ISRF Bulletin Issue 8: Economics - The Situation is Serious... by Independent Social Research Foundation

i s r f

b u l l e t i n

Issue VIII

Economics The Situation is Serious...

Edited by Dr Rachael Kiddey

i s r f

b u l l e t i n

Issue VIII

Economics

The Situation is Serious...

First published November 2015 Copyright ÂŠ 2015 Independent Social Research Foundation

TABLE OF CONTENTS

FROM THE DIRECTOR OF RESEARCH

EDITORIAL 6 AXEL IN WONDERLAND: DSGE 9

COMMENT ON “AXEL IN WONDERLAND: DSGE”

ECONOMICS: SOME CONSIDERATIONS FOR GOING FORWARD 22 ON THE RELATION BETWEEN ETHICS AND ECONOMIC THEORY 33 POLITICS, ETHICS AND ECONOMICS 44

WHAT DOES ECONOMICS LOOK LIKE?

FROM THE DIRECTOR OF RESEARCH Dr. Louise Braddock

xel Leijonhufvud once remarked that the conclusions of economics and the policies it prescribes ‘offend people’. While this phrase can be taken in the ordinary sense of offending feelings, we can notice (what may well have been behind his remark) that to ‘offend’ is, etymologically, to strike against and so, by extension of meaning, to injure. Economics’ failure has not only been one of delivery. The situation is (even) more serious than that, for economics has become injurious to human beings, in ways that need no spelling out. In this issue of the Bulletin we bring to the fore the ISRF’s founding concern with the ethical dimension to economics, a concern which Axel Leijonhufvud insistently kept in view during his years as an Academic Advisor. The contributors have all met their brief to make their views accessible to the general social scientific readership of the Bulletin. The articles are demanding but not obscure, and their different takes on the current state of economics are neatly summarised in Rachael Kiddey’s Editorial.

EDITORIAL Economics: The Situation is Serious... Dr. Rachael Kiddey ISRF Editorial Assistant

elcome to the first of a two-part edition of the Bulletin on the theme of the current state of economics. As an archaeologist by training, I do not mind admitting that, until recently, my patchy knowledge of economics in its contemporary expressions had led me to believe that economists must surely be those among us who prefer profit to people such was the lack of disciplinary ethical grounding and unwillingness to view problems from a variety of perspectives apparent to me. Contributors to this volume challenge this view by entering into a rich variety of explanations for the current state of economics and arguing persuasively for economics as a mode of enquiry that is both useful and capable of concerning itself with the need to make the world a better, fairer place. In part one, ‘Economics: The Situation is Serious…’ the current disciplinary landscape of economics is laid forth. To this end, it is my privilege to reproduce, in edited form, an article written by Professor Axel Leijonhufvud entitled ‘Axel in Wonderland’. Leijonhufvud critiques the Dynamic Stochastic General Equilibrium (DSGE) model of economic forecasting that is currently favoured by many central banks. With the wisdom and insight of a scholar whose work has successfully grown to form an entirely new branch of the economics tree (sic) Leijonhufvud argues that DSGE models do not take account of instability and are therefore unfit for purpose and dangerous to the welfare of untold millions of people. In his thoughtful response to

DR. RACHAEL KIDDEY

Leijonhufvud’s paper, Dr Constantinos Repapis chooses to focus on one particular strand (or ‘twig’) of Leijonhufvud’s argument which Repapis feels is of greatest significance to the present intellectual endeavour, that being, the “preference shocks that shift the marginal disutility of labor” (Leijonhufvud, this volume). As Repapis goes on to explain, helpfully in language accessible to non-specialists such as myself, the problem with economic forecasting models that use the behaviour of individuals or households but that do not take account of instability (such as unemployment) is that they generally fail to produce a general message that may be considered useful. Furthermore, as Repapis acknowledges, where one is ‘perched’ within the theoretical economics tree impacts how one views the usefulness of particular models. For an archaeologist, the observation that households and individuals behave differently when faced with different, unforeseen circumstances is familiar. People are generally far more unwieldly than numbers. Indeed, one might go so far as to suggest that human lives are entirely formed of ‘preference shocks’, strung together. This ‘ontological mismatch’ and therefore the need for economics to engage meaningfully with wider philosophy is the subject of much of Professor Tony Lawson’s work. It is my great pleasure to be able to include here a necessarily concise contribution by Lawson on the subject of reorienting economics away from exclusively mathematical models so that it can attend to social reality. Similarly, in his reflective contribution to this issue, Professor Olivier Favereau asks us to consider the relation between ethics and economic theory, by making three critical points. Here, I paraphrase: Homo Economicus should challenge the theory from which s/he has evolved (1); economics needs to collaborate with other social sciences to reflect and regain respectability (2) and; this course of action is desirable in order that the usefulness of economics as a powerful mode of explanation is restored. I am indebted to Louise Braddock for her elegant translation of Prof. Favereau’s paper, originally written in French and reproduced by kind permission of

EDITORIAL

Presses Universitaires de France. Professor Elizabeth Frazer cleverly turns the accusation that economics has lost its moral compass around so that we must concede that ethics, politics and economics are not independent of one another (or at least, that they shouldn’t be thought of as such). Rather, economics remains a deeply ethical subject that has, perhaps owing to political impotence, developed ‘bad’ ethics which can be reoriented if politics steps up to hold its side of the bargain. So where does this leave us? Dr Jamie Morgan’s insightful contribution to this edition of the Bulletin is the first half of an essay in two parts (the second half of which will be published in the Spring 2016 edition of the Bulletin). Morgan reminds us that, in its presentation as a science through textbooks, undergraduate course programmes, availability of postgraduate study funds etc. economics – a deeply ethical, social and historical subject and evolved from complex philosophical theory – is rendered synthetic. Those who study it currently learn early on not to question its recognised history and this in turn inhibits and slows down the rate of change within economics, directly affecting its effectiveness in and on the world. Reframing economics then so that it regains its historic respectability, ethical and moral grounding and social usefulness is entirely possible. As an outsider looking in, this disciplinary crisis reminds me of one that archaeology faced in the late 1970s when it was forced to admit that, as it struggled to prove itself a science, it had lost sight of its best qualities and instead become an unpopulated mess of graphs, measurements and statistics. Archaeology and economics have people in common and people are, by definition, pluralistic. One size cannot fit all. People’s actions affect others and therefore something as essential and integral to our lives as economics requires a moral framework that is reflective and responsive to the varied needs of the humans (and non-humans) who jointly rely on the world’s resources for life. Reorienting economics so that it is ethically sound really is that important.

