economists.
How is it possible that a humane science can cut itself off from these indispensable sources of knowledge about humans? The answer is, it can’t. It is not possible to theorize about human actions without some theory of humans. The selection of an economic system is also the selection of an underlying ethical system. The task is not to bury the ethical assumptions under the pretense of “objectivity,” but to make those assumptions explicit, where they can be examined by all. What actually happens is that neoclassical and Austrian economists accept as a purely economic truth that which is, in fact, a purely philosophic stance, namely that of Jeremy Bentham’s utilitarianism, and its various descendants. This philosophic assertion has become a pseudo-scientific dogmatism, placed beyond all question and critique and hence the science has become less scientific and more dogmatic.
Having said that, it is now incumbent on me to make plain my own ethical assumptions, at least those which lie nearest to the economic question. My primary ethical assumption concerns distributive justice, and by that I mean something very specific with a very specific economic signature. The specific meaning is that the output of production is divided proportionally to the contribution to production; that is, one takes no more than what one contributes. And the specific signature of distributive justice is that the returns to wages and capital are normalized to each other; that is, one cannot earn much more by investing than one could by working, which implies that there will not be vast differences of wealth and poverty, that the income gradient will be relatively flat. This is the technical requirement for the condition of equity. But the question immediately arises, why should this condition, this distributive arrangement, be vital to economic equilibrium?
Equity and Equilibrium
When people come together in families or firms to produce things, they add wealth to the economy; in fact, this is the only economic way to add wealth. If they and others also get an equitable share of the output, or the wealth they create, there will be enough purchasing power in the economy to buy all the things the firms produce. This is the much-maligned “Say’s Law of markets,” which states that “supply creates its own demand.” Say’s Law is much criticized because if you examine it closely, it says that recessions are impossible; there will always be enough purchasing power to clear the markets. Clearly, we purchase things in terms of other things. The total number of things created equals the total number of things that can be used for purchasing the other things. And yet, recessions do happen, quite obviously. Long ones. Deep ones. Serious ones. And they happened more so in Say’s day, the heyday of the laissez-faire economy, than in ours. So, what is wrong with Say’s “Law”?
To understand the problem, we have to look at the sources of demand in a money economy: wages and profit. Wages are, of course, the rewards of labor and profit the reward of capital. In another sense, however, these are the same rewards, since capital is merely “stored-up” labor, or things produced in one period to be used to continue production in the next period. For example, if a farmer wishes to have a crop next year, he must save some seed-corn from this year’s crop. Now, the corn he consumes and the corn he saves are the same corn from the same crop. But by saving some corn for seed, it becomes “capital.” Hence, the return on this capital is really a return on his prior-period labor, just as his wages are a return to current-period labor. Clearly the returns to capital and labor, profit and wages, spring from the same source (labor). Capital, then, ought to have roughly the same rewards as labor, plus some premium for saving.
If wages and profits are normalized to each other, economic recessions are unlikely to be protracted or serious. There will be enough purchasing power distributed equitably to clear the markets. In capitalist economies, the vast majority of men are not capitalists; that is, they do not have sufficient capital to make their own livings, either alone or in cooperation with their neighbors, but must work for wages in order to live. And since the vast majority of men and women work for wages, then the vast majority of goods will have to be distributed through wages. In conditions of equity, this will not be a problem; so long as there is equity, there is likely to be equilibrium, and periods of disequilibrium are likely to be brief. But it may happen, and quite often does, that profit and wages are not normalized to each other. Usually, this means that capital gets an inordinate share of the rewards of production. This, in turn, means that the vast majority of men and women will not have sufficient purchasing power to clear the markets, and the result will be a disequilibrium condition, that is, a recession.
At this point, the neoclassical economist might object that the division of rewards doesn't matter, since there will still be the same amount of purchasing power in the economy; even if capital gets more and labor less, there will still be the same amount of money, and hence of purchasing power. Alas, this is not true. The CEO may get 500 times what the line worker gets, but he cannot wear 500 times the shoes, eat 500 times the food, or live in a 500 bedroom manor. Nor can he productively invest the excess, because the very fact of receiving the excess narrows the market, which is always measured by the number of solvent consumers in that market. Hence, instead of productive investment, the investor finds no use for his money and he turns to speculative instruments like the CDOs, MBSs, CDSs, and the whole alphabet soup of financial gambling instruments with which we have become all too familiar. Thus, both purchasing power and investment funds leach out of the economy to produce structural shortfalls. When this happens, societies look to non-economic ways of restoring equilibrium.
