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….

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 Meta-Economics Part 4: Accounting for Ethical Dynamics and Disputes in Economics

While some disputes in economics are technical, some of the most obvious major fault lines in economic thinking are based on conflicts rooted in differing ethical ideals about how economies or economic actors should function.  In current disputes, left-of-center economic perspectives (mostly Keynesianism and leftward) give economics the task of increasing human welfare through direct government action or indirect government regulation that may direct investment and reduce economic inequality.  Their opponents on the Right both in professional economics and popular economics, believe that social or economic welfare is better served with each individual working to increase his or her own personal welfare without the aid or direction of government.  While there are positions that advocate a pure form of one or the other of these ideals, most often the argument is about whether the economy should have more either government-led activity or more individual economic initiative. Fault lines in, for instance, current disputes about deficit spending and public budgets are to a large degree a re-creation of this divide, with budget deficit hawks mostly on the Right and critics of the anti-deficit campaign more likely coming from the Left.

Even though economics (or political economy) itself evolved as a discipline that emerged out of the moral philosophy (ethics) of the 18th Century, a thoughtful consideration of the interaction of ethics with economics will require work to re-integrate insights in an ongoing manner from philosophical ethics, ethics as expressed in political philosophy, and psychology.   Adam Smith, considered by many to be the founder of modern economics was himself a moral philosopher yet most modern economists do not recognize this aspect of his work, perhaps in an attempt to safeguard the appearance of economics as a science.  Interestingly the division of Adam Smith into economist and moral philosopher roughly corresponds to how much attention a particular analyst gives to one or the other of his two main works: the Wealth of Nations or The Theory of Moral Sentiments.  The Wealth of Nations is by far the more popular of his works, due to in part to its function as the founding document of the economics as a discipline.  Subsequent heterodox economists and critics of orthodox economics have stressed the continuity or complementarity between Theory of the Moral Sentiments and his later work.

Engaging in an exegesis of Smith’s authorial intentions is important but in the end does not account for all issues within the interface of economics and ethics, especially given the evolution of society and economies since Smith’s time.  Only in a multi-disciplinary “space” that can fully examine both the economic and the ethical dimensions of human decision-making and action can provide enough detail on all of these dimensions.  I am calling this space “Meta-economics” for obvious reasons, as “meta” usually refers to an overarching framework surrounding a discipline or type of information.

Ethics through the Filter of Politics

While in the late 19th Century, the economics discipline attempted declare its independence from politics by changing its name from “political economy” to “economics”, the continuing mutual influence of politics and economics is well known, as economists often, though not always, are differentiated according to their political leanings.  While political actors often differ in ideology and therefore the ethical framework they profess and/or use to guide action and policy, they also differ in their own (social and economic) interests and the interests of those they represent:  interests and ideology are not always exactly aligned.  People have been more apt to express their ethical leanings through political than through economic affiliations (a great uncle of mine apparently used to say that his heart was on the left but his pocketbook was on the right).

The formation and activities of political groups are not themselves a pure expression of sole concern about large-scale ethical issues.  Political groups most often express a mixture of specific geographical, cultural and economic interests combined with some overarching (ethical) ideas about how society should be: some affiliate with the group because of their specific interests while others because they subscribe to the general ideas that are influence by ethics.  However in politics, we are able to express, as did my great uncle, some ideas and strivings that are not tied purely to a narrowly defined set of personal economic interests.

Ethical considerations in economics then are most often mediated by politics or political affiliations.  Professional and folk economists are not necessarily consciously expressing an ideal view of what society should look like as would an ethicist but are often enmeshed in fights with other interest groups that nevertheless express ethical tendencies. Political groups hire professional economists to help them express their views and struggle over economic policy projections with their political opponents.  Wealth of Nations, the founding document of economics, is itself a polemic about economic policy.

Meta-Ethics and Economics

Ethicists divide ethics into three basic types:  deontology, consequentialism and virtue ethics.  These meta-ethical systems do not dictate specific ethical principles, outcomes or decisions but are simply the overall classifications for types of ethical decision making.  They are not in many cases mutually exclusive, though they are distinct forms of argument.  Deontology is traditional rule-based ethics where it is incumbent upon an individual to follow rules usually originating in tradition or in a social consensus to promote the good or prevent the bad; “deon” means duty in Greek and another way to express deontological systems is that they are duty-based ethical systems.  In deontology, rules are a-priori, or come before, good acts, which are good because they comply with the rules.  Consequentialism or teleological ethics, tries to determine the good on the basis of outcomes; if something turns out well, then it is good.   Generalized to society as a whole, consequentialism attempts to maximize good outcomes and minimize bad outcomes for the greatest number.  Utilitarianism is the most famous consequentialist ethical school and famously economics, in particular neoclassical economics, is an outgrowth of utilitarianism.   Pragmatism is another form of utilitarianism.  Finally, virtue ethics seeks to promote conditions which encourage the development of virtues, i.e. good traits, in people.

Very few real-world ethical systems are purely either deontological, teleological or virtue ethics.  While neoclassical economics and the neoliberal/market fundamentalist political tendency are mostly teleological, the insistence that markets will always produce the optimal outcome is an a-priori rule and therefore is a form of deontology.  Loosely regulated or unregulated markets generally are teleological in their operation, with profit seeking defined as “the good”.  By contrast, a completely teleological, pragmatic economic system would “not care” whether a good outcome came from the use of markets or the use of government intervention, though “prima facie” would prefer markets.

