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FOUNDATIONAL PROBLEMS OF POLITICAL ECONOMYPART TWO: ECONOMIC LAWS AND THE DYNAMICS OF THE ECONOMIC SYSTEM

27.09/2018

© 2018 Dr. Nicolas Laos 

Causes and Consequences in Political Economy 

In the philosophy of science, by the term ‘law’, we mean a proposition that establishes a relation between variables, variables being concepts that can take different values. The concept of a ‘natural law’ has been central to our understanding of the natural sciences. The history of modern political economy can be traced back to physiocracy, which was the first methodical attempt to explain economic behavior in similar ways to natural (that is, inanimate) behavior. Physiocracy was particularly dominated by François Quesnay (1694–1774) and Anne-Robert-Jacques Turgot (1727–81). According to the physiocrats, there was a ‘natural order’ that allowed human beings to live together. Within the framework of the physiocrats’ political economy, the human being is merged with the natural world, so that it reduces to merely a particular consequence of the operation of natural laws. Paul Samuelson and William D. Nordhaus write about physiocracy:  

A remarkable depiction of the economy as a circular flow, still used in today’s texts . . . was made by Quesnay, Louis XIV’s court physician. He stressed that the different elements of the economy are as integrally tied together as are the blood vessels of the body. 


The founder of the so-called classical economics is Adam Smith (1723–90). The thought of the physiocrats and other 18th century economists as well as the mentality of industrialism converge in the publication by Adam Smith of The Wealth of Nations in 1776, which “marks the birthdate of modern economics”. In this book, Adam Smith, analyzed the price system, the distribution of income and various theories of wages, and he performed an empirical study of inflation. However, his most important contribution to economic analysis is his attempt to place the economic rationale of the physiocrats within a scientifically rigorous analytical setting by arguing that the market mechanism is a self-regulating ‘natural’ order and that the price system organizes the behavior of people in an automatic fashion. 

In the half century after The Wealth of Nations appeared, the law of diminishing returns was formulated by Thomas Malthus (1766–1834) and David Ricardo (1722–1823). Campbell McConnel has explained the law of diminishing returns as follows: 

Imagine an economy whose property resources (land and real capital) are absolutely fixed. In particular, visualize a primitive, underdeveloped economy whose stock of capital goods is negligible and whose supply of arable land is fixed. Assume, too, that technology . . . is fixed; this means that the quality of capital and labor are both given. Assuming its population is growing, the simple agrarian society is concerned primarily with adding labor to a fixed amount of land and a few rudimentary farm tools to produce the food and fiber needed by its population . . . The law of diminishing returns indicates that as successive equal increments of one resource (labor, in this case) are added to a fixed resource (land and property), beyond some point the resulting increases in total output will diminish in size. 

Furthermore, Samuelson and Nordhaus have made the following comment about the law of diminishing returns: 

ironically, just as the Industrial Revolution in the West was offsetting the dire workings of that dismal law, the Reverend T.R. Malthus . . . enunciated the iron law of wages, holding that population growth will inevitably drive workers’ wages down to subsistence level. 

For Ricardo (from whose thinking neoclassical and, in general, modern economics are derived), given that the total social product is limited by diminishing returns, “what was gained by one social class had to be taken away from another one”. In the 19th century, the reactions of both capitalists and socialists to Ricardo’s thought was positive, for different reasons though: 

No wonder the capitalists like Ricardo. They could find quotations in his work to prove that trade unions and reforms can do little for the masses. No wonder the socialists liked Ricardo. They found in him a proof that capitalism would have to be destroyed if workers were to win their rightful share of national output. 

