Wednesday, August 29, 2012

Naturalism and Economics: What Is At Stake?

In previous posts (here and here), I examined whether Walras was committed to naturalism in economic thought.   I concluded that he is hopelessly contradictory on the subject.    But I never articulated what I think is at stake in the question generally.  It might be useful to do so here.

As I noted in my previous post, Walras believes that, when government fixes the price of a commodity, it “substitutes an artificial price for a natural one.”    This, of course, is precisely the kind of language surrounds the question of government “intervention” in the market.  That is, the discussion of government regulation of markets is framed around the opposition artificial/natural, such that market processes are deemed “natural,” and regulation of the market is deemed “artificial.” 

To take just one example.  During Congressional debates over proposals to raise the minimum wage, Ron Paul, in voicing his opposition to the bill, argued:

Raising living standards for all Americans is an admirable goal. However, to believe that Congress can raise the standard of living for working Americans by simply forcing employers to pay their employees a higher wage is equivalent to claiming that Congress can repeal gravity by passing a law saying humans shall have the ability to fly.

So the laws of the market are akin to the law of gravity.  It is as impossible to repeal the one as it is another.   We thus have an explicit ontological statement, where the nature of economic laws is equivalent to the nature of social laws.  

This kind of ontological commitment (not to say fetishisization of the natural sciences) infects, I dare say, nearly the whole of the economics as a discipline.  It finds its voice, for example, in the best selling introductory textbook by Gregory Mankiw, who is unabashed in comparing economics to physics (as noted by my friend and colleague Daniel MacDonald at anti-Mankiw. )  The whole discipline is, indeed, riddled with physics envy.  And, like envy of all kinds, this sort of envy is not harmless. * It finds its way into political discourse.    

This is all to convey that my interest in whether Walras viewed market processes as “natural” or “artificial” is not, in my view, a mere academic one.  It goes to the heart of the ideological function of neoclassical thought.   To the extent that market or capitalist processes  (but the two are not the same – that conflation has been explored elsewhere) are deemed “natural,” then any thought of changing them is futile.  Political action in opposition to destructive forces of the market is (as Ron Paul, or Walras, would say) like fighting gravity.    It’s pointless.  So why bother? 

This, in my view, is one of the essential ideological functions of an introductory microeconomics class.   It seems almost a religious requirement to make the second or third chapter of an introductory micro textbook a kind of moral allegory about price controls.  Create a price ceiling below equilibrium, and you cause a commodity shortage.  So rent control is a bad idea.   Create a price floor above equilibrium, and you cause a commodity surplus.  So the minimum wage is a bad idea. 

Note that these conclusions can only be reached if the market is natural.    The process by which employers lower their demand for labor (assuming they do – I am setting aside the empirical question for now) must be a natural one, i.e., akin to gravity.  The reasoning (familiar to intro students) is that the decision rule for profit maximization for a firm is to hire labor up to the point where the marginal revenue product equals the wage (hence the downward-sloping demand curve for labor).   If a minimum wage is imposed, then firms demand a lesser quantity of labor.  But if each step of this process is natural, inexorable, and unchangeable, then it is pointless to imagine a different form of economic organization.   It is pointless to imagine an economic system that is not based on profit so long as the profit-motive falls on the “natural” side of the natural/artificial frame.  So the commitment to market-as-natural is not, I believe, an innocuous one. (Proudhon, in response to the naturalist turn in political economy, leveled at its practitioners the charge of fatalism.  The charge is no less accurate today.)

Though I referenced Walras above, I should add that the commitment to the market-as-natural frame is not by any means limited to Walras, or even merely to the neoclassical school.   It goes back to the classical political economists as well.   For example, John Locke claimed that "...economic relations are similar to natural phenomena." Locke argued for this on the ground that the laws of human nature "... are like the laws that govern the movements of the planets." Similarly, JS Mill argued that "...the methods of physical science [are] the proper method for political economy."  Mill appealed to the same grounds as Locke, namely, the universality of human nature -- a nature no less a part of the natural world than any other object of the natural sciences, and, as such, no less amenable to its methods: "The science of human nature now falls far short of the exactness realized in human astronomy; but there is no reason that it should not be as much of a science as Tidology is, or as astronomy was when its calculations had only mastered the main phenomena but not its perturbations."

