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«Tamara Lothian* Columbia University – Center for Law and Economic Studies Roberto Mangabeira Unger* Harvard University March 1, 2011 * © Tamara ...»

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It nevertheless suffers from two connected defects, characteristic of the dominant tradition of economics throughout its history, before and after the marginalism of the late nineteenth century. These defects compromise the value of Keynes’s insights for the understanding and the overcoming of the slump. The ideas and methods capable of remedying 61 them do not simply fill a gap in our knowledge; they modify the significance of what we have already discovered.

The first such defect is the psychological and anti-institutional bias that runs through the entire history of English political economy after Adam Smith. (Smith was himself as free of this defect as his sole intellectual counterpart in the history of economics, Karl Marx.) This tradition is the chief source of the economic ideas now dominant in the world. The theoretical center piece of this bias is the assumption that, despite minor national variations, a market economy has a single natural and necessary institutional form.

In speaking of a market economy, we make, according to this view, implicit reference to a detailed system of private-law rules, beginning with the regimes of property and contract. The diversity of legal traditions in the world, such as the distinct doctrinal taxonomies of the civil-law and common-law worlds, does not diminish, and cannot disguise, the functional convergence. This convergence, rather than being the outcome of a history whose constraints it should be our purpose to overcome, is, according to this view, the progressive revelation of a truth.

It is remarkable that this idea of the inner legal logic of a market economy has maintained its ascendancy in the face of its deconstruction by a hundred and fifty years of legal analysis. No theme is more constant in the legal thought of this historical period than the step-by-step and often involuntary discovery of the multiplicity of alternative institutional forms, defined in legal detail, that a market economy can take, each form with different consequences for the distribution of advantage as well as for the organization of production and exchange.

Keynes’s view presents a striking example of the theoretical and practical assumptions of this approach. The entire discourse concerns the 62 transmutations of large-scale economic aggregates within an institutional order that is itself left not only unchallenged but also (save for particular organizations, like the stock market) unnoticed. A corollary of this view is the failure to consider the implications for the level and course of economic activity of alternative sets of institutional arrangements to govern the relation of finance to the real economy. It is failure of vision all the more striking in an economic theory that takes as its point of departure the observation that a money economy and a barter economy work in radically different ways. For what is finance but the enactment of the power of money to go its own way, and, in going its own way, to serve the real economy better or worse?

The central categories in Keynes’s General Theory -- the propensity to consume, the preference for liquidity, and the state of longterm expectations -- are all psychological. In the spirit of the tradition that formed him and against which he staged his incomplete insurrection, Keynes represents them as psychological forces unqualified by particular contingent and revisable institutional settings.

A central idea of this essay has been that the crisis, the slump, and the recovery cannot be adequately understood and confronted without taking into account the institutional indeterminacy of the market economy, and therefore also the relation of finance to the real economy.

The same principle applies to the arrangements governing the relations between governments and firms. Ultimately, it must apply as well to the basic rules of property and contract. It is the point of Marx’s criticism of English political economy all over again, only expunged of the taint of

functionalist necessitarianism that runs through all of his social theory:

the economists have represented as laws of the economy what are only the laws of a particular type of economy, that is to say, of a certain way of organizing production and exchange.

The second major flaw that Keynes’s mature theory shares with the 63 tradition against which he rebelled is its lack of an account of the diversity of the stuff on which the mechanisms of competitive selection established by a market economy operate. The results of competitive selection of products, of forms of production and exchange, and of alternative dispositions of resources and of time, must depend on the range of the alternatives from which the comparative exercise may choose.

The more we come to think of innovation and experimentation, in the forms as well as in the objects of production and exchange, as central to economic growth, the more significant does this problem become. A theory that takes the supply of the diverse stuff to which competition applies for granted can supply no proper account of innovation or experimentation, and therefore no adequate view of growth. It must accept as given what it should explain and show how to change.

It is true that much of the economic theorizing of recent decades has focused on innovation and that, among these theories, some have sought to provide an account of technological innovation consistent with the established body of economic theory (e.g., endogenous growth theory). However, these developments have remained largely confined to technological innovation as distinguished from institutional innovation.

