Walras, Responsibility, and the Minimum Wage: Further notes on the political consequences of naturalism

In an earlier post, I noted that I'd like to investigate how (if at all) Walras reconciles his view that human beings are persons and not things, and therefore that they cannot be adequately understood in terms of the "blind and inelcutable" forces of nature, with the view that the project of political economy ought to be to create a science of economics modeled on the natural sciences. I'll return to that in a separate post. I want to say a bit more here about the stakes behind that question.

To the present day, arguments about our economic system often revolve around what is "natural" and what is "artificial."  I'll quote again here Congressman Paul on the question of minimum wage legislation:

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.

The claim, as I noted before, is an ontological one.  The laws of the market are here regarded as ontologically equivalent to the laws of gravity.  The question I want to return to here is the political implications of this kind of ontology. More specifically, I want to turn to the connection between a naturalist ontology and responsibility.

In the contemporary debate over the minimum wage, there is much disagreement over whether an increase would cause unemployment. Many economists say it would, and many disagree. However, for present purposes, I do not address the empirical question. Instead, I am interested here in the grammatical-logico form of the statement "the minimum wage causes unemployment," regardless of whether that statement is true or false.  The logic behind this claim is typically as follows (simplified): employers are profit-maximizing.  In accordance with such profit-maximizing behavior, they have downward-sloping labor-demand curves, determined by labor's diminishing marginal product. The supply curve for labor is upward sloping (higher wages induce workers to trade away more leisure for labor).  The equilibrium wage is determined by the intersection of the downward-sloping labor-demand and upward-sloping labor-supply curves. Hence, any minimum wage (price floor) above the equilibrium wage creates an increase in labor supply, and a decrease in labor-demanded -- hence, a glut in the labor-supply, or, otherwise put, unemployment.

Note, though, that critical to the above logic is that decisions by all actors in this narrative are naturalized other than the very first decision, i.e. the decision to institute a minimum wage.  Employers' profit-maximization behavior is a given.  It is therefore not subject to question.  Employers can therefore not be held accountable or responsible for such behavior.  It would be, as Congressman Paul would say, like holding gravity accountable for dropping you when you fall.

To use Walras' taxonomy, the decision to institute a minimum wage is a decision by persons (in this case, the "persons" being policymakers, legislators, etc).  But the decision to have a downward-sloping labor-demand curve is a decision by a thing. In that sense, it is a very curious kind of decision. Because the behavior of employers in this story is naturalized, then, although they appear to be persons, they are, fact (on account of this naturalized interpretation) things. The decisions that ground the neoclassical system, because they are naturalized, become no real decisions at all.

Unsurprising, then, employers they are never held responsible for the consequences of their actions in the  labor market -- whether it is poverty wages, or firing workers in the face of an imposed minimum wage (if, indeed, this is what they do -- again, I am leaving this particular empirical question aside).  Walras is himself quite clear that responsibility is a property that only attaches to persons and not to things.

Since a thing is neither a self-conscious or self-directing, it is not responsible for the pursuit of its ends or or the fulfillment of its destiny. Being just as incapable of evil as it is of good, it is always innocent and can be likened to a pure mechanism.  In this respect animals do not differ from minerals and plants: an animal's instinct is blind and ineluctable force like any other natural force.  A person, on the other hand, just because he is conscious of himself and master of himself, is charged with responsibility for the pursuit of his ends, and the fulfillment of his destiny.  If he succeeds, he has merit; if not, he takes blame. (Elements, 62)

Note here that the responsibility Walras speaks of is both factual and moral. If economic behavior is naturalized, then such behavior is "likened to a mechanism" -- as such, actors in the economic system are "just as incapable of evil as of good" and hence are "always innocent."  Again, no wonder that any deleterious consequences of the imposition of a minimum wage are ascribed to the minimum wage itself and not to the actors in the market, since they are not, in fact, actors at all. They are not taking action.  They are, rather, mere mechanism. On the other hand, the initial act to institute a minimum wage is interpreted as an act taken by persons (and not things).  Therefore, it is that action that is held accountable for subsequent unemployment, and not the actions of the employers themselves. Such are the consequences of a naturalist interpretation of the economy.

And this is at least part (I take it) of Walras' motive for cautioning us against the construction of a naturalist economics -- namely, to preserve a space for moral accountability.  Whether his own aspirations to use the natural sciences as a model for a science of economics undermine his own attempt to keep the world of persons and of things separate is a question that remains to be answered.

