“There is a great difference between studying how people actually behave and positing how they should behave. When we wish to know how and why people behave as they do, we turn to behavioral economics, anthropology, sociology, political science, neurobiology, business studies and evolutionary theory. We discover that evolutionary roots, cultural heritages, hierarchical structures, and personal histories all influence our behavior: we are socially constructed beings, within the limits of our evolutionary heritage. There is a large body of evidence which shows that we do not consistently order preferences, we are poor judges of probabilities, we do not address risk in a “rational” manner, we regularly commit a wide variety of reasoning errors, and we generally base our behavior on habits and rules of thumb. In the end, we are not “noble in reason, not infinite in faculty.” On the contrary, we are “rather weak in apprehension…[and subject to] forces we largely fail to comprehend”. And as any advertiser could tell us, our preferences are easily manipulated, our responses quite predictable.
Despite all of this evidence, neoclassical economics stubbornly insists on portraying individuals as egoistic calculating machines, noble in reason, infinite in faculty, and largely immune to outside influences. The introduction of risk, uncertainty and information costs changes the constraints faced but not the basic model of behavior. I will call this the doctrine of “hyper-rationality” so as to distinguish it from a more general notion of “rationality”, which refers to the belief or principle that actions or opinions should be based on reason. The point here is to avoid the neoclassical habit of portraying hyper-rationality as perfect and actual behavior as imperfect. It is a topsy-turvy world indeed when all that is real is deemed irrational.
The question is not whether economic incentives matter, but rather how they matter.”
Anwar Shaikh (2016), Capitalism – Competition, Conflict, Crises, Oxford University Press, p.78-9.
James Crotty is an economist at the University of Massachusetts Amherst, whose work ‘attempts to integrate the complementary analytical strengths of the Marxian and Keynesian traditions.’ This sort of approach to economics, or political economy, as many such heterodox thinkers prefer to call it, is right up my street. A collection of his papers was published last year.
Here is a very brief excerpt from one where he considers the relationship between individuals and social structures in economics and social theory more broadly. While mainstream economics tends to reduce the objects of study to the behaviour of the individual, some alternative theories place equal importance on emergent social structures such as the economy as a whole, the state, the political system etc.
In this line of thinking, such structures are dependent on but not reducible to the individuals. They ’emerge’ from the interactions of individuals. In the jargon, they are non-reductionist. Such an approach is much more fruitful when it comes to macroeconomic analysis.
“Sensible social theory must try to acknowledge and integrate the insights of both individualist and structuralist methodology. To be sure, social structures can be changed by groups of individuals. And Keynesians insist that individuals do have significant freedom of choice; they do not always make choices consistent with the orderly reproduction of society. But institutions also socialize individuals, and hierarchical societies do differentially socialize distinct classes of individuals and assign them to qualitatively different economic and social roles. In addition, institutional structures constrain agent choice and set bounds on expected economic outcomes. Moreover, institutions are economic agents themselves. Institutional decision-making requires a theory of choice of its own, one that incorporates the effects of particular organizational structures, strategies, and conventions. Marx’s famous dictum that “men make history, but they do not make it precisely as they choose” is methodologically on the right track…
…[B]oth microtheory and macrotheory must be institutionally specific and historically contingent.”
James Crotty (2017), Capitalism, Macroeconomics and Reality, Cheltenham: Edward Elgar, p.60-61.
Robert Anton Wilson’s Prometheus Rising is a book which tries to make sense of how the human mind works, how to make it work better, and the implications for human development, from the past through the present to the future. It is in part a work of social philosophy, and is truly enlightening about humanity, containing plenty of thought-provoking insights. Here is one which I think is relevant to this blog:
“Welfare-ism, socialism, totalitarianism, etc. represent attempts, in varying degrees of rationality and hysteria, to re-create the tribal bond by making the State stand-in for the gene pool. Conservatives who claim that no form of Welfare is tolerable to them are asking that people live with total bio-survival anxiety and anomie combined with terror. The conservatives, of course, vaguely recognize this and ask for “local charity” to replace State Welfare – ie.,, they ask for the gene-pool to be restored by magic, among people (denizens of a typical city) who are not genetically related at all.”
This is surely right, but for me there is no alternative to some form of welfare state under capitalism, if some of its worst aspects are to be mitigated. Some sort of middle way is preferable to political extremes which have historically been associated with repression and a widespread disregard for human life in the pursuit of ideological purity. Continue reading
An extract from SOAS Professor Mushtaq Khan‘s illuminating chapter on ‘Rents, Efficiency and Growth’ which summarises the classical economists’ concern with the economic surplus. He discusses the relation of the surplus to economic rents, and how conflicts over their distribution can affect economic growth and development.
By drawing on ideas from classical economics in his discussion of rents and rent-seeking, it is possible to broaden the analysis of neo-classical economics, which dominates the modern mainstream, by bringing in the insights of Smith, Ricardo and Marx. The book that this quote comes from ‘radically’ extends the rent-seeking framework, ‘by incorporating insights developed by political scientists, institutional economists, and political economists’.