Returning to the neoclassical universe, Jevons follows Mill's reasoning to the letter, arguing that there could be such a thing as a a science of human nature, and that political economy would be an essential part of this science: "I think Mr. Mill is right in arguing that [political economy] is an instance of the Concrete Deductive Method.  A few of the simplest principles concerning the nature of the human mind must be taken as its first starting point, just as the vast theories of mechanical science are predicated upon a very few simple laws of motion."  The analogy is explicit: the laws of the human mind are akin to the laws of motion, and the theoreoms of political economy ought to be deduced from these laws in the same way that the theories of "mechanical science" are deduced from elementary "laws." 

[I should perhaps add here that Walras' commitment to the market-as-natural frame seems less predicated on an explicit notion of laws of human nature than the other authors referenced.  As noted above, and in previous posts, the laws of value of exchange were, for Walras, "natural" because "scarcity" and "usefulness" were the two determinants of value, and each of these determinants is "natural."  The relationship of the human mind to these determinants were not rendered explicit -- although one might think there would need to be an implicit relation if indeed value-in-exchange were to be regarded as "natural."  This is yet another tension in Walras, which perhaps can be taken up elsewhere] 


 I should stress that I do not mean to say that any of these authors intended for political economy and economics to have the ideological effect of portraying political action as futile.    Their motivations were varied and complex. In large measure they wished to put the social sciences (or, in earlier vernacular, the “moral sciences”) on the same kind of secure footing as was the natural sciences (or, at least, the natural sciences gave the appearance of security – whether it had as much security as appeared is another question.)  The “physics envy” was (and remains) very powerful.

Further exploration of this relation between the natural and social sciences will be taken up elsewhere. 
*f/n MacDonald argues that analogies per se are fatal to good science, which more properly rests on deductive reasoning.  I disagree.  I think it is impossible to excommunicate analogy (or, more properly, metaphor) from the field of reasoning.  But that is another matter.

Tuesday, August 21, 2012

The Uses of Utility

Utility theory in neoclassical thought has always been subject to the criticism that it is nothing more than mere tautology.   Utility is said to explain consumer behavior.  But is utility itself observed?  Or, if it cannot be observed, how is it operationalized?  The answer generally is -- through observing consumer behavior.   Thus the criteria for knowing both the explanans and the explandum are exactly the same. Hence, one cannot be said to explain the other. Samuelson expressed his concern on this question as follows:

Prior to the mid-1930s, utility theory showed signs of degenerating into a sterile tautology.  Psychic utility or satisfaction could scarcely be defined, let alone measured...Just as we can cancel two from the ratio of even numbers, so one could use Occam's razor to cut utility completely from the argument, ending up with the fatuity: people do what they do.  (Samuelson, 1972)

(Samuelson, believed that he his theory of revealed preference "cut utility completely from the argument"without generating a tautology.  I'm not so sure.  That can be revisited perhaps elsewhere)

In considering the issue of the tautological character of utility, I was struck recently by Mark Blaug's take on the concept.  In discussing the problems that utility theory attracts by making it the 'explanation' (his quotes) of consumer behavior, he proposes a solution.  The key to understanding utility correctly, he claims, is to recognize its different usage in the theory of consumer behavior and in welfare economics.  In the former, it does not "explain" choices, it only describes them:

 In the theory of consumer behavior, utility is a quantity that it is useful to regard the individual as maximizing in the interpretation and prediction of behavior.  A utility function is nothing more than a way of describing an individual's preferences between various real and hypothetical alternatives.  Such a function no more 'explains' an individual's choices than a production-transformation curve 'explains' the state of technology. (Blaug 353)

So a utility function is not intended to explain.  It merely describes.   However, says, Blaug, matters change when we turn to welfare economics.  There, utility does indeed have some kind of independent ontological existence.  It is a quantity that must be maximized for people to be better off.

