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 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.

The Case for a Metaeconomics Pt. 5: Tracing the Origins of Demand and Economic Preferences

In the previous post in the “Case for a Meta-economics” series, I explored the possibility that the interface between economics and ethics has a significant impact on economic arguments and the division of economics into schools.  Ethics is supposed to contain, develop, and communicate our higher and better selves.  Crucially, though, economics is also supposed to account for the effects of our more basic or amoral drives, for which there are not necessarily traditional ethical justifications.  Economists are tasked to explain how human wishes, no matter how trivial or “primitive”, become economically important and shape economic institutions like money and “demand”.

Neoclassical Economics and Demand

Neoclassical economics, the dominant school of economics in most of the world, assumes that one of the prime drivers of economic activity is “demand” along with its complement “supply”.  Within this paradigm, demand is thought of as the result of the search of individuals and organizations to maximize their “utility” through a rational process of calculation of the relative benefits of one consumption or investment option over another.    Utility is a “black box” of wants and needs which is supposed to remain inscrutable to economists though is best observed by its behavioral effects after the fact:  what maximizes utility is that which compels monetary transactions to occur.  While everybody can imagine and infer what they think constitutes the basics of utility (the satisfaction of recognizable wants), economists are wary of defining what actually drives people to want one product or service over another.  Instead, the argument remains the rather circular and somewhat limited notion that what people want is what they want (to buy).  Like many aspects of neoclassical economics, the notion of “demand” suggests that it is a dynamic force but in its actual measurement it is an outcome rather than the force itself.

While in underdeveloped or pre-consumer societies, demand for essential goods is more likely to “chase after” supply, in affluent societies, supply tends to chase after demand making demand the more powerful of the two main economic entities in neoclassical economics.  Economic success depends, in consumer societies, on being able to figure out what people want or might want then being able to supply those wants at an affordable price.  Occasionally in consumer societies, either a monopolist or a highly successful market leading company (like Apple) can shape to some degree what people should want by creating new appetites and leading in product design; sometimes supply can create its own demand.

Marketing and Demand

While within the “high church” of conventional economics, demand can be represented as a “demand function” or “demand curve“, theories of how demand itself actually arises are pushed outside the main body of theory into fields like marketing or consumer psychology, within which numerous ideas about people’s wishes and how to address them compete.  Neoclassical economic theories of demand therefore have not much to offer businesspeople in the way of guidance about how to figure out what the market wants and need to turn to the diverse and sometimes confusing toolkits of marketing and related social sciences.

Marketing then might be considered the craft and/or science of demand, either assessing its pre-existing form or creating demand by sending messages to potential buyers of a product or service.  Furthermore, more on the supply side, marketing can help in product design and refinement by embarking on an iterative process of improvement by continual communication with existing and potential buyers.  Even though marketing can be credited with many of notable business successes in the last century, marketing, like other business economics disciplines, is not in regular communication with the abstract formulations found in academic economics.

Despite its location outside the “High Church” of neoclassical economics, many human activities critical to the functioning of the economy fall under the rubric of marketing.  So a meta-economics or a more complete economic theory would need to be able to incorporate both the domains of human experience associated with marketing as well as shed some light on the techniques themselves that are used in marketing.  Splitting off marketing as either slightly “sub-rosa” and entirely unproductive or as an art beyond economic theory does this critical domain a disservice.

Keynesianism and Demand

Though John Maynard Keynes did not break decisively with neoclassical economics on all issues, he did formulate theories which suggest that there are qualitative as well as quantitative dimensions to demand.  Keynes suggested in his General Theory, that “animal spirits”, presumably their tone and energy, were key in determining how willing people are to engage in economic activity.  These emotional states kept people in the Great Depression and other economic crises from spending money, when in fact, if people as a group did spend, the economy would recover sooner.  The theory of “animal spirits” is thus linked to another concept revived by Keynes, the paradox of thrift.  Furthermore Keynes pointed to the insufficiencies in overall measurable (aggregate) demand after an economic crisis, pointing to the need by governments to step in to stimulate or substitute for the weakening of private demand after a financial crisis.

While economists since Keynes have been more accepting of his observations about aggregate demand (though these are still disputed by conservative economists who wish to reduce the role of government in management of the economy), his ideas about animal spirits are other qualitative dimensions of demand are sometimes treated as “sui generis” musings of a great mind but not part of what came to be called Keynesian (as well as neo and new Keynesian) theory.  In general Keynesian economics has been characterized overall as “demand-side” rather than “supply-side” economics.  “Supply-side economics“, a now somewhat out-dated term, focuses on whether investors have enough money after taxes to invest in productive assets (therefore “supply”) and is used as a justification for cutting taxes on the wealthy and on businesses.

Wants, Needs and Economics

Attempts to translate the experience of “demand” in terms of utility and utility maximization has presented a problem for the dominant neoclassical economics in that the political actors who help shape economic policy have been unable to take such a distanced view of their own subjective experience of wants and/or needs.   Folk or popular economics of almost every kind must draw in the vernacular to relate economics to lived experience and as I have posited in an earlier post, all schools of economics have to in some way grapple with the interaction of their abstractions with how people feel and think about the economy.  Economics students might think of themselves as “maximizing their utilities” by satisfying their wants but very few others will relate to this language.

The part of English vernacular that addresses the experience of “demand” (and there are close analogues in other languages I know) deals with “wants”, “needs”, and “desires”, most of which are used to describe what presumably is an internal or a social experience of needing and wanting things and experiences.  In addition to these subjective experiences, technically “demand” involves an additional component, the ability and readiness to pay for a good or services that addresses the perceived need or want.

