The Home of American Intellectual Conservatism — First Principles

May 27, 2018

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The Problem with Conventional Economics
Edward Hadas - 03/07/08

excerpted from Human Goods, Economic Evils: A Moral Approach to the Dismal Science

There can be no doubt that the modern industrial economy works well, at least by some standards. Any system that has been able to resolve the economic problem cannot be all bad. The titanic claims for industrial capital may ultimately be illusory, but advances in technology have truly allowed a large number of human problems to be solved. That success suggests that the shapers of the industrial economy—in business, politics, research, and general cultural formation—know, and have always known, what they are doing in some basic sense, whether or not they understand the deepest principles underlying their techniques.

Unfortunately, conventional economists, the professionals who are supposed to understand exactly those deepest principles, do not know what is really going on. True, their basic ideas come out of the same modern worldview that has inspired both scientists and technologists in their successful development of capital and so many others in their successful dedication to industrial prosperity. However, practical success in some domains—in this case science, technology, and prosperity—does not imply the truth of all modern ideas. Indeed, for conventional economics, most of the founding notions of the discipline are wrong and most of the supposed laws and rules are some combination of wrong, misguided, and meaningless.

The economists’ most basic problem is anthropological, in the philosophical sense of that word—the “logos” (reasoned principle or nature) of “anthropos” (man). A number of erroneous claims about human nature are accepted with more or less enthusiasm by almost all professional economists. These bad ideas both limit and distort their vision.

Nine Bad Ideas about Human Nature

The first day of the first introductory course in economics sets the tone for everything else, all the way into postgraduate work and beyond. The professor defines the field—generally in terms of scarcity, choice, or money—and gives a few hints about the analytic techniques that will be used—mathematical, monetary, or “rational.” If the teacher is sophisticated and direct, he might introduce economic man (homo economicus). That odd creature embodies human nature as economists see it, at least for the purposes of their study. Even if economic man is not cited by name, students will rapidly become familiar with his characteristics. Indeed, by the time they hear about the “golden rule” of neoclassical economics—markets balance when marginal cost equals marginal revenue—they will be taking for granted that when it comes to economics, this is how men are. The principles that guide this economic man are listed here. They are not entirely consistent with each other, but their contradictions are rarely severe enough to cause any sort of theoretical crisis. They do share one common attribute—they are all wrong.

