Thursday 13 March 2014

Critique of Lee Boldeman's 'The Cult Of The Market: Economic Fundamentalism and its Discontents'

The Cult Of The Market[1]

Chapter 2: The Creation of Social Order is Irreducibly a Moral Project

Boldeman: “One important consequence of this adherence to methodological individualism has been a stubborn refusal on the part of economists to examine the formation of preferences – the basis of our choices. They do so on the grounds of what is called the doctrine of consumer sovereignty – the idea that we are all free to form our preferences without having to justify them. As such, it is simply a restatement of the economic profession’s commitment to individualism. It privileges so-called individual preferences – as opposed to social institutions and collective rules of behaviour – on the assumption that preferences have been chosen individually. This view ignores the extent to which our choices are conditioned by our positions in the social system – positions that involve normative obligations and power relationships enforced by society. It ignores the fact that we justify our choices to ourselves in the language of contemporary culture and the social construction of that language and culture. It also assumes that we know what alternatives are open to us and that we know what we want. So it simply refuses to examine the great extent to which preferences are learned and not chosen. It also ignores the particular influence that others have on those preferences, the extent to which they depend on previous choices and the extent to which they are either incomplete or inconsistent. What is more, it ignores the highly manipulative nature of much advertising. Furthermore, the economists’ assumption that preferences are consistent has been proven to be false – a finding that undercuts rational choice theory, which, in turn, underpins the theory of demand.” 47

Brian: I will address this laundry list of points one by one.

Economists don’t “examine the formation of preferences” because that is the domain of psychology. Economics studies the endeavours of people to get what they think they want. It doesn’t claim to know what people should ‘truly want’, nor does it claim to know what people’s preferences would be in the absence of certain environmental and social influences on the individual. I think that any science that hoped to attain this kind of knowledge would fail hopelessly. Thus, economics has a more modest scope, but is a more modest and realistic scope for a science really grounds to criticize that science?

The doctrine of consumer’s sovereignty merely says that the producers must ultimately cater to the demands of the consumers, whatever these demands are and however they are formed, if they wish to make monetary profits on the free market. It doesn’t say anything about whether we have to justify our preferences or not. At best, this factual doctrine, if interpreted as a mark in favour of a freer market, might imply that consumers shouldn’t have to justify their preferences to the government in order to freely pursue them. But if our preferences are disapproved of by our friends and family, economics would simply interpret this disapproval as a cost like any other that individuals must take into account when forming their preferences and deciding on courses of action.

Yes, most free-market economists ‘privilege’ individual preferences over ‘collective rules of behavior’. This is mainly because they recognize that these ‘collective rules of behavior’ simply represent the individual preferences of those in power or, in rare circumstances, of a majority of the population in a geographical region. If, for example, 70% of the population of a political region preferred that no one in the region smoke tobacco, and decided to turn this preference into a ‘collective rule of behavior’ by banning smoking, the remaining 30% who liked having the freedom to smoke would be harmed by this ‘rule of behavior’. I would venture to say that members of the 30% are harmed more by the policy, because their preferred, freely chosen behavior is roughly trampled upon, than members of the 70% are benefitted by the dubious satisfaction of seeing that their ‘fellow citizens’ are no longer smoking.

“Our choices are conditioned by our positions in the social system”: Sure, our choices are conditioned by an almost endless array of factors. Does that mean that we are indifferent as to whether we can make decisions for ourselves and freely pursue our chosen objectives or not? Not in the slightest. I would venture to say that most people don’t particularly like having their chosen courses of action forcibly aborted by others. If this were not so, and the ability to pursue personally chosen objectives does not make people any happier in the slightest, than people shouldn’t mind if they are just enslaved by the next arbitrary thug that comes along. What does it matter whether people’s courses of action are determined by the orders of an arbitrary thug or by their own personal choices, if personal choices are meaningless in the first place? And yet, I have a strong feeling that we are now venturing into the territory of the absurd, so there must be something good about the freedom to pursue personally chosen courses of action.      

“It also assumes that we know what alternatives are open to us and that we know what we want”: Sound free-market economics assumes no such thing. It does not assume that individuals are omniscient beings, nor does it assume that governments are omniscient beings, as some people who make this criticism seem to. What it does say is that if individuals want to attain better knowledge of their alternatives or of how best to achieve their ends, they would be better off consulting experts in a freely competitive, free-market information industry, than they would be being ordered around by a monopolistic, inefficient government beholden to all kinds of special interests. Furthermore, the political extension of free-market economic thinking tends to hold that adult individuals are ultimately the best qualified to know what they themselves want, more so than governments or other authority figures. Due to the highly subjective and personal nature of most economic preferences, I think that this is a very defensible postulate.

