Economic Practice or Theory? Remaking the Real Economy or Destruction?

Devastating though the coronavirus undoubtedly is, it must not be allowed to obscure the fact that the world was already headed for some destruction. Covid-19 is a side show compared to those existential issues facing the world, largely resulting from the combination of reckless industrial expansion combined with the population growth it enabled.

Moral philosopher Adam Smith was motivated by the sudden economic growth generated by the industrial revolution, to inquire into The Nature and Causes of the Wealth of Nations. He started by observing the practical processes of manufacturing and noted the unprecedented gains in productivity from the coordination of specialised operations. In pin making he noted a productivity gain of over 240 times. From that practical account of the work and its outcomes, Smith drew some conclusions as to the creation of wealth, the details of which were later elaborated by what Drucker referred to as the management revolution.

As moral philosopher, he also developed ideas as to how that wealth might best be accumulated, employed and distributed among “ranks of people” as well as allocated to state provision of defence, justice, education and public works and institutions “which may be in the highest degree advantageous to a great society.”

That was the real subject matter for political-economic decision making. However, Smith also conjectured about theories of value which were later picked up by Ricardo and many others, developing what Marx later referred to as classical political economy. By mid 19th century that was being based on a mathematical modelling rather than the realities of production.

Thus, two distinct strands of explanatory analysis developed from the industrial revolution. One strand was based on the observation of real individuals, organisations, processes and systems. The other was based on the internal logic of mathematical models without reference to realities.

Theoretical modelling was necessarily based on a lot of simplistic assumptions such as self-interest maximising human beings, profit-maximising business units, and markets free from government regulation producing the best allocation of resources. Being purely mathematical they could make no accommodation with human values, with evolution over time nor with the social and ecological systems within which such economic processes function.

Subsequent generations of neoclassical-neoliberal economists have elaborated much further detail to that theoretical web, notably including the change of business aims from profit maximising to having ‘no social responsibility other than to make as much money as possible for stockholders.’

Right from the start that theoretical orthodoxy was subject to challenge and rejection. As early as 1862, Ruskin argued it lacked “applicability.” Nevertheless it was applied. Alfred Marshall, author of the first standard economics textbook which led economics to mathematical definition, pointed out the unreality of assumptions which the mathematics required. and their so called laws regarding “profits and wages that did not hold even for England in their own time.”

Economists agree the unrealism of neoclassical modelling. It was nicely summarised by Routh in The Origin of Economic Ideas, ignoring facts as irrelevant and as basing “its constructs on axioms arrived at a priori, or ‘plucked from the air’, from which deductions are made and an imaginary edifice created … orthodox economics becomes a matter of faith ad, ipso facto, immune to criticism.”

The outcomes from application of that highly theoretical orthodoxy are ever increasing levels of inequality, both within economies and between. Piketty’s analysis of Capital in the Twenty- First Century showed that a market economy based on private property, generated forces of divergence. They resulted from the fact that in such free markets, the % return on capital has been greater than the rate of growth of income and output. Wealth earned from the past grows faster than wages. The entrepreneur is therefore encouraged to move from real economy operations to the financial economy where their returns will increase faster, becoming ever more dominant over those without wealth.

At some stage that process will inevitably have to be reversed by some enforced redistribution of wealth. That will be achieved either by agreement. Or by disagreement.

Continued destruction of the real economy is justified by conformance to the neoclassical economic theorising, rather than focusing on practical realities. The result is not just continuously mounting levels of inequality both within and between nation states. It involves environmental destructions which will deprive future generations of a habitable domicile on planet earth.

That much is known. But yet, the powers that be do very little to achieve change. For them, the coronavirus may be a welcome distraction from their fundamental duty to contribute positively to ensuring humanity’s survival and progression.