In welfare economics, however, utility is a quantity that 'should' be maximized or that society 'should' help him to maximize.  Here, utility is indeed a quantitative concept, whereas in theory of consumer behavior it is strictly speaking no quantity at all but simply a choice indicator....As soon as this distinction is firmly grasped, most of the criticism that was leveled against utility theory as a theory of consumer behavior falls to the ground. 

I find it difficult to be as sanguine as is Blaug on this question.  Welfare economics is predicated (in part) on the theory of consumer behavior.  The former could not exist without the latter.  If utility has no separate ontological existence apart from its manifestation in consumer behavior, then how does it suddenly acquire such existence when we move to the realm of welfare economics?

And if it doesn't, then how does welfare economics acquire any content?   Welfare economics relies on a concept of consumer welfare defined in terms of maximization of utility (given budget constraints).  To say that consumer surplus (for example) is greatest under competitive conditions is to say that the consumer would lose utility under monopolistic conditions. But if utility merely describes or interprets behavior, then there is nothing to be gained or lost.  Blaug's solution, though seemingly saving a theory of consumer behavior from the "tautology" critique, appears to do no such thing for welfare economics.  Without such a solution, welfare economics has no foundation.

It is possible that I am reading Blaug incorrectly, however.   The problem is his bouncing back and forth between the terms "behavior" "choices" and "preferences."  Which is it that utility describes? His clearest statement is the last, i.e., preferences (though he also uses the other two).  If, indeed, a utility function is a means for describing preferences, then, in Blaug's view,  the utility function does explain behavior -- just not the preferences themselves (which it merely describes).

But then we run back into the problem stated at the outset. How do we operationalize those preferences absent behavior?  Blaug provides no answer.  In which case it cannot be said to explain behavior; in which case it is a poor theory of behavior -- and, even more so, of welfare.

No doubt I am oversimiplifying the matter in countless ways, and therefore many objections can be made.   I'd welcome discussion of them (or I will raise them in another post).

Monday, August 20, 2012

More on Walras

A follow up to my post on on Walras and naturalism.   Walras’ near-religious commitment to the notion of political economy as a natural science appears throughout his work.

For example, he wrote that he wanted to create

…a new science: the science of economic forces analogous to the science of astronomical forces.  I cite astronomy because it is in fact the type of science like which, sooner or later, the theory of social wealth ought to become.  In both there are natural facts, in the sense that they are and remain superior to social conventions and that they impose themselves on the human will; laws equally natural and consequently necessary, some of principal importance, few in number, the others secondary, quite numerous, varied and complex; facts and laws suitable for an extensive and fruitful application of calculus and mathematical formulas.  The analogy is complete and striking. 

 And on exchange-value, he writes:

The fact of value in exchange is a natural and ineluctable fact; since, although it was generated partially as a result of mankind’s presence on earth, it is above all generated as a result of the limitation of the quantity of useful things, and should be considered just as independent of our psychological liberty as are the facts of gravity of vegetation, etc.

Among the economic facts are found the facts of value in exchange and the fact of exchange which are essentially natural facts just like the facts of heat, of illness.  They are the primitive direct object of political economy, a natural science as completely independent of justice as is physics or pathology.

I cannot escape the conclusion, therefore, that Walras is just hopelessly inconsistent.  As I noted elsewhere, he stresses that matters such as property arrangements (individual vs. communal) are matters of social conventions. So how could it be possible that the so-called laws discovered under a private property regime would be “superior”  to” social convention”?   Further, if property is social institution, how could the fact of exchange be “natural” (even if one could argue that the exchange-values of commodities are “natural”)  Earlier, I tried to rescue Walras from inconsistency by suggesting that he meant to say that if a society instituted private property, the laws that resulted were (at least in some sense).  But with the above passages, even this reading cannot be sustained.

