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sanity, humanity and science
post-autistic
economics review
Issue
no. 21, 13 September 2003 back
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In
this issue:
- Jacques
Sapir
Seven Theses
for a Theory of Realist Economics
Part I:
Theses 1-4
- Special Request
- Jorge Buzaglo
Capabilities:
From Spinoza to Sen and Beyond
Part II: A
Spinoza-Sen Economics Research Program
- Charles K. Wilber
Ethics
and Economic Actors
- Jim Stanford
Confessions
of a Recovering Economist
- Matthew McCartney
Driving a car
with no steering wheel and no road map: Neoclassical
discourse and
the case of India
- PAE in the news
“Fired up for
battle”
Seven Theses for a Theory of Realist Economics*
Part I: Theses One to Four
(Part
II: Theses Five to Seven will appear in the next issue)
Jacques Sapir1 (L'École des Hautes Études en Sciences Sociales,
Paris)
The issue of realism has been central to the PAE movement from its
beginning. As I have previously
stated in this journal and elsewhere, for me realism is not the opposition
between a "factual" world and a "theoretical" one,
between reality and abstraction.
Instead for me realism is both a methodological stance and the definition
of a theoretical research program.
Realism however can give rise to different interpretations. Uskali Mäki has made an important
distinction between world realism and truth realism.2 This distinction nevertheless raises
the issue of what we understand as being the "real world", and
there is here a kind of fast-lane to positivism.
I agree with Tony Lawson’s distinction between events and processes.3 A process, a notion central to the
works of Marx and Keynes,4 is understood here not as a sequence of
events but as "...the genesis,
reproduction and decline of some structural mechanism or thing, the
formation, reformation and decay of some entity in time".5 This realism is completely different
from empirical realism, which takes for granted the notion that any human
agent can have a direct, non-mediated access to reality.
‘Realism’ as I use the word is both procedural and subjectivist. Subjectivism does not mean that human
subjectivity is the only possible reality, a fallacy commonly found in some
post-modern authors, but that subjective views of reality, as far as they
shape human decisions, are part of reality. Realism will then define methodological constraints for
economists. That does not mean
that economics must have a specific methodology, which is the position of
mainstream economists defending Friedman's instrumentalism, but rather that
the methodological requirements for social science can have distinct
applications for economics, with specific methodological rules for conducting
enquiries or for story-telling.6 Elsewhere I have described what such applications in the
methodology of economics could be.7 Realist economics does not bear kindly theoretical
tinkering or ad-hoc arguments. There are, as I have explained before
in this journal, limits to pluralism.8
A coherent research program needs to be developed for a realist
economics. To this end I offer
the following seven theoretical theses.
Thesis 1: The central issue in
economics is the co-ordination of decisions and interactions generated by
decentralised, heterogeneous and interdependent agents whose decision-making
abilities are constrained by limited cognitive capacities.
In the real world, in the theoretical sense of this word, decision-making
is done in a decentralised way.
Not to acknowledge this fact is to reduce human agents to the status
of mere parts of a giant machine, the issue then being who is the power
behind such a machine, God Almighty, the market auctioneer (pace Walras), the
Party general secretary or the mainstream economist himself.
But human agents are not only decentralised, they also are
heterogeneous. Not to
acknowledge heterogeneity, as when one assumes identical decision-making
patterns and initial positions or a single commonly shared rationality
principle, transforms the community of human agents’ into a world of
clones. If this were really the
case there would be no sense in talking about decentralisation even in a
politically free society.
The decentralisation principle is then largely grounded on the refutation of
the possibility of a single rationality principle which could be shared by
all agents, everywhere, always and under every possible condition. Daniel Kahneman and his colleagues,
the late Amos Tversky especially but also Richard Thaler, Paul Slovic and Sarah
Lichtenstein to name just a few, have made this refutation.9 The reluctance of mainstream
economists to acknowledge these scientific results - a paradoxical position
for a group professing fondness for the Popperian legacy - betrays their
unwillingness to accept true decentralisation, whatever they may say about
possible different initial human and material resources allocations to
individuals. Heterogeneity is a
necessary concept for understanding decentralisation. Ultimately heterogeneity means not
just that situations can be different and thus also the social positions from
where decisions are made. This
is heterogeneity in its descriptive sense. In a more analytical sense heterogeneity derives from the
fact that patterns of decision-making, models of rationality - here to be
understood as the simple fact of having a reason for doing something - are
different. Heterogeneity is not exogenous to the decision-making process,
something that a dedicated policy could eradicate, but instead something at
the very heart of this process.
The interdependency of decentralised and heterogeneous agents must be
understood. The standard
economics theoretical tradition emphasises the Robinson Crusoe metaphor,
negating the interdependency issue, and envisions the social process from the
point of view of a completely isolated individual. Against this tradition, realist economists conscientiously
put the issue of possible unintentional effects of individual decisions on
other agents at the very centre of economic activity and as part of social
life. Here they reclaim both
Hayek's legacy, at least the one coming from The Constitution of Liberty,10 and the Durkheimian one with its concept of social density.11 This last, that the web of intentional and unintentional
relations and the perceptions related to them is the real place where
decisions are made, was developed by Emile Durkheim in his seminal work on
the social impact of the division of labour.12
To jointly acknowledge decentralisation and interdependency implies a switch from
the allocation paradigm to the co-ordination one. Co-ordination can be achieved through intentional
processes (networks and hierarchies) as well as through unintentional ones
(markets). But whatever the
process one thinks fits best at a given time and for a given problem,
decentralisation is the central issue.
Anti-realism as a methodological strategy supported by mainstream economists
does not stop with rejection of heterogeneity and/or interdependency. Perfect information, as in the
initial Walrasian model or as in the rational expectations theory, is part of
such a strategy. Refutation of
the perfect information assumption can be epistemic. Simon and de Groot have shown that
even if a perfect information structure could exist, our cognitive capacities
preclude us from computing in a time short enough for this structure to be of
actual use for our decision-making process.13 But refuting the perfect information
assumption can also be ontological.
Perfect information could be an unreachable goal because the real
world is too complex to be understood - the classical Hayekian understanding
of uncertainty - or because our own attempts to gather more information are
generating endogenous modifications of the information structure (Stiglitz,
Akerlof). Uncertainty is then
not an exogenous addition but is endogenously generated. This understanding of uncertainty
puts the asymmetrical information school on the right side of the
methodological realism border when compared to the information search school (Stigler).
One has to add that if we agree with the fact that there can not be a single
and common rationality principle then the rational expectations theory is
devoid of any logical basis.
Whatever the reason for endogenous uncertainty, this assumption is
another defining characteristic of mainstream or non-realist economics. It is so as to deny uncertainty that
neo-classical economics pretends to give to profit and price a natural law
dimension.14
A common attribute of varieties of non-realist economics, whether because
they refuse to acknowledge heterogeneity or interdependency or endogenous
uncertainty, is their denial of the relevance of time and money. Realist economics, on the other hand,
stresses time and money relevance.
Time is relevant as a causal factor,15 something which was
understood quite early by Gunnar Myrdal who pointed to the relevance of the
ex-ante / ex-post divide in the perceptions of economic agents,16
and by the classical institutionalist school with its first mover / second mover
paradigm.17 Time is
also relevant, as a delay between decision and effects or between a demand
and a supply response, as clearly understood by Mordecai Ezeckiel a long time
ago.18
Money is a necessary institution for co-ordination. It generates the illusion of homogeneity that agents need
to make complex decisions on the basis of their limited cognitive
capabilities and because, by allowing for the separation between income
formation and income utilisation, money makes possible a better use of time.
Thesis 2: If money is a necessity in
an uncertain world, money also introduces a specific form of uncertainty,
casting doubts on the market’s ability to efficiently process information.
In a world devoid of uncertainty money would not matter. But money gives to every agent in an
uncertain world the ability to shelter himself in liquidity. Liquidity in turn allows every agent
to defect from the long and continuous chain of interdependencies generated
by the division of labour. This
very possibility of defection introduces a new strategic uncertainty which is
at the heart of economic decision-making in money-based economic
systems. Actually there is a
deep interaction between uncertainty and the flight to liquidity, which in
turn generates this strategic uncertainty. This was perfectly described years ago by G.L.S. Shackle:
"When knowledge seems especially elusive, we
desire money rather than specialised, vulnerable assets. We sell the assets, their prices fall
and it becomes no longer worthwhile to produce them, no longer worthwhile to
invest, to give employment. Had
Keynes attended to Cantillon, he could have freed himself from the
proposition that an employer will always offer a wage equal to marginal product
of value of his body of employed people. For since he must employ people first and sell their
product later, he cannot know for sure what their marginal product is going
to be".19
Hyman Minsky has shown how financial innovation,
as burgeoned during the second half of the XXth century, could be deeply
destabilising.20 From Marx to Keynes, realist economists have
analysed how the flight to liquidity should put crisis - not equilibrium - at
the centre of economic thinking.
