TheMarketForIdeas

The overarching question concerning complex modern economies is the following: are they symphonic systems, harmoniously coordinated for the smooth functioning of the human economy and society and the fulfilment of human needs? Are they, also, compatible with virtue, beauty, honesty, character and, in general, with the life well lived and human flourishing? Or, are they rather huge arenas of vice, profiteering, greed, impersonal cold human interrelations, instability and recurring economic crises and cycles etc.?

Now this is neither a new question, nor one posed or raised exclusively pertaining to the social world seen as an economic universe or from an economic point of view. One can find Plato, in his dialogue Philebos, raising it ontologically for the entirety of the universe: is the universe itself a chaos or a cosmos (Kline, 1982, p. 16)? Likewise, even if Aristotle has only relatively little to say concerning economics and society from the economic point of view in a couple of loci clasici in the Nicomachean Ethics and Politics, his long shadow – if I may say so – is felt even today. In his view – expressive to a significant extent of the ancient view of the Greco-Roman world – economic activity is at best second rate, inferior to philosophy, politics and military activity. It is down there on the scale of respectability with the technical occupations of “vulgar mechanics” or manual labour. It is fit for slaves or metecs, that is, foreigners with no political rights to participation in the life of the polis. While the genuine part of economic activity – the management of the household (oikonomia) – has at least some degree of respectability, it retains it only because – and to the extent that – philosophical and political life require resources. Thus, economics is subservient to politics.

Moreover, exchange, trade, money, intermediation and the like (chrematistike/chrematistics), are a step further away from respectability, and they can be thought of being necessary and useful to the extent that they complement the household. The farthest away from respectability are financial operations and the pursuit of monetary profit on the back of purely monetary capital. This is an activity with a dubious telos or, rather, with no telos at all, as there could be unlimited striving for profit. And this for Greek ears was base.

Now, unwrapping this characterization is no simple task. I will briefly elaborate here only two points concerning it. First, it must be said that it is not altogether clear what exactly has Aristotle witnessed in his own time (fourth century B.C.) in terms of economic dynamics (the volatile aspects he circumscribed under the chrematistike label). On the one hand, having no complete picture of economics – as Jörg Guido Hülsmann has observed[1] - Aristotle could not conceptualize an equilibrium of the monetary economy. Namely, arguing that there are no limits in the pursuit of monetary income, the ancient philosopher was basically saying that there is no equilibrium in the economy to put a stop to the pursuit of wealth by means of money (capital investment). Nevertheless, this was one of the most important results of classical economics, namely, that capital is invested in a certain line of business only as long as the return from is greater than that of other lines of activity. This means, first, that there are no apriori grounds that financial profits (interest from lending money) would necessarily be larger than profits from other sectors (trade, manufacturing; later industry, or services, for instance). Thus, the economic sectors included by Aristotle under the rubric of chrematistike can very well be an integral part of the entire economic system, obeying the same rules and supporting the general telos of providing the people with adequate means of subsistence and a flourishing life. Investing in agriculture, manufacturing, trade or banking (rudimentary as this must have been in Aristotle’s time) are, from an economic point of view, just species of the same genus.

Secondly, it is more than possible that what Aristotle has contemplated was not a “natural system of economic liberty” (in the terms of Adam Smith), but most probably an inflationary economy[2]. Thus, the discussion here reverts back to the idea that a modern complex economy can be perverted, distorted, disfigured by – among other things, such as natural catastrophes or moral disasters, such as widespread use of narcotics or pornography and prostitution – poor economic policy, especially monetary policy. An inflationary context can lead to an overextension of the financial and monetary sectors, thus creating the impression that there is a perennial situation of greater profits in finance as compared to the other sectors. Thus, the “natural limits” of this part of the economy would not be very much in sight, presenting the analyst with the peculiar type of problem that bothered Aristotle: endless, purposeless pursuit of gain, bound to become pathological for the person, and corrosive for society.

