Making Sense of the S&P Downgrade: Semantic, Performative and Reflexive Views of the Economy

This cartoon by KAL for the Economist, posted by Paul Krugman on his blog, captures the social and linguistic nature of some economic activity.

The S&P downgrade of US sovereign credit  has been heralded as both a pivotal event and at the same time an inconsequential event.  The profusion of opinions and notions about it make it difficult to evaluate in an analytically rigorous manner.  Here I hope to offer a way to “unpack” the profusion of views so we can understand them in a multi-dimensional mental model and are able to “turn them around in our mind” to see their various merits and oversights.  The point of this is not to inflate the importance of this one act but to investigate whether economic events lend themselves to an analysis that considers how language might be operating in politics and economics.  In an opinionated or simplified commentary, commentators have in my opinion collapsed these dimensions to instrumentalize this event to support their view of economics, with sometimes ethically benign and sometimes ethically suspect intentions.  However it helps for critical consumers of economic and other public utterances to be able to have “tools” to think about the “moving parts” of important events.

The co-occurrence of the downgrade with what seems to be a stock market downturn and potentially a still deeper recession in the real economy, may lead to false attributions of causality.  Nevertheless the downgrade has at least symbolic importance in an era of bad economic news.

Sociolinguistic and Semiotic Tools

Formally, in sociolinguistic and semiotic terms, the S&P downgrade is both a symbol in an ordinal scale (AAA,AA+ to D), i.e. the rating, and a text with an author or authors.  The rating is determined, simultaneously rationalized in a press release, and published by Standard and Poor’s Financial Services LLC, a division of McGraw Hill publishing.   McGraw Hill is a large publishing company with an influential board of directors.  S&P is, because of government regulation and financial industry practice, a division of that publisher with a special authority and status: S&P is one of three Nationally Recognized Statistical Rating Organizations (NRSRO) designated by the SEC, so enjoys a government mandated oligopoly.  S&P also manages a widely-followed stock index, the S&P 500 which gives it a semi-official role in the assessment of and perception of the value of the New York stock market overall.

The selection of a symbol in the ordinal scale, the rating, is used as a shortcut to evaluate and communicate the agency’s assessment of the risk of repayment for bonds and other debt obligations issued by a particular company or government. S&P shares this rating system with Fitch’s another rating agency/financial publisher.  Moody’s, a third rating agency, has a scale that is almost identical.

The rating agencies translate the fairly meaningless symbol in the ordinal scale to an English word or phrase that is slightly more meaningful to those who do not have the time to memorize symbols.  AAA is “Prime”, AA+ to AA- is “High Grade”, A+ to A- is “Upper Medium Grade”, BBB+ to BBB- is “Lower Medium Grade”, BB+ to BB- is “Non-investment grade speculative”, B+ to B- is “Highly speculative”, CCC+ is “Substantial risks”, CCC is “Extremely speculative”, CCC- to D are various grades of “In default”.   These words, if accurately applied, are meaningful to investors though as with any single word or letter grade, do not capture the specifics of any given bond issue or bond issuer.

Changing or re-affirming the rating along the ordinal scale is an event that requires the rating agency to justify their maintenance of the rating or change in the rating.  The ratings agencies produce texts which are ostensibly summaries of their numerical or qualitative analysis of the investment or the debt issuer.  These texts are issued as reports and press releases and have their highest impact and meaning at the time of their publication.

The downgrade document and rating can also being viewed as an “utterance”, as the downgrade text has been issued at a particular time and is treated by news outlets and commentators as a speech act by the corporate “person”, in this case S&P.  Unlike a work of imagination like “Hamlet” or a fact-based text like an encyclopedia, the timing of the downgrade text’s publication was a critical component of its coming into being, very much like an utterance in a conversation.  As you probably know from experience, utterances gain meaning if not their entire raison d’être from the context of a particular conversation that occurs in real time, which then quickly becomes historical time.   The text produced by S&P was timed to be issued after the markets close on Friday August 5th, 2011 after the conclusion of weeks of budget deficit negotiations involving the executive and legislative branches of theU.S. government.   There are other contextual factors in the timing of the issuance of the text which will be touched upon below.

One critical element of how people evaluate both texts and utterances is the value they attach to and relationship to who is the speaker/writer.  Views of Standard and Poor’s will range from those who accord it decisive authority on the matters of the solidity of various investments to, on the other hand, those who see the agency as a corrupt institution whose every utterance and publication is suspect.  These views and their diversity are based on a wide range of factors.

That Standard and Poor’s is considered a publisher as well as a ratings agency gives it both special authority but also invites challenges to its authority.  A “text” or publication has the appearance of independence from the speaker/author that “utterances” and “news releases” don’t have.  That S&P has additional standing as a publisher with a government mandate as well as a unique position in the financial industry adds to the at least formal perception that its publications are supposed to have standing.  However formal “publications” are supposed to be joint works between writers and independent reviewers or editors, a process which is supposed to make the contents of the publication more reliable or of higher quality.  That Standard and Poor’s is both the author and publisher of its work invites questions about the objectivity of its views.

The receiver or consumer of S&P’s utterances/texts is also a factor in the interpretation.  Whether one has a history with S&P ratings personally, an economic interest effected by the rating, or a political position that is influenced by S&P’s publications will effect how one assigns value or meaning to their utterances/ratings/texts.  This feeds into what I have called the “perspectival” nature of economics, which makes its status as a science, as well as the status of other social sciences, complicated if not problematic.   Perspectival doesn’t mean an entirely subjective model of social reality, either. If an extreme subjectivist position is taken, the whole point of communication is itself lost and leads to contentless cynicism: if reality is entirely dependent upon the receiver, there is no point in talking or uttering anything and everybody is exclusively preoccupied with private delusions.

Below I will classify interpretations according to three constellations of speaker, receiver, utterance and context that I will call semantic, performative, and reflexive.  The semantic view says that words “contain” meanings or prescribe a limited set of interpretative acts on the part of receivers of utterances or readers of texts.  The performative view says that speech acts (including transmission of and/or publications of writings) also perform actions that cannot be reduced to some exterior or pre-existing world.  The reflexive view blends performative and semantic views of the world, portraying the social and economic world as a historical series of hermeneutic (interpretive) and performative acts that have a critical dependence upon each other.

Semantic Perspectives: What Facts/Meanings does the Rating Downgrade Contain?

The simplest, most “commonsensical” view is the semantic view which says that words have meanings which are inherent in the words themselves or that words prescribe a certain constrained set of interpretative acts by readers/listeners.  Dictionaries are written based entirely on a view of language as semantics:  a word is supposed to “map to” a meaning that is explicable by reference to other words and/or by implication to a non-linguistic reality represented by those words.

A semantic view of the S&P downgrade and explanation would look at the content of the downgrade texts themselves and see if it maps to a reality that we can agree exists independently of S&P’s utterances and assumed motivations and wishes.   This view is analogous to a view of economics and business events being an “objective” reality out there in the world over which economists and business analysts make accurate or inaccurate statements, observations that do not effect the events being observed.

Standard and Poor’s, in a simplistic idealized world, would view their own rating and the justification of their rating as largely semantic or, adding a small performative dimension, as their “performance” of a semantic act, a “naming”, justified by an objective world described in their analyses and publications.   Consumers of S&P’s rating who “believe in” S&P’s view of the United States as a debtor will share this view and act accordingly if they are in a position that requires them to act based on bond ratings.  Some people would call this stance “naive realism”, the idea that representations of the world are largely transparent views onto the world as it is, objectively beyond all of our wills, of can be made so via the application of the correct semantics.

In the same simple idealized world, business people and economists will accept the representation of the world contained in S&P’s rating and will treat it as a fact, even though they must “average” this fact with other views that may contradict S&P’s view.  Nevertheless the content of the rating is supposed to predominate.  In certain social contexts, rules of the discussion dictate that one is supposed to focus purely on the semantic, intended meanings of what someone else says and not their “agenda”, tone or other non-semantic elements of their speech.  People are supposed to “mean what they say” even if you believe that they don’t mean it.

There are at least five possible positions in this, four of which are represented in the current set of reactions to the downgrade:

  1. Full acceptance of rating and propositional content of rating justification –  Those who think that S&P’s text corresponds to a real world “out there” would accept that its credit rating of the US as AA+ rather than AAA corresponds to real events that have occurred in the world since S&P’s last rating of the United States as a bond issuer.  They would take S&P’s scope of evaluation as material to the quality of credit risk that the US government represents.  A full acceptance of S&P’s “observations” about the US federal government as debtor can be used for a variety of political programs including those on the right-wing who think that this is due to federal spending programs.  Alternatively those on the left can take the report and view it as an indictment of the Right’s anti-tax program and efforts to use the debt ceiling as a political lever.  Earlier reports that S&P has issued regarding the creditworthiness of the United States favored more the Right’s anti-government spending agenda, giving the current rating justification a different and perhaps more explicable context.
  2. Critical/partial acceptance of propositional content and/or rating – Some readers/listeners may find flaws or disagree with aspects of S&P’s rating of the US and its justification.   To some it may appear that parts of S&P’s analysis is correct, while other parts are off-base.
    1. S&P may have advanced true propositions that do not impact on the creditworthiness of the US government. Many believe, and we will see this borne out, or not, by events in the next weeks and months, that US debt will continue to be treated as “Prime” by bond markets, even if it now holds the rating of AA+ from one of the three rating agencies.  The other two rating agencies still rate US debt as “prime” and even if they didn’t, if US Treasury debt remains a refuge for investors, it will still be “virtually prime”
    2. Some on the progressive or Left side of the political spectrum may find total agreement with this statement in it is causally attributed to the political Right:   “The political brinksmanship of recent months highlights what we see as America’s governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed. The statutory debt ceiling and the threat of default have become political bargaining chips in the debate over fiscal policy.”
    3. Economists, many of which are on the Left side of the political spectrum, would be critical of this statement as a rationale for downgrading sovereign credit ratings:  “By 2015, we project that their net public debt to GDP ratios will range between 30% (lowest,Canada) and 83% (highest,France), with the U.S. debt burden at 79%. However, in contrast with the U.S., we project that the net public debt burdens of these other sovereigns will begin to decline, either before or by 2015.”  The linking of level of debt burden to GDP suggests an anti-Keynesian perspective, as Keynes recommended deficit spending during ‘liquidity traps”.  The counter-example of Japan’s very high debt to GDP ratio is overlooked.  The way to improving the financial position of the country may then be a temporary move towards MORE public debt rather than constrain public debt formation in the near term.
    4. The political Right might focus on the same critical points but using an opposing spin.  They have been claiming though, with, in my observations, a shaky basis in fact, that it is the Obama Administration’s responsibility that we have so much public debt (now a “party line” for the Republicans).  They will also assert that political turmoil around the debt ceiling is purely the doing of the Democrats, again with only slight basis in fact. Republican leader Boehner has claimed that Obama has changed his position throughout the negotiations, an observation which accords with some observations of critics of Obama on the Left that he has been using the debt crisis for political gain.
  3. Disputing Analysis or Methodology for Applying Rating– TheUS Dept. of the Treasury and others have disputed the methodology by which S&P has evaluated the US’s debt position and ability to pay.  The S&P $2 trillion dollar error is striking; an error which S&P upon accusation later admitted was justified.  Nevertheless S&P continued on with its downgrade without reference to this error.
  4. Disputing Materiality/Relevancy of Claims –  Some critics are agreeing with the propositional content of much of what S&P has written in its justification of its downgrade but have pointed out that assessments of political turmoil are not relevant to the ability of the US to pay its debts in the medium term.
  5. Total dismissal of propositional content and rating – Purely on the basis of the content alone, very few are arguing with all of S&P’s claims without reference to the overall disputed authority and politics of the rater, author itself.  Rather than viewing this as a dispute in semantics, I am categorizing this type of disagreement under performative and reflexive perspectives on the S&P downgrade below.

