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EH.NET BOOK REVIEW
Published by EH.NET (August 1997)
Michael Perelman, _The End of Economics_. London and New York: Routledge,
1996. $59.95 (cloth), ISBN: 0415137373.
Reviewed for EH.NET by Anthony O'Brien, Department of Economics, Lehigh
University. <[log in to unmask]>
Michael Perelman's new book argues that there is a flaw in the working
of the market system; a flaw that has caused problems in the past and that
is likely to cause disaster in the future. The result will be the
inevitable end of economics and the beginning of a new system in which
competition and the market system as we know it will no longer prevail.
There are some good things in the book: Perelman tells his story clearly
and directly, he has some interesting things to say about the last hundred
years of macroeconomic history in the United States, and it is certainly
easy to be sympathetic with his argument that neoclassical economics is
sometimes disconnected from the workings of the real world. But, overall
the book is rather a disappointment. It could easily have been much
better. Perelman's thesis will strike most economists as implausible, but
it is not indefensible. Unfortunately, Perelman (Department of Economics,
California State University, Chico) has allowed some avoidable roughness in
his presentation to make his arguments appear even weaker than they are.
This is Perelman's fifth book in fifteen years. This book lacks a preface
or acknowledgments, which makes me wonder how much feedback he received
before it was published. My guess is this would have been a better book
if he had taken more time with it.
Perelman's basic idea is that economists have by and large failed to
understand the enormous negative consequences for the workings of the
market system of the increasing importance of fixed costs. He believes
that since the Civil War fixed costs have been a large fraction of all
costs in many U.S. industries and that the importance of fixed costs
continues to increase (although neither point is well documented). In an
industry with high fixed costs, what Perelman refers to as "unbridled
competition" will result in disaster, because firms will find their prices
will be driven to the level of marginal cost. The substantial losses
resulting from these low prices will eventually lead to widespread
bankruptcy. He believes that at least since the experiences of the
railroads in the 1890s some non-mainstream economists and many businessmen
have realized that competition has to be constrained in order for the
market system to function. Such constraints are all that has stood between
the economy and disaster. So, while essentially all mainstream economists
act as if our economy is highly competitive -and build ever more elaborate
models that assume the existence of competition- in fact, the economy is
not very competitive and moves to make it more so run the risk of
unleashing the consequences of increasing fixed costs.
There are several problems with Perelman's discussion of this thesis.
He presents it in a rather off-putting polemical style, he commits a number
of avoidable blunders with respect to theory and history, and, perhaps most
disappointingly, he never deals with -- and gives the impression of perhaps
not even being aware of -- the conventional responses to his main argument.
Perelman's style is a mixture of debatable obiter dicta and remarks
that leave the unfortunate impression that he believes those who disagree
with him are either stupid or sellouts. The tenor of Perelman's style is
indicated by a few excerpts:
[The government] creates a legal structure that gives business the
upper hand relative to labor. When the economy falters, it increases
spending, often discovering imaginary threats that require more
military spending (p. 5).
Economics provides an ideological justification for atavistic methods
of providing for our economic and social needs. It leads to economic
practices that create great harm to both people and the environment
(p. 8).
Graduates [of Ph.D. programs in economics] soon develop a professional
persona with a vested interest in not rocking the boat, recognizing
that, to launch a significant challenge to orthodox beliefs can lead
to professional ostracism.... Finding an academic job does not free
the young economist from the clutches of the corporate sector, since
winning
grants is often an important consideration in the promotion
process....
[E]conomics is not a science, but an ideology designed to defend
existing
practices (pp. 23, 26, 29).
We live in an economy in which many corporations are large enough to
make decisions that threaten our welfare in obvious ways- spreading
toxic substances, selling dangerous products, or putting the health of
their
workers at risk. Those public agencies, which are supposed to
protect us from corporate misconduct, seem thoroughly beholden to
those whom they are supposed to regulate (p. 111).
