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sanity,
humanity and science
post-autistic economics
review
Issue no. 20, June
3, 2003 back issues at www.paecon.net
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In
this issue:
- Charles K. Wilber
Ethics
In Economic Theory
- Robert Costanza
Ecological
Economics is Post-Autistic
- Olivier Vaury
Is GDP
a good measure of economic progress?
- Alan Shipman
Economics:
The Disappearing Science?
- Sashi
Sivramkrishna
Towards a Post-Autistic Managerial Economics
- Jorge Buzaglo
Capabilities:
From Spinoza to Sen and Beyond
Part I : Spinoza’s Theory of Capabilities
Ethics In Economic Theory
Charles K. Wilber (University of Notre Dame, USA)
Introduction
Economics and
ethics are interrelated because both economists (theorists and policy
advisers) and economic actors (sellers, consumers, workers) hold ethical
values that help shape their behavior. In the first case economists must try
to understand how their own values affect both economic theory and policy. In
the second case this means economic analysis must broaden its conception of human
behavior.
In this article I will focus on the first of these two issues-- economists
construct theory upon a particular world view, resulting in basic concepts,
such as efficiency, being value-laden.
Values, World Views and the Economist
There is a substantial body of literature on methodological issues in
economics (though seldom found in the “top” journals), much of it calling
into question its supposed scientific character. Part of that literature
deals explicitly with the impact of ethical value judgments on economics as a
science. Of this literature, a greater amount argues the value‑permeation
thesis than defends the idea of value‑neutrality. However, value‑neutrality
of economics as a science remains the dominant position in the day-to-day work
of mainstream economists. It seems expedient to begin by laying out its
arguments.
Value-Neutrality. There are two pervasive tenets to the value‑neutrality
argument. The first is a reliance on the Humean guillotine which
categorically separates fact (`what is') from value (`what ought to be');
also known as the positive/normative dichotomy. The second basic tenet
strongly supports the first by claiming that since we have objective access
to the empirical world through our sense experience, scientists need not
concern themselves with `what ought to be.' This second tenet is the really
crucial point and the one which post‑positivist philosophy of science has
sought to undermine.
The value neutral position argues that scientific economics is comprised of
three separate components: pre‑scientific
decisions, scientific analysis, and post‑scientific application. However,
there is a difference between the value judgments of pre‑science and of post‑science.
Hume's guillotine is protected by drawing a distinction in social science
between two types of value judgments. A characterizing value judgement
expresses an estimate of the degree to which some commonly recognized (and
more or less clearly defined) type of action, object, or institution is
embodied in a given instance. An appraising value judgment expresses
approval or disapproval either of some moral (or social) ideal, or of some
action (or institution) because of commitment to such an ideal. Some value
judgments are thus not really value judgments of any ethical significance,
but judgments that merely allow one to carry on the scientific enterprise.1
In other attempts to reconcile value judgments and objective science, the
notion of `brute fact' is often used. This is the claim that facts are in
some sense `out there' for all to see, independent of scientific theory.
Unfortunately for the value neutral position, the idea of brute fact has
fallen on hard times in the philosophy of science literature. Today it is
generally recognized even by sophisticated logical empiricists that facts are
theory‑laden and that theories are tested by those facts deemed important by
the theory.
The defense of value-neutrality still stands, but the pillars have been
shaken. Blaug conceded that both `factual' and `moral' arguments rest `at
bottom' `on certain definite techniques of persuasion, which in turn depend
for their effectiveness, on shared values of one kind or another.'2
And, of course, McCloskey’s writings on the “rhetoric of economics” have
taken this argument into the heart of economics– The American Economic
Review– where mainstream economists have studiously ignored it.3
Value Permeation. The value permeation position argues that
while science is driven by a search for truth, it is not interested in just
any truth. The relevant truth must be both `interesting' and `valuable,' and
thus all science is goal‑directed activity. Further, the criteria for a
`good' or `acceptable' scientific theory cannot be ranked in terms of their
intrinsic importance, but only in relation to the degree they serve
particular goals of the scientific community.
Theory choice is not, therefore, based objectively on non‑controversial
criteria (e.g., degree of verification or corroboration), but on criteria
that are inevitably value‑laden (i.e. the extent to which each theory serves
specific ends). The scientists' search for `valuable truth' is directed by
what they think society (and science) ought to do. No amount of evidence ever
completely confirms or disconfirms any empirical hypothesis but only renders
it more or less probable.
Another line of reasoning, Kuhnian in character, has been another line of
attack. Kuhn, referring to the natural sciences, speaks of paradigms,
characterized by the shared values of a given scientific community.4
It is Kuhn's rejection of the second tenet‑‑ that we have objective access to
the empirical world through our sense experience‑‑ that is important for
those opposed to the value‑neutrality position. He argues that the empirical
world can be known only through the filter of a theory; thus, facts are
theory‑laden. Thus, a major argument of those who build on Kuhn's approach
runs as follows: A world view greatly influences the scientific paradigm out
of which one works; value judgments are closely associated with the world
view; theories must remain coherent with the world view; facts themselves are
theory‑laden; therefore, the whole scientific venture is permeated by value
judgments from the start. This world view, or Weltanschauung, shapes the
interests of the scientist and determines the questions asked, the problems
considered important, the answers deemed acceptable, the axioms of the
theory, the choice of relevant facts, the hypotheses proposed to account for
such facts, the criteria used to assess the fruitfulness of competing
theories, the language in which results are to be formulated, and so on.
The Neo‑Classical World View:
A Case in Point
Let me illustrate this world view argument by applying it to neo‑classical
economics.5 The world view of mainstream neo‑classical economics
is closely associated with the notion of the good embedded in its particular
scientific paradigm. It is founded on a world view made up of the following
propositions:
1. Human nature is such that humans are a/ self‑interested and b/
rational. That is, they know their own interest and choose from among a
variety of means in order to maximize that interest.
2. The purpose of human life is for individuals to pursue happiness as they
themselves define it. Therefore, it is essential that they be left free to do
so.
3. The ideal social world is a gathering of free individuals who compete with
each other under conditions of scarcity to achieve self‑interested ends. As
in the natural world with physical entities, in the social world too there
are forces at work which move economic agents toward equilibrium positions.