A purely semantic view of economic events is in agreement with a self-styled “natural scientific” view of economics and business, even though this view appears to be naïve and unrealistic. We will see below that there are a profusion of views of the S&P downgrade that plausibly include factors outside the simple truth-claims of the rating and the justification for the rating.

A Performative Perspective:  The Downgrade As Action

Linguists have differentiated semantic from performative dimensions in the generation of meaning: the semantic dimension refers to words as containers of meaning while the performative aspect of language highlights how the action of using specific words themselves in specific contexts co-creates meaning.  For instance, a minister or judge performs a marriage by stating:  “I pronounce you man and wife (or more recently, ‘spouses’, ‘husband and husband’ or ‘wife and wife’)”.  Technically the marriage did not exist prior to the pronouncement, the words which created the union.  There are many special-use language performances like weddings with designated officiators but a vast majority of language performances occur in everyday speech.  People, for instance, “promise” or “swear” that they will do something or not do something.  The promise did not exist prior to the utterance of words like “I promise” “I swear”.  A weaker form of promise is to “say that” you will do something.

Performativity is necessarily sociolinguistic, an aspect of language that is often ignored by the mainstream of linguistics, computer science, and analytic philosophy.  Sociolinguistics studies languages in their social contexts, including consideration of speech roles, i.e. “who is the speaker/writer” and “who is the listener/reader”.   A dynamic and historical perspective is possible within a sociolinguistic perspective, which is a good thing for the advancement of workable theories about how things have come to pass.

If the downgrade is considered to have a political dimension this is of necessity a performative aspect of the downgrade as well, as politics can be construed as a series of speech actions around the acquisition, exercise and maintenance of power.  Consideration of the characteristics of the rater, i.e. S&P also falls into the performative category, as when we view the performance, we attribute it often to be a characteristic of the performer of the action.  There is a school of sociology of the sciences that asserts that knowledge production and economics is a largely performative activity, i.e. the purpose of the activity is to “act as a economist” rather than to produce semantic knowledge, a position that is, in my opinion, extreme though interesting to contemplate.

I am dividing performativity regarding S&P into two categories:  Basic Ratings Performance and Additional Performative Dimensions.  Everybody recognizes the S&P’s “Basic Performance” of an investment rating but only some delve into “Additional Performative Dimensions”.

A)    Basic Ratings Performance – An S&P rating or ratings from other agencies are not just texts or utterances but involve the performance of an action with real consequences in the world.  This action is a basic naming or simple semantic act.  There are also, supposedly fiduciary as well as legal duties involved in rating investments, especially for the three NRSRO’s recognized by the SEC.  Thus, like the minister at a wedding or a judge in a courtroom, S&P whether deserved or not, has the right to take these verbal actions.  The actions also have more profound consequences because of both the sanctioned role of S&P as well as because of its high public profile.  Everybody agrees that these ratings have this minimum characteristic, including those who focus on the semantic aspects of the rating.  A bond or stock rating is not simply text- or knowledge-production.

B)     Additional Performative Dimensions – Most readers/receivers of the agency’s rating will be looking at more than just the bare minimum aspects of the rating as an action.  In general, the more critical or dissatisfied one is with the propositional content of the rating itself or the institution of the ratings agencies more generally, the more one considers the rating itself as an action by an entity in the world, with additional characteristics.

  1. Characteristics of the Rater – S&P’s action to downgrade is looked at by some in the context of Standard and Poor’s own institutional structure, business model and history.
    1. Rater’s Economic Interest/Business Model – S&P and other ratings agencies are paid to rate private issue securities from Wall Street firms by the firms themselves, from which they derive most of their income.  Thus their economic interests are aligned with neither the consumers of their ratings nor sovereign debtors like the United States government but with private Wall Street firms.
    2. Corporate Parent’s or S&P’s Political Agenda – Some commentators have pointed out that McGraw Hill publishing or its S&P division may have a political agenda because of relationships between its board of directors and the Business Roundtable.  The downgrading of US debt may serve the purpose of undermining the current Administration or the emergence of a more “Keynesian” agenda.  The downgrade justifications assumes that temporary increases in public debt will not help the economy and the US’s future ability to service its debts.
    3. Accuracy of Previous RatingsS&P has a long history of inaccurate ratings.  Consumers of its ratings as well as commentators on the downgrade have pointed out that because of the track record of S&P that one should ignore or discount the downgrade.
    4. Analytical/Mathematical Competency To Rate –  An additional line of inquiry or criticism points to the ability of S&P or S&P employees to “do the math” or research required to rate securities.  This sees the $2 trillion error in calculation as part of a pattern of sloppy research by S&P.  Some have called S&P one of the “stupidest” firms in a stupid industry.
    5. Competency to Rate Political Systems– As the downgrade rating was based on a political analysis, S&P is claiming a competency to rate political systems which is not thought to be a core competency of the ratings agencies.
    6. Habitual Fraudulence/Criminality – The harshest view of S&P is that it perpetrates fraud on a habitual basis.  Thus the downgrade of US debt is seen as part of a pattern of fraudulent ratings; critics here maintain that S&P does not attempt then to make its rating accurate, i.e. have no ethical commitment to a semantics of truth.
  2. Characteristics of the Rating-Action –  Viewed as a political-economic action, the downgrade has attracted attention that look beyond the minimum conditions for it to be a rating “event” at all.
    1. Information Value of Rating/Analysis –  The rating rests entirely on public information, all of which is political in nature.  S&P’s analysis offers no additional information nor analysis to consumers that is not accessible elsewhere.  Therefore it has questionable information value for market participants.
    2. Self-Correction/Over-compensation – Given S&P’s history of cheerleading for investments, the action may have been an effort at overcompensation for previous leniency.
    3. Economic “Cover” for Political Allies/Diversion of Washington’s Attention to Debt rather than Job Creation –  Assuming a Republican anti-welfare state bias at S&P, the timing of the downgrade suggests that the downgrade was an implicit endorsement of a still more savage cuts to social welfare spending.  This view is substantiated by earlier endorsements by S&P of $4 trillion in spending cuts which were not achieved by the deal agreed to on August 2nd.
    4. Pre-emptive Counter-attack/Distraction from own errors – S&P has been the most controversial of rating agencies and might be legally liable if prosecutions for financial wrongdoing were ever pursued.  As the US government would be the source of this prosecution, to create an environment where the US government is pre-occupied with its own liabilities is beneficial to S&P’s current management.  Furthermore, it would seem retaliatory to prosecute S&P after the downgrade.
  3. Characteristics of the Ratings Industry
    1. Ratings are Irrelevant to Treasury bonds –  As we have seen the market sell-off of August 8, 2011, there has been a “flight to quality” as investors have bought US Treasuries as they leave stocks.  Thus markets have ignored the downgrade and they may as well ignore other ratings of these financial instruments
    2. Ratings business Model is flawed – As mentioned above, many contend that all bond rating agencies have a flawed business model that doesn’t serve the public or investor interests.

These are just some of the possible interpretations and narratives that can with some justification be told about the S&P downgrade as a action in language.

Reflexive Perspectives on the Downgrade

Reflexivity is a concept that has gained currency in economics via the work of the investor and philosopher George Soros, though it has been an occasional concern in the theory of the social sciences and in other areas for several decades.  Reflexivity is not unlike the Heisenberg Uncertainty Principle in physics, in that observers and observations of social phenomena have an impact on the phenomena that they observe.  Reflexivity suggests that society and the economy are like an “echo chamber” within which single utterances and publications can have multiple effects over time.  Soros, drawing on his experience in financial markets, has pointed out how ideas about the valuation of assets can change the value of those assets, which is commonsensical to the stock trader but not to many economists and fundamentalist stock traders, who take a purely “semantic” approach.

Reflexivity depends also on the assumption of a critical intersubjectivity, i.e. that we are not isolated consciousnesses but influence each other via our communications and meaning-making activities.

For reflexivity to be analyzed empirically or at least understood in greater analytic clarity, it is my contention that it must be disaggregated into performative and semantic components.  Reflexivity represents a “higher level” concept that stands “in between” or utilizes both semantic and performative aspects of language and meaning-making activities.  As such, it also represents something of a longer historical arc, which makes it difficult to assess how the recent downgrade of US credit risk by S&P will affect this arc.

