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

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

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

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

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

One View of Perspectivism (or Perspectivalism)

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

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

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

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

Politics, Political Economy and Perspectivism

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

Perspectivism, Economic Interests, and Adam Smith’s Work

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

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

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

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

Perspectivism and Marxian Economics

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

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

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

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

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

Neoclassical Economics and Perspectivism

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

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

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

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

The Political Fight Over Economics and the Dream of Economic Science

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

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

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

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

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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 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.

The Case for Meta-Economics Pt.1: Fiscal Austerity as Prudence…or Madness

The most immediate and obvious case to be made for (something like) a meta-economics, or the equivalent, is the lack of a consensus among respected economists about what to do about the sovereign debt crises in Europe and the push for fiscal austerity that has emerged this year in the US and in many other countries.  We have many politicians as well as economists on the one hand claiming that now is the time to cut budget deficits by cutting spending (mostly on social programs) and on the other hand we have economists and some politicians who are calling this the equivalent of madness, urging steady or higher levels of government spending to stimulate weak economies.

Two Opposed Schools of Thought

The debate can be viewed either from the point of view of individual economists, who show some variability in their opinions, or as a clash of two schools of economic thought with regard to the value and use of fiat (paper) currencies and government spending.  Keynesian economists believe that government (fiscal) deficit spending is necessary in economic downturns to make up for reductions in demand from a troubled private sector.  In the case of our current economic crisis, households and businesses are either loaded down with existing debt and/or cannot get access to credit to buy goods and services.   With a fiat currency (where the government can print money), governments can choose to go into more debt and/or risk inflation of the currency by spending more than they collect in taxes to spur the economy.  The priority for Keynesian economists is to boost employment and spur demand for goods and services by the means available to make up for the slump in private spending.  Keynesian economists point to the relative economic stability of the period 1940 to 1980, as well as the lack of a clear association between government debt and economic prosperity at least in countries that control their own currency, to make the case for deficit spending.

Opponents of deficit spending, deficit “hawks”, many of whom share the assumptions of neoliberal/neoclassical economics, are concerned about how lenders in financial markets will view governments’ apparent disregard for the debts they are running up to stimulate their economies and will impose more stringent credit conditions on lending to these governments.   In general, these proponents of fiscal austerity as a cure to what currently ails us, represent a “hard money” position, in that they fear inflation more than Keynesians, who might even recommend “inflating away” national debts.  Fiscal austerity that cuts government spending and activity has the critical “side benefit” for neoliberals in that it cuts government regulation of industry as well as reduces the role of government as a competitor in the provision of goods and services to the private sector (Social Security competes with investment managers for instance).

A related but subsidiary issue is the type of government deficit spending in a recession based on what Keynes called the multiplier effect.  Some types of spending will circulate more quickly in the economy based on people’s propensity to save or spend.  Spending on wages and social welfare programs will circulate more quickly in the economy producing larger effects, multiplying the economic effects of the initial spending.  The neoclassical school objects to or questions the multiplier effect on the assumption that people will not spend the money assuming that higher taxes are coming to pay off the government debt generated by deficit spending.

For the purposes of this short post, I am going to assume that the dispute is fiscal austerity or no, but a reasonable case can be made that the fundamental dispute between these two groups is about the type of government spending rather than the amount of that spending.  As we shall see below those in the fiscal austerity camp differentially favor cutting social spending rather than defense spending or other programs favored by the political right-wing.

Individual Economists

Paul Krugman,  Brad DeLong, Dean Baker and others who occupy more of a Keynesian position on fiscal spending, are most scathing in their indictments of the calls for fiscal austerity that can be heard now around the world.  Krugman points out, as does Dean Baker and others that measures of what lenders think of the creditworthiness of the US government indicate that there is no current concern about the US’s fiscal health (low CDS spreads).  Krugman and other in the Keynesian camp, like Brad DeLong, point out how deficit hawks tend to blur the distinction between countries that control their own currency (the US, Great Britain, etc.) and the countries of the Euro-zone who are constrained by Euro-wide currency policy.   There are differences in the degree to which Keynesians pay attention to the question of budget deficits:  some think that raising deficits is a temporary fix while others are relatively indifferent to the amount of the deficit.

