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Once in a while the world astonishes itself. Anxious incredulity replaces intellectual torpor and a puzzled public strains its antennae in every possible direction, desperately seeking explanations for the causes and nature of what just hit it. 2008 was such a moment. Not only did the financial system collapse, and send the real economy into a tailspin, but it also reveale Once in a while the world astonishes itself. Anxious incredulity replaces intellectual torpor and a puzzled public strains its antennae in every possible direction, desperately seeking explanations for the causes and nature of what just hit it. 2008 was such a moment. Not only did the financial system collapse, and send the real economy into a tailspin, but it also revealed the great gulf separating economics from a very real capitalism. Modern Political Economics has a single aim: To help readers make sense of how 2008 came about and what the post-2008 world has in store. The book is divided into two parts. The first part delves into every major economic theory, from Aristotle to the present, with a determination to discover clues of what went wrong in 2008. The main finding is that all economic theory is inherently flawed. Any system of ideas whose purpose is to describe capitalism in mathematical or engineering terms leads to inevitable logical inconsistency; an inherent error that stands between us and a decent grasp of capitalist reality. The only scientific truth about capitalism is its radical indeterminacy, a condition which makes it impossible to use science's tools (e.g. calculus and statistics) to second-guess it. The second part casts an attentive eye on the post-war era; on the breeding ground of the Crash of 2008. It distinguishes between two major post-war phases: The Global Plan (1947-1971) and the Global Minotaur (1971-2008). This dynamic new book delves into every major economic theory and maps out meticulously the trajectory that global capitalism followed from post-war almost centrally planned stability, to designed disintegration in the 1970s, to an intentional magnification of unsustainable imbalances in the 1980s and, finally, to the most spectacular privatisation of money in the 1990s and beyond. Modern Political Economics is essential reading for Economics students and anyone seeking a better understanding of


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Once in a while the world astonishes itself. Anxious incredulity replaces intellectual torpor and a puzzled public strains its antennae in every possible direction, desperately seeking explanations for the causes and nature of what just hit it. 2008 was such a moment. Not only did the financial system collapse, and send the real economy into a tailspin, but it also reveale Once in a while the world astonishes itself. Anxious incredulity replaces intellectual torpor and a puzzled public strains its antennae in every possible direction, desperately seeking explanations for the causes and nature of what just hit it. 2008 was such a moment. Not only did the financial system collapse, and send the real economy into a tailspin, but it also revealed the great gulf separating economics from a very real capitalism. Modern Political Economics has a single aim: To help readers make sense of how 2008 came about and what the post-2008 world has in store. The book is divided into two parts. The first part delves into every major economic theory, from Aristotle to the present, with a determination to discover clues of what went wrong in 2008. The main finding is that all economic theory is inherently flawed. Any system of ideas whose purpose is to describe capitalism in mathematical or engineering terms leads to inevitable logical inconsistency; an inherent error that stands between us and a decent grasp of capitalist reality. The only scientific truth about capitalism is its radical indeterminacy, a condition which makes it impossible to use science's tools (e.g. calculus and statistics) to second-guess it. The second part casts an attentive eye on the post-war era; on the breeding ground of the Crash of 2008. It distinguishes between two major post-war phases: The Global Plan (1947-1971) and the Global Minotaur (1971-2008). This dynamic new book delves into every major economic theory and maps out meticulously the trajectory that global capitalism followed from post-war almost centrally planned stability, to designed disintegration in the 1970s, to an intentional magnification of unsustainable imbalances in the 1980s and, finally, to the most spectacular privatisation of money in the 1990s and beyond. Modern Political Economics is essential reading for Economics students and anyone seeking a better understanding of

