In Part I, which appeared in the last issue, Jacques Sapir argued that post-autistic or realist economics needs to develop a coherent research program. To this end he proposed to offer seven theoretical theses and introduced the first four.

Thesis 1: The central issue in economics is the co-ordination of decisions and interactions generated by decentralised, heterogeneous and interdependent agents whose decision-making abilities are constrained by limited cognitive capacities.

Thesis 2: If money is a necessity in an uncertain world, money also introduces a specific form of uncertainty, casting doubts on the market’s ability to efficiently process information.

Thesis 3: Time and money are at the very heart of the interchange between the individual and collective levels.

Thesis 4: Any attempt to negate the theoretical status of time and money leads to non-scientific assumptions and transforms the economist himself into a producer of ideology.

Part II: Theses Five to Seven

Thesis 5: To regard money as the one central institution in a market economy fails to break free from the neo-classical framework. Emphasizing only money could be as theoretically misleading as ignoring money.

It is clear that understanding money’s relevance is a cornerstone of economic theory. Yet this position can evolve into a mistaken one no less dangerous than the neo-classical denial of money’s relevance: monetary essentialism. It is the path taken by two French authors with whom otherwise I generally agree, Michel Aglietta and André Orléan, the latter a well-known and long-standing PAE contributor. Because they claim to have developed a workable alternative to the money denial strategy favoured by neo-classical and some Marxist authors alike³⁴, an alternative giving monetary policy and Central Bank independence a strong legitimacy, monetary essentialism is worth serious investigation. As a matter of fact, if one could demonstrate that money is as pivotal as monetary essentialism pretends it is, then one would have a pretty good argument for asserting the superiority of monetary authorities over political ones.

Monetary essentialism moves beyond acknowledging money relevance against the neo-classical cum monetarist tradition to the point of proclaiming money the central, pivotal, market economy institution³⁵. It acknowledges the fact there is a deeply entrenched violence in monetary relations which cannot be reduced to just an allocative process. Monetary essentialism is innovative in its aim of linking economics to anthropology and it is grounded on what Aglietta and Orlean call the Fundamental Girardian Theorem from the French catholic philosopher and anthropologist René Girard³⁶.

Years ago Girard developed an anthropological theory of violence that he opposes to one emphasizing the social roots of conflicts. His theory is grounded on the genesis of violence erupting from an undifferentiated mob driven by a demand for wealth. This word resonates in the economist's ears. However in Girard's works wealth is an all-encompassing notion running from material goods and money to social status and parental love. Because it is such a global, all encompassing notion, it makes it possible to conceive of a universe of one-dimensional choices where "wealth" is the measure of everything. This conception resembles the neoclassical concept of price which is supposed to carry all needed information. In a Girardian world an economist would be, to paraphrase Oscar Wild, a cynic who knows the wealth of everything and the value of nothing. In this universe of one-dimensional choices, individual preference transitivity could then be logically demonstrated and the neoclassical theory of preference and rationality given a new rationale. One could then forget that in the real world, and specifically when money is at stake, it has been demonstrated that violations of transitivity are systematic³⁷.

It is, however, perfectly clear that the Girardian genesis of violence is no less unrealistic and anti-social than the Robinson Crusoe metaphor that Austrian marginalists were so fond of. All the perfumes of Girardian wealth could not sweeten the neo-classical price. Aglietta and Orléan run into a serious contradiction. Admirably they profess their willingness to break with the neo-classical logic. However as they pretend to reject the view of a fully determined world - a position I completely share with them - they fall into another fallacy, the one of pretending that there are no so central rules but money. To do so they have to stick with violence as understood by René Girard³⁸. Then they have to pretend that there is no stable social relation between agents, that they are un-socialised social actors³⁹. This is one dimension of the neoclassical fallacy. The so-called Fundamental Girardian Theorem is supposed to say that unanimity could be the result of a spontaneous convergence, hence the undifferentiated demand for wealth could give birth to a global social agreement. However Orléan remarks with some ingenuity that if we introduce one differentiation level in the primitive wealth-driven population then unanimity is no longer a spontaneous result⁴⁰. Change here unanimity for equilibrium and you would have an exact restatement of the Grossman-Stiglitz paradox⁴¹. The Girardian Theorem’s sensitiveness to heterogeneity is another proof that it is a next of a kin to the neo-classical equilibrium and Girardian wealth to Walrasian price. Anyone here cruel enough into introduce in the picture the endowment effect and the framing effect would lead the Girardian Theorem to its self-destruction and monetary essentialism to its methodological collapse.