Following the intellectual legacy of Ricardo, in the 1870s, W. Stanley Jevons (1835–82) in England, Carl Menger (1840–1921) in Austria, and Léon Walras (1834–1910) in Switzerland, working independently from each other, founded modern (‘neoclassical’) economics “by devising an analysis that could synthesize both demand elements and cost elements”. Moreover, Walras devised a method of analyzing the economy as a whole. In particular, Walras started from the following definitions: (i) A market for a particular commodity is in equilibrium if, at the current price of the commodity, the quantity of the commodity demanded by potential buyers equals the quantity supplied by potential sellers. (ii) An economy is in general equilibrium if the markets for all goods and services are simultaneously in equilibrium. (iii) Excess demand refers to a situation in which a market is not in equilibrium at a specific price because the quantity of the commodity demanded by potential buyers exceeds the quantity supplied by potential sellers at that specific price. Then he formulated the following law, known as Walras’s law: the existence of excess supply in one market must be matched by excess demand in another market, and, thus, finally, it balances out. 

The physiocrats, the classical economists, and the neoclassical economists follow a positivist epistemology, which has been summarized by J.E. Cairnes as follows:

Political Economy is a science in the same sense in which Astronomy, Dynamics, Chemistry, Physiology are sciences. Its subject-matter is different; it deals with the phenomena of wealth, while they deal with the phenomena of the physical universe; but its methods, its aims, the character of its conclusions, are the same as theirs. What Astronomy does for the phenomena of the heavenly bodies; what Dynamics does for the phenomena of motion; what Chemistry does for the phenomena of chemical combination; what Physiology does for the phenomena of the functions of organic life, that Political Economy does for the phenomena of wealth: it expounds the laws according to which these phenomena co-exist with or succeed each other; that is to say, it expounds the laws of the phenomena of wealth. 

In general, modern economics is dominated by the argument that there are economic laws and that the primary aim of economics is the discovery of those laws. Thus, in the light of the arguments that I put forward in Part One, the dominant theories of modern economics are fixated in a flawed perception of philosophical realism and Newtonian mechanics. Alexander Woodcock and Monte Davis have pointed out that, even in the context of natural sciences, “Newton’s triumph was not an explanation of anything”, and that “it is possible to see the shapes of processes within the traditional framework, but only for a certain class of processes―those involving continuous change”. “Many processes”, Woodcock and Davis continue, “yield graphs with ostensibly ill-behaved curves . . . The planets travel in stately Newtonian paths, but meanwhile winds wrap themselves into hurricanes, chickens alternate with eggs, and we change our minds”. Thus, Woodcock and Davis observe that “the twentieth century has taught us that the universe is a queerer place than we imagined, perhaps (in J.B.S. Haldane’s words) queerer than we can imagine”, and that “much of reality is not so obliging”. 

The method of sustainable creativity, which I delineated in Part One, implies that there is a dynamic continuity between the structure of consciousness and the structure of the world, a dynamic continuity that allows the conscious mind to reconstruct and utilize economic reality. Furthermore, according to the principle of sustainable creativity, on which these essays are founded, the scientific world-conception is not a ‘world’ more than it is a ‘conception’. 

Science is an expression of the creativity of the human mind, in the sense that it intends to create theories that help one approach reality (both the reality of consciousness and the reality of the world). During the process of scientific creation, the conscious mind passes through three stages: (i) the first stage consists in an intuitive, general comprehension of its object; (ii) the second stage consists in an analytical discernment of the constituent elements of the given object in order to be systematically investigated; (iii) the third stage consists in a synthetic reassemblage of the previous elements, so that the conscious mind can achieve the final interpretation of its scientific subject-matter as a whole.

In the light of the dialectic of sustainable creativity, which I defined in Part One, it follows that analysis and synthesis constitute an important dual tool by means of which the conscious mind of the economist reconstructs and utilizes economic reality. From this perspective, economic reality is not merely an object whose partial expressions are statically conceived by economists; instead, economic reality is a goal toward which the economist’s conscious mind is dynamically oriented, and, in general, economists seek to eliminate the distance that separates economic reality from the economist’s conscious mind. Hence, the completion of the previous scientific process signals the transformation of the original scientific subject-matter into a mental construction, and, at a next stage, the previous scientific process leads to the objectivation of the theory that originates from the given scientific process. 

