A reading list for economic heretics
from Blair Fix
Do you think that the discipline of economics is a sham — an ideology masquerading as science? If so, here is a reading list for you. These 10 books have influenced my thinking over the years. Read them and join me in the journey of the economic heretic.
1. Capital as Power. A Study of Order and Creorder
Jonathan Nitzan and Shimshon Bichler
Few books offer both a compelling critique of mainstream economics and a bold alternative vision for political economy. But in Capital as Power, Jonathan Nitzan and Shimshon Bichler have the audacity to do just that.
Nitzan and Bichler point out that orthodox theories of capital are built on non-existent units. Neoclassical theory is built on the non-existent unit of ‘utility’. Marxism is build on the non-existent unit of ‘socially necessary abstract labor time’. Because they are based on non-existent quanta, Marxist and neoclassical theories of capital are incoherent.
Having boldly dismissed orthodoxies, Nitzan and Bichler build their own theory of capitalism. Their thesis, as the title Capital as Power suggests, is that capital is a commodification of power. The relative capitalization of a firm, Nitzan and Bichler argue, represents the differential power of the firm’s owners. With this bold vision in hand, Nitzan and Bichler chart a new approach for political economy, backed by ample empirical research.
Capital as Power represents everything that I look for in a paradigm-shifting work of science. It presents a compelling critique of existing orthodoxies, offers an alternative approach to political economy, and grounds this approach in innovative empirical research. Read Capital as Power and have your worldview forever changed.
2. Debunking Economics: The Naked Emperor of the Social Sciences
Steve Keen
Now almost 20 years old, Debunking Economics remains the best introduction to all that is wrong with economics. What really makes this books is Steve Keen’s style, which is both accessible and humorous. Keen revels in the awfulness that is neoclassical economics.
If you take one thing from this book, it should be that the neoclassical theory of supply and demand is hopelessly flawed. I remember taking Economics 101 as an undergrad. The professor drew the familiar supply and demand curves and pointed at the intersection. Here, the professor announced, is the equilibrium price.
At the time, the bullshit alarm sounded in my head. This explanation of prices seemed to be too simple to be true. But as a good undergrad, I swallowed my skepticism and memorized what I needed to know to pass the test.
A decade later, I began thinking about these issues again. And I was delighted to discover Keen’s critique of supply and demand. To put it simply, there is no supply curve and there is no demand curve. Keen shows how the logic used by neoclassical economics to construct these curves is hopelessly flawed. As a result, the neoclassical explanation of prices is exactly what I suspected it was as a lowly undergrad — bullshit.
Debunking Economics is, of course, much more than a critique of the neoclassical theory of prices. It’s a frontal assault on most aspects of mainstream economics. If economic theory raises your bullshit alarm, but you don’t quite know why, read this book. Steve Keen will show you why your intuition is correct.
3. History of Economic Thought: A Critical Perspective
E. K. Hunt
If you needed to design an ideology that perpetuated itself with virulence, the first thing you’d want to do is ban all (scientific) discussion of the ideology’s origin. To be virulent, the ideology must be presented as received wisdom — a gospel to be unquestioningly transmitted from one generation to another.
This is exactly how most students learn economics. They learn the gospel, but not its sordid history. Ask an economics graduate student if they’ve ever taken a course on the history of economic thought. The answer will likely be “no”.
With masterful scope, E.K. Hunt fights against this enforced ignorance. History of Economic Thought critically discusses the origins of most aspects of modern economic theory.
What I found fascinating about this book is the blatant ideological agenda of the early political economists. These thinkers had little interest in science. Instead, they were mostly interested in using armchair philosophy to justify their favored politics.
The coup d’état of neoclassical economics is that it managed to transform blatant political ideologies into seemingly objective scientific theories. Reading History of Economic Thought will remind you that economics has always been about ideology.
4. Debt: The First 5,000 Years
David Graeber
If you surveyed anthropologists and asked them their opinion of economics, most would probably tell you that they’re skeptical. But because of disciplinary boundaries, most anthropologists don’t write about this skepticism. David Graeber is the exception, and we’re lucky for it.
Debt: The First 5,000 Years is a book that only an anthropologist could write. It’s an ambitious foray into the deep history of credit and debt that draws on the study of archaeology, written history, and the observation of traditional societies.
Graeber begins by demolishing the fable of the ‘barter economy’. This is the story told by mainstream economists about the origin of money. First there was barter, economists say — the direct exchange of goods. Money was then invented as a lubricant for this barter. First came coins, then came ‘virtual’ money. Graeber argues that actual human history shows the reverse trend. Money started out as an IOU — a quantified obligation.
What separates Graeber’s work from other histories of money is his willingness to connect credit and debt to systems of power. Graeber acknowledges that the creditor-debtor relation is all about power. And he shows how this has changed through human history.