While the collection of human material strivings in “demand” papers over the distinction between wants and needs, the latter distinction has extremely important political economic effects that motivate conflicts between economic schools despite their nominal commitment to the neutral language of “demand”.  Wants or desires are subjectively experienced states but needs are a subset of wants that are socially sanctioned and recognized by others.  Paradoxically “needs” though they contain this additional component are usually more primitive wants without which we would not survive.   So “wishes” are analytically simpler (a wish is a component of a need) but “needs” are a complex combination of phylogenetically and biologically more basic strivings within a social web of relationships.  Needs, which evoke the dependence of children in childhood, imply a web of social interdependence while wants can be ascribed to the individual, self-responsible social “atoms” of neoclassical theory.

Laissez-faire or neoliberal economics tends to emphasize that all of “demand” is individual wants or freely chosen selections from a variety of wishes, which an unregulated market is supposed to supply.  These economists make an exception for national defense and criminal law which they think of as vital social needs, especially in defense of property rights.  Meanwhile Keynesian and leftward economic commentators operate with a both a conception of optional wants and an implicit or explicit concept of individual human and social needs, which most often are being insufficiently served by the market for at least the more vulnerable parts of the population.  In left-of-center economics, there is the implication or statement of social responsibility for partially or completely fulfilling certain basic wants, i.e. needs.  By contrast, neo-liberal economists subscribe in theory to a doctrine of individual responsibility for one’s personal wishes.

An instance of this conflict between economists who conceive of individual needs being primary versus economists who believe that wants are primary is found in the recent conflict between “deficit hawks” and that group of economists that oppose them, mostly from left of center.   The more leftward group of economists and their supporters who oppose the efforts of deficit hawks seem to be operating with an implied socially-validated concept of needs, which their opponents in the US like to call, “entitlements”.  They believe that the moral imperative to care for the needy as well as provide some level of universal social benefits is threatened by the drive to cut deficits at all costs.  For example, James Galbraith has recently stated that the fulfillment of human needs as the ultimate purpose for economics and government fiscal policy in both the US and in Europe.  Other opponents of deficit hawkery might disown the idea that they are operating with a concept of human needs, perhaps to continue to be included in a mainstream economic discourse that is inimical to the idea of needs. In fact, most opponents of immediate action to cut deficits are operating with a political-economic hypothesis that the primary reason that deficit hawks have started their assault on deficits is to undermine government support for needs.  In fact, some deficit hawks have shown inconsistent support for the idea of cutting deficits (by insisting on maintaining tax cuts), apparently tipping their hand that cutting social services is the prime objective of their campaign.

By contrast, deficit hawks suggest that a show of responsibility for one’s wants is required to reassure bond markets or other lenders to the US government by either denying those wants, or it seems, less frequently, raising taxes to pay for the fulfillment of those wants.  Their idea is that the need/want for social services needs to yield (soon) to some form of scarcity, be that a scarcity of tax revenues or a scarcity of the ability of government to run budget deficits.  The troubling aspect of this insistence on an apparent universal rule of individual responsibility and management of scarce resources is that, as mentioned above, the vulnerable are those who are supposed to yield to the principle of scarce resources, while the wealthy (and most of the deficit hawks are personally wealthy) will seemingly keep both their personal wealth (via continued low tax rates) plus the public services that they value and use, including a government that will bailout the well-connected and powerful.

Demand, Sustainability and Growth

Another area of challenge for understanding the current economy as well as some future economy is how such an economy would deal with a net zero material growth state, an economic steady-state.  Most rational observers of the growth of humanity both in terms of number but also in terms of consumption put some hard limit on the size of the human footprint on the world.  Those who assume our continuing propensity to grow exponentially as an immutable fact sometimes turn to idea of the colonizing of other worlds as a means to continue humanity’s current rate of growth and consumption, though how this would happen in physical and biological terms currently resides almost entirely in the realm of science fiction.

Moving simply by successive approximation to a no-growth state from where we now stand however is also unworkable.  The set of tools upon which our current economy would be unsustainable under any conditions because of their dependence on the irreversible conversion of depleting fossil fuels into their constituents some of which additionally undermine the sustainability of the biosphere.  Thus certainly in the next several decades there will and should be robust economic growth in the sector of developing sustainable alternatives in the area of energy as well as industrial production.  Further along in this process, facing the hard choices associated with achieving a steady state economy would seem to be inevitable.

Demand, our wants and needs, is one of the key drivers of our economic system.  If our wants and needs, are, as some claim or imply, rigid and hard-wired in their objectives and intensity, we will be unable to move to a society where most economic activity is focused on either maintenance of material well-being or the development of cultural and non-material products and goals.  If our wants and needs are responsive to (elastic) the encroaching externalities of our ways of consumption and production, then it should be possible for human beings to evolve towards the next stage of our species’ “wild ride” on this planet.  A comparative anthropological perspective indicates that an economy that grows meteorically and then plunges is not necessarily part of our genetic code.  A meta-economic perspective will enable the relevant portions of philosophy, comparative economics and economic anthropology to at least inform such Big Picture theorizing about “what’s next” for humanity.

Needed: A Multi-disciplinary View of “Demand”

I hope the foregoing has suggested to readers that a view of demand as simply a quantitative record of past expenditures and investments or a projection of those numbers into the future compresses what is a more complex and dynamic reality.  I am proposing that a meta-economic framework can bring to bear insights from biology, biophysics, psychology, and philosophy to capture some of the causal factors that drive purchasing and investment behavior in both the private and public sectors.  Additionally such a framework can help explain or at least clarify the existing divides in economic theory and popular economic debates.