Friday, August 17, 2012

Walras and Naturalism

[Note: I am republishing this, as the vicissitudes of the internet have deleted it.  Alas.] 

I started reading Walras recently, which I’ve been wanting to do for a while.   This is part of a general project of mine to trace the intellectual history of the idea of the market as a natural phenomenon, or of "market forces" as something akin to natural forces.

Walras is complicated in this respect.  So far, he seems self-contradictory to me, but perhaps I simply haven’t read enough yet.

At the beginning of “Elements of Pure Economics” he criticizes JB Say (and several others) for declaring the whole of political economy to be akin to a natural science.  Say (as quoted by Walras) defines political economy by saying that “…the aim of political economy is to show the ways in wealth is produced, distributed and consumed.”  Walras criticizes Say for forgetting the fact of free will: “From Say’s definition it would seem that the production, distribution and consumption of wealth take place, if not spontaneously, at least in a manner somehow independent of the will of man, and as though political economy consisted entirely of a simple exposition of this manner of production, distribution and consumption.”  (emphasis in original) Walras goes on to note how useful this “naturalistic” view is to those who would argue against socialism:

“What has proved so pleasing and at the same time misleading to economists in this definition is precisely its characterization of the whole of political economy as a natural science pure and simple.  Such a point of view was particularly useful to them in their controversy with the socialists.  Every proposal to reorganize production, every proposal to redistribute property was rejected a priori  and practically without discussion, not on the grounds that such plans were contrary to economic well-being or to social justice, but simply because they were artificial arrangements designed to replace what was natural…Such an attitude led Prouhdon to hurl the epithet fatalistic at this school of economists.”(Elements at 54-55)

Walras is quite clear that such this “point of view” or “attitude” is incorrect.  That is, one cannot label one form of economic organization any more “natural” than another.  And the reason for this is the existence of human will.  That is, through the exercise of our will, we can choose different socioeconomic institutions, and none is more natural than any other. I quote the relevant passage at length:

“Unfortunately, convenient as this point of view is, it is mistaken. If men were nothing more than a superior species of animal, like bees that live and work together instinctively, then, to be sure, the description and explanation of social phenomena in general and of the production, distribution and consumption of wealth in particular would be a natural science. Indeed, it would be a branch of natural history, viz. the natural history of man, a sequel to the natural history of bees.  But this is not the case at all. Man is a creature endowed with reason and freedom, and possessed of a capacity for initiative and progress. In the production and distribution of wealth, and generally in all matters pertaining to social organization, man has the choice between better and worse and tends more and more to choose the better part. Thus man has progressed from a system of guilds, trade regulations and price-fixing to a system of freedom of industry and trade, i.e., to a system of laisser-faire laisser-passer; he has progressed from slavery and serfdom and from serfdom to the wage-system.  The superiority of the latter forms of organization over the earlier forms lies not in their greater naturalness (both old an new are artificial, since they came into existence only by supplanting the old); but rather in their conformity with material well-being and justice. The proof of such conformity is the only justification for adhering to a policy of laisser-faire, lasser passer.  Moreover, socialistic forms of organization should be rejected if it can indeed be shown that they are inconsistent with material well-being and justice.” (55) 

At least for me, I found this pronouncement quite surprising, coming from one of the founders of neoclassical thought.  That is to say, given that I read neoclassical thought as having the ideological function of (covertly) supporting the view that capitalistic arrangements are natural (and I am using the Marxist notion of ideology here), I was taken aback to find one of its founders explicitly criticize this ideology  (or “attitude” as he puts it).

At the same time, what Walras giveth, he appears also to taketh away.  When we come to Walras’ discussion on value in exchange, he is adamant and explicit that he is investigating a natural phenomenon.  That is, any science investigating the exchange-value of a commodity is, he believes, on the exact same ontological and epistemological footing as the natural sciences.

