the economics of power.docx
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the economics of power.docx
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theeconomicsofpower
ThePowerofEconomicsvs.TheEconomicsofPower
Irecentlyattendedanimportantconferenceinwhichvirtuallyalloftheparticipantswereverymarketfriendly.Theirpaperswereallverythoughtfuland,withinlimits,madeagreatdealofsense.Iwaspleasantlysurprisedtolearnthatthepresenterswereunusuallyopentoexchangeswithpeoplewhoseideasdifferedfromtheirown.
OneextraordinarypapergaveanindepthanalysisofthedevelopmentofRonaldCoase'sinfluentialsuggestionforenvironmentalregulationthroughnegotiation.Ifoundnothinginthepaperwithwhichtodisagree.Solongasallaffectedpartiescouldnegotiateamutuallysatisfactorysolution,Coase'sprocedureseemedthoroughlyunobjectionable.Besidestheobviousproblemofidentifyingwhoshouldhavestandingtoenterintosuchnegotiations,oneseriousproblemremained:
theabsenceofanyconsiderationofpower.
Iamgoingtodescribeseveralexamplesoftheexerciseofpoweroftenrawpowerwhichfalloutsideofpurviewofeconomics.Iwillnotattempttodefinepower,butIthinkthatmostpeoplewouldconsidertheseexamplestofallwithintheirownconceptionofpower.
LetmebeginwiththeexampleofthesocalledCoasetheorem.Supposealargecorporationwantstolocateatoxicwastedump,whichthreatensmypropertyvaluesorevenmyhealth.Theprofitsfromthisventuremightwellbesufficientforthecompanytooffermeenoughcompensationtoagreetotheestablishmentofthetoxicwastedump.Ifso,boththecompany'smanagementandIwouldbemadebetteroffbysuchanarrangement,ignoring,ofcourse,theeffectsonothers.Inreality,lackingpower,Iwouldbeunlikelytogetmajorcorporationstositdowntonegotiatewithme,letalonesatisfactorilycompensatemeoranyoneelse(saveafewfriendlypoliticians)fortheirdestructiveactivities.Eventakingsuchbusinessestocourtisvirtuallyimpossible.IntheunlikelycasethatIcouldbeabletogetahearingatcourt,anylegalhelpthatImightaffordisalmostcertaintobeoutgunnedbythecorporation'spowerfullegalteam.
Mostoftheotherpapersattheconferencediscussedhowmarketsevolvenaturallyandworkefficiently.Nowherewasthereanyconsiderationofpower.Theparticipantsclearlyunderstoodthedisciplineofeconomics,butthatwasalsotheirproblem.Theirtrainingconditionedthemtoinstinctuallyavoidanyconsiderationofpower,otherthanthosepresumptiveabusesofgovernmentthatinterferewiththefunctioningofmarkets.Inconventionaleconomics,powerisreducedtoametaphor.Wehavethepowerofthemarketorthepowerofcompetition,butcorporatepowerisnowheretobefound.
Thisexclusionofpowerfromeconomicshasalonghistory.Inresearchingmybook,TheInventionofCapitalism,astudyofclassicalpoliticaleconomists'attituderegardingprimitiveaccumulation,Iwasstruckbytheircavaliertreatmentofthisabusiveexerciseofrawpower.Overandaboveoutrightdispossession,thestateallowedthearistocracytoenforcetheGameLaws.TheseremnantsoffeudalismgrantedexclusivepropertyrightsinwildlifetotheKing,butthelawhadlongfallenintodisuse,atleastuntiltheearly17thcenturywhenmoderncapitalismwastakingholdinEngland.
Acommoner'spunishmentforkillinganimals,washarsh,tosaytheleast,evenwhenthepurposewastopreventthecreaturesfromdestroyingafarmer'scrop.Suchcroplossesweresignificant.Infractionsofthelawmetwithpenalties,whichrangedfromexecution,toincarceration,whichwasmorecommon,ortransportationtoAustralia,whichwasevenmorecommon.
Besidestheresultinglossesfromtheprotectedgame,hunterswerefreetorideroughshodthroughfarmers'fields,creatingevengreaterdestruction.OnemighthaveexpectedthepoliticaleconomistsatthetimetohavetakennoticeoftheGameLaws'violationoftraditionalrights,nottomentiontheeconomiccostsassociatedwithneofeudalfoxhunts.Althoughtheyweresilentaboutsuchabuses,theCornLaws,whichleviedatariffonimportedgrain,wereamatterofgraveconcernfortheearlypoliticaleconomists,eventhoughthethesetariffshadamuchsmallereffectoneconomicefficiencythantheGameLaws.ThedifferencewasthattheCornLawsinterferedwiththeefficientexploitationoflaborbyraisingthecostofasubsistencewage.Ironically,theGameLawsprobablydidmuchmoretoraisethecostoffoodthantariffsonimportedgrain.
However,theGameLawswereanimportanttoolofprimitiveaccumulation,preventingselfprovisioning,therebyforcingpeopletoenterthelabormarketinordertosubsist.Thispressureincreasedthesupplyoflaborandloweredwages.