“It ignores the highly manipulative nature of much advertising”: Strictly speaking, sound free-market economics shouldn’t take a position on this question. If advertising succeeds in manipulating people, then it becomes just another of the many psychological factors that enter into individual preference formation, preferences which economics must take as a given. However, the political extension of free-market economics tends to hold that it is very difficult for advertising alone to ‘create needs’ in its target audience. Also, if every firm is free to advertise, than the firms offering products that meet ‘real needs’ could put just as much into advertising as those firms offering products based on needs ‘artificially created’ by the advertising campaign. In such a contest, it would seem likely that the former firms would be able to handily outcompete the latter firms, who face a far more difficult advertising task than the former, in which case consumer preferences would not be noticeably changed by the advertising campaigns. In addition, ultimately, an individual is responsible for his own conduct in a free society. If an individual is stupid enough to indiscriminately buy any random thing that an advertiser puts in front of him, than he almost deserves to lose his money uselessly. Hopefully, this individual will learn from his mistakes and reform himself in the future.      

“The economists’ assumption that preferences are consistent has been proven to be false”: Sound free-market economics does not assume that individuals have preferences that are consistent over time. An individual could well prefer an apple over an orange at 1:00 PM, but would prefer an orange over an apple if he had been shopping at 2:00 PM. But this poses no real difficulty for the economist. It just means that consumer demand can vary unexpectedly, and that producers must try to prepare themselves for this variance if they wish to make monetary profits. It by no means invalidates the Law of Demand; this claim is extravagant and backed up by nothing.


Boldeman: “We are all capable of unspeakable acts and an extraordinary indifference to the suffering of others. Before we get carried away, therefore, about the perfectibility of modern humans, or even about labour-market deregulation, it would be wise to remember that within every person there exists the capacity to be a slave driver, a slave owner, a death-camp guard, a camp commandant, a torturer and a tyrant – writ large or in the minutia of everyday life.

This is the reason why people have long sought to put in place structures to inhibit the accumulation of excessive power and its abuse. It has been one of the primary justifications advanced for liberalism and the market system in the past two centuries. There has also, however, been a recent strong tendency to overlook the exploitation and the abuse of power that occurs within the market system itself. It is not simply governments that are capable of tyranny.”  66-67

Brian: From my perspective, it appears that actors within ‘the market system’ are constantly getting accused of ‘exploiting’ people, often erroneously, while the evils perpetuated by western democratic governments are the ones more often overlooked. In any case, no tenet of free-market economics is based on the assumption that humans are generally ‘good’, however that is defined, or on the assumption that humans are ‘perfectible’. If it is assumed that people are generally nasty creatures, then they will be nasty whether they are in government or acting in the free-market. Arguably, because government can use physical force to achieve its goals while actors in a free-market cannot, people in government are capable of perpetrating far nastier acts than people in free-market organizations. I don’t see how pointing out that humans can be nasty to one another is any kind of argument against the free-market and in favour of government intervention.


Chapter 7: What, Then, Can We Say of the Status of Economics?

Boldeman: “There is no neutral platform of pure science utterly free from value commitments. Rather, social science is a product of the development of a particular kind of society and its lexicon. The development of Enlightenment economics clearly took place in parallel with the development of the market system and served to justify that system morally and scientifically. Nowhere is that connection more closely observable than in the period of the ideological conflict between capitalism and communism, when economics was deployed as a ‘scientific’ justification for the capitalist system.” 187

Brian: Boldeman seems to be confusing the reasons for developing a theory with the accuracy of the contents of the theory once developed. If a physicist hated trains, and this lead him to disseminate the physical theory that stepping in front of a moving train would mean death for a human being, we don’t say that the theory is a ‘valuational’ one. An arbitrary value judgement of the physicist (his hatred of trains) led him to develop the theory, but there is nothing valuational about the contents of the developed theory. The theory is not valid only for people who hate trains; it is valid for train lovers and train haters alike. If a train lover were to attempt to disprove the theory by stepping in front of a moving train, he would promptly die and the objectivity of the theory would be nicely illustrated.