Non-Economic Equilibrium
The major non-economic means of restoring equilibrium are charity, government spending, and consumer credit (that is, usury). Each of these methods transfers purchasing power from one group, which has an excess, to another, which has a deficit. The first method, charity, will always be necessary to some degree because even in the most equitable economies, there will always be people who are incapable of making a decent living, perhaps because of mental impairment, moral deficiency, or physical handicap. One hopes that there is enough generosity and benevolence in society to voluntarily cover these needs. However, when low wages become widespread, and when self-interest becomes the dominant motivation in society, it is likely that charity will be insufficient, and other means must be used.
The second non-economic method is government spending, by which the government seeks to re-establish equilibrium conditions either by supplementing the income of some portion of the population, or simply by increasing its spending to create more jobs and thus add more purchasing power to the economy. This strategy is at the heart of Keynesian economics.
Despite the fact that Keynesian transfers now consume a huge portion of the public expenditures, these transfers have been, for some years now, insufficient to balance supply and demand, and for some time now the economy has depended chiefly on the third method, usury or consumer credit. This is the plastic economy, an economy based on credit cards. And to the extent that an economy depends on consumer credit, it is, quite literally, a house of cards, and will be as unstable as those structures usually are. In fact, usury is the most destructive way of increasing demand, since a borrowed dollar used to increase demand today must be paid back tomorrow and hence decrease demand in a future period by that same dollar—plus interest. This requires more borrowing, which of course only makes the problem worse. Eventually, the system falls of its own weight, as credit is extended to an increasingly weakened consumer, and a credit crisis results.
The “Standard” Model
If this connection between equity and equilibrium is so obvious, then why have economists missed it? The truth is, they haven't. Rather, the problem is that they have inadequate tools to handle the problem of equity. This is because over 100 years ago the professional economists made the conscious decision to eliminate distributive justice and try to explain everything in terms of commutative or corrective justice alone. The economy was modeled as a series of exchanges originating in an “exchange with nature.” At each step of the series of exchanges, each factor of production would be compensated by contractual arrangements. The belief was that free bargaining is sufficient to insure that the contracts are fair and the wage just. This is the theory of marginal productivity, which states that in a perfectly free market, contract alone is sufficient to guarantee each factor of production a share proportional to its contribution to production.
Now, there are any number of critiques we could offer of this theory, but I will mention only three. The first is that the idea of “an exchange with nature” is absurd. Who, we may ask, negotiates in nature's behalf, and what precisely does she get in return? “Dear mountain, let us have your coal, and we will give you this nice heap of slag in return.” Nature, it seems, needs a better agent.
But the second problem was actually pointed out by Adam Smith 100 years before the theory of marginal productivity was formally proposed. Concerning any dispute over wages, Smith says,
It is not, however, difficult to foresee which of the two parties must, upon all ordinary occasions, have the advantage in the dispute, and force the other into a compliance with their terms. The masters, being fewer in number, can combine much more easily. …In all such disputes, the masters can hold out much longer. ... Many workman could not subsist a week, few could subsist a month, and scarce any a year without employment.1
In other words, Smith recognized that it was power, and not productivity, that determines the outcome of wage negotiations, and power will generally favor “the masters.”
The third problem is that commutations, corrective justice, cannot account for production. Commutations are merely an exchange of ownership of commodities that already exist, such as when we exchange money for bread. But in the process of production, we deal with something that was not there before. When we take a tree and make some chairs, we bring something new into being. In this case, a principle that deals only with changes in ownership will not be sufficient. The problem of distributing the new chairs among the factors that had a hand in their creation can only be solved by distributive justice, by definition. Now this leads us to a rather amazing conclusion: modern economic science, the science of production and exchange, lacks a coherent production function!
Again, the economist will counter that he does indeed have a production function, and one that involves a high level of sophisticated mathematics. The function purports to claim that the inputs of capital and labor to production are rewarded according to their actual contribution to the process of production. But in fact, the function assumes what it ought to calculate, namely what the share of the production should go to each factor of production, I.e., its price. But instead, the function uses the market price as an input for each factor. That is, it uses as an input that which should be an output. It is an example of circular reasoning.
