Franz Oppenheimer — The Law of Transformation and Social Market Economy Oleg Komlik

Oppenheimer’s Law of Transformation can be read as the paradox of cooperative economics and it refers to macro-social dynamics: the beginning of a cooperative group endeavor will end up in a capitalist calculation enterprise or cease to exist as long as the macro-social conditions are based on capitalist monetization and accounting. Knowledge is about predictability and wisdom is about outcome: the later Kibbutzim were from the Oppenheimer viewpoint a survival mechanism which will be inevitably followed by economic means of privatization.

This is another must-read. It's hardly an accident that this knowledge is again coming to a head after having been known at least since Marx & Engels as conditions that led to the previous two world wars are being recreated. I already said some time ago that WWIII has already begun. It just hasn't gone viral yet.

The problem is institutional, and it goes back 5000 years as the post describes. There seems to be no way out as long as money is used to produce commodities in order to make more money (Marx's M-C-M'). The problem is that money not only buys commodities but also result in asymmetric power through asymmetric control of the means of production. Oppenheimer’s nLaw of Transformation suggests that this cannot be remedied in a monetary production economy through co-ops.

Is there another alternative? Our resident Libertarian-Austrian commentator keeps reminding us of the economic calculation problem and socialist calculation debate that suggests not. Socialist experiments to date have not scaled. Franz Oppenheimer suggests that that even limited-scale attempts have ultimately transmogrified into capitalism.

I have suggested that two things are needed for a genuine transformation. The first is an observation that Karl Marx made in Preface to A Contribution to the Critique of Political Economy:

Just as one does not judge an individual by what he thinks about himself, so one cannot judge such a period of transformation by its consciousness, but, on the contrary, this consciousness must be explained from the contradictions of material life, from the conflict existing between the social forces of production and the relations of production. No social order is ever destroyed before all the productive forces for which it is sufficient have been developed, and new superior relations of production never replace older ones before the material conditions for their existence have matured within the framework of the old society.
Mankind thus inevitably sets itself only such tasks as it is able to solve, since closer examination will always show that the problem itself arises only when the material conditions for its solution are already present or at least in the course of formation.

While I agree with the highlighted text, I would dispute the assertion of materialism. Materialism is the ontological underpinning of naturalism as the methodology of science as "true knowledge vs. opinion" in the ancient Greek sense of episteme vs. doxa that underlies the Western intellectual tradition.

As R. Buckminster Fuller pointed out, the wealth of humankind includes not only material wealth but also "metaphysical" wealth in the form of knowledge. While the former is finite, the latter is potentially infinite. In addition, to this there is also "spiritual" wealth in the form of everything that distinguishes humans. Fundamental to this is the ability to know and appreciate universality, where worldly knowledge is only a part of the story and not the greater part either. In addition to the cognitive faculties are the affective faculties, linked by the volitional faculty.

Thus, the second factor that comes into play in social transformation is the "spiritual" dimension, which can be considered either metaphysically or humanistically. For present purposes, the distinction can be disregarded, important as it may be otherwise. The important factor is that humans can not only know universally but also feel universally.

The level of collective conscious is revealed by the level of universality that the members of a society exhibit in behavior, culture and institutions. The present day level of collective consciousness is based on self-interest and this is reflected socially, political, and economically. Meher Baba elaborates on this in "The New Humanity." Some argue that this is just human nature, so get used to it. Others assert that the level of consciousness is malleable. Bucky Fuller showed that increasing electricity use has a profound effect, on one hand. On the other hand, raising the general level of education also affects the collective consciousness positively.

At a deeper level, the wisdom traditions of the world have asserted that consciousness can be transformed directly and have provided instructions on now to do so. These are being adopted increasingly.

For a transition away from predatory capitalism, two factors are needed. The first is a shift in the mode of production, which may be happening with the transition from the industrial age to the knowledge age. Dealing with climate change is also going to be a game-changer. The second is a transformation of the level of consciousness through a "spiritual awakening" such as has been suggested as coming in The Fourth Turing, for example.

Anyway, there is a lot to chew on in this post.

Economic Sociology and Political Economy
Franz Oppenheimer — The Law of Transformation and Social Market Economy
Oleg Komlik | founder and editor-in-chief of the ES/PE, Chairman of the Junior Sociologists Network at the International Sociological Association, a PhD Candidate in Economic Sociology in the Department of Sociology and Anthropology at Ben-Gurion University, and a Lecturer in the School of Behavioral Sciences at the College of Management Academic Studies

Lars P. Syll — Keynes vs. Wicksell — the loanable funds theory

Quote from Giancarlo Bertocco, "Some Observations About The Loanable Funds Theory"

Lars P. Syll’s Blog
Keynes vs. Wicksell — the loanable funds theory
Lars P. Syll | Professor, Malmo University

Lars P. Syll — What is ‘effective demand’?

Economists of all shades have generally misunderstood the theoretical structure of Keynes’s The General Theory. Quite often this is a result of misunderstanding the concept of ‘effective demand’ — one of the key theoretical innovations of The General Theory.