Here are a few of many possible perspectives on the downgrade informed by reflexivity:

  1. Paradoxical strengthening of treasury debt as an investment –  We have already seen that while S&P’s downgrade of treasury debt has contributed to an overall climate of economic gloom it has actually strengthened the position of Treasury bonds, as there has occurred a flight to safety, which Treasury bills represent in contrast to stocks or other securities.
  2. Reactions to downgrade as wound to American self-esteem —  I will explore this theme in greater detail in another post, but many Americans have been caught up in a decades long cultural trend of defensive self-aggrandizement.  The downgrade from “prime” to AA+ will either be perceived as a useful or a harmful slight to American self-esteem:  some politicians and political commentators might take it as a call to positive action while others may retire into a resentment-laden withdrawal from society.
  3. Market differentiation opportunity for other ratings agencies – Moody’s and Fitch’s might reassert their AAA rating of the US longer as a way to differentiate themselves versus Standard and Poor’s in the hopes of gaining market share.
  4. Political Re-definition of economic progress as recovering “AAA” rating/Narrowing scope of economic policy – The rating may itself be meaningless but some may take the recovery of a AAA rating by all three agencies as the primary goal of economic policy.

As noted above it is too early to tell whether this event will have meaningful long-term “echoes” within the economy and economic policy environments.

The Sociolinguistic Foundations of Political Economy

I’ve taken the S&P downgrade of US Treasury debt on August 5th, 2011 as an example of how meaning and communication interact dynamically with economic institutions.  Opinions about what this event should mean have been so various, often from people who are allied politically, that it provides as good as any an example of the insufficiency of our understanding of how the future is created from the present and the past.  I’ve tried to show how there is a dynamic edge to economic institutions that involves political fights over not only material resources but also symbolic terrain.

An underlying assumption here has been that viewing economics as a political economy rather than an autonomous “economy” is a truer representation of how economies move and evolve.  The contests over meaning and power that are waged through language and speech acts help shift the direction of the economy and are only thinkable if we think of how language and symbol manipulation create a variety of outcomes.  If we think of an economy shaped in part by people’s will and drives, expressed through action and language, we find interesting variations and exceptions in what were thought to be invariant laws of supply and demand.  An economy embedded in society and governmental institutions gives us a chance then at developing human self-understanding far more realistically than one which assumes an ahistorical economy.

It would seem that these language phenomena are not a superficial layer on a numerical, material economy but part of the structure and motive force of that economy.

My New Politics Blog: Politics 2100

As I believe in keeping “on topic”, I’ve created a separate blog on politics called “Politics 2100: Getting Down to Brass Tacks” at the following web address:

http://politics2100.wordpress.com/

On this blog, my focus has been on scientific issues related to economics and related social sciences. While it is pretty clear to readers where my sympathies lie here, I am at least formally trying to represent a “meta-” position with regard to science that should be applicable to those who do not agree with my political or economic preferences. On my politics blog, I feel freer to develop my political point of view.

I don’t see this blog or that blog as being competitive with each other, though my time is limited.

Paradox of Thrift, the Deficit Debate and Virtue Ethics

An economist friend of mine pointed out to me that my post on the intersection of ethical dynamics and economics omitted to mention the “paradox of thrift” brought to the attention of 20th Century economists and theoretically elaborated by John Maynard Keynes.  In fact, my friend felt that the post was mostly about the paradox of thrift yet I had neglected to mention it or credit Keynes.  While it may have been a significant oversight on my part, I disagreed with his premise that that post or my position was largely about that paradox.  I explained to him and will explain here the differences between a simple observation of the paradox of thrift as it operates in contemporary economics and my approach.

The Paradox of Thrift Summarized

The paradox of thrift is a phenomenon whereby if everybody in an economy attempts to increase savings (thrift) and these savings are not in investments but in liquid assets, overall savings and economic growth goes down;  individual virtue collides with overall social well-being.  There are many good explanations of the paradox of thrift which, as Wikipedia includes in its entry on the subject, goes back to biblical injunctions against a propensity to save rather than spend.  Various pre-Keynesian economists including Bernard Mandeville commented on the paradox.  During the Depression, Keynes elaborated the paradox by introducing the notion that governments should stimulate demand by government deficit spending on projects that put money back into the economy.  The stimulation of aggregate demand would counteract the tendency of individual economic actors to save out of fear during an economic downturn.  Richard Koo’s “balance sheet recession” is an example of the paradox of thrift.

The Paradox is based on Keynes’s observation that people have a propensity to prefer liquid assets over commitment to investments that “tie up their money”.  The liquidity preference is a fundamental problem for economics, where overall wealth is based on longer-term investments in productive goods and in the demand by consumers for the products produced by capital goods.  Under conditions of uncertainty and fear including in economic downturns, this liquidity preference is enhanced.  We appear now again in a “paradox of thrift world” according to Paul Krugman and others.

Anti-Keynesians, Deficit Hawks View the Acknowledgement of the Paradox as Itself a Vice

While Keynesians accept the paradox of thrift as a fact or periodic objective condition of the economy, especially in an economic downturn, the struggle between economic schools inside economics has meant that this observation is not accepted universally as a fact of life.  From a Keynesian or Keynes-influenced perspective, the deficit hawks, who of necessity must overlook or downgrade the Paradox, are simply out to lunch, ignoring a fact of life (if everybody tries to increase savings under conditions of weak demand, total savings and wealth goes down).

However there are those anti-Keynesians of various stripes, including followers of the Austrian school, who believe that Keynesianism and its acknowledgement of the paradox are essentially incitement to violate the economic virtue of saving.  They see this, whether in honesty or as a political pose, as a moral war between two conceptions of virtue or rather to them, a war between a virtue and a vice.  Mandeville in the 18th Century and Keynes in the 20th century were faced with scandalized reactions to this observation, though in the case of Mandeville, a fairly consistent anti-moralism and commitment to self-interest helped inflame the reaction to what might have been sound economic advice.

Thrift is Not the Only Economic Virtue

While thrift is considered, in a post-Calvinist world, to be a primary economic virtue, and was praised by Adam Smith the founder of modern economics, and Ben Franklin, it is not the only virtue.  As implied above, anti-Keynesians think of Keynesians as promoting spending as a virtue, though as I will argue below this is only ambiguously the case.  Giving to charity is considered by many to be an economic virtue, and corporations and individuals often display their charitable giving to gain benefit from the perception of this virtue.  Nowadays, “going green” or efforts to work towards ecological sustainability are considered to be virtues, which many show off to others, as a means, in part, of gaining social status, as well as an educational tool.

Anything that can be said to be a stable or inherent characteristic of a person or a corporation can be taken by some economic actors to be a virtue or vice and either compel attraction or repulsion.  Thus a structure of a virtue ethics involves the evaluation of these presumed stable or inherent characteristics as either positive (promoting attraction or approbation) or negative (promoting repulsion or condemnation).  Unfortunately, and this may seem a stretch to some, the use of racial preferences and prejudices works very similarly to virtue ethics in this regard:  people do business with people from one or two ethnic groups as a preference over others or avoid doing business with one or two or more other members of other ethnic groups.  Virtues, of course, are subjectively evaluated, so for some, a preferred ethnic group may be a shunned one, but nevertheless the same structure of attaching value in both positive and negative form to an inherent, though not necessarily lifelong, characteristic of an individual or organization is occurring.

Virtue Ethics Is a Way of Seeing the World

The foregoing is an effort to show that virtue ethics is a meta-ethical way of seeing the world that in turn shapes more specifically economic paradigms and is highly influential within professional economics.  A paradigm, as defined by Thomas Kuhn the historian and theorist of science, is a way to look at the world that frames that world so as to be meaningful to scientists or other observers.  For Kuhn observations of the world entail or imply some form of a framework.  Some facts or features of the world will appear to be unimportant or even invisible from within one or another paradigm.

Those economists who see their jobs as the inculcation of virtuous habits in people and groups of people, will tend to look for and praise characteristics of people, governments or organizations that to them exemplify these virtues while criticize or even excoriate the same actors who do not exhibit these virtues or display their opposites.  They may view their task as objective observers and interpreters of the world, but where there is uncertainty, ambiguity, and the need to evaluate or project into the future they are likely to view the economy as something like a morality play between good and less good or even bad actors.

Thus in the struggle over deficit spending and the paradox of thrift, defining the economy as largely enacted by people with varying levels of virtue, especially as regards the virtue of thrift, emphasizes inherent or supposedly inherent characteristics over what might be systemic and situational issues.   The various deficit commissions and other organizations that are creating or trying to create an atmosphere in which statements of personal virtue or the economic virtue of entities (using the value of thrift and the responsible borrower as primary virtues) are signs of “responsibility”, are almost exclusively wedded to a virtue ethical way to parse the world.  Critics of their perspective usually point to a system or specific history which they are misinterpreting or missing altogether.

What Isn’t a Virtue Ethics in Economic Meta-Ethics?

As I noted in the previous post , economists have the choice of at least three meta-ethical frameworks to organize and evaluate the social data which they collect and organize into a perhaps part-scientific, discourse that applies valuations to its findings:  these valuations implicitly use some admixture of utilitarian, deontological, and virtue ethical frameworks.

Keynesianism, which is itself a broad and unsystematized climate of opinion, does not build itself up as a virtue ethics, and, in fact with Keynes’s observations of the effects of virtue ethics in the paradox, shuns the ascription of stable inherent characteristics in economic actors, to which values are attached.  The meta-ethics of Keynesianism might be construed as a “systemic, behaviorially-based utilitarianism with a varying deontological commitment to full employment”.  Keynesians attempt to weigh and measure various human attributes that effect economic behavior and attempt to figure out how economic policy can be designed to achieve full employment at any given juncture.

While the broadness of Keynesianism (if we include post-Keynesianisms, neo-Keynesians, new Keynesians, etc. in this category) is a scientific and political problem across the board, those Keynesians that remain most “technocratic” run particular political risks in avoiding the emotive cores of virtue ethics and deontological commitment to universal or popular rights.  A systemic utilitarianism based on numerical representations of utility is a particularly “dry” affair for most non-economists; in the case of the deficit debate standing up for continued deficit spending in the interests of maintaining “aggregate demand” is not particularly inspiring rhetoric.  On the other hand, a “left” Keynesianism, which is mostly absent from the center of the public debate, draws on deontological commitments to “decent jobs” or environmental integrity as a means of inspiring at least some political support for its agenda.