  1. The transcendental is not relevant to economics. Sure, a man might go to church, meditate at home, or sometimes ponder about the meaning of a life that ends in the mystery of death (a meaning, if there is one, that is presumably concerned with things more durable than economic stuff). For the conventional economist, however, such matters are irrelevant. Speculations about deeper things are simply not his business. This economic inattention to the transcendental is supposed to be neutral to claims about supernatural goods, but in practice inattention easily slips into hostility. So, for example, economists generally treat arguments that hard work can be sanctifying or that poverty can prepare men for heaven as absurd. This is all wrong. Men have an inerasably transcendental orientation that guides them in everything, even in worldly economic activities. Indeed, worldly prosperity is only valuable to the extent that it aids men in their transcendental search for meaning. Religion, in particular the world-loving transcendentalism of Christianity, can play an important role in economic analysis.
  2. Economics has nothing to do with morality. Conventional economists want to be ethically as well as transcendentally neutral. If the good is a meaningful concept at all—a claim that makes many economists deeply uncomfortable—then it is one that should stay in the domain of philosophers and other airy-fairy types. Economists think they are limiting themselves to hard facts—what men’s actions show about their economic desires. The main hard fact, or so the economists claim, is that people want more, in particular more consumption goods. In practice, this “more” serves as a basic economic good. This is all wrong. Men rarely if ever act without some sort of ethical intent—they always search for the good, a good that has at least some hint of the transcendental about it. If they do look for more stuff, it is because they believe that this stuff is in fact good. Of course, ethics is complex. The good cannot easily be identified or followed in any domain, including economics, but it certainly cannot be reduced to mere quantity.
  3. All economic ties are contractual. According to conventional economic anthropology, each man is an economic island, interested only in his own good. These islands, however, are not fixed, but bump into each other. The collisions are regulated by freely negotiated contracts. In turn, these are guided entirely by each individual’s search for his own advantage; they are unconstrained by any previous obligations. The result is not so much a society as a contractual quasi-society, a place without tradition or fixed rules and with the open-ended possibility of any number of new contracts. This is all wrong. Men are by nature social, and they naturally live in societies that have many structures—of family, religion, and government, to name a few, as well as the economic structures of labor and consumption. Contracts can be useful, but they are only manifestations of deeper structures of law, trust, and community.
  4. Men’s economic behavior follows physical laws. Economists suffer from physics envy. They want to base their field on simple, elegant, and pervasive mathematical formulas. Newton’s laws of mechanics were the first inspiration, but the laws of thermodynamics, most notably the conservation of energy, have had more direct influence, especially in the neoclassical model. Economic transactions are thought to conserve latent utility (or pleasure or happiness). In any transaction, the total utility, like the total of money, is the same at the end as at the beginning. All of this can be expressed in terms of mathematical functions. This is all wrong. Men—their motivations, joys, hopes, and fears— can rarely be reduced to numbers in any meaningful way. Economists’ equations might explain something, but whatever they explain is not what should be central about economic activity—how well it serves the human good.
  5. The economic life is a constant struggle. This idea comes out of social Darwinism, the vision of human society as guided by an unending, inevitable, and universal struggle for survival. This theory, generated by biology envy, does not mesh easily with the last, generated by physics envy, but the struggle-view lies behind the widespread praise of competition as a force that drives the economy forward. This is all wrong. Amoral social Darwinism offers a most unrealistic interpretation of all human interactions, but it is particularly inapplicable to industrial economies, which rely extensively on trust and cooperation and which demand the support of entire communities. Competition can be helpful, but it needs to be controlled and channeled with great care. Otherwise, like any struggle among men, it is more likely to prove mutually destructive than uplifting.
  6. Perfection is within reach. Economists love to talk about perfect markets and the optimization of “welfare.” They assume that well-directed economic effort will be rewarded by coming closer to these perfect states. The belief in an unceasing ability to do more economic good helps justify a dismissive attitude towards any tradition—political, cultural, or religious—that gets in the way. This is all wrong. Men can and should strive to improve their lot, including their economic lot, but they should never expect too much. Life in the world, no matter how economically enriched, will always be marred by moral weakness. Traditions can provide valuable anchors. Economic perfection is a dangerous goal, as the Communist experiment demonstrated.
  7. Economic freedom is a good found in free choice. Many conventional economists consider freedom, along with “more,” to be an economic good. Their definition of freedom is the one endorsed by philosophical liberals—freedom is choice. So an economy is freer—better—if people have more choice in their consumption, more choice in their jobs, and more choice in who they contract with. This is all wrong. The liberal understanding of freedom is inadequate. True freedom is found in the ability to live up to the true and the good, the transcendental true and good. Unrestrained choice can restrict rather than enhance this freedom, for example when the choice is for addiction or some other evil. The value of free economic choice is particularly hard to determine without some sense of the social context in which the “free” economy is set.
  8. The good economy is controlled by the beneficent state. Some conventional economists prefer order and efficiency to freedom of choice. For them, the road to economic optimization is blocked by the steady inability of men to act in their best interest and by their tendency to waste time and energy in petty squabbling. The assumption that the perfect is possible leads to the conclusion that this inability and waste can and should be overcome by extensive government controls. At the extreme, this line of thought leads to praise of the total central planning of jobs and production. This is wrong, just as wrong as the simple praise of freedom. Governments are fallible in much the same way as the individuals they govern. Wise governments certainly play a part in the search for the economic good, but they are never good enough to create perfection.
  9. Economics rules. The idea here is that behind all of men’s actions lurk economic motivations, motivations that only economists can fully understand, because only they are trained to apply the correct mundane, mathematical, amoral, individualistic, competitive, and optimizing logic to situations that noneconomists might try to think about in more noble terms. This is all wrong. Economic motivations are hardly relevant beyond the domain of economic activity. The conventional tools of economic analysis hardly provide any insight into economic motivations, let alone noneconomic issues. Residents of industrial societies may well be more oriented to the satisfaction of economic desires than their preindustrial predecessors were, but other concerns—spiritual, social, romantic, aesthetic, political—still predominate.
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