Published on December 24, 1999 at 01:01
In an essay—somewhat hurried in form but worthy of attention—which he published five years after the fall of the Berlin Wall under the title The End of the Twentieth Century, the Hungarian-American historian John Lukacs wrote: “It took a long time, almost an entire century, for the appeal of communism to die and for that of Wilsonianism to fade; but that is not due to any inherent quality of these ideologies. If it took so long, it is because, contrary to what a superficial impression might suggest, the movement of ideas in this democratic century was extremely slow. As an illustration, consider the attitude of intellectuals everywhere in the world. They could not—or would not—correct, let alone abandon, their sympathies for Marxism, despite its increasingly obvious failures. This widespread reluctance to change one’s ideas is characteristic of this century, and not only in politics. Seventy years ago, not only Marx but Darwin, Freud, Picasso, Stravinsky, Einstein were regarded as the giants of our time. Fifty or sixty years later, the same names were cited, and this would still be the case today for most of them. Compare this static list with the shifts in perspective that occurred in the nineteenth century, reputed to be stupid and boring. What a difference between Goethe and Nietzsche, Scott and Wilde, Chateaubriand and Ibsen, Rossini and Debussy—not to mention Wagner!”
According to certain appearances, the closed world of economic thought may have escaped this fixation. The extraordinary multiplication in the number of economists attests to it only in appearance. One must ask whether it has not gone hand in hand with a tightening grip on knowledge that has become the attribute of a certain power or prestige.
Their controversies rarely concern points of doctrine. They are most often political in nature and framed in vague terms. The most clear-sighted of American economists, James Buchanan, believes that the United States has returned to mercantilism—always the enemy of liberalism. In short, the self-proclaimed triumph of the market economy has not been accompanied by any systematic and thorough reflection on the conditions for the proper functioning of a market economy.
The theories that have dominated discussion over the past twenty or twenty-five years have set the tone. Such is the case for the twin theories known as rational expectations and market efficiency. All fall under the philosophy of Dr. Pangloss and the best of all possible worlds. In other words, it is useless—indeed forbidden—to rack one’s brains to find anything else. The reference doctrine on which these new shoots have been grafted has remained untouched for more than a century.
Yet the gaps in the theoretical construction to which economists of all persuasions refer are gaping. Without our realizing it, they leave our economic and financial system—and ultimately our political and social system—exposed. Nonetheless, the movement of ideas remains largely blocked. These gaps, which are as many failures to explain what the key economic-financial notions on which society relies actually consist of, have ceased to be seen as problems. Thus, enterprises and their personnel—reduced to the rank of “resources”—are managed in the name of “value creation” without anyone knowing precisely what is meant when one speaks of value. The vagueness here implies that we do not know precisely what a “price” is either. To what extent is the seller’s profit added to the value (price) of the merchandise, or rather an inherent component of it?
On this fundamental point, modern theory is silent or very confused. It has remained bogged down in the work handed down by the economists of the last quarter of the nineteenth century. Léon Walras (his Elements of Pure Political Economy dates from 1874) is still the hero of neoliberals. These seem to have forgotten that, in life, Walras (1834–1910) was a socialist. To him, his famous construction of general equilibrium was an exercise without practical value, not a bible for guiding society! One may, moreover, entertain doubts about the model he proposed. Is the perfect market to which he refers actually competitive? The assumption may well be that supply is limited to a given quantity (no new entrants). Paul Valéry noted that the venerated economist had mis-posed his equations. But who today cares about the judgment of a French poet, even one who was also a mathematician?
The fact remains that modern theory of capitalism—over a century old (and thereby already in rupture with the authentic founders, Adam Smith (1723–1790) and, above all, Ricardo (1772–1823))—has no theory of profit. It gets by with evasions. At times profit is a “residue” attributed to good managerial performance; at times it is seen as remuneration for risk. Are we to understand that if there were no risk, the shareholder who has placed capital at the disposal of the enterprise would have no right to anything? The direction in which the solution lies is clear. One should integrate the dynamics of profit into the general framework of exchange: in return for the contribution of capital, the shareholder is entitled to receive an indefinite flow of income. Of course, this exchange, spread out over time, is subject to the risk inherent in the uncertainty of the future. But it is an abuse of language—and a logical error—to see in this risk the foundation of profit. Reasoning on the basis of exchange would lead theorists to refocus their analysis of capitalism on… capital. This is precisely what the “marginalist” school (of which Walras is, along with several Austrian economists, a leading figure) refuses to do.
This confusion of ideas and the refusal to change them have enormous consequences. Even today, EDF believes that it has enabled the French economy to take a major step toward a rational price system. For nearly forty years, electricity-pricing schedules in France have been calculated on the basis of marginal cost. The idea is that the price should be aligned as closely as possible with the price of the last kilowatt-hour supplied. Hence the price modulation depending on whether a firm—or an individual—uses electricity during peak hours, when the price is higher, or during off-peak hours, when it is lower. According to a similar principle, the SNCF has modulated its fares, notably on high-speed train lines. In this price modulation, the national enterprises are not only taking into account the higher cost of supply during peak periods. They are exploiting a psychological factor: at what price does the consumer “value” the advantage of traveling at the time that suits him (for example, at office-closing hours)? Surveys show that many people are willing to pay a significant premium for this. So why not take advantage of it? Such is the operation of a black-market economy. Such is the reasoning of marginalist economists: for them, the price of goods is a function of their “utility,” subjectively estimated by the buyer. Nobel Prize 1991, Ronald Coase writes:
“I suspect that the idea of the maximization of utility by the consumer is a nonexistent entity that plays, in modern economic analysis, the role that the ether played in medieval physics.”
On a competitive market, the principle of reference is (or should be) very different. Whatever desire I may have to buy a good or service, I feel cheated if I pay more than “what it is worth.” But for that to be the case, the market must operate on the basis of objectively (not subjectively) determined prices.
A rational price implies that the return on the capital employed is included in it, as, of course, is the share of fixed costs incurred. Yet this double condition is not satisfied. The first had been forgotten, and the second is unmet whenever the additional expenditure required to produce one kilowatt is lower than the average cost. The marginalist misunderstanding of profit meets the “public-sector” philosophy that long guided EDF. The principle was that of “budget neutrality”: no deficit, but no profit either. The vast nuclear program was undertaken in order to re-establish, on paper, the equivalence between short-term marginal cost and long-term marginal cost—by which the great institution’s theorists claimed to correct the anomaly of their system: the deficit resulting from a marginal price that did not cover average production cost. O the power of received ideas, held in perfect good faith!
Such good faith is not always present. There was indeed, in the middle of the century, an attempt to overturn received ideas and concepts. Its promoters themselves called it the “Keynesian revolution.” Its prestige rested on a double heresy: it denied the existence of “natural mechanisms” capable of restoring full employment, and it held that this could be achieved only through public spending financed by deficit. In both cases, it flattered the ideological preferences of the intellectual left. It also flattered the expectations of the political class. The implicit Keynesian model is the war economy, which grants the state full powers.
PAUL FABRA