Neo-classical economists either accept the preceding empirically
unverifiable and unfalsifiable statements or, barring overt acceptance,
conduct scientific inquiry with methods based thereon. The first two
propositions contain the motivating force in economic life (satisfaction of
self‑interest) and the third proposition spells out the context in which that
force works itself out. It is interesting that experimental studies by
psychologists indicate that people are concerned about cooperating with
others and with being fair, not just preoccupied with their own
self-interest. Ironically, these same studies indicate that those people
attracted into economics are more self-interested and taking economics makes
people even more self-interested. Thus economic theory creates a
self-fulfilling prophecy.6
It seems fairly clear that judgments of value, of a particular notion of the
good, are directly implied by propositions one and two of this world view. If
the purpose of life is that individuals pursue happiness, and if they do so
self‑interestedly, then it certainly would be good for individuals to receive
what they want. Here is the basic notion of the good permeating all neo‑classical
economics: individuals should be free to get as much as possible of what they
want. There are two basic judgments required to translate this concept of
the good into economic theory, such as cost‑benefit analysis. The first of these
is that individual preferences are what count. The second is a value
judgment on distributional equity. But this value judgment is rather
superficial, for it is external to the neo-classical paradigm. Because it is
external it often obstructs our view of the more fundamental value judgments,
those deeply embedded in the paradigm itself.
Other ancillary value judgments of the neo-classical paradigm either qualify
what types of individual wants will be considered or are derivative from this
basic value judgment. These other ancillary value judgments can be summarized
in this way:
1. Competitive market equilibrium is the ideal economic situation. Therefore,
a/ competitive market institutions should be established whenever and
wherever possible; and b/ market prices should be used to determine value.
2. Means and ends should be bifurcated into two mutually exclusive
categories.
3. Means and ends should be measured quantitatively.
The first ancillary value judgment derives from elements one and three of the
neo‑classical world view and from the basic value judgment that individual
preferences should count. If one takes the core ideas of individualism,
rationality and the social context of harmony among diverse and conflicting
interests, along with a number of limiting assumptions, it can be shown that
competitive equilibrium maximizes the value of consumption and is therefore
the best of all possible economic situations. This ancillary value judgment
does not stand alone. Competitive market equilibrium is good, in part,
because it allows the greatest number of individual wants to be satisfied.
Moreover, this value judgment is also determined by the world view. Without
the third proposition such a judgment could not be made, for then some other
economic condition could be found to satisfy individual wants. Competitive
market equilibrium is good because the world view insists that only this
condition can be ideal.
The notion of competitive equilibrium carries out two basic functions: it
serves as an ideal and as a standard by which to measure the real value of
current economic conditions. Because it serves as an ideal for which we
strive, it leads directly to the value judgment that wherever competitive
markets do not exist or are weak, they should be instituted or promoted.
Wherever markets do not exist, the natural competitiveness of human beings
will be channelled into other non-productive directions. It would be better
to establish markets where this competitiveness and self‑interest seeking
behavior could be channelled into mutually satisfying activities. Wherever
markets are weak and distorted due to monopoly power or government
interference there is sure to be a reduction in actual consumption.
Therefore, perfectly competitive markets should be promoted so that the ideal
competitive equilibrium can be achieved.
The second and third ancillary value judgments do not spring directly from
the world view. Instead, they make the paradigm based thereon operational.
The separation of means and ends is not strictly required by the world view
itself, but is an operational requirement, without which the paradigm could
generate no meaningful research or study. If means and ends were not mutually
exclusive, then neo-classical economics would be nothing more than a simple statement
that humans do what they do because they wish to do it. There could be, for
example, no inquiry into how satisfaction is maximized by choosing among
various alternatives. If some activity (e.g., production or consumption)
could be both means and end then one could not determine which part is which.
This results in the value judgment that consumption is the end or `good' to
be achieved. In so doing, any good inherent in the process or means for
obtaining higher consumption is ignored. For example, if the production
activity of human labor were more than just a means-- if work was good in and
of itself regardless of the final product-- then it would be impossible for
the neo-classical economist to discover how much individual wants are
satisfied by the activity. The ends and the means would be all mixed together
and it would be impossible to speak of the value of the product and the cost
of the resources independently.
The splitting of economic activities into means and ends by its very nature
promotes a particular notion of the good. It may be an operational necessity,
but it is also a judgment of value. With means and ends separated, it becomes
convenient to measure the satisfaction given by particular ends and the
dissatisfaction (costs) resulting from employing various means. It becomes
possible to measure how much better one situation is than another, by
comparing numbers instead of concepts or ideas. Things that are apparently
incommensurable thus become commensurable. This is evident in many branches
of neo-classical analysis; when money values are unavailable or
inappropriate, quantified units are used in their place.
The emphasis on quantification in neoclassical economics adds another element
to its particular notion of the good. While the second ancillary value
judgment separates means and ends, the third ancillary value judgment tells
us to focus on means and ends that can be quantified. One practical outcome
of this is a heavy emphasis on `things' over interpersonal relationships,
education, cultural affairs, family, workplace organization, etc. Things are
countable while the quality of these other spheres of human life is not. In
the area of economic policy especially, such concerns are treated often as
obstacles to be removed or overcome.7 To the extent that this
occurs, the notion of the good which focuses on quantifiable inputs and
outputs is embedded in the paradigm.
Within neo-classical economics there are thus judgments of value which are
rooted in a fundamental world view. There are also ancillary judgments of
value which operate in concert with the world view and which allow the
neo-classical approach to be operational. Together these judgments make up
the neo-classical position on the character of the good, and when an economic
policy is planned, implemented and evaluated, it is done on the basis of
these clearly defined standards.
To conclude this discussion, the paradigm or research program of any
scientific community is circumscribed by boundaries laid out in a world view
which, while not perhaps individually subjective, is nevertheless empirically
untestable, or metaphysical as Boland would say.8 How then do
value judgments about the good, the just and the right enter into scientific
analysis? Such value judgments are themselves entailed by the same world view
which gives rise to theoretical and factual analysis. `What is' and `what
ought to be' are thus inextricably commingled in the data, the facts, the
theories, the descriptions, the explanations, the prescriptions, and so on.
All are permeated by the a priori world view.
Economists must recognize that there is no alternative to working from a
world view. Making explicit the values embodied in that world view will help
keep economics more honest and useful. For example, many institutional
economists see the social world as characterized by interdependence of
economic actors with the result that “externalities” are ubiquitous. The
assignment of rights by the political and legal systems, therefore,
determines “who gets what.” The distribution of income, wealth, and rights
that results from economic transactions and public policies becomes as
important as efficiency.9
Furthermore, it is not sufficient to simply reject the neo-classical position
that satisfying individual preferences, as expressed in the market, is the
only measure of economic welfare. Alternatives must be proposed and
developed. Let me sketch out one possible alternative.10
We must broaden our view of human welfare from that of a simple consumer of
goods and services with consumer sovereignty as the goal. Rather, once
biological needs are met, people derive welfare primarily from social
activities such as working, dancing, theorizing, playing golf, painting,
partying, and so forth. In order to engage in such activities people need
instruments, capacities, and a social context or environment.