In the current political climate, which is dominated by neo-liberal values that tend to place responsibility on the individual rather than society, it is easier to evoke and maintain a political consensus around an individualized virtue ethics.   Concerted efforts would need to be made by Keynesians to defend themselves politically, most probably evoking some form of a deontological commitment to overall social welfare and to good work with adequate wages.  Though there are exceptions, the declaration of commitment to this type of values with manifest emotive basis has not, for the most part, been forthcoming from either the economic profession nor political elites.

The Public Deficit Debate as a Conflict Between Ethical Systems

Hinted at in the introductory post on ethical dynamics in economics, the debate between deficit hawks, both sincere and hypocritical, and the defenders of deficit spending can be very clearly understood as a competition between two orientations that use different ethical tools to understand the world.  The competition is on the level of the tools (meta-ethics) and the content of professed and/or real ethical commitments, so therefore on two levels of abstraction within ethics.  To analyze the ethical dynamics that either underlie or coexist with conventional economic arguments, I believe one has to assume something like a meta-economic stance, a stance that sees economics as embedded in a larger scientific and philosophical enterprise.

To underline the point above, the most contextually well-grounded economic arguments did not win the day in setting the terms of the policy debate or the development of an academic economic consensus; economic arguments were supplemented or supplanted by what I would describe as statements of ethical probity.  These ethical orientations may either be open to or immune to empirically grounded arguments either for or against fiscal austerity, so an ethics does not necessarily undermine rational or scientific understanding.  It appears now that increasing numbers of economists are realizing that empirical evidence supports continued deficit spending.  Nevertheless, I would submit that the power of this meta-ethical conflict was triggered first within academic economic and political circles without a primary reference to empirical or relevant historical comparative study and has set the debate on a course that makes it relatively immune to evidence-based discussion.

Ethical Conflict and Old and New Class Conflict

A competing and not necessarily contradictory explanation of the debate, popular on the political left, is that the deficit debate is motivated by a form of a narrowly-defined class conflict, a conflict of economic interests between “haves” and “have nots” and that it is therefore not premised on a conflict between universal ethical orientations.  In terms of a conventional class conflict, on the one side of the conflict, those who want to cut deficits are attempting to prevent a re-distribution of wealth downward via deficit- and tax-funded social and economic stimulus programs.  The cutting of deficits in this view functions as a means for the wealthiest to hold onto a concentration of money and power that has dramatically increased since the advent of supply-side economics in the 1980’s.  On the other side of this conflict, those who are attempting to maintain deficit spending as a public policy tool do so as defenders of the middle and working classes or as defenders of the social contract that emerged from the Great Depression and Second World War, in which the wealthiest would accept higher tax levels, government regulation of business and government-funded social programs in exchange for social stability.

An alternative or emerging view of classes that has its clearest theoretical grounding in post-Keynesian economics is that the fundamental class conflict in contemporary capitalism is between a new financial class and almost all the other classes in society, including the traditional owners of productive assets.  It is striking how many popular and economic discussions now refer to this division without using the still unfashionable “class” moniker.  As in traditional class conflict this is not exclusively an argument between ethical world views but a power struggle between interest groups.

While this class or distributional conflict may or may not be the primary cause in the conflict over deficit spending, it is not the field upon which the political conflict over policy has been fought, at least in the United States.  I would submit that the arena of conflict is public debate about and internal ethical struggle over ideals of individual and social economic probity and the ultimate purposes of economic activity.

Debt as Sin; Fiscal Austerity as Virtue

The urging to cut deficits, with or without empirical grounding, has been couched in terms of personal and/or national virtue as regards debt and repayment of loans.  This virtue, based on the simple transactional morality of loan and repayment, has been generalized to the situation of a number of governments around the world, including the United States, as these governments face mounting public debt in the aftermath of the financial crisis of 2007-8.  The complexity of the situation and its historical context for many, who did not bother or wish to think through the economics, was distilled down to a simple morality play of the debtor attempting to reclaim virtue for him or herself by repaying loans.  As it is difficult to appear as though one is ignoring this simple, seemingly basic morality, those who advocated a more nuanced response were drowned out or have been, until recently, politically marginalized.

Furthermore a generalized discourse about debt both private and public has perhaps spurred deeper social and individual psychological dynamics in which many people around the world seem to be at times blindly seeking to purify themselves of the “pollution” of debt.  In this effort, government is held up at the avatar or scapegoat for a sometimes personal or motivated effort to get out of a world of “bailouts” and what appears to be economic and political corruption.  While it is convenient for those in the private sector that lived off and helped spur this debt crisis for the focus to shift to government debt, the popularity of the discourse of cutting public debt draws upon the simple ethics of debt repayment and the worries about personal moral pollution and self-disgust that may be stirred up by the economic crisis.  The “qui bono” (who benefits) approach to explaining the stirring and deployment of this morality tale does not explain its popularity, the depth of feeling or the apparent rationale with which governments around the world and various individuals attempt to purge themselves of debt and, in so doing, may make their economic situation worse.

On the level of what’s called “normative ethics” there are three generally recognized classifications of ethical system, deontological (dutiful compliance with ethical rules is good), consequentialist/utilitarian (what produces the most happiness or pleasure overall is good), and virtue ethics (what encourages the development of good characteristics in people is good).  The argument for cutting deficits now is based on both a simplified deontology (the duty of the debtor to the lender is primary) and most strikingly a virtue ethics.  Those who have worried most, or appeared to worry most, about the reaction of bond markets, are making an argument that is premised almost entirely on a virtue ethics:  bond markets, i.e. lenders or buyers of debt, need to be convinced of the virtue of a nation before they buy its debt, i.e. lend it money.  Furthermore the display of this virtue is supposed to forestall or appease the imagined or real retribution of bond markets.

Virtue ethics is not entirely irrelevant to a simplified lender-borrower relationship: the lending relationship is ultimately one that involves decisions about whether someone or some entity will repay, which involves both the borrower’s circumstances and the borrower’s will.  That a borrower is regarded as “virtuous” in the area of repayment of loans is then a key, though not the only ingredient, for determining whether money will be loaned and, if so, at what rate.  Various bond, investment, and credit ratings are modern efforts to assess the “virtue” of borrowers or sellers of debt.  These ratings can be unreliable and have an element of subjective judgment as well as motivated under- or over-rating by the raters but they are an effort to apply a number to and evaluate this type of virtue.

The repeated argument by those preaching fiscal austerity after the crash of 2008 has been that debtor nations must appear to be virtuous borrowers or sellers of debt to avoid punishment by nervous or finicky bond buyers.  For a borrower in a simplified borrower-lender relationship, virtue involves either timely or accelerated repayment of debt or a show of abstemiousness that signals an intention or capacity to do the former.  The latter however can become simple ritual self-laceration, without benefit to the lender other than maintaining a sense of moral or financial superiority.

The implicit model of a virtue ethics is that ethics is a property of actors and their identities rather than a function of rules or actions in the world.  While attaching moral valuation and judgment to the identities of actors themselves is itself highly motivating, it obscures systemic issues, complex histories and interactions.  To spur harmful actions through fear of losing virtue is not an effective financial morality.  Not all of economic “goodness” inheres in actors themselves but in a complex interaction of factors.

Richard Koo, in his description of the long Japanese “lost decade”, sketches out how the focus of individual economic actors (in this case corporations) on repaying debts simultaneously, leads overall to an exacerbation of the economic downturn for the system as a whole.  As, due to a variety of factors, each Japanese corporation focused on its own balance sheet in the period 1997 to the present and attempted to pay down debt rather than invest in productive activity led to slackening demand for services from other companies and therefore economic contraction and increased unemployment.  While in Koo’s description of a “balance sheet recession”, each actor could explain their behavior using a justifiable microeconomic rationality, their behavior was analogous to the pursuit of individual economic virtue implied by the current worldwide drive towards fiscal austerity.

Counter-Austerity:  Deontological Commitment to Addressing Human Needs

The economists and observers of the debate (including myself) who are most appalled by the rush to austerity are generally operating with a different conception of how economics and economies should work.  While those who are counseling austerity start with a rule (deontological ethical systems start with a priori rules) about duty to lenders to repay their loans, much of their argument is based on a virtue ethics, the idea that nations who borrow should demonstrate virtues to lenders to avoid an escalating spiral of debt.  The appearance of debt as a sign of a lack of virtue is as, or more, important than the ethical rule “you must repay your debts” in their arguments.

By contrast those who are pre-disposed to question the logic of fiscal austerity are often starting from an assumption that economies and economics exist to serve widely-shared human and social needs as a primary goal.  While not often discussed explicitly as such, there exists for them a duty by economists to design or steer economic frameworks so that the likelihood that these needs are either directly fulfilled or as a byproduct of economic activity are largely fulfilled is increased.   Starting from a commitment to “needs first” generally leads to favoring government intervention in markets or direct government investment to supplement the work of markets or even, though this has become unfashionable in an era in which markets have been viewed as a panacea, replacing private market activity in areas where it has become entirely dysfunctional.

Those who preach fiscal austerity would counter-argue that their position is about serving human needs better in the long run, because they feel that the inculcation of the virtues of prudence and fiscal discipline will enable prosperity for more people over a period of decades.  This counterargument however depends upon an assumption that markets and the individual relationships of buyer/seller and lender/borrower can manage themselves and produce optimal outcomes without “steering” by governments and the influence of “external” actors to these basic transaction types.  If the unregulated market economy is prone to break down, destroy its own natural basis or shrink for endogenous reasons, the basis for this counter-argument would prove to be illusory.  Koo’s “balance sheet recession” is also an uncomfortable counter-example for this argument.

There is then a clear demarcation between those who reach for fiscal austerity and those who argue against it during this downturn in the area of their preferred meta-ethical systems and specific ethical commitments they endorse.  The deficit “hawks” call upon an ethics of commitment to lenders and a display of virtue to lenders and to the world at large.  Those who are opposed to the austerity campaign point out the human and other damage that would be caused by this effort and renew their call for a economists’ and broader social commitment to fulfilling basic human needs.  For them the display of virtue to lenders is outweighed by the use to which the lent funds will be put.  Furthermore, for them, any economic means should be applied to avert a human catastrophe.