Here is Walras on the subject (using the exchange-value of wheat as an example):

Wheat is worth 24 francs a hectoliter.  We observe, first of all, that this partakes of the character of a natural phenomenon.  This particular value of wheat in terms of money, that is to say, this price of wheat, does not result either from the will of the buyer of from the will of the seller or from any agreement between the two. Though the seller would like to sell at a higher price, he cannot do so because the wheat is not worth any more. …Thus, any value in exchange, once established, partakes of the character of a natural phenomenon, natural in its origins, natural in its manifestations, and natural in its essence. If wheat and silver have any value at all, it is because they are scarce, that is, useful and limited in quantity – both of these conditions being natural.  If wheat and silver have a definite value with respect to each other, it is because they are, each of them, more or less scarce, that is, more or less useful and more or less limited in quantity – again the same two natural conditions mentioned above.(69)

Walras goes even further to say that, if we were to fix the price of wheat we would be substituting an “artificial value for a natural one.” (Id) This is an exceptionally striking sentence, given that, just a few pages earlier, he rejects the natural/artificial distinction outright.

A number of criticisms can be leveled at this line of reasoning.*  But in the present context, what I want to highlight is that it seems to overlook the fact that the very existence of exchange-value depends on a social institution, i.e., of private property.  Indeed, Walras himself insists that private property is a social fact, and not a natural one: “The appropriation of scarce things or of social wealth is a phenomenon of human contrivance and not a natural phenomenon.  It has its origins in the exercise of the human will and in human behavior, and not in the play of natural forces.” (76) He goes on to explicitly contrast “communism” and “individualism” as distinct ways of appropriating and distributing social wealth, judged according to different sets of ethical criterion.  Accordingly, he argues that the science studying these systems is a moral science, not a natural one: “Appropriation being in essence a moral phenomenon, the theory of property must be in essence a moral science.” And again, as noted above, Walras notes at the very outset of Elements that no socioeconomic arrangement is more natural than another.  So, on the one hand, he argues that neither communal nor individual property arrangements can be regarded as “natural.” On the other, he regards exchange in the market as a natural phenomenon.  So does Walras contradict himself?

Here’s the best I can make of this. Walras is attempting to say that that institution of private property is no more natural then that of, say, communal  property, but that if the former institution exists, then the “definite values” of commodities produced under it are determined by the “natural qualities” of those commodities.   

But I’m not convinced that this is an adequate solution to the contradictions that appear in his text.  It just seems too generous a reading.  Indeed, he does not merely claim that exchange-values are “natural,” he further says that “the pure theory of economics is a science that which resembles the physico-mathematical sciences in every respect.” (71) He equates this “pure economics” with the study of market exchange.  He distinguishes this “pure theory of economics” from “applied economics” (which he deems the study of industry) and “social economics” (which he deems the study of private property).   His goal is to delineate these three branches, which he believes his predecessors failed to do. 

The problem is that he simply is not taking his own reasoning to its full conclusion.  If indeed no socioeconomic organization is any more natural than any other, then the study of “pure economics” simply cannot be relegated to the study of exchange on the market.  It is quite obviously not “pure economics” but the study of a particular kind of economic system, to wit, capitalism.  And, while it seems that Walras wants to avoid, quite explicitly, the notion that capitalism is natural, he feeds right into that notion by arguing that the study of markets is “pure,” that it is the study of a natural phenomenon,  and that, as such, it “resembles the physico-mathematical sciences in every respect.”

A note on my own investigations here. I first saw this quote from Walras (re “physico-mathematical” sciences) in “From Political Economy to Economics” by Milanokis and Fine.  From this and other quotes, I got the very strong sense that Walras was entirely on board with the naturalist impulse in economics.  Then I finally read him, and find that he wants to critique that impulse.   But, despite himself, he seems ultimately to endorse it.

There are a number of other exceptionally interesting issues raised by Walras (among them the relation of “free will” to utility and the laws of demand), but I’ll perhaps take them up elsewhere.

[* Among them is the notion that the “usefulness” is solely a function of a commodity's “natural” qualities. Commodities take on social meanings as well; hence the significance of the advertising industry]