What is problematical with monetary essentialism is not its emphasis on violence or its attempt to link economics to anthropology. The problem lies with the anti-social anthropology that it mobilises, a theory leading not to a definitive break with neo-classical orthodoxy but to the reverse, a return toward typical neoclassical simplifications and methodological unrealism.

Thesis 6: The idea that there is one pivotal institution for a market economy is devoid of meaning. Institutions cannot be assessed in isolation. What matter are institutional systems or precisely defined hierarchical clusters of institutions.

If money cannot be seen as the central institution of a market economy, then maybe property rights could be seen as an alternative⁴². After all, without property rights it is difficult to understand market transactions. However when one discusses property rights it is frequently private property which is at stake. But, as explained years ago by Richard Nelson, private property does not work as an operational concept enabling us to delineate differences between forms of social organisation⁴³. To oppose private to collective ownership is to run quickly into an interesting, if frequently forgotten, paradox.

If property rights are to be defined inside a society, then we have more than one economic agent to think about. Hence, what agent (a) is doing could affect in an unintentional way the wealth and position of agent (b). The latter could sue the former who then would think twice before doing anything if the penalty were significant by comparison to the expected result form his own action. This is nothing more than a restatement of the Shackle Paradox, explaining that decentralised decision-making gives birth to uncertainty and that uncertainty could prevent decentralised agents from making decisions⁴⁴. To prevent unintentional effects from paralysing the whole social life, every society has developed a different set of rules for actually constraining our individual freedom to use and abuse our properties. Rules, without which no individual action is possible in a society, are nothing less than collective property rights. Hence, individual property rights can't exist without collective ones. And if to avoid this problem we attempt to define individual property rights from the Robinson Crusoe metaphor, then we define something that does not exist. Before the landing of Friday, Robinson, alone on his island, owns everything that is nothing. Property rights here have no meaning.

Private and collective property rights can't be opposed and are actually closely integrated. But, if we have to think about collective ownership to understand private ownership then it is mandatory to think about the way human collectivities are organised. Political issues (how legitimacy and legality interact) matter then as much as property rights. They cannot be substituted for money as the pivotal market economy institution, and I hope that this discussion had made a case against the whole idea of defining any "pivotal" institution.

Let us now return to the problem of money. We have to reckon with the fact that barter trade can exist simultaneously with money, meaning that there is more to be considered than just the fact that money is a more effective and rational transaction medium than barter⁴⁵. The development of barter trade in Russia from 1993 to 1998, a period when inflation was actually decelerating (barter was at its highest point early 1998 when inflation was down to 12% a year), raises an important theoretical issue. The use of money receded not because the value of money was disappearing as happens during a hyperinflation crisis (remember Weimar and the wheelbarrows full of banknotes) but because institutions, without which money cannot be used, were missing⁴⁶. The development of barter trade in Russia was the result of a lack of financial institutions, the result of the liberal monetary policy implemented from October 1993 onwards⁴⁷. It was also the result of a lack of trust⁴⁸ resulting from the weakening of State institutions through the particular privatisation process then implemented by Anatolyi Chubays and his US crony advisers⁴⁹. Money, as an institution, needs both technical institutions (mostly in the finance sector) and political ones to support it and make it effective. In turn, after the August 1998 crash, barter receded not because of any hard monetary policy (actually inflation rose) but because Primakov's government worked hard to rebuild state legitimacy and institutions⁵⁰.

Money can be relevant when two specific freedoms or rights can be found in any transaction: the freedom to engage in a transaction with whom one wants and the freedom to engage when one wants. Both these freedoms do not exist for every possible transaction. Sometimes technical constraints drastically reduce the first one, so that vertical integration, that is the substitution of a hierarchy for a market, is then the logical evolution. And social constraints can reduce both the first and the second freedoms. In any case, these freedoms or rights imply a whole set of institutions which, in turn, defines the place and form money can take at a given time in a given market economy.

The central issue is then not the functionality of a single institution but how institutions in a given set can be mutually supportive. In the end it is the coherence level achieved by the institutional system that is the analytical key of statistical stabilities and medium-term trends. When money is at stake, it is the coherence (or the lack of) between managing institutions (central bank, financial markets, banking system, international financial institutions) and related ones (public regulations, labour-management relations, balance of property rights between individual and collective ownership, institutional forms of the social protection system, regulation of human, material and financial trans-border flows) which really matters. The coherence issue, be it static or dynamic, is then the central one for realist economics.

Thesis 7: The embededness of any institutional system in a given territory, itself a social and historical construction, is an omission of mainstream economics that is hidden behind the denial of time and money relevance.