Crisis is the permanent horizon of a capitalist economy because either
liquidity is too much in demand or is not wanted at all. The specific uncertainty generated by
liquidity pushes economic systems toward under-investment and
under-employment. This
uncertainty can not be managed by economic computation and can be called radical
uncertainty.
Here we are facing the first paradox of money. As an institution money pretends to solve the
heterogeneity problem by setting monetary prices as a common norm for
decision-making, something which makes the deepening of the division of labour
possible. However by doing so
money generates the radical uncertainty which constrains the expansion of the
division of labour.
A second paradox of money is that as an institution it would seem to unify
time through interest rates and its function as a reserve of value. But money, through its liquidity
function, contributes greatly to making the future even more uncertain.
The twin paradoxes of money stress the fact that if monetary prices are a
necessary fiction, from the realist economics point of view, they nonetheless
are a fiction. That was precisely what Max Weber tried to show when
explaining that monetary prices are necessary in a decentralised economy but
are not the result of demand and supply equilibrium - as pretends capitalist
spontaneous collective thinking.
Monetary prices actually reflect the balance of power between social
or individual forces and interests.21 Keynes, in one of his first works, wrote something very
similar. He explained that
inflation and deflation translated into the monetary world social conflicts
opposing large, structured social groups.22
However if monetary prices are a necessary fiction they also are an
uncompleted one.23 They are unable to carry the whole range of
information needed for decision-making.
Because we need information which can not be conveyed through monetary
prices and which belong then to different information spaces, our decisions
are situated and embedded in multidimensional worlds. One consequence is that the
transitivity of individual preferences
is broken in a systematic way.24 Then the Allais' Paradox holds true,25 and we
can forget the subjective expected utility theory and every device invented
by mainstream economics to transform the static Walrasian world into a
dynamic one and to cope with uncertainty (even in a Bayesian form). A second consequence, as demonstrated
by Grossman and Stiglitz, is that in such a situation, where prices do not
convey all needed information, competitive markets are not informational
efficient.26
Thesis 3: Time and money are at the
very heart of the interchange between the individual and collective levels.
Time matters, inter-allia, because of the time constraint: the more we
wait before making a decision the more we lose even if our decision is the perfect
one. However the time constraint
has not the same meaning for individuals and groups. Our decision tempo is largely shaped
by our more or less deep insertion into collective groups, from the family to
the enterprise, including social and political organisations. In turn, the way collective groups
are institutionalised shapes also their impact on our individual use of time
and our sensibility to the time constraint.
The power that money gives, particularly as liquidity, is not used in a
vacuum of representations.
Kahneman and his colleagues have demonstrated that our individual
preferences are shaped, or more precisely "framed" by collective
contexts.27 But the
way I use my liquidity power could affect decisively some collective groups
to which I belong, even if I have no idea of this fact. A bank-run, even if induced by
misguided collective representations, is a movement of thousands of
individuals who try to protect their savings but, by doing so, usually
destroy most of the economic context supporting collective groups
(enterprises) from where their income is generated.
Any attempt to seriously make time and money relevant, from a theoretical
point of view, amounts to repudiating methodological individualism. But because time and money relevance
comes from interdependency and from social density, we also have to repudiate
the idea of a single dominating collective context. If realist economics embraces methodological holism it is
a non-deterministic holism.
Thesis 4: Any attempt to negate the
theoretical status of time and money leads to non-scientific assumptions and
transforms the economist himself into a producer of ideology.
Being serious about time and money places economics in the very middle of the
social sciences. If statistical
regularities and stabilities are to be found, they are not the products of
intemporal laws but of social systems of institutions. The stability of these systems is
itself a local and temporary phenomenon. On the other hand if one wants to ground economics on laws
similar to ones found in natural sciences, in physics or mechanics, one has
to negate time and money relevance.
Such a strategy is logically coherent if and only if one negates
either decentralisation or interdependency. Both are radical retreats from realism.
Here we have one of the most fanciful paradoxes of mainstream economics. To reject realism for axiomatics,
mainstream thinkers have to invoke ergodicity.28 But to pretend that economic
processes could be in any sense a kind of ergodic process, one has to
demonstrate that they are subject to a determination which is non-human
(thereby violating the initial assumption of decentralised decision-making)
and non-social. Obviously the
standard theory of individual preferences and its conclusion, the closed and
universal model of rationality, fit nicely here.
Traditional assumptions about individual preferences (transitivity,
continuity, reflexivity, independence and time monotony) are then just not
ad-hoc assumptions but the logical core for any instrumentalist methodology
grounded on preference utilitarianism.29 They provide the stable, non-social, reference point
needed to pretend that observable local economic stabilities are like the
exposed tips of yet unknown "natural" laws of economics.
It happens to be the case, however, that all these axioms can be tested and
when they are they are invalidated.30 Facing such results most mainstream thinkers pretend they
are irrelevant. They dismiss the
very idea of confronting an economic theory with real life experiments.31 By doing so they fail to understand
that they can claim legitimacy for the
axiomatic approach if and only if they can find empirical grounds for
their ergodic assumption. What
psychology has done is no less than to destroy the only substantial argument
for ergodicity, that is the universality and stability of the neoclassical
model of rationality.
The willingness to integrate into economic theory the findings of applied
psychology versus the refusal to do so is the true borderline between
economics as a scientific activity and economics as production of
ideology. The defence of
axiomatism clearly no longer belongs to any kind of scientific approach to
economic phenomenon but instead is a form of religious thinking.
In contrast to the we-do-not-want-to-know approach, George Akerlof has
succeeded in integrating recent psychology results to a theory of inflation,
which is clearly Keynesian.32 Akerlof’s writings are living proof
that Kahneman and Tversky works can be solid ground for Keynesian
assumptions, particularly when it comes to money and time.33
Notes
* This
paper is a translation and adaptation of one that appeared in the French
journal Alternatives Économiques
(n° 57, 2003, hors série, pp. 54-56, see also www.alternatives-economiques.fr)
and is published here with authorisation of the journal’s editorial board.
The initial aim was to review assumptions developed in an earlier book, Les trous noirs de la science économique
(Albin Michel, Paris, 2000) and to specify some details that could be of use
for the PAE readership.
This book was published in the very middle of the battle following the French
students appeal for more realism in the teaching of economics (spring 2000)
and sold quickly, being re-printed twice before its forthcoming pocket
edition, September 2003. This
coincidental publishing was a pure stroke of luck. The book was written between 1995 and 1998 when I
was teaching at the Vyshaya Shkola
Ekonomiki (Higher School in Economics - Moscow). From lectures delivered
in Moscow I wrote first a basic book for Russian students (K Ekonomicheskoy teorii neodnorodnykh
sistem - opyt issledovaniya decentralizovannoy ekonomiki - Economic
theory of heterogeneous systems; an essay on decentralised economies) which
was published by Vyshaya Shkola Ekonomiki Press, Moscow, in 2001. At the same
time I re-focused and expanded part of its content to write Les trous noirs, this time not as a basic book but as a critical essay on
mainstream economics. This second book is not then the translation of the
Russian one, although they are closely related.
I have adapted and developed here the arguments of the Alternatives Économiques paper for the sake of an English
language readership not necessarily aware of debates currently raging in
Paris.
1. Professor of economics, EHESS-Paris, director CEMI-EHESS.
2. U. Mäki, "How to combine rhetoric and realism in the methodology of
economics" in Economics and
Philosophy, vol.4, avril 1988, pp. 353-373.
3. T. Lawson, "Realism and instrumentalism in the development of
econometrics", in Oxford Economic
Papers, vol. 41, janvier 1989, pp. 236-258.
4. For the latter, A.M. Carabelli, On
Keynes's Method, Macmillan, Londres, 1988.
5. T. Lawson, Economics & Reality,
Routledge, London & New York, 1997, p. 34.
6. C. Lloyd, Explanations in Social
History, Basil Blackwell, Oxford, 1986.
7. J. Sapir, "Calculer, comparer, discuter: apologie pour une
méthodologie ouverte en économie", in Économies et Sociétés, série F, n°36, 1/1998, pp. 77-89.
8. J. Sapir, "Realism vs. Axiomatics" in Edward Fullbrook (ed.), The Crisis in economics, Routledge,
London & New York, 2003, pp. 58-61.