This kind of thing is pretty tiresome. I don't believe the people at
the EPA and OSHA are "thoroughly beholden" to those they regulate, there
may be academic economists defend the market system only so as to be able
to make their next mortgage payment, but I've never met one, and so on.
Writing in this way is counterproductive. By about page 10 anyone who
doesn't already believe the market system is bad is likely to stop reading,
leaving Perelman to preach to the choir.
Perelman makes a number of statements that indicate there are
significant gaps in his knowledge of the economic history and history of
economic thought literatures. For instance, how many economic historians
still believe the old chestnut that the Civil War was an important
watershed in the development of U.S. manufacturing?
During the war, the military created levels of demand that were
previously unknown, setting off an unprecedented economic boom.
Because the war drained off so much labor and grain prices were so
high, farmers invested heavily in labor saving devices, such as
reapers. No doubt, other businesses followed a similar course.
Certainly, the railroad boom was part and parcel of this process (p.
54).
How many economic historians believe the price deflation of the late
nineteenth century was due to excessive competition, as Perelman apparently
does (p. 59)? How many historians of economic thought would buy the notion
that marginal productivity theory was developed in an attempt "to cool the
radical ardor of farmers and workers by crafting an abstract theory based
on mathematical theorems that supposedly demonstrate that labor could do no
better than to trust its fate to the market" (p. 77)?
How many observers of the controversies in macroeconomics of the last forty
years would call Milton Friedman a disciple of Leon Walras (p. 78)? A key
reason why Friedman has not been taken entirely seriously either by his
Keynesian critics of the 1960s and 1970s or by his latter-day putative
followers like Robert Lucas and Thomas Sargent is that he has declined to
reduce his story to a neo-Walrasian model- the sine qua non of modern
theoretical work. These sorts of slips significantly undercut the
authority of Perelman's presentation.
The biggest problem with the book is Perelman's failure to deal with
or, in many cases, even to mention the arguments of the critics of the
notion that high fixed costs lead to destructive competition. Perelman
discusses approvingly and at length the ideas of a group of late nineteenth
century economists who became convinced that large fixed costs and excess
capacity in the railroad industry meant that unbridled competition would be
ruinous both there and in other industries with similar cost structures.
The writings of these economists brought forth a number of critiques --
almost entirely unmentioned by Perelman -- that, for mainstream economists
at any rate, were quite telling. Perhaps the best known was Eliot Jones's
1920 Quarterly Journal of Economics article, "Is Competition in Industry
Ruinous?" Many latter articles- and, for that matter, most industrial
organization textbooks- have discussed the supposed evils of cutthroat
competition and, by and large, have come to the conclusion that they are
greatly exaggerated. Now, these conventional arguments may be correct or
incorrect, but surely Perelman needs to deal with them.
Finally, if the market system does not work well and can't be made to
work well, what would Perelman replace it with? He doesn't really say:
I do not pretend to offer some simple crackpot reform that will
magically solve all economic problems. Instead, I intend to expose
economics as a pseudo-science that stands in the way of human
betterment in the hopes that we can develop new practices and better
institutions that will allow us to manage our lives in a more
satisfactory manner (p. 7).
Unfortunately, the history of the twentieth century doesn't inspire much
confidence that replacing market practices and institutions with non-market
ones will lead to human betterment.
Anthony O'Brien
Department of Economics
Lehigh University
Anthony O'Brien is author of a number of articles-- all of which are
entirely above criticism ;-). These include "The Importance of Adjusting
Production to Sales in the Early Automobile Industry," recently published
in _Explorations in Economic History_ and (with Judy McDonald and Colleen
Callahan) "Trade Wars: The Canadian Reaction to the Smoot-Hawley Tariff"
forthcoming in the _Journal of Economic History_.
Copyright (c) 1997 by EH.Net and H-Net, all rights reserved. This work may
be copied for non-profit educational use if proper credit is given to the
author and the list. For other permission, please contact
[log in to unmask] (Robert Whaples, Book Review Editor, EH.Net.
Telephone: 910-758-4916. Fax: 910-758-6028.)
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