Apart from the question of whether naturalized decision-makers can be held responsible for the consequences of their actions, there is at lease one other reason why the "naturalistic" claim has force.  The natural/artificial distinction has, I would argue, a kind of implicit poetics.  That which is artificial is regarded as a kind of distortion or corruption of that which is natural, while only that which is natural remains "pure."    With this kind of poetics in the background (operating perhaps in the unconscious, whether the individual or the collective,  or implicit in social discourse as a form of ideology) little more needs to be said when arguing that one might be tampering with nature.   Indeed, warnings against such "tampering" is generally sufficient to communicate that an attempt to change that which is natural will in some sense backfire. Our good intentions led us (as policymakers, etc.) to institute a minimum wage.  But this evinced nothing more than a kind of foolishness, because, as everyone knows (and evidently we forgot), there is an old saw about good intentions and the pavement on the road to hell.  And this road-to-hell logic is a common meme in standard neoclassical accounts.  For example, Paul Krugman, in his introductory micreconomics text, entitles his chapter on price floors and price ceilings "The Market Strikes Back."  Even without an explicit analogy to nature (although it is curious that we would explicitly invoke the market as empire -- was it a conscious decisison?), the message is clear.  Mess with the natural laws of the market (supply and demand), and the market will "strike back" at you.  In the case of a price ceiling set below the equilibrium market price,  it creates a shortage. In the case of a price floor -- as in our minimum wage example above -- it creates a glut. The market has struck back.  Don't mess with nature.  But of course, as noted above, it only becomes possible to hang responsibility for that outcome on the initial decision to create the so-called "artificial" price only if we naturalize all other actions in the narrative of the market-response to that initial decision.   As such, all subsequent decisions are no real decisions at all.

Let me try then, for a moment, to sum up, between this post and the last, what I think might be at stake in the question of a naturalized economics.  First, as indicated previously, there is the question of whether human decisions are products of free will, or, rather, are "blind, inelcutable" consequences of the forces of nature.  That is, the question here is whether human history is simply a particular variety, as Walras says, of natural history. Second, there is the question, as indicated above, regarding whether human beings can be held responsible for the consequences of their (economic) actions.  If, indeed, we are mere things and not persons (products of natural history), then responsibility does not attach to us, and we are instead more properly "likened to pure mechanism." And, third, whether the market, insofar as it is natural, must of necessity "strike back" in some way if we try to change it.

We may explore these issues further in upcoming posts.

Revisiting Walras and Naturalism

I have recently gone back to a project I last looked at over a year ago, namely, the question of Walras' understanding of the ontological status of the social sciences in general, and economics in particular.  The question, more specifically, was whether Walras regarded the economic phenomena under investigation as akin to "natural" phenomena.  The question, for Walras, is a complicated one.  On the one hand, Walras is entirely committed to the notion that human beings occupy a moral universe -- that we are beings with free will and endowed with reason.  As such, as we are not mere things , but rather persons.  Walras sets out his person/thing distinction as follows:

The fact that man's will is cognitive and free makes it possible to divide every entity in the universe into two great classes: persons and things. Whatsoever is not conscious of itself and not master of itself is a thing. Whatsoever is conscious of itself and master of itself is a person. Man, being both self-conscious and self-directed, is a person.  Man alone is a person; minerals, plants, and animals are things. (Elements of Pure Economics, 62)

Ultimately, argues Walras, because human beings are persons, and not mere things, they cannot be analyzed simply as one would the objects of a natural science.   Natural phenomena (the world of things) and human phenomena (the world of persons) are ontologically distinct:

...we may divide the facts of our universe into two categories: those which result from the play of the blind and ineluctable forces of nature, and those which result from the exercise of the human will, a force that is free and cognitive (Id., 61)

Because human beings are persons, and not things, we cannot, argues Walras, study human beings in the same manner as we would natural phenomena.  The essential difference, he argues, is that  natural forces are "blind and ineluctable" -- i.e., they are not subject to change.  Facts that result from the human will, on the other hand, can be changed. Precisely because the nature of human will is such that it permits mastery of one's actions, those actions can vary or can be directed.  "...the human will, being free and cognitive, at least up to a certain point is capable of receiving advice, of having such and such a course of action prescribed to it, and of being directed." (Id. 61-62, emphasis added)

It would therefore appear that Walras is committed to avoiding any naturalistic implications in his construction of political economy, insofar as it would threaten to make persons into things, and risk analyzing that which is changeable or capable of being directed as though it were inexorable or  "ineluctable"