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”.

The America Speaks Town Hall Pt. 2: Implications for Folk Economics and the Politics of the Deficit Commission

In the first part of this post, I described what I thought were the most important aspects, events and results that emerged from the 7 hour June 26th AmericaSpeaks Townhall which I attended at the Silicon Valley site.  In my account, I attempted to include aspects of the experience that contradicted some of my preconceptions as well as those that confirmed them.  I obviously am a partisan observer, with a clear interest in not allowing budget fears or fear-mongering to reduce the already minimal welfare state that we have in the US as well as with the future-looking projects related to oil independence and climate change which would depend in part on deficit spending.  However, I don’t want to simply reinforce my biases in this account because I learned from the experience without fundamentally reversing my overall view of the intensified campaign against budget deficits at this time.

Two Folk Economic “Layers” at AmericaSpeaks/Deficit Commission

The AmericaSpeaks event is an example of folk economics on two levels, one of them more problematic than the other.  On the one most obvious level, the event itself was organized as a event where ordinary citizens were supposed to apply their values and understanding to the macroeconomic question of reducing the federal budget deficit.  So this was an invitation to engage in folk economics.  As almost everybody is affected by economic decision making, it makes sense to get people involved to try to educate them and get their opinions about these issues.  Also, as I have claimed here, professional economics can never replace folk economics, so formalizing the relationship between folk (or popular) economics and professional economics makes sense.

On the second level, which may be more controversial, AmericaSpeaks was communicating a vision of how the government spends money that corresponds largely to one political/folk economic view of government spending rather than one that is fully in tune with all of the tools of professional economics.  While James K. Galbraith is an economist who is decidedly left of center, he provides in an article in Huffington Post a rather detailed vision of how the deficit commission is overlooking key aspects of how governments that control their own currencies actually spend money and manage deficits; these details are entirely absent from the AmericaSpeaks materials.  Also Paul Krugman, again left of center, points out that the economic framework within which those who prioritize cutting budget deficits work, rests on worries about future events and fears of disapproval in the bond market about the solidity of US government debt for which there are no current signs and attention to which doesn’t seem to help countries like budget-slashing Ireland reduce their interest rates.  Furthermore, the notion that deficit reduction is a primary concern at this time, ignores what many of the leading American macroeconomists are focused on a still anemic American economy with massive private indebtedness.  Trade deficits are also left out of the picture.  Within the world of AmericaSpeaks then, a folk economic vision that ignores much of what concerns professional macroeconomists is presented as the primary economic task of the American people (“Our Budget, Our Economy”).

The most ardent supporters of the AmericaSpeaks townhall or the work of the budget deficit commissions might object that these economists are of a different or outside-the-mainstream political persuasion.  While some of these economists are left of center, the premise of any science and the meta-economics project is that we are looking for the best explanations that account for the broadest and most relevant data-set available no matter their political provenance.  If some economists on the left have a better theory of one phenomenon or another, an economic science should take complete account of their theories rather than cast economic analyses and differences of interpretation as purely a political contest by other means.

The Political-Economic “Frame” and Timing of the Townhall (and the Anti-Deficit Campaign)

Many of the critics of the anti-budget deficit campaigns point out that the organizers of these events and the politicians who are most enthusiastic about cutting deficits are paying attention now to budget deficits rather than when their closest political allies (Republicans like George Bush) were in office.  The American “deficit hawks” seem most worried when someone from the centrist to left leaning Democrat Party has decision-making power , a group which they may feel they have less political influence over, therefore requiring the manufacture of or intensification of  pre-existing fears about deficits to rein in a less secure political ally.  Spending on military adventures and hardware, as well as bailouts demanded by their powerful economic allies are apparently not so troubling to these budget hawks, even if, in particular, those same bailouts are now ideological targets for Republicans after the fact.

The issue of timing of the budget deficit scare is not only political but economic.  Most explanations of the 2008-9 economic crisis emphasize the role of private debt both consumer and commercial which helped inflate the asset bubble that punctured in 2008.  Some Wall Street firms were leveraged 30 to 1 (had 30 times more debt than assets) while consumers and homeowners have never been so indebted in the US and in some other countries.  A similar phenomenon occurred before the Great Depression, when a similar debt-fueled asset bubble burst.  If those in the private sector who were co-responsible for the downfall or at least benefited greatly during the asset bubble and during its bailout, might have a vested interest in distracting from the bad debts and mishandling of debt in the private sector by focusing on public debt as the prime evil in our economy.

The counter-argument that is mustered against this line of thought common mostly on the political Right and in the now-opposition Republican Party is that quasi-public agencies like Fannie Mae and Freddie Mac, as well as pro-homeownership policies by the Bush and other Administrations distorted the operation of free markets which would never have allowed so much bad debt to accumulate.  While there is some plausibility to the idea that the presence of a government that was willing to bailout firms increased risk-taking, to “blame” government guarantees alone overlooks the active and aggressive means that private businesses leveraged themselves up and encouraged government to look the other way.  Furthermore, these objections to government guarantees were, for the most part, not forthcoming from Republicans when powerful corporate donors were reaping profits from favorable policies.  Military spending, wars and tax cuts for the rich were also not part of the concerns of these political deficit hawks in general, all of which have increased the federal budget deficit.