They have nothing to say, for example, about the significance of the existence of different sovereign states in the world, as an opportunity to radicalize experimental divergence in the forms of economic life, or about the ways in which the effect of technological innovation is always shaped by the institutional setting in which it takes place, or about the prospects for giving the genius of the market -- as a system for the experimental discovery of new possibilities of production -- a more general and a more radical expression. When technological innovation is separated from these other forms of experimentalism, it appears to be 64 innovation about things when all economic innovation, even when it appears to be about things, is, at bottom, innovation in the ways we cooperate. Its true object is society rather than nature.

Think of it this way. The established economic theory is like half of the contemporary Darwinian synthesis in the life sciences: the half that is about competitive selection, bereft of the half that is about the diversification of the genetic material on which natural selection works.

The result is a truncated theory, powerless to grasp what innovation is and can become and therefore unreliable as a guide to recovery and prosperity.

Nothing in Keynes’s doctrines or in the ideas of the Vulgar Keynesians, and little in the teachings of their adversaries, suggests a way to redress this truncation of insight. Any vigorous response to the slump, must see the recovery as an occasion not to get back to business as usual, once the shadow has passed, but to create an economic order in which many-sided innovation assumes a more central role.

This theoretical deficiency gains practical significance today in the light of circumstances to which the argument of this essay has drawn attention. A new form of practical organization has emerged in the world. It cannot adequately be described as simply high-technology, knowledge intensive production. Its methods and practices translate practical experimentation into a way of working together. It does more than destandardize products and services and replace many forms of centralized production with decentralized contractual networks. It also attenuates the contrast between jobs of supervision and execution. It attenuates rigid contrasts among specialized jobs. It gives a practical and collective form to the process of analytical decomposition and synthetic recombination. It breaks down the contrasts between cooperation and competition, traditionally associated with distinct realms of activity. It increases our chances of creating an economic system in which people 65 will use machines to do whatever they have learned how to repeat, and reserve their time for that which does not yet lend itself to formula and mechanical repetition. There is better reason to hope that in the future no man will need to work as if he were a machine, in denial of his nature and in forgetfulness of his power. Such a form of production is practical reason on horseback.

In the world today, however, it remains largely confined to limited sectors of the economic order. The vast majority of the economically active population remains locked out of these parts of the economy, and the revolutionary methods in which they pioneer continue to be largely denied to the rest of the production system.

The response to the crisis and the slump would provide an opportunity to extend the reach of this experimental form of production.

It is, however, an outcome than can be achieved only by that combination of heightened resource mobilization and institutional innovation that characterized the war economy. Moreover, because its ambitions are more general and far-reaching than those of any war effort, it would require as well a vast advance in the intellectual equipment of the ordinary working population.

The institutional arrangements would, at the outset, be those that innovate in the relations between governments and firms beyond the limits of the American model of arm’s length regulation of business by government and the northeast Asian model of centralized, bureaucratic formulation of trade and industrial policy. They would also be those that favor practices of cooperative competition among firms and among teams united in contractual networks, The educational empowerment would be designed to afford ever larger numbers of workers and citizens mastery of generic and flexible practical and conceptual capabilities.

We must solve these problems in ways that also reshape the 66 relation of production to nature. We must so approach the development of a less predatory approach to the natural base and setting of production that it becomes less a pretext to abandon large conflicts and controversies over alternative forms of social and economic organization (as if nature were a great garden in which we seek refuge from the disappointments of history) than an occasion to reinvent such contests in more telling form.

Vulgar Keynesianism has nothing to contribute to the pursuit of these concerns. Neither, however, does the economics of Keynes himself. It is a theory of the inducements and inhibitions to spend and to invest within an institutional setting of production and exchange, and on the basis of a level of diversity in the material to which the competitive selection of the market applies, that it takes for granted. It is, for all its heterodoxy, a view from the inside. But a view from the inside is no longer enough to make sense of our circumstance and of our options. It is powerless to guide us in making use of the opportunity for insight and for transformation with which crisis and its aftermath provide us.

This essay does not offer a theory, even in outline, correcting the defects that the economics of Keynes shares with the economics of his adversaries. It nevertheless provides an example of practical thinking informed by other ideas and intentions. It offers a down payment on intellectual obligations that have yet to be fulfilled. It proposes an agenda of economic and legal analysis as well as a program of institutional reconstruction


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