The (inherently) stable or unstable nature of the market economy is a topic which will probably forever figure among the disputable or debatable ideas in economics. For instance, if we compare the perspectives of two very important economists of the XXth century, Ludwig von Mises and John Maynard Keynes, we discover almost polar opposite views[3].

Thus, for Ludwig von Mises, the capitalist free-market is fundamentally a social order, based on social (human) cooperation. The adequate incentives provided by a regime of private ownership of the means of production facilitates the efforts of all participants to the market process – which is at the same time a social process – to allocate resources as best as possible in order to satisfy the hitherto unsatisfied most urgent needs of the consumers (as Mises often formulates the matter). More importantly, the fact that the modern economy is a monetary one, and that a structure of monetary prices exists which is daily renewed by the actions of all market participants, is a condition of possibility – for Mises – for the rational allocation of the scarce factors of production. Thus, given money prices, the entrepreneurs – but no only them, as ultimately, in market economies, even consumption becomes a calculation-dependent process – are able to engage in the crucial process of economic calculation of profit and loss, the compass which tells them whether they allocate resources for the better or for the worse. This ubiquitous process of calculation which adjusts daily the structure of prices is, in the Austrian economists’ view, a type of an intellectual division of labour (Salerno, 1990) with coordination properties at the level of the whole economic process. This process is what, fundamentally, is lacking under a socialist system based on the command economy, so that someone like Mises speaks of socialism as an “impossible system”.

Moreover, when we zoom in into what could be called “the entrepreneurial heart of the market” – namely, the capital market in general and the stock exchange in particular –, Mises considers it especially important for the general economic process. Specifically, for him it is here, on this level of the market, that true and genuine entrepreneurship takes place. The stock owners, the speculators, the visionary capitalist entrepreneurs who by their actions not only create, merge, split or liquidate business, but at the same time determine the general structure of economic activity into which all the other scarce resources are channelled. They, in a sense, make the market. And even if everyone is in a general theoretic sense an entrepreneur – in the sense that their activity is undertaken, willy-nilly, in a context of uncertainty of the future –, on the capital market emerges a sort of entrepreneurial elite, the promoters, whom Mises consider especially eager to profit from adjusting the structure of the economy to the best possible satisfaction of consumer preferences, mediated for them by the highest profits. Their experience, vision and even practical wisdom[4], one might say gives coherence to the market process. The latter, thus, appears to be not only human and social, but also rational and coherent (even in its mistakes, as it is not infallible, of course) even if dynamic and volatile.

On the other hand, for Keynes (or for certain Keynesians, such as Hyman Minsky), the market economy is fundamentally unstable. Keynes explicitly says in the General Theory, that the free market is where it should be (full employment equilibrium) only “by accident or by design”. Thus, for him it is not as much motivations/incentives that matter, or economic calculation (which he more or less disregards completely as a problem, apart for a few occasional considerations; see Lopes, 2019), but “animal spirits”, or the impetus of men to do something rather than nothing. But the problem with this impulse is that it has, on the long term at least, no fundamental anchor in reality or what economists usually call “economic fundamentals”[5]. Thus, the fundamental volatility or erratic dynamic of the capitalist market economy in general.

Moreover, like with Mises, this general view of Keynes, also translates into a more specific view of capital markets and the stock exchange. While the “animal spirits” of the general population are at least commendable in the sense that it constitutes a premise for economic activity and growth (and thus, very important for Keynes, for employment), the capital market in general and the stock exchange in particular somehow drown these “animal spirits”, converting them into a speculation mode, meant not to produce, but to conserve. Or, as Keynes often suggests, the liquidity preference problem intervenes along these channels – the old avarice or love of money, “the root of all evil”, in a new disguise. The capital market is a huge arena of speculation, inadequately interested in new investments. Here, the investors or entrepreneurs which in the real economy would be moved by their “animal spirits” to at least create something (a new factory, a new firm, a new project), become speculators, paralyzed by the fear of losing and mesmerized into searching old investments and assets by means of which to preserve or conserve what they have already earned. From a driving force, they become a brake or a drain on the economy. In addition, the epicentre of this sphere, the stock exchange, becomes nothing less than a casino in which the speculative impulse of already misguided agents is boosted to unreasonable dimensions. The stock exchange is the gangrene which infects the whole economic organism, threatening every now and then even to destroy it completely in moments of economic depression. Without the benevolent hands of astute, wise and aristocratic mandarins bent upon taming the excesses of the problematic parts of the capitalist market economy, it cannot last. By itself, the social process is like the freshly beheaded corpse of a chicken, wondering chaotically to and fro up until exhaustion.