Jesper Jespersen untangles the concept and shows how Keynes, by taking uncertainty seriously, contributed to forming an analytical alternative to the prevailing neoclassical general equilibrium framework:

Lars P. Syll’s Blog
What is ‘effective demand’?
Lars P. Syll | Professor, Malmo University

Merijn Knibbe — Cecchetti and Kharroubi on the non-neutrality of money

Is money ‘neutral’? Is it just a veil over ‘real’ transactions? Or does it affect the level and composition of ‘real’ expenditure? Stephen Cecchetti and Enisse Kharroubi recently published an article which in a very net way shows that money is non-neutral (as it is closely related to credit). It’s not a veil. It’s part of the essence of our economy. The abstract:….

Real-World Economics Review Blog
Cecchetti and Kharroubi on the non-neutrality of money

Merijn Knibbe

Brian Romanchuk — A Postscript On Barter

Brian answers objections raised here and elsewhere on why the history of money is still relevant in economics as practiced today.

It is relevant not because economics discuss barter any longer but because they assume a barter-based economy, in which goods are traded for goods. 

This is the basis of Say's law, which even Say came to recognize is not a "law" in a monetary economy. Say's law is the basis of the modern assumption of general equilibrium, that all markets clear in the long run.

Related to this is the assumption that money is a neutral veil so the monetary aspects of a modern economy don't really matter in the long run, although there can be short run effects. 

Moreover, it is is at the foundation of Friedman's monetarism, which is based on Hume's analysis holding that at increase in the money supply will drive up the price level cet. par. Monetarism assumes cet. par, even though empirical evidence runs counter to it.

The neutrality of money view also underpins the assumption of conventional economics that finance can be ignored in econometric analysis. The banking system just intermediates between borrowers and savers, so the interest rate is determinative in economic activity. While it can be used as a lever by the monetary authority, the central bank is reactive rather than proactive, responding to markets rather than determining them.

Keynes's General Theory of Employment, Interest and Money is grounded in effective demand, which is income and consumption based. Neoclassical economics is grounded in production, hence investment based. Keynes agreed that production (supply) is investment-based and that investment is the driver of growth. But he pointed out that investment is consumption-driven and consumption is demand-driven. 

Firms produce goods to sell, and when sales lag owing to lagging demand, they unplanned inventories rise and firms reduce quantity rather than price, as neoclassical economics wrongly assumes. Modern economies are "monetary production economies." they don't produce just to produce because they can. They produce in order to make a money profit. Marx had observed this as the difference between C-M-C' as classical economists assumed and M-C-M' as he theorized. See Wray, "Theories of Value and the Monetary Theory of Production" (Levy Working Paper No. 261).

 

The insight of Keynes was that lagging demand, that is, effective demand insufficient to purchase the quantity of goods that can be output using available resources efficiently, results from demand leakage to saving rather than being initiated by a market failure involving the factors of production, e.g., an exogenous shock. This vitiates Say's law "in the short run" as long as liquidity preference remains high enough to inhibit spending and there is no monetary offset. And "in the long run we are all dead." Waiting for the system to autocorrect is folly when the government sector can offset lagging demand by accommodating liquidity preference (saving desire) to return the economy to capacity and full employment "in the short run".

There are other reasons that the history of money is still important in the study of economics and finance, which are joined at the hip in a monetary economy. But just from the point of view of the fundamental assumptions of conventional economics — even Krugman and DeLong self-identity as neoclassical economics — the history of money is important in understanding the basis of fundamental neoclassical assumptions that run counter to the operation of a modern monetary economy, as well as the failure of neoclassical economists to correctly understand and incorporate finance and monetary operations in their models.

While may not be necessary to know how the erroneous assumptions were arrived at based on the assumption of money arising from barter and economic exchange being essentially barter, it accounts for what might otherwise be surprising. Why would intelligent people think that monetary operations, banking, and finance were irrelevant to economic analysis, miss a major crisis and still be mystified about policy to correct for it. The conclusion is that they are either morons, or are using the wrong model. 

Keynesian, Post Keynesian and MMT analysis may not depend on the history of money, but the history of money illuminates the analysis.

It also shows the value of studying the history of money and theory of money, Neoclassical economics is a development of classical economics and also a response to issues previous raised by Smith and Ricardo in particular. The foundations for the neoclassical view of money were laid by the classical economists and Hume. Menger's analysis of money, that is, money as barter-based and gold as the basis of commodity money (numeraire), dominated early neoclassical thinking and influenced neoclassical assumptions.

Keynes apparently developed his views on the monetary theory of production from both Marx (see Wray above) and also Knapp's Chartalism or state money. Post Keynesian later developed understanding of the monetary circuit that corresponds to the circular flow of production-distribution-consumption that underlies neoclassical thinking. This led to an accounting approach and sectoral balance stock-flow consistent analysis by Tobin and Godley. Neoclassical economists have largely either ignored this development, or rejected it, claiming that methodological issues are settled, so history is irrelevant.