AXEL IN WONDERLAND: DSGE1 Professor Axel Leijonhufvud Professor Emeritus at the University of California Los Angeles (UCLA) and the University of Trento, Italy

n 2011, in the midst of the financial crisis I was invited to a conference in Vienna and was asked to a comment on a paper produced by the research department of one of Europe’s leading central banks. I was shocked to see that, in the wake of the financial crisis, economists were still tinkering with “dynamic stochastic general equilibrium” (DSGE) models. The Question For the quarter-century leading up to the financial crash of 2008, DSGE models were the ruling paradigm in macroeconomics. The strength of DSGE models was supposedly their sound, microtheoretical structure. However, one of their shortcomings has been the lack of reference to unemployment. The crisis made the lack of reference to finance an even more acute embarrassment. More recently, several papers introduced unemployment in DSGE models and attributed it to “labor market frictions.” An alternative hypothesis advanced by DSGE writers is that unemployment is due to “market power in labor markets.” So within this literature, the issue becomes whether changes in unemployment are due to shocks to the labor market mark-up or to “preference shocks that shift the marginal disutility of labor.” 1. Adapted from comments delivered at Research Workshop on

“Analyzing the Macroeconomy: DSGE versus Agent-based Modelling”, Central Bank of Austria, June 15-16, 2011. 9

AXEL IN WONDERLAND: DSGE

The problem for this outsider is to make sense of the question. To be frank, it makes me feel transported into a Wonderland of long ago -- to a time before macroeconomics was invented. (One has to recognize, of course, that DSGE practitioners of a New Classical persuasion do feel that it would have been altogether better if macroeconomics had not been invented.) Neither of the two hypotheses has much intuitive appeal. The problem is that they exclude alternative hypotheses. Backtracking It is often useful to think of the History of Economic Thought as a growing decision tree. We have arrived at the present state of the subject through decisions made by prior contributors who have persuaded the entire economics profession, or some especially influential segment of it, to take a particular sequence of forks in preference to what seemed the alternatives at the time. DSGE is a branch of the tree that prospered abundantly up until the crisis. Here we are posed with a choice between two of its outermost twigs. (I find myself perched on another branch altogether.) The two twigs between which we are supposed to choose are: (1) Either a rise in unemployment is due to an unexplained shock to the labor-leisure preferences of a representative agent such as to cause a spontaneous rise in “laziness” (as I think Franco Modigliani characterized it years ago), or (2) that same optimizing representative agent somehow imposes a mark-up on his wage with the result of making himself “involuntarily (sic!) unemployed”. (This sounds odd, of course, but having accumulated a lot of DSGE mileage, the representative agent has been taken into the shop and rebuilt to modern specifications). Partial vs General Analysis DSGE constructions are models of “general interdependence” as they used to be called decades ago. But here unemployment is treated as a partial equilibrium problem in the labor market.

PROFESSOR AXEL LEIJONHUFVUD

It was one of the lessons of an older brand of Keynesian economics that a disequilibrium arising in one part of the economy will disequilibrate also markets where ruling prices are exactly at the levels that would obtain if the economy were in general equilibrium. In particular, if the rate of interest were above its GE level, one result would be unemployment even at the â&#x20AC;&#x153;rightâ&#x20AC;? (GE) level of real wages. Note that downward wage flexibility is unlikely to help in this situation. As long as intertemporal prices are wrong, lower wages will not clear the labor market. If wages were to be very flexible, it would make matters worse. Falling wages and prices would disequilibrate balance sheets in Fisherian debt-deflation fashion. The point of this piece of analysis would apply with multiplied force if intertemporal markets were not just disequilibrated by a market rate higher than the natural rate of interest but were thoroughly disrupted by a financial crisis. We may conclude, I believe, that it is wrong to presume that either the origin or the solution to problems of unemployment must necessarily be found in labor markets. The Old Model Representative Agent Representative agent models will not admit fallacies of composition. Keynes taught the Paradox of Saving: if households try to save more than the business sector invests, they will not succeed; instead income will fall. Milton Friedman had his own favorite version of the fallacy: if everyone tries to add to their money balances when the money supply is held constant, most will not succeed; instead, incomes will fall. The fallacy of composition for our times might be called the Fallacy of Deleveraging: if everyone were to try to deleverage, most will not succeed; instead asset prices and incomes will fall all around.

AXEL IN WONDERLAND: DSGE

Representative agent constructions that do not admit fallacies of composition thereby eliminate from the models the major sources of instability in the economy. The New Model Representative Household In a more modern vein, some writers have replaced the old representative agent with a “representative household”, consisting of an infinite number of infinitesimal workers. The workers have utility functions for consumption and leisure. This populous “household” maximizes a utility function that is the double integral of the individual utility functions. (I imagine a pater familias who performs the calculation for all his dependents). Thus, if I understand it correctly, additive, cardinal utilities and hence also interpersonal utility comparisons are back with us.2 The individual workers labor under two curses but enjoy one blessing. First, they suffer from “unions” who might “exogenously” increase the wage mark-up and cause unemployment. It is not known where these “unions” come from (or what they optimize) but they are in any case not under the control of the utility maximizing “household.” Secondly, there is the well-known “Calvo curse”. It too is “exogenous”. Each category of workers participates in a lottery each period. The losers are not allowed to adjust their wage to market conditions during the period in question. This imparts some frictional stickiness to the average wage of the economy. However, thirdly, there is the blessing which turns the lottery losers into winners in another respect. The “household” is a risksharing organization which ensures that everyone enjoys the same consumption whether employed or not.3 The model has a bit of a problem explaining labor force participation as a consequence. 2. When I was a graduate student (some time ago) we were taught that this was 19th century utility theory which 20th century economists were obliged to abandon. This is the 21st century however. 3. Somewhat of an improvement on the “welfare home” ideal of the Swedish Social Democratic party of my childhood! 12

