commissioner.org
| Source | Jurriaan Bendien |
| Date | 03/07/22/06:14 |
| (Julio Huato ask me to forward this to PEN-L List)
Ronald Coase's work deals with issues that bourgeois economics had previously swept under the rug. So it effectively reintroduces them into modern economics. How effectively is another matter. These are issues we usually associate with Marx. A big theme in Coasian economics is how societies organize production by 'choosing' (one way or another) the form of ownership. IMO, his concept of 'transaction costs' is not unrelated to Marx's concept of the 'socialization of production.' Coase adopts the view popularized by Lionel Robbins that economics is a purely logical structure separable from any concrete substance. Economics is simply the 'logic of choice.' Therefore it has general applicability in the social sciences -- a la Becker. People make choices regardless of the social institutions around them. Such choices are amenable to the 'economic approach.' Coase's novel view is that the institutions themselves are amenable to the 'logic of choice.' Somehow, societies wind up "choosing" their institutions. And Coase is concerned with "the choice among different social arrangements for the solution of economic problems." Before Coase, the presumption was pretty much that under all conditions the best "social arrangement for the solution of economic problems" was private ownership and markets. Although, in the face of externalities, Pigou's welfare economics resorted to taxes and subsidies, there was no explicit second-guessing of the optimality of private ownership and markets. Although it appeared as a validation of the market as the mechanism that sorts everything out, in fact Coase's work let the demons out. When first presented, in the 1930s, Coase's views surprised economists used to dealing with 'consumers,' 'firms,' and 'markets' as abstract entities. Coase wanted to apply the 'logic of choice' to explain historically concrete 'social arrangements' under capitalism -- firms and markets in particular These arrangements -- concrete institutions that people created in the course of their economic activities -- had to be explained, not merely assumed. This clearly connects with Marx's theses that economic and political "institutions" evolve dialectically driven by the growth of the productive forces. The literature in the field of welfare economics that followed Coase has somehow mingled with the strand spanned by Allyn Young's elucidation of "external economies" in his 1928 presidential address to the British Association for the Advancement of Science (see Young's "Increasing Returns and Economic Progress" in Readings in Welfare Economics, ed. K.J. Arrow and T. Scitovsky, 1969). The notions of nonrivalry and nonexcludability that define the existence of public goods (which, by the way, led to Romer's endogenous growth theories) are now widespread in economic analysis. (There's a link also with Amartya Sen's (1972) On Economic Inequality; particularly with his chapter on "Works, Needs, and Inequality.") Effectively, Coase and Young changed the landscape in economic analysis. This is something that some Marxists who have not updated their views on bourgeois economics since Hilferding's reply to Böhm-Bawerk or since Bukharin's critic fail to see. In 1867, Marx wrote: "In spite of the numerous analogies and links connecting them, the division of labor in the interior of a society, and that in the interior of a workshop, differ not only in degree, but also in kind. The analogy appears most indisputable where there is an invisible bond uniting the various branches of trade. [...] Now it is quite possible to imagine, with Adam Smith, that the difference between the above social division of labor, and the division in manufacture, is merely subjective, exists merely for the observer, who in the case of manufacture can see at a glance all the numerous operations being performed on one spot, while in the instance given above, the spreading-out of the work over great areas and the great number of people employed in each branch of labor obscure the connection. But what is it that forms the bond between the independent labors of the cattle-breeder, the tanner and the shoemaker? It is the fact that their respective products are commodities. What, on the other hand, characterizes the division of labor in manufacture? The fact that the specialized worker produces no commodities. It is only the common product of all the specialized workers that becomes a commodity. The division of labor within society is mediated through the purchase and sale of the products of different branches of industry, while the connection between the various partial operations in a workshop is mediated through the sale of the labor-power of several workers to one capitalist, who applies it as a combined labor-power. The division of labor within manufacture presupposes a concentration of the means of production in the hands of one capitalist; the division of labor within society presupposes a dispersal of those means among many independent producers of commodities. While, within the workshop, the iron law of proportionality subjects