And yet, at the same time,  Walras was also passionate in his project of modeling a science of economics upon the natural sciences.  He was especially influenced (as were so many in the 19 century) by the Newtonian revolution, and was inspired to create a science of economics modeled precisely on the methods of Newtonian mechanics.   Walras wrote of his own inspiration in reading physicist Louis Poinsot's Element de Statique: "I opened the Statique of Poinsot one evening...and that theory of equilibrium achieved through the linking and unlinking of forces and of connected elements seemed to me so luminous and and so straightforward that I read half of it in one sitting. The next day, I finished off the second half." (Letter of 1853, quoted by Donald Walker in Walrasian Economics). William Jaffe and other Walras scholars have argued that he took  "...the conception and framework for his equations of general equilibrium...from the second chapter..." of Poinsot's Elements, entitled "On conditions of equilibrium expressed by means of equations." (See Ingrao and Israel, "The Invisible Hand" p 88) The inspiration thus drawn carried him to embark on the creation of:

...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 remain superior to social conventions and that they impose themselves on the human will; laws equally natural and consequently necessary, some of principle 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 (Letter, 1862 as quoted by Walker)

"The pure theory of economics," Walras claimed triumphantly "is a science which resembles the physico-mathematical sciences in every respect."

 On the surface, this seems like a contradiction, and a rather blatant one at that.  It is mistaken, says Walras, to analyze human economic relations deterministically.  "Determinism" said Walras, "is metaphysics, not science." (Eurves Diverses, as quoted by Donald Walker in "Walrasian Economics") Walras' commitment to a robust conception of a human free will (as master over itself) precludes any adoption of a deterministic worldview.  And yet, says Walras, the system of simultaneous equations that describes a market system as a determinate equilibrium outcome.  That is, the equilibrium result is determined by the initial conditions, as represented in the system of equations. How to reconcile the use of a deterministic system with the resolve not to view human beings determinstically?  Similarly,  how to model a science of economics on the natural sciences when human beings are persons and not things? How could one and the same person champion the ontologically distinct character of human beings as existing over and above mere natural forces, in virtue of their reason and free will, and then commit himself to creating a science of economics modeled on the natural sciences?

I defer an answer to that question here. I attempted to address it here and here.  At the time, I found myself (at best) unconvinced that he had, in fact, resolved it.  I'd like to give it another shot.  For now, I want to say what I think is at stake in the question (Again, I attempted to address the stakes of this question elsewhere as well, but it's reasonable to give it a go again here as well.)

Walras himself is quite clear on the subject of the stakes behind a question such as this.  At the outset of Elements, he criticizes Jean Babtiste Say for his definition of political economy. Say argues that "...the aim of political economy is to show the ways in which wealth is produced, distributed and consumed." (JB Say, quoted by Walras in Elements 54).  Where Walras takes issue with Say is the suggestion 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." (Elements 54). As we have seen above, Walras is insistent upon the unique and singular ontological status of the human will, and wants a political economy that acknowledges its being as transcendent of nature, at least in the sense that it need not obey "blind, ineluctable" forces.  Say, argues Walras, is therefore mistaken in overlooking this ontological distinction. Further, and most significantly, this oversight (if indeed it is that, and not a rhetorical move) supports a particular political argument. In particular, it allowed Say and other advocates of laissez-faire and opponents of socialism to argue that a laissez-faire system was natural and, hence, inevitable, or "ineluctable."  Arguing in favor of "laissez-faire, laissez-passer" on the grounds of inevitability permits Say and other advocates to avoid arguing in its favor either on pragmatic grounds or on moral/ethical grounds.

I quote below from Walras at length:

What has proved so pleasing and at the same time so misleading to economists in this definition [as set out by Say] is precisely its characterization 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. [emphasis added]  ...Such an attitude led Proudhon to hurl the epithet fatalistic at this school of economists. (Elements 55-56)

Walras then goes on to argue against this sort of naturalist argument, on the grounds of the ontologically distinct status of the human will:

Unfortunately, convenient as this point of view is [regarding the natural status laissez-faire], 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. (Elements, 55)

Refusal to acknowledge this characteristic of man (i.e., man as person), and of the will, allows for the "convenient" refutation of socialist positions on the grounds that such positions advocate that which is "artificial" and not "natural."  But Walras argues that those sorts of justifications are illegitimate:

 In the production and distribution of wealth, and generally in all matters pertaining to the social organization,  man has the choice between better and worse and tends more to choose the better part.  Thus man has progressed from a system of guilds, trade regulation and price-fixing to a system of freedom of industry and trade, i.e., to a system of laissez-faire, laissez-passer; he progressed from slavery to serfdom and from serfdom to the wage-system. The superiority of the later forms lies not in their greater naturalness (both old and new are artificial, the newer forms more so than the old, since they came into existence by supplanting the old); but rather in their closer conformity with material well-being and justice. The proof of such conformity is the only justification for adhering to a policy of laissez-faire, laissez-passer. Moreover, socialistic forms of organization should be rejected if it can be shown that they are inconsistent with material well-being and justice. (Id)

Walras' analysis remains relevant today, I believe, insofar as the kinds of "fatalistic" arguments, as identified by Prodhoun, remain alive and well in contemporary political discourse regarding the subject of  "the economy."  Such fatalism raises its head in, for example, debates over the minimum wage.   We may look for example at the following argument made by Congressman Ron Paul, on the floor of the House of Representatives, against a bill proposing an increase in the minimum wage:

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.