The economists are forced to use this because they are trying to calculate a quantity that simply does not exist, namely the “independent” contribution of capital and labor to production. Such independent contributions do not exist, at least not in a way that can be calculated, because all production is a social process, and apart from each other, and from a particular configuration of factors, no factor has any productivity whatsoever. To illustrate this point, take the example of a football team. A quarterback who can throw a ball a long distance with high accuracy under great pressure certainly makes a big contribution to his team. However, his individual contribution cannot be figured just from looking at his statistics. If, for example, you were to replace all his 250-pound linemen with 175-pound weaklings, he would spend a good deal of the game introducing himself to the opposing linebackers. His contribution is not independent of the other “factors of production” on the team. A manager who allocated all his personnel funds to the quarterback and left little for the line would lose both line and quarterback. A sensible manager has to make a judgment about the relative importance of each position on the team and allocate his funds accordingly. This judgment is guided by the statistics, but is never reducible to them. There are indeed, individual contributions to the team, but their worth can only be judged in relation to the particular configuration of talents on that team.
Therefore, economic science, lacking a coherent notion of distributive justice, is not and cannot be a complete description of any actual economy. Hence, we are not surprised to learn that 90% of economists missed the coming of the current disaster, and the few who did note it were marginalized and ridiculed. Further, we can note that 90% missed the last train wreck, and the wreck before that, etc. Clearly, you cannot accurately predict the behavior of a system you cannot accurately describe.
Now, if what I have said so far is correct, then there are compelling reasons for the economic scientist to enter into dialog with theologian. We see throughout this encyclical that Benedict insists on the priority of distributive justice, and if the economists wish to include this notion, as they must if they are to have an adequate description of the economy, they must come to us, they must take up the dialog. However, this fulfills only half of Benedict's requirements, for so far we have dealt with the natural virtue of justice. But the Pontiff insists on the super-natural virtue of love. That is to say, we still have to face the Tina Turner question. Is the economist entitled to draw the line at this point, and say, “So far, but no farther; we do not need to understand love to understand the economy”?
Let me start by suggesting that a group like this can grasp intuitively the Pope's meaning. For while most of you are masters of the highest science, theology, you do not command the highest salaries. Or at least you wouldn't at my university. And yet I suspect that this is not a problem for you. For while your salary funds your research, it is not really the reason for it. What you do is offer your gifts to the common good, a task for which a salary is a necessary, but not a sufficient explanation. You spent many difficult years acquiring your skills, you teach, you research, you write, you come to conferences like this for reasons that must always exceed the compensation. Your work is a gift that the salary makes possible, but cannot possibly explain. It is ultimately a matter of love.
Does this fact of our profession have any application to the business world? I believe that it does. The entrepreneur may proclaim, in gruff tones, “I am in business to make a profit!” And this is the truth, for without making a profit, no one can be sure that he is producing a useful product or allocating his resources correctly. But even as the businessman makes this statement, he knows that it is not the whole truth, except in pathological cases. The entrepreneur knows that his work involves a range of values, such as expressing his own creative skills, supporting his family, supporting his associates and his community.
Now, with all of this as background, it is easier to see what Benedict means by gratuitousness. The worker and the entrepreneur offer their services to the community, and offer it in solidarity with all the other stakeholders. On the mere level of exchange, this is of course covered by the rules of contract, by the laws of supply and demand. Nevertheless, “in commercial relationships the principle of gratuitousness and the logic of gift as an expression of fraternity can and must find their place within normal economic activity. This is a human demand at the present time, but it is also demanded by economic logic. It is a demand both of charity and of truth" (36). This “logic of gift” does not negate the logic of exchange or the logic of duty or law, but transcends them both. It allows us to see our work in a new light, and thus enlightened, to contribute our talents to the commonwealth and the common good. This common good involves building not just a business, but a culture internal to that business devoted to the common good of the firm and the community it serves.
But as lofty as this vision is, are their any concrete examples? Yes, there are. We can speak here of such enterprises as the Mondragón Cooperative Corporation of Spain, a 50-year-old collection of cooperatives that do over $24 billion in sales, or the cooperative economy of Emilia-Romagna where worker cooperatives provide 40% of the GDP. Wages are about twice the average for Italy and the standard of living is among the highest in Europe. But I would like to focus here on an American company, the Springfield Remanufacturing Company (SRC) and its founder and CEO, Jack Stack.