People need instruments (goods and services) to engage in activities--
fishing poles to fish, tools to work, shoes to dance in. Traditional
economics focuses solely on this need. However, the instruments are worthless
unless people have the capacity to use them-- training is needed to learn how
to fly-fish, to use tools to repair a car, to dance the Tango. Finally,
people need a social context or environment to carry out these activities-- a
clean river is needed to fish in, good working conditions are needed to enjoy
working, clean air and safe streets are needed to enjoy jogging.
The result of such a world view is that the measure of human welfare expands
from consumer sovereignty to also include worker sovereignty (Do people have
the jobs they want; are the jobs fulfilling; does the work enhance people's
capacities?) and citizen sovereignty (Do people have the communities and
environments they want; do they have the power to construct the social
contexts within which they can develop their capacities?). With this expanded
conception of human welfare the evaluation of economic policies can be quite
different.
Notes
1. see Ernest Nagel, The Structure of Science: Problems in the
Logic of Scientific Explanation (New York: Harcourt, Brace and World,
1961).
2. See Mark Blaug, The Methodology of Economics: Or How Economists Explain
(Cambridge: Cambridge University Press, 1980), p. 132.
3.See Donald N. McCloskey, The Rhetoric of Economics (Madison:
University of Wisconsin Press, 1985) and the voluminous literature generated
by it.
4. See Thomas S. Kuhn, The Structure of Scientific Revolutions, 2nd
Ed. (Chicago: University of Chicago Press, 1970); `Reflections on My
Critics,' in Imre Lakatos and Alan Musgrave (eds.), Criticism and the
Growth of Knowledge (Cambridge: Cambridge University Press, 1970); `Notes
on Lakatos,' in R.C. Buck and R.S. Cohen (eds.), Boston Studies in the
Philosophy of Science, vol. 8 (Dordrecht, Netherlands: Reidel, 1971).
5. This section is based on Charles K. Wilber and Roland Hoksbergen, `Ethical
Values and Economic Theory: A Survey,' Religious Studies Review, 12,
3/4 (July/October 1986), pp. 211-212.
6. See Robert H. Frank, Thomas Gilovich, and Dennis T. Regan, `Does Studying
Economics Inhibit Cooperation,' Journal of Economic Perspectives, 7, 2
(Spring 1993), pp. 159-171.
7. A classic example is the construction of public housing for the poor.
Square footage per household is the key variable, not such intangibles as
neighborhood, community, or access to services. Another example is welfare
policy that concentrates on levels of support and ignores the psychological
impact of means testing or the prohibition of able bodied males in the
household.
8. See Lawrence Boland, `On the Futility of Criticizing the Neo-classical
Maximization Hypothesis,' American Economic Review, 71, 5 (December
1981), pp. 1031-1036 and his The Foundations of Economic Method
(London: Allen & Unwin, 1982). The recent literature on `rhetoric' takes
the argument another step--economic theory is a conversation, and different
groups of economists (neo-classicals, marxists, institutionalists, et al.)
have their own conversations which are different. See McCloskey, The
Rhetoric of Economics.
9. See A. Allan Schmid, Property, Power, and Public Choice: An Inquiry
into Law and Economics (New York: Praeger, 1978) and Benefit-Cost
Analysis: A Political Economy Approach (Boulder, CO: Westview Press,
1989). Also see the exchange of correspondence between Warren Samuels and
James Buchanan: `On Some Fundamental Issues in Political Economy: An Exchange
of Correspondence,' Journal of Economic Issues, 9 (March 1975), pp.
15-38.
10. See Herbert Gintis and James H. Weaver, The Political Economy of
Growth and Welfare, Module 54 (MSS Modular Publications, 1974); Denis
Goulet, The Cruel Choice: A New Concept in the Theory of
Development (New York: Atheneum, 1971); Charles K. Wilber and Kenneth P.
Jameson, Beyond Reaganomics: A Further Inquiry into the Poverty of Economics
(Notre Dame, IN: University of Notre Dame Press, 1990); and “The Ethics of
Consumption: A Roman Catholic View,” in Ethics of Consumption: The Good
Life, Justice, and Global Stewardship, eds. David A. Crocker and Toby
Linden(Lanham, MD: Rowman & Littlefield, 1998), pp. 403-15.
______________________________
SUGGESTED CITATION:
Charles K. Wilber, “Ethics In Economic Theory”, post-autistic economics review, issue no. 20, 3
June 2003, article 1, http://www.btinternet.com/~pae_news/review/issue20.htm
Ecological Economics is
Post-Autistic
Robert Costanza
(University of Vermont, USA)
Autism: A
psychiatric disorder of childhood characterized by marked deficits in
communication and social interaction, preoccupation with fantasy, language
impairment, and abnormal behavior, such as repetitive acts and excessive
attachment to certain objects. It is usually associated with intellectual
impairment. (American Heritage® Dictionary of the English Language: Fourth
Edition. 2000)
The post-autistic economics
movement has correctly identified many of the failings of mainstream
economics. With reference to the definition above, mainstream economics is
“autistic” in its deficits in
communication and social interaction with other disciplines, preoccupation
with mathematical fantasy, language impairment in its limited and specialized
vocabulary, and excessive attachment to certain objects (assumptions and
models). This intellectual
impairment has led to its inability to address many important real world
problems.
Ecological economics has moved well beyond the autism of the mainstream and
represents a viable post-autistic alternative. This paper describes briefly what ecological economics is,
how it developed, and why it is “post-autistic.”
Ecological economics is a transdisciplinary effort to link the natural and
social sciences broadly, and especially ecology and economics (Costanza
1991). The goal is to develop a deeper scientific understanding of the
complex linkages between human and natural systems, and to use that
understanding to develop effective policies that will lead to a world which is
ecologically sustainable, has a fair distribution of resources (both between
groups and generations of humans and between humans and other species),
and efficiently allocates scarce
resources including “natural” and “social” capital. This requires new approaches that are comprehensive,
adaptive, integrative, multiscale, pluralistic, evolutionary and which
acknowledge the huge uncertainties involved.
For example, if one's goals include ecological sustainability then one cannot
rely on the principle of "consumer sovereignty" on which most
conventional economic solutions are based, but must allow for co-evolving
preferences, technology, and ecosystems (Norton et al. 1998). One of the basic organizing principles
of ecological economics is thus a focus on this complex interrelationship
between ecological sustainability (including system carrying capacity and
resilience), social sustainability (including distribution of wealth and
rights, social capital, and coevolving preferences) and economic sustainability
(including allocative efficiency in the presence of highly incomplete and
imperfect markets). A major
implication of this is that our ability to predict the consequences of
economic behavior is limited by our ability to predict the evolution of the
biosphere. The complexity of the many interacting systems that make up the
biosphere means that this involves a very high level of uncertainty. Indeed,
uncertainty is a fundamental characteristic of all complex systems involving
irreversible processes and ecological economics is particularly concerned
with problems of uncertainty. More particularly, it is concerned with the
problem of assuring sustainability under uncertainty. Instead of locking ourselves into
development paths that may ultimately lead to ecological collapse, we need to
maintain the resilience of ecological and socioeconomic systems by conserving
and investing in natural and social assets.