30 review for Modern Political Economics: Making Sense of the Post-2008 World

  1. 5 out of 5

    Randal Samstag

    The magisterial book, Modern Political Economics (MPE), by Yanis Varoufakis, Joseph Halevy, and Nicholas Theocarakis is a tour de force. The subtitle of the book expresses its major theme: Making sense of the post-2008 world. But this is not another book about corruption on Wall Street. Or rather, it is, but it is more importantly a book that reveals how far the practice of economics has systematically strayed from the real world and how far the real world has strayed from a rational order. The b The magisterial book, Modern Political Economics (MPE), by Yanis Varoufakis, Joseph Halevy, and Nicholas Theocarakis is a tour de force. The subtitle of the book expresses its major theme: Making sense of the post-2008 world. But this is not another book about corruption on Wall Street. Or rather, it is, but it is more importantly a book that reveals how far the practice of economics has systematically strayed from the real world and how far the real world has strayed from a rational order. The book has two parts: first, a major review and critique of the enterprise of political economic theory and second, an historical survey of the post-WWII world leading up to the crash of 2008. The economic theorists critiqued in Book I include Aristotle; the physiocrats; Adam Smith; David Ricardo; Karl Marx; the early marginalists, William Stanley Jevons and Alfred Marshall in England and Carl Menger, Eugene von Böhm Bawerk, and Friedrich von Weiser in Austria; the equilibrium theorists including the Frenchman Leon Walras; the dissenting marginalist John Maynard Keynes; and finally, the founders of neo-classical economics: John Nash, Gerard Debreu, and Kenneth Arrow. Along the way contributions of major figures like J. B. Say, John von Neumann, Joseph Schumpeter, Paul Sweezy, Friedrich Hayek, and Paul Samuelson are reviewed and critiqued. Unlike most treatments of economics, however, this book is dominated by a pervasive scepticism of the very idea of successfully formulating a closed system of equations which can in any way be said to represent real economies. They show a deep appreciation for the sceptical tradition. Two out of the three authors are Greeks, of course. And while the names of Sextus Empiricus and Pyrrho are nowhere mentioned in the book, the classical Sceptic’s legacy of rational critique of dogmatism pervades this book. Key original concepts of the book include: Inherent error and lost truth Condorcet’s secret Radical indeterminacy The fundamental theorem of Marxism and the mechanization of the economy The Meta Axioms Each one of these concepts is worth talking about. Inherent Error and Lost Truth The great difference between natural science and any study of the human world is that (until the arrival of quantum mechanics) humans can (could) study the natural world from a perspective of distance that would allow them to consider themselves abstracted from that world. This, of course, is not possible with study of the human world. In spite of this, humans have persistently tried to apply the success that had been achieved in natural science to the understanding of human affairs. The inherent error in this as it applies to political economy shows up when (typically) attempts are made to close systems of mathematical equations purporting to represent a system which is affected by the equation system itself. Inevitably these attempts founder on the rocks of self-contradiction. A key inherent error of economic theories is “an error caused by a definite feature of human, market societies: value can never be independent of the distribution of social power over the surplus produced by human labour and ingenuity. Social power is determined by our valuation of things, of people and of their ideas and, at once determines these values. This infinite feedback between value and power lies at the heart of economics’ Inherent Error, ensuring that all economics that overlooks it, or tries to ‘solve’ it by technical means, is bound to produce a profoundly misleading theory of society.” An illustration of this tendency towards inherent error in economic theory occurs in theories of growth and value. Varoufakis et al. argue that “overcoming economics’ Inherent Error and procuring a logically consistent theory of value within a useful theory of growth is more than just difficult. It is impossible!” This inherent error shows up over and over again in their history of economic theory: “Ricardo’s insistence of squaring his value theory with a theory of growth led to Malthus’ devastating critique; Marx’s desperate attempt to close his model led to the transformation problem and the contorted logic required for its resolution; the marginalists’ insistence of explaining all prices and quantities by means of the equi-marginal principle forced them, eventually, to stick to Robinson Crusoe-like economies, etc.” I will look in more detail at their analysis of Karl Marx’s wrestling with this problem of inherent error in a subsequent paragraph. The typical development in the history of economic theory when these difficulties are exposed is to replace the failed theory with another, which eventually leads to the same fate. But, meanwhile, important truths uncovered by the previous theory are forgotten. This presents the correlative problem of lost truths: “The trouble with these failures was that, once their logical incoherence became apparent, and the political order no longer had uses for them, they led the following generations of economists to drop them wholesale, together with the important insights contained within. And if this has not happened just yet with neoclassicism, because of its continuing political utility, eventually it will.” Condorcet’s Secret Economics, whether it admits it or not, is about managing surplus. From the reign of the Pharaohs to the rise of Wall Street a key task of political economics has been to explain and either justify or declaim the command exercised by the ruling elite over the surplus of value created by collective labor. Because this surplus comes from the work of the majority, yet is enjoyed for the most part by the ruling elite, a ruse must be played on the majority. But the raw power of the majority is always greater than that of the few in ruling elites. This reality was captured by the French thinker Condorcet when he wrote in 1794 “force cannot, like opinion, endure for long unless the tyrant extends his empire far enough afield to hide from the people, whom he divides and rules, the secret that real power lies not with the oppressors but with the oppressed.” These are the “mind forg’d manacles” of Blake; the consent of the many to the exercise of power by ruling elites. Radical Indeterminacy A parallel fact about economic theory to its tendency to inherent error is what the authors call its “radical indeterminacy.” In a chapter titled “The Trouble with Humans” they explore the reasons why an economy composed of humans resists quantification in a way an economy composed solely of machines would not. In this chapter they make much of the story told in the commercial movie “The Matrix” in which a future economy of automatons on planet Earth has no need for humans except as a source of energy. Human heat is harnessed and captured to use as batteries to power the Matrix Economy. They credit Karl Marx with being the first to discover a crucial fact about labor, that of its “ontological indeterminacy”. This chapter argues that “without the indeterminacy of labour inputs no economy is capable of producing value. In short, our economic models can only complete their narrative if they assume away the inherent indeterminacy that is responsible for the