With the rise of Modern Monetary Theory, the theorization of credit and debt has become a sexy topic. After reading Debt: The First 5,000 Years, you’ll realize that there’s nothing modern about Modern Monetary Theory. More accurately, MMT has rediscovered that money is nothing but a quantified obligation that can be created and destroyed at will.
5. Energy and the Wealth of Nations:
Understanding the Biophysical Economy
Charles Hall and Kent Klitgaard
In a 1974 speech given to the American Economics Association, the economist Robert Solow remarked “The world can, in effect, get along without natural resources”. Since then, Solow’s comment has become synonous with the obliviousness of neoclassical economics to the natural environment.
As an ecologist by training, Charles Hall has spent most of his career trying to rectify this neglect. Energy and the Wealth of Nations is Hall’s magnum opus, written together with heterodox economist Kent Klitgaard.
The book puts energy front and center in the study of the economy. If you’re a social scientist with no training in the natural sciences, this book should be essential reading. It’s designed as a textbook, so it comes with plenty of examples and diagrams.
As we move into an energy-scarce future, understanding the biophysical economy will only become more important.
6. Capital in the Twenty-First Century
Thomas Piketty
For most of the 20th century, economists paid little attention to income distribution, preferring instead to focus on economic growth. By with income inequality skyrocketing in many countries, it’s becoming harder for economists to ignore income distribution.
Few economists have contributed more to the study of income inequality that Thomas Piketty. Because of this, I recommend reading Capital in the Twenty-First Century. It’s a masterpiece of empirical research.
Since Capital was published, it’s become somewhat of a cottage industry for heterodox economists to critique Piketty. True, his central thesis about the cause of inequality is cringe worthy. He proposes that when the rate of economic growth is less than the rate of return on capital, income inequality will increase. I don’t buy this for a second.
Still, I have enormous respect for Piketty because he actually went out and measured inequality in a novel way (using tax records). Read Capital in the Twenty-First Century not for its theory, but for its data.
7. How the Other Half Dies: The Real Reasons for World Hunger
Susan George
When I was first becoming interested in economics, I would browse the University of Toronto library for books that looked interesting. I’d read the book, and then read the bibliography, noting references that looked interesting. I’ve long since forgotten the book in whose bibliography I discovered How the Other Half Dies. But Susan George’s polemic has stayed with me.
Although George doesn’t frame it this way, her book is about the political economy of food distribution. Her thesis is simple: no famine in modern history has been caused by a global food shortage. Famine is not a problem of too little food production (or over population). Famine is a problem of distribution. People who starve do so because they are poor. There may be food in the world that could feed them. But the starving lack the money to buy this food.
Even if you’re familiar with the political economy of global food distribution, the urgency and moral outrage of George’s writing is worth the read.
8. This View of Life: Completing the Darwinian Revolution
David Sloan Wilson
David Sloan Wilson is an evolutionary biologist who has spent his career studying the evolution of sociality — the propensity to cooperate in groups. Together with E.O Wilson (no relation), David Sloan Wilson has been a primary proponent of ‘group selection’, which proposes that sociality evolves by selection between groups, rather than selection between individuals. As the two Wilsons put it: “Selfishness beats altruism within groups. Altruistic groups beat selfish groups”.
In This View of Life, Wilson argues that group selection has made the small group the natural unit of human organization. In light of this fact, Wilson notes, most economic theory makes little sense.
Economists base their theories on the idea that humans are selfish utility maximizers. Sociality never enters the equation. Wilson cogently argues that if we want to design institutions that function effectively and equitably, we need to understand our evolutionary heritage. This means acknowledging human sociality and abandoning much of economic theory.
9. When Corporations Rule the World
David Korten
When Corporations Rule the World has a special place in my heart because reading it was part of my political awakening.
I was in high school when the infamous Battle in Seattle took place — the protests that shut down a World Trade Organization meeting. I remember seeing these protests on the news and having no idea what they were about. As usual, the corporate media framed it as a bunch of radicals who were up to no good. And I more or less bought this framing.
Only when I read Korten’s book (a decade later) did I understand the other side of the story. Korton made me realize that the World Trade Organization (and other organizations such as the IMF) exist to promote a corporate agenda based on free-market ideology.
If you want to understand what neoliberalism is about, read When Corporations Rule the World. Korten’s outrage at the corporate take over of the world is palpable throughout the book. You can’t help but feel enraged when you read it.
10. The Shock Doctrine
Naomi Klein
In the 1970s, the University of Chicago trained a group of Latin American economists who became known as the ‘Chicago Boys’. Having been indoctrinated as free market fundamentalists (after studying with Milton Friedman and his ilk), the Chicago Boys returned to Latin American to spread the gospel. The results were disastrous. Think Pinochet and all the horror that came with his take over of Chile.
The Chicago boys preached that the best way to pursue free-market reforms was through ‘shock therapy’ — a dramatic change in policy that would ‘shock’ society into a free-market utopia.
