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Must we Restructure Economic Theory?

William Krehm

It is either naive or excessively cunning to mistake what has happened to the world economy for a cyclical event. What we are confronted with today is the breakdown of the assumptions underlying the "pure and perfect" market and its acrobatic extension into Deregulation and Globalization. These have devastated corporate as well as government accountancy. Not even basic morality has been left untouched.

The time has come to rethink the very structure of economic theory. Despite its immense inconvenience, there is no way of avoiding the task. Like discussions on the trials of old age, what clinches the argument is the alternative.

It wouldn't be the first time economic theory underwent drastic restructuring. Marginal Utility distracted attention from the bloody class warfare that climaxed with the Paris Commune of 1871. The need arose to blinker society's gaze onto the market from the factories whose horrors were portrayed by Dickens and Emile Zola. Wage workers were recast as just traders, each comparing the satisfactions of selling his labour at the wage offered against the joys of leisure in his parlour. Of the three independent creators of marginal utility theory two Jevons and Menger actually published their great books in the actual year of the Commune, while Leon Walras did so two years later. The theory slackened the bonds with the real world. They provided the genes that eventually, when they put the economy into orbit, gave us Enron.

We must take a hard look at the claims of equilibrium theory to scientific status. Strike one: Its profusion of differential and integral signs can't be taken seriously, be-cause of the assumptions to make possible their use - all the actors of the economy are of such insignificant size that nothing they do individually can affect the trend to equilibrium of the "pure and perfect market." Strike two: Shoving such non-market areas as the environment, the household economy, the subsistence agriculture of the world, and society itself into the category of "externalities." Clearly this is the distant source of the present "off-balance-sheet liabilities, and indeed morality that are convulsing the world.

The great classical economists in contrast sought out links with the real world. Their means of achieving this was the labour theory of value, or, alternately, the cost of production theory. These were structured in opposite ways. The labour theory felt that it knew the final value figure in advance. Its approach is breaking up a total rather than adding up the parts to get at the final figure. The amount of "average labour" that enters the production of a good is distributed between capitalist, landlord and worker on the market. It used to be considered a weakness of the labour theory that it was hard arriving at a figure for "average labour." That has turned into a strength: it leaves an "air hole" for new factors previously ignored that force themselves upon our attention. Adam Smith, the real Adam Smith not the stuffed manikin that economists in uniform have invented actually switched from one to another of three theories of value, depending on the angle of vision most suitable for the subject at hand. Moreover, value theories are most helpful for what they warn us not to do, rather than for the precision of their answers.

The cost-of-production value theory invites us to add up columns for answers-much as accountants do in their better moments.

The Perils of Number Crunching

This variety of historical value theories suggests the importance of studying interrelationships and structures - rather than just crunching disembedded numbers. That has been the main trend of mathematics

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It is a war of attrition with no respect for human life, no decency, no rules, no hope for victory for anyone and no ending.

Unless we see that we are at war we cannot hope for peace.

But the instant that the human race wakes up to the fact that it is at war, � peace is at hand.

Because we can do an analysis to see the root cause of the war.

This is an exciting proposition, because it has its own built in safety device. Until the root cause of the war is located and correctly identified, the situation remains hopeless, as everyone with their eyes open will see.

But on the instant that the true and real cause of our grief is revealed, we can be certain of peace and prosperity. A world where everyone can win, and survive gloriously.

It is well worthwhile to wake up. Shall I bring you your morning cup of tea?

President, International Association for Monetary Reform

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