Posts Tagged ‘economics’

Today’s economic orthodoxy is heavily dependent on the idea of utilitarianism, because it is a convenient mechanism that allows economics to be taken more seriously as a natural science. It allows economists to bypass all the inconvenient complications that arise when delving into deeper considerations of ethics and human behavior. The adoption of utilitarianism allows for the use of an additive system that fits well into an economics that is based on mathematics, as we have today.

Before going further, it’s worth briefly exploring who Jeremy Bentham was, and what we mean by utilitarianism.

Utilitarianism, or the “greater good” argument, is the belief that is the idea that the “right” course of action is the one that maximizes the overall “good” of a situation. So actions should be judged right or wrong depending on whether they increase or decrease human happiness, or utility. In economic-speak, utilitarian is used as the rationale behind the crucial assumption of rationality of consumers – that agents (i.e. people) consume so as to maximize their “utility”. Bentham put it thus: “Nature has placed mankind under the governance of two sovereign masters, pain and pleasure. It is for them alone to point out what we ought to do.”

On the face of it, utilitarianism has some appeal. But a simple thought experiment, first articulated by American philosopher Robert Nozick in 1974, puts the simplicity of utilitarianism in stark focus. Nozick hypothetically proposes the “experience machine”: a machine that would give you any experience you so desire. So if you wanted to experience the thrill of climbing Machu Picchu, so be it. But all the while you would be hooked up to this machine, not knowing that you were there. In other words, you would actually believe you were climbing Machu Picchu. Would you plug yourself into the machine? As long as you’re living your hearts desire, does it matter whether its real or not?

Nozick believes that most people would choose not to be plugged into this experience machine. This implies that it is somehow important whether these experiences are real or not. The reality of life is important: people want to actually do certain things, achieve certain goals, rather than simply feel the pleasure associated with it. However, if utilitarianism held strong, then the pleasure associated with actions would be all that mattered, and we would choose the machine. It is clear then, that there are other things besides simple pleasure that people consider intrinsically valuable.

While different forms of utilitarianism have attempted to come to grips with this and other complications, this was not so for Jeremy Bentham. He proposed a form of ‘felicity calculus’, where the pleasure and pain that arises from different actions could be quantified and and determined by addition and subtraction. This sort of simplistic rationale is too tempting to resist for orthodox economists. For Bentham, different pleasures vary only in their intensity and duration, and not quality. He even said himself, “the game of push-pin is of equal value with the arts and sciences of music and poetry.” Reductionism at its finest. This form of thinking has given rise to “homo economicus”: economic man. Homo economicus, meant to represent each and every one of us, is a narrow, self-interested individual who’s only concern is to maximize his or her consumption of goods and services. In physical terms, the assumption that we are all homo economicus is akin to the assumption that, for practical purposes, all cows are spheres.

The concept of utility is core to understanding economic orthodoxy today, and yet the assumption of rationality is based on an outdated and unrealistic form of utilitarianism that is not, and has never been, applicable to real life. Luckily, we have fields of economics, such as behavioral economics, that have attempted to move beyond this mode of thinking, and incorporating knowledge from other fields such as psychology in altering models to be more realistic. But neo-classical economic theories are still based on this idea, and despite strong attempts from many directions to reform the discipline, it clings stubbornly to such discredited beliefs.

There is a problem with the way that economics is taught in classrooms today … it’s wrong. There are whole books written about the question of what exactly is wrong with economics today, but this blog post will focus on just one simple, yet extremely important aspect: reductionism. The dictionary defines reductionism as “the practice of simplifying a complex idea, issue, (or) condition … especially to the point of minimizing, obscuring, or distorting it.” We observe a degree of reductionism in every aspect of what we do, so why is it such a big deal, particularly in economics?

Lets start at the basic building blocks of textbook economics. An ‘market’ is a system where buyers and sellers meet. Buyers want something, and sellers offer that something to buyers, in exchange for currency. Suppose its a market for cars. Lets assume its a perfectly competitive market, meaning that all sellers are selling an identical product, have identical costs, and sell for an identical price, so that, for Joe Consumer, it doesn’t matter who he buys the car from, he’ll always pay the same price for the same car.

How much does a car cost? Well, in a perfectly competitive market, the price of a car equals the cost of producing that car (the marginal cost). Suppose that the cost of the car is made up of fixed costs (the factory, fixtures, etc) and variable costs (labor, materials, etc). The total cost of the car is the sum of all these costs for that car.

Economics, as taught in classrooms across the world, has little to add beyond that, in our small example. It is seen as a closed system, with no relations to other systems. The unit of measurement is the dollar (or whatever currency we choose), and it is about the flow of goods and services between firms and households. The impacts of economic activity on the environment, the ecosystem, society and culture are all ignored. But how can they be? Without the biosphere, there could be no economic activity! Oil is pulled up from out of the ground, and used to create goods and services, and transport them across the globe. Trees are felled for paper, wood, and other products. Coal from under the earth is used as a source of energy. The fish of our oceans are decimated for the satisfaction of our deep bellies. The biosphere is also crucial to absorb the products of our economic activity – no, not the goods and services, but the pollutants, the greenhouse gases, and other harmful byproducts.

In that sense, we cannot reduce the economy to a simple exchange of a few products without looking at the wider – and most certainly important – effects that result directly from our activity. The discipline has made some half-assed attempts at factoring these in, there the concept of “externalities”, i.e. stuff that is external to economic theory. And still the concept of monetizing these externalities is used, as if you can ever accurately put a price on such things. Can you put a price of climate change? On species extinction? No, you can’t.

The economy needs to be seen as a system within a system: a human system of trading goods and services, within the greater biosphere of our planet. It is especially crucial to recognize the role of economic activity in today’s world, where the threat of climate change looms larger than ever – according to this report, carbon emissions have hit a record high despite the recent recession. Economic policies can no longer be made in isolation of the global reality.

But frankly, its inconvenient. It’s not just a case of ignorance. Its a matter of interests. There is a reason that the economic discipline looks the way it does, and a reason why it is so powerful and well respected. We’ll leave that to future posts.

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Before I go, have a look at this blog post about Strauss-Kahn and the maid who accused him of sexual assault. It makes the very good point that, without union backing, she would likely have never been able to make such a complaint against such a powerful man.