Ecological economics has historical roots as long and deep as any field in
economics or the natural sciences, going back to at least the 17th century
(Costanza et al. 1997).
Nevertheless, its immediate roots lie in work done in the 1960s and
1970s. Kenneth Boulding's
classic "The economics of the coming spaceship Earth" (Boulding
1966) set the stage for ecological economics with its description of the
transition from the "frontier economics" of the past, where growth
in human welfare implied growth in material consumption, to the
"spaceship economics" of the future, where growth in welfare can no
longer be fueled by growth in material consumption. This fundamental difference in vision and world view was
elaborated further by Daly (1968) in recasting economics as a life science -
akin to biology and especially ecology, rather than a physical science like
chemistry or physics. The
importance of this shift in "pre-analytic vision" cannot be
overemphasized. It implies
a fundamental change in the perception of the problems of resource allocation
and how they should be addressed. More particularly, it implies that the
focus of analysis should be shifted from marketed resources in the economic
system to the biophysical basis of interdependent ecological and economic
systems and their co-evolution over time.
Ecological economics is not, however, a single new paradigm based in shared
assumptions and theory. It is instead a metaparadigm. Rather than espousing and defending a
single discipline or paradigm, it seeks to allow a broad, pluralistic range
of viewpoints and models to be represented, compared, and ultimately
synthesized into a richer understanding of the inherently complex systems it
deals with. It represents a commitment among economists, ecologists, and
other academics and practitioners to learn from each other, to explore new
patterns of thinking together, and to facilitate the derivation and
implementation of effective economic and environmental policies. Ecological
economics is deliberately and consciously pluralistic in it’s conceptual
underpinnings. Within this pluralistic metaparadigm, traditional disciplinary
perspectives are perfectly valid as
part of the mix. Ecological
economics therefore includes some
aspects of neoclassical environmental economics, traditional ecology and
ecological impact studies, and several other disciplinary perspectives as components,
but it also encourages completely new, more integrated, ways to think about
the linkages between ecological and economic systems.
Ecological economics has also developed a solid institutional base. After
numerous experiments with joint meetings between economists and ecologists,
the International Society for Ecological Economics (ISEE) was formed in 1988
and currently has over 2000 members worldwide
(http://www.ecologicaleconomics.org/). The journal of the society, Ecological Economics, published its
first issue in February of 1989 and is currently publishing 12 issues per
year, with an impact factor ranking it in the top 1/5 of all economics
journals (http://www.elsevier.com/inca/publications/store/5/0/3/3/0/5/). Major international conferences have been held since 1990
(http://www.ecologicaleconomics.org/conf/conf.htm) with attendance as high as 1500.
Several ecological economic institutes have been formed around the world, a
significant number of books have appeared with the term ecological economics
in their titles (e.g. Martinez Alier 1987, Costanza 1991, Peet, 1992, Jansson
et al 1994, Barbier et al. 1994, Krishnan et al. 1995, Costanza et al. 1997),
and a fair number of university courses, certificate programs (e.g.
http://www.uvm.edu/giee/giee_certif.html), and graduate degree programs (e.g.
http://www.rpi.edu/dept/catalog/97-98/Interdisciplinary/ecological.html) have also developed.
So, is ecological economics post-autistic? The “Kansas City Proposal” (2001) lists seven changes
needed to move to post-autism: (1) a broader conception of human behavior;
(2) recognition of culture; (3) consideration of history; (4) a new theory of
knowledge (beyond the positive-normative dichotomy); (5) empirical grounding;
(6) expanded methods; and (7) interdisciplinary dialogue. Ecological economics certainly has all
of these characteristics. Its
explicit links with the natural sciences result in a more scientific
approach, which is inherently more pluralistic (Fullbrook 2001) and
empirically grounded. It places humans and human behavior in a broader
historical, evolutionary, and ecological context (Costanza et al 1993). Humans are seen as a part of the
natural world, not abstractions in isolation from nature and each other. It
is problem-based, not tool-based, and its methods include any that are
applicable to the problems at hand. These include everything from
participatory processes (Campbell et al. 2000) to envisioning alternative
futures (Costanza 2000, Farley and Costanza 2002) to complex systems
simulation modeling (Costanza et al. 1993, 2002, Boumans et al. 2002). It recognizes the importance of
envisioning and the limits of the positive-normative dichotomy (Costanza
2001). It goes well beyond
interdisciplinary dialogue. It aspires to be a truly transdisciplinary
science.
One question is: given that ecological economics has been around since 1990
and seems to “fit the bill” for post-autistic economics, why has it not been
recognized as such by the
post-autistic economics movement which began around 2000? I can only conclude that this is just
one more symptom of the autism of mainstream economics, which has been so
hermitically sealed from the real world that it has not noticed (or more
likely aggressively ignored) these developments and has not made its students
aware of them. Now that the veil
of that autism is finally being lifted, we can join forces and move together
to create a transdisciplinary, pluralistic science that can help solve the
pressing problems the world faces today and help create a sustainable and desirable
world for the future.
References
Barbier, E. B., J. C. Burgess
and C. Folke. 1994. Paradise lost? the ecological economics of biodiversity.
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Boulding, K. E. 1966. “The economics of the coming spaceship Earth”, in H.
Jarrett (Ed.) Environmental quality in a growing economy. Baltimore:Resources for the
Future/Johns Hopkins University Press, pp. 3-14.
Boumans, R., R. Costanza, J.
Farley, M. A. Wilson, R. Portela, J. Rotmans, F. Villa, and M. Grasso. 2002.
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Ecology 4(1):5. [online] URL: http://www.consecol.org/vol4/iss1/art5
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economics”,
BioScience 51:459-468.
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Costanza, R., J. C. Cumberland, H. E. Daly, R. Goodland, and R. Norgaard.
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Costanza, R., A. Voinov, R. Boumans, T. Maxwell, F. Villa, L. Wainger, and H.
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detailed shared vision of a sustainable and desirable USA in 2100”, Ecological Economics 43:245-259
Fullbrook, E. 2001. “Real science is pluralist”, Post-autistic Economics Newsletter. Issue 5, Article 6. URL: http://www.btinternet.com/~pae_news/review/issue5.htm
Jansson, A. M., M. Hammer, C. Folke, and R. Costanza (eds.). 1994. Investing
in Natural Capital: The Ecological Economics Approach to Sustainability.
