Economics for Dynamic Economies
By Angelo Fusari
In this article Angelo Fusari summarises the themes in his newly published book, A New Economics for Modern Dynamic Economies. Innovation, Uncertainty and Entrepreneurship, Routledge (Frontiers of Political Economy), 2016, available in hardcopy and ebook formats.
It is becoming increasingly clear that a new economics is required for investigating modern dynamic economies and the coming social world. Important features of those economies, such as innovation, uncertainty and entrepreneurship, are usually considered capitalist features. This may have been true historically, but this book argues that the contrary will be true for the future: the full and efficient operation of those supposed capitalist features will increasingly require the overcoming of capitalist civilization. This book presents a theoretical framework for the interpretation and management of modern dynamic economies which demonstrates that deep institutional transformations are essential if we are to move beyond the current consumer-capitalist age and the age of the domination of financial capital.
The book arises out of a sustained critical reflection on (and dissatisfaction with) the current state of economic thought – a reflection based upon the systematic confrontation of current economics with the content of economic reality. It attempts to construct a theoretical framework more adequate than current formulations for the interpretation and management of the modern dynamic economies.
Part I considers basic aspects of modern dynamic economies that are largely ignored by the dominant schools of economic thought, or are at best mentioned merely for the sake of the appearance of completeness, and which, in addition, are largely misunderstood by the dissenters from the dominant doctrines. At the beginning, the book discusses some of the most important variables of modern dynamic economies, such as innovation, uncertainty and entrepreneurship as well as the explanatory power of their interactions, and directs some criticisms to past economic thought for completely or partially ignoring these variables. Afterwards, those criticisms are expanded by turning to the method of economic and social science, showing that the analysis of social reality needs a third method that is in addition to and distinct from those of the natural sciences and the logic-formal sciences – a method that is founded on completely different postulates, rules and classifications. On such a basis, some contemporary conflicts among schools of thought are discussed, particularly the opposition between mainstream and heterodox economics, which troubles current economic theory and even the teaching of eminent scholars. Then a representation of the whole economic system is offered, centred on the interrelationships between entrepreneurship, various kinds of innovations and radical uncertainty in a ‘dynamic competition’ process. The devised model has been formalized at the maximum level of sectoral disaggregation (one sector for each specific good) and simulated with a restricted number of sectors. It provides an explanation of business cycles that largely differs from current explanations, as it derives from the notion of dynamic competition and shows that the duration of cycles, especially the long waves, is shortened by the intensity of dynamic competition as a result of the values of some parameters. The analysis and formalization is then extended from the sectoral to the micro level, and a micro analysis with regard to the firm is developed, followed by a substantial broadening to radical uncertainty, the most typical and the most embarrassing element of economic dynamics, and probably, notwithstanding its growing importance, the most misunderstood.
In more detail:
The extension to the micro level provides a more complete representation of the economic process as a whole, bringing to light in particular entrepreneurial action. It shows the great gulf between the book’s construction and the Walrasian approach, highlighting the explanatory poverty of the latter. The question of the firm is considered in close connection with the phenomenon of radical uncertainty. Some of the main issues in the dense debate over the firm are set out and criticized, most notably the controversy between those who, distrusting organization and favoring spontaneous motion, tend to pass over the significance of the firm, and those concerned with the evolution of institutions that, on the contrary, see the firm as a crucial economic institution. The book also offers some reflections upon the problem of the size of the firm. An analysis of the limitations of and stimulants to dimensional growth is undertaken. A discussion is performed of the objective or institutional nature of the factors counteracting the boundaries to a firm’s dimensions, thereby obtaining knowledge of the degree of inevitability of the dimensional growth of the firm. In parallel, attention is dedicated to an increasingly incisive phenomenon in modern dynamic societies: radical uncertainty, clarifying at first the difference between expectation and uncertainty, with the former expressing the attempt to penetrate the inherent vagueness of the future, and the latter providing an expression of the degree of ignorance on future events as resulting from the instability or delusory nature of expectations. The importance of measuring the variable uncertainty at sectoral level is insisted on, with the benefits of BTS (Business Tendency Surveys), as enabling the definition of various indicators of radical uncertainty. The failures of opinion polls, as based on a probabilistic feature, in predicting the results of elections, are stressed. In the presence of growing changes in people’s opinions, it would be more judicious and illuminating to measure the degree of uncertainty based on the frequency of the changes of opinion with regard to different programmatic proposals or other questions. A simple model based on the interaction between uncertainty and innovation is formalized; it examines the connected business cycle; some econometric estimations of the model for Italy, the United Kingdom, France and Germany indicate differences between these countries in the operation of the phenomenon of dynamic competition.