On the other side of the fiscal austerity debate are also many respected economists, some of whom did predict the financial crisis of 2008.  Ragu Rajan reads a number of macroeconomic signals, including increased employment in Brazil, as indicating that the Fed might think about raising interest rates, which is an anti-inflationary measure and a sign of pulling back on monetary stimulus of the economy.   Krugman lambastes Rajan and others as submitting to a climate in which pain infliction on the economy and especially the poor is considered to be a way to “reassure markets”.  Jeffrey Sachs, also a highly respected economist is caught by Brad DeLong assuming that Obama’s stimulus spending raised interest rates that private lenders charged the government when it didn’t.   Both Krugman and DeLong feel their opponents are ignoring data on the ground and imposing upon and reading into reality their prescriptive model for how the economy should have, is and will behave.

Economic Advocacy Organizations

Driving the debate within and outside the academy are the work of advocacy organizations that, apparently, believe that social spending should be cut instead of targeting military or other budgetary items.  The billionaire and former Secretary of Commerce under Richard Nixon, Pete Peterson has had a major influence in inspiring the Obama Administration’s deficit commission through his funding of numerous foundations, economists and advocacy organizations.  Peterson, through his great wealth and political influence has been able to create a climate of economic opinion within which he has insistently attempts to create concern about government budget deficits while favoring only one of many possible solutions.  As can be seen in this 2003 interview with Bill Moyers, Peterson decries tax cuts and other signs of profligacy by both parties yet almost uniformly prescribes cutting social spending over either cuts in other discretionary programs or tax hikes on people like himself.  Peterson’s perspective is also premised on a theory of political behavior by policymakers who he assumes will never raise tax rates to deal with what he bemoans as a great evil, the imposition of debt upon future generations.  The assumption of this type of political behavior by Peterson does agree with the anti-tax prejudice of Peterson’s political milieu.

Making Sense of the Conflict

In broad terms the conflict in systemic terms is between two economic theories with opposing interpretations of that subsection of the data that they both address and also in this case some variance with regard to how much or which parts of the data are accounted for by the “story” that each side tells.  Furthermore, even if there is or would be some partial agreement on interpretations, the solutions offered are at odds (which part of the deficit to reduce or cut and when).   On the one side we have people who see government spending as a tool that now because of slumping economic conditions must be deployed, despite the negative impact on budget deficits.  On the other side we have people who place a higher negative value on budget deficits and the risk of inflation relative to the potential positive impact of spending on employment and current demand for goods and services.  For the latter group, the tradeoff is so, seemingly, frightening (or they wish to inspire fear in others) that they appear to imagine or invoke the prospect of events for which there is currently little or no data.  Alternatively they may be seeking to inspire “retribution” by private markets on the debts of governments, prospectively, by painting a negative picture of how these governments manage their budgets.

To me, as may be apparent from the way I am presenting the data, the case is better argued from the Keynesian side.  In this case, DeLong and Krugman seem to be presenting more apposite and solid data but the counterfactual “worries” of Sachs and Rajan are not to be entirely dismissed given their positions of authority and the reflexivity of financial markets, where opinion can become reality through the action of powerful and/or motivated stakeholders.  It is not unknown that powerful financial market actors can create chaos because of antipathy towards a government or because they simply want to achieve a higher return.  Claims of fiscal imprudence by authoritative voices can be invitations to markets for attacks on the currency.

While the point of recounting this debate may elude people who are not economic policy “wonks”, the stakes in what passes for an intellectual debate here could not be more immense:  if the austerity group prevails we may see, as in 1937, a very deep second dip to this recession, though these advocates would deny that this would be the outcome.  If the apparent wishes of economic advocates like Pete Peterson are achieved, we will see an undoing of the social and economic stabilizers created by the New Deal and Great Society in the period from the 1930’s to the 1960’s.  Furthermore, and more assuredly, choosing fiscal austerity, especially those who wish to cut social and other domestic spending rather than military spending and not raise any taxes, will bring much of the movement towards a green and oil-independent economy to a halt.  While some politicians and voters may be able to salvage some portion of existing social programs, the “new arrivals” in the areas of climate and energy that may require some deficit spending to be jumpstarted will almost certainly fall by the wayside.