Note here how Congressman Paul's argument is an ontological one-- i.e., that the laws of the market are ontologically equivalent to the laws of gravity. The one is as natural as the other.  Note further that the political implications of such a position are precisely the same as those described by Walras in his time. That is, it entitles the advocate of the naturalistic position to argue in favor of laissez faire on the grounds that it natural, and thereby avoid arguments based on considerations of "material well-being or justice."

We shall have more to say about the political consequences of the fatalism behind this naturalism in another post.  First, a reminder here that the question ultimately to be explored is whether Walras wishes to endorse this sort of naturalistic argument, or whether he would rather refute it.   It may depend on which Walras we are examining --  the one arguing for the ontologically distinct status of persons, as apart from things, or the one committed to a natural science model of economics. Ample evidence is given of the both the former and latter Walras above. To give the reader a bit more evidence of the latter here, I'll quote briefly Walras on the question of value in exchange.  Value in exchange (or, in Marxian terms, exchange-value), argues Walras, is a natural property of commodities.  He takes the price of wheat as an example:

"Wheat is worth 24 francs a hectolitre."  We observe, first of all, that this fact 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 from either the will of the buyer or the will of the seller or from any agreement between the two. ....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.

This is the makings of Walras modeling of an economic science on the natural sciences, analogous, as he says, to "astronomy."  Value in exchange (in the market) is thoroughly natural, and we are thus justified in treating our examination of it as we would any natural phenomenon, i.e., via the methods of the natural sciences.  Again, then, the question arises, what precisely is Walras position the naturalist turn in economics? How to simultaneously defend the claim that the market-system is an "artificial" institution, while the laws thereof are "equally natural" to the laws of astronomy, comprised of "natural facts" that remain "superior to any social convention"?

I'll turn to this question in another post.

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.

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).

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.

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]

The ACA and Social Obligations

In an attempt to return to blogging -- some thoughts here in the wake of last week’s Supreme Court ruling on health care (Though by now perhaps the subject is dated.  But I’m trying still to work out my own views on the ACA.  It’s possible that by the end of this post I will.)

In some ways, the whole affair is difficult still to comprehend.  The only possible word to describe it all is: irony.  Here we have a Democratic administration adopting a health insurance plan originally devised and conceived of by conservative think-tanks, and proposed by the Republican party in the early 90s, then in opposition to so-called “Hillarycare,” nearly struck down by the conservatives on the Supreme Court, and saved by the (purportedly) liberal justices.  In its wake, self-identified liberals and progressives are cheering, while conservatives are fuming.  At the same time, some left-wing critics of the law are considerably less-than-pleased at their sometime progressive allies. What are we to make of all this?

One possible explanation is that it’s all about tribalism.  People just want to root for their team.   (Among other bloggers “Vast Left Conspiracy” points this out about progressive support for Obama generally.)  And I think that’s a huge part of it. 

Would tribalism also explain the Supreme Court vote (Roberts aside)?  Let’s imagine for the moment that, consistent with its conservative origins and Republican support, the law had been passed by a Republican president and Congress.  Would Scalia have voted to uphold it?  Would Ginsburg have voted to strike it down?  Would it depend on who had brought the challenge?

I would like to think not.  But that’s only what I would like to think!  We saw the extraordinary partisanship of the Court on display in Bush v. Gore.  (I was in law school at the time.  I remember when the Court issued a preliminary injunction barring the re-count, with the conservatives issuing the ruling.  It was in direct contradiction to their supposed conservative principles of being sparing, at the least, with injunctive relief absent irreversible injury, which they typically defined narrowly.)

Still, I don’t think partisanship/tribalism exclusively accounts for this bizarre political/legal spectacle.  To understand this further, let’s unpack the law a bit.  The plan, as adopted by Republicans in the early 90s, was intended to do two things.  First, preserve, and strengthen, the insurance industry.  Second, achieve (close to) universal coverage, through a form of socialization.