Events Redefine Virtue for Government Borrowers

While this “classic” conflict has been playing out, events in the world have seemed to redefine the virtue of government borrowers, at least temporarily.  It now appears that bond markets are more trusting of debt issued by countries that continue efforts to stimulate their economies, rather than those countries, like Ireland, that have been engaging in efforts to display the virtue of a private borrower.  As Krugman has pointed out, bond ratings for countries that continue to run deficits are at very low levels.  The bond investment company PIMCO has expressed concern about governments cutting their stimulative efforts, inclusive of running more budget deficits.

That this has occurred either temporarily or for a longer term does not erase the conflict of ethical and meta-ethical systems established above.  Economists will continue to be divided by differences in their ethical commitments and the means by which they arrive at the valuation of different economic tools.  However, making these differences a matter of reflection and public discussion may enable more self-reflective consideration of which tools are appropriate and which valuations are best justified.

Addendum:  Where is Utilitarianism in the Deficit Debate?

Economics, especially the dominant neo-classical school has operated largely within the third normative ethical system, consequentialism, of which utilitarianism is the predominant school.  Utilitarianism can have an individualized or a larger social scope:

  1. for the individual, what is good is what maximizes pleasure and minimizes pain
  2. more commonly a utilitarian framework is used by ethicists and macro-economists applied to society as a whole to attempt to “achieve the greatest good for the greatest number”.   Various macro-economic indicators like GDP are efforts to create a numerical utilitarian method of evaluating “the Highest Good” for an entire economy.

While there have been criticisms of  measures like GDP in particular the fact that it hides social inequality and also endorses growth for growth’s sake,  the broad middle of economics continues to use some version of a utilitarian framework by attempting to find measures of social welfare that assign a number to some composite happiness, usually an aggregate of individual “happinesses”.

An argument can be made that critics of fiscal austerity are solidly within the utilitarian tradition, in that they are sensitive to the woes of mass unemployment and marginal employment, and the harms caused by an unsustainable overhang of household financial debt.  If they have made a case using both notions of greater social welfare through deficit spending and also now via continuing “approval” by bond buyers for the bonds of many deficit-spending nations, they would seem to have shown themselves to be “better utilitarians” (and therefore economists) than their deficit hawk opponents.

However, I would argue that while many economic arguments will necessarily take place within a utilitarian evaluative framework, these arguments are by their very nature backwards looking:  utilitarian value judgments are almost always a posteriori or after the fact.  Therefore policy advice must either contain a rule-based or virtue-based component that may derive from a utilitarian argument and analysis but nevertheless requires some a priori assumptions about what is “the Good”.   While confirmed utilitarians and those convinced that all of their beliefs are entirely based on established facts may find the reliance on a priori assumptions suspect these assumptions are absolutely necessary for anybody to act in a policy or business context under the usual or, especially under unusual, conditions of uncertainty.

As an example, to act on climate change or to structure an economy around an agenda to address energy shortages and irreversible environmental damage means to, of necessity, use some form of rule- and duty-based decision-making structure.  The endangerment of pleasures and pains in the future is highly abstract in comparison to the weight of past and present pleasures and pains that are the basis of utilitarian calculations.  It is therefore no accident that among established economists, that James Galbraith and other economists who see economics as primarily an instrument to fulfill human needs, incipiently or explicitly within a rule based ethical framework, have the clearest argument for a future effort to address as yet unknown but extremely probable disasters.  The natural scientific results upon which an argument for decisive action on climate change and oil depletion is based, are most compatible with a deontological commitment to human and planetary welfare, rather than other two major systems for arriving at “the Good”, virtue ethics and utilitarianism.   Why this is so is beyond the scope of this piece.

Much more can be written on the normative and meta-ethical dynamics that underlie social and economic conflicts and debates but this is all for now….

Krugman Describes a Meta-Economic Problem in the Social Security “Debate”

In his “Conscience of a Liberal” blog on the New York Times website today, Paul Krugman calls attention to the inconsistency via which various “deficit hawks” account for the budget for the US Social Security system.  Krugman points out how leaders of the deficit commission appointed by President Obama alternate in an arbitrary way between two ways of accounting for Social Security and any shortfalls related to its finances:

  1. Sometimes it is referred to as a dedicated (payroll) tax which adds to a sequestered social security trust fund from which Social Security benefits are paid.  Complaints by deficit hawks that this will eventually run out of money in an unplanned way (soon) are used as one form of justification for cutting benefits by among other things, raising the retirement age.
  2. At different times, payroll tax revenue is viewed as part of the general federal budget.  The argument is made by deficit hawks that too much is borrowed from Social Security surpluses because of shortfalls in other programs, endangering Social Security.payments in the near term.

Krugman makes the point that you either say that Social Security has a current or near-term surplus or that you can say that it has a current or near-term deficit but you can’t say both.

Krugman during the course of the article appeals to a rule, that might be called either an epistemological or a logical rule:

“But here’s what you can’t legitimately do:  you can’t switch views in midstream..”

I agree with him, but to whom or what is he appealing?  There is no framework “around” economics or economic argumentation, a meta-economics, which would not make this simply an appeal to those who agree with him or to the skies above.

Thus, the notion of an ordered form of argumentation, perhaps even a “scientific” method, which made this inconsistency illegitimate, makes sense.  Economists and folk economists like those who head the deficit commission could at least be “cited” for their inconsistency or illogic.  On the other hand, Krugman and other economists would also be giving up some freedom to make up their own “creative” forms of argumentation, if they were to submit their own argumentation to such a framework.  Within such a framework, one could not continue to support distortions or poor argumentation just because you agree with the underlying sentiment.

Without a meta-economic or more rigid epistemological framework for social scientific argumentation and related political discourse, this type of accusation becomes an ad hominem political attack:  “my opponents are inconsistent (I’m not)”.   Krugman may intend this as well, and I too want to call into question the authority of those who wield power with poor arguments and little accountability.   But I believe such a form of argumentation is not as strong as presenting a clearer, more transparent means for everybody to make their arguments.

Of course, if one side adheres to such a framework and the other side does not, then you have imbalances in forms of argumentation very similar to the current situation.  Some are happy to reduce every issue to a contest of wills or ad hominem verbal blows but then something like the truth and the common good are left out of the picture.    Those who believe in frameworks that make human comity and increased human knowledge and self-knowledge possible, need to point out when such rules, if established, are broken.

The Case for a Meta-economics 7: Knowledge, Truth-Seeking, and Science in Economics

One of the much-overlooked and little-examined values and assumptions in contemporary political discourse is the commitment or lack thereof to truth-seeking and truth-telling.  For instance, the public discourse on deficits is largely dominated by a position which is, according to a number of economists who make a well-reasoned and fairly well-substantiated case for their opposing position, relatively unmoored from much of the relevant data about the effect of deficits and deficit spending in a deep recession.  The responses from those advising deficit cutting do not address the main concerns of their critics and reveal a certain obliviousness to the need to respond to these often distinguished critical economists. Without widely-held methods of determining truthful representation whether through data verification and/or commitment to clarification of differences through argumentation, economic discourse and public discourse more generally eventually falls in on itself or becomes merely another form of hollow entertainment without content.  If there is a not a common commitment to truth-seeking on both sides or to a method that examines truth-claims, we have a major epistemological problem.

In parallel, we have a general political culture, often undergirded by folk economic theories, in which truth-telling is claimed by each to be their own virtue but is assumed by many to be a virtue of very few.  It may be that one side of the political argument is more detached from something like an objective truth (“reality has a well known liberal bias”) but this assertion by those on the left of the political spectrum will need to be explained and investigated more deeply before it can be established as having merit and truth in itself.  Critical characteristics of some highly influential folk economic and professional economic theories may play a role in this culture of diminished truth-telling, which will be dealt with in subsequent posts.

There are debates about whether the social sciences and in particular economics can be held to standards of truth at all, as some claim that economics is a creative or practical discipline that co-creates the reality which it analyzes.  In the 1950’s the distinction between positive economics (positivistic notions of economics describing a real world outside us) and normative economics (value judgments about the economy) was a matter of some discussion between Samuelson and Friedman, though contemporary economics has developed with often the unquestioned assumption that one’s own work is of the “positive” type and therefore describes an objective world.  Since then, almost entirely outside the economics discipline, a thirty year flirtation with post-modernism has called into question the positivist ideal of truth that was previously considered commonsensical.  As above, economists (and other social scientists) still draw authority from the notion that they are not creating, interfering with or influencing the object of their study: they are presenting a picture of the reality “outside in the world” that can be found.  Even if we assume that economists are completely enmeshed in the economy they describe, the notion that economics is itself reflexive or performative of economic reality does not necessarily mean that there can be no standards or constraints on its creativity.  Economics then becomes a practice which may be subject to ethical rules as are other practices such as medicine, that also claims to be science-based.

To adhere to the position that there is no objective truth in economics or other social sciences means giving up a great deal in the way of usefulness of the discourse as well as places a great deal of strain on consumers of economic knowledge.  If truth claims must be always put into context of an individual’s perspective, more work is required of non-economists and the claims of any authority at all for the discipline come into question.

Truth-telling and Science

Conventional objective truth-seeking and truth-telling, implicit values of scientific endeavor, are extremely well enforced in the natural sciences by the process of data collection using electromechanical instruments, hypothesis testing, continuous development of progressively more unified or more explanatory theory, and peer-review. The generally accepted model for hypothesis testing, falsificationism is applicable to many though not all natural scientific statements, i.e. a statement must be falsifiable to be scientific.  While Thomas Kuhn questioned the notion of linear progress within the sciences with his notion of scientific paradigms, chemistry and physics, at least have benefited from progressively more granular understanding of their object of study, even with varying shifts in experimental or theoretical paradigms. Natural scientists are not necessarily more virtuous people but they operate within a community and culture within which there are mechanisms to determine whether writings and presentations reliably correspond to the universe outside themselves.   While throughout the 20th Century philosophers of science like Kuhn have disagreed about the exact nature of natural scientific endeavor, positivism is still a reasonable approximation of how natural science knowledge is consumed by technologists and viewed from the outside.