Similar considerations hold for free-market economic theory. It may have been developed in order to justify the market society that was becoming more prevalent. Or, the development of the economic justification of the market society may have led to an intensification of that kind of market society, as more and more people in society and government were convinced of its benignity by the teachings of the economists. Probably both happened, mutually reinforcing one another. But, while an interesting question for the intellectual historian, the circumstances surrounding the development of free-market economics have nothing directly to do with the correctness or objectivity of free-market economic theorems. Just because certain value judgements may have led many economists to their interest in the subject doesn’t mean that the theorems developed by these economists are invariably ‘valuational’ ones.   

For instance, no matter whether you are a capitalist or a socialist, everyone must agree that when an exchange takes place, both parties must expect to benefit more from making the exchange than from not making the exchange. This proposition of economics is irrefutable. It is also a tautology, but a tautology that social commentators too often forget or gloss over. Everyone must also agree that when an individual gives up a unit of a homogeneous good in his stock of that good, he will remove that unit from the use he considers to be the least important, and hence will value the loss of the unit given up according to that least important use which is no longer possible.  Similarly, everyone must agree that, if it is assumed that human capacities for labor differ and that the suitability of different parcels of land for different kinds of production differs from one another, division of labor and exchange will be more physically productive in the aggregate than autarchic isolation. These, and other deductive and semi-deductive (deductive reasoning based on given assumptions that might not always hold) truths, form the basis of free-market economics, truths that are not valuational but objective. One can opine that market participants are fools who don’t know what’s good for them, but one cannot opine that when an exchange takes place, the market participants involved didn’t expect to benefit more from making the exchange than from not making the exchange at the time.


Chapter 8: The Critique of Neoclassical Economics and its Influence on Policy Decisions

Boldeman: “The marginalist movement pioneered by Walras, Jevons and Menger in the nineteenth century strengthened these (Newtonian) tendencies in economics, which were strengthened still further by the post-World War II fascination with formalism….”

“Within this mechanical framework, Homo economicus – economic man – created originally by classical economics, is a reductionist attempt to obtain an idealised creature defined by economic motives only – a machine for making decisions, an atomistic economic billiard ball on which economic ‘forces’ act, which at the same time remains perfectly ‘rational’.” 213-214

Brian: Actually, Menger’s method and the school of thought that he spearheaded were entirely different from those of Walras and Jevons. Walras and Jevons did indeed rely on mathematics and strove to make economics like Newtonian physics. Menger most certainly did not. There are no mathematical equations in Menger’s Principles of Economics, something that Boldeman would know if he had actually read the book. The school of economic thought descended from Menger, the Austrian School of economics, explicitly rejects the use of mathematics in economics and is highly critical of the neoclassical obsession with general equilibrium (Newtonian) analysis.

Similarly, the Austrian School never makes any assumptions about people being Homo Economicus. The Austrian School recognizes that market participants can care about all kinds of things, and that this will affect their consumption and production decisions. An Austrian economist might say: ‘Assuming other psychic factors are equal, a worker will choose to work at a job with a higher wage over a job with a lower wage’. But they would never say: ‘Let’s just assume that workers don’t care about anything except money.” There is no need to make such an assumption; it is easy enough to incorporate psychic factors into economic analysis alongside ‘material’ or ‘monetary’ factors.   

You would think that someone writing a book criticizing free-market economics would at least be aware of and mention the fact that there was another school of free-market economics that had a very different methodology from the neoclassical school. Unfortunately, Boldeman doesn’t seem to have done his research properly. As a result, many of the methodological critiques he makes of what he thinks represents all of free-market economics, the Neoclassical School, are also critiques made of neoclassical economics by another school of free-market economics, the Austrian School. Austrian School economists tend to be even more free-market oriented than Neoclassical economists, so Boldeman’s critiques are unlikely to have their intended, devastating effects on free-market economics when presented to people familiar with the Austrian School such as myself.  


Boldeman: “Furthermore, there is much evidence, including in economics, to show that in practice people’s choices are often not selfish. For most of us, this would seem to undermine the whole idea (of the economy being governed by individual preferences). (Amartya) Sen goes on to argue that, while choices based on sympathy for others could perhaps be accommodated in mainstream models, choices that are made on the basis of moral commitments are counter-preferential and cannot be so accommodated.” 220

Brian: The fact that people don’t always act ‘selfishly’, however that is defined, does nothing to undermine economics. Individual preferences still determine action and the structure of market prices, whether they are based on ‘selfish’ motives or ‘altruistic’ motives.

