Slides from presentation in the Summer School on heterodox economics given at Jilin University, Changchun, July 11 2018

1. ECONOMIC GENERAL EQUILIBRIUM
THE FOUNDATION OF A GODLESS RELIGION

2. KEY WORDS
• Monotheoreticism
• Mutual [causation]
• Simultaneous [equations]
• Catena (Latin for ‘chain’)
• Difference [equations]
• Differential [equations]
• Temporalism
• Positivism

3. MARSHALL’S ‘CATENA OF CAUSATION’
Jevons:
• Cost of production
determines supply
• Supply determines final
degree of utility (marginal
utility)
• Final degree of utility
determines value
Marshall:
• Utility determines the
amount that has to be
supplied
• The amount that has to be
supplied determines cost of
production
• Cost of production
determines value
The problem
“if this series of causation really existed,
there could be no great harm in
omitting the intermediate stages and
saying that cost of production
determines value”
But this makes cause run backwards in time.
Therefore these things cause each other ‘mutually’ – at the same time

4. I WILL ARGUE
• Equilibrium is the dividing line between heterodox and orthodox economics
• Its victory was first secured within marginalism
• In the defeat of the Austrian school by Marshall
• Then spread to all other schools of thought

5. I WILL ARGUE
• Equilibrium is the content of the ‘economic counter-revolution’ of the 1950s
• produced monotheoreticism and positivism
• converted economics into a ‘godless religion’
• But cannot explain International Inequality and Great Depressions
• heterodoxy advances when these failures become obvious to millions of people
• for example, Marx 1870-1918 and Keynes 1933-1960
• Chinese economists and Western heterodox economists should work together
• to bring about a ‘third revolution in economic science’
• based on the pluralistic investigation of the facts

6. TWO SYSTEMS OF THOUGHT
Equilibrium and temporal approaches

7. SIMULTANEOUS AND SEQUENTIAL
(TEMPORAL) CAUSATION
Causation can be thought of as sequential (A causes B causes C), as
simultaneous mutual determination (as in Walrasian general
equilibrium), or as a confluence of “tendencies” whose net result may
bear little resemblance to any of the individual elements… during the
classical period, both orthodox and dissenting economists tended to
conceive of causation in a sequential sense—as distinguished from
simultaneous equilibrium
- Thomas Sowell 1974

8. ‘TWO SYSTEMS’ OF THOUGHT IN
ECONOMICS
• In all economic schools one finds two versions
• A ‘dangerous’ version that reacts to facts
• A ‘tame’ or ‘safe’ version that reacts to social regulation
• The ‘tame’ is the equilibrium version
• uses simultaneous equations
• The ‘dangerous’ version is temporal
• uses difference or differential equations

9. HISTORICAL
• This debate goes back to the classics in ‘Say’s Fallacy’
• Also present in Proudhon’s ‘just proportions’
• Walras first formalised with simultaneous equation models
• But Walras was a minor figure until Marshall’s intervention
• Marshall does not argue that mutual causation is better
• He argues mutual causation is safer
• It is the only way to escape the conclusion that ‘cost of production determines value’
• This is an ideological, not a scientific, justification

10. THE ‘SAFE’ VERSION SUPPOSES THE
MARKET WORKS
• First suppose society reproduces perfectly
• Market clears; nothing needs to change
• values and prices do not change during production
• but do change during exchange (sellers pay more than buyers receive)
• Profit rates everywhere equal (no surplus-profit)
• Write down a set of simultaneous equations and solve them
vtYt = vtCt + lt
ptYt =(pt Ct + wtlt)(1+r)
Values and prices are determined by requiring perfect reproduction

11. THE OPPOSITE IS TEMPORALISM
• Do not assume market clears
• Prices and values change during production, not exchange
• Profits are different for different enterprises
• Write down difference or differential equations

12. MANY SCHOOLS, BUT TWO SYSTEMS OF
THOUGHT
Tame version Dangerous version
Orthodox Keynesianism Post-Keynesianism
Sraffian Marxism Temporal Marxism (TSSI)
New Institutionalism Original Institutionalism
Marshallian theory of the firm Heterodox theory of the firm
Neoclassical General Equilibrium Austrian Theory

13. SPREADS THROUGHOUT ECONOMICS
Dangerous Version Safe Version
Adaptive expectations Rational Expectations
Non-equilibrium Walrasianism Walrasian Economics
Time-series econometrics (Congdon) Standard of econometrics
Jacobs growth theory (NB Searchinger on New York) Fujita, and Venables geographical school
Uneven development
Development of Underdevelopment
Lenin theory
Hecksher-Ohlin
Samuelson factor-price theory
Comparative advantage

