SATEB NR Vol 1 (1998) Nr 1 

Neosynthesis in Economic Theory* 

VKeDik 

Tallinn Technical University, Estonia 

ABSTRACT 

The large-scale transition from the system of (real) socialism to that of (mixed) 
capitalism was launched in central and eastern Europe in 1989, followed by the 
erstwhile republics of the USSR two years later. These developments also served 
to open the previously closed book of socialist economics to objective study and 
research. Much has been written on the subject by economists on both sides of the 
one-time iron curtain. But what are the impressions of an insider looking out'? It 
may come as a surprise that he might view the theoretical foundations of the 
market economy with serious misgivings. 

History knows many ciyil upheavals, s<Kalled social earthquakes. The world has 
seen deadly famine, eruptions of violence, the rise and fall of regimes, collapse of 
monetary systems, waves of bankruptcy, massive unemployment, devastating 
misery and all kinds of disequilibrium. Today's world is obviously confronted by 
numerous perils too. At the same time, however, such upheavals serve to 
stimulate the human mind: old ideas succumb to periodic shocks and this triggers 
the search for new ideas. Seeing that every radical change is one man's meat and 
another one's poison, historical turning-points are accompanied with fierce 
conflicts of ideas. Attack and defence are inseparable companions of progress. In 
the realm of theory, this means clashes between different schools of thought. 
However, reconciliation may also take place. Furthermore, what was once 

*Translated from Esmnian by M.L. Truu. 

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2 SAJEMS NS Vol I (1998) No I 

thought antiquared, may become modem again. All these, and many more, are 
among the innwnerable facets of life. 

It is particularly those cases where seemingly incompatible standpoints 
prove capable of reconciliation after all, that are of interest in the context of the 
present topic. Depending on one's point of view, (e.g. proprietorial vs. 
managerial), these are circumstances that give rise to various systemic components 
that are complementary to one another. The precondition for the neosynthesis in 
economic theory proposed in this article, has been the disappearance of erunity 
between the rival economic systems of the world. 

Words that signify reconciliation are integration, multifonnity, compromise, 
symbiosis, synthesis and, in particular, system. Words with the opposite 
connotation include eclecticism, conglomerate, alogism, ideology, scholasticism 
and any other term that signifies the lack of system. Frequent causes of inaccuracy 
or error are deliberare distortion motivared by narrow-minded self-interest, the 
conscious suppression of unwelcome facts, substituting a half-truth for the whole 
truth, escape from the harshness of real life into an agreeable world of fantasy, in 
other words, self-deception or surrender to an illusion. It is, of course, not 
possible to rule out innocent mistakes due to lack of comprehension or deficient 
information. Moreover, truth, like everything else, has the propensity to run its 
course and then come to an end. 

Consider some examples of ageing and obsolescence. Did Confucius err 
when he thought that patriarchal succession was tantamount to a divine right? Did 
Homer err in his belief that wars of plunder were the mainspring of wealth? Did 
Plato and Aristotle err when they classified working instruments into tools that 
were dumb, made sounds and could speak? Did Thomas Aquinas err in his 
conviction that ecclesiastical power was superior to secular power? Did Quesnay 
err in assuming the landlords to be the foundation on which the whole economy 
rests? Did Marx err when he ascribed the same function to the proletariat? Did 
Keynes err when he thought government regulation would prove the salvation of 
the economy? 

One must evidently conclude that all these thinkers expressed the particular 
circumstances of their time with a great deal of accuracy. It would, however, go 
against nature to expect that what was considered to be true at a given time in the 
past, should remain so until the present day. In the field of economics, abiding 
truths are very rare - if they exist at all. More often than not, misconceptions arise 
whenever an accepted truth is wrenched from its historical background and judged 
by present-day standards. By shaping life, time also shapes people and their 
beliefs. If Keynes had lived today, would he stilI have taken the same position as 

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SATEB NR Vol 1 (1998) Nr 1 3 

during the 1930s? Hardly so, for every stage of historical development gives birth 
to new ideas. 

Consider now, four theoretically significant episodes in economic history, 
each one tantamount to a social earthquake. They are (1) the capital accumulation 
during the last agony of feudalism, (2) the revolutionary wave that rushed through 
Europe in 1848, (3) the Great Depression and (4) the collapse of sovietism. The 
first of these triggered a feverish search for order (to avert chaos), the second led 
to a quest for harmony (to escape revolutionary upheaval), the third a renewed 
search for order (to prevent chaos from degenerating into ruin), the fourth - a 
search for betterment (to avoid a hand-to-mouth existence among the wreckage of 
the command economy). As always, the alarms and fears produced by these 
upheavals too, caused ever more innovative ways of thinking to develop. 

The search for order in a free market led to the discovery of the "invisible 
hand". However, not even Adam Smith himself considered this to be a 
completely reliable or sufficient regulator per se, but preferred two-handed to one-
handed regulation after all. In point of fact, he associated the role of the so-called 
visible hand with enforceable contracts, which in turn presupposed the rule of law 
within a state. At the same time, Smith wamed mankind not to overestimate the 
self-regulating potential of the market. Unfortunately the warning went unheeded, 
resulting in the harsh social anomalies analysed by Marx later on. 

