Power and Neoclassical Economics

A Return to Political Economy in the Teaching of Economics

A. Ozanne

• Editore: Palgrave Pivot
• Anno: 2016
• ISBN:
  9781137553737
• Argomento: Economics
• Categoria: Microeconomics

Mainstream economics almost completely ignores the role power plays in determining economic outcomes, which means it can only provide partial explanations of the distribution of wealth and income, and of the problems associated with inequality and poverty. For many, this is a fundamental failing that severely limits its relevance to the real world and is the source of much dissatisfaction with, and cynicism about, economics and economists. Ozanne explains how this neglect of power has come about over the past 150 years and why it is important. He reviews various definitions and theories of power from across the social sciences and proposes a new approach that could bring considerations of power back into standard economic theory and economics teaching. The approach is simple and intuitive, involving little more than re-envisioning the social welfare function as a 'political economy function'. However, if adopted in economics teaching, it could radically change the way young economistsare taught to think about economic problems and lead to a 'return to political economy'.

1

Introduction

Abstract: It is argued that mainstream economics almost completely ignores the role power plays in determining economic outcomes. As J.K. Galbraith said, this “destroys its relation with the real world”. Since mainstream or neoclassical economics is the dominant paradigm in schools and universities today, this has a limiting and detrimental effect on the way young economists are taught to think about their discipline.

Ozanne, Adam. Power and Neoclassical Economics: A Return to Political Economy in the Teaching of Economics. Basingstoke: Palgrave Macmillan, 2016. DOI: 10.1057/9781137553737.0004.

It is a commonplace to observe that neoclassical economics is singular amongst the social sciences in its almost total neglect of power. A few quotations serve to indicate the sense of incomprehension and frustration this occasionally generates:

There is a “strange divorce between the concept of power on the one hand and the study of economics on the other... In fact, we can argue that economics... embodies in its current state the very absence of power”. (Monvoison and Rochon, 2006/2007, pp. 5–6)

Power is a concept frequently employed by political scientists and sociologists, and totally ignored by economists and practitioners of social choice. (Mueller, 2003, p. 360)

Power should be “a recurrent theme in economic studies of a theoretical and applied nature. Yet if we look at the main run of economic theory over the past one hundred years we find it is characterized by a strange lack of power considerations”. (Rothschild, 1971, cited in Young, 2002, p. 48)

Orthodox neoclassical economics fails to handle some of the key issues of power...the standard presumption is that there is no exercise of power if both parties voluntarily enter a transaction. (Bardhan, 1991, pp. 265–266)

In economics, the study of power is clearly in a “prescientific” state. Moreover, of its various schools of thought, neoclassical economics “has had the very least to say about power”. (Bartlett, 1989, p. 4, referring to Kuhn’s classic analysis of the progression of scientific knowledge)

While the distribution of power is a major focus of all the other social sciences, “Mainstream economics, alone, ...has developed a perspective and vocabulary, as well as a methodology, for avoiding consideration of this issue...the studious avoidance of that reality has been honed, polished, and embroidered into a fine art”. (Klein, 1980, pp. 872–873)

The decisive weakness in neoclassical economics...is not the error in the assumptions by which it elides the problem of power...Rather in eliding power – in making economics a nonpolitical subject – neoclassical theory, by the process, destroys its relation with the real world. (Galbraith, 1973, p. 2)

The net result in terms of the teaching of economics in present-day schools and universities is that, as noted by Bartlett (1989, p. 5), Young (2002) and Monvoison and Rochon (2006/2007, p. 28), a search of the index of any standard microeconomic textbook will find only a few very specific and rather benign uses of the word power, such as in “purchasing power”, the “natural” power provided by wind or waves, monopoly or market power, and bargaining power in cooperative game theory.

If one looks further afield to include other schools of economic thought, more frequent mention of power may be found, but not a body of theory that can be said to be consistent or widely accepted. Austrian economics shares with neoclassical economics the view that power is, by definition, absent from “free” market economies characterised by voluntary exchange (Young, 2002). However, power is a central concern of radical economists influenced by Marx and of institutional economists. For the former, power is vested in classes, especially the capitalist class, and exercised through the social and economic system. However, neither of these concepts is recognised by neoclassical economics, and radical or neo-Marxist economics has had little if any long-term impact on mainstream economic thought.

Power is also a central concept in institutional economics. In particular, J.K. Galbraith (1967, 1983) identified three types of power (condign power, compensatory power and conditional power), derived from three sources of power (personality, property and organisation), and considered how they are wielded in business corporations and enterprises, trade unions and the state. However, despite the fact that Galbraith and other institutional economists discuss power far more frequently and openly than neoclassical economists (see in particular the December 1980 special issue of the Journal of Economic Issues), ultimately their efforts have been frustrated by a lack of agreement on fundamentals. Writers (and even the same writer in different publications) adopt definitions of power that are not necessarily consistent with each other, and no single accepted definition or shared understanding has emerged that can be applied in different contexts (Bartlett, 1989, p. 7).