The second goal might seem odd, coming out of conservative think-tanks, and I doubt very much that conservatives themselves ever expressed the matter that way. But this is precisely what the individual mandate does.  If we require insurance companies to, say, not discriminate on the basis of pre-existing conditions, or even if we insist that no one be turned away from the emergency room regardless of ability to pay, then, somehow, medical care has to subsidized  – and for that to happen, healthy people, not only the sick, must be in the pool. This has always been understood by advocates of a “single-payer” approach.  The “individual mandate” approach was a way to replicate the economics of single-payer while still preserving the insurance industry.  It was therefore “conservative” in that it attempted to solve the coverage problem without creating a state-administered pool.  But it was still “liberal” in the sense that encouraged a subsidized pool – albeit a pool that was administrated by for-profit insurance companies.

And this, I think, was the real nature of the objection of the “conservatives” on the court.  It was not about (what Ginsburg brilliantly termed) “the Broccoli Horrible.” It was about the horrible specter of social rather than individual financing for medical care.

In one illuminating exchange during oral argument between Solicitor General Verilli and Justice Scalia, Verilli tries to explain what is  unique about the health care market: the goal of universal health care is, he says, “a result of the social norms to which we've obligated ourselves” Scalia replies: “Well, don't obligate yourself to that.”

 America still wants to have it both ways.  Our (ideological) love of the market and fear of the state has helped keep the insurance industry alive (but see polling on “Medicare for all” – most American want it).   But we won’t take the logic of the market, as applied to the health care, to its ultimate conclusion.  In spite of our ruthlessly individualistic selves, even Americans still do not want people turned away from the emergency room – even we will not let people die on the street.    If we can own the fact that, yes, even we have achieved that degree of civilization, then we will ultimately have to embrace at least some form of socialized payments for delivery of health care.  

But evidently, for the conservatives on the court, any degree of subsidized medical care is simply too much.   In Scalia’s vision, people pay for their own insurance or they don’t.  If they don’t, and they get sick – tough luck.  Let them die.

I think it is this terribly draconian vision of the right that prompts many progressives to support the law.  Which is entirely understandable.   After all, the  law, among other things, bars insurance companies from discriminating against those with pre-existing conditions, and bars them from dropping people when they get sick.  These are non-trivial achievements.

 At the same time, I think progressives are mistaken to ignore the law's conservative history, and the left critique thereof -- namely, if we're going to "socially obligate" ourselves to expanded health care coverage, this is the worst way to do it.  Leaving for-profit private insurances as de facto administrators of the financing pool leaves in place the very incentives and resources to undermine any attempt to regulate the industry.  They will always look for a way to cover the healthy and deny the sick.  The notion that the insurance industry will become any better at recognizing and paying claims is sheer fantasy.  The left’s desire for single-payer is thus not a matter of mere ideological rigidity (a frequent charge)– it is that, so long as we retain a trace of civilization about making sure no one goes without care regardless of ability to pay, the profit motive will have to be taken out of the system. (Here's a decent NYTimes piece on why the profit motive is so disastrous for the provision of health care).  Moreover, this scheme entrenches the insurance industry yet further.  By making them the very center and lynchpin of the ACA, their political power grows, and the prospects for single-payer becomes even dimmer.

So is this a victory? Frankly, I still don’t know.   If the a previously-deemed conservative idea is now deemed not sufficiently individualistic, this only shows just how reactionary the conservative movement in America has become.  And if all we can we do is hold back the most reactionary forces in America, that seems to me not terribly great cause for celebration.    

And yet, I nonetheless take some solace in seeing the Scalias of America rebuked.   We can, in fact, lawfully “socially obligate ourselves” to ensuring that everyone receive the medical care they need, regardless of ability to pay.  We can, in fact, come to a collective decision that the necessities of material existence should be provided for all – and nothing in the Constitution requires otherwise. 

 (There still remains the Constitutional and political question on the question of the government forcing us too buy something.  I admit that that could be quite dangerous.  It perhaps elevates state-sponsored capitalism to a whole new level.   But I think Roberts was right -- the plan simply means that people who don't buy insurance get taxed at a higher rate.  The government does this all the time anyway -- it gives tax credits for certain purchases, e.g., solar panels, as observed by Justice Sotomayer in oral argument.  If Congress had structured it as an overall tax increase with a tax credit for those who purchase insurance, it would, as an economic matter, be the exact same thing, and there would be no question whatsoever as to its Constitutionality.  It's simply that the Democrats were trying to have their cake and eat it too.  They didn't want to be accused of raising taxes.  A good piece on that is here. Perhaps a fuller legal/Constitutional analysis will appear in another post)