Secular Economics?

Quick distinction before we begin: atheism states there is no conclusive proof god exists; secularism that the state is neutral with regards religion using neither coercion or favour on citizens to one belief or another. The conscience of the believer and infidel is safeguarded equally. Sadly an article in the National Catholic Register mixes them up, accusing secularism of adding to the fiscal cliff, confuses the two. They mean atheism and in particular non belief in heaven and hell stopping us being virtuous.

Economics without God

Economics does not lend itself to an atheistic philosophy, because political economy is not really into those questions. Marx tackles religion from a philosophical context, and for him economic relationships underpin the social order of any given system in his political economy, theocratic or capitalist. Critical examination of such things matter for him because: “The criticism of heaven turns into the criticism of earth, the criticism of religion into the criticism of law and the criticism of theology into the criticism of politics.” (Marx)

A moral economic philosophy that may almost sound appealing to atheists is Buddhist Economics by Schumacher. That uses Right Livelihood, one of the eight parts of the noble path, to suggest that economic development needs to also address moral development – something which traditional economics does not model. The idea here, at a basic level, is not simply generating happiness. It is reducing suffering for both labour, producer and consumer. That for Schumacher is the basis of his thinking in using Buddhist philosophy to maximise the traditional economic maxim of optimising well-being.

That does not require the idea of an after life because Schumacher is using the here and now of a life. With no deity to worship or please Buddhism can be said to be atheistic. However, we cannot get away that the major suffering idea in Buddhism being samsara – the cycle of death and rebirth. The goal is to, by such things as right livelihood, end this cycle, possibly taking many future lives to achieve. As written in Why I Am Not A Buddhist, atheists could reject such ideas as being unverifiable on an empirical level – the same reason for rejecting god. The point is Schumacher in his thesis is not using thoughts of an after life in how we should behave with every day economic activity. Rather he is using philosophical ideas for making very real everyday decisions concerning our own welfare.

For the writer at the National Catholic Register, such thinking that ignores an after life explains why the fiscal cliff ever emerged on the horizon:

To boil it down, the moral world of Christianity was prefaced on the existence of the soul and a hierarchy of its virtues. In this moral scheme, avarice (aka greed) was a vice, and so the inordinate desire for worldly wealth was a character defect that ruined one’s soul (and hence damaged one’s chances for bliss in the next life).

However, secularism, in rejecting Christianity, left us with no heaven to hope for or hell to fear. One of the effects was the dilution and then dismissal of the need for virtue. The notion arose among early “capitalists” that passionately pursuing one’s own material self-interest actually resulted, as a happy side effect, in producing moral social order and even something like virtue in the individual. In buying and selling, they reasoned one must be honest or risk losing customers; one must be just in one’s transactions for the same reason; one must be industrious and prudent or one’s business would fail.

But as we became more secular, things became more crass. Some began to argue that a vice, greed, was actually good, because the desire for wealth — especially if it is inordinate and all-consuming — will produce more wealth for oneself and others and spread technological, medicinal and practical benefits that enhance everyone’s life.

Source

In summery the desire to spend more than was coming in, and creating a social welfare state like Europe, is to be blamed on us abandoning the notion that at least God is watching and keeping score. Though by spending more on the less advantaged via social welfare receipts may be considered virtuous by some, especially Jesus. Also, when it mentions USA government expenditure being similar to the European level it crucially misses out military spending – account for that and Europe is significantly higher. No mention of “those who live by the sword die by the sword” could mean the cost of holding said sword for so long. Which the USA as number one military spender is equal to the same expenditure as the next 20 odd countries combined.

Why do I sell myself?

Adam Smith observed:

“It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.”

However that advocate of free markets also had this to say:

“How many people ruin themselves by laying out money on trinkets of frivolous utility? What pleases these lovers of toys is not so much the utility, as the aptness of the machines which are fitted to promote it. All their pockets are stuffed with little conveniences. They contrive new pockets, unknown in the clothes of other people, in order to carry a greater number. They walk about loaded with a multitude of baubles, in weight and sometimes in value not inferior to an ordinary Jew’s-box, some of which may sometimes be of some little use, but all of which might at all times be very well spared, and of which the whole utility is certainly not worth the fatigue of bearing the burden.”

“Theory of Moral Sentiments” is a primer if you ever believe free market promoting economists by nature lack feeling, or empathy. The economy supplies our wants and needs without appealing to anyone’s better angels. At a restaurant you do not have to convince the waiter you are a good person before he takes your order. The chef feeds you because ultimately they need to feed themselves. How we chose an occupation is a worthwhile question to explore from a material and psychological point of view.

