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17G. Chiodi
KNOWLEDGE AND CULTURE IN RELATION TO THE DOMINANT ECONOMIC THEORY2
The transition to a Noonomy society implies the overcoming of the dominant (market-centred) economic theory (DET). In this regard, 'knowledge' and 'culture' can be taken as key-reading of that overcoming. Over the last century and up today, the DET has been subjected to an ever increasing refinement which has ultimately led to a self-referred dehumanized and dissocialized closed-world, centred on the unidirectional behaviour of the individual acting much like a robot. One example, among the possible many, the foolish use of algorithms of contemporary finance, the latter still considered the outcome of a high-profile research. This is also an example of how the economic culture is being produced and disseminated all over the world, specifically in the universities, in the international organizations and in the leading research departments. To change the course of the events in a different direction, further reflection on 'knowledge' and 'culture' is therefore much needed.
Keywords: Dominant Economic Theory, Financial Speculation, Knowledge, Culture.
DOI: 10.37930/1990-9780-2020-4-66-120-126
УДК 330.352
Introduction
Millennium after millennium, the long historical process of humanity has created, accumulated and almost fossilized different distinctive features of environment, religions, customs, laws, social and political institutions, all of them deeply rooted into the social DNA of the people.
The transition to a new society, as envisaged by Professor Budronov [1]3, is certainly a welcome and suggestive scenario worth of much consideration.
In this respect, I want to make some reflections on two distinct (although intertwined) aspects of human life: 'knowledge' and 'culture', which seem to me universal features of any human society and which I consider particularly relevant to the Noonomy society.
However, because the final step of achieving Noonomy seems to be the complete disappearance of any economic relations substituted by 'knowledge', 'creativeness' and 'ingenuity' of the human beings, reference to the Dominant Economic Theory (DET) - by means of which I intend the contemporary market-centred or neo-liberal neoclassical economic theory - should be of some importance.
1 G. Chiodi, Professor, Sapienza Universita di Roma, Italy.
2 Based on the plenary paper delivered at S.Y. Witte INID International Scientific Seminar "Socialization of the Economy: Human Being as a Product and Active Subject of the Historical Process" (26.10.2020).
3 See also the review by Plotnikov [2].
This is a compelling task, once the DET is seen (as it should be, in my opinion) a formidable obstacle to the transition to Noonomy.
In the following sections, I will state some propositions, as regards the kind of difficulty in overcoming the DET, having in mind, as a key-reading, the two salient aspects of 'knowledge' and 'culture', as mentioned above.
Features of the Dominant Economic Theory
Over the last century, and up today, the DET (whose roots can be traced back, as is well known, to the last quarter of the 19th century) has been subjected to an ever increasing 'scientific' intellectual refinement process, thanks to the use of analytical tools and languages, most of them borrowed from physics and mathematics. As will be seen in the following sections, this process led to a strong consolidation of the underlying paradigm, up to the point of making it the dominant one in the general economic thinking.
In this regard, the Arrow-Debreu General Equilibrium Model (ADGEM) [3] can certainly be taken as the most significant and representative stepping stone of that 'scientific' refinement process. The most characterizing features of the DET (i.e., the centrality of a free market, agents acting rationally with maximizing behaviour, the capacity of the market forces to ultimately produce a state of equilibrium,) are in fact all safely encapsulated in a highly rigorous mathematical framework which, in the years to come, would have been taken as the basic reference framework of the neoclassical paradigm. The essential ingredients of that framework were destined to run throughout the myriad of models taking inspiration from it, no matter which specific area of the economic discipline they were referring to.
An outcome of that intellectual process should be properly emphasized, for it has naturally and perilously led the prevailing economic thinking into a self-referred, dehumanized and dissocialized closed-world, impoverished by the absence of any meaningful value-judgment and of any slight openness to other humanistic disciplines. The economic thinking was more and more centred on a unidirectional robot-like behaviour of the individual.4
Bringing to an untenable extreme individualism, the coming into being of any appreciable idea of 'community' or 'common good' has been severely precluded - let alone the role of the State, the latter generally viewed as a hindrance to the smooth working of the market mechanism.