In The Shock Doctrine, Naomi Klein documents the rise and spread of this practice. Although she’s writing about economic policy — which can be dry and abstract — she makes the subject lively and engaging. The story is always told through the lens of individual participants, which brings economic policy down to the human level.
Since disaster capitalism is more prominent than ever, The Shock Doctrine remains relevant a decade after it was first published.
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They have indeed influenced mine too, for decades. There are loads of other books and critical contributions one could add to the list above. And I am not talking about plenty of others that have not had a chance to be translated into English and given the state of the global economy and situation, never will. It is indeed past being a total sham and utterly bankrupt as a science. It has neither sound contextual analyses, nor specific explanations for anything, even for its own dismal self having had such an unexplainably long life. We need to move on towards a new agenda that starts dealing with the real issues that stare us in the face every day, GLOBALLY.
When you are an intuitive thinker who just recognises bull-shit when he sees it, it is great to find a writer who can say in words precisely what you merely point to:
“What I found fascinating [in Hunt’s History of Economic Thought] is the blatant ideological agenda of the early political economists. These thinkers had little interest in science. Instead, they were mostly interested in using armchair philosophy to justify their favored politics”.
Helen, you keep saying “We need to move on towards a new agenda that starts dealing with the real issues that stare us in the face every day, GLOBALLY.” Please try to see that what in this blog I am having to say, i.e. point to, is precisely that.
We can see the issues, but the solutions don’t yet exist, and you mustn’t expect the medicine to look like the illness. On this analogy, we need to recognise which illnesses result from germs before one can develop effective medicine. That is the level at which Blair Fix’s MMT is pitched, and my Complex Truth is about the network within which his credit circulates, interpreted as a control system, in which junctions create potential for parasitic and mis-directed flows. With that in mind, try to see the point of
https://rwer.wordpress.com/2019/11/24/economics-enslaved-by-the-wrong-theory/#comment-161348 .
I have benefited greatly from most of the books on this list, and I agree with Fix on the importance. The first book, “Capital as Power” is a fairly recent read, but essential, although I dislike such made-up jargon as “creorder”. Their focus on power is a refreshing change from mountains of material on capitalism, economics and politics. I prefer the term “power of capital” to the ideological expression “capitalism”, as it gets to the essence of what drives and frames our economy.
I read Korten’s book when it was published and found it essentially informative. Korten’s career path was similar to one I might have taken had not my bullshit meter taken over and driven me from the field. I greatly admire him and what he as done since that book, among other things publishing the essential “Yes! Magazine”, which relates deeply to paradigm shift.
Klein’s is essential reading for any citizen. So is her book on climate justice, “This Changes Everything”.
I was trained in economics at a prestigious university in the 60s. Like Fix, my bullshit meter went on alert, but I didn’t trust my intuitions then, and I went on to grad school, where the bullshit was even thicker. I was told in no uncertain terms that mathematical models were the career wave of the future; that income and wealth distribution were the concern of sociologists, not ours; that Marx was required reading only because a large part of the world was affected; that agribusiness and not farm worker justice should be our study focus; and that such as the Institutional Economics of Veblen was “passe”. Unlike Fix’s experience, the History of Economic Thought was required of undergrads in my time. According to my own recent research, it is barely offered anywhere. I cannot understand a profession that trains its future professionals without a required understanding of its own history. I am not familiar with Hunt’s book, but shall read it soon with interest.
I would add two other authors to this list: Jamie Galbraith (in “End of Normal”, I think it is, he so artfully slices and dices his profession’s orthodoxy that the casual reader might not notice what he did) and Michael Hudson (take your pick: “Finance as Warfare” is a good one; so is “J is for Junk Economics”).
Here are some readings by Mortimer Adler and others.
The economic logic of the Just Third Way is expressed by the theory of binary economics first articulated by Louis Kelso, and the three principles of economic justice that Kelso and philosopher Mortimer Adler defined in their first book, The Capitalist Manifesto.
Binary economics, a justice-based free market theory, recognizes the changing relationship between “labor” (human input) and “capital” (non-human input) in economic growth and the production and distribution of goods and services. This change has been accelerating as advanced technology displaces human labor in many sectors of the economy.
Binary economic theory builds upon “four pillars of a just market economy”:
– Limited economic power of the state, whose duty is to police abuses, enforce contracts, prevent monopolies, and lift barriers to full participation;
– Restoration of the full rights of private property;
– Free and open markets for determining just prices, just wages, and just profits; and
– Universal access to the means of acquiring capital ownership (the moral omission in all conventional schools of economics).
Recommended Readings on Binary Economics
Binary economics offers a holistic and integrated framework for economic analysis, diagnosis and prescription that provides a moral basis and practical solutions to systemic problems that have not been addressed effectively by any of the mainstream and heterodox schools of economics.