PROFESSOR AXEL LEIJONHUFVUD

But this is the sort of problem that keeps a modern research program going. Somebody, we can be sure, will soon come up with a variant of this model where this problem is disposed of. Perhaps we might assume, for example, that the “union” – remember there is a union? – assigns jobs to its members in order of seniority. Presto! Now the model explains one more stylized fact, namely, youth unemployment. And we have not even messed with the mathematics, so the model is as “rigorous” as ever. Pure scientific progress! Do these modifications of the old representative agent model affect the instability issue? I do not think so. The maximization by the pater familias would seem to guarantee against the usual fallacies of composition. So the clever solution that has been devised for problems that have emerged within the DSGE program do not address the instability problem. One additional note is in order. The usual objection to the “old” representative agent constructions has been that it ignores the heterogeneity of agents. This model can claim heterogeneity of a sort within the “household”. Heterogeneity of expectations and of strategies in financial markets would make the system somewhat less prone to instability (as Keynes noted ages ago). Serious trouble arises when too many agents try to do the same thing at the same time. But the heterogeneity postulated for this model is of no consequence in this respect. Instability It is of course true that the DSGE literature has moved beyond single agent models. In so doing, has it reintroduced the most relevant fallacies of composition? I do not know. But I believe it is true to say that the DSGE school has paid little attention to unstable processes. The diagnoses of our current problems that we get from DSGE practitioners tend all to run in terms of stable GE systems beset with “frictions.”

AXEL IN WONDERLAND: DSGE

My own belief is that such explanations misdiagnose our problems in the most serious way. About 200 years ago, bank runs taught us the instability of fractional reserve banking. It took us more than a century to find ways to stabilize old-fashioned commercial banking systems. But the solutions proved temporary. The economic system evolved beyond the means of control that were fashioned in the wake of the Great Depression. Today, the entire financial system, not just the fractional reserve deposit-taking banks, is unstable. Macromodels that ignore problems of instability are dangerous to the health and welfare of untold millions of people. Multiple equilibria? One reaction to the charge of ignoring instabilities that I have heard from one distinguished DSGE practitioner is that the system “cannot be unstable” because then it would either have already exploded or imploded. This argument is supposed to justify ignoring the possibility of instabilities. As pointed out by Willem Buiter, however, this mistaken view of the matter seems to be due to the practice of assuming linearity around the solution point as a supposedly harmless way of making DSGE models easier to solve. A somewhat more plausible argument in favor of DSGE is that these models can accommodate multiple equilibria and that, when this is the case, some of these will be unstable. So, it is argued, the criticism that DSGE theory generically ignores instabilities is false. But this defense is not without problems. One such problem, of course, is to determine which of the multiple equilibria the system will settle on. Here, theorists have often resorted to coordination by “sunspots.” In astronomy, sunspots are empirically observable apart from their consequences. In macroeconomics, that is not so and the scientific status of the sunspot literature, therefore, dwells in a darkness where no sunshine ever penetrates.

PROFESSOR AXEL LEIJONHUFVUD

But the basic stability problem with GE models is rather different. Recall Walras’ problem with the possibility of “false trading.” The simplest illustration assumes pure exchange in an EdgeworthBowley box. If some trade were to occur at a price different from the equilibrium price, the exchange process will not terminate at the solution point determined by the Walrasian equilibrum conditions. The disequilibrium trade shifts the initial endowment. In a financial crisis, this problem becomes infinitely worse. Not only do defaults shift the endowments about, but they keep changing the dimensions of the box. Furthermore, a great many agents will suffer Knightian uncertainty about what their endowments may be and what they may end up being. The probability that the system would settle in any one of its multiple initial equilibria is basically zero. Transversality and the Conduct of Monetary Policy The “household” internalizes just about anything they please, including I suppose the entire structure of debts and claims in the economy. An economy with more than one household – if you will forgive such a flight of fancy! – would have the problem of coordinating saving and investment decisions over an infinity of future periods. A model of an economy that does that successfully would have the trading plans of all its members tied together by a transversality condition at the end of time. This kind of structure has figured prominently in recent monetary policy discussions. A brief attempt at perspective: One or two centuries ago, the price level was supposed to be governed by the demand and supply of gold while central banks managed the volume of credit. Today central banks manage the price level and trust in the transversality condition to control credit. If reliance on the gold standard meant putting your faith in a “barbarous relic”, trusting in the transversality condition is surely nothing but pure and utter superstition. This figment of economic

AXEL IN WONDERLAND: DSGE

imagination simply has no counterpart in the world of experience. Every bubble that ever burst is proof of this fact. It should be removed from our models. From the standpoint of the DSGE tradition, the consequences would of course be drastic. If you remove the capstone from a Roman arch, everything crumbles. Remove the transversality condition from DSGE models and everything unravels. Without it, there is nothing to guarantee that individual intertemporal plans are consistent with one another. The system lacking an empirical counterpart to the mathematical economist’s transversality condition is likely to experience periodic credit crises. Such crises reveal widespread, interlocking violations of intertemporal budget constraints. Walrasian constructions, even those of recent vintage, take for granted that budget constraints are binding. To do general equilibrium models without budget constraints is not easy (unless, of course, we feel free to assume that all agents are part of the same “household” so that no market exchange takes place at all). Conclusions One must conclude, I believe, that a Walrasian equilibrium modeling strategy is hopelessly inadequate for dealing with financial crises and their aftermaths. Claims that these models have “sound microtheoretical foundations” and are “particularly suitable for forecasting and policy analysis” are without merit. It is particularly unfortunate at this time that so many central banks have sunk so much intellectual capital in the DSGE enterprise. Disposing with transversality makes us see the economy as an ‘open” system that does not evolve along some foreordained – even if stochastic – path towards a fixed endpoint. So seeing it will have two consequences. Firstly, it will force us to adapt our analytical and empirical methods to the nature of our subject matter. Secondly, after three decades of New Classical dominance, it will make stabilization policy once again a central concern in macroeconomics. 16

COMMENT ON “AXEL IN WONDERLAND: DSGE” Dr. Constantinos Repapis Lecturer, Institute of Management Studies, Goldsmiths, University of London

xel in Wonderland is Professor Leijonhufvud’s effort to make sense of the research that is currently undertaken in Europe’s (and elsewhere) leading central banks as they cope with the worst financial crisis since the Great Depression. He finds their continued focus on Dynamic Stochastic General Equilibrium (DSGE) models perplexing. In order to understand why this is the case we need to consider these developments in relation to his own background, and he himself makes a remark on this when discussing the history of the discipline. He writes: “It is often useful to think of the History of Economic Thought as a growing decision tree. We have arrived at the present state of the subject through decisions made by prior contributors who have persuaded the entire economics profession, or some especially influential segment of it, to take a particular sequence of forks in preference to what seemed the alternatives at the time. DSGE is a branch of the tree that prospered abundantly up until the crisis. Here we are posed with a choice between two of its outermost twigs. (I find myself perched on another branch altogether.)”1 The parenthesis reveals the author’s characteristic modesty, as he is not simply perched on another branch, but his work altogether forms another branch of this almost 250 year old oak. What is more, where one is ‘perched’ informs his/her perspective on the 1. Leijonhufvud, Axel, “Axel in Wonderland: DSGE” in this volume , p. 10 17

