18 September 2013 Comments Off on The Poverty of Economics

The Poverty of Economics

RWES ( Random Walk Economics Society ) of LUMS published an article about my talk at LUMS regarding the “Normative Foundations of Scarcity.” The main idea of my article is that economic theory claims to be objective and value free. However, its central concepts are value laden, and these values have been hidden from view. The magazine article is attached in PDF format below. View | Download

Slides for the talk are linked here

The Poverty of Economics
Coverage of a Talk on “The Normative Foundations of Scarcity” by Dr. Asad Zaman at LUMS

Dr Zaman began his talk by pointing out that while the limitations of economics, especially the dysjunction between economic theory and reality, is recognized by many, there is too much invested in it which prevents an easy departure for Western academia. The present circumstances however present us in the East, where we have much less invested in conventional economics with a tremendous challenge and opportunity to redo economics from scratch and question some of its fundamental assumptions.  He structured his talk around the philosophical underpinnings of some basic economic assumptions, contending that they were not value-free and while not advocating any particular alternative, stressed the available opportunity to revisit some of the fundamental notions of economic theory, particularly the designation of scarcity as the foremost concern of economics.

Dr Zaman described how modern economics emerged in the 1930s and is grounded in the prevailing philosophy of the time- logical positivism. He said that economic methodology, with its stress on mathematics and quantitative analysis, is a reflection of this as the elevation of scientific methods is a key tenet of the school.  While quoting numerous leading economists, he mentioned Nobel prize winner Stiglitz stating that “[Economics as taught] in America’s graduate schools… bears testimony to a triumph of ideology over science.” Furthermore, one of the architects of modern general equilibrium theory, Frank Hahn, writes that “Although I never believed it when I was young and held scholars in great respect, it does seem to me to be the case that ideology plays a large role in economics.” Nobel laureate Ronald Coase is of the same view, saying “Existing economics is a theoretical system which floats in the air and which bears little relation to what happens in the real world.”

The Rise and Fall of Positivism

Dr Zaman then described the philosophy of positivism in greater detail to understand its relevance to economics. He said that the binary drawn between fact and value by positivists is artificial and that in reality, though facts and values may be separated, they are not separated along the lines the positivists have divided them. Positivism elevates fact over value, science over religion, the objective over the subjective, casting everything that is ‘non-scientific’ into the garbage can.

While describing the rise of positivism, Dr Zaman referred to the historical circumstances. Positivism rose in an era enamoured of science and it became the magic formula for the complete deification of science. Positivists reduced the category of knowledge to facts and logic alone, dispensing with religion, values, etc and treating them as worthy of contempt. The basic tenet was that only those things count as knowledge which can confirmed by observation i.e. they are manifested in brute fact and sense-data. (This is in stark contrast to religion, for example, which calls for belief in unseen elements.)

A particularly harmful consequence of this was that values were also deemed as nonsense. This was exemplified in the change in the mission statements of universities which, prior to the rise of positivism, aimed at building the character of students.[1] After the 1930s, the statements were gradually purged of this notion with horrific consequences. e.g. the architects of the gas chambers during World War II were graduates from top universities and the Vietnam war was also ‘managed’ as a business by Ivy League graduates.[2] Dr Zaman pointed out that the casting away of values resulted in the creation of one-eyed monsters who had no regard for the sufferings of their fellow beings.

Positivism and its relation to economic theory

Relating positivism to economic theory, Dr Zaman explained that the key idea of positivism is that observables exist and non-observables do not and that only those statements are meaningful which have observable implications. He explained how Samuelson’s theory of revealed preferences is based on this idea. Since preferences are internal, they are not used directly but choice is deemed to be their manifestation. Dr Zaman stressed that the replacement of utility by revealed preferences in the form of choices is erroneous because for choices to be consistent, they have to be backed by internal (i.e. unseen) preferences, because otherwise an individual may choose differently each time.

Dr Zaman then pointed out that the fundamental problem of economics, scarcity, rests on three normative assumptions:

1. A political commitment to private property
2. A methodological commitment to considering tastes as exogenous
3. A commitment to the notion that welfare equals the satisfaction of preferences.

Dr Zaman stressed that despite the claims to being objective, factual and scientific, these were all normative ideas which underpin basic economic theory. Expounding on this, he referred to the positivist notion which stresses that the validity of a theory rests in the accumulation of enough supporting facts. Actually, it can be proven that there is a fundamental indeterminacy: large numbers of theories will fit all available facts and it is the accidental ideological/political commitments of scientists that determine which theory will be picked. It is here that the historical process assumes paramount importance.