For an accurate understanding of Binary Economics, the reader should explore the seminal writings of Louis O. Kelso, who first conceived of the idea. Foremost among these are the two books co-authored in 1958 by Louis Kelso and Mortimer Adler (The Capitalist Manifesto and The New Capitalists), and later, Two-Factor Theory: The Economics of Reality, co-authored by Louis Kelso and Patricia Hetter.
A textbook by Robert H.A. Ashford and Rodney Shakespeare, entitled Binary Economics: The New Paradigm, provides the most in-depth, scholarly examination of the subject to date. (See CESJ President Norman Kurland’s review of Binary Economics: The New Paradigm.)
The following selected writings are available through the CESJ website:
“Q and A’s on Binary Economics” by Richard Stutsman (revised by CESJ, 2014). An excellent source of basic information on Binary Economics — the socio-economic theory and market-based, expanded ownership model underlying the Just Third Way.
“Ten Controversial Questions,” by Prof. Robert H.A. Ashford, raises questions that other schools of economics have failed to explain adequately or solve without violating free market principles on the one hand, and/or principles of economic and social justice on the other.
“Binary Economics in a Nutshell,” by Norman G. Kurland, provides a brief explanation of binary economics and the principles that can help to start solving systemic problems such as poverty, boom-and-bust cycles, and the worsening concentration of wealth and income.
“The Binary Economics of Louis Kelso: A Democratic Private Property System for Growth and Justice,” by Prof. Robert H.A. Ashford, gives a scholarly examination of binary economics.
ABSTRACT >> | FULL ARTICLE (pdf) >>
“A New Look at Prices and Money: The Kelsonian Binary Model for Achieving Rapid Growth Without Inflation,” by Norman G. Kurland, presents the macro-economic logic of binary economics, and how it can restore balance in the economy between supply and demand so that Say’s Law of Markets would operate.
ABSTRACT >> | FULL ARTICLE (pdf) >>
Links to the readings are at https://www.cesj.org/learn/
I think that Egmont Kakarot-Handtke’s comments on the blog, “Starting again, and relating the schools” on 27 Nov, is just as appropriate here.
Thanks for this. Lists like this are always reminding me of how much I don’t know, haven’t read. Only two of the eight read, and just five of the authors known to me.
I think you’ll be hearing from feminist economists soon too.
I say that because a NYTimes article on Mariana Mazzucato sent me down the line from Nicola Sturgeion to Alisa McKay and Diana Strassman, to name just a couple of the branches.
So much to catch up on. Still, this lagging indicator thinks that MMT, flaws and all, offers the best chance to initiate the most ideas from the huge roll of dissenting economists. Although some of its practioners try to enlist Libertarians as being able to fit within the theory, it seems to me that MMT in the sum of its greatest parts, leans towards a more democratic economy and with it a more powerful state to fill in for the shortcomings of Neoliberalism since the Merger and Acquistion, Shareholder Value and de-regulatory mania of the past 30-40 years. And the lagging investment in the West.
Good luck to us all.
I find these readings another example of living in the intellectual prison of anglo=saxonia. When I started reading into business economics, I started with article in the Zeitschrift fuer handelswissenschaftliche Forschung, founded in 1906 by Eugen Schmalenbach. Here is something about him, which you know nothing about because of intellectual prison in which you live: “After Schmalenbach
Preface
Our themes must seem incompatible even in the Accountancy section of a congress devoted to the mathematical modelling of economies. And our chronicling will report doctrines from Cologne which consistently over the decades opposed planning in favour of disseminated information and decisions decentralised to the consumer, to the firm or even through quasi-markets within the firm. Schmalenbach�s beliefs robustly held until his death in 1955 will differ from the assumptions of many papers here presented, as from the socio-political doctrines professed in East Europe until very recently. “Socialism” has faced more systematic alternatives; but our interest here will be to show how straight dichotomies did not prove acceptable earlier in the Century. Consequently our care will be to show adaptation, learning indeed, in turbulent times with some themes continuing as possible contributions in the extending period “after Schmalenbach”. Our first concern is with biography and biographers.
The Bio-data and the Biographers
Schmalenbach was born in Halver in 1873. He entered Leipsig College of Commerce in 1898. His success there earned a call and subsequently a professorship at Cologne. His teaching, research, journal-editing and publications prospered before and after World War I, when the College of Commerce formed part of the new university. His reputation grew through his pupils, his consultancies and membership of official commissions. From many such activities, he retired in 1933, but his reputation long protected him and his Jewish wife from the Nazis. Eugen died in 1955, and his wife shortly after.
Compared with the Frankfurt sociologists, the Austrian Liberals or even the Social Democratic ideal nurtured at Freiburg from 1933, German Business Economics (Betriebswirtschaftslehre) received little attention in post-War decades. Then in 1977, Hundt�s Theoriegeschichte traced the leading ideas from 1900, while Forrester�s Schmalenbach and After concentrated on that teacher�s life and varied interests, including practical accounting, financial accounting, charts of accounts, cost accounts and finance. Dieter Schneider produced his Geschichte Betriebswirtschaftslehre covering the early and later years of this Century by subject area and with great documentation in 1981 (with later editions). Just a few years later was published the definitive study of Schmalenbach�s life and influence by Kruk, Potthoff and Sieben. In just a few years, death had been replaced by copious source materials which enable a briefer and more selective treatment here of testing times.