COMMENT ON “AXEL IN WONDERLAND: DSGE”

developments in DSGE modelling that consume so much energy and talent, draining resources from the rest of the tree. The two twigs that Professor Leijonhufvud considers in some detail are modifications within the DSGE world that aim to make these models deal better with issues in the labour market, and especially deal with the problem of unemployment. These modifications are: (1) Labour market frictions which may be due to a host of issues including labour unionisation, or information asymmetry, or problems with incentives etc. And (2) “Preference shocks that shift the marginal disutility of labor”2. While I concede that (1) has been a broader and more widely studied avenue of research among the scholars working in this field, in the rest of this comment I will concentrate on (2) because I think it has interesting, often ignored, ramifications for this broader research project. Let me start by providing some context. DSGE modelling is part of a broader programme within economics that has tried, since the 1970s, to introduce robust micro-theoretical foundations in macro-economic models. Starting with the work of Robert Lucas the two pillars of this programme3 have been that any macro-economic behaviour of the economy must be directly linked to individual action, and that individual behaviour follows the rationality axioms that are the bedrock of neoclassical micro-economic theory. Due to these two pillars the theoretical, even scientific, superiority of this research programme was proclaimed over other programmes that reputedly introduced ad hoc assumptions that lacked ‘true’ theoretical basis when their models faced empirical difficulties. In this research programme the most widely used models assume that you have a typical 2. ibid. p. 9 3. I am here taking a very broad view, as there are important and substantial technical, ideological and other differences between the Rational Expectations models of Lucas, the Real Business Cycles models following Kydland and Prescott and the later literature on New Keynesian modelling. But these two pillars are shared by all these programmes and their substantial progeny. 18

DR. CONSTANTINOS REPAPIS

individual, or a typical household, and that the world is a multiple of this household. This creates a direct link between individual (or household) action and macro-economic behaviour. And since these individuals are rational and operate in a general equilibrium world, they always respond in a way that maximises their welfare, or, as economists call it, their utility. The problem that this individual continuously faces is unforeseen shocks, which make him/her alter their behaviour to cope with these changes that unavoidably alter their current and future plans. Thus, the world around these agents continually changes, and they have to change their rational decisions across a number of variables (consumption/saving, work/leisure, portfolio choices etc.) to take account of the new environment. These unforeseen events were, in the first generation, Real Business Cycle models in the 1980s, technology shocks, but they later came to include other types of shocks, even government induced ones. Over the last ten or so years, preference shocks have surfaced occasionally as possible modifications in this fieldâ&#x20AC;&#x2122;s efforts to overcome discrepancies between what the models predict and real data. Thus it is not surprising that preference shocks are again considered, this time in relation with labour market issues and unemployment. What I do find surprising is that researchers working in the DSGE mould find this avenue a possible way forward. That is, they find this to be a modification upon which further growth on this field can take place. For the sake of argument let us assume that a DSGE model with a type of preference shock that relates to the labour-leisure decision of this neoclassical representative individual, produces simulated results for this economy that mimic, very closely, the real data that we have. Would this be a success for DSGE modelling? Or to put it in less loaded terms, what would this mean for the DSGE branch of economics? I think we are faced with an interesting conundrum. On the one hand we have come up with a model that does very well by the metrics of success that this research programme uses, which

COMMENT ON â&#x20AC;&#x153;AXEL IN WONDERLAND: DSGEâ&#x20AC;?

is the comparison of simulated to real data. On the other hand this apparent success comes with utilising a type of shock that at least appears to contradict one of the pillars of the broader research programme. This is because preference shocks suggest that this representative individual is irrational, at least with respect to his labour decision, in that he takes unforeseen actions (unforeseen to himself) that violate his rationality and have no clear cognitive or other reason. He then uses all his â&#x20AC;&#x201C; substantial - rational machinery to compensate for this unforeseen change in his environment, brought about entirely because he changed his mind on how much labour to provide. If indeed this is a good description of how individuals behave in reality, I wonder what the general message from this is. To claim that this is a step towards some type of behavioural economics, or bounded rationality, seems a bit of a stretch as we have no complex (or simple) clearly articulated explanation for why this individual displays this (or any) type of irrationality. And in any case, broader questions are unavoidable. For example, why is it that he is irrational in only this way, and only in his behaviour towards this particular choice? Taking a step back, and looking at these developments on this branch of economic modelling from the foliage of another branch, one may be able to frame even larger questions. One of these is: when has a research project run its course and reached an impasse that shows that this programme needs to be abandoned for something else and perhaps something radically different? A conventional answer to this question emanating from the literature on scientific progress, is that programmes fail either because they lose their contact with reality and the phenomena they try to explain, forecast or predict,4 or because they reach a point of crisis as they find empirical or analytical results that contradict foundational aspects of the research project. It is this second criterion that is at the centre of our current puzzle. I, looking from outside, see this latest trend as a negation of the whole programme, and if such modelling modifications 4. And Professor Leijonhufvud makes a number of observations of how DSGE models fare in this regard. 20