9. For a now quite old review of this literature see J. Sapir, "Théorie
de la régulation, conventions, institutions et approches hétérodoxes de
l'interdépendance des niveaux de décision", in A. Vinokur (ed.), Décisions économiques , Économica,
Paris, 1998, pp. 169-215. Also: A. Tversky, "Rational Theory and
Constructive Choice", in K.J. Arrow, E. Colombatto, M. Perlman et C. Schmidt
(eds), The Rational Foundations of
Economic Behaviour, Macmillan and St. Martin's Press, Basingstoke - New
York, 1996, pp. 185-197.
10. F. Hayek, The Constitution of
Liberty, University of Chicago Press, Chicago, 1960.
11. E. Durkheim, Les règles de la méthode sociologique,
PUF, coll. Quadriges, Paris, 1999 (1937).
12. E. Durkheim, De la division du
travail social, PUF, coll "Quadrige", Paris, 1991 (1893).
13. A. de Groot, Thought and Choice in Chess, Mouton,
La Haye, 1965. De Groot's work
has been much used by Herbert Simon. See H.A. Simon, "Theories of
bounded rationality", in C.B. Radner & R. Radner (eds.), Decision and Organization, North
Holland, Amsterdam, 1972, pp. 161-176.
14. G.L.S. Shackle, "The
Origination of Choice", in I.M. Kirzner, (ed), Subjectivism, Intelligibility and Economic Understanding ,
Macmillan, Londres, 1986, pp. 281-287.
15. M. Capek, The Philosophical Impact of Contemporary
Physics, Van Nostrand, Princeton, 1961. G.P. O'Driscoll Jr. and M.J.
Rizzo, Economics of Time and Ignorance,
Basil Blackwell, Oxford, 1985, pp. 60-61.
16. G. Myrdal, Monetary Equilibrium,
W. Hodge, London, 1939, pp. 43-44.
17. W. M. Dugger, “Transaction cost Economics and the State”, in C. Pitelis,
(ed.), Transaction Costs, Markets and
Hierarchies, Basil Blackwell, Oxford, 1993, pp. 188-216.
18. M.Ezekiel, "The Cobweb
Theorem", in Quarterly Journal of
Economics , vol. LII, n°1, 1937-1938.
19. G.L.S. Shackle, Business, Time and
Thought. Selected Papers of GLS Shackle, New York University Press, New
York, 1988, p. 43.
20. H.P. Minsky, Stabilizing an
unstable economy, Yale University Press, New Haven, Conn., 1986.
21. M. Weber, Economy and Society: An Outline of
Interpretative Sociology, University of California Press, Berkeley, 1948,
p.108. See also about the nature of money in chapter II in the first part of Wirtschaft und Gesellschaft ,
translated as M. Weber, The Theory of
Social and Economic Organization, the Free Press, New York, 1964.
22. J.M. Keynes, "A tract on Monetary reform", reprinted in
J.M.Keynes, Essays in Persuasion,
Rupert Hart-Davis, London, 1931
23. C. Deutschmann, "Money as a Social Construction: On the Actuality of
Marx and Simmel", in Thesis Eleven,
n°47, novembre 1996, pp. 1-19.
24. This is clearly a consequence
of the Endowment Effect. See, D.
Kahneman, J. Knetsch et R. Thaler, "The Endowment Effect, Loss Aversion
and Status Quo Bias" in Journal of
Economic Perspectives , vol. 5/1991, n°1, pp. 193-206.
25. M. Allais, "Le comportement de l'homme rationnel devant le risque.
Critique des postulats de l'école américaine" in Econométrica, vol. 21, 1953, pp. 503-546. Also: M. Allais &
O. Hagen (eds.) Expected Utility
Hypotheses and the Allais Paradox, Reidel, Dordrecht, 1979.
26. S. J. Grossman & J. Stiglitz, “Information and competitive price
systems”, American Economic Review ,
Vol. 66, n° 3, May 1976, Papers and Proceedings of the Annual Meeting of the
American Economic Association.
27. The framing effect is well
described in D. Kahneman, "New Challenges to the Rationality
Assumption" in K.J. Arrow, E. Colombatto, M. Perlman et C. Schmidt
(eds.), The Rational Foundations of
Economic Behaviour, St. Martin's Press, New York, 1996, pp. 203-219
28. For an enlightening analysis about how not to use the ergodicity concept
see P. Mirowski, More Heat than Light,
Cambridge University Press, London - New York, 1989. See also : B. Ingrao et
G. Israel, "General Equilibrium Theory : A History of Ineffectual
Paradigm Shifts" in Fundamenta
Scientiae, vol. 6, 1985, pp. 1-45 et 89-125; P. Mirowski, "Energy
and Energetics in Economy Theory" in Journal
of Economic Issues, vol. 22, 1984, pp. 811-830.
29. C. Harsanyi, "Morality and the theory of rational behaviour",
in A. Sen et B. Williams, Utilitarianism
and Beyond, Cambridge University Press & Éditions de la Maison des
Sciences de l'Homme, Cambridge & Paris, 1982, pp. 39-62.
30. D. Kahneman, "New Challenges to the Rationality Assumption" in
K.J. Arrow, E. Colombatto, M. Perlman et C. Schmidt (edits.), The Rational Foundations of Economic
Behaviour, St. Martin's Press, New York, 1996, pp. 203-219.
31. For a good example of such an argument, see M. Friedman, "The
Methodology of Positive Economics", in M. Friedman, Essays in Positive Economics, Chicago University Press, 1953, p.
30-31.
32. G.A. Akerlof, W.T. Dickens, G.L. Perry, (1996), "The Macroeconomics
of Low Inflation" in Brookings
Papers on Economic Activity, pp. 1-76 ; Andersen T.M., (2001) "Can
Inflation Be Too Low?" in Kyklos,
vol. 54, Fasc.4, pp. 591-602.
33. G.A. Akerlof, "Behavioral Macroeconomics and Macroeconomic
Behavior", in American Economic
Review, vol. 92, n°3, juin 2002, pp. 411-433, p. 424 ; the source quoted
here is D. Kahneman et A. Tversky, "Prospect Theory: An Analysis of
Decision Under Risk" in Econometrica,
vol. 47, n°2, mars 1979, pp. 263-292.
Part II: Theses Five to Seven will appear in the next issue.
______________________________
SUGGESTED
CITATION:
Jacques Sapir, “Seven Theses for a Realist Economics;
Part I: Theses One to Four”, post-autistic economics review,
issue no. 21, 13 September 2003, article 1, http://www.btinternet.com/~pae_news/review/issue21.htm
Special
Request
The Crisis in Economics: the post-autistic economics movement: the
first 600 days was published in May. It consists of material taken from the first 12 issues of
this journal. You are
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the various online bookshops that offer this opportunity. Your doing so will help spread the
PAE message. Links to the
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Capabilities: From Spinoza to Sen and Beyond*
Part II: A Spinoza-Sen
Economics Research Program
Jorge Buzaglo (formerly University of
Gothenburg, presently in search of funding and affiliation)
“Part I: Spinoza’s Theory of Capabilities”
appeared in the last issue
The Ethics
and present-day science
The psychophysical identity theory in Spinoza’s The Ethics is particularly well adapted for the analysis of the
body/mind problem in the framework of present day natural sciences. In
particular, evolutionary theory finds its natural foundation in the notion of
immanent causation inherent to Substance (God or Nature) ─ that which has
itself as its own cause and is not produced by anything external. Particular
entities are modifications or modes
of the Substance, produced by one another in an infinite chain of causation.
According to Henry Atlan (1998, p. 215), “[w]ith such a notion of immanent
causality, Evolution can be seen as the unfolding of a dynamic system, or a
process of complexification and self-organization of matter, produced as the
necessary outcome of the laws of physics and chemistry. In this process, new
species come into existence one after the other as effects of mutations and
stabilizing conditions working as their efficient causes, whereas their
particular organizations are particular instances of the whole process.” The omniform complexity of the
texture of matter/extension corresponds to the omniform complexity of the
thought dimension of the Substance. To the chain of causes in the material domain
corresponds an equivalent chain of causes under the attribute of thought.1
It is important to remark the absence in this conception of interaction
between matter and thought; both have their own, equivalent causal
structures, as they are two (different) faces of the (same) coin. In his Ethics Spinoza writes:
[A] mental decision and a
bodily appetite, or determined state, are simultaneous, or rather are one and
the same thing, which we call decision, when it is regarded under and
explained through the attribute of thought, and a conditioned state, when it
is regarded under the attribute of extension, and deduced from the laws of
motion and rest (3.2, Note).
Or, as emphatically stated in 3.2: Body cannot determine mind to think,
neither can mind determine body to motion or rest or any state different from
these, if such there be.