Following the scare of 1848, an infant called microeconomics also known 
by the name of marginal ism came into the world in 1870. Seeing that 
mathematics is a science with an exceptionally harmonious intemal structure, it 
was decided to explore the same source for an equally harmonious model that 
would fit the economy too. This is humanly understandable. Unfortunately 
models of this kind are, however, confined to the frictionless world of abstract 
thought, where they exist in splendid isolation like the gods of antiquity. They 
cannot smooth over the rough parts of real life. Moreover, in spite of much effort, 
nobody has ever invented a generally accepted scale for measuring subjective 
utility. Yet, science is said to begin only there, where objective measurement 
begins. Therefore, not much more could be expected from microeconomics than 
its analytical methods based on marginal concepts, since it exemplifies form 
without content, a so-called empty box. 

Marshall, moreover. drew an explicit distinction between function and 
causation, arguing that economics is a bundle of such complex mutual relations 
that it may just not be possible to separate cause and effect. Are things really so 
bad? Descartes, in any case, taught that everything is open to question. The input 
which enters a system is the direct cause that determines the nature of the output 

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4 SAJEMS NS Vol I (1998) No 1 

which emerges from it. Feedback, in contrast, only serves to correct an input 
without being its primary cause in the process. Systems analysis gives both these 
relationships a raison d'elre, at the same time helping us distinguish functionality 
from causality. General systems theory was stilI unknown in Marshall's day. 

We may note in passing, that the Estonian Encyclopedia, (EE, 1992 : 340) 
describes microeconomics as an inadequate theory, on account of the dogmatic 
capitivity with which it is associated. Substantially the same verdict is returned by 
the Finnish economists Pikkarinen1 and Sutela2 • They observe that, against 
expectations, microeconomics is dominated not by positive but by normative 
reasoning after all, which runs counter to the method of the exact sciences. (The 
marginal approach implies either a partly canonical, or largely a piously wishful, 
modus operandi.) In the end, there is no dynamic analysis here, despite 
Marshall's introduction of the time factor. Consequently, microeconomics failed 
to live up to its historic mission. Its harmonic foundations were undermined by 
business cycles time and again. 

The Great Depression dealt the harmonious marginalist model a staggering 
blow. showing up the utter vulnerability of the theory in the face of rigorous trials. 
On both sides of the Atlantic it was realised, more or less simultaneously, that 
without the aid of the ''visible hand" of state intervention, the economy cannot in 
fact be pulled out of depression. This gave birth to Roosevelt's New Deal 
programme in America and Keynesian macroeconomic regulation in Europe. 
Both models reconciled pro- and retroactive intervention, thus laying the 
foundation of a comprehensive policy. The differences between the American and 
European models were matters of form rather than content. Both models WOUld, 
when the time came, prove to have their inevitable historical shortcomings in 
common too. 

In the context of a mixed economy, neoliberalism came to offer some fresh 
policy options, epitomised by Freedman's monetary model in the United States 
and the Eucken-Erhard, Ordo-liberal3 model (or the social market economy) in 
central Europe. As always, these variants also had their strong and weak points. 
Come what may, the future demands that a model should be adaptable to changing 
times. Progress never ends: technological innovations give rise to chain reactions 
that continously spread their effects to the economy too. _ 

A harsh and in some ways bitter lesson was learned from the fourth social 
earthquake mentioned above. This once more served to expose the manifest 
weakness of theory. Neither micro- nor macroeconomics is able to suggest any, at 
all sensible, solutions to the economies-of-transition4 today. Something vital is 
missing. What can it be? The answer seems to be universality. It is precisely the 
lack of universality that obstructs the discovery of models powerful enough to fit 

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SATEB NR Vol 1 (1998) Nr 1 5 

untypical siruations too. The neoclassical synthesis represented only a very slight 
movement in the direction of universality. Life today demands a much more far-
reaching neosynthesis. 

Above all, neosynthesis calls for the renouncement of the artificial and quite 
unnescessary antagonisms that have taken root in micro-macroeconomics, which 
are purely ideologically (and therefore unscientifically) motivated. Recall the 
abovementioned contrast between functionality and causality. We may take 
Gossen's laws as a case in point. Although Gossen himself expressed them in 
functional form, they might as well be causally interpreted. On the other hand. 
there is no reason to contrast Franklin's law of value with the law of demand-and-
supply. Firstly, the two laws are easily reconciled and, secondly. it is possible to 
interpret both of them causally. What has been said here, applies to all known 
laws in general, whether subjective or objective in kind. 

World-wide agreement, as a criterion of truth. has for the present rejected 
all extreme forms of one-sided regulation as inefficient. Solutions with outcomes 
that are efficient enough, are as a rule to be found on the so-called combined 
micro-macro or macro-micro wave bands. Differences are limited to matters of 
emphasis, depending on whether the "thick end of the stick" that is 
macroeconomic power happens to be in the hand of the government or the banking 
sector. A balanced division of power is also conceivable. 