Tested through turbulence
Those who recall the revolutions in Eastern Europe in 1989/90, 1968, 1948 and even 1938 may be reminded of the World Wars which were only the greatest of catastrophes in Germany to be set alongside the changes from 1945, in 1933, and post-1918/19. The sharpest of inflation in the early Twenties stands out against the progressive industrial developments through the Second Reich and from before Schmalenbach�s birth. The struggles of nations and classes found family-scale, however, in his rebelliousness against his father!
In the early Twenties Schmalenbach was active in the Cologne Democratic Party, as well as in numerous commissions set up in the Weimar Republic to make recommendations on Price-level accounting or uniform Charts, etc. He also undertook consultancies; but by 1927 he expressed frustration with politics and bureaucracy, preferring to work with his students, and with congenial company which was formalised as the Schmalenbach Society in 1933. Post-War membership was opened beyond former seminar participants to others from both industry and academia. In 1978, the Society was firmly linked with the German Society for Business Economics (DGfB in acronym). In 1990 they received at St.Gallen a distinguished Prize for collective research. Much of that research had been published in a journal started in 1906 and still published on behalf of the Society with the title “Schmalenbach�s” Zeitschrift fuer betriebs-wirtschaftliche Forschung. Continuities and consistencies may thus be traced, narrower than f or the Cologne School as a whole or for Business Economics in the many “Wiso” (Wirtschaftsociologie) Faculties within the German-speaking zone.
Nevertheless the Schmalenbach tradition may be contrasted with other Schools which arose amid the turbulence of those times. The Schmalenbach School emerges as less theoretic and systematic than others and with more practical orientations and key-ideas which appeared applicable whatever the ethos of each age. The distinctions made between theory and practice do not seem robust, but hagiography of such a provocative thinker has been largely avoided. One notes that Business Economics texts and the teaching of Schmalenbach and his followers have not been disseminated over the years largely in Japan. We may illustrate first the horizons which he researched beyond the ambit of the simple business.
National and international
As the Nazis came to power, Schmalenbach published his text on Financing. He wrote much on credit and the finance of the firm. But innovative sections on National Balance-sheets must be of interest to those attending this conference. These Balances, he suggested, could be more accurate than company accounts; and without them, one “tapped around in the dark”. In the same year, Grunig was to make more formal proposals; but German statistics were not properly systematised until the 1950s. The co-ordination of industry had to rely on cartelised data, rather than on the management-by-prices which Schmalenbach commended.
Exports were a continuing interest, and also international relations through academic contacts, but these were not facilitated by Schmalenbach�s incompetence in ancient and modern languages! Contacts in the safe-haven of Switzerland were especially close using emigrant relatives and a collaborative research-company. But it was much-bombed Cologne which was preferred in autumn 1943, in the preparations for an international institute for research and translations! Efforts were thus made to overcome dangers and isolation. But home-loving preferences inhibited the reputation of that School abroad, compared with the acceptance of the scholarship of Vienna or Frankfurt. We now sample persistent themes and invite tests of their relevance far from Cologne and long after Schmalenbach.
Information and Control
The first theme studied is that of information and control. The topic if not the techniques have contemporary relevance. Primarily of interest then was the information available within the firm, for market signals were often distorted by cartels and price controls and by incomplete capital markets. Quoted firms with routinely quoted share prices were infrequently compared with the firms which were dominated by the German banks. (For such reasons Market-based research relating share price changes to “new” information has only recently been undertaken in Germany).
Schmalenbach claimed that important information could be gained from a firm�s accounts. The results of one�s firm should show through-flows more usefully than balances. What he termed “Dynamic Balances” were to be promptly and regularly prepared and presented, so that external changes and internal efficiencies could be gauged. When the price-inflation of the early Twenties struck Germany, “Gold-mark Balances” indexed to an earlier and firm money-of-account were advocated so that useful information could still be obtained. Inter-firm comparisons were to be facilitated by another technique.
Uniform “Charts of Accounts” (Kontenrahmen) were then advocated from 1927 to assist decentralised management�s ability to compare its results with others in its sector of the economy. Astounding benefits were hoped for through this decimalised classification of financial and cost accounts: old fashioned routines and the paper-work of authoritarian systems were to go: instead there was to be joy in work, and a new adaptability for accountants!