However, the idea that the decisions of the mind determine the actions of the
body is deeply rooted in our intuitive (unreflective) view of our actions.
This is due, thinks Spinoza, to the fact that, in general, we are aware of
our desires and intentions, but unaware of the causes that motivate these
desires and intentions (2.35, Note; 3.2, Note).2 The belief is so
entrenched that it is merely at the bidding of the mind that the body
performs its actions, says Spinoza (3.2, Note), that only experimental proof
may eventually induce us to change our minds.
Now, it seems that neuroscience can today supply the conditions for an
experimental proof of immanent causation, and convincingly reject the
hypothesis of mental causation of bodily action. As reported by Atlan (1998),
Libet (1985) consistently found that a conscious decision to act corresponds
to an electrical brain event which occurs 200 to 300 milliseconds after the beginning of action. This
experimentally reproducible fact, consistent with the above “monist” model,
falsifies the conventional idea of mind-determined bodily action. The action
of the body is triggered by some neuronal unconscious stimuli. That is, a
physical impulse determines a bodily movement. Accompanying that action there
is a conscious observation with an understanding of the action. The conscious
observation accompanies the action, but it is not its cause. The psychic
decision and the neural impulse are identically equivalent, each within their
own domain of existence/description.3 This fact has of course
important consequences for our understanding of homo oeconomicus, and for what can be accepted as meaningful
explanation in economic theory.
Economic theory after The Ethics
The effects of the above insights on conventional economic
theorising are, I think, devastating. The utility maximizing individuals of
conventional theory are isolated minds commanding bodily actions. Homo oeconomicus is a mind with a
particular preference system and a perceived resource constraint commanding a
body to perform specific actions (purchases and sales) in a marketplace. This
mind is conscious of its own actions, and ignorant of the causes by which it
is conditioned. This idea of “rational choice” simply reflects ignorance of
any cause for the agent’s actions.
That is, the homo oeconomicus model
of conventional microeconomics does not specify how the preferences of the
mind have been themselves determined, and even less how the mind determines
the body to perform its “optimal” decisions in the market. Microeconomics is
totally silent on how and where this interaction could take place. The model
of man propounded by microeconomics simply eludes the problem of interaction.
The man of microeconomics should more accurately be named homunculus oeconomicus. In cognitive science, the homunculus is an implausible little
man inhabiting the brain and embodying an uncaused will making choices and
commanding the body to execute them.4
The canonical model of body/mind dualism is still that of Descartes in Traité des Passions de l’Ame (1.50).
In Descartes, the will, located in the pineal gland, receives signals and
sends impulses ─ by means of the bodily humours (esprits animaux) ─ to
other parts of the body.5 But, as Spinoza argues (Part 5, Preface)
it is not possible to have non-physical entities acting on material objects (deus ex machina) as an acceptable form
of rational explanation. Should an interactive mechanism ever get specified,
it would absorb the non-physical antecedent into the physical consequent.6
In The Ethics, individual
entities are, as described in the previous section, causally interconnected in
an unlimited web of modifications (modes)
of the uncaused Substance (causa sui).
The ideas of the mind are causally connected to other ideas, as bodies in
space are causally interrelated. Yet this does not exclude autonomy and
responsibility. On the contrary, individual entities endeavor to exist
according to their own individual nature (3.6):
Everything, in so far as it is in itself, endeavors to persist in its
own being.
For Spinoza (3.7), the actual essence of a thing
is nothing else but this endeavor to persist in its own being (conatus). The mind endeavors to
persist in its being, and is conscious of it (3.9).An implication of conatus, as formulated
in the Theologico-Political Treatise,
is that
[…] no man’s mind can possibly lie wholly at
the disposition of another, for no one can willingly transfer his natural
right of free reason and judgment, or be compelled to do so… All these questions fall within a man’s
natural right, which he cannot abdicate even with consent. (Spinoza 1951,
p. 257, quoted from Ellerman 1992, pp.144-5)
______________________________
SUGGESTED
CITATION:
Jorge Buzaglo, “Capabilities: From Spinoza to Sen; and Beyond; Part II: A
Spinoza-Sen Economics Research Program”, post-autistic economics
review, issue no. 21, 13 September 2003, article 2, http://www.btinternet.com/~pae_news/review/issue21.htm
Ethics
And Economic Actors
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, investors)
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 a previous article in this journal I dealt with the first issue. In this
article I will focus on the importance of the second issue-- economic theory,
with its myopic focus on self-interest, obscures the fact that preferences
are formed not only by material self-interest but also by ethical values, and
that market economies require that ethical behavior for efficient
functioning.
Values of Economic Actors
It is important to recognize that though Adam Smith claimed that self‑interest
leads to the common good if there is sufficient competition; he also, and
more importantly, claimed that this is true only if most people in society
have internalized a general moral law as a guide for their behavior.1 This means that the efficiency claims
that economists make for a competitive market system require that economic
actors pursue their self-interest only in "fair" ways. Smith
believed most people, most of the time, did act within the guidelines of an
internalized moral law and that those who didn’t could be dealt with by the
police power of the state.
One result of this recognition must be the acknowledgment that a better
conception of human behavior is needed. Thus, I argue that (1) people act on
the basis of embodied moral values as well as from self-interest and (2) the
economy needs that ethical behavior to be efficient.
Hausman and McPherson recount an experiment in which wallets containing cash
and identification were left in the streets of New York. Nearly half were returned to their
owners intact, despite the trouble and expense of doing so to their
discoverers.2 It
could be argued that altruistic motives-- modeled as the concern for
another’s utility as an element within one’s own utility function--
ultimately are an extension of self-interested behavior. Such an argument is substantially
weakened in this case because the discovered wallets belonged to persons
unknown to the finders. Hence,
the personal satisfaction and pleasure stemming from the wallets’ return
ought to be significantly diminished, as altruistic sympathies are usually
weaker with a lack of personal familiarity. The effort expended and the apparently unselfish behavior
demonstrated by those who returned the lost goods may, as Hausman and
McPherson assert, more likely reflect a commitment to societal norms than a
reflection of egoistic desires.
Similarly, it usually is argued that the provision of such goods as public
broadcasting and church services will be hobbled by the classic free-rider
problem that accompanies public goods.
Many consumers of these goods do indeed fail to respond to funding
appeals or shirk as the collection plate passes. This, however, does not
explain the motivation of the many who do give. Are we to attribute irrationality to those who contribute
to public broadcasting, for example, knowing that their gift offsets the
free-loading of others? In the
case of public church collections, it might be argued that the anticipated
approval of fellow church-goers entices contributions and their threatened
opprobrium dissuades stinginess.
Masking the amount of one’s gift in a closed fist or a sealed envelope
are effective and relatively costless, however, and suggest that perhaps a
sense of duty, obligation or gratitude might be more important in compelling
contributions to church collections.
It is not only for the sake of accuracy that economists should pay attention
to evidence that human actions are guided by concerns not solely egoistic,
but also because there are real economic consequences to non-egoistic behavior. Robert Solow has suggested that
“principles of appropriate behavior” among workers may explain why labor
markets are not fully clearing.
Appropriate behavior dictates that one not undercut a peer in order to
get that person’s position. As
Albert Hirschman argues, this example of seemingly non-self-interested
behavior may entail market inefficiencies and resulting costs, but most in
society (with the exception of many economists) would deem the portrait of
human interaction it paints as more than worth it.3
A Case in Point: The Supply of Blood
An example of the problem of relying solely on self-interest is given by
a comparison of the system of blood collection for medical purposes in the
United States and in England. In his book, The Gift Relationship,
Titmuss questions the efficiency of market relationships based on purely
monetary self-interest principles.4 Instead he hypothesizes that in some instances, such as
blood giving, relying on internalized moral values (in this case, altruistic
behavior) results in a more efficient supply and better quality of blood.
Kenneth Arrow's response to Titmuss questions the extent to which altruism or
other internalized moral values may be counted upon as an organizing
principle yet acknowledges that there may, indeed, be a role for altruistic
giving.5 The following covers some of the more salient points in
the debate and reflects on these issues in an attempt to clarify the role
that embodied moral values may play in the economy.
Titmuss focuses on the blood supply system in Great Britain and the United
States. The United States system has moved toward a commercialized market
system in which suppliers of blood are paid for the service while in Great
Britain the supply of blood depends on voluntary and unpaid individual blood
donors. Titmus argues that the commercialization of blood giving produces a
system with many shortcomings. A few of these shortcomings are the repression
of expressions of altruism, increases in the danger of unethical behavior in
certain areas of medicine, worsened relationships between doctor and patient,
and shifts in the supply of blood from the rich to the poor. Furthermore, the
commercialized blood market is bad even in terms of nonethical criteria.
