[OPE] The micro dimension of the Financial Crisis

Paul,

Interesting comment at http://archives.econ.utah.edu/archives/ope-l/2008m11/msg00175.htm, but that raises the question of what grounds you choose to model a distribution of data referring to events which include events which are deemed "risky" at a given magnitude. The way we model risks can vary a great deal, but the approach taken will depend among other things on how we theorize what brings about the risky event, i.e. we typically need and assume some understanding of causative processes as a prerequisite for modelling the probability of occurrence.

As I mentioned before I am a bit doubtful about interpreting the law of value as a stochastic law governing a social system, since I do not think that this law, properly understood, regulates the whole of economic life, and I do not think that market activity by itself can constitute equilibrium via price movements. At best you can prove that, given certain assumptions, a set of prices can exist at which all markets would clear.

Farjoun and Machover shift the equilibrium discussion from a simple supply-demand balance to the equilibrium of a social system.

No doubt you can discover statistical regularities for a social system, but the challenge in that case is really to discover how the system attains equilibrium and subsequently loses it, across intervals of irregular duration, which may imply that the same variable can have the opposite effect, or behaves in the opposite way, in a different quantitative configuration. This kind of thing is very difficult to model statistically. Thus, I think it is more worthwhile to interpret the actual quantitative and historical trends, with a theory of what causes what.

My thought is that Marx's notion of equilibrium is somewhat different from what it is ordinarily understood to be - in his view, a relative supply-demand balance is maintained because people respond to the observation of imbalance in a way that tends towards restoring the balance, but in fact any perfect supply-demand balance rarely if ever exists, i.e. there are constant market fluctuations (fluctuations of prices and sales volumes), and it is precisely through those fluctuations that the system is capable of making the adjustments necessary in order to reproduce itself. There is no proof possible for the existence of any equilibrium other than that things stay constant across time, but they rarely do; all we can say is, that at a certain level of abstraction, the magnitude of variability is very slight. This implies really that the system is actually never in equilibrium, i.e. equilibrium is only an idealised extrapolation.

It is just that very large market fluctuations can cause capital flight, loss of income and unemployment, to the point that the social order is seriously threatened. The characteristic bourgeois response to this evidence is that factors external to the market disturbed peaceful trading, i.e. the causes could never reside in market activity itself, they could never be system-immanent, since markets, if they are not interfered with, spontaneously gravitate towards equilibrium.

But this is I think really a different issue from the issue of how social order is maintained, and I think in this respect that Marx argues that the preservation/enforcement of the social relations of production are the basis of the conservation of social order, not market activity per se. Hence Marx says these relations (defined by property rights, income entitlements, and conditions of work, enforced by the state) constitute the "economic structure", the "real basis".

To illustrate, e.g. the immediate post-war situation in Germany, described by Armstrong/Glyn/Harrison. The first big strike wave occurred in the Ruhr in early 1947 - it was about food rations and housing, but soon there were demands for nationalisation. The US appointed military Governor Newman however stated at the time that he had to power to break strikes by withholding food rations. The clear message was: "no work, no food". As the workers went back to work, it was soon "business as usual". Thus, the social order was maintained, by enforcing the social relations of production, even despite fairly chaotic market conditions. I think that if you studied the contemporary history of e.g. Iraq or Argentina you would find that market activity as such cannot explain the establishment of social order. In fact, I think that if you studied the project of destroying and rebuilding social order in Iraq, it would provide brilliant proofs of Marx's interpretation of capitalist society, though somebody might consider this exercise "purely academic".

Jurriaan

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Received on Mon Nov 17 13:32:05 2008