At this point, we must explain the difference between social science and natural science. As Michael Nicholson has pointed out, “at the most general level a social science is the study of human beings in a social context”, and “international relations is just one of those contexts and we would expect the same problems and probabilities to be involved in it as with any other social science”. Therefore, according to Nicholson, “the central question is, to what extent can these phenomena be described by the same sort of procedures as natural phenomena, such as planets or genes, and are the differences, which clearly exist, of such a nature as to preclude their analysis by the same sorts of methods?”. 

To answer the aforementioned question, we must explain the difference between the evolution of the physical world and history. The evolution of the physical world has undergone and continues undergoing several crises. Prigogine and Stengers have emphasized the dynamic character of the world of nature: “Our universe has a pluralistic, complex character. Structures may disappear, but also they may appear. Some processes are, as far as we know, well described by deterministic equations, but other involve probabilistic processes”. However, none of the crises of the physical world can be considered as an object of history or of social-scientific research unless it has affected a human society. In order for an event to be considered as ‘historical’, it must involve humanity, because history is an exclusively human creation and an exclusive characteristic of human life. From the perspective of the dialectic of sustainable creativity, history expresses humanity’s potential, and, therefore, it can be identified with the evolution of the human being. 

From the previous viewpoint, there is a fundamental asymmetry between physical (or astronomical) time and historical time, and, therefore, there is a fundamental asymmetry between natural science and social science. Whereas physical time is, more or less, uniform, historical time is subject to structural changes. Moreover, physical time obeys its own entropy, which means that it flows in a precise and unalterable (irreversible) direction toward a precise but unknown aim. On the other hand, historical time is not characterized by any entropy, because it is a free outcome of the action of human consciousness, and, therefore, it is subject only to the laws imposed upon it by the intentionality of human consciousness through the ages. Hence, the process of history functions according to the dialectic of sustainable creativity. In other words, historical becoming combines alternatively causality and freedom, progression and regression, recurrence and uniqueness. 

Because we can find causality and recurrence in history, many social scientists (especially those who follow the positivist-empiricist tradition) are led to “the notion that we can identify certain sorts of situations as the ‘same’, or at least ‘the same’ in some crucial and relevant aspects”, and, therefore, they argue that “generalization is possible” and “we can move on to formulating deductive theories of social behavior in the standard scientific way and devise a social science of behavior in this mode”. On the other hand, because we can find freedom and uniqueness in history, modern idealists, such as Peter Winch, and post-modernists, such as Michel Foucault, Jacques Derrida and Richard Rorty, “are averse to causal analyses of the sort practised in behavioral political science” and argue that “there are no social events but multiplicities of events―perhaps as many as there are people who have experience of the event either directly, as observers or by report”. All the previous views are partial approaches to reality, and, therefore, they give only a fragmented knowledge of reality. For, according to the dialectic of sustainable creativity, history is characterized by a dynamic, dialectical relation between causality and freedom, progression and regression, recurrence and uniqueness. Therefore, neither positivism-empiricism nor idealism-postmodernism can stand as a general epistemological theory. Positivism-empiricism is philosophically justified due to the existence of causality and recurrence in history, but it cannot account for freedom and uniqueness in history. Idealists and postmodernists, on the other hand, are right to emphasize freedom and uniqueness in history, but they treat history as if it were the outcome of arbitrary idealistic action, and, thus, they fail to recognize the principle of sustainable creativity, which I explained in Part One. 

As a conclusion, since history is created by the intentionality of consciousness, according to humanity’s sustainable creativity, the most adequate way of studying history consists in the study of the intentionality, and, especially, of the underlying ethos and education, of the actors’ conscious minds. 

Communication Among Conscious Beings and the Dynamics of the Economic System 

As I have argued in Part One, the conscious mind is not merely a framework within which the accumulation of experiences takes place, but it is an alive and structured presence that has all the characteristics of a being, namely: substance, structure, temporal and spatial activity, and it is continuously restructured, determining the laws of its activity, of its intentionality and of its integration into the world. Thus, consciousness is the fullest expression of the reality of the human being. Consciousness is both the ontological synopsis of the human being and the means by which the human being confirms its autonomy and its quest for other beings. 