In founding his company, Mr. Stack recognized that the first task was cultural:
People can accomplish almost anything if they have a common purpose, a higher goal, and they all know what it is, and they’re going after it together. Everybody needs to be going somewhere. People need a destination, or they get lost. It they have one, however, and if it’s really their own, there’s no telling what they can do. They can survive the darkest hours, beat the longest odds, scale the greatest heights.2
Building a common purpose, a goal that is owned and shared by all members of the firm, is the primary task in building a company culture, and hence of building the firm. What Mr. Stack especially wished to avoid was what he called “employee thinking,” that is, thinking only about one’s job or at best, one’s department, without considering the common purpose, the good of the whole firm.Yet, this is precisely the kind of thinking that most of us have been taught, both formally and informally. It is the kind of thinking implicit in Milton Friedman’s shareholder model of the firm, which states that the sole purpose of a firm is to improve the stock price. After all, if only the interests of the shareholders count, then there can be no common purpose that involves all members of the firm. But this kind of thinking, Mr. Stack says, is capable of destroying the company from within.
What Stack set out to create was a community of entrepreneurs, rather than just a collection of people with jobs; indeed, Stack wanted to do away with “jobs” and the employee mentality altogether.3 But the primary problem is that people have been trained to see themselves in terms of jobs rather than entrepreneurs; they see themselves as merely performing a function for somebody else, usually somebody very remote. Creating this community meant realizing that the business was not an end in itself, but a means to an end, “a tool that allows us to accomplish the things that matter most to us, and those things must transcend business to have real meaning and value.”4 To accomplish this goal, to create this community, SRC used two means: education and equity-sharing.
To educate the members of the firm (it would be wrong to say “employees”), Stack invented a system of informal but continuous education he called The Great Game of Business. If the workers are going to take responsibility for the firm, they must know the rules of business, and the Great Game was the means of teaching them these rules, from the simplest to the most complex. As Stack evaluates the results of this “game,” he notes that “we’ve had dozens of employees rise from the shop floor…to top management positions, and they’re far better qualified than a lot of MBAs I see.”5 The game required that the firm practice open-book management. If all members of the firm are to be responsible for the firm, then they all must have equal access to the books. Further, you cannot truly educate employees unless they can see how their actions affect the firm, and this is impossible without looking at the books. But the greatest benefit, as Jack Stack notes is that, “When you open your books—really open them—you also open your mind, and neither your mind nor your books will be closed again.”6
Continuous education and open-book management frees the firm from the constraints of the division of labor, which confines each worker to just one task, and from the quasi-militaristic “top-down” management, which confines responsibility to just one group. The results of this culture at SRC have been nothing short of phenomenal. In 20 years, they went from sales of $16 million to $185 million, with similar results for profit and shareholder equity. But it is in the area of shareholder equity that the firm really stands out, because all of the shares are owned by the workers. The company has 727 worker-owners, of whom only five were original members of the firm. The other 722 shareholders own 64% of the firm. This point is crucial, because “owning their work” must involve real ownership, and not just some psychic substitute. Equity-sharing defines the community, a community built on the premise that all the members of the community must share in the wealth that the community creates.
Note how Jack Stack's experience of the firm aligns with Benedict's vision of the civilized economy:
Alongside profit-oriented private enterprise and the various types of public enterprise, there must be room for commercial entities based on mutualist principles and pursuing social ends to take root and express themselves. It is from their reciprocal encounter in the marketplace that one may expect hybrid forms of commercial behaviour to emerge, and hence an attentiveness to ways of civilizing the economy. Charity in truth, in this case, requires that shape and structure be given to those types of economic initiative which, without rejecting profit, aim at a higher goal than the mere logic of the exchange of equivalents, of profit as an end in itself. (38)
What is common to all of these examples is that ownership is shared among the members of the firm; there are no remote and outside owners that can impose the stock price as an alien value, the only one to be respected. The workers who own their firm are more likely to work to a broader range of values; they are more likely to be concerned with the common good, not only of the firm, but of the wider community. Further, distributed ownership solves the problem of distributive justice. Workers who are also owners are more likely in wage negotiations to take account not merely of their own needs, but the needs of the firm, which is to say, the needs of their fellow worker-owners.