Scapegoating Gullible Politicians, Government and Public Budget Deficits

While Republicans are favoring a focus on public debt, the role of private debt either within the financial system, corporate America or of the American people as a whole, falls almost entirely out of the framework set in motion by the focus on public debt and fiscal deficits.   The formulation of the AmericaSpeaks townhall “Our Budget, Our Economy” suggests that contrary to the economic wisdom of the last thirty years, suddenly government budgeting forms the economy, conveniently when that economy is deeply troubled;  in the dominant market fundamentalist ideology beloved by supporters of budget cuts, the government is usually pictured as the impediment to “The Economy”.  Nowhere in the AmericaSpeaks proceedings was the role of private debt even mentioned and furthermore, and perhaps gleefully, the two Republican Senators (Domenici and Gregg) were attempting to re-write history by suggesting that our current economic situation is due to public deficits when only the most ideologically motivated economists could find a link between public budget deficits and the economic downturn of 2008-9.

Furthermore and most damagingly these efforts are made in a society with a very poor public information system/news media, a short memory, and a public discourse that is biased towards stories that emphasize the positive and tend to shy away from the negative aspects of life.  There is consequently a tendency to “ball together” all negatives in one location, be it demonic forces or, more recently the government.  These efforts to conflate all “evils” (debt, profligacy, and government together) are part of a political move that the rather credulous Obama Administration has allowed itself to be maneuvered into.   The public’s grasp of economics, let alone politicians’ grasp, cannot in the context be expected to be able to make distinctions between public and private debt or their dynamic roles in the economy.  The government can be used as a whipping boy or a sacrificial lamb, for these ills especially in the wake of neoliberalism, the ideology that maintains that markets represent economic virtue and government, economic vice.

It would seem that government and the party that believes to some degree in governing in the US, the Democrats, have been placed in the position of being made responsible for the  negatives in the American economy by the push to blame public debt and deficits for most of societies’ ills.  Why they would allow themselves to be put in this position is an interesting question, which I would partly attribute to a lack of understanding of both the deeper cultural and even psychological dynamics that animate American politics as well as a lack of a deep understanding of the economic dynamics of the Great Crash of 2008.   Republicans have been only too willing, including Sens. Gregg and Domenici, to entrap these compliant Democrats with falsehoods or implied false connections between budget deficits and our current economic distress.

Meta-economics, Folk Economics and Ethics

Unfortunately I have not yet had the time to make a formal introduction of one of the key rationales for building a meta-economics: exploring in a systematic way the interaction of certain aspects of philosophical and practical ethics with economics.  The timeliness of the budget issue and the material from the AmericaSpeaks townhall should not bias this discussion in this context:  I will write a more inclusive introduction of the topic shortly.

Nevertheless one of the entry points for ethical concerns in economics has been folk or popular economics, where people attempt to blend their own personal ethical concerns or viewpoint with their view of how the economy does or should work.  As an example of organized folk economics, the AmericaSpeaks “Our Budget, Our Economy” meetings attempted to link ethical concerns to its mission to mobilize people to become involved in the budget deficit cutting discussion.

While I am supportive of developing an economics that is responsive to ethical concerns, within “Our Budget, Our Economy” as I highlighted in part one, these concerns were introduced in a way that activated moral conflicts in a manipulative way, violating some precepts of what might be called a scientific economics, especially as regards public spending.  Most troubling was the first “Values” polarity on one of the worksheets where caring for the current generation was played off against caring for future generations.  There are areas of the economy (climate change and fossil fuel use) where there is quite a stark conflict between the interests of the current generation and future generations but in the area of budget deficits at the current conjuncture this polarity is not a guide to meaningful action (for instance the proposal favored by many deficit hawks to raise the age of eligibility for Social Security due to budget concerns would mean that older workers would compete longer for jobs with younger workers).

The implication in this polarity is that concern for future generations is equated with cutting deficits and therefore denying oneself services, while presumably, supplying similar levels of social services is considered to be anti-thetical to this highest ethical goal.  An elaborate, potentially fraudulent, misappropriation of people’s more noble ethical concerns were thus mobilized for those who did not have either sufficient economic instinct or economic scientific background to note this false choice.   Put another way, if the current generations are immiserated future generations aren’t put at advantage or may not come into being in the first place.

Furthermore, there is a similar and quite sinister political sleight of hand that recalls the obscuring of public and private debt in the deficit discussion as a whole.  Individuals went into private debt in the last two decades to either supplement meager earnings (or earnings that were assessed as too meager) or sometimes to indulge in various luxuries.  Financial firms went deeply into debt in pursuit of very high profit margins.  By contrast most of what seniors and poor people use social insurance for (SS, Medicare, Medicaid) are for the absolute bare necessities and the payments are often insufficient for that.   The period of the 90’s and 00’s could be viewed by some luckier people as a time of foolish excess in their lives for which they feel the need to repent in some way.  The current form of expiation for these sins is viewed as concern about budget deficits, which is a political and psychological “displacement” from looking at excessive debt in the financial sector and in people’s personal budgets.

By contrast resolving our current PRIVATE indebtedness via growing employment in productive industries and solid investment strategies is difficult, complex and requires a large-scale re-birth and restructuring of the American economy.  This will probably involve confrontations with powerful interest groups, a difficult passage from to investment in paper assets to investment in productive assets, as well as genuine self-searching about one’s own values as they apply in the private economy.

Potential Political Uses of the “Our Budget, Our Economy” Townhall

As Catherine Lukensmeyer, the CEO of AmericaSpeaks reminded participants, the funders have specific interests in sponsoring this townhall that seem to go beyond a mere opinion poll of the American people.  For one, she mentioned that they had a particular interest in the high quality video of tables working together on the budget deficit problem.