Part II moves from the theoretical side of our work to the reformations it implies or suggests and to questions of political economy more generally. Specifically, the analysis now combines the account of the process of dynamic competition and the cyclical motion it implies, with the notion of particular historical phases of development: a combination disregarded by current economics and yet essential if we are to understand the changing character over time of growth processes and cycles. The earlier treatment of institutions now facilitates a distinction between different historical phases as well as a perception of the circumstances of their advent. This supplies important knowledge concerning the basic content of present and future ages as well as the changes over time of cyclical behaviour.
Those developments allow important clarifications on a theme that has generated substantial misunderstanding and yet long been a great source of inspiration for political economy, namely Keynesian and post-Keynesian assumptions as to the leading role of demand in the economy and in the definition of economic policies. The book points out that the appropriateness of demand-led modeling is referable to the phase of monopoly capitalism, as characterized by high profits, low wages and unstable expectations that hold investment back well below profits, thereby causing a systematic deficiency of effective demand. But such appropriateness is far less evident in more recent ages, which therefore demand an attempt to delineate a political economy more appropriate to newer phases of development. Moreover, the analysis underlines that the demand-led hypothesis cannot be applied to underdeveloped and dualistic economies: the operation of bottlenecks and diffused disequilibria prevents demand-led policies from stimulating growth and development.
The changing role of some important monetary and financial variables over the course of different phases of development is considered, highlighting the peculiar role of money in the phase of monopoly capitalism, characterized as it is by a chronic deficiency of effective demand. Then the author turns to the controversy between Keynesians and monetarists, and points out the inappropriateness of both interpretations to the phase of consumeristic capitalism. In the phase of financial capitalism, characterized by the dominance of international finance capital on a global scale, the inadequacy of both Keynesian and monetarist interpretations appears exacerbated.
The notion and the content of phases of development are of crucial importance if we are to be able to delineate the basic reformations needed over the course of life of economic systems. A key step in satisfying such a need is a sound proposal concerning the organization of financial markets that aims to eliminate the domination of financial capital that is characteristic of the current phase of financial capitalism. Thus a final section attempts to depict a national and international financial order not enslaving production but which is rather at its service.
The book also delves into the ethical dimension, primarily in relation to questions of social justice when combined with the operation of freedom and creativity. In other words, it is considered a functional need to combine diversity, which is essential to the expression of creativity, with social justice (which is essential to the extraction of the creative skills that are casually dispersed among a great number of people) so as to ensure a complete expression of individual skills and, hence, the realization of the connected evolutionary potential. It is clarified that this need also implies and requires the operation of some other important ethical principles, such as tolerance, free thinking, and the role of the individual. Consequently, these organizational and ethical needs appear to be endowed with an objective substance, rather than the subjective one imputed to them by ethical relativism.
Finally, the book analyzes a central question of modern society: how does one best use ‘the instrument of the market’ – this being a basic mechanism of organizational efficiency in dynamic economies as characterized by a high degree of uncertainty – in such a way as to prevent the market itself from turning everyone and everything into expendable tools, with consequences that are ever more disastrous for equity and for human dignity. The purpose here is to envisage the possibility and, more importantly, the necessity of economic forms of human society that are different from those that have emerged from the spontaneous transformation of the Western world. Persisting in the denial and ignorance that such a possibility of change is indeed possible will inevitably lead to the (often fanatical) conviction that the capitalistic market, with all its degenerations and inefficiencies, is the unavoidable, even if bitter, outcome of institutional evolution – a necessary, teleological fruit of human exertion; in a sense, the end of history.
Students and practical people’s attitudes toward social phenomena oscillate between two opposite positions: the idea that those phenomena must be considered and accepted as spontaneous events and the pretension to govern them. This book points out the intermingling of the two aspects in the life of each social system. As a matter of fact, the history of human societies and the logical sense confirm that spontaneous forces and their governance always operate together, even if one or the other can be largely prevalent in various cases. The suffocation of spontaneous forces obstructs creativity, thus causing stagnation. On the other hand, the ability to govern society is more and more required by the steady acceleration, via creativity, of social change. The book insists on the possibility of driving market economies outside a capitalistic context (what after all is a necessity in the modern world) and the way to do that.
One of the chief economic problems of the West has been its increasing reliance on a strange sense of sublimated superiority, which it has erroneously imputed to the most proximate origin of its wealth: the capitalist market. The inference is mistaken in that the source of this wealth, whatever the merits and demerits of its nature and uses, lies in human ingenuity rather than in the capitalist machine, whose essentially constrictive and feudal countenance has come, fraudulently, to represent Western economy as a whole. But capitalism is not Western inventiveness as a whole; it is but a proprietary scheme that has usurped all the fruits of Western creation. And this tragic quid pro quo has led the West to clash violently with the rest of the world. In truth, the capitalist system is the source of so many disadvantages to the Westerners themselves: namely, social injustice, poisoned labour relations and the threat to human dignity; social and geographical disequilibria; the wideness of fluctuations; the sorceries and distortions promoted by the hegemony of financial capital; and finally the suffocation of entrepreneurship, freedom and growth.
From: pp.16-18 of World Economics Association Newsletter 6(6), December 2016