value of things we produce and consume.” Radical indeterminacy was also appreciated by John Maynard Keynes. At several points in the book the authors stop to recognize Keynes’ answer to the question why capitalists invest: “We are damned if we know!” Keynes use of the term “animal spirits” for why capitalists act in the world the authors consider “a major own goal” because it led to criticism of Keynes for attributing irrationality to the capitalist system when what he really had discovered was its radical indeterminacy. The Fundamental Theorem of Marxism and Mechanization of the Economy Varoufakis et al. are, in general, sympathetic to the critique of political economy provided by the towering figure of Karl Marx. Their approach to economics in the face radical indeterminacy is to turn to history. This approach is certainly influenced by Marxian analysis. Marx’s analysis of the crises of capitalism is also highly compatible with their own. But before they travel away from closed theory to historical analysis, they discuss the attempts by Marx to capture a theory of capitalism. Following Michio Morishima, they call the following equation the “Fundamental Marxian Theorem”: π = e / (1 + k) Where, π = Rate of profit e = Rate of exploitation (or extraction) = s / v s = Surplus value = λ – c – v λ = Total value of product c = Constant capital = raw materials + auxiliary materials + machinery depreciation v = Variable capital (labor) k = Organic composition of capital or the rate of mechanization = (c/v) The surplus, s, derives from value produced by the laborer during the working day (Chapter 10 of Capital, Volume I) in excess of the value of his means of subsistence. The surplus, s, is at least partly due to the cooperation which takes place among humans working together. Since the capitalist negotiates his labor contract with each laborer independently, the surplus goes wholly over to the capitalist. Marx outlines this process in Chapter 13 of Volume I of Capital. The degree of exploitation, e, is developed in Capital, Chapter 9. This represents the ratio of surplus to the total labor value. It is the measure of surplus relative to the amount of labor applied to a productive process. Varoufakis et al. term this, rather than the rate of exploitation, the rate of extraction; because this has less of a pejorative connotation, but also because this parallels the extraction of value from humans in the Matrix Economy. The factor, k, in the fundamental theorem Marx calls the “organic composition of capital.” But Varoufakis et al. emphasize that this factor represents the degree of mechanization in the productive process. Because this tends to increase as capitalism develops in time and because there must be some limit to the amount of surplus value that can be extracted from workers, this equation provides a mathematical formulation of Marx’s long-term prediction of a falling rate of profit in capitalist societies, an end which Marx saw as inevitably apocalyptic for the capitalist system. In the shorter term, however, this equation provides a way to follow cyclical crises of capitalism. In an upswing k rises and although production increases, profit rates fall. Capitalists eventually stop investing and reduce production or go bankrupt. This produces unemployment which produces a reduction in demand. With fewer firms as many go bankrupt, the prices of labor power and materials drops. This produces a stimulation of rates of profit which drags the economy out of the mire. So with one simple equation, Marx had found a basis for cyclical crisis in capitalist economy and a justification to believe that in the long term, the dynamic of capitalism would cause it to run down. The problem came when Marx tried to apply this model, in Volume II of Capital, to a multi-sector economy. In the simplest version of such an economy, an economy with two sectors: π1 = e1 / (1 + k1) = π2 = e2 / (1 + k2) The problem here is that capital and labor will migrate between sectors such that the rates of profit in the different sector will tend to equalize. But the only way that the profit rates in different sectors can be the same, unless the organic composition of capital in the two sectors, k1 and k2, is the same, is if the rates of exploitation, e1 and e2, diverge. But migration of labor between the sectors would cause profit rates to diverge, causing capital to migrate to the more profitable sector. So instead of discovering the key to the long-run demise of capitalism, Marx had instead discovered a deep tendency to flux. What was equally concerning was that here he had discovered another factor affecting the rate of profit, besides of the surplus value extracted from labor power. The Transformation Problem The “transformation problem” is the difficulty with which classical economists, Smith and Ricardo, tried to explain how underlying values are transformed into prices. Their answer to this question was that “equalization of profit rates will bring about prices at which each commodity exchanges with others at a rate (or relative price) reflecting the relative labor inputs necessary during their production.” The “serious” problem that the authors see with this solution is that “when machines assist human labour in the production process, an increase in labour costs (relative to the cost of the machines) changes the value of all commodities.” Adam Smith assumed that “the wage share of the surplus (and thus the price of labour relative to machines) remains constant.” Ricardo, who did not want to make this assumption, left himself open to the critique of Thomas Malthus that “for Ricardo’s labour theory of value to hold water, each commodity had to be produced by the same technique of production involving the same proportions in the use of the various inputs. Ricardo meekly replied that his theory could be seen as an approximation.” Marx was also faced with the Transformation Problem. The “only way of maintaining his own theory of value and keep alive the idea of a uniform rate of profit when capital utilization differs across sectors was to accept that the rate of labour input extraction is not the same across sectors. But then he had to explain why those rates differed.” The problem with this conundrum was that Marx was unsuccessful (in the author’s opinion) in coming up with a theory that solved the transformation problem (like accepting the empirical fact of differing extractive power of some employers over others) that did not threaten his major thesis that surplus value was the exclusive source of profits. The limit to this acceptance would be to have to acknowledge that “an increase in the economy-wide wage rate may indeed lead to an increase in economy wide prices (i.e. inflation)” an admission that would contradict his speech “lambasting” Citizen Weston at the First International Working Men’s Association meeting in June 1865. The Meta-axioms As a summary of Book 1, the authors present a matrix of characteristics of the historical schools of economic analysis included in their survey. The economic analysis schools and their “meta-axioms” are summarized in the table below. These meta-axioms are higher order axioms which underpin all of the theory. The first three meta-axioms underlie all of neoclassical economics, the development of marginal theory into equilibrium models conceived originally by Leon Walras and developed by the dominant stream of the American economics profession. The fourth meta-axiom evolved and was followed only by the Austrian school. The fifth meta-axiom, reducibility of human action, is the idea that human beings can be thought of as reducible to machines. I will continue my review as a review of Varoufakis's solo book, The Global Minotaur. For the complete review see my blog.