  1. The Townhall as an Opinion Poll – Deficit obsessives would not have gotten too much validation from the results of the opinion poll.  The assembled group was in general favorable towards more stimulus even if that raised the deficit.   A majority favored more progressive tax policies rather than flat, across-the-board taxes.   There was however some support for increasing the age of eligibility for Social Security.  The enthusiasm for a carbon tax and a financial transactions tax were strong.  However, motivated interpreters of the event could distort these messages or selectively attend to only those portions that fit the deficit cutting mantra that targets social spending rather than tax cuts for the wealthy.  Alarmingly, Alice Rivlin who sits on both the “Debt Reduction Task Force” and the “National Commission on Fiscal Responsibility” (the latter being Obama’s bi-partisan deficit commission), commented on the AmericaSpeaks broadcast disapprovingly that participants had shown most enthusiasm for taxing the rich.   More alarming than Rivlin’s views is the sense of entitlement she seemed to have felt to second-guess and stand in judgement of what were a set of multiple choice questions offered by AmericaSpeaks.  The potential for Rivlin’s preferred “folk economics” to override the poll results within the cloistered commissions is then made more vivid.
  2. The Townhall as Colorful Backdrop – The video footage from the event could be used as a backdrop against which the Commission could continue on its deliberation without reference to the poll results or critical comments like mine and those of others about the content and course of deficit cutting efforts.
  3. The Townhall as Grassroots “Civic” Rubberstamp – Similar to being used as a backdrop, interpreters of the event, like Lukensmeyer, could pour the data and results from the event into a form which adds “vox populi” to the conclusions and gives a populist flair to the decidedly elite Deficit Commission.  Below in testimony to the Commission last week, Lukensmeyer constructs an interesting rhetorical chain that condemns partisanship and Washington business-as-usual while, in the end, reinforcing the sanctity of the task of cutting budget deficits as a prime directive and implying that “the people are ready to cut deficits”.
  4. The Townhall as Sanctification of Deficit Cutting – Re-interpreting the same testimony of Lukensmeyer as in “3” above, in a slightly loonier version, the “people’s” concern about budget deficits could be made a sacred cow which could become a (misinterpreted) touchstone of the Commission.
  5. The Townhall as Sanctifying Bipartisanship — Lukensmeyer in the video below portrays like so many political actors in the last few years the importance of bipartisanship; claiming that the Townhall shows that both sides can work together unlike in Washington.  If however one Party is simply trying to damage the other Party and a majority of Americans, what is the moral basis of bipartisanship?

A posting on Youtube by the White House of public hearings by the President’s Deficit Commission. Lukensmeyer’s testimony starts approximately at 35 minutes in.  An interesting effect of the controversy surrounding the deficit commission, including perhaps the firestorm ignited by Co-chair Simpson’s remarks on film has been the posting of approximately 7 hours of testimony on Youtube.  The activities of the Deficit Commission are potential political dynamite.

The Misuse of Civic and Individual Virtue

In the end, my take on the “Our Budget, Our Economy” Townhall and by extension the work of the budget deficit commissions as evidenced so far is that civic and individual virtue is being called upon to solve the wrong problem at the wrong time.  Some people, rightly, would like to live a more virtuous life and not to rely on debt as much in their own businesses and lives.  However, at this time, to repay debts, we must have an economy that generates income and jobs.

Additionally, Americans and those in other developed nations might plausibly and beneficially sacrifice some of their more fleeting pleasures for forward-looking causes like a more sustainable economy and energy-use system.  The Townhall and anti-deficit campaigners are looking to opportunistically collect these sentiments and impulses and yoke them to a cause that does the economy and the long-run deficit little or no good and risks doing the economy some serious long-term damage.   I hope to establish here at Meta-economics that virtue that is ignorant of science or our best organized knowledge is, in the privileged and powerful, no virtue at all.

The Case for Meta-economics Pt. 3: Relationship between Popular Economics and Professional Economics

While there is a good deal of debate about whether economics or for that matter any of the social sciences, are truly sciences, professional economics both within the academy and outside the academy is different from what might be called “folk theories” of economics.  In philosophy of mind, “folk theories of mind” are how ordinary people experience their own minds and their theories about the minds of other people.  A “folk theory” is distinguished from a scientific theory of the brain or consciousness.  While the notion of a “folk theory” is slightly patronizing, the distinction between folk and scientific theories is critical for the study of the human mind/brain because the experience of having a mind or cultural or personal self-reflection on the experience of having a mind is different than studying the mind/brain as a scientist;  “folk theories” are just as important, if not more important than scientific theories when dealing with human experience.

What I am calling “popular economics” is the broad range of ideas about economics, “folk theories”, that are not part of the sanctioned core of professional economics, as diverse and conflictual as that body of knowledge might be.  As in “folk theories” of the mind, popular economics is for the most part the practical, “business end” of economics, as much as that may dismay professional and academic economists.

In practice, people in the economy are using what they believe to be their own or someone else’s economic wisdom to make decisions and act millions of times a day, around the world.  While the practical disciplines of accounting and the some of the basic tools of corporate and public finance are fairly well systematized/controlled and not necessarily professional economics, there exists a broad range of thinking and acting about the economy inside and outside of businesses and government that is informed by personal theories about how the economy works, without the legally binding controls associated with accountancy and the “boring” part of corporate and public finance.  These personal theories are sometimes in dialogue with but not identical with the body of work recognized as professional or academic economics but there are also some truly “folk” economic theories that arise from people’s experience and which bear only tangential relationship to the professional variety.  For instance, a businessman might act according to the principle “give people a good deal and great service, and they will come back for more”.  This might not accord with what his accountant is telling him or what a professional economist might tell him but this is one of millions of potential popular or folk economic theories.

