The blog provides a left-wing non-partisan perspective on socio-economic issues in Russia and throughout the world. The focus is on qualitative development of national economic systems and ensuring flexibility in economic policies to meet the challenges of the 21st century. Email: leftistobserver@gmail.com

BUSINESS: A SERVANT OR A TASKMASTER?

Young lawyer: Dad, I have just solved the case you have been working on for 20 years!
Retired lawyer: Idiot! You have just solved the case that has been feeding us for 20 years.


People outside of the economic profession see economics as a solid mass of knowledge confirmed by complicated mathematical calculations and enormous practical experience that the developed world has accumulated over the last couple of centuries. Those who went beyond a high-school economics course realize that things are much more complicated – there are several economic schools that continuously compete for public attention and the right to influence political decisions.

Those schools that enjoy political and financial support from influential people and institutions received a generic title “mainstream economics”. Their scope of knowledge is being spread throughout the world in various forms and shapes – including college textbooks and media coverage – as a fundamental scientific foundation for arranging economic processes. The analysis provided by mainstream economics is unquestionable for international organizations, governmental agencies, political associations, colleges and universities as well as businesses of various kinds.

Not a single school within the conventional economics has ever challenged the notion of business constituting the economy itself. To them, business means the economy and the economy means business – there is no other way to look at it. They may be arguing blue in the face about government interference, money supply, banking regulations, etc. But none of them will ever say a word against the existing transnational corporate system. Boastful corporate claims and risky investment practices prior to the crisis have now given way to panhandling for government bailouts, which makes taxpayers wonder about the way business as an economic activity affects the economy.

For the purpose of analysis, a capitalist economy can be divided into two spheres (for lack of a better word). The former is associated with production of economic goods, which has been the primary purpose of any economic activity from the very early days when mankind ever became capable of it. It was the desire to eliminate scarcity that caused people to communicate and cooperate with each other in order to combine efforts in opposing forces beyond their individual abilities. As a result, humanity came up with various types of economic systems developing them from primitive models to more advanced ones in order to meet the ever-changing circumstances that human beings would find themselves in. Although those systems are far from flawless, their objective and the only purpose of existence have been the provision of economic goods for a society at a particular stage of its social, technological, and thus economic development. This sphere of human activity is the true essence of the word “economy”.

Let us give this part of an economic system a name to separate it from other elements. With certain reservations, we can probably call it a production sphere recognizing that it has been part of any society under any political and ideological regimes since its very existence is due to our human nature and cannot be done away with without putting humanity in peril of utter destruction. Thus, only an economic system capable of maintaining the provision of economic needs of the entire society by reproducing public and private resources can be called efficient.

However, we can also see the existence of another sphere, which has to do with trading economic goods for certain exchange equivalents (or monetary values) and managing pools of those equivalents by distributing and re-distributing them among members of the society in accordance with formal and informal regulations. This other sphere seems to have existed as part of pre-capitalist economic systems in various primitive forms, but its significance in our day and age can hardly be underestimated as the control over the circulation of these equivalents, which we call “money”, has become essential for controlling the exchange of goods within the society.

This monetary or financial sphere of a capitalist economic system is capable of allocating funds on credit thus making monetary equivalents a unique commodity. Under capitalism, goods and their monetary equivalents flow in opposite directions within an economy thus blending the two spheres into an inseparable unity. Even prior to capitalism, money as a unique commodity in the form of precious metals became capable of circulating separately from the goods while preserving its exchangeability for them and making financial returns the ultimate objective of any business activity. Capitalism inherited this arrangement from preceding economic systems and has taken it to a higher level. When possible, businesses strive to break away from the obligation to produce anything and prefer profiting from financial operations alone. Even when businesses do get involved in the exchange of physical goods, the public benefit of a commodity or a particular type of business activity remains outside of their concern. They proclaim financial returns as the ultimate benefit, no matter what commodity gets into consumers’ hands and what impact it might have on their living standards, health, their children’s conduct, etc.

We can thus define business as a mere money-making activity. It may be associated with providing a society with a particular commodity or service, but the ultimate goal remains unchanged – financial returns at any cost to the rest of the society. Those readers who run their own business are probably furious now when reading this. They are convinced that thriving businesses are a must, that entrepreneurs, in fact, render a service to the society by taking the risk of organizing production and distribution of goods and are entitled to a compensation of their investments and efforts.