14. DIVIDES EVERY ‘SCHOOL’ INTO A HETERODOX
AND AN ORTHODOX BRANCH WITH
ORTHODOXY ON TOP
• There is an ‘orthodox Keynesianism’, etc
• There is a temporal Marxism
• Every school has a ‘safe’ version
• No school is immune

15. WHAT IS THE FUNCTION OF THE
‘DANGEROUS’ AND THE ‘TAME’ VERSION?
• The dangerous version seeks to explain what is seen
• The safe version seeks to regulate society
• But ‘society’ is ruled by the capitalist class
• So the ‘safe’ version ‘proves’ that capitalism works
• It is optimal
• It is eternal
• It is natural
• This is a ‘godless religion’

16. THE ‘DANGEROUS’ VERSION IS
SUPPRESSED
• The schools act as gatekeepers
• They produce ‘versions’ of their thinking which cannot work
• They disallow ‘socially unacceptable’ versions
• This is why interpretation is critical

17. AN EXAMPLE: ‘TSSI’ MARX
vt+1Yt+1 = vtCt + lt ;
pt+1Yt =(pt Ct + wt) (1+rt)
vt+1 = pt+1/et+1
Where et+1 is the ‘Monetary Equivalent of Labour Time’ (MELT)
and rt is a vector, whose elements are not necessarily equal
• p is now observed, not predicted
• r is the outcome of sale, not a forecast of it
• There are many degrees of freedom – the system is ‘indeterminate’
• Which allows us to fit the theory to the facts
• Equilibrium fits the facts to the theory

18. FEATURES OF TSSI
• No transformation ‘problem’
• Marx’s explanation of the declining rate of profit is confirmed
• There are no ‘inconsistencies’
• The observed facts can all be explained
• Nearly all ‘Western Orthodox Marxists’ reject it
• And suppress it

19. WHY DOES ECONOMIC TRUTH GET
SUPPRESSED?
• Truth is socially dangerous
• Example of Galileo
• Heavens were proof of perfection of God

20. POSITIVISM AND THE DEATH OF
FREE WILL

21. WEBER’S IDEOLOGICAL MOTIVATION
We have this [German] revolution to thank for the fact that we cannot
send a single division against the Poles. All we see is dirt, muck, dung,
and horse-play—nothing else. Liebknecht belongs in the madhouse and
Rosa Luxemburg in the zoological gardens.
- Weber

22. WEBERIAN RECONSTRUCTION OF THE
SOCIAL SCIENCES
• Creation of ‘pure’ economics
• Positivism rules economics
• Economics rules all other social sciences
• Dehistoricisation of social sciences
• The eternal ‘now’
• Death of political economy
• Death of pluralism
• Whig historical method
• Monotheoreticism
• Death of scientific method

23. To understand this economy aright, we must remember that it embraces not
merely the inorganic world, but also the phenomena of human life, [which]
though more modifiable than any others, are yet equally subject to invariable
laws; laws which form the principal objects of Positive speculation. Now the
benevolent affections, which themselves act in harmony with the laws of social
development incline us to submit to all other laws, as soon as the intellect has
discovered their existence. The possibility of moral unity depends, therefore,
even in the case of the individual, but still more in that of society, upon the
necessity of recognising our subjection to an external power. By this means our
self-regarding instincts are rendered susceptible of discipline. In themselves they
are strong enough to neutralise all sympathetic tendencies, were it not for the
support that the latter find in this External Order. Its discovery is due to the
intellect; which is thus enlisted in the service of feeling, with the ultimate
purpose of regulating action.
-August Comte 1856

24. CONSEQUENCES FOR THE ‘SCHOOLS’
• Price behaviour
• The firm has to behave as a ‘rational agent of reproduction’
• ‘markup’ is literally impossible
• Price and value
• Sellers pay a different amount of money to what buyers receive
• Of course there is a transformation ‘problem’
• Rate of profit cannot decline
• Institutions act as agents of the market, not vice versa

25. TWILIGHT OF THE POSITIVIST GODS

26. THE ‘DANGEROUS’ VERSION IS PLAUSIBLE
DURING BOOMS
• But not during great depressions
• Then it becomes obvious that the ‘safe’ version is wrong
• The ‘mavericks’ come to the fore
• They ‘rediscover’ certain basic truths which recur
NOTE: in poor countries, the ‘safe’ version is obviously wrong most of the
time
This is why Marx is more popular in poor countries

27. 88
90
92
94
96
98
100
1948 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003 2008
Percentageofcivilianworkforcein
employment(inverseofunemploymentrate)
• ‘Neoliberal ascendancy’: partial and temporary relief
• Achieved at expense of third world (see later)
• Failed of its own accord (2008 crash)