We can also note that solving the distributive problem also solves the governmental problem. Where distributive justice is satisfied, there is less need, and indeed less space, for government involvement in the economy. For example, The Mondragón cooperatives provide their own social security networks, unemployment insurance, elementary and high schools, training institutes, research and development centers, and a university, all from their own resources and without government help. Here, then, is a great irony: in order to see laissez-faire in action, you will have to go to the distributists. Libertarian economics is the subject of many a learned tome, but it has no actual examples; distributism, on the other hand, has fewer tomes, but a great many examples.
Hence, I believe that we can state that Benedict's principle of gratuitousness is not at all alien to business, not some outside requirement imposed on the subject of economics. Rather, it does more to explain why people act than do all of the volumes on “utility” and “self-interest.” Because indeed, people act because they love, and act in the way that they love. It is quite true that in any individual, family, firm or society, love may be reduced wholly to self-love, and hence the precepts of utilitarianism will hold. However, such cases are exceptional, and when we see cases where self-love is the only allowable value, we say that the individual, family, firm, or society is dysfunctional, if not downright pathological.
So then, what's love got to do with it? Everything. And not just at the level of the moral order, but at the level of practical science and everyday business. For indeed, no humane science can be practical without it.
1 Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (Amherst, New York: Prometheus Books, 1991), 70.
2J. Stack, A Stake in the Outcome: Building a Culture of Ownership for the Long-Term Success of Your Business (New York: Doubleday, 2003), 21.
3Ibid., 57-60.
4Ibid., 5.
5Ibid., 9.
6J. Stack, “Springfield Remanufacturing Company--The Great Game of Business,” in Curing World Poverty: the New Role of Property (Saint Louis: Social Justice Review, 1994), 9.
Is Economics a Science?
One salient fact about this recession is that 90% of the working economists missed the warning signs, and those who predicted a disaster were marginalized and ridiculed. This, however, is not surprising; 90% missed the last disaster, and the one before that, and the one before that, etc. With that in mind, do we not have warrant for suspecting that economics is not a complete science and is unable to give us real information about the economy?
The Roman pontiffs have long insisted that something was missing. They have insisted on the role of distributive justice in economics. Beginning in 1891, with Leo XIII’s Rerum Novarum, they have insisted on the just wage as the basis of economic science, a position that has been repeated by every pope since Leo. The economists, on the other hand, have always found this problematic. A just wage can make no sense, since the wage is just the price of that particular “commodity” known as “labor.” Clearly, there is a dispute here about the nature of economic science. Given that the economists are presumed to be the experts in their own field, is there any reason for them to take the claims of the Roman Church seriously? In other words, can they subject their science to the moral claims of the Church and still be scientists, or would they be like Galileo, forced to recant what they know to be the truth?
Benedict XVI, in his latest encyclical, Caritas in Veritate, locates precisely the source of the disagreement.
The market is subject to the principles of so-called commutative justice, which regulates the relations of giving and receiving between parties to a transaction. But the social doctrine of the Church has unceasingly highlighted the importance of distributive justice and social justice for the market economy, not only because it belongs within a broader social and political context, but also because of the wider network of relations within which it operates. In fact, if the market is governed solely by the principle of the equivalence in value of exchanged goods, it cannot produce the social cohesion that it requires in order to function well. (35)
By insisting on the priority of distributive justice, the Pope poses a special problem for the economists, a problem that goes back to the late 19th century. At that time, the study was known as political economy, a discipline firmly located within political and social structures. However, many practitioners of the discipline felt that this was far too “philosophical” and hence insufficiently scientific. In order to become a true science, they would have to reduce economics to strict calculations. In order to do this, they reduced all economics to a science of exchanges, that is, to commutative or corrective justice alone. The economy was to be modeled as a series of exchanges governed only by free contract and beginning with “an exchange with nature.” The absurdity of originating production with such an exchange is made clear when we ask, “Who negotiates in nature's behalf, and what, precisely, does nature get in return? “Dear mountain, please give us your coal, and we will give you this nice slag heap in return.”
But leaving aside the question of the exchange with nature, the new economists claimed that exchanges under free contract would result in workers getting a fair wage and capital getting a fair return. There would be no reason to bring up the messy questions of distributive justice; commutative justice, the justice that regulates exchanges between individuals and firms is sufficient to guarantee fair returns to labor and capital. “Fairness” was built in to the system, because free contracts are always fair, or so the theory has it.