Washington DC: Island Press.
Kansas City Proposal. 2001. “An international open letter to all economics
departments”, Post-autistic Economics
Newsletter. Issue 8, Article 1. URL: http://www.btinternet.com/~pae_news/KC.htm
Krishnan, R., J. M. Harris, and N. Goodwin (eds). 1995. A survey of
ecological economics. Washington, DC, Island Press.
Martinez-Alier, J. 1987. Ecological economics: energy, environment, and society.
Oxford: Blackwell.
Norton, B., R. Costanza, and R. Bishop. 1998. “The evolution of preferences:
why ‘sovereign’ preferences may not lead to sustainable policies and what to
do about it”, Ecological Economics 24:193-211.
______________________________
Robert Costanza is Gund Professor of Ecological Economics and Director
of the Gund Institute of Ecological Economics, The University of Vermont,
email: Robert.Costanza@uvm.edu
______________________________
SUGGESTED CITATION:
Robert Costanza, “Ecological Economics is Post-Autistic”, post-autistic economics review, issue no. 20, 3 June
2003, article 2, http://www.btinternet.com/~pae_news/review/issue20.htm
Is GDP a good measure of economic progress?*
Olivier Vaury (École Normale Supérieure,
Paris)
Every year, or even every quarter, economic
growth figures are anticipated and scrutinised to assess the economic health
of a country. In spite of abundant commentary in the media by politicians and
economists, the very notion of economic growth remains elusive: who really
knows what it really measures ? Yet the level of GDP (or GDP growth) is probably the most widely used
indicator for piloting economic policies around the world and for making
international comparisons.
When one says that “GDP growth reached 3% in 2002”, what does that mean ?
Broadly speaking, GDP measures the amount of goods and services produced in a
given place (a country, a region, etc.), in a given period of time (a year, a
quarter, etc.). All goods and services ? Well, that’s where the whole issue lies!
Our point is that GDP includes goods and services that do not increase a
country’s economic wealth, and, furthermore, excludes goods and services that
do. Thus, the use of GDP as an indicator of economic progress is flawed and
results in biases in international comparisons.
What GDP
forgets
“Marry your cleaning person,
and you will make GDP drop!”. This weird remark, made by the famous French
economist Alfred Sauvy, points to the fact that GDP excludes (or
significantly underestimates) goods and services produced outside the
official market economy. The bits forgotten by GDP can be divided into three
categories:
-
Household production: marrying the cleaning person means transforming a
standard marketed activity (house cleaning, paid at a given rate, etc.) into
domestic work, not accounted for in GDP as there is no way to measure the
value added by this service (no price paid). A priori, this change does not
alter the level of service enjoyed by the newly married consumer (in both
cases, house cleaning was made, by the same person; this example is used to
point out the insufficiencies of GDP, not to advocate more domestic work…).
Is that a problem? Yes, as by any measure domestic production represents a
large part of goods and services. For instance, one estimates that people
spend 17% more time in household production (cleaning, cooking, childcare,
etc.) than in paid activities. According to various studies carried out in
France, domestic production could represent as much as 75% of standard GDP.
-
Voluntary work: a bicycle repaired
by a friend makes GDP fall if the work used to be done by (and paid to) a
professional. Thus, a society where voluntary work is widespread will enjoy a
higher level of economic well-being but not necessarily a higher GDP (in
fact, even a lower GDP).
-
Public administration: in public
accounting rules, GDP is the sum of values added by all economic entities,
i.e. the difference between the value of production and consumed inputs
(energy costs, raw materials, etc.). Thus, value added is in fact constituted
by two main parts: wages and profits. But for public administration, no value
of production is available as public services are generally not bought by
anyone on a market (think of public gardens maintenance or tax collection).
To include them in GDP, accountants decided to measure value added as wage
costs (we exclude capital depreciation from our analysis). As a result, the
contribution of public services to GDP is always underestimated. By the same
token, a free service resulting from a past public investment (a road, a
fountain, a public park or a public sport facility) will not appear in GDP,
contrary to its private equivalent (priced road, private sport facility,
etc.).
What GDP should forget
“Burn Paris and you will make GDP grow!”.
Another weird remark, another problem with GDP : GDP only includes positive
values: if something is destroyed, then rebuilt by a private company, GDP
goes up while economic well-being is unchanged. Those who use GDP as a good
measure of economic progress forget that production is closely linked to
destruction. In two ways:
-
Production as measured by GDP is
often just compensation for a previous destruction (think of booming activity
after a cyclone or of most legal and medical activities). If lawyers prosper
because there are more crimes and more offences, does that mean the country
is richer?
-
Production is, by definition,
destruction: destruction of human and natural capital. What about two
countries achieving the same level of standard GDP but, for one of them,
through the exhaustion of its natural and human resources? It reminds us of
those companies who report profits only by under-reporting depreciation of
assets. The case is not just theoretical: Britain and France have roughly the
same GDP but British workers work 25% more.
The Obesity Connection
The remarks made above can be
illustrated by the example of obesity. Obesity is not just a pathology, it
is also a formidable way to create standard economic wealth without
increasing well-being (figures below can be found at www.rprogress.org, the website of an
American think tank, Redefining Progress):
- in the US alone, food companies spend around
$20bn in advertising to convince consumers to eat more;
- unfortunately, their efforts prove
successful as each day, one in every four Americans eats in a fast-food
restaurant, for a total expenditure of $110bn a year;
- consequently, Americans are increasingly
obese (over the past 30 years, the number of Americans not able to use a
standard airplane seat – due to overweight, not to financial difficulties…
– has risen by 350%);
- obese people (and others) spend around
$30-50bn a year in weight-losing products, gym facilities, etc.;
- but most do not manage to lose the weight
“gained” in fast-foods, which feeds medical expenditure linked to obesity
(obesity often leads to diabetes, increases the likelihood of heart
attacks, etc.), at around $50bn per year.
These expenditures boost GDP,
but their contribution to economic well being is at best questionable. As
asked by one of Redefining Progress’s leaders: “if GDP is up, why is
America down?”.
|
Flawed international comparisons
The arguments presented above cast doubt on
the usefulness of GDP as the main “pilot” of economic policy. If the
thermometer is wrong, then the policy based on it should be wrong too. The
use of GDP produces biases in favour of a particular set of political
choices, consisting in marketisation of economic activity. This also means
that international comparisons based on GDP are fundamentally flawed. In two
ways, following the two problems associated with GDP:
-
two countries with different
levels of “marketisation” cannot be compared on the basis of GDP, as GDP will
not include the same activities in the two countries (part of economic
activity will be excluded from the comparison);
-
two countries with different
levels of destruction cannot be compared on the basis of GDP as these very
destructions are not taken into account. Peaceful societies, characterised by
a lower level of crime (and consequently legal activities, private prisons,
etc.) are penalised in terms of GDP! As are countries with a healthy way of
life!