Thanks to this refined intellectual achievement, the majority of the economists have considered, and still consider, the DET as the most valuable theory at the disposal of theoreticians and policy-makers, in so far as it conveys universal laws efficiently applicable to a universally valid and eternal mode of production, as the market economy is supposed to be.5
The above opinion has been firmly retained despite the many critiques coming from alternative visions of society (as, for example, Sraffa's Marxist critique [7], essentially, but not exclusively, based on logical grounds, and Keynes' critique [8], based instead on the loss of generality of the orthodox theory). In each of the these cases, the DET has always been utterly insensitive or at most stubbornly resilient.
It is very much worth noticing that the analytical structure of the ADGEM, being firmly based on topological concepts, is not directly subjected to the critique rightly raised against the marginal neoclassical theory years before by Sraffa [9], and a few years later by Sraffa himself [7], whereas the Keynesian critique has been (and still is) strongly fought and in most cases explicitly rejected outright.
4 Cfr Chiodi [4].
5 Marx [5] was certainly the first scholar to clearly perceive long before the symptoms of this process. Cfr. also Chiodi [6].
A bifurcation in mainstream economics
The dissemination of an economic culture, almost exclusively identified with the DET paradigm, occurred at an ever increasing pace since 1950s and up today, and taught and applied all over the world, according to the specific circumstances, through the most relevant equipped institutions, such as universities and international organizations (e.g. IMF, WB, FAO).
A crucial remark must be made at this point. Over the years immediately following the World War II, a sort of 'bifurcation' took place in mainstream economics: on the one hand, research work was addressed to topics concerning the working of the real economy (e.g., production, distribution, growth), both from the micro and from the macro point of view; on the other, a parallel research work was instead devoted to the study of the financial aspects of the economy (e.g., optimal portfolio choice).
As I will try to make evident in the sequel, the two strands of the economic research referred to above are in many ways connected and, from the operational point of view, they are indeed strictly connected. On theoretical grounds, however, they worked mainly disjoint, with the effect that finance can be considered an independent and autonomous section of the whole economic discipline.
One aspect of this independence and autonomy manifests itself quite clearly in the fact that finance is mainly concentrated on specific micro-choices of a single individual (being she/he a trader, an investor, or a manager), having no need to make any direct reference to more general macro problems, such as unemployment, inflation, growth, income and wealth distribution. Because of this, it employs, in its own research works, specific analytical tools and concepts which have not generally been subjected to criticism, like those tools and concepts in the 'real' economy studies have been used since long, such as, for example, the production function and the notion of marginal productivity in income distribution theory.6
It should be noted that modern finance has not only indisputably maintained the 'core' of the DET as its basic reference framework, but, reciprocally, it has also contributed to greatly reinforce it - as will presently be seen.
The core of modern finance
In the early 1950s of last century, Markovitz [10] provided the seminal modern portfolio optimization model, at the centre of which there is the choice of a rational investor aiming at maximizing expected returns for a given risk, and minimizing risk for a given expected return. The context in which that choice takes place is obviously a free competitive market, and attention is almost exclusively focused on comparing quantifiable alternatives and, in particular, on quantifying the risk.
A few years later, Sharpe [11] made a step forward in the direction and along the lines of Markovitz model, and in this way he contribute to the enrichment of the Capital Asset Pricing Model.
By far the most important theoretical work in modern finance, however, should be considered the Modigliani-Miller Theorem - Modigliani and Miller [12], Miller and Modigliani [13] - as responsible for having profoundly influenced the behaviour of traders and investors in the financial markets, in particular, and in the economic culture, in general.
The gist of the Modigliani-Miller Theorem can be stated as follow: the market value of the firm depends exclusively on the income stream generated by its assets. As a consequence, its value is not affected (i) by the proportion between debt and equity, characterizing its financial structure, (ii) by the proportion in which the returns are distributed between dividends and real investment. Thus finance appears altogether irrelevant to investment decisions.
The above are indeed very strong propositions and therefore they invite some reflections.
6 Cfr., in this regard, the seminal and fundamental works by Sraffa [7, 9].
In the very first instance it should be noted the kind of assumptions beneath the theorem: (a) perfect capital market, viz. costless access to information to all traders, no taxes, no transaction costs, (b) rational behaviour of the investors, (c) perfect certainty.
