‘Economics of the 1%: How Mainstream Economics Serves the Rich, Obscures Reality and Distorts Policy’ reviewed by Bill Jefferies

John Weeks is a veteran Marxist academic and economist. His Economics of the 1% is a popular, but most definitely not vulgar explanation of how modern neo-classical economics, the brand of mainstream economics taught in every university in the world, is other-worldly and unreal. It covers similar ground to other recent critiques of the neo-classical synthesis, notably Steve Keen’s Debunking Economics, but is aimed at a wider, less specialist audience.

Weeks contrasts neo-classicism, predicated on the assumption of perfect markets, competition and full employment, with various rival explanations of the world from Keynesian to Marxist. This forms the basis for what he considers to be the essential division in economics, between, on the one hand, the panglossian neo-classicals, and, on the other, those who recognise that markets are imperfect, that there are limits to competition and most importantly, that unemployment exists. Explaining how the mainstream fantasy came to dominate the world of professional economic theory and commentary is the purpose of this book.

Weeks shows how professional economists conceal the real workings of the capitalist economic system in the interests of the rich and powerful. They foster ignorance to flog a theory – a professional fraud – that justifies reaction. Frustration grips the page. The reader feels Weeks’ pain. The economics establishment peddle “fakeconomics” – a set of lazy contradictions – hidden behind a mass of mathematical mumbo-jumbo, to justify their own existence and that of the system they serve. Nevertheless, Weeks’ argument is not an anti-market one per se, rather Weeks favours the regulation of markets to address their imperfections, since for him there is a middle of the road. He frequently cites the US President Franklin Delano Roosevelt (FDR), the 1930s architect of the new deal, and Paul Krugman, the Nobel-winning economics professor and author. These are a curious pair to choose. FDR enacted the reform of the US economy during the Great Depression to head off the pressure of the US working class for more fundamental change, while Paul Krugman is what Steve Keen, amongst others, calls a salt-water economist. Krugman is part of the mainstream, but slightly salty. Krugman admits the odd fault with the neo-classical orthodoxy, only to more effectively defend its main propositions. After all, as Krugman admits, he’s done very well out it.

Weeks examines the assumptions behind perfect competition, the basis of all neo-classical economics, a never-never-land where numerous small firms produce a homogenous good, have no influence on market price, enjoy perfect information, and where there are no barriers to a firm entering a sector or costs of leaving it. Weeks makes the obvious point that perfect competition cannot exist and never has. It is like considering the qualities of a horse by comparison with those of a unicorn. This market exists only inside the imaginations of neo-classical economists, where an impersonal “auctioneer” sets the price without reference to actual market participants. In this fantasy Walrasian general equilibrium theory the market has simultaneous purchases and sales, never produces surpluses or shortages, and no haggling over price occurs.

Weeks calls this fakeconomics – the study of exchange relationships that have no counterpart in the real world, and are endowed with metaphysical powers. It is buttressed by Nobel prizes – fake, not real (here too) – issued since 1968 by the Central Bank of Sweden. These prizes have demonstrated the economic rationality of slavery, the subordinate role of women at work, and provided vindication for Long Term Capital Management, a scheme that collapsed with losses of $4.6 billion in 1998. A powerful combination of self-interest is described, where mainstream economists validate and are validated by their adherence to the rules of the club, established not by the approximation (or otherwise) of theory to reality, but by a subjective standard known only to them.

Weeks explains the fundamental difference between labour markets – better called jobs-markets, he thinks – and all other markets. The seller cannot separate themselves from the sale. Unlike any other exchange, workers sell their capacity to labour, not the product of labour itself. This means that the use the purchaser can garner from the seller is variable, the effort that the employer extracts from the employee is not technically determined. The capitalist buys labour in order to produce more, to create surplus commodities, the workers buys commodities in order to consume at all. This fundamental distinction is the origin of class society, and of the surplus value extracted from the working class by the capitalist system. This rather obvious point is the foundation of Marx’s labour theory of value. It is highly contentious, but Weeks does not explain the point of contention, or the answer to it. Rather, Weeks skirts around the issue, to assert that “production” is the source of all value. There is no reason to be so abstemious.

The distinction between labour power and all other commodities provides the only credible explanation for the origin or existence of surplus value. It is what Steve Keen calls the negative proof in favour of the labour theory of value. The positive proof, according to Steve Keen and convention, falls down due to the so-called transformation problem, Marx’s explanation in Volume III of Capital, of how value added in production is transformed into the prices of commodities through competition. Marx accepted the limitations of comparative statics to provide a mathematical illustration of an actual process. The contradictions that have been discovered in the model forget this.