DR. CONSTANTINOS REPAPIS

become established we appear to have returned to the start of this research endeavour. Thus, to me at least, models with all kinds of preference shocks appear to be lacking microfoundations as much as earlier models, that, by the way, had other interesting characteristics and Professor Leijonhufvud gives an indication of these in his article. Have we simply traded one black box for another? And why then bother with the sophisticated mathematical machinery of rational agents, if the most important feature that drives the phenomena in which we are interested (e.g. unemployment) are preference shocks about which we know close to nothing? What is even more remarkable, however, is that these modifications, these preference shocks, are not seen by those perched on the DSGE branch as a possible indictment of this research field. On the contrary, they appear to be seen as new research avenues that add to the power of these models, seemingly helping to explain better or larger parts of our economic environment. This is a disturbing development, because it indicates that their perspective on what is happening in this research field is drastically different from that of others sitting on other branches of this tree. But is this common field, this trunk that gave rise to the different branches of economic theorising, still something that unites us and something we can all appeal to? Can we, as a discipline, find epistemic criteria which would allow us to not only discard twigs but also develop different branches of economic knowledge? Professor Leijonhufvud’s paper is arguing in favour of such a systemic change and offers pointers on how to proceed. My fear is that we may be reaching a point of no return, a complete collapse of common ground for discussing broader disagreements between the different proponents in this field of knowledge. This collapse means that we cannot, as a discipline, discuss the merit of whole branches of research or even consider how and when to discard one branch and start investigating others. The very concept of the discipline as a tree with branches comes into question. And then Professor Leijonhufvud’s ‘Wonderland’ may continue to create dystopian realities for some time to come. 21

ECONOMICS: SOME CONSIDERATIONS FOR GOING FORWARD Professor Tony Lawson Professor of Economics and Philosophy, University of Cambridge

hose who know little of academic economics may well imagine it to be a discipline following agreed best standards of practice, skilfully and knowledgeably designed to enable insights into social reality to be successfully pursued by a community interested in uncovering truths in order to help make the world a better place. Those who adopt this view (such as the British Queen) are apt to express genuine surprise if they learn of the discipline’s explanatory failings. Those who know something more of the discipline tend to view/ present it as a fractious forum comprising groups of right wingers (or ‘neo-liberals’) and critical others (often styled ‘heterodoxy’) united in nothing but a desire to fashion the world according to their own specific political interests or ‘ideology’.1 Both conceptions I have argued are way off target. Rather the modern economics academy is, or hosts, a community that is primarily concerned to prove itself as scientific, where the latter is (erroneously) understood to involve the application of mathematical methods whatever the context. It is a community whose participants pursue a range of different political and 1. See Lawson, Tony (2012) ‘Mathematical Modelling and Ideology in the Economics Academy: competing explanations of the failings of the modern discipline?’ Economic Thought: History, Philosophy Methodology, An open access journal of the World Economic Association, Vol. 1, No. 1, pp. 3-22.

PROFESSOR TONY LAWSON

substantive goals but almost always on the presupposition, albeit one that is mostly taken for granted and unexamined, that any such pursuit should turn centrally on the practices of mathematical modelling.2 It is easy enough to show that such mathematical modelling endeavour is unlikely to produce much by way of explanatory insight. This is simply because the material of social reality (systems characterised by openness, depth, relationality, process, meaning, value, etc.) is not of the sort for which mathematical modelling techniques can be useful (closed systems of isolated atoms). I do not want here to reproduce the details of this ontological mismatch; something I have done often before.3 Instead, I want to draw out some practical and other consequences that bear on questions of how best to take the discipline forward. I do so in fairly stark terms. I think this is important, because there is a tendency for many to acknowledge the just noted ontological critique as successful, and so implicitly at least to accept that social reality is open, and characterised by depth, relationality and process etc., but then to continue as though accepting these insights is without bearing upon the practices that are justifiably pursued. I think the latter habit or complacency is a major obstacle to disciplinary advancement. Implications for Practice So what implications do I suppose follow from the noted ontological critique? I take the following inferences to be indicative rather than comprehensive, but not without significance. If acted upon the discipline, I believe, would be significantly transformed and much advanced. 2. See Lawson 2012 op. cit., and Lawson, Tony (2015) Essays on The Nature and State of Modern Economics, London and New York, Routledge 3. See for example: Lawson, Tony (1997) Economics and Reality, London and New York, Routledge; Lawson 2003, op. cit.; and Lawson 2015, op. cit. 23

ECONOMICS: SOME CONSIDERATIONS FOR GOING FORWARD

1) It is unhelpful to treat the widely observed crisis of the modern economics discipline as though it turns on problems that originate at the level of economic theory and/or policy. Most obviously the ontological critique implies that any merely substantive critique misses the point. If the problems of the modern discipline arise because of a lack of match of method and the conditions in which they are applied, then any criticism pitched only, or even mainly or centrally, at the level of substantive economic theory and/or policy matters, will likely be largely irrelevant. 2) It is an error to suppose the failings of modern economics emerged only with the recent economic crisis and so reduce to a failure to accommodate factors called crises into the analysis. Economics has been in an intellectually sorry state for the last 50 years or so. The output of the discipline has long been explanatorily a failure, plagued with unrealistic assumptions, and produced by those with no real idea where the project is going. This has been the case indeed ever since the significant take-up of methods of mathematical modelling in economics. 3) It is a mistake continually to seek successful predictions, or to think that, where heterodox forecasters are found to do better than the mainstream ones, for this reason they should be lauded. If social reality including the future is open, then successful event prediction, if and where it occurs (and where all outcomes are covered by the totality of forecasts there is always someone that gets it right), will likely not be much more creditable than winning a lottery. This is not to deny that we can understand many of the various tendencies in play at any time, not least those that are unsustainable. In the latter case we all know that something somewhere must â&#x20AC;&#x2DC;giveâ&#x20AC;&#x2122; in some way sooner or later. But when and how a specific manifestation happens is usually highly contingent.

PROFESSOR TONY LAWSON

Moreover, successful event prediction, if mostly infeasible in the social realm, is not only unnecessary but mostly unwanted anyway. This is so because we can still successfully identify explanatory social causes of phenomena, and the impossibility of systematic event prediction is consistent with our ability to use explanatory insights achieved to knowledgeably transform social reality to make the world a sounder place. In other words, it is better that we can knowledgeably (and preferably with wisdom) make our own history than we are confined to merely watching it unfold, if albeit in a predictable manner. 4) Use of the label neoclassical to dismiss the substantive theory and/or policy contributions of opponents is unhelpful at best. Rarely is the category defined. And far from pinpointing or facilitating an understanding of any fundamental problem of the discipline, to dismiss a contribution as neoclassical imparts the impression that the problem of the discipline is self-evidentially essentially a matter of poorly, but freely constructed, theory or policy - that which is dismissed as neoclassical.4 5) Progress is unlikely merely through highlighting and chipping away at the lack of realisticness of prominent substantive assumptions (such as the familiar claims made about rationality, preferences, beliefs and states of the economy). Like the rest of us, mathematical modellers do recognise that most of their modelling assumptions are unrealistic. 5 In 4. Lawson, Tony (2013) “What is this ‘school’ called neoclassical economics?” Cambridge Journal of Economics 37(5), pp. 947-983; Lawson 2015, op. cit. Chapter 4; and Morgan, Jamie (ed.) (2015) What is Neoclassical Economics? Debating the origins, meaning and significance, London and New York: Routledge. 5. For example, see: Lucas, R.E. (1986) “Adaptive Behaviour Economic Theory”, Journal of Business 59(4). Pratten Stephen (ed.) (2015) Social Ontology and Modern Economics, London and New York: Routledge, p. 425; Hahn, F. (1985) “In Praise of Economic Theory”, the 1984 Jevons Memorial Fund Lecture, London: University College, pp. 11-12; and Hahn, F. (1994) “An Intellectual Retrospect”, Banca Nazionale del Lavoro Quarterly 25