These are effectively the standard assumptions found in a vast class of neoclassical models, generally viewed as simplifying assumptions. In the case of the Modigliani-Miller Theorem, however, they appear, instead, as characterizing assumptions, in so far as they precisely outline the ideal environment in which the theorem can practically be operative. Put it other way, traders can draw strong inspiration from the theorem in their speculation activity in the financial market, by privileging a 'wild rush towards short term profits and a rapid distribution of dividends', at the expense of productive investments - as Pasinetti [14, pp. 1445-1446] has rightly emphasized. From this perspective, the theorem marks a significant departure from the Classical and Marxian viewpoint.
It should be added, in my opinion, that the theorem represents also the very first model in giving a suggestion to financial managers of how to behave efficiently and in furnishing an invitation to policy-makers not to intervene in the functioning of the market.7
In the middle 1960s the appearance in the financial literature of the Efficient Market Hypothesis (EMH) marked another big and profound advancement in modern finance. It was very clearly stated by Fama [16-18], whose notion of 'efficiency' is worth quoting at length: An "efficient" market is defined as a market where there are large numbers of rational, profit-maximizers actively competing, with each trying to predict future market values of individual securities, and where important current information is almost freely available to all participants [16, p. 76].
Having at the background that notion of 'efficiency', Fama was able to elaborate his theory of 'random walks' in stock market prices. He did maintain the view that 'on the average, competition will cause the full effects of new information on intrinsic values to be reflected "instantaneously" in actual prices.' Ibidem. The consequence of this was that past history is irrelevant to predict significantly the future, and also that no agent can beat the market persistently.
At the beginning of the 1970s, another stepping stone in the financial literature was brought by the Black-Scholes-Merton option-pricing model, Black and Scholes [19] and Merton [20].
Their contribution to modern finance took place at the time in which financial markets started to become enriched by far more sophisticated new financial instruments, up to the point that the value of financial assets supersedes the value of world GDP by many times.
The Black-Scholes-Merton contribution ultimately boils down in reducing significantly the systematic risk of any asset by a continuous dynamic 'hedging', which means taking positions in different financial products such as bonds, options and the underlying stocks.
Although the contributions so far reviewed all have the 'core' paradigm of the DET in common, nonetheless the Black-Scholes-Merton does furnish a qualitatively different value added, in so far as it aims at shaping reality, instead of simply interpreting or predicting it.8 This can be seen as a further step forward with respect to the Modigliani-Miller Theorem, as has been maintained above.
Knowledge and culture in economics
Let me remind that since 1969 the Swedish Academy of Sciences annually awards the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel (improperly called, for short, Nobel Prize in Economics).
7 In this regard, cfr. Weissman and Donahue [15].
8 On this points cfr. the reflections contained in Caldentey and Vernengo [21, p. 79], as well as the crucial statements in Merton [22, p. 109]. Cfr. also MacKenzie and Millo [23].
Most of the economists named in the preceding sections have received the Nobel Prize in Economics. Leaving aside Arrow and Debreu, it is quite remarkable that the economists who have contributed most to the development of modern finance, viz. Markovitz, Sharpe, Modigliani, Miller, Fama, Scholes, Merton all of them have been awarded the prize. This can be interpreted as a clear sign of acknowledgement of their real contribution to the development of 'knowledge' and 'culture' in Economic Science. Let me remind also, that in 1997 the Nobel Prize in Economics was awarded to Robert C. Merton, from Harvard University, and to Myron S. Scholes, formerly from Stanford University and then from the hedge fund Long Term Capital Management (LTCM).
The Prize motivation of the Prize was: "for a new method to determine the value of derivatives", and, more specifically, their work "generated new financial instruments and has facilitated more effective risk management in society" - as is written on the Nobel Prize official website.9
As has been seen above, Merton and Scholes actually refined an algorithm whose use, accomplished with the most advanced technology of informatics, was essentially devoted to upgrade the performance of the financial markets.
Their contribution was thus supposed to be a big step forward not so much in the knowledge of how financial markets actually work, but instead in the knowledge of how they should work efficiently.