From this angle, the logic seems flawless. Now let me suggest an alternative viewpoint. This is where we are starting to see that approaches to economic development as suggested by mainstream economics and political economy are fundamentally different. Please do not rush to conclude that political economy is all about bashing private entrepreneurship. If we put things in proper perspective, the point is that the positive effect of business on the prosperity and well-being of a society is not absolute, as we are told, but is conditional upon factors, which derive from the very nature of capitalism as an economic system.

In my previous articles, I have already mentioned that political economy recognizes that capitalism has always been heavily addicted to economic growth and identifies intrinsic systemic reasons for that addiction. The expandability of solvent consumer demand (either by forceful expansion into foreign countries or simply by reducing the cost of domestic borrowing) is the most critical condition for any successful business activity. The countries of the developed world have seen several decades of favorable business conditions mainly because of an unceasing economic and political expansion into less developed territories. The most recent expansion has received the name of globalization. Obviously, developing economies typically featuring meager domestic solvent demand coupled with a limited ability to tap into foreign markets were never able to generate sufficient long-term investments to compete with the more affluent countries. Businesses in such conditions often ended up searching for other ways, often immoral and illegal, to ensure financial returns from their activities by lobbying for government contracts, physically eliminating competitors, externalizing costs by pushing them onto the public, etc. Needless to say, the only beneficiaries of such business activity have been members of bureaucratic and corporate elites. Since higher solvent demand in developed countries provide more profit-making opportunities, emerging economies, while in need of investment capital, often become capital donors themselves as local businessmen step up capital flight in hopes of higher returns from abroad while breeding financial anemia and corruption in their own countries. As numerous industries remain gruesomely under-funded for a significant time, the production sphere (as defined above) becomes chronically incapable of fulfilling its primary responsibility.

For political economy, this situation is a disaster with adverse long-term consequences for many generations. As opposed to conventional economics, political economy recognizes that creating a business-friendly environment is far from being sufficient for putting the economy to work for the public benefit rather than for a small group at the very top of the society. In fact, some do think that worrying about the society is not even necessary. The “invisible hand” is believed to be miraculously responsible for everybody’s well-being – as long as individual profits keep rising, no-one gives a damn about what goes on outside their window. But as developed economies’ middle class is rapidly losing its positions, the concept of economic miracles is getting very hard to sell.

Political economy is pretty specific that business activity is conditioned upon various factors that eventually determine its ultimate impact on an economic system. In certain conditions, that impact is going to be negative. Any capitalist economy, when left with no expansion opportunities, becomes incapable of preventing a downfall in corporate profits, which encourages capital owners to either seek alliance with the government or externalize costs at the expense of the local population. Unfortunately, conventional economics ignores developing countries’ immense evidence to this effect and continues to paint a rosy picture.

Whose interests does conventional economics protect? The answer is a no-brainer – business interests. Economics was designed to answer a different set of questions than those raised by political economy. Economists employed by corporate and political elites are often instructed to make means of enrichment out of existing economic problem rather then solve them for future generations.

This explains why corporate economists and politicians were blind to the impact that outsourcing to low-cost country has on the developed economies by limiting its consumers’ ability to spend thus boring into the very pillars, on which the entire global economy is now resting. This explains why IMF recommendations attached to their credit programs end up slowing down developing economies rather than speeding them up. This explains why, in spite of all the efforts, poverty and misery continue to spread.

From the scientific standpoint, economics cannot be considered a fundamental economic discipline because it provides nothing but a set of applied principles conditioned upon underlying shifts of economic reality. That is why the official Western economic theory underwent two fundamental revisions in the 20th century (from laissez faire to Keynesianism, and then on to neoliberal monetarism). When an economic system starts shifting its “tectonic plates”, corporate economists can only shrug their shoulders because, figuratively speaking, trimming the weeds over and over again is more profitable than uprooting them.

To those who studied economic history, this situation might look familiar. I have recently been reminded that Aristotle, a famous Greek philosopher, used to separate oikonomia (knowledge of managing resources of a household for long-term benefits of its members) from chrematistics (knowledge of manipulating property and wealth for maximizing short-term monetary benefits to an individual owner). The two are closely related so people, Aristotle warned, tend to confuse one with the other. According to him, the chrematistic desire for personal enrichment at any cost easily leads to exploitation of both people and nature.

And it is very unfortunate that colleges in many countries have moved their attention from the fundamental discipline of political economy and eagerly embraced economics, which I see to be superficial and situational. It justifies opportunism, oversimplifies reality and confuses cause and effect, and fails to keep pace with systemic changes. If you are an economics instructor, you may want to cover your ears now because I am going to say it out loud – MODERN ECONOMICS IS AN ANACHRONISM. Reality has grown more complex, but neoclassical economists still live in dreamy recollections of the past.