Bond Economics
A Postscript On Barter
Brian Romanchuk

JW Mason — Minsky on the Non-Neutrality of Money

I try not to spend too much time criticizing orthodox economics. I think that heterodox people who spend all their energy pointing out the shortcomings and contradictions of the mainstream are, in a sense, making the same mistake as the ones who spend all their energy trying to make their ideas acceptable to the mainstream. We should focus on building up our positive knowledge of social reality, and let the profession fend for itself. 

That said, like almost everyone in the world of heterodoxy I do end up writing a lot, and often obstreperously, about what is wrong with the economics profession. To which you can fairly respond: OK, but where is the alternative economics you're proposing instead? 

The honest answer is, it doesn't exist. There are many heterodox economics, including a large contingent of Post Keynesians, but Post Keynesianism is not a coherent alternative research program. [1] Still, there are lots of promising pieces, which might someday be assembled into a coherent program. One of these is labeled "Minsky". [2] Unfortunately, while Minsky is certainly known to a broader audience than most economists associated with heterodoxy, it's mainly only for the financial fragility hypothesis, which I would argue is not central to his contribution. 

I recently read a short piece he wrote in 1993, towards the end of his career, that gives an excellent overview of his approach. It's what I'd recommend -- along with the overview of his work by Perry Mehrling that I mentioned in the earlier post, and also the overview by Pollin and Dymski -- as a starting point for anyone interested in his work.… 

For me, the fundamental points here are (1) That our overarching vision of capitalist economies needs to be a system of "units" (including firms, governments, etc.) linked by current money payments and commitments to future money payments, not a set of agents exchanging goods; and (2) that the critical influence of liquidity comes in the terms on which long-lived commitments to particular forms of production trade off against current income.

This post is about what "capitalism" actually is based on how it works in a monetary production economy. How it works is the result of addressing key issues that the conventional approach to economics ignores by assuming the neutrality of money. Money is not neutral for very specific reasons that JW suggests need to be explored — and Minsky realized this. In doing so, he suggested how to set economics on a fresh course based on tried and trusty principle, Follow the money.

From the POV of following the money, money and banking, and finance are essential components of the study of economics, and accounting is as important or more so than econometric modeling. This being the case, law and government are also heavily involved in understanding the construction of economics systems based on the wider social and political context.

Probably the most important takeaway from JW's recent posts is his focus on the need to be asking the right questions in order to arrive at the right answers. The first step in design and engineering is figuring out what the problem actually is. Instead, economists have tended to assume that the purpose of economics is to provide explanations. The problem here is that events can have many explanations. But when dealing with a system that has variable effects depending on the construction of the system and the variable inputs, the question is about how the system works to do what it is capable of doing.

The conventional view of economists about their subject is similar to theoretical physics, whose object is "pure science," which consists mostly in constructing mathematical models. Evaluating those models based on outcome is left to experimental physicists, and then the result are passed along to applied physicists, who are called engineers. Conventional economics has tended to emphasize the theoretical, ignore the experimental, and leave the applied to a separate discipline, management science, that doesn't rely on very much on economic theory.

As Thomas Aquinas observed at the outset of De ente et essentia, paraphrasing Aristotele, "A small mistake at the beginning becomes a great one by the end.

The Slack Wire
Minsky on the Non-Neutrality of Money
JW Mason | Assistant Professor of Economics, John Jay College, City University of New York

Lars P. Syll — Keynes vs. Wicksell on loanable funds theory

"The fundamental difference between Keynes and Wicksell and in general the supporters of the LFT [Loanable Funds Theory] lies in the specification of the consequences of the presence of bank money.…

In contrast, Keynes states that the spread of a fiat money such as bank money changes the structure of the economic system. He underscores this point by introducing the distinction between a real exchange economy and a monetary economy.…

Keynes notes that the classical economists formulated an explanation of how the real-exchange economy works, convinced that this explanation could be easily applied to a monetary economy. He believed that this conviction was unfounded …" — Giancarlo Bertocco

Lars P. Syll’s Blog
Keynes vs. Wicksell on loanable funds theory
Lars P. Syll | Professor, Malmo University

Merijn Knibbe — Shocking! Breaking! Young economists discover that lower income leads to lower consumption!

This line of reasoning is of course influenced by the ideas of people like Milton Friedman who mixed up non-monetary consumption (i.e. the use of consumer goods) and ‘utility’ with monetary consumption (i.e. the purchase of consumer goods) and production, to argue that consumption was non-cyclical, signifying that all kinds of counter-cyclical government policies were not necessary. But monetary consumption is cyclical and contrary to the statements of Gerlach-Kirsten, Merola and O’Toole it has been quite cyclical all along, especially expenditure on consumer durables. In the real world, the smoothing of the use of these durables leads to more cyclical purchases!

Dear friends, if post war consumption did not show the large cyclical developments of the past this was because incomes were smoothed by automatic stabilizers, minimum, wages, whatever, and not because households smoothed expenditures. However – governments have given up on this, at least in the EU, and ultra-unemployment (oops, ultra-unemployment is not even mentioned in their article…) and volatile expenditure are back, together with highly volatile consumer expenditures.

Real-World Economics Review Blog
Shocking! Breaking! Young economists discover that lower income leads to lower consumption!
Merijn Knibbe