Can Contemporary Economics Gain From A Philosophical Perspective?

Can Contemporary Economics Gain From A Philosophical Perspective?

In the fifth instalment of this Q&A with Conatus News, Dr Alexander Douglas discusses economic philosophy and contemporary economic issues.

Dr Alexander Douglas specialises in the history of philosophy and the philosophy of economics. He is a faculty member at the University of St. Andrews in the School of Philosophical, Anthropological and Film Studies. In this series, we discuss the philosophy of economics, its evolution, and how the discipline of economics should move forward in a world with increasing inequality so that it is more attuned to democracy. Previous sessions of our Q&A can be found herehere, and here.

Scott Douglas Jacobsen: How is philosophising about economics useful in the development of insights into economics itself?

Dr Alexander Douglas: Many economists doubt that it is. They can argue that they get along just fine without reading any philosophy of economics. And I suppose they do, given their goals. Companies and governments keep on hiring them to give advice and make forecasts. Philosophers can criticise their models for being not scientific enough, or ignore what is of real human value. Anyone can criticise their forecasting record based on whatever external standard they deem appropriate. But the economists can always reply: ‘If we’re so wrong, why are we always consulted?’ I think philosophers of economics ought to think about that question. But doing so would mean moving in the direction of social critique and away from contributing to economics as such.

Joan Robinson claims, in Freedom and Necessity, that the task of the social sciences is very different to that of the natural sciences. It is, she says, to provide society with an organ of self-consciousness. I think contemporary economics fails at this task. Economists build models in which the system works a certain way; they plug in values and predict outcomes, and policymakers and others base their decisions on these predictions. What is left out is the amount of social control required to keep the systems working in this theoretically tractable way. Economists rarely discuss this, as far as I know. Nor do they acknowledge the extent to which their models are self-fulfilling prophecies: the systems they describe work the way that they do because decision-makers unconsciously internalise the models that describe them working in that way. A real organ of social self-consciousness would make us aware of all this. If economists don’t provide one, maybe philosophers will have to.

“Contemporary economics fails at this task.. of providing society with an organ of self-consciousness.”

Jacobsen: How will the economics of the future change – as the implicit philosophy and descriptions around it change into the future?

Douglas: I’m not sure what the engine of change would be. While economics is heavily criticised in certain portions of the media, economists are still, as I said, routinely hired to produce the analyses which government agencies and businesses use to determine their strategies. The analyses are based on models, the basic types of which were developed in the 1970s. Economists criticise some of the types and promote others. But, from the outside, I don’t see a huge amount of theoretical innovation; within the economic profession, improvement is just about making the right upgrades to the classic machines.

To me, this theoretical conservatism goes with political conservatism. We theorise how we govern, and vice-versa. Economic modelling is all about predicting and controlling human actions with increasing precision – winning that little bit more margin by tracking us with better algorithms. Politics works to render us algorithmically tractable. The goals work in a positive feedback loop. The more our political institutions can trap our behaviour into predictable patterns, the better the economic models can track us; the better the models track us, the better the institutions can control us. If we refuse to be described in this way, we can refuse to be governed in this way, but we can’t successfully refuse the one and not the other.

Jacobsen: Do you think the era of individual economic philosophy is almost dead, where a pluralistic approach becomes ideal because of the complexity of an international economy such as our own?

Douglas: Pluralism sounds nice. But the problem is that different approaches are non-diversa sed opposita. They are at odds with each other more than they complement each other.

Take the most fundamental question: how the entire economy, in the most general sense, works. One answer appeals to the idea of a ‘dynamic’ general equilibrium. Households maximise their utility over an entire lifetime, looking over the menu of goods that exist now and will be produced in the future. Firms decide which goods to produce by optimising a profit function, which is partly determined by the household utility functions. The government tries to minimise losses from inflation and unemployment, and this policy can, as Michael Woodford demonstrated, be derived from household utility functions. Samuel Bowles called this picture ‘utopian capitalism’. I think most economists see the real economy as an approximation, though perhaps a distant one, to this utopian picture (some might call it dystopian).

Here is an entirely different picture, which I tried to sketch in my book. Institutions determine the prices, production, and allocation of goods, in a way that is almost entirely independent of household utility. Companies get big enough to hold spare capacity and run operations too complicated for their shareholders to understand. They don’t need to worry about profit maximisation. Smaller firms, rather than competing with the market leaders, simply copy their apparently successful strategies. The government, meanwhile, chooses its policy targets by thinking about what will win votes, not what will maximise household utility. And production decisions are primarily determined by central bank policy.

Here is a concrete example of the latter. If you’re a bank in the UK, and you issue a mortgage, you can swap the mortgage with the Bank of England for pure cash (or a reserve balance): mortgages are on the Eligible Collateral List. Their placement there was a political choice. If, on the other hand, you issue a loan to an entrepreneur, you can’t swap the loan for cash (unless you find someone to buy it), and you’re stuck with the loss in case of default. Unsurprisingly, the financial sector is much more interested in lending to house-buyers and aspiring ‘property asset managers’ than to entrepreneurs in other sectors. And so we get a British economy obsessed with trading in property and doing very little else. Households readily internalise this obsession, but I doubt that it came from them originally. I think this is a pretty clear case of the economy being directed from the top, by political decisions that have nothing to do with maximising household utility.

The first picture is of a traditional free-market economy; the second is of a command economy. I suspect we live in a command economy. For all the rhetoric about free enterprise, the defeat of the Soviet Union by the Western powers was the victory of one sort of command economy over another – one controlled through the monetary system rather than through the industrial system. But whether or not you agree with me depends on which approach to economics you take. I don’t think we can avoid this argument by taking some ecumenical approach.

Jacobsen: Does modern economics imply a certain amount of faith in particular axioms? If so, what is the faith? What axioms?

Douglas: Yes, at the broadest level most economic theory (including Marxist theory, I should say), implies faith in the existence of a market system, in which capitalists pursue profit by producing at the lowest possible cost the goods that people want. I’ve never seen much evidence that our system works like that. Certainly its behaviour resembles that model to some degree of approximation, but then it resembles anything to some degree of approximation.

Above I tried to sketch out another model – not a mathematical model, but a verbal one – that I think our system resembles a greater degree of approximation. The production and allocation of goods are decided by the executive decisions of committees whose members got there by a combination of inherited privilege and blind chance.

Economists can reply that a verbal ‘model’ of this sort is unscientific: it is a satirical caricature with no mathematical precision. But then caricatures and models are the same in one way: they flatten reality by emphasising certain features and ignoring many others. Mathematical models can deliver precise predictions, but caricatures can predict outcomes in a different way – more generic, but perhaps more nuanced in a deeper sense. Which is preferable depends on what our ultimate purposes are: what we want our economic theory for. I return to Robinson: if we are after an organ of social self-consciousness, caricature might be preferable to mathematics. But if we want to sustain the status quo at the lowest possible cost, economists are probably getting it about right.

Scott Douglas Jacobsen is the Founder of In-Sight: Independent Interview-Based Journal and In-Sight Publishing. Jacobsen works for science and human rights, especially women’s and children’s rights. He considers the modern scientific and technological world the foundation for the provision of the basics of human life throughout the world and advancement of human rights as the universal movement among peoples everywhere.

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