Global Contentions – East and West
Edited by Geoffrey M. Hodgson, Makoto Itoh and Nobuharu Yokokawa
Chapter 2: Contested exchange: a new microeconomics of capitalism
Samuel Bowles and Herbert M. Gintis* INTRODUCTION In this chapter we develop a new microeconomic foundation for the political economy of capitalism, one that illuminates rather than obscures the exercise of power and which thus is capable of addressing the democratic concerns of the left. To do this we apply recent developments in the microeconomics of incomplete contracts to illuminate themes initially developed by Marx, and particularly his representation of relationships between employers and their workers as political as well as economic. In the neoclassical general equilibrium model, each agent maximizes utility subject to a wealth constraint, and prices are set to clear all markets. In competitive equilibrium, moreover, conditions of free entry and exit ensure that for each commodity, including labour and capital, each buyer faces a large number of sellers, each seller faces a large number of buyers. It follows that in equilibrium, if agents A and B engage in an exchange, B’s gain exactly equals the gain from his or her next best alternative. This treatment of exchange views the economy purely as a system of resource allocation and the state as the quintessential system of power. Indeed, the equation of ‘politics and power’ with the state and ‘production and wealth’ with the economy is still widely accepted as deﬁning the disciplinary boundary between economics and political science. Among traditional economists the consequent excision of power from economic theory has been a source of celebration. Abba Lerner (1972, p. 259) expresses a common sentiment: ‘An economic...
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