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some instances, this is explicitly regretted and rationalised as a temporary recourse. So inroads are unlikely to be made by highlighting additional specific cases of assumptions that are unrealistic; this will not be news to anyone. The insight that does appear to go unrecognised by most is that it is the emphasis on methods of mathematical modelling that is responsible for this persistent lack of realisticness, and that in an open complex social reality the production of unrealistic formulations is not a temporary contingent state but inevitable. Much better then to focus the critique on the modelling emphasis per se. 6) Economics needs philosophy If the central problems of the discipline lie at the level of ontological presupposition, necessitated by its a priori acceptance of certain methodological dictums, then a turn to philosophy in the form of ontology and methodology in particular, will be essential for emancipating the discipline from its current chains. 7) The division between modern mainstream economics and heterodox alternatives is not a matter of competing substantive and policy claims. The division rests ultimately on very different ontological presuppositions (preconceptions, often implicit and unexamined, about the nature of social reality) combined with the fact that heterodox, but not mainstream, economists embrace pluralistic stances at the level of method. 8) To criticise/oppose the current mathematical modelling emphasis is to adopt a pro- mathematics stance. To oppose the current mathematical modelling emphasis of modern economics is simply to point out that various tools (methods of mathematical modelling) are being used, and more or less exclusively so, in conditions (social reality) where these Review, p. 246. 26

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tools are generally inappropriate and more useful alternatives are available. To seek to use any specific tool only in conditions for which it was designed or anyway is capable of being successfully applied, is to adopt a positive, possibly even a caring, orientation to the tool. 9) To criticise/oppose the current mathematical modelling emphasis does not mean giving up on science. Mathematics is not essential (or inessential) to science; science involves using tools that are appropriate to the given task. A science of economics is perfectly feasible, and the current emphasis on mathematical modelling in economics serves, given the nature of social reality, mostly to prevent that potential from being realised.6 10) It is misguided to suppose that methods of mathematical modelling can be pursued in some neutral fashion, serving as just another language or heuristic device or whatever. They cannot be used in a neutral fashion. They are tools. And like all tools they are appropriate for some tasks and conditions and not others. In certain contexts tools used inappropriately can be positively harmful. This has been (and is usually) the case with the application of mathematical methods in economics. It has forced the discipline into irrelevancy at best, whilst diverting resources away from potentially insightful alternative projects and applications. The claim that the mathematical methods adopted by economists are, or might conceivably be, employed as useful heuristic devices, serves, in the main, merely as an apology for this unhappy affair. 11) It is pointless to use mathematical economic models to generate any result, including conclusions held to be true or functional specifications interpreted as being consistent with economic data. 6. See: Lawson 2015, op. cit., Chapters 1 & 9. 27

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Mathematical models of the sort used by economists presuppose closed systems. Social systems are in a relevant sense open.7 So the assumptions that are made in model construction will usually be known to be false. Using such assumptions to generate conclusions thought to be true adds nothing of value. It may be true that ‘all polar bears are white’. But if this apparent truth is deductively generated from the assumptions that ‘all polar bears eat snow’ and ‘all snow-eaters are white’, we have added nothing to our understanding of polar bears, snow or whiteness; and nor have we provided explanatory support for the proposition that ‘all polar bears are white’. 12) The solution to making modern economics more relevant lies somewhere other than in revising certain assumptions of mathematical models, or in constructing more complex (in particular non-linear) forms of mathematical modelling, perhaps in the form of simulation analysis. Any idea that producing different forms of mathematical modelling, models assumptions, or estimation techniques and so on, is based on a failure to see that the worldview presupposed by a reliance on these revised methods and forms, is just as unrealistic as that presupposed by more traditional ways of mathematical modelling. 13) Economists can usefully invest significant resources in devising alternatives methods and ways of proceeding. If social reality is open and complex, and in particular is highly relational and processual, then methods are required that are appropriate to the analysis of such conditions. Especially important here are dialectical methods such as contrast explanation, that do not require the usual sorts of closures in order to provide insight.8 7. See: Lawson 1997, op. cit., and Lawson 2003, op. cit. 8. See: Lawson, Tony (2009) “Applied economics, contrast explanation and asymmetric information” Cambridge Journal of Economics, 33(3), pp. 405-419; and Morgan, Jamie (2013) ‘Forward looking contrast explana28

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14) Economics will need to concern itself centrally with matters of ethics/morality. If social reality is recognised as being relational then all actions are affecting of others and so are moral in nature. It follows that any kind of policy/prescriptive/practical stance requires an explicit, systematic and sustained orientation to questions of ethics. In particular, an ethics grounded in ontological analyses of such matters as human nature, care, the nature of social organisation, and the possibilities for flourishing (of human and other living beings), is essential for any suitably transformed more pluralistic, emancipated, economics. 15) It is an error to suppose that economics appropriately conceived is basically descriptive common sense, and this must be the basis of a transformed economics. Although mainstream and heterodox economists disagree on the value of descriptive common sense, the two schools are united in presuming that the latter is the only real alternative to methods of mathematical modelling. Want to close this gap! But I canâ&#x20AC;&#x2122;t make it close. However, if social reality is marked by complexity in the form of depth, openness, relationality, process and so on, then a resort to economics as common sense will not be sufficient and will likely make things worse. In fact, we all need seriously to raise our game and move way beyond common sense in all its forms; and in this both causal analysis and explicit, systematic and sustained projects in social ontology are likely essential. That is instead of simple and lazy common sense (and a naĂŻve rush to forming simplistic policy recommendations) we likely need to return to pursuing economics in the manner prosecuted by the likes of Smith, Ricardo, Marx, Marshall, Veblen, Keynes, Schumpeter, Hayek and others, who dedicated themselves to explicit systematic and sustained programmes of uncovering the workings of the social system in which we actually live. tion, illustrated using the Great Moderationâ&#x20AC;&#x2122;, Cambridge Journal of Economics, 37(4), pp. 737-758. 29