Time and money have led us to institutions. Not just the usual discussion about institution functionality but to the understanding that an institution cannot be considered in isolation. Institutional systems, coherent and hierarchal sets of institutions, are the main issue. Rejecting the functionalist fallacy about institutions means also rejecting any functionalist understanding of the birth of institutions⁵¹. The Hayekian view of spontaneous selection raises many methodological and theoretical problems. Among them the two most vexing are:

(a) the Hayekian selection process introduces a methodological holism dimension into an otherwise individualist theory (institutions are selected through groups) and

(b) that without assuming temporal monotony of individual preferences it is impossible to prove that selection has not been accidental unless one assumes a stationary universe.

Up to now the only realist theory of institution generation has been François Guizot's. Social conflicts of opposing human groups have been the historical process of institutional development and selection⁵². The dynamic of these conflicts develops in the space of sovereignty, which is then shaped by the development of conflicts. Such a process makes the distinction between rules and the principles on which rules are founded a pervasive necessity.

Social density implies the necessity of rules, as individual agents are unable to forecast all possible unintentional effects of their own actions. This makes then unable to write complete and perfect contracts. Contract incompleteness and imperfection make rules a necessity. Institutions generate rules but individual institutions are incomplete as shown above. To make institutional systems work in a coherent way, rules of a greater magnitude are needed. They are laws as produced by political institutions. But the human agent’s inability to write complete and perfect contracts applies here too. It is then to be expected that laws are to be contested even if the process under which they have been produced has respected its own rules. Hence, the rule of Law is not enough or we have to prove that the concerned human community is perfectly homogeneous and composed only of people driven by the best set of sentiments possible⁵³. The emphasis put on the rule of Law, as in the British and American mainstream tradition, reveals a deep negation of the heterogeneity principle⁵⁴.

The legality of the process does not confer to a law the legitimacy it needs. Legitimacy proceeds from principles, which characterises a political community which, historically, is territorially defined. In turn one can see how the neo-classical view of a perfect information world is congruent to an understanding of institutions reduced to their functionality and to the negation of the legitimacy principle for the sake of making the rule of Law the one and only one benchmark⁵⁵.

If we agree to the fact that economics is not a natural science, and to the contrary that economic processes are embedded in social and historical construction, then the institution building process is as much political as it is economic. It cannot be understood separately from links between a given territory and a political community. Even in the globalisation age, Nation-State matters. It matters when it exists as well as when, weakened by decades of neoliberal policies, it is no more able to play its part. The difference between the way Malaysia rode the financial storm in 1998 when Indonesia sank is not just a difference between a wise and an unwise economic policy. The Malaysian state was still functional whereas the Indonesian one had been dramatically weakened. Malaysian economic and political elites were then in a position to resist the IMF policy and implement effective decisions (like the currency control) when Indonesian elites were so fragmented and deprived of legitimacy that they had to abide by IMF prescriptions with their usually catastrophic results⁵⁶.

If institutional systems cannot be understood in a dynamic way without including in the picture the way space has been shaped by centuries of social and political processes and conflicts, economics has no meaning but the one of political economy. This political economy needs to seriously address the Nation-State issue as well as the fact that every Nation-State is not fully homogeneous and that institutional differentiation can be found inside their own perimeter. Institutional differentiation inside a given Nation-State can explain why regional competitiveness is frequently different and why some regions develop faster than others do at a given time. In turn this can be understood only on the basis of acknowledging the social dimension of any institution, including given sets of markets. The development of an effective market economy (“effective” and not “efficient” because out of the neo-classical theoretical frame this word is devoid of meaning) always is the result of a given social process. Markets are socially constructed objects⁵⁷. The development of regional sciences is then a logical and necessary addition to a comprehensive research program for realist economics⁵⁸.

Notes

34. M. Aglietta et A. Orléan, La Violence de la monnaie, PUF, Paris, 1982; Idem, La Monnaie entre violence et confiance, Odile Jacob, Paris, 2002. Both authors explicitely state their theory is not just a refutation of neo-classical assumptions but also of the Marxian Theory of Value.

35. M. Aglietta et A. Orléan, La Monnaie entre violence et confiance, op.cit., p. 81.

36. A. Orléan, "Monnaie et spéculation mimétique" in P. Dumouchel (ed.), Violence et vérité autour de René Girard, Paris, Grasset, 1978, pp. 147-158.