Contrary to Sen, there can be no such thing as a ‘counter-preferential’ choice. Such a concept is an oxymoron, a contradiction in terms. If we observe someone making a choice, we must infer that he preferred making the choice in that way over making the choice in another way. So what if a choice is made based on a ‘moral commitment’? Obviously, the actor prefers to uphold his supposed ‘moral commitment’ over not upholding it. There is nothing ‘counter-preferential’ about it. If the actor preferred otherwise, he would forget about his ‘moral commitment’ and choose to do something ‘immoral’.


Boldeman: Criticizes Rational Choice Theory, Pareto-Optimality Welfare Economics, and General Equilibrium theorizing. 221-226

Brian: These things are all worthy of criticism, but Austrian School economists have harshly criticized them as well. Hence, Boldeman is not here criticizing ‘free-market economics’ as he thinks he is, but only the less free-market oriented neoclassical branch of it.


Boldeman: “And, since capitalism is not a monolithic system, which capitalist system are we talking about? Why not, for example, imitate Denmark, a capitalist country that is very prosperous and has a comprehensive welfare state? Why pick the mean-spirited social policies of the contemporary United States? If one is to copy the United States, why not copy its active industry and innovation policies? Better still, why not pick the best of everyone’s experience? Complacently satisfied with economic fundamentalism, we do not devote anything like sufficient resources to studying what other people do – or how the world is changing.” 233-234

Brian: Really? Boldeman spends hundreds of pages harping on about how complicated the social system is, and how therefore economic theory cannot say anything meaningful about it, and now he dares to present us with crude empiricism as a supposedly viable alternative? Arbitrarily select a political ideology, cherry-pick the correlations that are convenient to that ideology and ignore those that are inconvenient to it, and then proclaim that your ideology is backed up by ‘the evidence’. This is how we are to go about gaining a clearer understanding of social affairs in their infinite complexity? I would take economic theory, flawed as it may be, over this crude procedure any day.

With regards to Denmark, the Heritage Institute gives it a higher rank (#10) on its 2014 Economic Freedom Index than the United States (#12). While taxes and government spending in Denmark are indeed high, Heritage gives them a high score in crucial areas such as protection of property rights, business freedom, labor freedom, trade freedom, investment freedom, and financial freedom, higher than the United States in all of these areas except for labor freedom[2]. In addition, the corporate income tax rate, a particularly destructive form of taxation, is lower in Denmark than it is in the United States.

Thus, it is simplistic and naïve to just say that we should “pick the best of everyone’s experience”. Without theory, we have no idea what factors caused these ‘good experiences’. Is Denmark’s prosperity a result of its large welfare state? Or is its prosperity due to its high degree of economic freedom in non-fiscal areas? Would Denmark become more prosperous if its large welfare state were shrunk? Or would it become more prosperous if economic freedom were curtailed more in non-fiscal areas? The ‘data’ does not give us any answers to these questions. There are simply too many factors at work in any social or economic outcome, and too much non-measurable diversity among different countries, for the ‘data’ to answer such questions at all convincingly.  

What does Boldeman mean when he says that we are “complacently satisfied with economic fundamentalism”? Even in relatively economically free Australia, Boldeman’s home country, ranked #3 on Heritage’s 2014 Economic Freedom Index, government expenditures constitute 35.3% of GDP[3]. In the United States, the supposed bastion of free-market capitalism, government expenditures constitute just over 40% of GDP[4]. If people were really satisfied with ‘economic’ or ‘free-market’ fundamentalism, then governments would only be providing basic law and order functions, funded through a minimal, probably flat, tax rate. They certainly would not be consuming over a third of a country’s yearly output, as they do in even a relatively economically free country such as Australia. Nor would they ‘regulate the economy’ or ‘plan cities’. It seems obvious that no country in the world is actually based on ‘economic fundamentalism’, or else their governments would be much smaller and less intrusive than they currently are.       



       



[1] Dr. Lee Boldeman, The Cult Of The Market: Economic Fundamentalism and its Discontents (Canberra: ANU E Press, 2007)
[2] http://www.heritage.org/index/country/denmark
[3] http://www.heritage.org/index/country/australia
[4] http://www.heritage.org/index/country/unitedstates

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