All this seems very reasonable, but it is not. There are at least two problems. The first problem is that commutations deal only with change in ownership of already existing commodities, such as when we exchange money for bread or labor for money. But the first problem for any economics is not exchange, but production. Before the bread comes into existence, it must be produced by human labor. When we take a tree and produce a set a chairs, we call the chairs into being; we are dealing with something that did not exist before. The great question of economics is how to divide this new thing among those who had a hand in creating it. Production produces values that did not exist before, hence commutations cannot answer the question, “How many of the new chairs should be given to the labor that produced them or to the owners of the tools by which they were produced?”
This is a matter for distributive justice. The problem that the new economists had with distributive justice is that it can never be (as Aristotle pointed out) a matter of calculation, but a matter of judgment, and different social arrangements would produce different answers. This reliance on reasonable judgments struck the new scientists as unreasonable, and certainly as unscientific. Without being subject to a strict mathematics, economics could never be “scientific.”
The problem of trying to describe production as a series of exchanges came to a head in the 50's with the so-called “capital controversies.” Simplifying a very complex argument, the debate dealt with the adequacy of the standard production function, with purported to describe the appearance of new things by the function P=∫(K,L), where K aggregates all the different exchanges of capital and L of labor. However, K cannot be used directly in the formula, since capital comes in various shapes and sizes (trucks and tools and raw materials, etc.) without any common denominator. So in aggregating capital into the formula they used the price of the various capital goods. However, this turns out to be circular: The price of capital depends on the return to capital, but the formula is supposed to determine that return. In other words, in order to use the formula, you would first have to know the results of the formula. In trying to deny the role of reasonable judgments, they had to sneak a judgment into the formula. The whole thing is self-contradictory.
The interesting thing about the capital controversies is that the defenders of the commutative production function admitted defeat. In fact, Paul Samuelson, the leading economist of his day and chief defender of the function, not only admitted defeat, he actually refined the mathematics to show how the formula was internally self-contradictory. Samuelson did make some corrections to his textbook, but nevertheless the formula is still taught as if the controversies had never taken place. Why? Because there are no other alternatives available within a pure theory of exchanges.
This leads to a startling conclusion: Modern economic science—the science of production and exchange—lacks a coherent production function! And lacking such a function, it can never be a complete description of any economy. Hence, it can never accurately predict the course of any economy nor make any rational policy recommendations. Now we can understand how 90% of the economists fail to see its most obvious failures: they simply lack the tools with which to do a complete analysis of the economy.
The irony of this is that political economy become economics in the name of scientific computation, only to end up with a formula that can't be computed. In attempting to explain everything in terms of numbers, they explain nothing at all. But they needn't have worried for computation's sake. Although distributions depend on judgments, or on power, the results can be computed and compared. For example, if it is determined that labor ought to receive no more than bare subsistence, then economists can accurately compute the results, most likely in terms of over-supplied capital markets and under-supplied consumer markets. And if it is decided that the capitalist shall live in rags and the worker as a king, then the under-supply in capital markets will reduce everyone to rags.
If the positive claims of economics break down, so do the normative ones. Fair contract, the argument goes, is supposed to ensure fair wages, but Adam Smith destroyed this argument. In any dispute over wages,
It is not, however, difficult to foresee which of the two parties must, upon all ordinary occasions, have the advantage in the dispute, and force the other into a compliance with their terms....A landlord, a farmer, a master manufacturer, or merchant, though they did not employ a single workman, could generally live a year or two upon the stocks which they have already acquired. Many workmen could not subsist a week, few could subsist a month, and scarce any a year without employment. In the long-run the workman may be as necessary to his master as his master is to him; but the necessity is not so immediate.
In other words, wages depend not on productivity, but on power, and the more powerful party will prevail. Contract alone cannot insure fair wages. And without fair wages, there will be an oversupply of capital and a shortage of demand, and a recession is the result. Recessions can be delayed by using government spending to prop up demand, or by usury, that is, by supporting demand by consumer borrowing. But both of these methods have their limits, and we are smack up against the limits of both remedies in the current crises. It is precisely this double failure which makes this recession so persistent.