And all this is without even taking into
account the technical difficulties: how to compare GDPs measured in different
currencies? If we use simple exchange rates, we run the risk to have very
volatile results (the euro lost 30% of its value against the dollar from
January 1999 to October 2000, but it would have been stupid to conclude that
GDP dropped in the same proportion). The purchasing power parity method, used
by economists to take into account the fact that currencies do not buy the
same amount of goods and services, is not without problems, too. Is it
relevant to compare the price of the same basket of goods and services in
different countries (to derive purchasing powers) when the structures of the
studied economies vary. Finally, statistical methods used to measure outputs
and prices differ significantly across the world. Thus, cross-country
comparisons create many more difficulties than the already problematic
national GDP calculation.
Paradoxically, it is mostly for poor countries
that alternatives to standard GDP have been developed, though they are badly
needed for rich countries too. For instance, the United Nations Development
Programme (UNDP) calculates a Human Development Index (HDI), which includes
GDP per capita, but also the literacy rate, life expectancy at birth and
school enrolment ratios. A report to the French ministry for Social Economy
(abolished by the current government) suggested that the human development
report (now limited to poor regions) be extended to cover Europe. Others have
tried to build more relevant measures of GDP, by removing from standard GDP
values added that do not increase well-being or that contribute to the
destruction of natural resources, and by adding domestic and voluntary work.
One such example is the Genuine Progress Indicator, calculated by the US NGO
Redefining Progress (see above) for the US, and which has been stagnating
since the early 1980s (while standard GDP almost doubled over the same period).
Yet, these interesting experiments are not
without drawbacks : besides numerous technical difficulties, similar to those
identified for the measure of standard GDP, the choice to include or exclude
economic activities from the new index can easily be arbitrary. For instance,
should we exclude health care linked to avoidable diseases on the ground that
it merely reflects a fundamentally unhealthy way of life (the counterpart of
other parts of GDP such as fast-food activities, or tobacco, so as not to be
counted twice…). Or should we include it because it makes people live better,
everything else being equal…?
Should we exclude legal activities linked to divorces because divorce is a
sad thing which reflects the disintegration of families in contemporary
societies, or include them as they allow women to enjoy more independence?
In my opinion, we should give up trying to
compete in terms of GDP (an aggregated indicator). Economic development is
always something with many dimensions. Therefore, an economic system should
be judged on its ability to provide individuals with what they need to
achieve well-being : food, health, leisure, clean air, a high life
expectancy, means of communication, etc. For each of these sub-categories, it
is possible to build indicators that reflect to what extent the population
enjoys access to these resources. Not an average indicator but one that takes
inequality into account : two people with a phone each is better than one
people with two phones and one without any. Thus, we would be able (in fact
we already are, but these figures are never publicized) to compare two
countries by comparing their ability to provide these essential goods to the
largest possible part of their population. We would certainly have some
surprises, such as that the World Health Organisation ranks the US health
system as 37th in the world, while France ranks 1st and
Portugal 12th, two countries with a much lower GDP per capita.
___________________________________
*This
article originally appeared in French in Les Éconoclastes, Petit breviaire
des idées reçues en économie, Paris: Éditions la découverte, 2003.
______________________________
SUGGESTED CITATION:
Olivier Vaury, “Is GDP a good measure of economic progress?“, post-autistic economics review,
issue no. 20, 3 June 2003,
article 3, http://www.btinternet.com/~pae_news/review/issue20.htm
Economics: The
Disappearing Science?
Alan
Shipman
Economics
can easily explain the demise of wheelwrights, weavers and wallpaper hangers.
Technical progress dispelled the first group, globalisation the second,
changing preferences the third.
The ‘dismal science’ has more difficulty
accounting for its own disappearance. But the downtrend in UK economics has
now persisted too long to be dismissed as a mere correction after momentary
excess.
Entry of home students to PhD courses has
fallen to “dangerously low levels” according to Royal Economic Society
research published in 2000. Two of the country’s most prestigious
institutions (London School of Economics and Nuffield College, Oxford) had,
that year, attracted no new UK doctoral students. Demand for national funds
to support these had also slumped to the level of supply, while sociology and
politics maintained their usual over-subscription.
The Royal Economic Society gives a predictably
economic explanation for the flight from higher degrees. “Relatively low pay
and unattractive working conditions in academia” persuade high-flyers to seek
higher returns on their instructional investment. Writing before stock
markets stumbled, report authors Stephen Machin and Andrew Oswald noted that
City economists could earn up to five times their academic counterparts, with
senior management, consultancy and civil service jobs also catapulting more
basically qualified economists above the professors who taught them. At
Oswald’s Warwick University, the proportion of first-class honours students
staying on for further study dropped from 80% in 1983-5 to 33% by 1995-7.
But if this were the only explanation for
decline, demand for more basic economic qualifications would have held up. In
reality, the PhD numbers plunge is the culmination of a fall in interest all
along the economist production line.. Shrinking UK
postgraduate entry results from steady decline in undergraduate
and taught masters interest, now mirrored in the final
pre-university years. Entries
for economics A-level slid from over 32,000 in 1993/4 to less than
20,000 in 2000/01.
The American Economic Association has dug more
deeply for explanations of its own declining undergraduate enrolments, which
peaked in 1990. American Economics Association research suggests this is due
not just to doubts on the economic rewards of staying the course, but
disillusionment with the way it is structured and taught. From being a
historical and literary subject, whose journals could still be understood by
non-specialists into the 1960s, the subject’s ‘mainstream’ research has
become submerged in mathematical modelling and statistical analysis. A shift in assessment methods from
essays to exercises and multiple choice tests further opens the subject to
mathematicians who have never read the economic ‘classics’, while closing it
to those who study nothing else.
By ‘formalising’ past ideas into highly
stylised models, economics has become a narrow problem-solving exercise,
denying students the big picture they expect it to provide. With dialogue
confined to a shrinking range of specialists familiar with the same formulae,
the subject’s past power to clarify everyday dilemmas has if anything been
reversed. “Many college seniors who have taken an economics course still show
a lack of understanding of basic economics,” laments the latest American Economics
Association survey of economic literacy by William Wallstad and Sam Allgood,
echoing recent British results. Though adept at deducing a rational agent’s
optimum consumption bundle, new graduates are often baffled by practical
questions - what happens when an exchange rate falls, who sets monetary
policy, or what can be done to fend off a recession.
