Modern Political Economics: Making sense of the post-2008 world

543 Pages·2011·3.166 MB·English

by  Yanis Varoufakis, Joseph Halevi, Nicholas J. Theocarakis

Modern Political Economics
Once in a while the world astonishes itself. Anxious incredulity replaces intellectual torpor
and a puzzled public strains its antennae in every possible direction, desperately seeking
explanations for the causes and nature of what just hit it. 2008 was such a moment. Not only
did the fi nancial system collapse, and send the real economy into a tailspin, but it also
revealed the great gulf separating economics from a very real capitalism. M odern Political
Economics has a single aim: to help readers make sense of how 2008 came about and what
the post-2008 world has in store.
The book is divided into two parts. The fi rst part delves into every major economic theory,
from Aristotle to the present, with a determination to discover clues of what went wrong in
2008. The main fi nding is that all economic theory is inherently fl awed. Any system of ideas
whose purpose is to describe capitalism in mathematical or engineering terms leads to inev-
itable logical inconsistency; an I nherent Error that stands between us and a decent grasp of
capitalist reality. The only scientifi c truth about capitalism is its radical indeterminacy,
a condition which makes it impossible to use science’s tools (e.g. calculus and statistics) to
second-guess it. The second part casts an attentive eye on the post-war era, on the breeding
ground of the Crash of 2008 . It distinguishes between two major post-war phases: the G lobal
Plan (1947–1971) and the Global Minotaur (1971–2008).
This dynamic new book delves into every major economic theory and maps out meticu-
lously the trajectory that global capitalism followed from post-war almost centrally planned
stability, to designed disintegration in the 1970s, to an intentional magnifi cation of
un sustainable imbalances in the 1980s and, fi nally, to the most spectacular privatisation of
money in the 1990s and beyond. M odern Political Economics is essential reading for
Economics students and anyone seeking a better understanding of the 2008 economic
crash.
Yanis Varoufakis is Professor of Economic Theory at the University of Athens, Greece.
Joseph Halevi is Senior Lecturer at the University of Sydney, Australia.
Nicholas J. Theocarakis is Assistant Professor of Political Economy and History of
Economic Thought at the University of Athens, Greece.
Modern Political Economics
Making sense of the post-2008 world
Yanis Varoufakis,
Joseph Halevi and
Nicholas J. Theocarakis
First published 2011
by Routledge
2 Park Square, Milton Park, Abingdon, Oxon, OX14 4RN
Simultaneously published in the USA and Canada
by Routledge
711 Third Avenue, New York, NY 10017
Routledge is an imprint of the Taylor & Francis Group, an informa business
© 2011 Yanis Varoufakis, Joseph Halevi and Nicholas J. Theocarakis
The right of Yanis Varoufakis, Joseph Halevi and Nicholas J. Theocarakis to be
identifi ed as authors of this work has been asserted by them in accordance
with sections 77 and 78 of the Copyright, Designs and Patent Act 1988.
All rights reserved. No part of this book may be reprinted or reproduced or
utilised in any form or by any electronic, mechanical, or other means, now
known or hereafter invented, including photocopying and recording, or in any
information storage or retrieval system, without permission in writing from the
publishers.
Trademark notice: Product or corporate names may be trademarks or
registered trademarks, and are used only for identification and
explanation without intent to infringe.
British Library Cataloguing in Publication Data
A catalogue record for this book is available from the British Library
Library of Congress Cataloging-in-Publication Data
Varoufakis, Yanis.
Modern political economics : making sense of the post-2008 world / by
Yanis Varoufakis, Joseph Halevi, and Nicholas J. Theocarakis.
p. cm.
Includes bibliographical references and index.
ISBN 978-0-415-42875-0 (hb) – ISBN 978-0-415-42888-0 (pb) –
ISBN 978-0-203-82935-6 (eb) 1. Capitalism–History. 2. Economics–History.
