A brilliantly clear refutation of Milton Friedman’s Chicago School of Economics theory by Peter Dolack!
Art by Selwyn Rodda. Homo Sacer the Drowned and the Devoured. 145 x 105 cm. Charcoal on paper
Such an ideology flows naturally from the Chicago School’s antecedent, the Austrian School, whose leader, Friedrich Hayek, went so far as to claim that human civilization consists of a long struggle against “primitive instincts” such as solidarity, benevolence and a desire to work for the needs of the community. Such an elevation of selfishness to an organizing principle of the world found its echo later in Margaret Thatcher’s statement to a British magazine that “There is no such thing as society.” There are only individuals and families autonomous from all others, the prime minister said, yet actual humans seem strangely absent from conservative economics.
Standard neoclassical economics is highly abstract, built on mathematics and based on concepts such as “perfect competition” rather than on the real world. The model of perfect competition assumes that all prices automatically calibrate to optimum levels, and that there are so many buyers and sellers that none has sufficient power to affect the market. Summing up these assumptions, economist Robert Kuttner wrote:
“Perfect competition requires ‘perfect information.’ Consumers must know enough to compare products astutely; workers must be aware of alternative jobs; and capitalists of competing investment opportunities…Moreover, perfect competition requires ‘perfect mobility of factors.’ Workers must be free to get the highest available wage, and capitalists to shift their capital to get the highest available return; otherwise identical factors of production would command different prices, and the result would be deviation from the model.”
In the real world, workers do not have the ability to freely find jobs at the highest wages, nor do capitalists have sufficient information to always earn the maximum possible profit. Corporate secrecy, a requirement imposed by the rigors of competition, makes it impossible for capitalists or working people to ever possess sufficient information to achieve anything close to these ideals. Friedman tap-danced around this problem by arguing that it does not matter whether an assumption is empirically true as long as it is internally consistent and the model is not refuted by data. Chicago School economists, however, don’t believe there are any data that refute their assumptions—any economic difficulties, such as inflation or high unemployment, are always the result of government interference. This attitude is exemplified by a Chicago School economist, Frank Knight, who wrote in a leading academic economic journal that professors should “inculcate” in their students that these theories are not debatable hypotheses, but rather are “sacred feature[s] of the system.”
This is not abstraction for its own sake, but for a cause. Thus, Chicago School economists could gleefully institute their ideology in 1970s Chile simultaneous with (in fact, because of) Pinochet torturing and killing tens of thousands. It is just such a mindset that led a major New Orleans developer to declare, days after Hurricane Katrina devastated the city in 2005, that “I think we have a clean sheet to start again. And with that clean sheet we have some very big opportunities.” Friedman himself, in his last public statement, said the fact that “most New Orleans schools are in ruins” offered “an opportunity to radically reform the educational system” by handing them over to “private enterprise”—by which he meant privatizing the schools for corporate profit. So what that one of the world’s culturally unique cities had to be destroyed to create this “opportunity.”
Neoclassical theory can be seen as a theory of equilibrium in exchange, with production and distribution as afterthoughts, in which firms and individuals are not part of a social structure; initial factors such as wealth and property are taken as given. Production is alleged to be independent of all social factors, the employees who do the work of production are in their jobs due to personal choice, and wages are based only on individual achievement independent of race, gender and other differences.
Given the unreality of the preceding, it is not surprising that so much capitalist ideology resorts to the “magic of the market” and the “invisible hand.” Yes, magic must account for dramatic imbalances in income and power! Don’t laugh just yet—here’s how a prominent Chicago School economics professor invoked supernatural forces to defend “junk bonds” (high-risk debt created to finance takeovers of companies by speculators who did not have the money to buy them):
“My own view is that the fact that the invisible hand could work its magic through mere humans is an essential part of Adam Smith’s insight. Not many thousands of years ago, men like this would have clubbed each other over hunting rights. A few hundred years ago, they would have hacked each other with axes and swords. Now they yelled at trainees while they brought together the supply and demand of home mortgages on a world-wide scale.”
Those feudal lords hacking at each other with axes and swords undoubtedly believed they were doing God’s work, too. For his part, Smith himself wrote that “Providence” guarantees that everyone, including the poor, has enough to eat: “When Providence divided the earth among a few lordly masters, it neither forgot nor abandoned those who seemed to have been left out in the partition.” And it is a small step from there to the proposition that without regulation business activity will invariably be honest and benefit all.
Panegyrics to magic and invisible hands aside, the closest neoclassical economic theory seems to get to an explanation of profits is the cliché of “buying low, selling high.” Profits appear out of thin air, or thanks to the business acumen of the capitalist. But if somebody is buying low, then someone else is selling low. Selling something for more than was paid for it explains how one individual earns a one-time profit, but does not explain how the system as a whole generates profit. Otherwise, the economy would function as one giant flea-market, which it does not.
There must be something inherent within the capitalist system that ultimately is the source for the profits it generates. We need a more material explanation than “magic.”
Indeed, there is a source of profit—labor power. Specifically, labor power produces surplus value. Labor power is not the same as labor: Labor is the actual activity of production whereas labor power is the workers’ mental and physical capabilities that are sold to capitalists. Nature is the source of much wealth; by no means is labor power the sole source. But it is labor power that is used to extract natural resources and produce the commodities that are to be sold.
Surplus value is the difference between what an employee produces and what the employee is paid—the surplus value is converted into the owner’s profit.
The preceding is an excerpt from It’s Not Over: Learning From the Socialist Experiment [Zero Books, 2016]. Citations omitted. The author, Pete Dolack, currently organizes with Trade Justice New York Metro and writes the Systemic Disorder blog.