Detachment from reality is especially a
deterrent for women and ethnic minorities, whose second-class status is
confirmed in other Royal Economic Society surveys. In the UK women comprise
one-third of PhD candidates and hold almost the same proportion of fixed-term
lecturers in economics, but hold only 17% of permanent lectureships, and 4%
of professorships. Although family-unfriendly faculties are part of the
explanation, the earnings gap for unmarried women (14% below male
counterparts) is actually greater than that for married women (‘only’ 9%).
Similar discrimination was found for ethnic minority economists, who on
average earned 8% less than white counterparts, even after adjusting for
their relatively greater youth and resultant shorter experience and
publication records.
Reviewing these millennial results, Royal
Economic Society president Partha Dasgupta and women’s committee chair Carol
Propper looked across the Atlantic for salvation, inferring from a strong PhD
market that “clearly US economics continues to generate innovation and
intellectual excitement.” When, as end-century chair of the Cambridge
economics faculty, Dasgupta led a radical redesign of its undergraduate
course, he had little hesitation in swapping ‘Cambridge Tradition’ for the
North American approach.
Cambridge’s new course, whose final phasing-in
this year will coincide with the hundredth anniversary of the original,
downgrades Keynesian demand deficiencies, business cycles, capital debates
and income distribution effects, in favour of more statistics and
mathematical modelling. Supporters say the expanded technical toolkit will
restore the subject’s relevance to those who currently by-pass it for
business studies or other social disciplines.
However, critics charge that narrower focus
and procedural prescriptiveness are what have stifled interest, just when the
spread of everyday economic problems – from widening world inequality to
underfunded personal pensions – should be reviving it. A reductionist search
for optimising ‘microfoundations’ neglects economies’ ‘emergent’ properties,
produced by individuals’ interactions and not predictable from their actions.
Economists build an unrealistic ‘micro’ picture, based on well-informed
rational choices that even statistically trained subjects seem incapable of
making. They thereby lose the macro picture, denying (or ascribing to state
interference) such awkward phenomena as persistent unemployment and
growth-rate differences, because the models point to ‘equilibrium’ and
‘convergence’.
In his just-published Reorienting
Economics*, Dasgupta’s Cambridge nemesis and leading ‘realist’ Tony
Lawson goes beyond the usual arguments about what to measure and how to
model, tracing the economists’ troubles to the way they view the world. He
accuses the mainstream of twisting the economy to fit mathematical analysis
by treating it as a ‘closed’ mechanical system, ignoring complexities due to
reflection and reaction by its constituent parts, and their need for social
institutions to steer through the complexity. Economists’ search for surface
‘event regularities’, showing which policy levers to push, displaces concern
for the more relevant underlying tendencies and structures, whose surface
manifestations resist statistical disentanglement. Mainstreamers’ mistake,
Lawson argues, is to mimic (nineteenth-century) natural scientists in
‘inducing’ general principles from superficial observation, or ‘deducing’
them from axioms, when all they can realistically do is ‘retroduce’ the
deeper reality from surface effects.
Instead of arguing, in a
classic example, whether sighting of a black swan negates the universality of
white swans, realists want to re-focus on the mechanisms that generate and
change swans’ colour. Many alternative views are demanding attention from the
mainstream. Evolutionists emphasise the path-dependent nature of
technological and industrial change. Institutionalists deny the reducibility
of all social structures to individual decisionmaking and voting. ‘Austrian’
theorists point out how markets can coordinate choice by interdependent
individuals with scattered and limited information, inverting the textbook
depiction of fully informed and behaviourally independent individuals.
‘Post-Keynesians’ seek the return of aggregate demand to explanations of
economies’ short-run cycles, and of income distribution to accounts of their
long-run growth.
UK calls for a rethink have found strong
resonance elsewhere in Europe, notably the ‘post-autistic economics (PAE)
movement’ launched on the internet by disgruntled French students in 2001. As
the PAE’s Crisis in Economics** manifesto hit the press in early
April, the plea for pluralism reached the ‘other’ Cambridge, with 700 Harvard
students rallying behind Professor Stephen Marglin’s campaign for a
broader-spectrum introductory course. Colleagues’ rejection of his
eclecticism drove home the dissenters’ point..
Machin and Oswald speculate at the end of
their 2000 study that shrinking supply will eventually cause a jump in
economists’ price, until their soaring pay brings financially savvy students
flocking back onto their courses. But loss of initiative to more inclusive
disciplines could thwart that recovery. Non-mainstream staff and students
displaced from economics faculties have often found more fertile ground in
business schools and other social science departments, where methodologies
snubbed by peer review still prosper in the marketplace.
In an accompanying survey of minority
representation, David Blackaby and Jeff Frank interpreted the high proportion
of expatriate staff in higher-ranked UK economics
departments as confirming the UK’s entry into a global market for top
economic talent. But if the commercial capture of home-grown high flyers is
as widespread as the Royal Economic Society suggests, this import of labour
to resolve local skill gaps owes more to the pattern of the UK’s National
Health Service than football’s Premier
League.
Economists used to joke that they had solved
the unemployment problem – for economists. For much of their subject’s
history, this could be done without any professional entry restriction. As
chroniclers Keith Tribe and Alon Kadish have shown, pioneering courses at
London and Cambridge faced a protracted struggle to attract sufficient
students. Most continued to see classics, history, law or moral philosophy as
firmer career foundations, or preferred to keep their elegant mathematics
unsoiled by social concerns. A century on, that attitude seems to be
returning. Economics that continues to sidestep reality could soon be down to
economy size.
Notes
* Tony Lawson (2003) Reorienting Economics, London and New York:
Routledge.
** Edward Fullbrook (ed) (2003) The Crisis in Economics, London and New York:
Routledge.
______________________________
*This article appeared in The
Times Higher Education Supplement, 2 May 2003, under the title ‘Dismal
Returns of Micro-Men’
______________________________
Alan Shipman (alms@aol.com) is
a freelance economist, affiliated lecturer in the Faculty of Social and
Political Sciences, Cambridge University. His books includeThe
Globalization Myth, The Market Revolution, and Transcending
Transaction.
______________________________
SUGGESTED CITATION:
Alan Shipman, “The
Disappearing Science“,
post-autistic economics review, issue no. 20, 3 June 2003, article 4, http://www.btinternet.com/~pae_news/review/issue20.htm
Towards
a Post-Autistic Managerial Economics
Sashi Sivramkrishna (Foundation to Aid Industrial Recovery, India)
A course in economics finds a place in almost every management education
program. This course, usually
called Managerial Economics, is intended to help students to solve
decision-making problems that they will encounter as managers. Most students find the course quite
fascinating and the economic models seem to provide them with
tools to solve important problems they are likely to face as managers. The MC = MR rule, in particular,
tells a manager what she needs to know most, price of the product and
quantity to be produced so that profits are maximized!