As with popular vs. scientific theories of mind, popular economics can never be replaced by professional economics for a number of reasons:

  1. Much of what is produced in professional economics is hard to understand without at least an undergraduate if not a graduate education in economics; perhaps this is a sign of weakness in professional economics but it may also be that there are some concepts that require abstract reasoning and mathematical understanding which is not a strength for many people.
  2. People are always going to have slightly different perspectives on certain economic phenomena that are not easily reducible to the rules of, for instance, accounting, which has a system of controls in it to make sure that the rules are followed (when these controls do not fail).  The dynamism of society has a lot to do with the ability of the human mind to take different perspectives on physical and social reality, which itself is also dynamic and changing beyond our ability to completely grasp what is going on.  So popular economics has a dynamism that perhaps is not completely compatible with a rigidly organized body of knowledge.
  3. Thirdly, and this is more of a flaw than a feature of professional economics, economic theories have had both acknowledged and unacknowledged flaws that make them less useful than they might be otherwise.  So popular economics, in addition to accounting and uncontroversial parts of corporate and public finance, have had to step into the breach to make practical rules where the major economic frameworks have nothing to say.

Economists and social scientists have also been interested to understand how the formal study of economics effects both views of the economy and views of society and human nature, i.e. how popular economics and the study of professional economics interact.  There have been studies that correlate the undergraduate study of economics with more stereotypically self-interested behavior in the game called the prisoner’s dilemma.  A recent study by the New York Federal Reserve of graduate and undergraduate economics students, (referenced by James Kwak on Baseline Scenario also with interesting comments by readers there) shows that undergraduate study of economics in the US  correlates with subscribing to a schematic endorsement of stereotypically neoclassical economic views on economics that are now associated with the political Right.  The same study found that graduate study is correlated with more nuanced and less Right-leaning views of some but not all of these issues.     Formally, the views of the latter must be considered part of professional economics.

Politics, Policymakers, and Popular Economics

One massively important subsection of popular economics is the relationship of politics and economics.  Like it or not, how governments act effects the economy enormously but these actors are not transmitting and instituting the exact dictates of a scientific consensus in the admittedly fractious discipline of economics.  The original name for economics in the 18th and 19th Centuries was political economy and some professional economists and academic institutions continue to use this name as a reminder of the importance of the relationship between politics in governments and economics.  There are three main types of popular economics as it relates to politics:  the personal theories and preferences of political leaders as regards economics, the theory of the economy embedded in standing laws and in policy proposals, and voters’/citizens’ views of economics as it relates to politics.   Professional economists can be employed by governments, political pressure groups, and political parties but these will often be selected to mesh with the general concerns of that group.   In this way, the popular economic “tail” can wag the professional economic “dog”.

In the United States as well as a number of other developed nations, popular economics as it relates to politics can be divided into two basic tendencies:  those who believe that the government should intervene in the economy in favor of interests of the less powerful and the non-human environment and those who believe the government should not intervene much at all in a redistributive or protective way in the functioning of the domestic economy.  Generally the probability of one individual or another holding one or the other of these popular economic theories are based on that individuals’ perceptions of their life experiences and/or their perceptions of how they, their families and their friends might best gain from different economic policy regimes.

While these two main political tendencies are related to how policymakers might make actual policy, their views are still a more complex blend of professed loyalty and their own actual personal/popular economics in practice.  A policymaker can profess to subscribe to one or the other of general popular economic theories in order to win votes and get elected while, in office, proposing and voting on legislation that in some ways contradicts those professed views.  For instance a policymaker can claim to believe that government is for protecting the less fortunate and the environment but in actual fact tend to support bills and executive orders that for the most part serve the interests of the already rich and powerful.  Currently disappointed left of center critics of the Obama Administration believe that this last characterizes many of his initiatives to date.   Or another policymaker can profess to believe that government should not intervene in the private sector and should become smaller as an institution but end up in practice intervening in the private economy (perhaps in favor of established business interests) and expand government in other ways.  Professed libertarians and those on the conservative Right who would like to disown the policies and politics of the 2001-2009 Bush Administration hold the latter view of that Administration.

Crises and unforeseen events can further complicate how economic policy is made.  A government executive or ruling party has a particular set of economic preferences which will interact with the news from a crisis in distinct ways.  Selected professional economists will help interpret that crisis which may help justify the already mentioned “disappointments” of expectation of that might occur within the term of an office holder.  The policymaker may point to the professional economists as “bad cops” which are forcing his or her hand to disappoint the political base of the party.  The selection of these professional economists or pundits will itself help pre-condition this turn of events.

Popular Economics and Policy:  The Case of Former Senator and Deficit Commission Chair Alan Simpson

In the last few days, the video below of former Senator Alan Simpson (Republican) of Wyoming has been posted with commentary on a number of sites.  President Obama appointed Simpson as one of two chairs of the National Commission on Fiscal Responsibility and Reform (a.k.a. “Deficit Commission”).  While Simpson is not formally a policymaker anymore, he has arrived at a position of probably even greater power and less accountability in being named to the Deficit Commission by Obama than he had as a sitting Senator.