In terms of economic efficiency it is highly wasteful of blood; shortages,
chronic and acute, characterize the demand-and-supply position and make
illusory the concept of equilibrium. It is administratively inefficient and
results in more bureaucratization and much greater administrative, accounting,
and computer overheads. In terms of price per unit of blood to the patient
(or consumer), it is a system which is five to fifteen times more costly than
voluntary systems in Britain. And, finally, in terms of quality, commercial
markets are much more likely to distribute contaminated blood; the risks for
the patient of disease and death are substantially greater. It is noteworthy
that since the AIDS crisis started in the United States, physicians regularly
recommend that patients scheduled for non-emergency surgery donate their own
blood in advance.
Arrow attempts to restate Titmuss' arguments in terms of utility theory. Thus
the motivation for blood giving is reduced and reformulated in the form of a
utility function. One such form is (1) the welfare of each individual will
depend both on his own satisfaction and on the satisfactions obtained by
others. We here have in mind a positive relation, one of altruism rather than
envy. Another form is (2) the welfare of each individual depends not only on
their own utility and of others but also on one’s own contribution to the
utilities of others. By representing altruism in this way, the
incommensurability of self-interest and altruism that is crucial to Titmuss'
analysis is ignored.
However, the commercialization of certain activities that historically were
perceived to be within the realm of altruism results in a conceptual
transformation that inhibits the expression of this altruistic behavior.
Contrary to the commonly held opinion that the creation of a market increases
the area of individual choice, Titmuss argues that the creation of a market
may inhibit the freedom to give or not to give. If this is true then Arrow's
model that treats apparent morally based behavior as a simple addition to an ordinary
utility function, seriously misrepresents these issues. What is only
mentioned in passing and downplayed by Arrow is that market relations may
often drive out non-market relations. Material incentives might destroy
rather than complement moral incentives.
The supply of blood provides a clear illustration of the problem. A person is
not born with a set of ready-made values, rather the individual's values are
socially constructed through being a part of a family, a church, a school and
a particular society. If these groups expect and urge people to give their
blood as an obligation of being members of the group that obligation becomes
internalized as a moral value. Blood drives held in schools, churches, and in
Red Cross facilities reinforce that sense of obligation. As commercial blood
increases, the need for blood drives declines. Thus, the traditional
reinforcement of that sense of obligation declines with the result that the
embodied moral value atrophies. In addition, the fact that you can sell your
blood for, say, $50 devalues the donation from a priceless gift of life to
one of a small monetary value. Finally, there is an information problem. As
blood drives decline it is rational for an individual to assume that there is
no need for donated blood. The final outcome is that a typical person must
overcome imperfect information, opportunity costs, and a lack of social
approbation to be able to choose to donate blood. The tremendous outpouring
of blood donations after September 11 indicates the latent altruism
available.
Economists often claim value neutrality in their analysis. But value
neutrality cannot be achieved merely by focusing on the efficiency results of
a policy recommendation derived from a theoretical model. The motivations on
which the results are based are also important, that is, how we
achieve these results needs to be addressed.
This problem arises because economists take preferences as given--they
neither change over time nor are affected by the preferences of other
individuals or society. Consequently, the process of preference formation and
the nature of the preferences that people have are ignored. That the
distribution of beliefs and behaviors at time t influences individual
beliefs and behaviors at time t+1 is, however, the single most basic
finding of the voluminous research within sociology on the behavior of
groups.6
Beliefs and preference structures are important because they are the basis
for individual motivation. An understanding of these also gives us a notion
as to what are and what will encourage the continuation of certain valued
feelings. When economists look to self-interest to solve social problems they
are placing a higher value on and promoting their own beliefs about what is
proper motivation.
Even though neo-classical economists are seldom interested in why people
behave the way they do, society usually places a high value on motivations.
This is readily evident if one looks at the legal system. Consider a
situation in which a person shoots and kills someone else. The end result is
the same but depending on the motivation the act may be judged to be murder,
justifiable homicide, or even just an accident.
In short, three conclusions can be derived from our discussion of issues
raised by the Titmuss-Arrow debate. First, economic policies have a direct
effect on both market outcomes and individual values. Second, economists
should drop their narrow approach to human behavior and join the rest of
society in giving attention to the effect that policies have upon values. How
we achieve results is important. Finally, economists must recognize
that the policy impact upon values exerts its own influence on future market
activity. Thus, over time the type of values promoted by public action has
significance even within the `efficiency' realm of traditional economic
analysis.
Economists are often reluctant to depend on ethics. Ethics are perceived to
be a less stable attribute of human behavior than self-interest. As Arrow
states: “I think it best on the whole that the requirements of ethical
behavior be confined to those circumstances where the price system breaks
down... Wholesale usage of ethical standards is apt to have undesirable
consequences.”7
Certainly individuals, with particular needs and abilities, motivated by
self-interest do create consequences that often are benevolent. But there is
also a role for ethically based behavior. In response to Adam Smith's “it is
not from the benevolence of the butcher, the brewer, and the baker that we
expect our dinner, but from their regard to their own interest,” the reality
is that more than half of the American population depend for their security
and material satisfaction not upon the sale of their services, but rather on
their relationships with others. There are many occasions on which reliance
on the good will of others is necessary and more reliable.
Internalized Moral Behavior vs. Self-Interest
I do not want to leave the impression that ethically based behavior and
self-interest are necessarily mutually exclusive. Proximity to self-interest
alone does not defile morality. Moral values are often necessary counterparts
in a system based on self-interest. Not only is there a “vast amount of
irregular and informal help given in times of need”8; there is
also a consistent dependence on moral values upon which market mechanisms
rely. Without a basic trust and socialized morality the system would be much
more inefficient.
Peter Berger reminds us that “No society, modern or otherwise, can survive
without what Durkheim called a `collective conscience,' that is without moral
values that have general authority.”9 Fred Hirsch reintroduced the
idea of moral law into economic analysis: “truth, trust, acceptance,
restraint, obligation‑‑ these are among the social virtues grounded in
religious belief which...play a
central role in the functioning of an individualistic, contractual
economy....The point is that conventional, mutual standards of honesty and
trust are public goods that are necessary inputs for much of economic
output.”10
The expectation that public servants will not promote their private interests
at the expense of the public interest reinforces the argument that the
economy rests as importantly on moral behavior as self‑interested behavior.
As Hirsch wrote: “The more a market economy is subjected to state
intervention and correction, the more dependent its functioning becomes on
restriction of the individualistic calculus in certain spheres, as well as on
certain elemental moral standards among both the controllers and the
controlled. The most important of these are standards of truth, honesty,
physical restraint, and respect for law.”11
Attempts to rely solely on material incentives in the private sector,
and more particularly in the public sector, suffer from two defects. In the
first place, stationing a policeman on every corner to prevent cheating
simply does not work. Regulators have a disadvantage in relevant information
compared to those whose behavior they are trying to regulate. In addition,
who regulates the regulators? Thus, there is no substitute for an
internalized moral law that directs persons to seek their self‑interest only
in `fair' ways. The second
shortcoming of relying on external sanctions alone is that such reliance can
further undermine the remaining aspects of an internalized moral law. The
Enron case might be an example of the decline of those embodied moral values
in the market place. As discussed above, by promoting solely self-interest
society encourages that type of behavior rather than ethical behavior. The
argument is not that there is no role for self-interest, but rather that
there is a large sphere for morally constrained behavior. To distinguish in
which sphere self-interest should be used and in which sphere altruism should
be promoted is very important and sends signals to society as to what we
value.
Conclusion
In conclusion, I claim that (1) self-interest alone does not adequately
explain actual economic behavior because economic actors are also motivated by
internalized moral values, such as trust and honesty and (2) self-interest
does not lead to efficient outcomes in the absence of these moral values. The
irony of mainstream economic theory is this: on the one hand it is permeated,
despite repeated denials, with ethical values imported from its governing
world view; on the other hand it fails to fully understand that economic
actors are motivated by more than material self-interest and need to be
if a market economy is to function efficiently.
Endnotes
1. See Adam Smith, Theory
of Moral Sentiments (London: Henry Bohn, 1861); A.W. Coats, ed., The Classical Economists and Economic
Policy (London: Methuen, 1971); and Jerry Evensky, "Ethics and the
Invisible Hand," Journal of Economic Perspectives, Vol. 7, No. 2
(Spring 1993), pp. 197-205..
2. Daniel M. Hausman
and Michael S. McPherson, Economic Analysis and Moral Philosophy
(Cambridge University Press, 1996), p. 34. 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. 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.