definite numbers of workers to definite functions, in the society outside the workshop, the play of chance and caprice results in a motley pattern of distribution of the producers and their means of production among the various branches of social labor. It is true that the different spheres of production constantly tend towards equilibrium, for the following reason. On the one hand, every producer of a commodity is obliged to produce a use-value, i.e. he must satisfy a particular social need (though the extent of these needs differs quantitatively, and there exists an inner bond which attaches the different levels of need to a system which has grown up spontaneously); on the other hand, the law of value of commodities ultimately determines how much of its disposable labor-time society can expend on each kind of commodity. But this constant tendency on the part of the various spheres of production towards equilibrium comes into play only as a reaction against the constant upsetting of this equilibrium. The planned and regulated a priori system on which the division of labor is implemented within the workshop becomes, in the division of labor within society, an a posteriori necessity imposed by nature, controlling the unregulated caprice of the producers, and perceptible in the fluctuations of the barometer of market prices. Division of labor within the workshop implies the undisputed authority of the capitalist over men, who are merely the members of a total mechanism which belongs to him. The division of labor within society brings into contact independent producers of commodities, who acknowledge no authority other than that of competition, of the coercion exerted by the pressure of their reciprocal interests, just as in the animal kingdom the 'war of all against all' more or less preserves the conditions of existence of every species. The same bourgeois consciousness which celebrates the division of labor in the workshop, the lifelong annexation of the worker to a partial operation, and his complete subjection to capital, as an organization of labor that increases its productive power, denounces with equal vigor every conscious attempt to control and regulate the process of production socially, as an inroad upon such sacred things as the rights of property, freedom and the self-determining 'genius' of the individual capitalist. It is very characteristic that the enthusiastic apologists of the factory system have nothing more damning to urge against a general organization of labor in society than it would turn the whole of society into a factory" (Capital, I, p. 477 Penguin). More simply: "[I]n the society where the capitalist mode of production prevails, anarchy in the social division of labor and despotism in the manufacturing division of labor mutually condition each other." In 1937, Coase cites Arthur Salter: "The normal economic system works itself. For its current operation it is under no central control, it needs no central survey. Over the whole range of human activity and human need, supply is adjusted to demand, and production to consumption, by a process that is automatic, elastic and responsive." Coase continues: "An economist thinks of the economic system as being co-ordinated by the price mechanism and society becomes not an organization but an organism. The economic system 'works itself.' This does not mean that there is no planning by individuals. These exercise foresight and choose between alternatives. This is necessarily so if there is to be order in the system. But this theory assumes that the direction of resources is dependent directly on the price mechanism. Indeed, it is often considered to be an objection to economic planning that it merely tries to do what is already done by the price mechanism. Sir Arthur Salter's description, however, gives a very incomplete picture of our economic system. Within a firm, the description does not fit at all. [...] Those who object to economic planning on the grounds that the problem is solved by price movements can be answered by pointing out that there is planning within our economic system which is quite different from the individual planning mentioned above and which is akin to what is normally called economic planning. [It encompasses] a large sphere in our modern economic system. Of course, this fact has not been ignored by economists. Marshall introduces organization as a fourth factor of production; J.B. Clark gives the co-ordinating function to the entrepreneur; Knight introduces managers who co-ordinate. As D.H. Robertson points out, we find 'islands of conscious power in this ocean of unconscious co-operation like lumps of butter coagulating in a pail of buttermilk.' But in view of the fact that it is usually argued that co-ordination will be done by the price mechanism, why is such organization necessary? Why are there these 'islands of conscious power'? Outside the firm, price movements direct production, which is co-ordinated through a series of exchange transactions on the market. Within a firm these market transactions are eliminated, and in place of the complicated market structure with exchange transactions is substituted the