We cannot end this brief assay but by remaining somewhat more aware of this millenary debate on complex, monetary economies – whether we call them capitalist or not. From Aristotle down to Marx, and further into the XXth (to Keynes or Mises; Galbraith and Minsky, or Friedman) or XXIst century (Stiglitz, Piketty, or Jesus Huerta de Soto), for some this type of economy is a sufficiently harmonious system, deserving preservation and defence. While for others is a rotten system which cannot be just cosmetically reformed, but is in need of systemic reform, even replacement by a better system. Not that the latter problem has been solved, though. We could leave the matter here, by reminding the adage of Churchill concerning democracy, applied to free market capitalism: it is probably the least bad of all possible systems.

References:

Cohen, E.E., 1992. Athenian economy and society: a banking perspective. Princeton, NJ: Princeton University Press.

Hülsmann, J.G., 2017. The ethics of capital incomes. The Property and Freedom Society Annual Conference 2017 [online]. Available at: https://www.youtube.com/watch?v=Yn1ziuO6DfE.

Keynes, J.M., 2007. The general theory of employment, interest and money. Basingstoke: Palgrave Macmillan. [Originally published 1936].

Kline, M., 1980. Mathematics: the loss of certainty. Oxford: Oxford University Press.

Lopes, T.C., 2019. What would have been Keynes’ position in the socialist economic calculation debate and why it matters. International Journal of Pluralism and Economics Education, 10(3), pp.225–238.

Mises, L. von, 2008. Human action: a treatise on economics. Auburn, AL: Ludwig von Mises Institute.

Salerno, J.T., 1990. Postscript: Why a socialist economy is ‘impossible’. In: L. von Mises, Economic calculation in the socialist commonwealth. Auburn, AL: Ludwig von Mises Institute, pp.51–71.

Notes:

[1] In his lecture entitled “The Ethics of Capital Incomes”, delivered at the Property and Freedom Society Annual Conference, in 2017 (https://www.youtube.com/watch?v=Yn1ziuO6DfE).

[2] Works such as Edward E. Cohen, Athenian Economy and Society. A Banking Perspective (1992) support this hypothesis. There is an interesting debate concerning the nature of the Athenian expansionary money supply, namely whether it was privately driven by means of the equivalent of a fractional- reserve free-banking system (the trapezitei); or some other mechanism involving the Athenian state or political authority. In any case, the important dynamic of the money supply in 4^th century BC in Athens seems a plausible idea, and together with it, the context of Aristotle’s suspicion concerning the “moneyed economy”.

[3] See Topan, M.V., Apăvăloaei M, The Entrepreneurial Heart of the Market, forthcoming.

[4] Together with professors Nicolai Juul Foss (Copenhagen University) and Matthew McCaffrey (Manchester University) I have lately worked on a project to connect the economic notion of the entrepreneur and entrepreneurship (especially as developed by the Austrian School, and, specifically Ludwig von Mises) and the Aristotelean notion of practical wisdom. The material should be forthcoming as a book chapter in a book edited by Barry Schwartz.

[5] One possible interpretation here would be that, for Keynes, the idea of economic fundamentals combined with the long-term perspective is meaningless, or simply does not exist. This leaves the possibility that they do exist in the short term, but somehow any extrapolation from this short-term fundamentals to long term fundamentals (Keynes’ problem of long-term expectation) is more or less arbitrary, and vulnerable to fluctuations (over-optimism or excessive pessimism) – fluctuations which can happen and have such a wide range precisely because in the long-term expectations have no fundamental anchor.