I. Halevi, Joseph. II. Theocarakis, Nicholas. III. Title.
HB501.V362 2010
330.9–dc22 2010037780
ISBN: 978-0-415-42875-0 (hbk)
ISBN: 978-0-415-42888-0 (pbk)
ISBN: 978-0-203-82935-6 (ebk)
Typeset in Times New Roman
by Glyph International
Contents
List of tables vii
List of fi gures viii
List of boxes ix
Three authors, three forewords xii
1 Introduction 1
B OOK 1
Shades of political economics : seeking clues for 2008 and its
aftermath in the economists’ theories 15
2 Condorcet’s Secret: on the signifi cance of classical political
economics today 17
3 The odd couple : the struggle to square a theory of value
with a theory of growth 30
4 The trouble with humans : the source of radical indeterminacy
and the touchstone of value 51
5 Crises : the laboratory of the future 78
6 Empires of indifference : Leibniz’s calculus and the ascent of
Calvinist political economics (with an addendum by George Krimpas
entitled ‘Leibniz and the “invention” of General Equilibrium’) 115
7 Convulsion : 1929 and its legacy 177
8 A fatal triumph : 2008’s ancestry in the stirrings of the Cold War 227
9 A most peculiar failure: the curious mechanism by which
neoclassicism’s theoretical failures have been reinforcing their
dominance since 1950 250
10 A manifesto for M odern Political Economics : postscript to B ook 1 289
vi Contents
BOOK 2
Modern political economics : theory in action 301
11 From the G lobal Plan to a Global Minotaur : the two distinct phases of
post-war US hegemony 303
12 Crash : 2008 and its legacy (with an addendum by George Krimpas
entitled ‘The Recycling Problem in a Currency Union’) 343
13 A future for hope: postscript to B ook 2 442
Notes 457
Bibliography 497
Index 520
Tables
4.1 Input–Output Matrix 55
4.2 The Matrix Economy’ s steady-state growth path 58
9.1 The prisoner’s dilemma 276
11.1 Percentage increase/decrease in a country’s share of world GDP 318
12.1 Average annual rate of change in l abour unit costs (in $US) 348
Figures
3.1 The physiocratic t ableau économique 32
4.1 Nature’s limits 73
7.1 Reward from investing $15 per week in Wall Street during the
swinging 1920s 197
7.2 GDP in billion dollars 197
7.3 The great banking disaster 198
7.4 US National Debt as a proportion of US National Income (GDP)
per Presidency (1940–2010) 203
7.5 Annual rate of infl ation in the USA (1929–55) 203
9.1 The Dance of the Meta-axioms 270
10.1 The six meta-axioms of political economics 295
11.1 Real GDP per capita during the period of the G lobal Plan 317
11.2 Oil dependency 330
11.3 Effects of the 1970s crisis on the United States’ relative position 330
11.4 Stagnant wages, booming productivity (year 1975 = 100) 332
11.5 US real profi ts during the post-war period and prior to the C rash of 2008 332
11.6 US trade defi cit 340
11.7 US federal government budget defi cit 340
11.8 The Global Minotaur ’s success 341
12.1 How the EU and Japan on the one hand and Asia and oil exporters on the
other fi nanced the US current account defi cit 357
12.2 Global capital infl ows and outfl ows, 2003 358
12.3 US corporate profi tability (1961–1970 = 100) 358
12.4 Personal loans and credit card debt of US households (1961–1970 = 100) 359
12.5 Link between median house price infl ation and the growth in consumer
spending, 2002–7 360
12.6 The World is Not Enough : world income and the market value of
derivatives (in $US trillions) at the height of the Minotaur’s reign 368
12.7 The triumph of fi nancialisation 397
12.8 US job losses (in thousands) during the 12-month period around the
worst post-1945 recessions 409
12.9 The recession of ambition 410
12.10 A comparison of the Crash of 1929 with the Crash of 2008 412
12.11 The Global Minotaur : a life 426
12.12 Increase in US assets (in $ billion) OWNED by foreign state institutions 427
13.1 The Globalising Wall 452
Boxes
2.1 Aristotle’s theory of value in the N icomachean Ethics 19