Please do not rush to conclude that political economy is about bashing private entrepreneurship. As long as capitalism lasts, business will remain its essential part. But I will not be surprised if further economic development necessitates limiting business activity to particular sectors or even encourages alternative ways of organizing economic systems. As an element inherited by capitalism from preceding economic formations, business has its pluses and minuses. And since it is likely to stick around while you and I are still here living on this planet, we should recognize the need to make business our servant rather than a taskmaster.

Unfortunately, humanity has done a lousy job in this respect – it is business that dominates media, dictates fashions, shapes opinions and rewrites history turning politics and wars into instruments of profit-making. It is business that has become the golden calf of our time, elevated on the pedestal of glory and so enthusiastically worshipped by economists and politicians. In their devotional fury, they remain absolutely deaf and blind to extensive evidence that, without unbiased strategic planning and control by the wider society, business becomes detrimental to further social and economic development. It may be prosperous and thus arrogant in times of plenty, but, when facing no opportunities for further expansion, it starts tossing about wildly, like a decapitated chicken in mortal agony, willing to break any law or moral principle for the sake of more profits. Luckily, some countries do see the danger of exposing their economic systems to chaotic convulsions of oversaturated markets and take unorthodox measures to ensure economic sustainability.

Boris Anisimov

WHAT IS POLITICAL ECONOMY?

I am wondering if you have noticed what economics students from developed countries often say about their studies: “Cut your theories, give me solutions instead.” It can be translated as “Give me practical money-making solutions now, and then – several millions later – I’ll try to find time for fundamental studies”. Looking behind the curtains of the world economy seems pointless when you can simply learn a couple of money-making techniques and, if successful, worry about nothing until the end of your life.

But I have noticed that those among such students who claim profound understanding of economics are as na├»ve and helpless as babies when it comes to dealing with developing economies, where the wheels of a free enterprise system get easily stuck in the bogs of corruption, unpredictable politics, questionable property rights, and – most importantly – dilapidated infrastructure and insolvent internal markets due to poverty, etc. Without a profound paradigm shift, even the most brilliant among Ivy Leaguers will find it difficult to run a business in a constantly changing reality, which is so typical of emerging economies.

This points to a fundamental shift in developed countries’ economic education from serving the interests of the society to boosting corporate profits. It is in the above-mentioned reality typical of a developing country that one begins to realize that the words “business” and “economy” are not necessarily synonyms. Even though mainstream economists recognize that running a business in a developed country is easier than in a developing one (for obvious reasons), they rarely show interest in economic questions outside the realm of business and profit-making. To them, business is the economy, and there is no other way of looking at it. Obviously, this topic deserves an entire new article, which I may write in the future.

But we need to recognize that, in a developing economy, roles and functions of various institutions tend to differ from their Western counterparts. This fact alone necessitates observing both national and global economic development from a totally different angle rather than from the sole standpoint of doing business. In a book that I have been reading lately, I have found a reference to Michael P. Todaro, a US economist in the field of development economics, who had allegedly said that it is political economy that developing countries need for a realistic analysis of their economic development. How I wish I would find the original comment! It is another example of the ever-growing awareness among economists that developed countries and third-world economies are inherently different. In the latter countries, the economic reality reveals itself as a much more complicated mechanism than the current neoliberal theories may suggest.

But what is the definition of political economy? There seems to be many. Various economic schools have been staking claims to that name. What you are going to read below is my attempt to systematize various data on this economic discipline. I am going to present things as I see them without claiming either unique insight, or monopoly on the truth. In fact, I realize quite well that I am far from being alone in the way I look at political economy.

Political economy and economic systems.

Prior to defining political economy, let us consider economic systems. Go ahead and look up the definition of an economic system, and you are likely to find something like this: An economic system is a mechanism which deals with the allocation of economic inputs, production, distribution of economic outputs and consumption of goods and services in a particular society and is composed of people and institutions, including their relationships to productive resources and property. The word “economy” is often used as a synonym to the concept of an economic system.

There are various types and sub-types of economic systems, some of which may have more than one name and more than one politico-economic interpretation, but, traditionally, the following basic economic systems are identified:
- market economy (the basis for several "right-wing" systems, such as laissez-faire capitalism);
- mixed economy (includes various types of "centrist" economic systems);
- planned economy (the basis for several "left-wing" systems, commonly referred to as socialism).