Gekko

The article essentially is making as it’s straw-man Gekko from Wall Street. Remember that prior to his “Greed is good” speech he talks about a time when executives were accountable to the stockholder for the running of the business – and that times have changed. He suggests that his ability to liquidate as an asset stripper is the only sanction to make them run a business properly. In a free market economy, to ensure they focus on making real profits for their share holders or else:

The point is, ladies and gentleman, that greed, for lack of a better word, is good. Greed is right, greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit. Greed, in all of its forms; greed for life, for money, for love, knowledge has marked the upward surge of mankind. And greed, you mark my words, will not only save Teldar Paper, but that other malfunctioning corporation called the USA. Thank you very much.

IMDB

Rather than an economic regulator in the sky being taken more seriously in compliance meetings, we could argue that real and immediate sanctions in the career of chairs and executives of boards would be productive. That means real accountability to stockholders, transparency in the statistics of the company, and effective regulation and enforcement of rules including sanctions that will modify behaviour, or at least recuperate any loss and more then punish any reward for breaking.

As such game theory, moral hazard, and other concepts used in economics would be a better tool than trying to make people believe there is treasure in heaven rather than asking about stock options. Virtue is something we all have an interest in promoting without thinking we need heaven and hell to make people moral. We need something more palpable.

How we deal with knaves is the thing in the here and now, as well as making our own character not all about the materialistic, but about living a good life that makes us happy.

The picture comes from a thoughtful blog on thinking about economists of the past here

Article written by John Sargeant on Homo economicus’ Weblog

Follow @JPSargeant78

Plan B

Rising inflation, falling retail sales and lacklustre economic growth. The deficit in the UK is not the only thing to worry about here by raising tax revenues which reduce economic recovery that you may not raise the revenue needed in the medium term.

Shadow Chancellor Ed Balls understands this having called for the reduction in VAT (sales tax on retail goods 20% nationally in the UK):

The shadow chancellor criticised Mr Osborne’s refusal to consider changing course on the economy.

“When I hear George Osborne refuse even to countenance a Plan B, I do not believe this is economic judgment at work, but a political gamble with the nation’s economy from a chancellor shaping his policies not around constitutional responsibility, sound economics and the protection of jobs, growth and homes, but around a fixed political strategy to win an election in 2015.”

[Source BBC News]

I suspect many in the Liberal Democrats are more inclined to John Maynard Keynes on the fool hardiness of cutting spending and keeping taxes high when the economy is in the doldrums. The emphasis should be on getting business going again, increase economic activity stimulated to increase revenues overthe medium term, measures to boost productivity and deal with structural issues.

Then reduce the deficit.

Lipstick on a piggy told a tale on you Obama

McCain: look at them piggies

Politics has silly moments when serious debate ends up as handbags at dawn. Oh dear, figure of speech not a reference to one of the Vice Presidents being of the female gender – it is an old expression. Whoops, no reference intended to the 70 plus year olds in the campaign.

Basically Barack Obama at a meeting was talking about McCain’s economic plan, and how it was no different to the Bush one, using the analogy “You can put lipstick on a pig; it is still a pig”. The audience got a bit excited at the comment, and it is being inferred by the Republican camp that this was a slur on Sarah Palin. In her speech (which you can watch here) at the RNC she made the comment that the difference between a hockey mum and a pitball was lipstick.

Now it is an expression – one that McCain himself made use of when attacking Hillary Clinton’s reform ideas for health care as First Lady. Yet the news is out there and what will matter is the spin, and whether anyone can be bothered to look at the evidence.

McCain is leading in the polls at the moment – 46% to 41, overcoming a 7 point deficit in the same poll a month ago. From a civic participation POV it would be great if that was based on a knowledge of the candidates economic policies. Or at least their position on pork barrel politics. With reform of Washington being the central, piggy-in-the-middle position of the two candidates.

Ok, I am squealing the pig reference to death. I am sure that American politics will be serious from here on in. When that happens look up; it will be a sight. But one thing which we can try and prevent is the unnecessary testing of cosmetics on animals.

PETA's latest campaign

A defense of Homo economicus – he ain’t dead yet!

This is not a defense of me – would much rather leave that to others if ever that was called for. Rather I am talking about the economic concept of Homo economicus.  I am in many ways replying to an article that describes the concept as a myth which can be read here. While not essential to follow this blog, it will give background to the criticism I am responding to.

The definition at least can be agreed – Homo economicus refers to people acting as rational utility maximizers as they make economic decisions. The concept is used for both consumers and producers – basically anyone involved in an economic activity. This creates a model by which economists try to explain behaviour and make predictions that are born out by empirical evidence.

