Economics of Good and Evil: bridging demand and supply

EconomicsofGoodandEvilHere is another quote in the series drawing on the book Economics of Good and Evil. How do we bridge the gap between demand and supply? By either increasing supply or reducing demand. This opens up a whole can of worms, alluding to everything from the cult of GDP and alternative measures of human progress to ecological economics and the limits to growth, from the psychology of wants and needs to debates between philosophical, spiritual and religious approaches to dealing with the very essence of what it is to be human. Readers will have to forgive me for not running further with any of these ideas in this particular post.

“There seem to be two ways to minimize the discrepancy between demand and supply. One is to increase the supply of goods (in personal lives as well as in permanent GDP increase) until it satisfies our demand – to have, so to speak, all that we want to have. This is the Hedonist program: find out what you want and then strive toward it. This is a never-ending story, as is the case of a carrot on a stick. However, this is the program that we have chosen from the Greek era until today. That is one reason why our GDP has grown as it has – because we wanted it very, very much.

The other reply to the problem of demand versus supply is an opposite one, and it can be found in the ideas of the Stoics: if there is a mismatch, a gap between demand and supply, then decrease demand to meet your existing supply. While it looks easy on paper, this is a tough psychological exercise that the Stoics had to train a lifetime for. A common reply to this was: “It is better to be a human dissatisfied than a pig satisfied;  better to be a Socrates dissatisfied than a fool satisfied.” This is true, but it is even better to be a Socrates satisfied (at least in terms of consumption). For it was Socrates himself, by the way, who said “in that case stones and corpses [who have no wants or desires] would be happiest.” Ultimately, Plato does not ascribe positive values to the desires and needs of the human body – for they are deceptive…

In this view, a truly “rich” man is someone who wants nothing (more), while the needs of a poor man are many. Thus, technically speaking, an unsatisfied millionaire can be much poorer a man than a man with low income.”

Tomas Sedlacek (2013), Economics of Good and Evil, Oxford University Press, p.221-2.

Economics of Good and Evil: questioning value-neutrality

EconomicsofGoodandEvilFollowing my recent post of a couple of excerpts from Tomas Sedlacek’s stimulating book Economics of Good and Evil, I have decided to run a series of further short extracts, containing what are for me the most thought-provoking quotes from the book. I have also felt inspired to write at more length, and will put together a more discursive post as well.

I am frequently drawn to critiques (and criticism) of mainstream economics, but this book is surely different from almost all other such writings in its breadth of interdisciplinarity and its literary scope. It remains focused on economics, for that is the target of its economist author, but it manages to challenge many aspects of contemporary economic thinking in an erudite and truly refreshing manner. This particular quote speaks for itself.

“Despite modern mainstream economics’ efforts to avoid the categories of good and evil at all costs, or any kind of value judgements or subjective opinions or faith, it is still an open question as to whether we have succeeded – or whether it is even possible to succeed in this effort. Incidentally, the desire of economics (or of science in general) to be separate from good and evil, the effort towards positivism and value neutrality (to be outside good and evil) strongly brings to mind the time when mankind knew no difference between good and evil. Didn’t Adam and Eve lose that state by biting into the fruit of the Tree of Knowledge of Good and Evil? Before that, they were value-neutral; they did not know the difference between good and evil, and were unaware in this regard. Economics (and science in general) therefore wants to know much in certain things, but in the moral area it wants to know nothing.

But we cannot run away from knowing good and evil anymore; it is now embedded in all our activity, including science. Despite this desire to be value-free, a fundamental part of our science of economics is based on normative judgements that such things as suffering, inefficiency, poverty, ignorance, social inequality, and so forth are bad and that they should be removed (by science). Isn’t all of science and our progress built on our hope to escape evils?

For a large part of history, the idea that ethics and economics are firmly joined together, that one has an influence on the other, has dominated. The Hebrews, Greeks, Christians, Adam Smith, David Hume, J. S. Mill, and others considered the interdynamics of economics and ethics to be a crucial topic. Whatever conclusion they reached, they all believed that the study of ethics is important to economics. Distinctions between economic and ethical questions were rarely ever made.”

Tomas Sedlacek (2013), Economics of Good and Evil, Oxford University Press, p.251-2.

The Power of Creative Destruction: insights from the mainstream and the role of political economy

CreativeDestructionIn this post I praise a new book on how innovation in the form of creative destruction drives economic growth and the implications of this for a wide range of contemporary economic problems. I go on to suggest that, despite this, a richer political economy approach can offer some deeper insights into such problems, with some of the ideas examined in the book as points of departure.