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16) The improving of economic teaching may be fairly straightforward, and not warranting of formal planning. Current activities in critical circles concerned to improve the teaching of economics are taking the form of prolonged, collective, formal discussions and debates over issues of relevant substantive theory and policy. The formulation of proposals in these terms seems to be underpinned by assessments that the problems of modern economic teaching stems from their having being written by economists either conforming to the uncaring atoms of their own theories or simply being ideologically biased at the level of theory and/or policy. This though is not the problem. Rather it is that text book writers and course designers like all other modern economists are ideologically blinkered primarily by the idea that economics must be mathematical if it is to make a contribution. Even the lack of pluralism that so characterises the modern economics academy, stems mostly from a belief that to allow other methods into the toolbox will lead to a dumbing down of the discipline and a waste of resources. Once the methodological error underpinning all this is revealed, or rather fully recognised and acted upon, the potential is there in principle for the skills and energy of all the various participants in the economics academy to be harnessed to help fashion a more relevant discipline. Of course, new skills will likely need to be acquired by many. And serious research requires sustained effort and critical reflection. But we always must start from â&#x20AC;&#x2DC;hereâ&#x20AC;&#x2122;. In a process of successfully emancipating the discipline, the emphasis in the beginning will doubtless be as much upon supplementing, as upon replacing, existing courses albeit likely involving the conversion of various currently compulsory courses into options and also a change in teaching styles, with the latter likely being rendered more interactive. However, I do not anticipate that, with methodological

PROFESSOR TONY LAWSON

blinkers removed, the task of providing relevant sets of courses in economics would be significantly more difficult (given time and sustained critical activity) than it is in any other openminded, confident and successful discipline, where balancing acts regarding content taught are always to be performed. All disciplines must cope with issues of change in subject matter, competing interpretations and interests, and limited resources. The pedagogical balancing act in an emancipated discipline of economics would presumably always be one of combining insights of the discipline regarded (albeit provisionally) as the more â&#x20AC;&#x2DC;foundationalâ&#x20AC;&#x2122; with any ongoing (possibly widely contested) advances regarded as contemporarily exciting and/or novel, taking into account local research and teaching expertise, skills and interests and the concerns of students; a transformed balancing act to that currently in play, but no less (or more) an inevitable balancing act. The current problems, as I say, do not, in my assessment, derive in the main from an incapacity to care, or the sway of political ideology, or even an inability to find solutions. Rather, to repeat one last time, they stem from a pervasive and uncritical, indeed blinkered, belief in, and insistence upon, a simple and understandable, if ultimately mistaken, methodological dictum: that mathematical modelling is essential to any serious contribution to economics. Once that fallacy is transcended, the discipline can hopefully recommence its journey as a fruitful form of academic enquiry. Conclusion It is the declared goal of many observers both inside and outside the academy to render the discipline of economics more relevant. Activities in pursuit of this goal however are seemingly doomed to failure if carried out without recognising the methodological and practical implications of adopting methods that are inappropriate to the social context. On a more positive note, it seems

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reasonable to suppose that once the implications are recognised, the obstacles that remain to achieving an emancipated and relevant discipline will be of the challenging and interesting sort that confront most other forms of academic endeavour. Of course there will remain various (political and other) differences no doubt, as in any science. But still achieving relevance and purposeful debate (if not agreement) about the state of the social world and its possibilities has to be a very major step forward.

ON THE RELATION BETWEEN ETHICS AND ECONOMIC THEORY THREE CRITICAL CONSIDERATIONS1 Professor Olivier Favereau ISRF Academic Advisor, Professor Emeritus, University of Paris Ouest

conomics has chosen to construct itself as a science on the exclusion of moral values and ethical norms. For an economist there is no shame in acknowledging this fact. Neutrality with respect to grand ethical systems has its justification in its scientific approach.2 For the dominant ‘neoclassical’ theory this neutrality became a self-conscious stance in the 1930s, where it is usual to attribute a key role to the work of Lionel Robbins3 as well as to the developments that followed upon the ‘new welfare economics’. The economist maintains that she has nothing to say as economist about ends, whether individual or collective, while declaring herself expert on the most efficacious ways of securing requirements in a world of scarce resources. My focus in this short paper is on the current status of this postulate of neutrality, so familiar to economists. Today this postulate cannot be defended for reasons internal to the evolution of economic theory itself, to begin with. First, homo 1. Abridged from: Canto-Sperber, M (Ed.) Ethiques d’aujourd’hui: séminaire 1, PUF, Paris, 2004, pp.25-36, reproduced with permission 2. Weber, Max (1919) Le metier et la vocation du savant 3. Robbins, Lionel (1932) An Essay on the Nature and Significance of Economic Science 33

ON THE RELATION BETWEEN ETHICS AND ECONOMIC THEORY

economicus should revolt against the economic theory which bore him: neutrality has become immorality thanks to the generalisation of his own constitutive principle of rationality. Second, the discipline of economics is having to turn to other social sciences for diagnosis and treatment of its own malaise – this is the extent to which economics’ imperialism as a discipline is now under challenge. Third, what the discipline stands to gain by relinquishing its postulate of neutrality is not simply the recovery of a degree of respectability but much more: the restoration of its explanatory power in respect of phenomena that are truly economic - for instance, in the management of the firm. There are three steps in my argument. 1. Homo economicus in revolt against economic theory Homo economicus’ essential characteristic is, notoriously, his rationality. This model of human behaviour has gained ground relentlessly in the human and social sciences in the past decades, invading turn by turn psychology, philosophy, sociology, political science, economic history…and has become today the keystone of a research programme that cuts through all these disciplines. One reason for the intellectual influence of this model is its solid foundation. The accepted criterion of individual rationality (maximisation of a goal-function under constraints) has been axiomatised in the three general contexts of decision conceivable a priori: certainty4; future under risk (objective probabilities)5; uncertainty (subjective, but no objective, probabilities) 6 . The axioms translate the general idea of rationality into a series of operational conditions on the ability of economic agents to calculate (in the broad sense), where this is unlimited both in extension and coherence. An essential feature of this formalism is the exhaustiveness (as well as the exogeneity) of the list of States of the World, such that any decision problem can be put 4. Debreu, Gérard (1959) The Theory of Value: An axiomatic analysis of economic equilibrium 5. von Neumann, John & Morgenstern, Oskar (1947) Theory of Games and Economic Behavior 2nd Edition 6. Savage, Leonard (1954) The Foundations of Statistics 34