Outside the realm of the natural sciences, because of epistemological uncertainties as well as significant political and perspectival aspects, the values of truth-telling in the social sciences are not well enforced or perhaps not even completely enforceable.  The fragmentation of each of the social sciences into two or more paradigms or schools, enables isolated, parallel developments within these disciplines with the personal preferences of analysts and readers determining which theory “succeeds” for a time.  These successes, in turn, rarely lead to a progressive enhancement of knowledge within often fragile or transitory sub-disciplinary knowledge frameworks.  This leads to the temptation and propensity of individual analysts to create their own personal version of truth or to tailor their utterances and writings to the opinions of a peer group or a patron.

Perhaps the epistemology of the social sciences cannot and should not be measured against the yardstick of the natural sciences. If economics is not just an objective science but includes the subjectivity of the writer/analyst, then satisfying truth claims may necessarily involve some form of truthful SELF-representation not just the truth of a world outside the analyst.  Perhaps this necessary self-representation might involve disclosure of their own preferences in terms of what is the purpose of economic activity, theoretical frameworks, and funders for their work.   This meshes with the notion that economics is necessarily perspectival.  On the other hand, obscuring the object of study, economics, with talk of the studier, the economist, about him or herself is kind of a “bait and switch”.  Self-representation would need to be subordinated to the representation of the world outside the economist in order for non-economists to get value out of economic discourse.   Nevertheless, some transparency about the studier could increase the value of that discourse; perhaps this might be an area within which a meta-economics might have something to say.

Example:  Who was “Telling the Truth” about Housing?

An example will show how difficult it is to establish truth claims in contemporary economics.   The housing bubble and subsequent financial crash engendered a number of schools of thought that can be subdivided into two main groups: on the one hand were those who predicted or assumed continued asset growth and therefore inaction in the face of the bubble while on the other hand a collection of diverse economists emerged who predicted that a crash was coming.   Within each of these groups, particularly in the group who “got it right”, there was a range of approaches to the problem of housing prices that made each of the views of these economists seem personal and sui generis, though each may be describing an important aspect of a world “out there”.  Steve Keen, for instance, approached the bubble as early as December 2005 from the perspective of a systemic tendency towards private debt accumulation leading to financial crises that has its origins in the heterodox work of Hyman Minsky.  Others in the same eclectic group have praised Minsky, (Krugman), but are not nearly as committed to Minsky’s model and tools as Keen.  There is an “Austrian school” critique of bubble formation that suggests that speculative debt accumulation is either a government led phenomenon or an individual moral and management failing of economic actors which will be corrected by a downturn and bankruptcies of the most irresponsible debtors.   Ken Rogoff has ascribed the main failure in allowing the bubble to grow as one of arrogance and forgetting of the lessons of history. Robert Shiller who was an early predictor of the two major asset bubbles in the last 20 years (dot.com and housing) has analyzed these bubbles as a disproportionate growth in the housing sector versus other economic sectors that was fueled in part by an overvaluation of the role of speculator in the world economy.  James Galbraith, in his 2004 assessment of the housing bubble, sees the inflation of that bubble by political leaders and central bankers as a stopgap measure to paper over an economy that was increasingly failing to generate sufficient aggregate demand and meet human needs.  Finally, and most importantly, the opinion among the most powerful economic functionaries, central bankers, first Alan Greenspan and then Ben Bernanke, was to let the bubble grow, often in the background assuming along with neoclassical economic orthodoxy that economic equilibrium and individual self-control are the determinative economic forces rather than potentially destabilizing economic swings.  However these bankers were in all probability not simply stating personal opinions or reflecting upon an objective economic reality but balancing an “out there” economic reality with the needs of political leadership for economic growth, low inflation, and the appearance of economic stability.

Given the diversity of these opinions (and there are more) as well as the efforts of officials to hide their views of these matters, it was difficult for consumers of economic knowledge to come to an understanding of what WAS going to happen with housing and ultimately the world financial system as a whole.  Is a composite of these views correct?  Is it all based on your own values and standpoint as an observer?

Complexity and Truth-Telling

One counter-claim to the demand that economists deliver an objective “truth” can be made by economists is that the economy itself is a complex system with multi-factorial determination of events, making complete and reliably reproducible accounts of what happens in the economy either impossible or meaningless.  There are so many factors and interactions that it might not be possible to document and trace each and every factor in a given account.  Alternatively, it may be possible to trace or classify all relevant interactions but to interpret all factors at once would be beyond the capability of our ability to derive any meaning from the tangle of interactions.

Contrary to these assumptions, I believe it should not be impossible to create a general map or taxonomy of economic factors that impact a particular type of event, such as a housing bubble or bank regulation, though impossible to predict their dynamics with complete accuracy.  To operate within this taxonomy would at least open the possibility for there to be a common basic language for most economists who addressed a particular issue.  At some point an overarching framework might then stabilize arguments around key programs of research or alternatively key philosophical differences that would be treated as such.  Such a taxonomy would need to be revised as events change, but it shouldn’t be too hard to compile a complete set of the relevant factors.

Still such a taxonomy and the resultant analyses would be terribly complex.  Addressing the problem of interpretability of overly complex datasets and models requires creativity in modeling the data and perhaps strategically but transparently choosing to emphasize one or the other factor.  Again, it would help if there were a discipline-wide consensus and taxonomy of factors and measurement instruments which could be called upon, so the selectivity of individual interpretations could be openly questioned after the fact.

Time, Irreversibility, Uniqueness and Truth-telling

One of the criticisms leveled at neoclassical economics is that it often operates as if hermetically sealed off from the real world, in a world of reversible time and physical improbability.  The implication is that economic processes run in a timeless world and they can be reversed.  In the real world, physical and economic processes are irreversible, a function of the complexity of real complex physical systems, living beings, ecosystems and societies.  Each event is unique.

If one accepts the non-repeatable nature of the world as a total blanket assumption, the only type of economics that would be truthful would be a historical and institutional approach that chronicles what happens in the economy over time in all its multifarious nuance.  Yet this approach has less obvious means of highlighting trends, repeating dynamics and how people actually intervene and change that irreducibly complex reality.  Prior to the installation of neoclassical economics as economic orthodoxy, the previous orthodoxy was a form of institutionalism or historicism.  The success of neoclassical economics is in part that it suggests that there are “buttons to push” in reality which will change that reality, rather than economists providing endless historical minutiae that do not simplify the world for actors in the economy and political leaders.  Still, if these “buttons” are either unreal or the wrong buttons, then economics has not helped further economic understanding and overall social welfare.

This stand-off between historicism and timeless, though potentially erroneous, economic abstractions can be resolved in two ways:  either with new more reality-based abstractions or an iterative process of correcting existing theoretical abstractions with empirical data are needed to move economics to a closer correspondence to what actually happens in economies.

Intersubjective and Objective Dimensions

Another approach that may be unsatisfying to those who look for “monistic” (single-principle frameworks) explanations is that economics has two aspects, an objective and an intersubjective dimension, which is subtly different from the distinction “positive” vs. “normative” discussed in the 50’s.  (Intersubjective is a fancy but precise word for describing what happens in the interaction between conscious, knowing beings, i.e. philosophical “subjects”.) In the objective dimension, economists can be held to standards of objective truth by examining their inclusion of data about and consideration of real unavoidable factors of life, even if these factors may be too complex to represent in their entirety and are not amenable to controlled experimentation.  For one, the geophysical world is finite and in particular the finitude of the atmosphere and fossil energy sources are objective factors that impinge upon economics.  Beyond the obvious non-human physical world, there also might be some human invariants or dynamics which play a role in economic life.  To ignore these invariants or dynamics should be grounds to dismiss the credibility of a particular economic theory.

On the other hand, there is an intersubjective world which is both the object of study of and part of the economic profession: economics describes this social world and also economic theories and analyses shape the sometimes herd-like behavior of human beings. Economists themselves have subjective concerns related to their own personal interests and ideals, as well as the personal interests and ideals of the people whose interests they are either sensitive to or trying to represent.  Economists probably always have some sense of an “ideal” (normative) and “real” human community which they feel as though they belong to or would like to co-create, even if the ideal is simply an ideally “efficient” economy.   In expressing their subjectivity as well as ordering the data that interests them, economists almost unavoidably, without a standardized form of argumentation, use rhetoric or persuasive speech to move the opinions and thoughts of other “subjects”, i.e. people, to pay attention to their arguments and views.

The intersubjective dimension of economic life can probably be described much more precisely but more often that not, not meaningfully by falsifiable statements (like the natural sciences).  Also the action of economists as they attempt to build persuasive arguments in that intersubjective world can be better described by analyzing the rhetorical devises used rather than simply a presentation of “data” or modeling to make a point or a policy recommendation.

Conflicts of Interest and Truth-Telling

A lot is at stake in economics:  the difference between poverty and wealth, health and morbidity, community integrity and community disintegration, social status and social ignominy.  Powerful interest groups have a stake in shaping economics to either continue their power or to add to that power.  Some outside the profession feel that economics is entirely reducible to a play of these interests, that economics is simply a form of politics by other means.  It is not inconceivable that certain powerful interests may see it in their interest for economics NOT to be entirely effective or truthful, that the insufficiencies of economics are in this way benefits to them, if they don’t end up taking the discipline seriously themselves.  Alternatively they may see economics as just another weapon they have to retain their privileged position, the truth value of which is secondary to its usefulness as a political and economic weapon.

Thus the content of economics may necessarily show the signs of the war of forces that surround it.  To then judge the discipline from the perspective of truth-telling may be difficult: perhaps then the best economics is like the “sharpest stick” with which to further the interests of a social group not to describe a world “out there” as it would appear to everyone.  There are people for whom the world is such a competitive and conflictual place and therefore knowledge of any kind is just another cudgel to wield to win out over “the other guy”.  On the other hand, the project of a more refined and more effective human knowledge that is open to all who wish to learn, is also an ongoing transcendent value for many.  My personal preference is the latter approach but the perspective of the former view cannot be banished from all consideration.

Reflexivity and Performativity

Under the rubric intersubjectivity, a number of approaches have been suggested as applied to economics that suggests that economics is a creative force, a technology, rather than the representation of a world “out there”.  George Soros’s concept of reflexivity suggests that reality is changed by actions and assertions of economic actors, so that it is impossible to draw a clear line between subject (observer) and object (observed).  Rather than give up on economic knowledge, Soros has continued to write and fund initiatives (the Institute for New Economic Thinking) that attempt to make economic knowledge more useful and of greater social value.