This blog is often critical of mainstream economics, broadly conceived. A new book exploring what it calls the “upheaval” generated by capitalism which it argues is part of the process of wealth creation has made me question this negative attitude, to a degree. The Power of Creative Destruction by Philippe Aghion, Céline Antonin and Simon Bunel argues that cumulative innovation is the main source of the growth in output and productivity which underpins collective prosperity. Creative destruction is a term originally coined by Joseph Schumpeter to describe the turbulent processes which result as entrepreneurs innovate, generating new products and processes, enter and disrupt old markets, create new ones, and innovations diffuse throughout the economy, driving the constant change that a successful capitalism seems to require. Continue reading

What I am reading right now: Economics of Good and Evil

EconomicsofGoodandEvilFor some unusual but enlightening summer reading, I happened upon this book by Tomas Sedlacek in a local charity shop. Sedlacek is a former member of the National Economic Council in Prague. In his book the author sets out to find and “grasp the beliefs underlying economics”, drawing on cultural “myths, religion, theology, philosophy, psychology, literature and film.” It is a bit different to my usual fare, but no less interesting for that. I want to write on some of the book’s ideas in due course, but for now here are a couple of stimulating quotes from the early chapters:

“But everything has its price, and no lunch is free – not even the course of prosperity, which specialization has laid out for us. The price we pay for independence from the whims of nature is dependence on our societies and civilizations. The more sophisticated a given society is as a whole, the less its members are able to survive on their own as individuals, without society. The more specialized a society is, the greater the number of those on whom we are dependent. And so much so that it is existential.” (p.30)

“It is enough to direct and regulate the self-propelled energy of chaos, which nourishes itself and creates a feedback loop of causality, so that it serves our goals, as that saint did. Economics should then mean the art of helmsmanship. The interaction of chaos and free will should not be understood as an obstacle (even if it appears as a stormy sea) but as a resource. Instead of trying to calm the sea down and directing it by threats of violence, one should instead learn how to steer on it. Michael Novak writes interestingly about this problem in his book The Spirit of Democratic Capitalism. He argues that in all existing and historical systems, only the system of democratic capitalism has understood how deeply embedded “sin” is in the human spirit; however, it is not possible for any system to uproot this sin. For this reason, capitalism takes the “fallen world” as the base for reality, and in addition manages to “retransform its energy into creative power.” (p.161-2)

Distinguishing political economy from economics

402px-AdamSmith“We may define political economy as the study of the mechanisms used or usable by society to operate the social economy, understanding the social economy to be comprised of the tools, institutions and human energies that produce goods and services. Social choices in production and distribution are constrained by governance structures and a cultural economy of attitudes, norms and values embedded in the historically specific institutions of a society. Oscar Lange defines political economy more formally as ‘the study of the social laws governing the production and distribution of the material means of satisfying human needs’. Political economy is a return to oikos, the Greek from which we derive ecumenical (all in this together), economics (material providing), and ecology (interdependence of all the creation). The core differences between economics and political economy from such a perspective are that economics presumes the isolated individual as its key construct, sees the core problematic as allocation of given and known resources, and allows for a mechanical model of minimization and maximization as its determinants. Political economy begins with the social individual facing contingent choices and bounded rationality, and considers institutions and governance mechanisms that constrain and guide individual and group activity. Political economy is an effort to study as endogenous variables the parameters usually held constant by economists – technology, property rights, the state. Changes in political-economic organization assumed away by neoclassical economics are the basis of theorizing sources of structural change in political economy. It also has a normative side, understanding normative political economy as the study of how societies can best change their institutions and why they would want to make the rules that constrain individual choice different to how they are. ‘The driving idea behind normative political economy,’ Ben Ward writes, ‘is the belief that societies can change their economic institutions – not without premeditation and discussion, of course, but certainly in response to persuasive objections to the prevailing mechanisms and compelling mechanisms and compelling arguments for different ones’. The more interesting economists to most readers of the history of ideas are those who, from Adam Smith to John Maynard Keynes, offer such an avowedly normative perspective within a larger political economy framework, using tools of conventional analysis modified to meet their purposes. It is just such a project that, when successful in becoming sufficiently influential, becomes important to canon formation in the discipline.”

William K. Tabb (1999), Reconstructing Political Economy: The great divide in economic thought, Routledge, p.15-16.

Wealth, welfare and well-being – what do we want from our (political) economy?

This post draws on a variety of unconventional yet renowned economists to reconsider the values and goals of economic activity and challenge aspects of the conventional wisdom, arguing that economics would benefit from being more controversial and open to debate.

Economics has been called the science of rational choice. An older definition holds that it is concerned with the production, distribution and consumption of wealth. Some of today’s progressives, which this writer often aspires to be, hope for a capitalism (and beyond) that can somehow reconcile sustainable prosperity, justice and liberty. However it must be acknowledged that attaining these three in a satisfactory way can be fleeting, and requires constant work, both in thought and deed. Continue reading

Dean Baker – When we keep giving money to rich people, why are we surprised by inequality?

Dean Baker is the author of Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer. The implication of his arguments is that structural and regulatory reforms to the way markets work would be a more effective, sustainable and efficient way to reduce inequality under today’s capitalism than much greater redistribution via more progressive taxes and transfers. This would be radical in a sense, but the focus on reform rather than revolution appeals to me.

In today’s post from the Real World Economics Review Blog, he outlines some of his ideas.