Way back in 1907 von Bortkiewicz, a Russian former Legal Marxist, demonstrated that if you extended Marx’s model, so that the output prices formed the input prices of the next round of production, then there was a divergence between the total of values and the total of prices. In other words, if you accepted the legitimacy of von Bortkeiwicz’s extension of Marx’s tables, then Marx failed to meet the conditions for static equilibrium. This is taken by Steve Keen, amongst others, as mathematical proof that labour cannot be the source of all value. It is why economists agree that value is created by “production”, rather than labour in production. But if as von Bortkiewicz acknowledges, the “contradiction” in the model reflects a real contradiction in capitalist production, then Marx’s explanation is fine. This is just the point. Marx’s model abstracts from several key facts; capitalism is a system of dynamic disequilibrium, not static equilibrium; as values are transformed into prices, the organic composition of capital changes due to the very process of transition; prices always fluctuate around values, the prices demonstrated in his tables illustrate a social average, rather than an unchanging absolute; and rates of profit are never equal, but have a tendency to equalise. The reason that Marxists have failed to solve the transformation problem is very simple – it cannot be solved – (von Bortkeiwicz designed it so). Indeed the alternative, advocated by Steve Keen amongst others, is to replace the labour theory of value with … nothing. No explanation of what value is, or how it is created. This is hardly satisfactory, given the trivial nature of the mathematical case against Marx.

Weeks illustrates the political prejudices of the establishment economists through the example of James M. Buchanan, a (faux) Nobel economics prize winner, who claims that “No self-respecting economist would claim that increases in the minimum wage increase employment. Such a claim, if seriously advanced, becomes equivalent to a denial that there is even minimal scientific content in economics, and that, in consequence economists can do nothing but write as advocates for ideological interests” (35). Fakeconomists have been unable to produce any empirical evidence to support this idea, for the simple reason that by increasing wages consumer demand rises and so does employment. In the real world, where there is more than one commodity, the effect of wage increases on employment can only be known after the event. Fakeconomists advocacy of low wages is “an ideological construction intended to justify lower wages and higher profits, and to blame unemployment on workers themselves” (37).

Weeks traces the repeal of the Glass Steagall Act of 1933 that was enacted after the banking collapse that followed the Great Crash of 1929. It strictly regulated bank behaviour, notably through prohibiting banks from speculating on the stock market. The Act was repealed in a series of steps starting in 1980. The financial consequences of this repeal directly led to the collapse of 2008. The dominance of finance was sustained by the “Big Market Lie”, which “represents an unholy symbiosis of the pseudointellectual abstractions of the fakeconomics profession – the respectable partner – and the extremist rants of the political Right …This marriage of the banal theory and venal politics spawns subsidiary lies that I now dissect” (60). Weeks attacks the notion that scarcity determines the nature of economic decisions, and that wants are unlimited. There is no law of supply and demand, he asserts. Or rather there is no supply or demand as described in the schedules of neo-classical economics. Supply and demand curves show quantities for hypothetical prices when the actual selling price is unknown to the vendor. When anticipated sales, not anticipated prices determine production, the anticipated quantity demanded dictates the actual quantity supplied, so supply and demand are the same thing. If at the going price sales are potentially unlimited, the production will always be at full capacity. Supply is one unique amount, unaffected by price, unless it falls below unit cost. How to save the law of supply and demand, when neither constant, falling or rising unit costs can generate supply curves? The question demands the solution, and provides it: the Law of Diminishing Returns. This law is a convention required by the model, not derived from objective reality. Another example of how neo-classicalism creates the world it attempts to critique.

So what about scarcity? The problem is that resources are abundant, not scarce. Labour is unemployed, and capacity is unused. But this unemployment, it is discovered, is “voluntary”, and therefore does not count. Meanwhile, the ability of markets to meet need, or maximise welfare ignores the rampant income inequality in society. While the very public furore around government debt ignores the fact that much of that debt, 40% in the case of the USA, is owed to other government institutions. A debt you owe yourself is no debt at all. At the same time, the monetarist tale that the quantity of money determines inflation fails, as the quantity of money can change through individuals creating it via the use of personal credit and electronic money, or by banks generating loans outside of government control. This point explains why the rightist argument that public investment “crowds out” private investment is false too. If resources are idle, if there is unemployment, then governments, businesses and households can all spend more, while there is simply no empirical evidence that deficits increase interest rates. If anything, the data supports the idea that large deficits are associated with low interest rates, not high ones. For if resources are idle, there is ample money available for borrowing. As deficits are associated primarily with recessions, the cost of financing deficits falls during crises, rather than increases. And so it was German mercantilism that caused the Euro crisis, not high welfare spending in the PIIGS (Portugal, Italy, Ireland, Greece, Spain).

Weeks concludes by explaining how acceptance of this austerity prevailed against all the evidence and common sense. The cause lies in the secular decline of trade union influence and the parallel rise in the power of capital (185). This decline explains the fall in the value of real working class earnings as a financial oligarchy increases its power at the expense of contemporary democracy. 

Weeks’ Economics of the 1% is a powerful indictment of the state of the contemporary economics profession. It demonstrates the feeble, logically incoherent and inconsistent nature of its key assumptions. It shows how its policy prescriptions, against all empirical evidence, aid the rich and powerful. And yet is exists, shaken by its demonstrable failings before and after the 2008 credit crunch, but still more or less intact, essentially unreformed. The nexus of individual material benefit for the caste of professional economists and their usefulness for the rich and powerful in obscuring the crisis wracked and exploitative nature of the capitalist market remains. It is truly the economics of the 1%.

8 July 2014