There is, however, a very dark side of that story. Merton and Scholes, in fact, were among the founders and associates of the hedge fund Long Term Capital Management (LTCM). The latter started its activity in 1994 and it had $126 billion in assets. To get to the fund, investor paid $10 billion. Between 1995 and 1996, LTCM was able to give annual returns of 40%, after having deducted 27% for management fees.10 In 1998, with a reserve capital of almost 5 billion dollars, the fund bet with collateral to buy derivatives for 125 billion dollars, and these were subsequently used as collateral to buy derivatives for 1.250 billion dollars.11 LTCM miserably collapsed in that year - and less than one year has passed since the Nobel Prize was awarded to Merton and Scholes.12
To avoid a far more serious financial catastrophe, the FED and other important international banks were bound to intervene immediately and drastically.
Speculation in the financial markets did continue since then, despite the pernicious consequences derived from the LTCM collapse: the traders, in fact, stubbornly continued to use the Black-Scholes-Merton equation to determine what was supposed to be, in their opinion, the 'exact' price of the derivatives until the outbreak of the 2007 financial crash, the effects of which are now widely well recognized.
It might be worth adding, in this respect, that very little has been learned from that dramatic experience13 and - worse that this - almost nothing from the apparently obvious but subtle difference between 'risk' and 'uncertainty', which is taught to the undergraduates in Economics all over the world - let alone Keynes' and Minsky's lessons in this regards.14
Concluding remarks
The intellectual process of refinement in the economic discipline outlined in the preceding sections gives sufficient evidence that the prevailing economic thinking has been monopolized by the DET.
9 www.nobelprize.org. Cfr. also Black and Scholes [19] and Merton [20].
10 Cfr. Amadeo [24].
11 Cfr. Coffin [25].
12 Cfr. Bouchaud [26], Brown, Kauffman, Palmrose, Smolin [27] and Haubrich [28].
13 Cfr. Chiodi [29].
14 Cfr. Keynes [8] and Minsky [30].
In particular, the development of modern finance makes quite evident that there has been incremental knowledge in the functioning of financial markets, which are rightly considered very important institutions in the more general working of a free market economy.
An increasing economic knowledge, however, did take place within a cultural milieu based on the market-centred neoclassical paradigm, where any ethical and societal problem has been aptly put aside.
The DET seems of having lost its original function of simply interpreting or predicting reality, and having instead assumed that of fundamentally shaping it. Some of the consequences of this very turn have been briefly examined, by means of LTCM collapse.
The latter case invites to reflect deeply on which 'knowledge' and which 'culture' should be cultivated.
I think that there is much interesting work still to be done to accomplish and to finalize the transition to a better society.
References
1. Bodrunov, S. (2018). Noonomy, Moscow-St Petersburg-London.
2. Plotnikov, V. (2019). Review of the book Noonomy by Sergey Bodrunov, Global Journal of Archeology & Anthropology, June, 99-101.
3. Arrow, K.J. and Debreu, G. (1954). Existence of an equilibrium for a competitive economy, Econometrica, July, 265-90.
4. Chiodi, G. (2020a). Ethics out of Economics: The Futile Attempt of Rendering Economics a Neutral Science, Problems of Political Economy, No 2(22), 88-99, (in Russian).
5. Marx, K. (1867). Capital, Volume I, London: Lawrence & Wishart, 1974.
6. Chiodi, G. (2020b). Sraffa's Silenced Revival of the Classical Economists and of Marx, Paper presented at the Forum Marx XXI, Moscow, May 17-19, 2018, forthcoming in Sinha, A. (ed.) (2020). A Reflection on Sraffa's Revolution in Economic Theory, London: Palgrave-Macmillan.
7. Sraffa, P. (1960). Production of Commodities by Means of Commodities. Prelude to a Critique of Economic Theory, Cambridge: Cambridge University Press.
8. Keynes, J. M. (1936). The General Theory of Employment, Interest and Money, London: Macmillan and Co. Ltd.
9. Sraffa, P. (1926). The Laws of Returns under Competitive Conditions, The Economic Journal, xxxvi, 535-50.
10. Markowitz, H. M. (1952). Portfolio Selection, The Journal of Finance, March, 77-91.
11. Sharpe, W. F. (1964). Capital Asset Prices: A Theory of Market Equilibrium Under Conditions of Risk, The Journal of Finance, September, 425-442.
12. Modigliani, F. and Miller, M. H. (1958). The Cost of Capital, Corporation Finance and the Theory of Investment, American Economic Review, June, 261-297.