If one expands one’s search yet further to include the other social sciences, one finds that while they also frequently address power, it cannot be claimed that their attempts to define and analyse power have been overly successful. Thus, Martin (1971, p. 240) observes of the attempts made by sociologists to develop models of power:

Despite widespread use, power remains a slippery and problematic concept. There is little agreement upon basic definitions, individual theorists proposing their own more or less idiosyncratic terminology...Only crude attempts have been made to progress from ...conceptual model building to ...an empirical hypothesis; the attempts that have been made have often failed to progress beyond the level of the a-social small group or have disappeared into the jungle of game-theoretic formulae and failed to reappear.

Similarly, although political science is, ostensibly, preoccupied with power, even here no generally accepted theory of power has emerged. Indeed, Dowding (2008) argues that mainstream political science has “almost left power behind”, referring to it only in terms of the power of the president or prime minister, or the relative power of countries or organisations, and views power as essentially what these agents can do. Similarly, Philp (2004) says attempts to define and construct theories of power have become increasingly marginal since the 1980s following advances made by rational choice theorists and criticisms of poststructuralists such as Foucault. Allen (2008, p. 52) also attributes the marginalisation of power to the hegemony achieved by rational choice theory in political science, adding that “relatively little work explicitly links rational choice theory with theories of power. This may be because rational choice theory initially came to prominence in economics, which as a discipline is largely unconcerned with the concept of power”.

According to Allen, therefore, economics not only has a blind spot of its own regarding power, but is also to blame for the neglect of power in modern political science. This can be seen as a symptom of what has been called a wider “economic imperialism”, reflecting the way mainstream economics theorising has come to dominate discourse in the other social sciences over recent decades (Harcourt, 1982; Fine, 2000; Lazear, 2000; Skidelsky, 2014b).

It is widely recognised, therefore, that power is a very difficult concept to grapple with in a meaningful way. There appears to be no consistent, widely accepted body of theory available from any of the social sciences that can be lifted whole and applied to economic questions. It is perhaps not surprising, then, that power has been “only a peripheral interest for mainstream economists or a central interest of (mainstream-defined) peripheral economists” (Bartlett, 1989, p. 3). The danger for any economist who sets out to study power is clear: almost by definition, you will be labelled a “peripheral economist”. But, if one decides to ignore this danger, the question remains, where to start?

The purpose of this monograph is to explore the reasons why neoclassical economics ignores power, to review the literature on power and to offer some suggestions for incorporating power within the standard model of general equilibrium. It should be emphasised that the aim here is less ambitious than that of Bartlett (1989), who argued that there is need for a “new theory” of power, and who made use of decision theory and a general, endogenous, utility function to develop such a theory, only to have his efforts ignored by mainstream economists. (In his own words, he became “peripheral”.) Rather, it is argued here that neoclassical economics already offers within its own “tool kit” the means for developing a theory of power. All that is required is a slightly different way of looking at some familiar concepts.

The next chapter considers why neoclassical economics ignores power, and Chapter 3 argues that this neglect is important because without an understanding of power economists cannot fully answer the core problem they define their discipline by. Chapter 4 reflects upon the recent challenges to the way economics is taught in universities today from the Post-Crash Economics Society and other student movements and Thomas Piketty’s Capital in the 21st Century, and argues that their widespread popularity arise at least in part from frustration with mainstream economics’ neglect of power. Chapter 5 considers two areas of economics, the relative new one known as “political economics” and cooperative game theory derived from the seminal work on bargaining problems by John Nash (1950, p. 53), which, it is suggested, might offer avenues for addressing these challenges. Chapter 6 provides a brief overview of some of the approaches used by philosophers, sociologists and heterodox economists to conceptualise power, while Chapter 7 outlines Bartlett’s theory of power – perhaps the most coherent, thorough attempt by a mainstream economist to investigate power. Chapter 8 offers a new definition of power, analogous to the definition of force in physics, and Chapter 9 outlines an approach for generalising the notion of bargaining power in cooperative game theory to identify a “political economy function”. Chapter 10 outlines some applications of this approach and the eleventh and final chapter contains concluding comments.

2

Why Does Neoclassical Economics Ignore Power?

Abstract: The neglect of power by mainstream economics is traced back to the neoclassical or “marginalist” revolution of the 1870s, when “political economy” was supplanted by “economics”, a process that was reinforced by the ordinalist revolution of the 1930s and shifts in thinking about welfare economics and social choice in the 1950s. Over many decades, this has led to the current dominance of a supposedly apolitical, “positive” science of economics today.

Ozanne, Adam. Power and Neoclassical Economics: A Return to Political Economy in the Teaching of Economics. Basingstoke: Palgrave Macmillan, 2016. DOI: 10.1057/9781137553737.0005.