1. The concept is right wing

I have to reject that – maybe the concept is used by people on that political side in your respective country. It however does not make the concept right wing. Just because the conservative party is seen as market friendly and has a good  relationship with the Adam Smith Institute does not mean Adam Smith was a conservative (or would be a member of the ASI for that matter).

The other similar criticism is it is based on the prejudice of the economist. That the assumptions that underpin the model (rationality, self-interest, information) are picked in such a way to support political normative public policy. Again, that is not really the case. The model stands or falls by whether it explains anything at all and whether the predictions are born out. For example, the concept would suggest that if the price of a good fell then everything else staying the same more of the good will be demanded, and more will be supplied. Many real applications based on this understanding of human behaviour are born out – regardless of what people think about the assumptions or the prejudices of those involved.

2. Does the model explain the real world?

There is no such thing as value free analysis. But the test of a model of human behaviour is the predictions. That is the ultimate test that it describes the reality of what is going on, not that it models that reality perfectly. For example Homo economicus does not take into account differences in decision making choices based on biological differences – but when theories based on the model are applied to different genders it does not break down. Some may say this does not reflect the real world accurately enough. The key thing is it does not break the theories that rely on the concept.

3. Are we rational?

In the examples given in the article (for example alcoholism) the argument makes a distinction that it does not recognise. It assumes it is rational for all to have the goal for a healthy liver. Without getting into why some people are alcoholics and others are not the problem exists because the critics of the concept are focusing on the goals rather than the means. The concept is referring to the means by which a person attempts to achieve the goals they have. The goals are subjective. The means by which you seek to achieve them however can be objectively measured or at least compared to other competing means.

The concept does not say that the goals are healthy or beneficial to society. Maybe in the long run not even for the person concerned. But that is a normative assumption. The concept is not concerned with whether the person is morally right, only in how they pursue their ambition by efficient means possible or known to the individual.

The law of large numbers suggests that most people will be rational in how they approach things, even though we differ in many ways from each other.

4. We are not self-interested?

Well I fear they have not read The Selfish Gene to understand the correct way to view what is going on in biology. Again they talk about the goals being in conflict with an overall goal (that of survival). Yet that goal may not actually be a rational one at all in all circumstances. In short self interest can be applied to other people in ways that are not appreciated by a simple one person world view that the critics take. If we want to understand evolution it is useful to think of biology in terms of genes as Dawkins does. If we are talking about how people make choices in economic reality Homo economicus stands up tall because it makes a useful application. 

4. Information

Well most critics fail to mention that economics treats this as a crucial problem in real life and has something to say on it in  economic theory. The idea of asymmetric information is one studied over and one that does not actually break down the concept of Homo economicus. Why the article does not mention for example the economist Arrow (on used cars and which are lemons) on this I have no idea. But it can be modelled.

5. It is not based on realistic assumptions

Well most models are not. They are deliberately streamlined with the minimum necessary detail in order to explain what is going on. Simplicity is key even when what is being modelled is complex. The key thing for a model is the results. Are they useful? Does the model make valid predictions? Is there an application for the model?

Homo economicus is a concept, a model of human economic behaviour that feeds into theories used in economics. To describe it as right wing is nonsensical. It is noticeable that the critics do not focus on whether it’s predictions are wrong or not useful. The main complaint is that we are not perfectly rational, self interested or have access to perfect information.

Yet in the real world where these conditions may not exist, the concept proves useful, whether describing price theory, consumer choice, wage theory or many other applications. To say that the theory breaks down in real life is not born out by how economics is used by economists every day.

6. So what about neuroeconomics?

Not mentioned in the article, but some people want to model more realistic assumptions into economic theory. In particular by how the brain makes decisions. Now neuroscience is something that I find fascinating. I do not think that economic theory itself will be proved wrong – empirical evidence would do that for us making a concept obsolete or wrong. If blending the two sciences, or specialists working together helps to explain humans in better or sharper detail then great stuff.

For example the issue of how we think about risk may suggest that we treat it possibly based on neurochemistry rather than cold hearted calculation, as this article claims on differences between a rational money making strategy and “loss aversion”.  Yet I see it building on economic theory rather than replacing it. Adding to it rather than rewriting the textbook.

The key thing is that it should be aiding us in understanding the world as it is, not as we want it to be. The former is positive economics, the later is normative economics. Bear that distinction in mind when anyone, especially a politician of the left or the right, talks to you about economics. Also when economists talk about it too.