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.
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