Conscious beings come into contact with each other in the contexts of their conscious minds. These contacts take place in accordance with the intentionality of consciousness and, especially, in accordance with the principle of sustainable creativity. The means by which conscious minds communicate with each other are called symbols. A symbol is a form that objectivates conscious beings’ attempts to participate in each other’s mental reality. Furthermore, symbols are forms that express commonly accepted intentions and actions and can be organized in sets that are called codes. When conscious minds act and behave according to common codes, a society of conscious minds is an inter-subjective and conscious continuum. 

As a code becomes more complete and more complex, it may increase the efficiency and the accuracy of the communication among conscious minds, but, on the other hand, it may make the communication among conscious minds more difficult. The elements of a code with which conscious minds communicate with each other are sings. Each and every sign receives a meaning that is related to its acceptance by each and every consciousness and to its participation in the overall code. Every code and every sign have a dynamic structure that makes it possible for them to be functionally adapted to various requirements. The functional success of every system of communication depends on the extent to which and the manner in which it can comply with a generalized correspondence between the signifier and the signified. 

At this point, we must clarify the difference between the terms ‘meaning’ and ‘significance’. In addition to having a ‘meaning’, i.e. a denotation, or conceptual definition, every sign also has a ‘significance’, i.e. a mode of referring us to a being (or a collection of beings) that is denoted by the given sign, transcends the given sign and constitutes the correct interpretation of the given sign. The distinction between ‘meaning’ and ‘significance’ is originally due to the mathematician and philosopher Gottlob Frege, who suggested that, in addition to having a denotation, names and descriptions also express a ‘sense’, which is the way by which one conceives the denotation of the term. Frege’s views about the distinction between ‘meaning’ and ‘significance’ were adopted by Wilhelm Dilthey, who applied them in the “mental” sciences, and by Ernst Troeltsch, who applied them in the social sciences. Moreover, Jaspers developed the distinction between ‘explanation’ and ‘understanding’ on the basis of the distinction between ‘meaning’ and ‘significance’.

In its attempt to assign meanings and significances to things, consciousness has the continuous tendency to move toward two directions: an extrinsic one and an intrinsic one. When consciousness follows an intrinsic direction, the purposes of its action are to gain access to its own self in order to structure and experience it in a more complete manner as well as to be sheltered in its own inner world and to strengthen its ontological status by itself. In this way, a being becomes ‘deeper’ and, by refusing to widen itself, avoids the danger of wasting its potential. However, this entrenchment in the inner ego cannot secure the integration of a being, because every being is characterized not only by its autonomy but also by its participation in other beings. If consciousness persists in intensifying its inner ego, then the inner ego inhibits the manifestation of the social ego, and, in this case, the social ego is unable to strengthen the conscious person through a dialectical relationship with other conscious persons. 

In its attempt to endow things with meanings and significances, the ego needs assistance from and cooperation with other egos. The existence of symbols and signs corresponds to the need of the ego to be complemented by other egos. Symbols and signs specify the relations among conscious beings that partake of common aesthetic experiences or exchange information with each other. Thus, consciousness is faced two risks: the risk of over-information, which is associated with extremely high information entropy, and the risk of under-information, which is associated with extremely low information entropy. Over-information intensifies the social ego and, by increasing information entropy, leads to a disorientated being. Under-information intensifies the inner ego and leads to an ego-centric being. The risks of over-information and under-information can be avoided by following the four-fold dialectic of sustainable creativity, which I defined in Part One. 

The economic system is a particular case of the general phenomenon of the communication among conscious beings. If we leave the realm of unconscious interdependence―which, in fact, is the realm of classical and neoclassical microeconomics―and attempt to deal with problems of deliberate cooperation, we need a new way of theorizing about economic organizations based on sustainable creativity. In the following sections, I shall study the states to which an economic organization is attracted, namely: (i) stable equilibrium, (ii) instability, and (iii) the point of sustainable creativity. 