I had a student who came up to me at the end of the Managerial Economics
course and asked me to be a consultant for a project to dispense a popular
Indian food through vending machines.
He wanted my help in finding p* and Q*. I had to tell him that a local restaurant manager would be
of greater help to him than an economist. Quite irritated, he asked me of what use then was a
microeconomics course to managers.
This led me to think about why economics may have so little to offer
managers and entrepreneurs in their actual decision-making problems.
The essential problem with the term Managerial Economics is its vague
meaning: is it economics for managers or is it the economics of
management? If Managerial
Economics means economics for managers then this course can be
considered supportive in nature, providing awareness, insights and a general
understanding of the market system – important ingredients for managerial
decision-making – but not meant to provide tools to solve managerial
decision-making problems per se. In other words, the course is not intended to teach
managers MC = MR type rules that they can “apply” in business.
“Conventional price theory was never intended to serve as a conceptual
framework for the study of pricing of the individual firm … price theory has
been primarily developed for use in the analysis of broad economic changes
and the evaluation of social controls … therefore, it would be unfruitful
(and erroneous) to use conventional price theory as a unified framework to
guide the theoretical and empirical study of price determination within
real-world firms” (Diamantopoulos & Mathews).
Such a managerial economics course, however, becomes essentially an economics
course; there is nothing managerial about it. In this case it is also not necessary to take just a neoclassical
approach – economic history, political economy, institutional economics and
even Marxist theory could all provide invaluable insights of the working of a
capitalist economy to managers.
And what is being discussed in the Post-Autistic Economics Review
is of utmost relevance to managerial economics courses.
I usually begin my Managerial Economics course with a reading of
Heilbroner’s, “Worldly Philosophers”. Students must understand that economists, not just
the neoclassical ones, try to unravel the mystery of the market system, how
it works, when and why it fails, where government intervention may be useful
and what are the effects of intervention on societal welfare. Managerial economics must be seen in
this light – putting the market system in perspective – the efficiency of the
market system in a perfectly competitive structure, the deadweight loss from
tariffs and quotas, the inefficiency of monopolies, the need for regulation
of natural monopolies, excess capacity in monopolistically competitive
markets, price and output of firms in oligopolistic markets, market failure
under information asymmetry or externalities like pollution and so on and so
forth.
The problem I find with most Managerial Economics textbooks is that they are
written as economics for managers, not in the way discussed above, but
as economics providing tools for the manager. In other words, we can go about using
MC = MR kind of rules.
Consider, a popular text, “Managerial Economics: Economic Tools for
Today’s Decision Makers” (italics my own) authored by Keat & Young. This text propagates “managerial
economics as the use of economic analysis to make business decisions
involving the best use of an organization’s scarce resources”. The many “applications” (usually in boxes)
and numerical examples are intended to make the student feel and reinforce
hope that their economics tools will one day be “used” by them. However, when encountered with a
problem like the one my student faced, they realize that such a Managerial Economics
course is autistic. Why?
When advocating economics as a bag of tools to managers, the economist must
realize that managerial economics suffers from a case of asymmetric
information – what the economist works with and what a manager actually has to
work with. The result: economics fails to give any answers
to, even articulate, problems of managers. If managerial economics were to be used as a set of tools
for managers, we need to begin with the economics of management,
articulating problems confronting the manager from a manager’s perspective,
taking into account the constraints they actually face, which must then be
related to their decision-making problems.
What is this information that an economist assumes but a manager does not
have? Recall Part I of your
Managerial Economics course: the actual demand curve. If you browse through an economics or
managerial economics text, you will notice that the demand curve derived from
consumer choice models is taken as the actual demand curve with a known slope
and location – giving information on what consumers are willing to buy at
what price. If the ceteris
paribus assumption is relaxed, the economist also knows by how much the
demand curve will shift. The
economist then freely uses this demand curve when she studies firm behavior;
whatever might be the market structure.
She is able to know in no uncertain terms what quantity of output the
firm must produce and at what price to realize its objectives.
The conventional Managerial Economics text “cheats” the student by
introducing a chapter on demand curve estimation: a brief chapter, on how to
estimate demand curves. Even if
you are told not to attempt this exercise yourself, given the dangers of
estimating a wrong demand curve, the student feels that “it can be done
nonetheless”. Students can
then go about the rest of the course feeling assured about the usefulness of
the course. Interestingly, this
chapter on demand estimation is missing in many (pure) Economics texts.
As a manager or entrepreneur, are you in the economist’s privileged
position? Do you have the actual
or estimated demand curve for your product on your table or computer
screen? Obviously not. If only we think about all those
cases that Jack Trout talks about in his book, “Big Brands Big Trouble”: the
failure of New Coke, A.1. Poultry Sauce, Xerox computers, Firestone
tires. If these companies, with
access to the best resources, could have estimated the demand curves for
their products would they have ended in failures?
The manager does not know or can never know with certainty where the actual
demand curve lies. In fact, if
she knows the actual demand curve for the firm’s product, there really
isn’t much of a management problem.
With the actual demand curve, all one has to do is to apply the
profit-maximizing rule (MR = MC) or any other rule meeting the firm’s
objective and the firm’s balance sheet could be prepared, not just for the
current year, but maybe even for the next year. A manager may still have to motivate employees or obtain
raw materials from the cheapest source, but those are not usually the
problems with which a manager goes to the economist.
It is useful for the economist to delve into the world of managers and
entrepreneurs. Al Ries and Jack
Trout provide some useful tips
for the economist trying to understand the economics of management:
q
You can’t predict the future. So don’t plan on it.
q
The fatal flaw in many marketing
plans is a strategy based on “predicting the future”.
q
Seldom are the predictions
obvious. Usually, they are so
buried in assumptions that you need a degree in rhetoric to ferret them out.
q
Remember Peter’s Law: “The unexpected always happens”.
There is something more that an economist
needs to learn about management before theorizing about it and that is,
management is not about “predicting” the future, but about “creating” the
future (Ries & Trout). It is
not enough that top management "sees" the demand curve for their
product; they also must create it.
In other words, they must not only know what people want but also make
them want it - through advertising, building brands, tactics or
whatever. Management decision-making
is not only about setting p* and Q* given the demand curve but also shifting
the demand curve to meet the company’s objectives. In his book on entrepreneurship, “In the Company of
Heroes”, David Hall comments that “entrepreneurs do not find high profit
opportunities, they create them”.
We must, however, be fair to the economist. The idea that
the actual demand curve is unknown to a manager is not a novel one in
economics. Diamantopoulos &
Mathews quote several economists on this point:
The most challenging
problems occur in attempting to estimate the firm’s demand schedule, for typically
the pricing executive only knows one point in its demand curve – the number
of units being sold for the existing price (Alpert).
From the |