  2. 5 out of 5

    Judith

    A fascinating read. The first part goes over macroeconomic theories from ancient times till now, critiquing their assumptions and mistakes while pointing out what knowledge they brought to the world - some of which has been lost to today's economics. The second part of the book is completely different, trying to give an own explanation of how the post-WWII world, and especially the post-2008 world, is functioning. Most enlightening is when the book explains how certain economic theories affected A fascinating read. The first part goes over macroeconomic theories from ancient times till now, critiquing their assumptions and mistakes while pointing out what knowledge they brought to the world - some of which has been lost to today's economics. The second part of the book is completely different, trying to give an own explanation of how the post-WWII world, and especially the post-2008 world, is functioning. Most enlightening is when the book explains how certain economic theories affected how crises came to be or affected how politicians tried to solve them, especially in regards to 2008 and Europe's sovereign debt crisis. Highly recommended!

  3. 5 out of 5

    Lievendr

    If all this is true, why are we still funding economic faculties to 'enlighten' us about their divinations as if it where science from the highest order? This book deserves far more attention than it got so far from all kind of scientists, economists, philosophers, media, politics, and so on. If all this is true, why are we still funding economic faculties to 'enlighten' us about their divinations as if it where science from the highest order? This book deserves far more attention than it got so far from all kind of scientists, economists, philosophers, media, politics, and so on.

  4. 5 out of 5

    !Tæmbuŝu

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  5. 5 out of 5

    Mike

  6. 4 out of 5

    Bobby McDonell

  7. 4 out of 5

    Jesper Döpping

  8. 5 out of 5

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  9. 4 out of 5

    Kevin

  10. 5 out of 5

    Jesse

  11. 5 out of 5

    Sanchit Bajaj

  12. 4 out of 5

    Piero Vereni

  13. 5 out of 5

    Apemberton

  14. 5 out of 5

    Petar Kocovic

  15. 5 out of 5

    Homo

  16. 4 out of 5

    Andrew Lee

  17. 4 out of 5

    Skarmoutsos Fotis

  18. 4 out of 5

    Arman Rahman

  19. 4 out of 5

    Maria

  20. 4 out of 5

    Artur Olczyk

  21. 5 out of 5

    Dylan

  22. 4 out of 5

    John O'Brien

  23. 5 out of 5

    Mconst

  24. 5 out of 5

    Francisco Lazaro

  25. 5 out of 5

    Alasdair

  26. 5 out of 5

    Daniel Daniel

  27. 4 out of 5

    Matt

  28. 5 out of 5

    Jan Drieghe

  29. 5 out of 5

    Anonymous

  30. 5 out of 5

    tom jonys

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