Mathematical Economics Is More Compatible With Communism Than Capitalism

by Eric Englund
by Eric Englund

When reflecting upon mathematical economics, it is natural to think about capitalism, high finance, and money itself. For those who have taken college-level macro and micro-economics courses, surely memories of complex mathematical equations come to mind. Yet, with a strong background in calculus, we were able to tackle difficult problems as if we were physicists describing constant quantitative relations among economic actors (i.e., human beings). With this mathematical prowess, we were also able to conquer the world of finance where we learned, via the Capital Asset Pricing Model, that volatility equals risk – there seems to be something about equality and equilibrium that is so satisfying to most intellectuals and professors. Of course, in finance, we were also taught that markets are efficient in that no individual is unique nor has any unique ideas – sounds like radical egalitarianism to me. Consequently, an individual isn’t, in the long run, capable of selecting a stock portfolio that will outperform the S&P 500 index. Thus, the "science" of mathematical economics (which encompasses finance as taught today) describes the human condition as one being in a state of equilibrium, where no one is unique, and therefore we are all equal. Oddly enough, if we take the assumptions of mathematical economics to a logical conclusion, then money itself would not be necessary and communism would be a smashing success. Mathematical economics isn’t the bastion of free-market capitalism it makes itself out to be. In fact, the very emergence of money itself discredits mathematical economics.

When taking tests in mathematical economics and finance, it was always gratifying to do well on such tests. Nevertheless, I couldn’t help but feel a bit empty because much of what I "learned" seemed so disconnected from reality. What was it about perfect competition, the Efficient Market Hypothesis, an economy in equilibrium, etc. that I found so other-worldly? It came down to the fact that this "scholarship" was built upon a surreal assumption. This assumption is that human beings have perfect knowledge – i.e., consumers have perfect information about prices, products, etc. Taking this perfect-knowledge assertion to its logical conclusion, I would know everything about everything. Clearly, this assumption is irrational and renders mathematical economics useless as it is completely disconnected from the real world.

Just how disconnected is this assumption? Murray Rothbard provides an excellent answer to this question. For if possessing perfect knowledge is truly a human trait, then the emergence of money would have never occurred. Here is what Dr. Rothbard stated in his magnum opus Man, Economy, and State (keep in mind that an evenly rotating economy is a mental construct describing an economy in a state of equilibrium):

To return to the concept of the evenly rotating economy, the error of the mathematical economists is to treat it as a real and even ideal state of affairs, whereas it is simply a mental concept enabling us to analyze the market and human activities on the market. It is indispensable because it is the goal, though ever shifting, of action and exchange; on the other hand, the data can never remain unchanged long enough for it to be brought into being. We cannot conceive in all consistency of a state of affairs without change or uncertainty, and therefore without action. The evenly rotating state, for example, would be incompatible with the existence of money, the very medium at the center of the entire exchange structure. For the money commodity is demanded and held only because it is more marketable than other commodities, i.e., because the holder is more sure of being able to exchange it. In a world where prices and demands remain perpetually the same, such demand for money would be unnecessary. Money is demanded and held only because it gives greater assurance of finding a market and because of the uncertainties of the person’s demands in the near future. If everyone, for example, knew his spending precisely over his entire future – and this would be known under the evenly rotating system – there would be no point in his keeping a cash balance of money. It would be invested so that money would be returned in precisely the needed amounts on the day of expenditure. But if no one wishes to hold money, there will be no money and no system of money prices. (Emphasis added by me)

Ironically, it would seem that the assumption of perfect knowledge would support the case for communism. For if mankind could survive, above the subsistence level, without money, then the Marxist experiments in Cambodia and the U.S.S.R. should have been smashing successes.

Indeed, there is a strong connection between the Soviet and Cambodian "experiments" with communism. In both countries, money was outlawed for significant periods of time – from 1918 to early 1921 in the Soviet Union and from 1975 to 1979 in Cambodia. As Dr. Morgan O. Reynolds conveyed in his masterful essay The Cambodian Experiment in Retrospect:

Dr. Reynolds goes on to point out that the Bolsheviks deliberately destroyed commercial trade while abolishing money and banking in an effort to replace the market economy "…with a system of planned, nontransferable, in-kind assignments of inputs and outputs." The Khmer Rouge essentially attempted the same thing in Cambodia. As we know, the results were disastrous. No amount of re-education and theorizing, in the U.S.S.R. and Cambodia, could change human nature in order for a communistic economy to thrive. Consequently, millions upon millions of innocents perished as the Bolsheviks and the Khmer Rouge experimented with Marxist communism. Instead of creating the utopian super-humans, as predicted by communist doctrine (and embodied by the concept of the highly evolved human being known as the "new Soviet man"), the results were better measured in a body-count of corpses.

So let’s get back to mathematical economists and their surreal assumption that human beings have perfect knowledge. It would stand to reason that abolishing all private property, including money, would pose no problems if people had perfect knowledge. In fact, it would seem that the communistic economy "…with a system of planned, nontransferable, in-kind assignments of inputs and outputs" would be a smashing success if humans were all-knowing. For every person’s needs and wants would be known, and would be met, day in and day out. No need for money, and a corresponding pricing system, here. Communism and paradise would be synonymous.

Unfortunately, mathematical economics thrives in colleges and universities throughout the world. Students are being grossly misinformed about how an economy works. Every economics professor (with the exception of Austrian economists) should be asked why money would be necessary in a world populated by people with perfect knowledge. Moreover, mathematical economists should be asked why the communist experiments in the Soviet Union and Cambodia failed as it appears that there is little difference between the "new Soviet man" and the all-knowing economic actors populating the fantasy world of mathematical economics. Most importantly, mathematical economists should be asked if they are aware that Ludwig von Mises proved that economic calculation was impossible in a socialist commonwealth – which of course meant that the Soviet Union and all experiments with communism would eventually fail. If all else fails, then each and every mathematical economics professor – in light of perfect knowledge – should be asked why every student doesn’t score a perfect 100% on each and every economics test. Always keep in mind that every time a mathematical economist opens his wallet, to pay for a good or for a service, he is discrediting himself.

October 7, 2004

Eric Englund [send him mail], who has an MBA from Boise State University, lives in the state of Oregon. He is the publisher of The Hyperinflation Survival Guide by Dr. Gerald Swanson. You are invited to visit his website.

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