Information thus normalised was promoted in a liberal period – only to be adopted for the control of industry in Nazi Germany and then throughout the “New Order”. The French economy was to be run with the aid of a dozen clerks and such a Chart, a German general claimed during the War. And a decimalised chart or Plan Comptable served in post-War French economic “planification”. Democratic planning of this type appeared for many post-War years to offer a successful compromise between the centralised planning of Eastern Europe and decentralised market economies. Charts are of less importance in post-socialist Eastern European countries; but in modified form they continue to receive official recognition.
Schmalenbach went an important step beyond his Chart of Accounts and indeed towards the systems of today when in 1948 he proposed the structure of a Purpose-neutral Data-base (Grundrechnung). Traditional recordings were to be modified by a systematic storing to enable retrieval of information in any desired form. A disaggregated structure was commended, segregating quantities and values but permitting retrieval or summations by any intelligent user. There was thus no one cost as prescribed by the cartels, by the Nazis or by the bureaucrats who purchased supplies for the public sector. Cost data could be extracted rather to meet the needs of the hour and market. One notes that purpose-neutral data-bases were presented first in a 1948 publication on the management of the economy through Prices, with alternatives presented for directed or market economies. Clearly the economics of information may discriminate between polities, even though advancing data-processing offers to serve both for the “Perfect co mputation” claimed for planned economies and in the “Perfect competition” necessary for market choice! (The contrast is owed to P.J.D.Wiles).
Costs and Utilities
Marginal Costing was a tactic advocated early and late by Schmalenbach. His first publication urged that costs should not be apportioned to centres and then aggregated to selling stage and price: rather, prices available on highly segmented markets should have costs progressively deducted for all the resources consumed in their production. The proposal is derived without acknowledgement from Wieser�s “Natural Value” of 1889. It was later elaborated as an alternative to marginal cost cumulation whenever there were constraints or scarce factors. Thus Marginal utility (which approximated net realisable value) had a role in allocating production and rewards in external markets and for internal decisions.
He complained until the end that the Full Costers neither understood nor sympathised; and the outcome of his advocacy over ensuing years is not yet clear. Varied sources of his conviction may be traced – in his experience with small firms where short-term adaptation rather than long-term average pricing was possible, or from his important work with the German railways for which full costings had little meaning. A further source and School may be examined.
Interactions with the School of Menger, Bohm-Bawaerk, Wieser and others deserve investigation today because of the important effects of Austrian economic theory in the renewal of capitalism in recent decades. In direct conflict with the historicist methodologies, Menger preferred an intuitive consciousness of needs and a ranking of means for their satisfaction. Utilities and market appeal had a primacy over producers� returns; but because of their subjectivity, utilities could neither be added nor reduced readily to statistical form. Von Mises (1949, p.210) was to assert that economic calculation can neither be based on nor related to anything which could be called value. Neither for Schmalenbach nor for these economists was mathematical modelling much favoured, although there was an important Mathemetical School in Vienna until the 1930s.
As von Mises re-established a post-War basis for free markets, capital and other, Schmalenbach wrote more neutrally on the systems of East and West. He criticised the manipulation of preferences under capitalism. Freedom within a pluralist yet media-manipulated democracy was less referred to than the problems of choice of consumables or of advanced consumer-goods. Discrimination was then held to require time and technical know-how, with competences which perhaps only professionals could claim. Product standardisation and simplification were advocated; while current advertising was held to be largely manipulative, uninformative and over-costly. Here again there were enduring motifs: even before the First World War, the whole marketing function had been belittled with the slogan that its costs should never exceed 10% of production costs. Price and interest rate changes were seen as sufficient mechanisms for affecting and directing demand. The economies of continuous production were emphasised so that there c ould be little sympathy with Schumpeter�s acceptance of competition and consequent creative destruction. Schmalenbach�s strong Puritan emotions prompted little sympathy for variety and change. A horror of waste and inefficiency in any form featured very high in the indoctrination of Business Economists, without recognition of the diseconomies of nature and with little atttention to the waste of war. Generalised ethics and claims for rationality may arise from varied assumptions; but they require exemplification.
A Secret Planning Weapon!
Frequently Schmalenbach produced “price” as his secret planning weapon. In 1918, it was to be the moderator for the slumps and booms which had bedevilled the economy of previous decades. Informed management should react quickly to overheating and raise their prices. The profits then earned should be reserved, tax-free, for release to cover overheads when prices had been reduced to the point where they covered marginal costs only. The tactic has been adopted in Sweden and remains open when demand cannot be shifted through anticipation and stock-building. Structural inflexibilities and labour costs at artificial exchange rates would seem to be greater concerns today than the variations round equilibrium of earlier concern.
Price too seemed to be available as control and corrective for investment decisions in planned or free economies. Inter-war investment had seemed to be often ill-timed and ill-directed. Much investment stood simply as a monument to the egos of the politicians who had authorised it! Subsequent historians have noted how the heavy industry lost post-1919 in Alsace-Lorraine was replicated rather than replaced by modern, “sun-rise” industries (James, 1986). Some industries such as the German Machine constructors employed economists like Rustow to collect statistics on current and likely supply and demand but others seemed to be possessed by an “investment devil”. After 1933, investment was encouraged by constraints on dividend distribution and was directed whenever possible to rearmament or to self-sufficiency with regard to key raw-materials.