In viewing this video, you will note that there is real difference of economic opinion between Simpson and the interviewer, Alex Lawson of the Social Security advocacy organization Social Security Works.   Neither Lawson nor Simpson are professional economists and they both show signs of having very different popular economic views of at least the state of Social Security if not some other issues related to the expenditure of government money.  Simpson, in a position of a great deal of influence, seems to have some interesting ideas about how revenue collection for the Social Security system works and, beyond his generally irascible self-presentation, makes statements that are under dispute by a number of commentators:

  1. He claims that Social Security planners had not already anticipated the baby boom retirees (they had but the funds collected had been misappropriated)
  2. He claims that they had not already anticipated our current life expectancies (they had)
  3. He wishes to look away from the three main reasons why the Social Security fund will reach a point in 2037 in which might require cuts without new revenue (tax cuts mostly benefiting the wealthy, unit costs of health care in the US vs. other industrialized nations, and war spending)
  4. He claims that he wants to maintain solvency of Social Security and the government without referring to new or restored revenue sources
  5. The solution he seems to favor involves cutting Social Security and Medicare benefits (he doesn’t mention any others)

Some of these claims are poorly substantiated, partial to solution favoring the wealthy over the “lesser people” (Simpson quote), and assume an unbelievable incompetence among government demographers and economists for at least four decades.  But whatever their basis in facts or the type of opinions he favors, Simpson is definitely not held to any scientific or academic standards of source verification (which are not guarantees either) or consistency: his assertions are definitely a form of popular economics.   He might be able to find some professional economists to support his view but that doesn’t, for the purposes of establishing the importance of popular economic views in politics, negate the fact that his is a popular economics.

His interviewer in the video, as well as the critics of Simpson’s views have different conceptions of what is right for the economy and do not see cutting Social Security as an inevitability as Simpson seems to feel.  One could say that Lawson’s implied solutions in his questioning are another set of popular economic views with perhaps more or less grounding in data but also with no doubt a different perspective on the distribution of economic benefits and costs in society.  Some of these critics are professional economists like Paul Krugman and Dean Baker, who would no doubt be joined by others.

While selecting Simpson’s views so openly displayed in such an unvarnished form may undermine the point I am making, politicians and political pundits will more often than not be operating with their own personal/popular economic theories for which they may or may not mobilize professional economists to either rubber-stamp their views or work with independent economic advisors with differing views from their own to whom they may or may not listen.   Already the Peterson Institute that is heavily in favor of cutting social spending as a means of deficit reduction, has attempted to distance itself from Simpson, in an effort the preserve the appearance that its focus on cutting social spending is justified by professional, “scientific” economics.

Popular Economics and the Science Question

What I have been calling here “professional economics” has the ambition to be a science based on objective findings about the state of the economy and likely future trajectories of that economy.  These claims to science are not loudly trumpeted given the diversity of opinion within professional economics.  While professional economics operates under greater constraint than popular economics and represents a narrower band of opinion, those who hold popular economic views of various sorts can find professional economists who back up their views to a greater or lesser extent.

While there are a number of established definitions of the scientific method, many assume that in science there can be universal agreement between reasonable observers about at least the facts if not the interpretation of those facts (though heterodox and post-modern theorists of science have questioned this).  In the case of Simpson and Lawson, though neither are professional economists, they do agree that revenues from Social Security have been used for other purposes though they don’t agree on what those purposes were and on what would be the responses to that borrowing.  Perhaps some facts can be agreed upon by all observers in this case but others will be disputed.

I will be returning on this blog numerous times to the question of and desirability of having an economic science.  Certainly there are areas of economics where there can be agreement about the facts but how large is this area?   Does it make sense to call the areas in which there is not agreement about facts, also parts of a science?  Should those contested areas be sectioned off?   Isn’t the process of examining those disagreements as important as looking at areas of agreement?

If economics is not just a science but an arena within which shared and conflicting self-interests are fought over and re-negotiated, then validating a role of more or less importance for something like popular economics is also crucial.  Also economics might also be an arena in which new designs for as yet non-existent economic processes are presented and argued over.  Without the ability to “speak” on issues that effect one’s self-interest or potential future designs for the economy or economic policy cannot be discussed, this leaves people and potential improvement out of the discussion.  On the other hand, if these personal economic views, especially those of policymakers, are largely divorced from something like an objective or at least highly likely reality, this can create a great deal of economic pain and suffering.

I am suggesting that meta-economics or a similar concept can function as an inclusive framework to include both scientific and popular economics as well as examine where agreement is possible and where and how disagreement about economic processes emerges.  As we have seen that economics and popular economic theories by those in government can have extraordinary consequential effects in the real world, such a framework is not simply of speculative interest.

The Case for Meta-Economics Pt. 2: Kwak’s Commentary on Thaler

James Kwak, along with former IMF chief economist Simon Johnson, writes one of the leading blogs on financial reform, Baseline Scenario.   Founded after the financial crisis of 2008, Baseline Scenario is mostly devoted to examining proposals for financial reform and urging legislators, central bankers and government leaders to reduce systemic risk to the banking system by breaking up very large banks that are “too big to fail”.  Kwak and Johnson are highly critical of the current form of proposals in the US Congress and advocated for by the Obama Administration as not going far enough in limiting the power of very large banks, which, because of their size, are able to hold governments and taxpayers hostage if they make bad bets on investments.   Among advocates of rigorous financial reform there is an interesting dispute between those who see bank size as a crucial factor while others are less concerned about the size of banks, a controversy I will take up at another point in time.

Kwak, Berkeley Ph.D. in European history, a software entrepreneur, former McKinsey consultant, and now studying law at Yale, has written a recent post critical of an article by Richard Thaler in the New York Times.  Thaler is one of the two or three leading economists and psychologists associated with behavioral economics and behavioral finance, new fields within economics that attempt through empirical study to examine how people make economic decisions.  Behavioral economics has come to challenge the dominant assumption in neoclassical economics that people are rational “utility-maximizers”.  While rational economic man has not been fully displaced from the structure of economics, behavioral finance is now considered to offer a “respectable” alternative to the assumption of purely self-interested rationality.