A more extreme version of the blurring between observer and observed in economics comes from the French sociologist Michel Callon who believes that economics is “performative” meaning it actually creates the reality that it studies.  Callon uses the example of the Black-Scholes model studied by Donald MacKenzie which was an economic creation that also has been the basis for most of the risk models used by financial institutions.  The model had an impeccable academic pedigree in economics but its reading and/or misreading of financial risk enabled both substantial profits on the upside of bubbles but no means of accounting for the “fat tail” risk of the bubble bursting.  Callon suggests that economics is a simply a source of new “agencements” or composites of people, ideas and technologies that compose social and economic reality.  Using a distinction from linguistics and philosophy, Callon suggests that rather than being “constative” (descriptive), economics is performative and it cannot be subjected to evaluation of its truth claims.  While Callon suggests that economics doesn’t arbitrarily create its world, he has left outside of his own program of research what those constraints on its creativity are.

It would be fruitful in the context of a meta-economics or similar, to pursue what are the constraints on the reflexive or performative aspects of economics, even if economics itself provides a stream of technical innovation that constitutes and alters the world that it studies.

In the Interim:  Ethical Commitments to Truth and/or Best Practices

If a more durable framework for social science and economic knowledge cannot be discovered/created/implemented in time, a call for individual ethical commitment to truth telling, truth-seeking, and ethical practice has some chance of improving the quality of economic and other social science discourse.  The anti-positivist and post-modern turns in philosophy and the social sciences of the last 40 years have created some interesting ideas but have also encouraged a certain cynicism about the potential for truth or at least widespread collaboration on a large, common body of knowledge.

Self-conscious engagement with the knowledge frameworks that one works in and attempting to challenge the basis for one’s favored assumptions is beyond some but not beyond all social scientists. In order for economists to be able to argue across the multiple fragmented paradigms within economics, they must be able individually to recognize areas of common ground as well as differences in order to develop a body of knowledge that better approximates reality.  As with the summary above of views of the housing bubble, many frameworks offer a glimpse of something that is perhaps held in common but nevertheless individual economists often argue past each other.

A meta-economic framework might help in the pursuit of a more durable epistemological framework, the long-term project, as well as how one can work with existing tools to further knowledge, increase social benefits and mitigate harms related to the practice of economics.

The Case for a Meta-economics 6: Is Economics Necessarily Perspectival (and therefore Political)?

If economics were a science like the natural sciences, it would for the most part uncontroversially describe a world “out there” the general characteristics of which almost all economic scientists would agree upon, i.e. an objective world.  All economists, for instance, would be largely in agreement about what were the salient types of data and even the datasets themselves that need to be accounted for in the decision to either engage in fiscal austerity at this time, or continue to stimulate the economy and run up fiscal deficits; they would then be entertaining a number of alternative hypotheses based on this data and have a means to decide which hypotheses or arguments were most successful in accounting for the data and which were falsified by the data.   This turns out not to be the case, as economists can attach their own personal or group political evaluations to the data without a compulsory “check” on those evaluations as well as tailor the data they present to support preferred hypotheses.

The theory and research program of physics is so successful that billions of dollars are spent on research instruments like the Large Hadron Collider at CERN for which there is no expectation that a useful product will emerge except an incremental increase in human knowledge of the inner workings of matter. Such an endeavor is in part a function of the ability of hundreds of physicists to collaboratively work within the same scientific paradigm (theoretical framework) which accounts for almost all particle physics data as well as the useful and the highly destructive technologies that have been the result of previous physics research. (Photo: CERN)

Though many practitioners of the social sciences strive to claim the status of such “normal” science, no social science has achieved this status completely (with perhaps the exception of physical anthropology, which is in essence a branch of biology).  While “physics envy” abounds in the social sciences, it is understandable that social sciences would want to be like the physical sciences beyond the ego-stoking appeal of their prestige and maybe the sophistication of the associated mathematics:  physics and chemistry are able to progressively build upon foundations laid down by successively more accurate theories and past experimentation.  By contrast the social sciences continue to shift from one fashion or paradigm to the next without necessarily a progressive augmentation in overall human knowledge.  While objectivity has come under fire over the last half century by critics from a wide variety of perspectives, it does enable people to work together across space and time on a common objective (for instance the massive particle physics collaborations) and create the basis for technological achievements that are also themselves massive collaborative ventures.

The social sciences, the domains of study of which are not nearly as amenable to such a disinterested view of their subject matter, have attempted to claim for themselves by approximation or appropriation aspects of physics and the physical sciences.  Neoclassical economics adopted some of the mathematical modeling of electromagnetic field theory from physics to help declare its scientific status.  Academic psychology shuns qualitative description in favor of fairly arid concepts that can be assigned numerical values, studied in a ready population of undergraduate college students, and analyzed with complex statistics.  Methods of argument in these academic discourses tend to either artfully finesse the non-objective aspects of their presentations or, in minority currents that react against orthodoxy, tend to avoid pretensions to describing an objective world “out there”.   For reasons that are not clear, subjectivity and objectivity are treated as an “either/or” rather than, potentially a world that may be some admixture of objective and subjective.

One View of Perspectivism (or Perspectivalism)

One theory of human knowledge and understanding (partially developed in the work of Immanuel Kant) now considered by some to be fairly commonsensical is that of perspectivism, the idea that there is a real, objective reality “out there” upon which different people have different perspectives.  A popularly recognized version of perspectivism is relativism which famously says that no one has worked out a single better or clearer perspective on reality, i.e. “it’s all relative”; despite its fame, relativism is not the only form of perspectivism and also does not account for the value of natural scientific perspectives.  The term perspectivism is also associated with Nietzche whose subjectivist philosophy is not the focus of this presentation.  Most forms of perspectivism can be contrasted with on the one hand naïve realism (we have transparent, undistorted access to reality), and various forms of solipsism (all we know is our own minds).

A far more interesting form of perspectivism than relativism, is that part of social reality is constituted by (made up of) people taking perspectives on the social and natural world that to varying degrees are representative of that world, and these perspectives can at times complement each other (add up to a unified understanding of reality) or compete on grounds of their relative verisimilitude as well as the social or emotional power with which they are communicated.  This type of perspectivism can accommodate both the natural sciences and the social sciences, as well as people’s lived subjective experience of the social world.  Perspectives also can be literally impenetrable or incomprehensible to a subset of other people in the world for a variety of reasons (insufficient information, lack of interest, lack of contextual knowledge, language barriers, different levels of mental acuity and maturity and differing types of mental ability).   Rather than the presumed equality of all perspectives in relativism, some perspectives are better articulated than others and approach a representation of a reality “out there” more closely than others.  If, for instance, we view natural science as a set of perspectives on the world, some of these perspectives complement each other and add up to a greater whole.  Other natural scientific perspectives compete with each other but are either confirmed or eventually dismissed by falsification.  Taken as a group, the modern natural sciences’ success in describing and manipulating the world “out there” needs to be taken account of, in contrast, for instance, to the perspectives of alchemists or phrenologists.

Furthermore we as individual human beings are capable of taking more than one perspective on reality, including a disinterested, what I would call a “third-person” perspective on the world.  Changing one’s mind in a fundamental way with essentially the same set of information could be described as a change in internal perspective. Without the ability of single individuals to change their internal perspective or alternate between perspectives, much of social communication and interaction would be impossible or without purpose.   Also, people share via language, mathematics and images among themselves basic perspectives on the world though it can be assumed that everyone has a personal variant on common themes; in this way perspectivism is not necessarily solipsistic or atomistic and perspectives can be descibed meaningfully as “important,” “persuasive”, or “widely-held”.  The venerable separation between fact and opinion, reproduced in traditional news organizations by separating reporting from editorial, is a nod to a version of perspectivism.

For the purposes of this discussion, I am going to adopt the (to me commonsensical) approach that allows perspectives on the reality of a single unified universe (though there may be other universes) to complement each other or compete with one another in terms of their verisimilitude but also recognizes that all perspectives contribute to and are a part of social reality.  Furthermore distortions in some perspectives may impact social reality as much as those perspectives that are more realistic in their representation of the world.   Soros’s concept of reflexivity, in which ideas about reality contribute to and change social reality, is an example of this type of perspectivism.  Despite the importance of perspectives and their social “weight” there is also a natural and socially-constructed physical world that may escape our notice and certainly contains and underlies our societies, i.e. the world is not all perspectives and subjectivity.  So neither relativism nor solipsism are worth much consideration if you believe in a world out there that may not be immediately or transparently accessible to our senses but nevertheless we are part of it and it effects us critically.

Politics, Political Economy and Perspectivism

Politics, particularly in representative democracies, is almost by definition a perspectivist enterprise:  politicians are elected to represent a perspective or group of perspectives, either those of constituents or, particularly in the US where party platforms are weak, some version of their own supposedly authentic and heartfelt beliefs that have been carefully vetted by the voting public.  In the halls of government, the politicians are supposed to struggle with representatives with other perspectives to come upon some synthesis that represents the general interest.  Even in autocracies and monarchies, the head or heads of government are supposed to represent the perspective of the nation as a whole as against other nations, though, of course as in democracies as well, corruption can also derail these goals.  Even if politicians were somehow able to represent the interests of all humanity, this could still be considered representing a perspective on reality, albeit one that all humanity for some reason would share.  Political economy, the original label for the economics profession, by definition, suggests that this discipline is the arena within which political influence on economics is discussed and or the perspective of a specific constituency is represented.

Perspectivism, Economic Interests, and Adam Smith’s Work

The name-change from political economy to economics in the late 19th century has nominally distanced economics from the perspectival nature of politics.  Nevertheless almost all economists claim a lineage back to political economist Adam Smith, who published his major works in the mid-18th Cenury.  Economists since Adam Smith and before have noted that people’s economic interests influence the way they see the world; an assumption that people make every day, and not without reason, is that people’s personal and economic interests color their perspective on the world.   Social scientists often continue to make this assumption though it remains sometimes unstated.

Smith argued that merchants and manufacturers in the mercantile system, his ideological and economic opponents, were solely interested in their own enrichment and they lobbied for policies that advantaged them over what Smith felt was the common good.  Smith, as well as many other economic commentators after, set himself up as representing the greater, common good, in that with free trade policies, he felt that the wealth of all people was better served than under various mercantile restrictions of trade.  Smith’s economic magnum opus, Wealth of Nations, can be viewed as a political polemic within political economy, though it suggests a complete economic system that has taken on a life beyond its polemical uses.