The neglect of power by neoclassical economics can be traced back to the neoclassical or “marginalist” revolution in the late-19th century, when classical “political economy” divided and was replaced by the more narrowly focussed “economics” and cognate disciplines of sociology and political science (Jary and Jary, 2000; Encyclopaedia Britannica, 2009). Whereas Smith, Ricardo, John Stuart Mill and Marx were centrally concerned with the distribution of wealth and power between classes in society and in the role of the state and the statesman in promoting the public good, in identifying themselves as “economists”, Jevons, Walras, Marshall (who titled his textbook Principles of Economics rather than the traditional Principles of Political Economy of Ricardo and John Stuart Mill) and Pigou sought to place their discipline on what they saw as a sounder scientific basis, in two senses. First, it was to be based on the use of mathematical methods and formality of exposition. Second, the focus of economics was restricted to the study of price determination and allocation of resources in anonymous markets rather than the study of human relationships.

Walras, for example, defined economics as the study of the relationships between things rather than people, suggesting that interactions between human agents could be viewed as if they were relationships between inputs and outputs (Bowles and Gintis, 1993, p. 84). “Walras’ fiction”, as Bowles and Gintis call this device, implies “an apolitical conception of the economy, in which the only power wielded by economic agents is purchasing power” (ibid., p. 86). Thus, the great neoclassical economists of the late-19th and early 20th centuries believed that “economics”, unlike political economy, could and should be discussed separately from the exercise of political power, the role of government and the relationships between classes in a capitalist society – fields of inquiry that they relinquished to (what they regarded as) the less scientific disciplines of sociology and political science.

This process, which narrowed the range of questions that could be addressed, was continued further by the ordinalist revolution of the 1930s, which rejected cardinalism and redefined economics – as “positive economics” – in terms of scarcity rather than economic welfare and the alleviation of poverty (Klein, 1980). For Jevons, the object of economics had been “to maximize happiness by purchasing pleasure, as it were, at the lowest cost of pain” (Cooter and Rappaport, 1984, p. 510). He, Pareto, Fisher, Marshall and Pigou – who represent what Cooter and Rappaport (1984) call the “material welfare school” – all recognised that interpersonal comparison of utility was not essential for explaining prices and commodity distribution. However, they persisted in using cardinal utility because they were primarily concerned with the alleviation of want and poverty, for which a measurable and comparable concept of utility was needed (ibid., pp. 510–512). Robbins (1932), the instigator of the ordinalist revolution, famously demolished the cardinal utility theory by attacking the idea that utility could be measurable and interpersonally comparable. He, followed by Hicks and Allen (1934) who more fully developed the indifference curve approach, promoted the idea that positive economics was superior to the earlier material welfare school, which relied on cardinality to address economic welfare and alleviation of poverty, because consumer behaviour could be explained using fewer, less restrictive, assumptions regarding the nature of utility.

As Cooter and Rappaport show, Robbins achieved this by misrepresenting the cardinalist view. In particular, Pareto had distinguished between “opthelimity” (the satisfaction of desires), which could not be compared, and utility (the usefulness of physical objects), which could be; but Robbins ignored this distinction, using the term utility to describe both concepts, which led him to reject the idea that economic theory could be used to justify redistribution. Effectively, he presented economists with a dilemma. Either they chose a convention that made interpersonal comparison of utilities possible, or they rejected utility comparisons. If they chose the former, they had (according to Robbins) to give up positive economic science; if the latter, they had to give up any interest in redistributive policy prescription (pp. 522–523). The ordinalists won this debate, and in so doing further narrowed the scope of economics to exclude interpersonal comparison of utilities. Power relationships were not an explicit part of the debate; however, since power is a feature of interpersonal relationships, discussion of it became more difficult and remote from economics.

Two further points can be made. First, contrary to the usual portrayal of these developments in economic theory found in textbooks, the ordinalist revolution did not necessarily represent scientific progress:

the older school was concerned with economic polices to bring about income redistribution and alleviate poverty, and the ordinalists did not offer a more general theory for solving these problems. Instead, the trick that carried the day for the ordinalists was to argue that the questions asked by the older school, and the answers which they gave, were meaningless...Thus, the ordinalist revolution represented a change, not progress in economics. (Cooter and Rappaport, 1984, pp. 507–508)

Second, even if the ordinalist argument is accepted, it is not actually necessary to exclude power from the list of legitimate questions that can be addressed by positive economics. For example, the questions, “How should the power of the state be used to redistribute wealth”, or “Should individual, group or class A be allowed to exercise power to enrich themselves at the expense of individual, group or class B?” are undoubtedly normative questions. However, the questions, “Does power exist?” and if it does exist, “How does power influence the ...

Indice dei contenuti

• Cover
• Title
• 1  Introduction
• 2  Why Does Neoclassical Economics Ignore Power?
• 3  Why Power Matters for Economics
• 4  Challenges to Mainstream Economics from PCES and Piketty
• 5  Political Economics and Cooperative Game Theory
• 6  The Concept of Power
• 7  Bartletts Economic Theory of Power
• 8  A New Definition of Power
• 9  Re-envisioning the Social Welfare Function as a Political Economy Function
• 10  Examples of Applications of the Political Economy Function
• 11  Conclusion
• References
• Index