3. Albert O. Hirschman, “Morality and the Social Sciences: a
Durable Tension,” in The Passions and the Interests: Political Arguments
for Capitalism before Its Triumph( Princeton: Princeton University Press,
1977), pp. 304-5.
4. Richard M. Titmuss, The
Gift Relationship: From Human Blood to Social Policy (London: Allen and
Unwin, 1970).
5. Kenneth Arrow,
“Gifts and Exchange,” Philosophy and Public Affairs, I, 4 (Summer
1972), pp.343-362.
6. Steven Kelman, What
Price Incentives? Economists and
the Environment (Boston, MA: Auburn House Publishing Company, 1981), p.
31.
7. Kenneth Arrow,
“Gifts and Exchange,” p. 355.
8. Kenneth Arrow, “The
Gift Relationship,” p. 345.
9. Peter Berger, “In
Praise of Particularity: The Concept of Mediating Structures,” Review of
Politics (July 1976), p. 134.
10 Fred Hirsch, Social
Limits to Growth (Cambridge, MA: Harvard University Press, 1978), p. 141.
11. Fred Hirsch, Social Limits to Growth,
pp. 128‑129.
______________________________
SUGGESTED
CITATION:
Charles K Wilber, “Ethics and Economic Actors”, post-autistic economics
review, issue no. 21, 13
September 2003, article 3, http://www.btinternet.com/~pae_news/review/issue21.htm
Confessions of a Recovering Economist*
Jim Stanford (Economist,
Canadian Auto Workers)
I am an economist. It is seventeen days since I last uttered the phrase
"supply and demand." But the demon still lurks untamed, within
me. Economics is an addiction. Every other addiction has a Twelve
Step program, laced with tough love and blunt self-honesty. Why not a
Twelve Step program for economists? God knows, we have done enough
damage with our arrogant, drunken prescriptions. Here's how each and
every economist can face up to their inner demons, and make their own small
contribution to setting things right.
Economics is an addiction. Every
other addiction has a Twelve Step program, laced with tough love and blunt
self-honesty. Why not a Twelve Step program for economists? God knows, we
have done enough damage with our arrogant, drunken prescriptions. Here's how
each and every economist can face up to their inner demons, and make their
own small contribution to setting things right.
Step 1: Admit you have a problem. Like they say at the AA
meetings, this is half the solution. Where economists are concerned, however,
it's easier said than done. Getting a substance abuser to face the facts of
their addition is nothing compared to convincing an economist that they're
hooked on elegant but useless mathematical models, and authoritative but
destructive policy advice. Where economists are concerned, we're talking
denial with a capital 'D.'
Step 2: Accept that all our efforts to explain the world have failed.
The 'market' is the holiest symbol in all of economics. It's magically
automatic and efficient. And supply always equals demand. The whole
profession of mainstream, 'neoclassical' economics is dedicated to the study
of markets and how they can be perfected. The problem, however, is that in
real life these idealized 'markets' don't explain much at all. Powerful
non-market forces determine most of what happens in the economy - things like
tradition, demographics, class, gender and race, geography, and institutions.
Indeed, what we call the 'market' is itself a complex, historically
constructed social institution - not some autonomous, inanimate forum. Power
and position are at least as important to economics, as supply and demand.
Step 3: Turn to our friends in other disciplines for help.
Economists get pretty snobby about the usefulness of other disciplines. After
all, when's the last time you saw the chief sociologist for the Royal Bank
interviewed on TV? Five years ago the Canadian Economics Association even
decided to hold its annual conferences completely separate from the giant
congress of other social science disciplines. This intellectual separatism
harms the pursuit of knowledge, and exaggerates the predisposition of
economists to a blinkered mode of thinking. A recovering economist can
confess - even in public - that they might have something to learn from other
disciplines. Turn to your friends, those who haven't been hypnotized by
supply and demand graphs, for help in understanding the world and how it works.
Step 4: Make a list of the situations where you are most likely to act
like an economist, and avoid those situations. Recovering alcoholics
know they must avoid bars. Recovering economists must similarly avoid any
meeting or social gathering where they may be asked to give authoritative
views on where the economy is going, explain elegant but counter-intuitive
doctrines (like why free trade is always good for everyone, everywhere), or
provide personal financial advice. Even if you mean well, the damage to both
yourself and to your audience could be incalculable.
Step 5: Acknowledge that an expanding GDP will only feed your habit.
The growth rate of Gross Domestic Product is the stuff of newspaper headlines
and international comparisons. Yes, it's true that having more material
wealth opens the possibility of using that wealth to improve living standards
in a meaningful and sustainable way. But one doesn't automatically imply the
other. GDP leads to human progress only if we make sure it does. If we are concerned
with how people live, and how they interact with their environment, we must
evaluate and target those things directly, rather than blithely hoping that a
rising tide of GDP will lift all our boats.
Inspired by folks like Marilyn Waring, there's now a determined constituency
of activists promoting alternative, more genuine measurements of our economic
progress. They believe these measures will guide us to collectively adopt
more balanced and genuine economic and environmental policies. They are wrong.
It is power, not statistics, that determines how our economy operates - the
things we produce, the way we produce them, and how the proceeds are divided.
But taking on the mainstream infatuation with gross output indicators, and
exposing the failure of growth to solve the real problems of the world and
its peoples, is a useful way for recovering economists to start to chip away
at that power.
Step 6: Stop putting price tags on everything you see.
Economists believe the 'value' of something is its monetary price. How, then,
do we understand the truly powerful passions and desires and emotions that
dominate our lives? Think of how most of us felt during the SARS scare. Ask
Canadians at that point which was more important - tax cuts or public health
- and the choice would have been overwhelming. Ask someone who's just lost a
loved one to place a dollar value on their feelings, and you'll probably get
socked in the face. For the things that really determine our ability to lead
a good life - family, health, community, peace - there are no price tags. Yet
the business pages and the classifieds and the Sears catalogues are full of
them.
Step 7: Avoid the temptation to run regressions - even "just
one." Economics is at its addictive, hyper-positivist worst
when it substitutes inscrutable statistical correlations for genuine creative
thought. It's even spawned its own sub-category of statistics:
'econometrics.' Certain tenured economists spend all their research time
performing computer regressions on randomly paired data sets, searching
blindly for strong correlations which they then explain with a theory
custom-fit to the data. Quantitative analysis, carefully applied, can play a
useful role, both in understanding the world and in seeking to change it. But
for a recovering economist, regressions are as dangerous as that infamous
glass of wine with dinner for an alcoholic.
Step 8: Get off your pedestal. Economists place themselves at
the top of an assumed hierarchy of knowledge. So it should be no surprise
that they enforce a rigid hierarchy within their own ranks. And at the peak
of that hierarchy, of course, stands one economist above all others: the
legendary 'Chief.' Reporters are always trying to call me the 'Chief
Economist' of the CAW. "Wrong," I tell them. "I am just the
economist. There is no 'chief' economist." But often as not, the
adjective still slips into their stories. It's as if they would undermine the
authority of their own reportage by admitting in print that they only talked
to a run-of-the-mill economist - not to the chief. Chances are, most 'Chief
Economists' work just the same way I do: solo, with no little
"junior" economists beavering away under their tutelage. But the
adjective is invoked nonetheless, to promote an aura of gratuitous importance.
Recovering economists know their inherent worth comes from inside - so they
can lose the phony titles.
Step 9: Learn from those who went before you. Mainstream
economics is arrogantly ahistorical. In most cases, capitalism is presented
as a natural, eternal state of human affairs. Even the term 'capitalism' is
rarely used: naming the system, after all, might imply that there are others.
The preferred euphemism is 'market economy,' which implies that the economy
is like some big flea market where anybody can set up a card table on
Saturday mornings and sell their wares. It's just coincidence that General
Electric has $575 billion (U.S.) worth of capital assets sitting on its card
table, while you and I have only our brains and our brawn to offer.
Modern economics was not actually invented until the early days of
capitalism. So the very discipline is historically relative - not to mention
the economies it purports to study. And the roots of neoclassical economics
were always inherently ideological: to justify, in the guise of explaining,
the perverse distribution of power and wealth that emerged under this new
social order. Studying economic history, and the history of economics, is the
best way to critique this knee-jerk determinism, and to place the whole
profession in a healthier, more contingent context. In economics, history
itself is subversive.
Step 10: Make a list of the countries and people you have harmed.