Dr Zaman then discussed the three assumptions mentioned above in greater detail:

1. Locke’s theory of property

The philosophical works of John Locke put property rights outside the reach of powers of monarchs (and  poitically legitimate governments). Particular historical circumstances in England led to the acceptance of this theory. The restoration of King Stuart, following Cromwell’s Rebellion, required support of an element of the aristocracy. Following the successful restoration, these elements proceed to carry out the biggest land grab in history, seizing all public lands, rivers, forests, and legitimizing this by a Lockean notion of private property. The massive numbers of people dispossessed of their livelihoods created the stock of labor necessary for the industrial revolution. This historical episode also led to the creation of the modern idea of private property as sacred, (to the detriment of all social values, as described in great detail in The Great Transformation by Polanyi)  mainstay. This notion of Private property is also a background assumption of economic theory. Dr Zaman described alternatives to private property e.g. the practice of native Indians who considered land as belonging to all, communist society in which people are motivated by social mechanisms rather than money, etc. Islamic theories of property are substantially different from dominant Western theories; see for example Sait & Lim.  While not advocating any particular theory of property, he simply argued that instead of being accepted as a background fact not subject to debate, the notion of private property should be recognized as a political decision and openly discussed.

2. Taste formation

Samuelson, Stigler and other leading economists have argued that “economists should not analyze tastes” and treat these as exogenous to economic theory.  The role of scarcity in economics changes substantially if we violate this methodological commitment born out of positivist views (of not analyzing internal mental states).  A number of analysts have suggested that tastes are formed through comparative assessments and attempts to keep up with the Joneses. Beyond subsistence level, taste formation was a matter of looking at what others have, leading to a rat-race and competition in the acquisition of commodities. In this case, production of goods would not eliminate scarcity, as the desired level o consumption would keep rising..  Dr Zaman referred to Galbraith’s work which shows how industries produce masses of junk products, creating a need where there is none. Thus the real problem was not scarcity, but over-production. Others have argued that societies choose how to train children and this determines preferences. Again, Dr Zaman did not advocate any particular theory of taste formation and noted that different people have said different things and which of these theories is correct has a tremendous effect on correct economic policy. Therefore it is crucial for economists to study this issue – they cannot afford to take tastes as exogenous and be agnostic about how tastes are formed.

3. Measuring Welfare

Dr Zaman used a modification of the Pareto principle to illustrate how our notions of welfare can be revised. The “Pareto-style longevity principle,”  would state that a redistribution of income increases the welfare of a society if it increases the lifespan of some members without adversely affecting lifespan of anyone. He pointed out that the original Pareto principle therefore reflects a commitment to private property, which leads to the conclusion that in this framework, upholding private property is scientific but upholding basic needs is not. By thus showing that the seeming neutrality of welfare principles is actually grounded in normative notions, Dr Zaman then referred to alternative ways of looking at welfare. He referred to the material welfare approach, human capabilities approach, etc which stress that the problem is not scarcity but distribution. Sen’s work on famines illustrates this by showing that famines are not a result of food shortage but of social commitments to certain notions of the rights and entitlements of the poor. Similarly, communitarian notions of welfare which elevate communal welfare over individual welfare can lead to a reduction in efficiency losses, through the creation of communal safety nets against unforeseen adversities. Again, while not advocating any notion of welfare, he argued that economists must study this issue, complex and thorny as it is. Any ruling on economics is based on an implicit view of welfare, and therefore it is better to make it explicit.

Summarising, Dr Zaman said that the positivist bifurcation between fact and value does not hold up to scrutiny and in reality, facts and values are entangled. It is values that determine which facts (and therefore which theories) are relevant and significant. He pointed out that positivist notions have been definitively rejected by philosophers. Even in mathematics, the heartland of logic, Godel’s undecidability theorem showed that even mathematical propositions must be chosen on grounds of aesthetic values, instead of being proven true or false. Intuition and aesthetics, as well as other values, determine ‘truth’ instead. He reiterated the opportunity to revisit economic theory by a recasting of the fundamental assumptions discussed, which did not hold up to the claims of objectivity and instead were manifestations of a particular philosophical school of thought. To be optimistic without being positivist may be a tough ask for many of us, but Dr Zaman certainly left hopeful question marks hanging in the air.

[1] Dr Zaman referred to a work by Julie Reuben, ‘The Making of the Modern University: Intellectual Transformation and The Marginalization of Morality’ which studies this.
[2] Dr Zaman referred to ‘The Brightest and The Best’ which looks at how Yale and Harvard graduates ran the Vietnam war with complete and callous disregard for human lives and suffering.

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