Stable equilibrium: If we follow the terminology used by Chester Barnard, then an economic organization is a “system of consciously coordinated activities or forces of two or more persons”. The following conditions are necessary for organization to emerge: (i) persons must be willing to contribute actively to the (cooperative) system; (ii) they must share a common goal; (iii) deliberate communication must be possible and present. The first two conditions must be met if the pattern is to be considered consciously cooperative, and the third condition must be met if conscious coordination and, hence, organization is to emerge. Herbert Simon has argued that the cooperative pattern emerges when the participants prefer the same set of consequences. If anticipations concerning one another’s behavior are correct, then all will act (cooperate) to secure these consequences. Nevertheless, in the absence of deliberate communication, the pattern tends to be highly unstable. Thus, conscious coordination is the device or process whereby each participant is informed as to the strategies selected by the others. The process of communication within the formal system of an organization is specialized in fairly stable centers of communication that make up the executive body of the given organization. However, the executive is not a mere center of communication, but it also yields authority over the members of the organization, i.e. the executive function implies the issuing of coordinating and authoritative communications to those who contribute activities to the organization.       

The formal system of an organization aims mainly at carrying out established, repetitive, day-to-day activities as efficiently as possible, and, therefore, it must function according to well-defined hierarchical structures and strictly applied rules and procedures. An efficient formal system in an organization is necessarily based on the non-ephemeral character of at least part of the interactions that are included in the organization, and, thus, it is meant to resist change and sustain the status quo to secure efficiency. Hence, the formal system of any successful organization is orderly and stable. The formal system of an organization is pulled toward stable equilibrium by the forces of integration, maintenance controls and the need to adapt to the environment. 

The informal system of an organization refers to a culture primarily satisfying the human desire for security, certainty and conformity (it is not only this, however, as I shall show later). In case the above-mentioned pull of the formal system of an organization toward stable equilibrium is reinforced by the informal system, then the given organization as a whole will be attracted to stability. Negative feedback drives both formal and informal systems; in this case, ‘negative feedback’ refers to the law of diminishing marginal utility or to the law of diminishing returns. 

As a conclusion, in the absence of strong destabilizing conscious and/or unconscious causes, organizations seem to be attracted to a stable bureaucratic state in which they carry on doing the same thing: this is the point emphasized by classical and neoclassical microeconomics. 

Instability: Whereas all organizations are pulled to stability, they are simultaneously pulled to instability by powerful forces of division and decentralization. If the formal systems of an organization move too far in the direction of division and decentralization, then they become fragmented and unstable. Moreover, even if the formal systems of an organization do not move so far in this direction, the informal systems of an organization are pulled toward instability by even more powerful forces. It should be mentioned that informal systems are a device not only for security and conformity but also for satisfying human desires for innovation, individuality (experience of existential ‘otherness’) and isolation from the environment. If informal systems are dominated by behavior patterns that refer to innovation, individuality and isolation from the environment, then they pull the entire organization to fragmentation and instability. Thus, in organizational terms, the attractor to instability means that positive feedback behavior, such as political interaction and organizational defense mechanisms, cause disorder in the system.   

The point of sustainable creativity: The alternative to either stability or instability lies in the border between them, namely, at a point of sustainable creativity, where both negative and positive feedback, both stability and instability, operate simultaneously to cause the emergence of changing patterns of behavior. In organizational terms, at a point of sustainable creativity, the formal systems operate in a stable way to secure efficient operations on a daily basis whereas the informal system operates in a destabilizing manner to cause change. For an organization to be changeable and, hence, innovative, its informal system (namely, the shifting network of social and other informal contacts between people within an organization and across its borders) must operate according to the dialectic of sustainable creativity. 

    An informal network operates according to the dialectic of sustainable creativity when opposing ways of behaving are simultaneously present. For instance, there is ‘instability’ when an organization experiences the clash of countercultures, the tensions of political activity, or when some managers operate in the formal organization using capital-budgeting techniques to keep the organization stable while, at the same time, others operate in the informal system to get around those budgetary controls, etc. If an organization is attracted only to the state of behavior that we call stability, then it will stop being creative; in fact, Cornelius Castoriadis has argued that: 

if the system were actually able to change individuals into things moved only by economic ‘forces’, it would collapse not in the long run, but immediately. The struggle of people against reification is, just as much as the tendency toward reification, the condition for the functioning of capitalism. A factory in which the workers were really and totally mere cogs in the machine, blindly executing the orders of management, would come to a stop in a quarter of an hour. 