Billions of human beings, entire continents, even the planet itself - all
have been devastated by the glaringly misguided dictates of economists. Even
some of the most orthodox practitioners at the World Bank and the
International Monetary Fund will now quietly admit that their domineering
advice to developing countries in recent decades - liberalize trade,
liberalize finance, downsize government, and wait for the invisible hand of
the market to work its magic - was completely and devastatingly wrong. Of
course, these institutions still actively perpetuate the poverty and hardship
which their own false recipe books did so much to create. But large cracks
are appearing in the intellectual dominance and self-confidence of orthodox
economics. Cataloguing the damage is an effective and damning first step in
tearing down the edifice.
Step 11: Make amends to those countries and people. Every
Twelve Step program requires the recovering addict to humbly commit to fix up
their own mess. Economists are no different. This is the time for recovering
economists to step to the front of the room and make personal pledges to undo
the damage that has been wrought in the name of supply and demand. Commit to
studying what's wrong with markets, as opposed to how beautifully perfect
they are. Work to empower rank-and-file folk, instead of dominating them with
your apparent but phony expertise. Start to imagine economic ideas that could
change the world, rather than invoking economic mumbo-jumbo to justify
inequality and explain why it's inevitable.
Step 12: Help other economists who come your way. Perhaps the
scariest thing about the economics profession is that it seems to be becoming
more homogeneous with time, not less. Economics departments at Canadian
universities, by and large, will only hire entry-level faculty who
demonstrate requisite acceptance of the free-market assumptions supporting
their elaborate but fragile intellectual scaffolding. At least twenty years
ago there was a token radical or two in each department, around whom
critical-minded students could congregate. Today even that is rare. Most
progressive-thinking students flee in panic from economics after their first
mind-numbing encounter.
Recovering economists of any age need help to rediscover their latent
humanity and rededicate their energies to the pursuit of things that really
matter. But none need our assistance and solidarity more than economics
students. Most are motivated by a gut-level conviction that learning
economics should allow us to do great things for people and the planet.
(Needless to say, they didn't go into the field because of the snappy dress
or witty humour of their professors!) Yet they are left to flounder in a
curriculum that tests mathematical aptitude more than ability to think, and
in which the urgent crises of the real world are made invisible. If you
encounter someone like this, put your hand on their shoulder. Tell them you
know how it feels. Help them find alternative sources of economic
inspiration, and places where they can befriend other recovering
economists-in-training. Show them they're not alone.
Don't get me wrong. Personally, I'm very happy to be an economist. I still
believe that there is a material basis to most of the problems humanity
faces. I think economics is the best way for me to make a contribution to
human progress and social change, and I've enjoyed great personal
opportunities because of my career choice. But lurking in my brain is a
nagging awareness that my own success was built at least partly on the
pseudo-rationalist coattails of the whole arrogant discipline - even as I
espouse a twisted, and hopefully insidious, version of that
pseudo-rationalism.
So collectively, my profession must come to grips with its elitist addiction.
I do it every morning when I wake up, look myself in the mirror, and say out
loud: "I am an economist."
* A version of this article appears in the current edition
of This Magazine www.thismagazine.ca. On-line
help for recovering economists is provided by the Progressive Economics Forum
www.web.ca/~pef of which the
author is a member.
______________________________
SUGGESTED
CITATION:
Jim Stanford, “Confessions of a Recovering Economist”, post-autistic
economics review, issue no. 21,
13 September 2003, article 4, http://www.btinternet.com/~pae_news/review/issue21.htm
Driving a
car with no steering wheel and no road map:
Neoclassical discourse and the case of India1
Matthew McCartney (SOAS, University of
London)
Neoclassical economics is based, as is any school of economics on certain
assumptions. It is my contention
here that too often these assumptions have served to narrow its analytical
perspective. In particular the
analysis of economic liberalisation has been limited to accounts chronicling
its implementation. Analysis is
very seldom concerned with the practical impact on issues such as
productivity, employment, social stability, etc. This is examined here with particular reference to India
in its ‘liberalising’ period after 1991.
Economics and Assumptions
Assumptions make life easier.
In partial equilibrium analysis ceteris paribus2 allows
a researcher to turn his attention from a bewildering array of possible
general equilibrium interactions and reach a commonsense conclusion. A demand curve slopes downwards; a
higher price of apples will reduce the quantity consumed. There is no pressing reason to
explain the endlessly complex interactions with markets for oranges, bananas,
guavas, …. Assumptions in
economics offer simplification; they give to a question a parsimonious
structure, enabling the researcher to focus on the heart of the problem. Altering the assumptions and gauging
the impact on the conclusions enables the robustness of the model to be
analysed. Even in a patently
unrealistic abstraction, such as the Walrasian General Equilibrium model,
assumptions provide a benchmark.
Once we drop the assumption of perfect information we can analyse the
impact on welfare of asymmetric information in exchange; of externalities and
imperfect competition in production.
Properly utilised the Walrasian General Equilibrium provides us a
gateway to the rich analysis of Stiglitz, Akerlof et al.3
In neoclassical economics assumptions obscure underlying economic
processes. Results may be
totally contingent on an assumption included for mathematical
convenience. Ultimately
assumptions may serve to distract the researcher from the heart of the issue.
“Theories can therefore be judged by their assumptions to some extent, if one
has an intelligent taxonomy of assumptions. A theory may well draw power from ‘unrealistic’
assumptions if those assumptions assert, rightly, that some factors are unimportant
in determining the phenomenon under investigation. But it will be hobbled if those assumptions specify the
domain of the theory, and the real world phenomena are outside that domain.”
(Keen, 2002, p153).
Efficient Growth (By Assumption)
By assumption individuals are rational and exchange is voluntary. Under perfect competition,
consumption will be distributed intertemporally efficiently. Profit maximising firms will utilise
these available resources and optimise investment decisions. The growth path over time reflects
preferences of individual agents, hence by assumption it must be efficient.
Economic reform (comprising stabilisation and structural adjustment) is based
on this assumption of efficient growth.
The two components are intrinsically linked. Stabilisation ensures that growth will be sustainable,
reducing inflation, government budget deficits and any trade imbalance.4 Once stabilisation is achieved, the
reform process (synonymous with liberalisation) is simply an accelerator.
Structural adjustment comprises all those policies that may interfere with
optimising decisions by consumers and firms. Tariffs must be reduced to align domestic with world
prices. Privatisation will
ensure that decisions are made by rational profit maximising
entrepreneurs. Removal of
minimum wage legislation enables agents to make voluntary and hence mutually
beneficial exchanges in the labour market. There is no question of steering the economy, simply of
speeding up (deepening is the typical metaphor) or slowing down the process
of transition from dirigisme to a free market.
Neoclassical analysis typically focuses nearly exclusively on the depth, pace
and implementation of reforms. A
typical example is the slowdown in economic growth in India after 1996. There is a broad consensus among neoclassical
economists on the need for a ‘Second Generation’ of reforms to deepen those
launched in 1991, to liberalise those areas hitherto neglected – especially
the labour market and privatisation.
Growth has stalled, hence the accelerator needs pressing.
Liberalisation, Means and Ends
Much of the intellectual artillery for the
neoclassical counter-revolution in economics was derived from close study of
the experience of countries that had pursued strategies of import
substitution in the post-war period.5 Industry was found to be high cost, capital intensive and
hence generating little employment.
Far from achieving self-sufficient industrialisation, such countries continued
their dependence on imports of capital goods and inputs. The counterpart of industrialisation
was a general discrimination against agriculture.
This type of analysis provided important antecedents for the shift to
strategies of outward orientation often as intrinsic parts of structural
adjustment programmes from the 1980s onwards.6
However the widespread adoption of the neo-liberal agenda has not seen a
complementary pattern of analysis. The success of ‘reform’ is not typically measured in
terms of employment, inequality, and growth. Rather,
“The problem was that many of these policies
became ends in themselves, rather than means to more equitable and
sustainable growth. In doing so these policies were pushed too far, too fast,
and to the exclusion of other policies that were needed.” (Stiglitz, 2002,
p53).
A good example of the neoclassical evaluation of
liberalisation in India is provided by Ahluwalia7 (2002) and
Bajpai8 (2002).
Ahluwalia makes the claim that,
“we consider the cumulative outcome of ten
years of gradualism to assess whether the reforms have created an environment
that can support 8 percent GDP growth, which is the government’s target.”
(Ahluwalia, 2002, p69).
Ahluwalia retreats into a typical twofold
analysis, considering first whether growth is sustainable – examining as a
consequence trends in the fiscal deficit, current account deficit and foreign
exchange reserves. Then
cataloguing how far liberalisation has been implemented - tariff reductions,
degree of integration with the world economy9, removal of price
controls, deregulation.10
Bajpai (2002) follows the same track.