29. 0%
2%
4%
6%
8%
10%
12%
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
US Net Investment as share of GDP
Trend

32. -1
0
1
2
3
4
5
6
7
8
9
10
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
$US Trllions
Capital Outflows
Industrialised
Transition
The Rest
China
Source: International Financial Statistics (IMF); Capital outflows = FDI out + Portfolio out + Other Investments out
Calculation: Geopolitical Economy Research Group Data Network.
For information contact secretary@geopoliticaleconomy.ca

33. 0
20
40
60
1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016
Fundamental Inequality Index (GDP
per capita relative to first world)
Third World China

34. 0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
Gross capital formation/GDP
USA China
But….

35. CAUSES
• Money and M-C-M
• The investment mechanism
• As capital accumulates, return on capital declines
• Financial growth becomes an alternative to productive growth
• Stagnation
• Geographical unnevenness is inherent in accumulation
• Positive feedback creates technological monopoly
• Technological lead of rich countries only overcome by developmental states

36. COUNTERREVOLUTIONS IN
ECONOMIC THOUGHT

37. THE AGE OF FALLACY
• Say’s fallacy
• Comparative advantage fallacy
• Both acknowledge to be false
• Both embedded in equilibrium model

38. THE FIRST COUNTERREVOLUTION
• Smith makes rent an addition to output
• The reward to a factor of production
• Ricardo discovers rent is a deduction from output
• Arising from the landowners legal monopoly of a scarce resource
• Ricardian socialists say profit also is a deduction from output
“if such ideas were to spread they would be subversive
of civilised society”
- John Stuart Mill

39. THE SECOND COUNTERREVOLUTION
As an author Karl Marx was enviably fortunate. No one will affirm that his work
can be classed among the books which are easy to read or easy to understand.
Most other books would have found their way to popularity hopelessly barred
if they had laboured under an even lighter ballast of hard dialectic and
wearisome mathematical deduction. But Marx, in spite of all this, has become
the apostle of wide circles of readers, including many who are not as a rule
given to the reading of difficult books.
- Böhm-Bawerk
The problem is not that Marx is wrong
The problem is that Marx is popular

40. THE THIRD COUNTERREVOLUTION
• Equilibrium arose from a debate within Marginalism
• Werner Sombart: “mortal sin against logic.”
• So heterodox economists don’t pay much attention to it.
• But actually, it transformed the whole of economics
• It became the standard ‘method’ for generating ‘safe’ theories

41. WHAT IS GENERAL EQUILIBRIUM?
• Dominates since WWII
• Not a theory but a method;
• Every school has an equilibrium variant
• There is thus no ‘correct’ or ‘superior’ school;
• ‘Safe’ theory no longer an alternative to Keynes, Marx, Veblen,…
• But within Keynesianism, Marxism, Institutionalism, etc.
• Orthodox Keynesianism, Western Marxism, New Institutionalism, etc.

42. REWRITING MARX TO MAKE SURE HE IS
WRONG
Alfred Marshall said once of Ricardo: ‘He does not state clearly, and in
some cases he perhaps did not fully and clearly perceive how, in the
problem of normal value, the various elements govern one another
mutually, not successively, in a long chain of causation’. This description
applies even more to Marx … [who] held firmly to the view that the
elements concerned must be regarded as a kind of causal chain, in
which each link is determined, in its composition and its magnitude,
only by the preceding links … Modern economics is beginning to free
itself gradually from the successivist prejudice, the chief merit being
due to the mathematical school led by Léon Walras.
Bortkiewicz 1905.

43. A NEW TYPE OF REACTION
• Not simply to present theories other than Marx’s (which is perfectly legitimate)
• but present such theories as the only legitimate possibility
• by misrepresenting and thereby discrediting Marx.
• It succeeded where the two previous counter-revolutions failed,
• It offers self-evidently false accounts of observed reality,
• But these can now be defended by pretending there is no alternative.
• It constitutes, in short, censorship

44. A NEW TYPE OF ERROR
• All such theories share fundamental shortcomings
• They are ‘Say’s Fallacy’ economies – no general glut is possible
• Money is a veil – a mere numeraire
• Crisis is impossible
• Unevenness is impossible
• So, the time is ready for a ‘new revolution’ in theory
• Heterodox economists should work together to achieve it

45. CHINA HAS SPECIAL ROLE TO PLAY
• China changes the game
• Shows poor country can break out of the development trap
• Shows growth is possible if state plays strong role
• And with modified property relations
• Therefore, the possibility and duty of a new basis for economics
• But requires understanding limitations of Western Orthodoxy
• In all schools and fields of study