For me, an interdisciplinary political economy such as this can yield deeper insights into the nature of economic processes by considering notions such as power, conflict and the resultant distribution of resources and their effect on growth and development.
“Our analysis of rents can be substantially extended by introducing some insights from classical political economy. Classical economists were interested in the size and allocation of the economic surplus which constitutes the potential investment fund of a society. In particular, they were concerned with the allocation of the surplus since this determined growth. The surplus could be productively invested, or ‘wasted’ in luxury consumption, and, even when it was invested, its allocation across sectors could determine the rate of growth achieved. While there were differences between classical economists, they defined the surplus not as the excess income of any group but, rather, as the income accruing to property owners after paying the direct costs of production. In a capitalist economy, the principal property owners are capitalists, but landlords and some of the middle classes may also be recipients of parts of the economic surplus. What is interesting about the classical analysis is that distributive conflicts and the associated re-allocations of the ‘economic surplus’ can determine the rate of growth. Thus, like rents, surpluses can be associated with a wide range of economic outcomes, depending on the technological context, and the type of distributive conflict going on over the allocation of the surplus. Since rents too can be the subject of distributive conflicts, the classical analysis is of immediate relevance (my emphasis).”
Mushtaq Khan (2000), Rents, Rent-Seeking and Economic Development, Ch.1, p.23
A quote from a book which is, for once, not about economics. The book that is, not the quote! Prometheus Rising is an eclectic look at how the human mind works and is both entertaining and enlightening.
“Where does this wealth come from? According to orthodox economics it comes from land, labor and capital. According to Marxists, it comes from land and labor alone, and the capitalist is a thief who has inserted an artificial book-keeping system into the process. Both are wrong. Land and labor alone, and land, labor and capital together, can’t produce new wealth if they are all organised by a fallacious idea, such as searching for oil where oil is not. The real source of wealth is correct ideas: workable ideas: that is, negative entropy – Information.
The origin of these coherent (workable) ideas is the human nervous system. All wealth is created by human beings using their neurons intelligently.”
Robert Anton Wilson (1983), Prometheus Rising
I have plenty of time for Marxist thought, not so much for socialism. But the labour theory of value (LTV) is, for me, perhaps not as scientific as Marx and many Marxists make out. The above quote sums it up nicely, suggesting that the LTV is misleading or at best incomplete, and designed to make social injustice and exploitation into something scientific.
If one wishes to fight injustice, including exploitation, that is all to the good. However I am not convinced that surplus value, a key concept in classical political economy and Marx, necessarily originates solely in the efforts of the workers. Management by the capitalists or their representatives is probably necessary for a productive and profitable workplace and can take many forms, coercive or otherwise.
To draw once more on the quote above: in the right political, social and economic environment, capitalists and workers, sometimes in conflict, sometimes cooperating, can be collectively productive if they work (and use their neurons) intelligently.
A short talk with Cambridge economist Ha-Joon Chang, who explains how mainstream economics tends to assume that individuals are entirely (and rationally) self-interested and why this is wrong and damaging to society. He illustrates how our broader motivations in the workplace and elsewhere are beneficial and should not be ignored in economic theory.
I think that modern behavioural economics has begun to address this, but it still begins with the idea of the individual, to the neglect of larger social structures and institutions, from class to society as a whole.
“The term ‘ecological economics’ should be a little redundant, as both words share the Greek root oikos (household) and together mean something like household-study household-law. It is telling that the two fields of ecology and mainstream economics have grown so far apart in the century and a half since they were named that they now represent completely different sets of principles.
The basic idea of ecological economics can be summarised by [Herman] Daly‘s argument with the World Bank economists: when you draw the box for the economy, you have to put it in a larger box called the environment. The human economy is a subset of the world system. Our inputs, in terms of natural resources, and outputs, including pollution, are like the metabolism of a kind of super-organism. We can analyse it using the same kinds of tools as we use to analyse other living systems, such as a cell, or a beehive, or a complete ecosystem.
Instead of being a closed system, like a machine, the economy is open to the environment. Attention therefore shifts from the inner mechanics of the economy to big-picture questions related to things like scale and timing and the flow of energy. Is the economy becoming to big relative to its environment? Is it consuming resources at too fast a rate? Is it adequately disposing of its own waste? Is it endangering the food chain on which it depends for its survival?”
David Orrell (2010), Economyths: How the science of complex systems is transforming economic thought
But remember, it’s all just models within models within models. They are all we have, so if we are to sustain human progress, we need to build better ones: better at explanation, and better at laying out the options for responding to change.
Divisions between the economy, society and the environment are a simplification, and a potentially dangerous one. Ecological economics offers useful ways of thinking about the state and direction of humankind as part of nature, rather than its master. So too does sustainable development. In my view we also need a political economy approach to the environment which studies how the costs and benefits of change lead to potential conflict and particular distributions of power in society. These processes require management by governments working with each other and with civil society. Such issues are surely the most urgent of our times.