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sanity, humanity and science
post-autistic
economics review
Issue
no. 21, 13 September 2003 back issues at www.paecon.net
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In this issue:
- Jacques Sapir
Seven Theses for a Theory
of Realist Economics
Part I: Theses 1-4
- 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
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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