He compiles a review of liberal policy reforms – devaluation, current
account convertibility, trade liberalisation, encouraging FDI inflows,
opening the capital market to portfolio investment, permitting domestic
companies access to foreign capital markets. Bajpai does not even make passing reference to the impact
of these ‘reforms’ in any other context than the change in integration with
India and the world economy. He
notes, over the course of the 1990s that the weighted average tariff fell
from 90 to less than 30%, foreign investment increased from 0.1 to 1% of GDP,
the share of trade increased from 18 to 30% of GDP.
The underlying assumptions of voluntary exchange and rational optimising
individuals mean that it must by definition be the case that the level of
growth reflects individual preferences and hence maximises welfare in a free
market. The successful outcome
of reform and the degree of implementation of liberalisation are collapsed by
a-priori assumption into the same meaning.
There is, it is assumed, no need to examine the impact of liberalisation on
the productivity and level of investment, the degree of social cohesion,
political and social stability, the level of spending on R+D, the
diversification of exports into more dynamic industrial sectors.11
Liberalisation, Reform and a Roadmap
There is no roadmap because by assumption neoclassical economics does not
admit the possibility of an alternative.
Rodrik (2000) argues to the contrary that integration with the world economy
cannot substitute for a development strategy. Development is increasingly viewed as synonymous with
global integration and with trade and investment being used as yardsticks for
evaluating government policy. In
actual fact ‘integration’ may crowd out alternatives. Rodrik suggests globalisation should
be evaluated in terms of the needs of development, not vice-versa.
It is clear, that although there exists a near consensus on the
positive relationship between openness and growth,
“there is a dirty little secret in
international trade analysis.
The measurable costs of protectionist policies – the reductions in
real income that can be attributed to tariffs and import quotas – are not all
that large.” (Krugman, 1995, p31).
And there is another fact often forgotten. Liberalisation and integration are not concerned solely
with the removal of controls and unwinding of government intervention. They also have demanding
institutional requirements.
Rodrik notes that to comply with the full panoply of WTO obligations
(customs, phyto and sanitary, intellectual property rights, etc.) would cost
the typical LDC $150m. The small
gains from trade noted by Krugman are undoubtedly offset by the potentially
enormous gains from an alternative – such as basic education for girls12.
Liberalisation, Implementation and Crisis
The neo-liberal discourse has not reacted to crises by evaluating their
underlying assumptions, but instead adding layers of complexity to preserve
them. To the concern with the
pace and depth of implementation have been added other considerations.
Liberalisation in the Southern Cone countries of Latin America in the early
1980s, saw rapid capital account liberalisation and large budget/ trade
deficits. This generated huge
capital inflows, consequent currency overvaluation, deindustrialisation, debt
accumulation and inevitable collapse.
There was no fundamental attention to assumptions in response, no
puzzling that in the case of Chile at least the vast bulk of the accumulated
debt was private13 so could not by definition be considered a
problem. The concept of sequencing
of liberalisation emerged, specifically that a fiscal deficit should be
corrected before the capital account is liberalised. With a similar crisis in Asia in
1997, sequencing implies prudential regulation of the banking sector before
capital account liberalisation.
The economic disintegration of Russia after 198914 despite a bold
pursuit of liberalisation (price reform, privatisation, abandonment of
planning) and rapid democratisation generated much discussion of the relative
merits of gradualism over shock therapy and the importance of institutions. An evident example is that
privatisation without a functioning legal system in the midst of an economic
collapse, will generate compelling incentives for asset mining among managers
and workers.
Analysis of liberalisation can be likened to driving a car with no steering
wheel – there is only one path of reform (from dirigisme to a free market),
the only item of control is the accelerator (the speed and depth of
implementation), and there is of course no road map (there is no
alternative). To extend the
analogy (too far), even at its worst moments, when neoclassical theorising
careers through red lights – in the Southern Cone countries in the 1980s, in
Russia in the 1990s there is no critical evaluation of underlying
assumptions, only ever more convoluted refinements to preserve them.
Notes
1. Grateful thanks to Ashwin and Alan for invaluable comments.
2. Other things being equal.
3. See for example Stiglitz (1986).
4. Private sector induced trade deficits, representing an excess of (optimal)
private sector investment over (optimal) private sector savings reflect
efficient decisions of optimising consumers so do not represent a
macroeconomic problem.
5. For the case of India see Bhagwati and Desai (1970), Bhagwati and
Srinivasan (1975).
6. The experience of East Asia may have been wrongly interpreted as one of
‘outward-orientated’ free trade rather than a strategy of export
promotion. The latter may imply
an increase in government intervention through a mechanism such as export
subsidies.
7. Finance Minister in 1991-6, the Congress Government which launched the
first generation of liberalising reforms.
8. One of the famously influential American-based non-Resident Indian
economists who have done so much to promote the agenda of liberalisation in
India over the 1990s.
9. Exports plus imports as a share of GDP and level of Foreign Direct
Investment.
10. There is momentary concern with other potential determinants of growth,
infrastructure provision and education, but this does not detract from the
primary thrust which is concerned not with ‘an environment to support eight
percent growth’ but the sustainability and implementation of liberalisation.
11. See variously Athukorala and Sen (2002) Ch 7, Rodrik (1999), Fosu (1996),
Barro (1991) etc for discussions of these issues and their positive role on
economic growth.
12. See Sen (1999).
13. Unlike Argentina the public sector budget was in balance.
14. Under IMF tutelage in the 1990s industrial output declined by a larger
share than during the whole of the Second World War.
References
Ahluwalia, M.S. (2002), ‘Economic Reforms in India Since 1991: Has
Gradualism Worked?’ (Journal of Economic Perspectives, 16:3).
Bajpai, N (2002), ‘A Decade of Economic Reforms in India: The Unfinished
Agenda’ – (Centre for International Development, Harvard University Working
Paper No.89).
Barro, R (1991), ‘Economic Growth in a Cross Section of Countries’
(Quarterly Journal of Economics, 106).
Bhagwati, J.N and P.Desai (1970), ‘India: Planning for
Industrialisation, Industrialisation and Trade Policies since 1951’ (Delhi, Oxford
University Press).
_____ and T.N.Srinivasan (1975), ‘Foreign Trade Regimes and Economic
Development: India’, (Delhi, Macmillan).
Fosu, A.K (1996), ‘Primary Exports and Economic Growth in Developing
Countries’ (World Economy, 19:5).
Keen, S (2002), ‘Debunking Economics: The Naked Emperor of the Social
Sciences’, (New York: Pluto Press).
Krugman. P (1995), ‘Dutch Tulips and Emerging Markets’ (Foreign Affairs,
July/Aug).
Rodrik, D (1999), ‘Where Did All The Growth Go? External Shocks, Social
Conflict, and Growth Collapses’, (Journal of Economic Growth, 4).
_____ (2000), ‘Can Integration into the World Economy Substitute
for a Development Strategy (World Bank EBGDE European Conference, June 26-8th).
Stiglitz, J.E. (1986), ‘The New Development Economics’, World
Development, 14 (2).
_____ (2002), ‘Globalisation and its Discontents’, (London: Penguin).
_________________________________
SUGGESTED
CITATION:
Matthew McCartney, “Driving a car with no steering
wheel and no road map: Neoclassical
discourse and the case of India”, post-autistic
economics review, issue no. 21, 13 September 2003, article 5, http://www.btinternet.com/~pae_news/review/issue21.htm
PAE in
the news: from The Guardian, 9 September 2003
Fired Up for
Battle
An economics conference next week will highlight
the rift between the subject's traditionalists and its 'post-autistic'
movement. Kurt Jacobsen and Donald MacLeod report
Next week about 200 economists from around the world will gather in Cambridge
- ostensibly to celebrate the centenary of the university's economics degree,
but in reality for another skirmish in a war that has split the discipline.
Economists have been bitterly divided between an establishment wedded to
mathematical models which dominates the journals and many university
departments (including Cambridge) and opponents who label them
"autistic" and out of touch with reality.
The
conference, sponsored by the Cambridge Journal of Economics, has set out to
open up the subject to outside influences from geography, history, law,
management, philosophy, psychology and sociology, and stop it disappearing
into mathematics.
To read rest of the article click here.
____________________________________________________________________________________________
EDITOR: Edward
Fullbrook
CORRESPONDENTS: Argentina: Iserino; Australia: Joseph Halevi, Steve
Keen: Brazil: Wagner Leal
Arienti; France: Gilles Raveaud, Olivier Vaury, J. Walter Plinge; Germany: Helge Peukert; Greece: Yanis
Varoufakis; Japan: Susumu Takenaga; United Kingdom: Nitasha Kaul; United States: Benjamin Balak, Daniel
Lien, Paul Surlis: At large:
Paddy Quick
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