2.2 The birth of capitalism: T he commercialisation thesis 23
2.3 Why Britain? 25
2.4 Tilting at dark satanic mills 27
3.1 The input–output model underlying the Physiocrats’ analysis 32
3.2 A critical celebration of the Physiocrats – by Karl Marx 34
3.3 Smith on capital accumulation 37
3.4 Growth and the distribution of income in a pure corn economy 42
3.5 On the possibility of unproductive labour 45
3.6 Ricardo on the machines v s jobs debate 47
3.7 The disappearance of money 48
4.1 Humanity’s resistance to utopia: In the words of a machine 52
4.2 The Matrix Economy ’s sector 1 54
4.3 The Matrix Economy ’s sector 2 54
4.4 An input–output model for the M atrix Economy 56
4.5 The principle of balanced growth 57
4.6 The architect and the bee 60
4.7 Of generators and humans 64
4.8 Adam Smith on human nature 67
4.9 The dialectic 69
4.10 Of viruses and humans 76
5.1 Labour’s two natures 79
5.2 The labour theory of wages and surplus value 81
5.3 Labour power, human capital and T he Matrix 84
5.4 The slave ship and the dialectic of racial identity 86
5.5 Capital’s two natures 88
5.6 Dr Faustus and Mr Ebenezer Scrooge in the Age of Capital 89
5.7 The fi rst theory of crises 93
5.8 The role of wages and of the unemployed in regulating capitalism’s crises 96
5.9 The Fundamental Marxian Theorem 98
5.10 The ‘scientifi c’ clothes of a political argument and of a teleological
hypothesis: Wages, prices and the falling rate of profi t 99
5.11 Value and the conditions for growth in a multi-sector capitalist economy 101
5.12 The Transformation Problem and its implications 103
5.13 The falling rate of profi t: Internal and external critiques 106
5.14 Piero Sraffa’s model and the spectre of M atrix Economics 108
x Boxes
5.15 Capitalism versus slavery and T he Matrix 110
6.1 The Inherent Error ’s triptych 116
6.2 Backlash 119
6.3 Neoclassical Price Theory 123
6.4 Dr Faust and the E qui-Marginal Principle 124
6.5 The Marginalists 125
6.6 Seven Marginalist dogmas 131
6.7 Natural unemployment 135
6.8 The futures’ trader: A morality tale 137
6.9 Of famine and arbitrage 140
6.10 A thoughtful Marginalist on how labour may differ from all other
commodities 141
6.11 The Marginalist calculus of wages 142
6.12 The discovery of domestic labour 145
6.13 On the impossibility of a sensible microeconomics 146
6.14 Knut Wicksell on capital 147
6.15 The loss of measurable capital 149
6.16 Thou canst not stir a fl ower without troubling of a star 156
6.17 The two faces of calculus: Newton’s F lux versus Leibniz’s M osaic 160
6.18 Calvin, Leibniz, Walras and… Voltaire: Neoclassical economics
as a political theology 164
7.1 Say’s Law or the Law of the Markets : The Inherent Error ’s alter ego 180
7.2 Imperialism’s new clothes 184
7.3 From cornfi elds to Wall Street 190
7.4 The unbearable lightness of calculus on the cusp of 1929 193
7.5 Midas loses his touch 198
7.6 Keynes on Malthus and the Outsiders 206
7.7 When Reason defers to E xpectation 207
7.8 The fallacy of composition 211
7.9 Redemptive cycles 214
7.10 Investment: The joker in the pack 218
7.11 Neoclassical Revisionism and the role of the Federal Reserve,
then and now 222
7.12 Austrian Revisionism and the role of the Federal Reserve, then and now 224
8.1 The ‘menace’ of fi nancial reform 228
8.2 The Cowles Commission for Research in Economics 232
8.3 The RAND Corporation 234
8.4 Brouwer’s Fixed Point Theorem 237
8.5 Nash’s unique solution to the B argaining Problem 243
9.1 Neoclassicism’s three meta-axioms, in brief 263
9.2 The fi rst meta-axiom’s strong and weak variants 265
9.3 The second meta-axiom’s strong and weak variants 267
9.4 The third meta-axiom’s strong and weak variants 268
9.5 When formalism is applied to economics it turns political. And when
it is applied to fi nance it becomes ruinous 284
9.6 Neoclassicism’s ‘slash-and-burn’ strategy 285
9.7 Wither capitalism? 285
10.1 The knowledge machine of Laputa 290