Despite the single a priori rule with which neoclassical economics operates that favors market solutions over other economic institutions, most critics of conventional economics tend to criticize it from the point of view of a deontological ethics, in one form or another calling neoclassical economics “amoral”.   For instance, left critics of neoclassical economics criticize its indifference to economic inequalities from the standpoint of an a-priori commitment to human equality.  Or environmentalists criticize neoclassical economics from the standpoint of a deontological commitment to the integrity of natural systems as a greater good than maximizing short-term utility for human beings.  Alternatively, from the standpoint of a virtue ethics, neoclassical economics is criticized for fostering the vices of avarice, consumerism, and indifference to the suffering of others.  Defenders of neoclassical economics would maintain that it contains a minimal set of deontological commitments (obeying laws against fraud, criminality, private property rights) but otherwise encourages people to increase their well-being by trying to increase utility through privately selected actions within these limits.

An Example of an Ethical/Political Dispute within Economics:  Deficit Cutting vs. Deficit Spending

A very hot contemporary issue in our economic-political-ethical system is the campaign by so-called “deficit hawks” to cut government spending and/or raise taxes rather than continued stimulus spending, thereby increasing government budget deficits.   Against this campaign a number of, mostly left of center, economists, action groups, and bloggers have decried either the foolishness or inhumanity of these efforts to cut deficits at a time when the economy is weak and people are experience economic hardship.  While some of this dispute can be attributed to differing views on how public finance and capital markets work, which might be called a scientific dispute, a portion is related to ethical valuations in economics.

Those who are focused on cutting deficits hold up the ideal of a normal transactional morality, either explicitly or implicitly, that once you borrow money that it is an overriding priority to pay the debt back, making minimal differentiation between government and personal borrowing.   In this view intolerably bad things happen to nations who delay paying back their debts.  By contrast those who object to placing a high priority on cutting budget deficits at this time in order to continue deficit spending on stimulus, are often arguing that serving human needs, meeting a deep economic crisis with all tools available and reducing the effects of economic inequality all are more important than the appearance of complying with normal transactional ethics at this very moment.  They also distinguish public from private debt.  These ethical arguments can be viewed either as being the underlying motivations to or co-existing with a number of other motivations including protecting private gain for specific interest groups as well as preferences for technical economic arguments about aggregate demand and creditworthiness of governments.

Beyond the ethical and the economic arguments or implied arguments, this debate is also carried on in political terms, where the specific interests and characteristics of one group or another are glorified or denigrated by political advocates and adversaries.  Deficit hawks tend to suggest that those who want to spend on deficit represent the interest of shiftless unemployed people, greedy bureaucrats and public sector unions, while casting themselves as advocates of fiscal virtue.  Their critics consider themselves defenders of ordinary working people and those who have been unlucky in the downturn and accuse their opponents of representing a political group that wants to cut tax-funded public services in particular public pensions to hand over these functions to the private sector, from whom these advocates may receive implicit or explicit benefits.

In the case of this or any other major divide in economic opinion, to understand the multifactor interaction of ethical, political and economic arguments, a meta-economic framework can allow each dimension to be examined without reducing or flattening that particular concern.  A reduction of, for instance, the budget deficit argument to purely economic arguments shortchanges the political and ethical dimensions and vice versa.

The precise use of a meta-economic framework is to try to disentangle the multiple strands of arguments for or against, for instance, deficit spending, rather than intermingling those strands for simple, but short-lived, rhetorical effect.  As we shall see, professional economists and popular economists (meaning everybody) are wont to do just this to gain advantage but also potentially mislead.

Gary Lynne’s Metaeconomics

Though I came up with the label “Meta-economics” before I encountered his work, Prof. Gary Lynne of University of Nebraska has been working for a number of years on a type of economics that he calls “metaeconomics,” to which I am sympathetic though it is a different concept.  To minimize confusion, I will try to use a hyphen between “meta” and “economics” to distinguish between his approach and mine though there is some overlap, especially when it comes to consideration of ethical issues.

Lynne is an agricultural and environmental economist who is very critical of the focus of conventional neoclassical economics on ego-istic drives and rational maximization of individual or firm-level utility.   Like many others, he feels that in the area of microeconomics (the behavior of individuals and single firms) that ego-ism remains largely unchallenged.  He proposes metaeconomics as a branch of microeconomics that incorporates orientations other than ego-ism, enabling economists to account for behavior that is driven by empathy, by ego-ism, or perhaps by other motives.

While there are clear overlaps in the area of considering ethics as part of economics between Lynne’s metaeconomics and what I am calling meta-economics there are also key differences.  I am not proposing meta-economics as a prescriptive (what Friedman called “normative”) type of economics that attempts to displace other economic views (much as I might like some of them to be displaced) but rather as an overarching framework that includes all types of economics and a host of other related disciplines (as they impact economic thinking and action).  Lynne is proposing metaeconomics as a contender to replace microeconomics and his theory may very well be on the road to doing this.  Lynne proposes his metaeconomics as being more inclusive than microeconomics and is therefore “meta”.  Lynne is however generating economic hypotheses based on metaeconomics and is attempting to test them (to account for and validate non-egoistic behavior).  Meta-economics as I conceive it, is a framework to understand any and all economic theories, Lynne is attempting to understand any and all types of economic behavior by individuals or firms via his metaeconomics.   If you are into the “type-token” distinction, meta-economics, what I am proposing, is a “type of types”.