Class Interests and Government Spending

While I am treating this here as a problem of systemic theories of the economy, many imply or state that this is a class conflict between economic groups.  The accusation leveled at Pete Peterson by his opponents can be parsimoniously stated as that he is waging “class war from above” by differentially targeting those social programs that stand in the way of financial capital in maximizing its profits.   Even more insidiously, the effort to stir hysteria about fiscal spending can be seen as effort to create a “balance of terror” by actors from the financial sector to guard its huge profits and downplay its culpability in the 2008 financial crash (“we weren’t the imprudent ones, you were”).  On the other side, deficit spending and social spending combined with progressive taxation redistributes income downward, leading the “haves” to feel that they are supporting the “have-lesses” and the “have nots”.   The implication by the “haves” is that they represent economic virtue while the “have-lesses” and “have nots” have not been prudent and are asking for a hand-out.

Alternatively, if we accept that there are economic classes with different and conflicting interests, the conflict is over a renegotiation of the social contract between those classes.  The post-New Deal, post-WWII consensus was that the “haves” owed a portion of their income to the society at large and to the less fortunate.  The idea was that everybody has an obligation to society and that individual success contains an element of luck.  The Reagan-Thatcher neoliberal criticism of the post-War consensus was that each person earned according to what he or she is due and that the society-at-large did not represent an economically important entity.  Redistribution of income via governmental spending and progressive taxation was and is opposed by neoliberals because it violates this principle and does not reward economic success.  This schematic view overlooks complexities of either position.

If this is a matter of economic class conflict two basic solutions are possible:  either one allies oneself with one or the other class or one attempts to stand apart and negotiate some compromise between those class interests.

Resolving the Conflict:  Three Strategies

I can see at the moment three basic strategies for economists and policymakers in dealing with this critical challenge and the yawning gap between the two positions as regards immediate action.

Strategy 1:  Make Better Arguments for Each Position

Advocates for one position or the other have good reasons, if they believe that what they represent is true, right and good, to make better arguments for each position.  I have a strong bias in favor of the Keynesian position at this point in time because of my concerns both about our overall economic health in the short and medium term as well as long-term environmental sustainability:  I see, at the least in the US, no significant moves to reduce oil dependency and address climate change without some deficit spending.  I am also persuaded by the relevance of the data presented by Keynesians to the questions being asked by both sides, in particular the phantom nature of market “concerns” about the security of lending to the US government at this point in time.  By both sides making clearer arguments, we may see clarification of the issue.  One danger without a strong meta-economic framework is that one side or the other would make arguments that are emotionally persuasive in nature but not well-reasoned and/or would use its considerable financial means to broadcast the less well-grounded argument in emotionally compelling but fallacious terms over the airwaves.

Strategy 2:  Political Compromise Between the Two Positions

While a bipartisan deficit commission and similar bodies may need to engage in compromise to reach consensus, this strategy may only serve to confuse the scientific and intellectual issues involved.  Some items from one “side” will be adopted and some proposals from the other “side” will be adopted in a melange of proposals.  While one sides’ arguments may be popular with politicians but wrong they will appear to be given equal or greater weight to  positions that are well grounded in reality.   If on the other hand there is an implicit recognition that there is no systemic economic theory that works but simply a class compromise between two interest groups, then adopting a political compromise which reflects the balance of power or the outcome of the discussion is the only possible outcome.  Either the compromise between systemic views or the compromise between classes would postpone clarity on the issue, though might prevent a disastrous outcome.

Strategy 3:  Develop a meta-economic framework for evaluating claims of both positions

The final strategy requires more time and preparation but I believe it will ultimately lead to better results: create a meta-economic framework for evaluating as much of the relevant data and positions involved as possible.  Such a framework would be able to weigh the benefits of economic stimulus, perceptions of government debt by private financial markets, other risks associated with debt, inflation costs and benefits, group/class interests and overall social welfare projections that are associated with an number of different scenarios.  I am calling this a “meta-economic” because it would straddle both the Keynesian and the neo-liberal or “hard money” position but create a new and better scientific framework rather than a melange of both positions as would “Strategy 2”.  New factors may be introduced from within economics or from a related discipline like political science, psychology, the natural sciences, etc to create new perspectives on hardened positions rather than to mix perspectives up as part of a political compromise.

None of these three strategies is mutually exclusive.  In upcoming posts here, I will look into this issue as well as other questions that would lead one to build a meta-economics.