If an organization is attracted only to the state of behavior that we call instability, then it will be dissolved. An organization can remain simultaneously orderly and changeable if and only if the disorderly dynamics of conflict and dialogue (which are the foundations of changeability and, hence, of innovation) produce a sustainable new synthesis (conscious communication), i.e. if and only if it operates according to the dialectic of sustainable creativity. 

When one studies patterns of consumer behavior, ‘negative feedback’ is analogous to diminishing marginal utility; ‘positive feedback’ to increasing marginal utility. The Hollywood, the mass media and the advertising industry tend to make consumers behave under conditions of increasing marginal utility. Thus, demand can get out of control, since it is deliberately and continuously stimulated by the cultural context. We gain added insight into the significance of positive feedback for the explanation of patterns of consumer behavior by analyzing specific aspects of the so-called super-industrial economy. First of all, in the super-industrial era, the production and control of what D. Bell calls “codified knowledge” (namely, systematic, coordinated information) is the main strategic resource on which the economy depends. Those who are concerned with the creation and distribution of “codified knowledge” (namely, scientists, managers/economists and skilled professionals of all kinds) increasingly become the leading social groups, often replacing the entrepreneurs of the old system. Hence, in the super-industrial economy, the consumers who spend on education and professional-training programs in order to acquire more knowledge and more professional skills operate under the conditions of increasing marginal utility. In fact, in the super-industrial era, the need for life-long, continuous education/training shows the significance of positive-feedback analysis for the explanation of consumer behavior. 

Furthermore, the significance of positive-feedback analysis for the explanation of consumer behavior is increased by the fact that the products of the so-called ‘new economy’, such as operational systems for PCs, mobile-phone sets, music CDs, iPods, etc., as well as many products of the so-called ‘old economy’, such as cars, are characterized by a high level of inherent obsolescence (namely, these products become obsolete very quickly), and those who buy them are continuously pushed to buy new/updated products. 

In classical and neoclassical partial-equilibrium analysis, the idea of a single equilibrium is encouraged by the law of diminishing returns. This one-sided single-equilibrium explanation of the law is wrong, especially in the context of the ‘new economy’ industries. Computers, software, optical fibers and telecommunications equipment, medical electronics and pharmaceuticals are all subject to increasing returns. This is because, from the outset, they necessitate enormous outlays on Research and Development, designing and redesigning, developing a prototype and setting up tools and automated plants for manufacture. But, once the products start rolling off the production line, the cost of producing additional units of output drops very sharply in relation to the initial investment (e.g. software―once written, tested, debugged and enhanced―is very cheap to duplicate, and it can become a massive source of continuous ever-increasing returns, until the producers bring out a better version). 

The many input and output markets are connected in an interdependent system that can be conceived in terms of a Boolean network. A Boolean network consists of a number of elements, or cells. Each cell is connected to others and sends outputs to all or some of those others. What state each cell is in at any moment―namely, what it is outputting at any moment―depends on the inputs it is receiving and the rules it follows to respond to those inputs. Thus, the state of an individual cell changes from moment to moment according to the energy or information it receives and the rules it follows for converting inputs into output. 

Suppose that each cell in the network is randomly connected to others and randomly assigned a different decision-making rule. Moreover, suppose that we assign randomly different initial conditions. When every cell is connected to every other, then the whole system is attracted to instability: it behaves randomly, and any time change in the initial pattern from which the system is started will lead to completely different subsequent patterns over time. However, when each cell is connected to only two others and random decision rules are assigned to all the cells, the whole system is attracted to stability: random local rules of behavior can cause the emergence of order at a global level, and whether there is order or not depends on the degree of connectedness between cells of the network. Furthermore, it should be mentioned that, just before such systems go completely random, i.e. at a point of sustainable creativity, they behave in a different manner: coherent structures that grow, split apart, and recombine in different patterns due to the dialectic of sustainable creativity.