In transitional countries, including Estonia, the call for moderation has often 
been ignored for typically political, selfish or ideological reasons. This is 
tantamount to gambling. It has meant leaping in the dark, cutting comers or trying 
to run before one can walk, irrespective of how long one's resources - or luck -
may last. The result has been several misadventures. A major disservice to the 
Estonian economy has been the singularly extremist restitution manias, which 
provoked the concomitant reaction of deepening apathy. Much self-deception 
emanated from the simple fact that nobody can turn back the wheel of history . 

The state of public responsibility leaves much to be desired. Disjointed legislation 
paves the way for irresponsible siruations. One of my articles in 1992 bore the 
tide "Contract power will save Estonia". Nevertheless, the Republic of Estonia 
has not yet managed to pass a law of contracts. Someone apparently likes fishing 
in troubled waters. 

Let us, however, return to the subject of neosynthesis. Instead of 
confrontation and exclusion. we now need to augment economic theory materially, 
to extend its universality. Whereas great purges in the past have often thrown out 
the baby with the bath water , it seems worthwhile starting the quest for renewal 
precisely among these ejected babies. Recall examples like historicism, causal 

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6 SAJEMS NS Vol I (1998) No 1 

analysis, the invariable· measure of value, multiplication of services, social 
economics; to which may be added institutionalism, conflicting objectives, the 
commodity theory of money, vent for surplus, entrepreneurship and innovation, 
utopian socialism, and interindustry analysis - the flow of trade that links all 
sectors of the economy. In contrast, the Smithian approach restricts analysis to the 
flow of the final product, thus excluding analysis of intermediate product flows. 

Say's theory of production gave rise to a series of production function 
models which, despite subsequent improvements, remained full of holes. 
Although energy has come to represent an increasingly significant production 
factor in the world today. this has not been reflected as a major development in its 
own right. The human contribution, however, is reduced to the same level as 
those of machines, animals and land. It is impossible to call this a theory in which 
the human being really plays a central part. Neosynthesis, on the other hand, 
makes it possible to view all factors, without exception, through a human-centred 
prism. Moreover, it also allows one to draw a parallel with unified field theory, 
according to which the universal source of information consists of the trinity: 
energy, motion and mass. It appears that the economy may be analogously 
described as 

Q = flE(L, K, E')N] where 

Q is the output (quantitative, qualitative) of the ecooomy, 

E - contribution of energy sources that serve to release human energy, 

L - direct, creative contribution of live human labour, 

K - indirect contribution of past labour embodied in capital, 

E' - activating, creative contribution of entrepreneurship, 

N - passive contribution of land and all natural resources. 

Considering the fact that the triad (L, K, E') in a sense amounts to an 
internally homogeneous term that expresses the triune cause of economic 
movement, then its analogy with the basic idea of the unified field theory, as the 
triune source of knowledge, becomes almost complete. The key to neosynthesis is 
in fact a catholic or pervasive anthropocentrism: in the economy everything 
begins, and likewise ends, with man. Where man does not go, neither money nor 
anything else at all related to the economy is to be found. The human being is the 
Alpha and Omega of ecooomic life. 

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SATEB NR Vol 1 (1998) Nr 1 7 

Against this background, there is reason to assert that the chief impediment 
to the successful development of economic transition is also a human factor. 
known as homo postsovieticus. This phenomenon is encountered at all tiers of the 
social edifice, including top government level. A mentality of greed has gained 
ground in Estonia and stubbornly refuses to retreat before creative thought, 
without the official codification of economic incentives. But the normalisation 
thereof is in turn hampered by corrupt self-interest. Hedonistic machinations 
prevent strategic considerations from gaining ground to a suffiecient extent. 
Incidentally, one-sided and peremptory deregulation is not compatible with general 
systems theory either, for any complex system is known to fail without the 
necessary regulation. The present is a time that requires us to take a broader view 
and to show a bener grasp of various acute and painful problems, than micro-
macroeconomic theory is capable of providing. The following is the fundamental 
problem that characterises the transition programmes of the countries embarked on 
this process: how to achieve the metamorphosis from a fortune-seeking or 
apathetic homo postsovieticus to a soberly calculating and creatively acting homo 
oeconomicus. Thanks precisely to its consistently anthropocentric nature, the 
theory of neosynthesis may yet, at least to an extent, assist the search for solutions 
conducive to the discovery of such a turning-point. 

ENDNOTES 

2 

4 

Jukka Pikkarinen, Director, Labour Institute for Economic Research, 
Helsinki. 

Pekka Sutela, Research Officer, Bank of Finland, Helsinki. 

In 1948 the German economist Walter Eucken founded the Ordo yearbook, 
whose title refers to the word and social concept "order". 

I.e., economies in transition from the system of (real) socialism to that of 
(mixed) capitalism. 

The official policy since Estonia regained independence in 1991, aimed at 
restoring to the previous owners or their descendants property confiscated 
by the Soviet Union after it had annexed the Baltic states in 1940. 

REFERENCE 

Eesti Entsilklopeedia (EE), vol 6. (1992). Tallinn: Kirjastus "Valgus". 

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