Against the mercantilist defense of particular national and class interests, Smith’s was an attempt to assert a relative independence from particularistic group interests for political economy, a research program that almost all economists claim for themselves today, i.e. that their approach to economics will yield a maximization of total social welfare rather than enrich or represent the perspective of one particular group or nation.  On the other hand, Smith’s doctrine of the invisible hand suggests that the pursuit of the self-interest of each actor WITHIN his system will yield the optimal results for overall “opulence” of the society.  Smith then attempted to unite a universal good and universal perspective with the narrow self-interests of each economic actor as a trader in goods and services, which is a unique and interesting philosophical proposition.  Critics of the popular interpretation of Smith’s work within economics and politics in the 20th and 21st Centuries have decried how Smith’s emphasis on the need for sympathy between human beings as a foundation for society, discussed in his earlier work Theory of Moral Sentiments, has been left out of discussions that base their economic and political programs on a few passages from the Wealth of Nations.

In Wealth of Nations, the universal good that Smith tended to represent were the interests of and perspective of all consumers and tended to disparage the interests of producers, against which, as mercantilists, he was arguing.  At least in logic this makes sense in that all people need to consume, while only some people produce and even smaller subset of people produce a particular good or service.  Furthermore Smith equated the interests of consumers with, above all, the cheapness of goods.  In his argument for free trade, for instance, he recommends importing certain goods because of their cheapness relative to English/Scottish goods.  Smith’s identification of the greater good with that of consumers and that good being best served by the cheapness of goods is now embedded as a largely unquestioned assumption in contemporary economics.

Perspectivism and Marxian Economics

A perspectivism based on group economic interests openly returned to political economy with Karl Marx’s mid-19th Century critique of Adam Smith that again, like the earlier Physiocrats, reinforced the importance of production in economics.  Marx’s political economy and theory of history was based almost entirely upon the pre-existing labor theory of value and the conflict of economically defined classes which each had distinct economic interests and perspectives on the world that stemmed from their relationship to ownership of capital goods and land, the means of production.  The dynamic of history for Marx was caused primarily by the conflict between the laboring classes against the various ruling classes who owned the means of production, though Marx also chronicled class conflicts that occur historically between other class groups.

Borrowing from Hegel’s dialectic (sometimes summarized as thesis + antithesis => synthesis [or transcendence – Aufhebung]), Marx saw the endpoint of class struggle as the triumph of the working classes that would become the universal class via an economic and political revolution which from what he called socialism to communism.  For Marx, relative to feudalism, capitalism was “progressive” though he clearly underestimated the resilience and creativity of the capitalist system. While Smith identified the universal interest implicitly with the perspective of consumers, Marx identified producers as the universal class, based on a labor theory of value which he shared with other classical economists like Smith, Ricardo, and Locke.

Marx claimed his work was a science (the German Wissenschaft carries somewhat less “scientistic” connotations than does the English “science”) and later commentators called Marxist “science”, historical or dialectical materialism.  “Idealism” was excoriated by Marx and “materialism” was valorized, a philosophy that asserts that all that exists is a material, physical world.   Marx believed that ideas were an outgrowth of material conditions though at the same time a type of false perspective can develop, what he called ideology, that supported the reign of the ruling group. Marxism as it evolved tended to divide knowledge into “bourgeois” and “proletarian” or “Marxist” perspectives, with the former being dismissed and the latter being valorized or praised.  Marx then had contradictory impulses to create a universal science but at the same time, created a categorized view of current knowledge and science that divided it up according to whose interests it ultimately served. A man who spent his life trying to change the world via ideas, Marx was also not self-consistent in allowing for the action of knowledge and the ability to change perspectives on the world as a force in the world itself.

With Marx’s written works and the First, Second and Third Internationals attempting to foment revolution in the name of the working and later the peasant classes rationalized via an economic theory, a very provocative and loudly broadcast “thesis” was advanced that was difficult to overlook within economics and within late 19th and early 20th Century industrial societies.  Marx and his followers have also been avid chroniclers of the weaknesses of capitalist societies, including his observations of capitalism’s tendencies toward economic and political crisis.

While, unlike some, I accept that Marx had humanistic ambitions in his opposition to capitalism (most noticeable in his earlier writing) and that some of his critique has merit, his theory has been insufficient in pointing a way to an alternative that is better than capitalism.  Inspired by his work, social democratic movements and parties have been able to humanize capitalism and, some would say, help save it from itself.  Others however have used his work or the gaps in it, such as a workable political theory, as a means to create various types of revolutionary dictatorship with often disastrous results.  However, all would admit that there is no new and compelling “mode of production” that has emerged from Marx’s work that replaces our current economic system.

Neoclassical Economics and Perspectivism

As a sharp contrast, neoclassical economics or marginalism, the current dominant paradigm, has created a relatively harmonious picture of the (capitalist market) economy, within which perspectives of buyers and sellers (supply and demand) were simply in (rather orderly) conflict about quantities (mostly price) rather than about the destiny of mankind.  Labor figures in neoclassical economics as another seller of a commodity (labor) rather than a transcendental shaper of history or the sole source of value.  Thought by some to be formulated as a response to the rise of Marxist economic theory in the mid-19th Century, neo-classical economics has been for most of the last century economic orthodoxy and much of what is considered “economics” is neoclassical economics.  Adapting Adam Smith’s thesis that competitive markets were the central and most efficient/effective economic institution, neoclassical economics has attempted to portray these markets as tending towards equilibrium, which is diametrically opposed to the conflictual and crisis-prone vision of markets and capitalism that, for instance, Marx as well as heterodox economists like Schumpeter (business cycle theory) have put forward.  While neoclassical economics was formulated during a particularly stormy period of economic development (the late 19th and early 20th centuries) it presents a rather placid picture of the economy.

Perspectivism assumes that we the “knowers” have subjectivity and neoclassical economics offers a generic, uniform subjectivity for all economic actors:  they have rational expectations, perfect information, and are attempting to maximize their utility.  Neoclassical economics assumes that these very simple “subjects” interact with each other and yield models of equilibrium prices and quantities.  The economic actors then view choices as offering then greater or lesser “utility” and that decisions are made “on the margin” about which choices offer greater marginal improvement in utility.  Conflict between perspectives only occurs in aggregate, when sellers, for instance, want to receive higher prices for their output but this contradicts the aggregate wishes of buyers as well as the neutral overall perspective of the economist who is attempting to maximize overall social welfare (utility) by achieving Pareto optimality (that point which gains in welfare will only come at the expense of others).   Each economic actor, in this utilitarian calculus is then simply attending to his or her “utility” and attempting to maximize it via buying and selling choices.

Neoclassical economics and the economics profession has been the object of a rising tide of criticism especially after broad recognition of the inability of the profession to prevent or predict the latest economic crisis. Despite its flaws and omissions that are now becoming more obvious, neoclassical economics does represent an attempt to study economic phenomena, detached from the interests of one social group or another, though maybe this detachment does not serve the general interests of humanity, either.  Neoclassical economics operates at least in theory with a conception of an overall social welfare that serves all, not just one social group or another, premised on the notion that competitive markets might at some point function optimally.  The effort to study economic invariants, objective facts about human economic behavior, is at least the impulse to create a science of economics, however questionable the execution of the project itself.   In this appearance it is like the much the more successful natural sciences but it may be a matter of simply emulating (parts of) these sciences while ignoring its own subject domain or the usefulness of its conclusions.

There are many, many interesting critiques of neoclassical economics to consider but for purposes of this particular discussion what remains is whether economics must be an economics for a particular interest group or can it rather or also be a neutral description of the economy that contains within it some objective observations about economics more generally.  Also is rather than harmony and equilibrium, dynamic conflict and instability caused by differing economic interests and perspectives key parts of the object of study of economics?  Furthermore, does neoclassical economics do a disservice to the domain of its study by imposing upon it a framework that may unthinkingly prescribe an ideal of objectivity rather than capture the most relevant date from economic reality?

The Political Fight Over Economics and the Dream of Economic Science

Despite the best efforts of neoclassical economists of yesterday and of today, economics remains enmeshed in political struggles.   As is readily apparent from most in-depth news accounts or here on this blog and elsewhere, there is considerable dispute about many of the most important economic issues, especially where decision making about economic policy is concerned.  The simple assertion of economics as a science or rhetorical flourishes that assume that economists’ views are objective are overwhelmed by the large scale struggles that rage between political parties and between economists with varying views of the same phenomenon.  If a plausible economic perspective can be formulated to support almost any economic policy position, then either economics (and other social sciences) are either not at all sciences or they are type of science that is completely unlike the natural sciences.

If economics “looks different” depending on one’s economic interests and these different perspectives have points of conflict, it may not be possible to build an economics that is entirely neutral and objective.  Alternatively, it may be possible to sort through economics and find areas where all “reasonable people” would agree and other areas where it is a matter of dispute.  Perhaps disaggregating economics into constituent parts is what is required to enable clarity of understanding by consumers of economic wisdom so that “fact” and “opinion” can be understood as such.

If economics is indelibly perspectival and not taking the perspective of some economic interest group would eviscerate economic understanding, then it would be incumbent upon economists to state which group or groups they are championing as a premise of their analysis or discourse.  They would also need to explain why it is best that they and we adopt the perspective of that economic interest group.  This would open a larger discussion about whose economic interest and economic perspective is best suited to lead the economy or have undue influence in the economy.  To those who claim that it is just this kind of scrutiny that some powerful groups wish to avoid, I would suggest that without that kind of clarity, we shouldn’t then have to lend credence to any political or scientific discourse that premises itself on economic understanding.  Avoiding this scrutiny puts economic discourse on par with innuendo and gossip.  As innuendo and gossip are efforts to mobilize the more primitive aspects of our minds and to shut down our higher capacities, I think this trend should be resisted.

On this blog, I will take a look at how economic speech and speaking about economic policy might be able to evolve beyond both sterile formalisms as well as innuendo and gossip to enable us to engage our individual and combined intelligences to solve some of the world’s grave economic and social problems.

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