entrepreneur-co-ordinator, who directs production. It is clear that these are alternative methods of co-ordinating production. Yet, having regard to the fact that, if production is regulated by price movements, production could be carried out without any organizing at all, well might we ask, Why is there any organization?" ("The Nature of the Firm"). (Coase doesn't acknowledge Marx's precedence. Perhaps he really wasn't aware of it. But it seems that he got the idea from Marx, although indirectly. He writes: "This distinction between the allocation of resources in a firm and the allocation in the economic system has been very vividly described by Maurice Dobb when discussing Adam Smith's conception of the capitalist." Of course that is because Dobb did read Marx.) As known, Coase 'solved' the puzzle of the firm appealing to the concept of 'transaction costs,' which he defines as "the cost of using the price mechanism" or, more specifically, as "search and information costs, bargaining and decision costs, policing and enforcement costs." This of course raises the question of why a society idyllically described as "an ocean of unconscious co-operation" (!) is so *opaque* that it makes people incur in 'search and information costs' or so *antagonistic* that there are 'bargaining and decision, policing and enforcement' costs to sustain. Why is it that the use of the price mechanism is costly? The 'Coase theorem,' presented in his essay "The Problem of Social Cost," is an extrapolation of the same insight. One agent (firm or consumer) imposes an externality on another one. If the 'transaction costs' are zero and the ownership rights are well defined, then all utility-maximizing solutions turn out to be equivalent: the harming party bribing the other to accept a certain amount of harm, or the harmed party bribing the former to reduce the harm to a certain amount, or -- if both agents merge their interests -- their internal allocative decision. Zero transaction costs means a costless negotiation between the agents. Of course, if there were complete markets for the ownership rights, then it would be piece of cake. In that 'frictionless' world, ownership rights can be divided, merged, and exchanged costlessly and welfare is thus maximized under any configuration. But that 'frictionless' world is such that capitalism and communism become undistinguishable. The theorem doesn't say which type of ownership rights is best: private or collective ownership rights? If the economy evolves in such a way that the externalities people impose on one another expand, the optimality of the 'price mechanism' is increasingly compromised. In such case, the 'transaction costs' are constantly going up. Marx's idea that as the productive forces under capitalism grow the interdependence in production ('socialization of production' -- and consumption?) tends to increases is like saying that externalities and transaction costs tend to increase with technological change. That makes sense to me. What kind of institutions would be necessary to cope with expanding externalities and transaction costs? Doesn't the coordination by the price mechanism become increasingly wasteful? If 'transaction costs' lead people to build 'islands of conscious power,' then will sufficiently large 'transaction costs' arising from the economic system as a whole lead people to 'choose' communism? Consider, for example, the increased destructive power of individuals nowadays (recipes for explosive devices on the net, etc.) or the implications of human cloning. The externalities that "private" pursuits of this kind may impose on the rest of us are huge. How is the 'price mechanism' going to deal with these transaction costs? Modern economics has returned to dilemmas that until recently had only been posed by the radical critics of capitalism. Of course, if one believes that the 'logic of choice' is useless as an analytical tool (because it is too abstract or polluted by bourgeois ideology), then there may not be any real gain here. The field of environmental economics -- based on the presumption that the 'price mechanism' cannot deal efficiently with externalities in the realm of natural resources -- has already sprawled. More recently, there has been an explosion in the literature analyzing the impact of social externalities on a market economy. For example, a host of kosher general equilibrium models where social inequality leads to inefficient patterns of intertemporal allocation (for Marxists, the foundation of capitalist production is the divorce between wealth and labor power). IMHO, the 'dialectics' between the productive forces and the relations of production (economic structures) is one of the most obscure aspects of Marx's historical materialism. To some Marxists, the belated, half-hearted admission by modern economics that there is indeed an elephant in the room means little. Some seem to think that all that needs to be known about that is known already. But, if an exercise analogous to that of Marx on Smith and Ricardo -- but now on Coase, Young, etc. -- is to shed some light on the conflict between capitalism and socialism, I will welcome it. |
Copyright (c) 1998, Joongpil Cho