Alternative coordinating instruments were clearly needed for investment and other decisions. Such simplification was indeed necessary when in 1936 a small firm might have to fill 15,000 forms requiring over 10,000 signatures! (op.cit. p.396). Schmalenbach�s Management-by-prices proposals were applicable, he held, in both public and private sectors, and must eventually be applied under the Soviets too. The price which he considered applicable in most investment decisions was an Interest or discount rate which would shift plans between high and low conjunctures. More tentatively it was suggested that labour could price itself into or out of a job. Special concern was expressed about increasing capital intensities.
Schmalenbach reacted to this structural change not by the prescription of some “pocket-tactic” but by political foreboding. By 1926 he had abandoned many of the means of political influence and could only express extreme disquiet in the statistically documented replacement of men by machines. Those who had sunk costs in machines could not ensure their utilisation and must turn to some new and planned order for security. His speech to his colleagues in Vienna in that year found repeated echo in his last publication “In Memoriam of a Free Economy” (Freie Wirtschaft zum Gedaechtnis). The choice of title suggested a Left-swing in his loyalties and was neither timely nor happy for readers committed to defend capitalism and Berlin against socialism. His argument extends some of his earliest themes, and offers critical advice on decisions at international, personal and state level. Some remarks on each are now in place.
New Orders may be appealed to, just as Hobbes appealed to his Leviathan to resolve clashes of interest at his time. The balancing of interests in the Weimar state was delicate and changing. Capital intensities had increased long before 1926; and more practical alleviations than a catalysed state were available such as better forecasting before investment, transnational links to reduce parochial uncertainties or – the equilibrating techniques already advocated! But for the forecasts of the 1920s, some Marxian/Spenglerian determinism of an inescapable future were always tempting. At best such determinism must express in mood and short hand the social forces which were open neither to understanding nor to control. No Business Economist need have shared a mood so widespread!
A chief reason for hope at that time and today must be found in the controllability not of fixed costs but of aggregate demand through money supply. If Austrian economists fear all interventions, German social market theory has justified strict controls to give stability of policy and monetary values through a central bank which is independent of welfare-promising politicians. One may wonder how far Schmalenbach could have anticipated such policies and results, had he accepted an invitation to be Top Banker received in 1923!
Economics or Institutions
The practices researched and commended to Business Economics students related to the Business Man and his decisions within changing polities. Comment and criticism of these polities were free. But formal institutional analyses has been less common in contrast say to the Corporatist studies based in Constance and widely elsewhere. Von Eucken also explicated more clearly a more liberal “Ordo”. The institutions appropriate to totalitarian, pluralist or mixed societies must be worth consideration especially if free market liberals conceive that market economies can be introduced by simple revolution!
One contribution of Schmalenbach deserves reference at this point: formally if not fully he compared the constitutions of corporations and of democratic states. The government, opposition and bureaucracy of each are described – without sufficient reference however to the potential of take-over threats and of marginal share-purchase. Such take-overs have been uncommon in German capital markets where management are prompted to efficiency rather by Supervisory Boards. These boards illustrate institutional arrangements which are not inherently acceptable in the nominally pluralist model of financial capitalism where more usually there is a dictatorship of the majority shareholding. More negotiable outcomes may appear as a legacy of Schmalenbach and his School with professional consciences often replacing rigorous agency relations. But effectiveness must be judged within particular polities.
Betwixt or Between
We have referred to Schools and theories which flourished in the same epoch as Schmalenbach�s – and indeed pervade political-economics today. Socialist ideals were given formal effect through the calculations of Oscar Lange and implemented to achieve “the dictatorship of the proletariat” through the cadres of Communism. On behalf of Austrian economics, von Mises in 1918 contrasted their calculatory pretensions with the infinite preferences of democratic persons. Subsequent apologetics for the Market took decades to achieve confident and academic acceptance. Cadres were not necessary for the dissemination of their beliefs up to 1990. But overlap of theory and theorists may be found between the Austrian School and the Social Market School which was brought forth if not conceived by lawyers out of economists in Freiburg, 1933. A welfare and legal framework was prescribed within which competitive markets should flourish; and the implementation came through schooled politicians such as Chancellor Erha rdt. Further adoption of Social Market principles has followed through the European Union.
Can the Cologne School and the Schmalenbach legacy compare with these Schools? Has it particular affiliations or contributions to make? On grounds already sketched, a stance was taken against planning as applied in the firm where the “Markets” option was clearly spelled out decades before Williamson described also the authoritarian Hierarchic option. The actual effects of planning of economies (Gleischaltung) were also seen, feared and caricatured. Whatever the order, liberalisation and choice were preferred. But in his writings and in his character, Schmalenbach placed his faith in schooled professionals to cope with every institutional arrangement. Among the consequences were even “neutered” data-bases and a system or polity-neutral profession.