With all this as background, we can ask, “Is economics a science?” The answer is, I think, “not in its present form.” The present form takes its cues from physical science, a science that rarely ventures into questions of justice. But economics, if it is to be a science, must obviously be a humane science, and such sciences cannot avoid questions of justice. This is to say, economics ought to be a science; it ought to be the science of political economy. In pointing to the importance of social and distributive justice, the Church is speaking only as a moral authority; but in doing so, she turns out to be a pretty shrewd economist. The moral requirement is not, as Benedict points out, something that is added to an otherwise complete science, but something that lies at its very core, and without which it cannot be a science at all.
Read more...Obama's Nobel Prize
"When small men cast long shadows, you know the sun is setting."
--Lao Tzu
I Can't Read My New Book!
My new book is an anthology of writings on economic liberty. Unfortunately, I’m not actually able to read the published edition, since it is in Romanian. My co-editor, Dr. Ovidiu Hurdezeu, asked me to put this anthology together to introduce Distributism and other localist economic ideas to the Romanian people, which should prove fertile ground for such ideas. Indeed, before the darkness of World War II and the communist occupation of Romanian, there was a vibrant peasants’ party in Romania, as Alan Carlson has noted in his Third Ways. Dr. Carlson has an essay in this collection. The title of the book translates as Economic Liberty: A Profound Romanian Renaissance.
Today, the Romanian economy is in shambles, with a government that is hostile to Romanian culture in the name of becoming “Europeans,” that is, subjecting the Romanian people to the bureaucrats in Brussels. The Romanians (and everybody else in Europe) can do better.
I will be in Romania for 10 days at the end of November to promote the book and the ideas contained in it. Romanian readers of this blog are invited to contact me for details of the trip.
Read more...Economics for Everyone
Economic Theory and Distributism
"Big Business and State Socialism are very much alike, especially Big Business." - G.K.'s Weekly, 4/10/26
"[No society can survive the socialist] fallacy that there is an absolutely unlimited number of inspired officials and an absolutely unlimited amount of money to pay them." - The Debate with Bertrand Russell, BBC Magazine, 11/27/35
"A citizen can hardly distinguish between a tax and a fine, except that the fine is generally much lighter." - ILN, 5/25/31
"Too much capitalism does not mean too many capitalists, but too few capitalists." - The Uses of Diversity, 1921
"Price is a crazy and incalculable thing, while Value is an intrinsic and indestructible thing." - Reflections on a Rotten Apple, The Well and the Shallows, 1935
"Business, especially big business, is now organized like an army. It is, as some would say, a sort of mild militarism without bloodshed; as I say, a militarism without the military virtues." - The Thing
"All but the hard hearted man must be torn with pity for this pathetic dilemma of the rich man, who has to keep the poor man just stout enough to do the work and just thin enough to have to do it." - Utopia of Usurers, 1917
"From the standpoint of any sane person, the present problem of capitalist concentration is not only a question of law, but of criminal law, not to mention criminal lunacy." - "A Case In Point," The Outline of Sanity
"Because a girl should have long hair, she should have clean hair; because she should have clean hair, she should not have an unclean home; because she should not have an unclean home, she should have a free and leisured mother; because she should have a free mother, she should not have an usurious landlord; because there should not be a usurious landlord, there should be a redistribution of property; because there should be a redistribution of property, there shall be a revolution." - What's Wrong with the World
"There is only one thing that stands in our midst, attenuated and threatened, but enthroned in some power like a ghost of the Middle Ages: the Trade Unions." - A Short History of England
"[Capitalism is] that commercial system in which supply immediately answers to demand, and in which everybody seems to be thoroughly dissatisfied and unable to get anything he wants." - "How to Write a Detective Story." The Spice of Life
"Our society is so abnormal that the normal man never dreams of having the normal occupation of looking after his own property. When he chooses a trade, he chooses one of the ten thousand trades that involve looking after other people's property." - Commonwealth10-12-32
"The real argument against aristocracy is that it always means the rule of the ignorant. For the most dangerous of all forms of ignorance is ignorance of work." - NY Sun 11-3-18
"Making the landlord and the tenant the same person has certain advantages, as that the tenant pays no rent, while the landlord does a little work." - "Hudge and Gudge," What's Wrong with the World
"You can't have the family farm without the family." - Tales of the Long Bow
"I would give a woman not more rights, but more privileges. Instead of sending her to seek such freedom as notoriously prevails in banks and factories, I would design specially a house in which she can be free." - What's Wrong World
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