There are numerous approaches to classifying pre-capitalist economic systems so I am not planning to address them. It is now commonly believed that today’s world mostly operates in a global economic system based on the capitalist mode of production.

The functioning of an economic system – considered to be a fragment of a larger structure called a social system – is greatly influenced by political, cultural, historical, geographical and environmental conditions of a society. In other words, socio-economic systems are affected by a wide range of internal and external ojective factors. As those shift, the systems undergo changes. Considering the temporal and spatial aspects of such changes, we can say that socio-economic systems tend to evolve, which underlies their tendency for logical qualitative development within the framework provided by respective factors. To put it plainly, socio-economic systems never stand still – they appear, develop and die away giving way to new systems to come in their stead.

Among economic systems that have ever been implemented on the earth, mankind has not seen a single one with a 100% equality and fairness. Some folks end up losing, other folks end up gaining. Humanity has not yet come up with a perfect solution to address all economic woes.

The subject of political economy.

I take sides with economists who believe that it is economic systems that political economy concerns itself with. To me, political economy is a socio-economic science that deals with economic systems together with their quantitative and, most importantly, qualitative development in time and space.

Unfortunately, there is confusion among mainstream economists as to the name and subject of political economy. Today, where it is not used as a synonym for economics, it may refer to very different things, including Marxian analysis, public-choice approaches based on the Chicago school, or simply economic policy advice given to governments. I do not intend to review existing opinions on that matter in this article, but there are several points that require some attention.

Firstly, those who do recognize political economy as a separate field of knowledge often define it merely as a combination of economics and political science. To my mind, that is a gruesome oversimplification. Such a definition does reflect the fact that economic development has always been a politicized issue, but at the same time it gives an erroneous impression that the two components stand on equal terms with one another. I tend to believe that the economic aspect greatly outweighs the political one, the latter being derivative of the former. Similarly, as political economy interacts with various related disciplines, it should not be treated as a mixture of all disciplines that it bumps into.

Secondly, mainstream economics believes that there is no need for such a discipline at all. They push political economy aside and classify it as one of heterodox economic schools or, in other words, economic heresies. I categorically object to such an impudent classification. Luckily, the on-going crisis has clearly demonstrated both the limitations of the mainstream economics itself and the need for more profound approaches to the analysis of the economic reality, which political economy can provide.

There are still debates as to the extent and applicability of political economy even among those who accept the above definition. But still political economy remains the most fundamental approach to economic analysis. As the mother of all economic disciplines, figuratively speaking, political economy can deal with a wide range of questions and often relies upon analyses made by various economic schools, but it should not be viewed as an ecumenical attempt to merge all schools into one, but rather put them in perspective by identifying their spatial and temporal limits. The particular cannot comprehend the general just as the branches cannot comprehend the roots.

Since economic systems undergo constant development, political economy concerns itself with the analysis of socio-economic alternatives, which clearly set this discipline apart from the existing conformist economics. The latter refuses to see the underlying changes in the modern society thus limiting the scope of its analysis and practical recommendations.

Political economy recognizes that elites throughout the entire human history have been employing political, national, cultural and religious ideologies as a tool for concealing the economic reality for the sake of attaining an advantage over the rest of the society. Official economic theories are often used for the same purpose. Those who remain unaware of the underlying politico-economic patterns and processes end up bearing the brunt of inevitable and sudden changes within economic systems. Looking back at the economic history of mankind, we can assume that our times are not different from the times of our ancestors, which implies that similar attempts to conceal the economic reality are being undertaking even now.

To my mind, the analysis of economic systems provided by political economy is the only way to see what goes on behind the curtains. This brings me back to Michael P. Todaro’s comment mentioned above. I am convinced that political economy is the only instrument for a realistic analysis of economic development.

Textbook economics vs. real-world political economy.

We are living in an age dominated by neoliberal thinking, which puts neoclassical economics together with its modern-day hanger-on (i.e. monetarism) on a pedestal of glory. It is probably needless to say that such thinking has given rise to the flamboyant free-market fundamentalism in the western world. However, developing countries find a lot of issues with that approach to economic development mainly because it has become apparent that the world economy dominated by large transnational corporations is far away from the free-market ideals and is unbeneficial to the third world countries no matter what they do to pull themselves out of poverty and despair. At the same time, take a look at the most prominent among Asian countries, whose economic performance over the last several decades has been quite remarkable. These economies have been cashing in on the global economic conditions of our time by moving away from the orthodox free-market economics and implementing mixed-economy approaches selectively combining elements from capitalist and socialist economic systems and often resorting to unique and completely unorthodox methods. Besides, both Europe and the United States are not as free-market as they want others to believe.

