A Review of The Unity of Science and Economics: A New Foundation of Economic Theory

By Dick_Burkhart on November 30, 2016

This short book outlines a new anduseful way of thinking about economics, based on measurable quantities, notutilities. These quantities are fixed costs of production, variable costs, rateof return, coefficient of uncertainty or risk, price, and quantity producedover a period of time. Under realistic assumptions, these factors are relatedby a second order linear partial differential equation that is a variant of theBlack-Scholes equation. This equation predicts a variety of economic behaviorthat poses difficulties for neoclassical theory. Examples are how economies ofscale give way to diminishing returns as output is increased, and how monetarypolicy magnifies business cycles.

Chen’s principle focus is on fixed costs versusvariable costs, noting the similarity between biological and economic systems.In a stable environment with abundant resources, large systems with high fixedcosts tend to dominate, because they are more efficient. But for fast changingor innovative systems, elaborate structures which optimize production are soonobsolete, so it is better to start with low fixed costs and put a lot more intoadaptation (= variable costs). Chen even applies this paradigm to languages(stable Chinese versus adaptive English) and to climax versus pioneer speciesin biology. He deviates to expound his entropy theory of value, versus utilitytheory or alternatives like labor theory or energy theory.

Chen’s theory is not comprehensive but is a good start.He includes many interesting and insightful remarks on current economics, bu the could have used a good proof reader, as many words are missing their finals’s. Also, his entropy theory of value is quite sketchy, though sensible at avery basic level. He admits that it must be qualified by a host of practicalconsiderations like monopoly power and other institutional practices, but hedoes not indicate how to model these effects. Personally, I find that theclosely related energy theory of value, or “net energy”, as developed byCharles Hall, is much more intuitive, since highly concentrated andtransportable energy, like oil, is the most useful form of the low entropy materialthat has high value under Chen’s theory. Incidentally, by “value” he meansprice, that is, Marx’s exchange value, not use value. This is an extremelyimportant distinction since fresh air has infinite use value to us but itsprice is zero. This distinction is the reason for “externalities” intraditional economics. A comprehensive theory must internalize use value, so Ihope that he will address this in his future work.

But I like Chen’s point of view on efficiency. Heavy investment to optimize a system or product may be counter productive when thesituation is in flux. In this case, low fixed costs and high variable costs maybe the name of the game, as with start ups. Of course, this only works when theexpected profits are high. Note that in general optimization yields complexity,such as filling every nook and cranny according to its local micro-environment,or the exact needs of each customer. From this point of view, traditionalfactories are very suboptimal – they take advantage of economies of scale butnot of diverse market opportunities when the means of production are moreflexible (via advanced computers and robots, fixed costs which are declining) .

However I take issue when Chen suggests (p. 55) that society can no longer afford as much investment in things with longer duration and high fixed cost, so we need to be thinking about less higher education and longer working lives. Here he totally misses the boat, because US society has already been investing far less in myriad ways, such as for infrastructure and in wages and benefits for most of the 99%. And this has happened while using the steady, if not spectacular, increase in GDP to dramatically increase investments in the affluent and things that serve them. So we know that substantial resources are present, at least for now, to invest for the benefit of future generations, but they are being wasted and misallocated to an extreme extent due to the greed and power of the 1%.

In fact I view that last 35 years of class warfare of the 1% against the 99% as one of the most successful in the history of the world, with pay for the bottom half the population stagnating or declining,when average pay should have increased by around ¾ in real dollars as measured by chained GDP per capita. Only the compensation of the 1% has kept pace with productivity, with all the gains going to the upper echelons of the 1%.

While Chen does address inequality, he asserts that increasing inequality is more efficient and utilizes higher fixed costs (p.32). In reality the higher fixed costs and lower prices primarily benefit the affluent, not the majority, who experience disinvestment and inadequate income to maintain their standard of living, despite lower prices for some things.This explains the vote for Donald Trump, with the majority hard hit by the rising costs of housing, health care, higher education, and other disparities,while the 1% revel in luxuries undreamed of by even the richest and most corrupt rulers of centuries past.

In theory this would be easy to fix. All we need are strongly progressive income and wealth taxes, together with strong regulation and enforcement, combined with universal ownership of the means of production,as suggested by Peter Barnes (“With Liberty and Dividends for All”). In practice,this will be extremely difficult due to the escalating political stresses created by mounting inequality documented by Peter Turchin (“Ages of Discord”).In addition, it is doubtful that the current US surplus will last much longer–that expanding ecological overshoot and turmoil will be followed by some formof collapse as the current global economic stagnation gradually gives way to resource-led contraction, despite technological progress. I’d love to see Professor Chen turn his mathematical acumen to these problems.

The link to the original review

https://www.amazon.com/Unity-Science-Economics-Foundation-Economic/product-reviews/1493934643