While a number of people have drawn the parallel between the Deepwater Horizon blowout and the 2008 financial blowup, Thaler’s Times column suggests that both with BP and the financial collapse we are tapping into a common cognitive problem that people have in assessing low probability risks.  Additionally Thaler feels that complex technology, sometimes beyond the ken of leaders, and diffusion of responsibility via complex inter-corporate partnerships interact with this cognitive difficulty that we have in preparing for unlikely events.  Thaler points out, in an interview in an an accompanying podcast on the Times website, that partners in these multi-company alliances have varying interests which don’t necessarily align with each other or with the common good.  Thaler’s prescription, though not stated clearly and strongly, is for regulators to require higher levels of insurance, where the insurers then would be incentivized to oversee operations.

Though not in principle opposed to the idea that people are bad at assessing risks and that rational economic man shouldn’t be assumed by economists, Kwak in his response takes issue with the way that Thaler’s thesis can be used to whitewash the very specific risks involved with large corporations that have incentives to maximize profits and externalize costs onto the population at large and governments.  Kwak points out that these “cognitive biases” within these companies almost always go the way of minimizing costs and maximizing profits (very much like rational economic man by the way).  Kwak also questions that one can personalize the composite behavior of corporations as he sees Thaler doing.  Kwak sees far more intentional rather than inadvertent minimization of risk in both the culture of large Wall Street financial institutions and BP.  Kwak, an advocate for much more stringent regulation of the financial industry, sees no way out of a return to more stringent external regulation by government.  While Thaler does not come out against regulation, his analysis tends to excuse the specifically corporate blindness to risk in the face of a structure of incentives and a regulatory culture that looks the other way.

Necessarily Creative Interdisciplinary Borrowing

Both Thaler’s and Kwak’s views on the common elements between the BP disaster and the financial crisis require the integration of frameworks and elements from outside of traditional economics.  Thaler’s view draws from cognitive psychology and organizational theory to help explain how our ability to assess economic risk became distorted in situations involving high technological complexity, low-probability events, and split organizational structures and incentives.  Kwak introduces a political discourse (one could say political science though this is not explicit) of power and power differences and a re-valuation of the now conventional economic theory of externalized costs, where externalization is the norm  rather than the exception.

Kwak and Thaler might agree on the individual “nudges” (Thaler co-authored the influential book “Nudge” with Cass Sunstein) or circumscribed regulations but Kwak suggests that overall there is a fundamental lack of government oversight and authority in our current system which were instrumental in both the BP spill and the financial crisis.  Thaler suggests that with a few minor tweaks, the corporations will “regulate themselves” by making sound assessments of risk.  Kwak suggests that there is the need for an entire cultural shift in business backstopped by a strong government regulatory culture.  There is then a fundamental philosophical and analytic difference between the two positions despite what might be some areas of agreement.

While I don’t want to argue out this particular dispute in this context, I am using this as an example, and perhaps not the best example, of smart, thoughtful people (Thaler and Kwak) bringing in a mixture of disciplinary tools in to solve some of the gravest problems of our times.  This “ad-lib” mixture of tools is a sign of personal erudition and analytic flexibility in assessing the reality of a situation but it leaves us not being able to compare their respective positions (not diametrically opposed by the way).  The contest, such as it is, between these two somewhat competing positions, is then consigned to the level of rhetoric:  with which account does  a reader feel more sympathy?  There is a comparison of apples and oranges.

Towards a Meta-economic Framework

My conception of a meta-economic framework could include as “compulsory” a consideration of some of the interdisciplinary elements as well as assumptions which both Thaler and Kwak (as well as others) introduce.  This may make some writing  less “fun” to write and “essayistic”, but it might serve the public better to be able to choose between arguments if assumptions, data, and analyses could be compared side-by-side.   A meta-economic framework would compel writers/”scientists” in this area to consider the vital connections between one disciplinary area and the immediate proximate causes that originate outside that discipline but impinge upon their chosen topic.  Aren’t these issues a matter of life and death, requiring a more serious engagement with reality?

As an example, Thaler might state or declare in some form that “I believe that corporations can accurately assess risk with the right alignment of corporate interests within and among corporations”  and “I believe corporations can share the characteristics of individual people in their ability to assess risk”.   Kwak on the other hand might state, “I believe internal controls will often be insufficient to control speculative excess and the misalignment of incentives within large oligopolistic corporations”.

A joint framework that encompasses both Thaler’s and Kwak’s “narratives” would include cognitive ability to assess risk, ability by economic actors to internalize ethical standards, relative autonomy of corporations vis a vis government, role of corporate internal group dynamics, employee performance metrics, operational complexity, alignment of interests in industry partnership “ecosystems”, and dominant government ethic of and power to regulate the industry in question.   If each author, this is maybe assuming a longer form of exposition perhaps, had touched upon their views of each of these dimensions, then readers would see both the weaknesses and strengths in their “models” for each of these debacles as well as whether they both can be analyzed together meaningfully.

While some may throw up their hands and say:  “we can’t consider every factor!”, I would counter that we clearly are in need of an analytic framework that guides us to either more comprehensive or different points of focus than the frameworks we have inherited prior to either the financial meltdown of 2008 or the BP blowout of 2010.  I am proposing what I am calling a meta-economic framework as a “workspace” to build that framework from the tools of economics and related disciplines.