A committed or neutral profession?
The function of “commitment” may well be asked of one who prescribed ethical stances from early days. Academic objectivity had been advocated by Sombart and Max Weber in 1911. With other opponents of the “lackies of capitalism”, Schmalenbach had argued for a training and for techniques which were applicable under any system. Although he attempted to make his teaching lucid to the laity, reliance was placed on a sometimes naive economising applied by his trained “crusaders”.
Simple or advanced theory was presented by some who followed, in search of a “system-neutral” frame-work for Business economics. The efforts of Mellerowicz and others are detailed by Hundt (1977). Elsewhere a convergence of systems, East and West, was heralded by Tinbergen in 1959, while Raymond Aron held that countries set on economic growth must adopt comparable “rational” policies. Such optimism was dealt a fatal blow through the Czech coup of 1968. The rise and fall of this Convergence Theory was documented by Tuchtfeldt (1969/89).
But the earlier and current roles of ethics in the teaching of Business Economics deserve further attention. None could welcome the immense challenges to thought and action which were faced by Schmalenbach. Much integrity in theorising and in relating narrower trainings to wider responsibilities has been subsequently shown. Schmalenbach�s tradition has been successfully replanted in the centres such as Leipsig where he had gained his wife and academic spurs. But such rewards to forty years of patience and persistence should not distract from further endeavours to improve the international affiliations of the Society and to extend the theory and practice compatible with pluralist economies.
Nice piece of introduction to Schmalenbach, although this is only a step stone to get our of intellectual prison of anglo=saxonia.
Can I ask two questions?
(1) Why did Schmalenbach mean when he recommended marginal cost? Is it the same concept as the standard neoclassical economics defines it? In other words, did he made distinction between marginal cost of substitution and the marginal cost when the scale of production changes?
(2) How is Schmalebach’s economic thought related to ordoliberalism?
“Schmalenbach went an important step beyond his Chart of Accounts and indeed towards the systems of today when in 1948 he proposed the structure of a Purpose-neutral Data-base (Grundrechnung). Traditional recordings were to be modified by a systematic storing to enable retrieval of information in any desired form. A disaggregated structure was commended, segregating quantities and values but permitting retrieval or summations by any intelligent user.”
This is almost exactly what I’ve been saying as a systems analyst and designer of database systems: that the data needed for restocking the world is already available in the supermarket records used for shelf-restocking.
” But the earlier and current roles of ethics in the teaching of Business Economics deserve further attention. ”
This is what I’ve been saying about debt being incurred by spending credit, and children having to learn to earn their pocket money.
A most helpful post, Robert. I shall study it closely.
All of the books listed are worth reading.
None of them put forth the paradigm changing insights and policy program of Direct and Reciprocal Monetary Distributism.
Craig is probably right. At my age and having been through the syllabus the one book listed I particularly want to read and reflect on is Naomi Kline’s “The Shock Doctrine”. There are signs of anxiety about global warming being used to promote loud-mouthed so-called “populist” but more appropriately “fascist” leaders. (The one currying favour by telling the people what they want to hear, the other appealing specifically to the insecure by offering them strong leadership). Graeber on Debt does sound interesting.
All the books listed seem to be quite modern, whereas those which have most influenced me are now old, but already recognising the same problems, so with proposals that are still relevant. I’m thinking Ruskin, George, G K Chesterton et al, Douglas, Soddy and of course Keynes’ “General Theory” as written. However, Australian Geoff Davies having a substantial discussion of the Mondragon organisation in his “Economy, Society, Nature” (on which I have myself presented a paper in Sydney), I am going to recommend a book by another Australian:
Race Mathews: “Jobs of our Own: Building a Stakeholder Society: [Co-operative] Alternatives to the Market and the State”. 1999, Comerford and Miller; Pluto Press.
This not only recapitulates the Chesterton Distributist story [distributing property more widely rather than re-distributing money], it takes it through American history into post-Franco Spain, where a Catholic priest organised Mondragon [investing where jobs were needed, not where they were already profitable].
My “off-the-top-of-my-head” sound-bite about ‘populism’ worried me sufficient to look up what Margaret Canovan had to say about it in “G K Chesterton: radical populist” (1977, Harcourt Brace Janovich). Reassuring but fun! It seems no-one has a clearer idea of what the word means, but Chesterton, despite being enjoyed for his wit, spoke to what people needed and in practice remained UNpopular because that wasn’t what most people actually wanted!
I read Canovan’s book when it came out. Since then I’ve got into Jungian/Myers-Briggs personality analysis, which I’ve long been saying Chesterton not only anticipated but in effect explained (i..e. he related it to the verbal and visually intuitive sides of the brain). Canovan hasn’t, but on rereading her book I found the evidence for it leaping out at me.