But regardless of the abounding evidence that modern economic practices and theories have long forked away from each other, the “divine status” of economic neoclassicism has remained preserved in academic circles and corridors of power, feverishly worshiped and zealously protected. To a great extent, this explains our inability to foresee the current crisis. The noise from the outburst of economic optimism worldwide simply drowned out the voices of warning. The prominent economic theories do not consider the functioning an economic system (see the definition above). Instead, they focus on business activity believing that an increase in corporate profits automatically means an improvement of the entire economy due to a trickle-down effect. Obviously, political economy views these beliefs as completely unjustified, and the reality confirms that.

The former Soviet countries due to the collapse of the Soviet economic system have committed themselves to liberal reforms and recklessly revised their economic curricula based on insistent recommendations from international economic organizations (the IMF in particular). As a result, the indoctrinated Soviet political economy has been replaced with the similarly indoctrinated Anglo-American free-market economics. Russia is no exception in these developments. The economic policy implemented by the liberals in the Russian post-Soviet government has been reflecting textbook economics, rather than real-world practices. It is no surprise then that numerous attempts to improve the economic situation have generally remained fruitless.

Finally, a gradual shift from textbook economics is becoming more and more evident among some of the Russian economists. And I myself am a witness to that. Even though officially approved Russian textbooks on economics disregard political economy, college instructors are gradually introducing political economy back into economic disciplines. Karl Marx’s Das Kapital is being mentioned more frequently. Alternative approaches are slowly taking their place among conventional methods of economic analysis. Luckily, the way the Russian economic curriculum is structured allows some opportunities for re-introduction of political economy as a separate academic discipline. For example, the official name for the existing discipline that studies economics in Russia is Economic Theory rather than Economics. The latter was considered to be too narrow, thus necessitating more flexibility as to its subject of such a discipline.

As a result, political economy is gradually being brought back (often under the name of General Economic Theory) as some Russian authors are attempting to balance its fundamentality with the neoclassical requirements of modern economics (and its terminology). I think the results are simply brilliant. Such an approach under the name of Economic Theory allows distinguishing roots from branches, figuratively speaking, by identifying several levels of theoretical studies (presenting them as a sort of a pyramid with political economy as the foundation, microeconomics as the first level, macroeconomics as the second level, mega-economics or international economics as the pinnacle). Thus, besides gaining knowledge on existing economic theories and respective terminologies, students are provided with a more fundamental analysis of economic systems and their qualitative changes.

That fundamental analysis is crucial for another economic discipline called comparative economic systems. Unfortunately, this discipline was frequently used as a propaganda tool during the Cold War for convincing the public of the merits of a particular political system. Instead, the focus should be on providing a profound analysis of economic systems and respective economic models, which differ based on specific and objective socio-economic conditions of a particular country. One of the conclusions that this discipline makes is that an economic system considered to be beneficial to one country may not necessarily be beneficial to another due to the objective reality these two countries exist in.

Renaissance of political economy?

The on-going crisis has revealed that the predominant economic paradigm is based on erroneous assumptions and is not conducive to the proper development of respective economic systems. Instead, enormous attention is given to the global financial sector together with its casino-style investment practices. Political economy has been warning all along of the danger that such an unceasing growth of the financial sector poses to the entire economy. When finance, which only represents a portion of an economic system, grows larger than the system itself, it is akin to a malignant tumor sucking out the energy from the entire organism to continue growing at any cost. The consequences will be quite tragic.

Luckily, we are witnessing an increased awareness of the systemic nature of the on-going crisis. People throughout the planet have started asking inconvenient questions about the future economic development of their national economies, and political and corporate elites are struggling to come up with meaningful answers. An interest towards political economy is growing as well, but it has not yet reached considerable proportions. Besides, a unified approach to political economy has not yet been developed.

Upon considering data on the recent economic development of my home country and the wide gap between the economic reality and the official economic theory, I have taken sides with the ever-growing group of economists who see political economy as the only instrument to provide those answers many people area seeking. Some tend to over-emphasize the political side of political economy, but I prefer to focus mainly on the economic one, the latter being more significant and fundamental. If time permits, I may write an article about Karl Marx as a significant contributor to political economy and the way Soviet economic abuses have discredited political economy as an economic discipline. So I do consider myself a political economist and hope to see a renaissance of this discipline in the near future.

Boris Anisimov