13. Miller, M. H. and Modigliani, F. (1961). Dividend policy, Growth and the Valuation of Shares, The Journal of Business, October, 411-433.
14. Pasinetti, L. L. (2012). A Few Counter-factual Hypotheses on the Current Economic Crisis, Cambridge Journal of Economics, 36, 1433-1453.
15. Weissman, R. and Donahue, J. (2009). Wall Street's Best Investment: The Deregulatory Steps to Financial Meltdown, Multinational Monitor, January/February, 10-31.
16. Fama, E. F. (1965). Random Walks in Stock Market Prices, Financial Analysts Journal, January-February, 75-80.
17. Fama, E. F. (1970). Efficient Capital Markets: A Review of Theory and Empirical Work. Journal of Finance, Papers and Proceedings of the Twenty-Eighth Annual Meeting of the American Finance Association New York, N. Y., December, 28-30, 1969, May, 383-417.
18. Fama, E. F. (2013). Two Pillars of Asset Pricing, Nobel Prize Lecture, December 8, www. nobelprize.org/prizes/economic-sciences/2013/fama/lecture. Accessed 04.11. 2020.
19. Black, F. and Scholes, M. (1973). The Pricing of Options and Corporate Liabilities, Journal of Political Economy 81 (3), 637-654.
20. Merton, R. (1973). Theory of Rational Option Pricing, Bell Journal of Economics and Management Science 4 (1), 141-183.
21. Caldentey, E. P. and Vernengo, M. (2010). Modern Finance, Methodology and the Global Crisis, Real-World Economics Review, no. 52, 69-81.
22. Merton, R. (1997). Application of Option-Pricing Theory: Twenty-Five Years Later, Nobel Lecture, December 9, Economic Sciences, 85-118.
23. MacKenzie, D. and Millo, Y. (2003). Constructing a Market, Performing Theory. The Historical Sociology of Financial Derivatives Exchange, The American Journal of Sociology, July, 107-145.
24. Amadeo, K. (2020). Long-Term Capital Management Hedge Fund Crisis, www.thebalance. com/long-term-capital-crisis-3306240#:-:text= Accessed 10.11.2020.
25. Coffin, B. (2008). Ten Lessons Learned from the Collapse of Long-Term Capital Management, Risk Management, September, 42-47.
26. Bouchaud, J.-P. (2008). Economics Needs a Scientific Revolution, Nature, 30 October, 1181.
27. Brown, M., Kauffman, S. A., Palmrose, Z., Smolin, L. (2008). Can Science Help Solve the Economic Crisis?, www.edge.org/documents/archive/edge269.html. Accessed 15.11.2020.
28. Haubrich, J. G. (2007). Some Lessons on the Rescue of Long-Term Capital Management, Policy Discussion Papers, Federal Reserve Bank of Cleveland, April.
29. Chiodi, G. (2019). The European Union Economic Policies: When Theory Does Not Keep Up with Practice, The World of Transformations - The International Scientific and Public Journal, 3/2019, 177-189, (in Russian).
30. Minsky, H. (1977). The Financial Instability Hypothesis: An Interpretation of Keynes and An Alternative to Standard Theory, Challenge, March-April, 20-27.
Переход к ноообществу предполагает отказ от доминирующей (рыночно-ориентированной) экономической теории (ДЭТ), при этом «знания» и «культура» могут рассматриваться как ключевые показатели этого перехода. В течение последних ста лет и вплоть до сегодняшнего дня ДЭТ подвергалась постоянным доработкам, что в конечном итоге привело к появлению зацикленного на себе дегуманизированного и асоциального закрытого мира, сосредоточенного на однонаправленной, во многом роботизированной поведенческой модели. Одним из множества примеров тому служит безрассудное использование алгоритмов современных финансовых систем, создание которых по-прежнему считается результатом серьезных исследований. Этот пример также отражает формирование и глобальное распространение экономической культуры, особенно в университетах, международных организациях и ведущих исследовательских центрах. Чтобы направить ход развития в иное русло, крайне необходимы более глубокие размышления о роли «знаний» и «культуры».
Ключевые слова: доминирующая экономическая теория, финансовые спекуляции, знания, культура.