Inotherwords,boththeenforcementofthegamelawsandtheabolitionoftheCornLawswereframedintermsofmakinglabormoreeconomical.Seeninthecontextofcoercivepower,however,boththeabolitionoftheCornLawsandtherenewedenforcementoftheGameLawsservedtostrengthencapital'sposition.
Politicaleconomistsofthetimeweretoomuchconcernedwithshowingthejusticeofmarketstoaddresssuchobviousexercisesofpower.However,intheirmoreprivatewritingsdiariesandletterstheyapplaudedtheuseofpowertopushworkersoffthelandandintowagelabor.Contemporaryeconomistsgenerallyfollowthistraditioninpresentingtheevolutionofmarketsasapurelyvoluntaryphenomenon,beneficialtoall.
Asapartialcorrectivetothisdistortionofreality,Irecentlypublishedabook,TheInvisibleHandcuffsofCapitalism:
HowMarketTyrannyStiflestheEconomybyStuntingWorkers.Asthetitlesuggests,animportantpartofthebookistoshowhowbothcapitalismandeconomictheoryhavedestructiveconsequences.Theothermainthreadofthebookdescribeshoweconomistshavegoneoutoftheirwaytocreateatheorythatexcludesallconsiderationsofwork,workers,andworkingconditions.Themainbenefitofthisexclusionisthatitconvenientlyeliminatesallconsiderationsofpowerfromthedisciplineofeconomics.Inthissense,theparticipantsattheconferenceIdescribedwereblameless.Theydidexactlywhat"good"economistsaresupposedtodo.Theproblemisthat"good"economistsdonotmakegoodeconomics,excepttotheextentthattheirworkprovidesusefulideologicalcover.
Thatcover,however,isincapableofcoveringupalloftheintractableproblemsofcapitalism.Oncethedamagebecomesobvious,powermaybrieflyenterintothepicture.Afterthecrisissubsides,powerquicklyreturnstoitspreviousstateofinvisibility.Whatismostremarkableisthataclearconsiderationofmainstreameconomictheoryshouldbeenoughtoalerteconomiststotheinherentcontradictionsinthisviewofthecapitalisteconomy.Suchaperspectivemight,atleast,becapableofmoderatingsomeofthemoredestructiveresultsofuntrammeledcapitalism.
Inanotherbook,RailroadingEconomics:
TheCreationoftheFreeMarketMythology,Iusedtheexampleoftherelationshipbetweenpowerandmarginalcostpricing.Letusenterintotheworldofconventionalpricetheoryandassumeastateofperfectcompetitionwherepricestendtomovetowardmarginalcosts(orevenmarginalrevenueifyouallowateensybitofmarketpowertocreepintothepicture).Inasmallvillageeconomybasedonhandicrafts,thisarrangementmightworksatisfactorily,butwhathappenswhenmarginalcostpricingoperatesinamoderneconomyinwhichfixedcostsareveryhighandmarginalcostsareinsignificant?
Withalittlethought,onecaneasilyseethatcorporationscouldnotcovertheirfixedcosts.Bankruptcywouldbecomecommon,somuchsothatitmightruintheentireeconomy.
Followingthelogicofmicroeconomicssuggeststhatbythe19thcenturytheintroductionofmoderntechnologieswithlowmarginalcostsledtowidespreadbankruptcies,especiallyinthecapitalintensiverailroadindustry.Otherindustrieswithlowmarginalcostsalsosufferedasimilarfate.
Mosteconomists,indoctrinatedwithatheoryofmarketefficiency,hadlittletosayaboutthisproblem.However,atthetimemanyofthemostpromisingeconomistswenttostudyinGermany,whichwastheonlysourceofgraduateeducationatthetime.TheseGermantrainedeconomists,whoreturnedtotheUnitedStates,hadnoproblemidentifyingthenatureofthesebankruptcies,inpartbecausetheyweresteepedinatraditionsimilartothatwhichKarlMarxexperienced.Giventhistraining,theseeconomistswerediscouragedbyirrelevanceofmuchofthemerchantorientedsimplicityofconventionaleconomics.TopromotetheirmoreholisticGermanicorientation,theyformedtheAmericanEconomicAssociation.
Giventheirmorerealisticunderstandingofeconomics,theseeconomistsrecognizedtheneedforsomekindofcountervailingpowertobluntthedestructivepowerofcompetition.Theyadvocatedtrusts,cartels,andmonopoliesasawaytogivecorporationsenoughpowertopreventthemarketfromselfdestructing.Nonetheless,perhapsmotivatedbycareerism,theleadersofthisneworganizationthenturnedaroundandwrotetextbookspraisingthewondersofperfectcompetition.JohnBatesClarkwasthemostegregiousexampleofthisduplicitousformofeconomics.
Ineffect,theseeconomistscarriedontwoseparateanddisconnecteddialogues.Onewaswiththerichandthepowerful,tellingthemhowitwasintheirinteresttobluntthepowerofmarketforces.Theotherwasintendedtocommunicatewiththeworkingclassesandtheirsympathizers.Here,theseeconomistswereattemptingtoshowthatworkers'meagerearningsweretheirjustrewards,accordingtothe'scientific'theoryofeconomics.Ineffect,thepowerofcompetitionshouldbeallowedtocollapsethelevelofwages.Incontrast,thestateshould
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