37. L. Ausubel, "The Failure of Competition in the Credit-Card Market", in American Economic Review, vol. 81, n°1/1991, pp. 50-81

38. M. Aglietta, "L'institution de base des sociétés marchandes" in Alternatives Économiques, n°57, 2003, p. 32.

39. A. Orléan, "Monnaie et spéculation mimétique", op.cit., p. 148.

40. A. Orléan, "Monnaie et spéculation mimétique", p.151 and 152.

41. S.J. Grossman et J.E. Stiglitz "On the Impossibility of Informationally Efficient Markets" op.cit..

42. O. Hart et J. Moore, "Property Rights and the Theory of the Firm", in Journal of Political Economy, vol. 98, n°6, 1990; E.G. Furobtn et S. Pejovich, "Property Rights and Economic Theory: a Survey of Recent litterature", in Journal of Economic Litterature, vol. 10, 1972, n°4.

43. R.R. Nelson, "Assessing Private Enterprise: An Exegesis of Tangled Doctrine", in Bell Journal of Economics, Vol. 12, n°1/1981, printemps, pp. 93-111.

44. G.L.S. Shackle, Decision, Order and Time in Human Affairs, Cambridge University Press, Cambridge, 1969.

45. This opinion has been developed in A. Alchian, "Why Money?", in Journal of Money, Credit and Banking, vol. IX, n°1/1977, pp. 133-140. For the opposite view and a discussion of the simultaneous presence of both money and barter, J. Sapir, "Le troc et le paradoxe de la monnaie" in Journal des Anthropologues, n°90-91, décember 2002, pp. 283-304.

46. D. Woodruff, Money Unmade: Barter and the fate of Russian Capitalism, Cornell University Press, Cornell, 1999.

47. J. Sapir, "A l'épreuve des faits...Bilan des politiques macroéconomiques mises en oeuvre en Russie", in Revue d'études comparatives est-ouest, vol.30, n°2-3/1999, pp 153-213.

48. D. Marin, "Trust Vs. Illusion: what is driving demonetization in Russia?", Discussion paper Series, n°2570, CEPR, Londres, september 2000.

49. J. Sapir, "La crise financière russe comme révélateur des carences de la transition libérale" in Diogène, n°194, April-June 2001, pp. 119-132.

50. J. Sapir, “Russian crash of August 1998: Diagnosis and prescriptions”, Post-Soviet Affairs (ex-Soviet Economy), Vol. 15, n° 1/2000, pp. 1-36.

51. On the functionalist fallacy, see Stiglitz's Nobel Lecture, J.E. Stiglitz, "Information and the Change in the Paradigm in Economics", in American Economic Review, vol. 92, n°3, juin 2002, pp. 460-501.

52. F. Guizot, Histoire de la civilisation en France depuis la chute de l'Empire Romain, Didier, Paris, 1869. 7th lesson, 1828.

53. This argument has been well demonstrated by Carl Schmitt. Although one may reject his conclusion and be disgusted by his political positions between 1920 and 1945, he certainly is a founding father for a realist understanding of paradoxes of a democratic society. See C. Schmitt, Legalität und Legitimität, Duncker & Humblot, Berlin 1932 (there is one French translation of this book as Légalité et Légitimité but, to the best of my knowledge, none in English); Idem, The Crisis of Parliamentary Democracy, MIT Press, Cambridge, Mass., 1985 (1926).

54. See C. Mouffe, "Carl Schmitt and the Paradox of Liberal Democracy" in C. Mouffe (ed.), The Challenge of Carl Schmitt, Verso, London & New York, 1999, pp. 38-53.

55. J. Sapir, Les économistes contre la démocratie, Albin Michel, Paris, 2002.

56. For a good discussion about the Asian crisis and different responses put by different governments, R. Wade, "The Coming Fight Over Capital Controls" in Foreign Policy, vol. 113, hiver 1998-1999, pp. 41-54; R. S. Rajan, "Sands in Wheels of International Finance: Revisiting the Debate in Light of the East Asian Mayem", Institute of Policy Studies working paper, Singapour, Avril 1999 and B.J. Cohen, "Contrôle des capitaux : pourquoi les gouvernements hésitent-ils ?", in Revue économique, vol. 52, n°2/mars 2001, pp. 207-232.

57. A. Bagnasco & C. Trigilia, La construzione sociale del mercato. Studi sullo sviluppo di picola imprese in Italia, Il Mulino, Bologna, 1988.

58. G. Benko & M. Dunford, (eds.), Industrial Change and Regional Development, Pinter/Belhaven Press, London, 1991. G. Benko & U. Strohmayer (eds.), Space and Social Theory, Blackwell, Oxford, 1997. G. Benko, La Science Régionale, PUF, Paris, 1998.

______________________________
SUGGESTED CITATION:
Jacques Sapir, “Seven Theses for a Realist Economics; Part II: Theses Five to Seven”, post-autistic economics review, issue no. 22, 24 November 2003, article 3, http://www.btinternet.com/~pae_news/review/issue22.htm