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in the form of rational participation in a â&#x20AC;&#x2DC;lotteryâ&#x20AC;&#x2122; (understood metaphorically). So far this is straightforward, all the more that the economic agent is free to integrate into the arguments of his utility function any variable of interest to him. The problem arises when the metaphor of the lottery discloses its deeper meaning: the decision-maker is confronted by a Nature that is exterior, indifferent to human hopes and fears, not on account of a malicious inhumanity but because of its intrinsic non-humanity. From this point of view the metaphor of a lottery is entirely appropriate. This way of representing things perfectly matched the canonical version of the dominant theory up until the beginning of the 1980s: the theory of general equilibrium in which the economic agent takes decisions presented with an impersonal market against which his own infinitesimal stature can have no influence. But from the mid-70s onwards dominant economic theory, driven by an individualist methodology, has applied itself to endogenising all the mechanisms of the market, and thereby imposing on its agents an additional responsibility, that of the choice of contractual procedures through which market exchanges are implemented. Henceforward, the market itself becomes as bilateral and personalised as it was previously global and anonymous. We see in these conditions the absolutely fundamental role played by the methodology of game theory. We can also note that this new upsurge of methodological individualism comes to rely in its explanations almost exclusively on the rational choice model. It is just here that the problem emerges into view. While the bulk of economic analysis largely shifted away from the interactions of homo economicus with an external Nature towards those of homo economicus with others of his kind, the model of rational choice stayed exactly as before. It is true to say that nobody noticed that the model stayed the same, because nobody noticed the difference in focus of economic theory either. The economic

ON THE RELATION BETWEEN ETHICS AND ECONOMIC THEORY

analysis accommodated new objects as it had always done. Moreover, it is significant that the first axiomatization of decision theory was carried out by von Neumann and Morgenstern, fathers of game theory. What in fact does the problem consist in? After all, the â&#x20AC;&#x2DC;genetic mutationâ&#x20AC;&#x2122; of the rational choice model shows its astonishing flexibility, indeed its universality. The problem is the contradiction with the postulate of neutrality. And, not only can dominant economic theory no longer presume axiological neutrality but, willy nilly, must take its stand henceforth on the basis of an inverted value-system according to which there is no difference for homo economicus between interaction with an anonymous environment equivalent to a machine (whether or not a social one), and an interaction with another agent. This diagnosis enables us to grasp the pathology within the current version of the dominant economic theory which itself pretends, as everyone knows, to explain the entirety of organisational and institutional phenomena on the basis of just two dysfunctional asymmetries of information in contractual life, moral hazard and adverse selection. In the first case, homo economicus conceals an action, in the second he conceals a piece of information. Whether economic theory is the theory of a world of tricksters, liars, counterfeiters and bandits is not even the worst of it; it is yet more embarrassing that the theory should be no more than this. The theory is condemned to this restriction by its own internal logic, that of the rationality principle. If in the quest for maximising individual interest no distinction is allowed between buying turnips and buying carrots, and between lying rather than telling the truth, then economic theory would contradict itself if homo economicus chose honestly when it is dishonesty that is more profitable. An objection may, perhaps, occur to the reader: even if this description is morally troublesome is it thereby empirically misleading or at any rate less misleading than the converse position which idealises economic man. This objection invites two

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responses: the first will be developed shortly, although it may be said now that a model constraining economic man a priori either to cheating or to altruism is certainly overridden by a model which offers him both possibilities. The second response is immediately decisive – a model which is formally incoherent cannot be employed in empirical investigation. The ‘genetic mutation’ of the rational model which transposes it without forethought or reservation from interactions with nature to interactions with others, formally implies that the space of nature is mathematically equivalent to the space of strategies. And, as Marco Mariotti has shown7 as a generalisation this is false, since one can find counterexamples where Savage’s axioms are violated by certain game configurations. Economic man is within his rights in demanding a reckoning from current economic theory: his increased power is too dearly bought at the expense of the indignity he incurs. 2. Social psychology to the rescue of economic man What is changed in moving from a game against nature to an interaction with another mind? One cannot expect a simple response. However, one can assert unequivocally that the worst response is not to ask the question! But, this is indeed the response of dominant economic theory. One can no longer be content with the reply that homo economicus projects himself just as he is, onto his vis-à-vis as his lookalike, since (setting aside the mathematical incoherence) economic man has been axiomatised as in opposition to nature, not as in interaction with another.8 Further, the demand for a response will have to mobilise disciplines outside of a standard economics oriented to an exceptionless methodological individualism which is exclusively 7. Mariotti, Marco (1995) “Is Bayesian Rationality Compatible with Strategic Rationality?” in The Economic Journal, Vol. 105, No. 432 (Sep., 1995), pp. 1099-1109 8. Johansen, Leif (1982) “On the Status of the Nash Type of Noncooperative Equilibrium in Economic Theory” in Scandinavian Journal of Economics 34 (1982), pp. 421–441 37

ON THE RELATION BETWEEN ETHICS AND ECONOMIC THEORY

based on the single undisputed ‘pillar’ of individual rationality.9 The imperialism of the discipline of economics is coming to undermine itself. We should look instead to economics’ neighbouring disciplines, for a representation of the individual which responds to the fact that homo economicus lives – what a discovery! – in society, where relations vary along a continuum from the personal to the impersonal. I turn here to social psychology: to the Theory of Social Identity10, and its quasi-generalisation as the Theory of Self Categorisation11 . The apparent arbitrariness of this selection is not crucial since my aim is not to defend one particular model against another but to clarify one model through using another. Self-categorisation classifies cognitive self-representations as a 3-tier hierarchy: - The ‘personal’ level: the individual ‘me’ of the economists, based on the differentiation between oneself and the members of those groups (if any) that one belongs to. At this level, the calculation of cost and benefit approximates to the model of homo economicus as utilitarianist and non-cooperative. - The ‘social’ level: the identity of the individual is defined in terms of membership of various social groups, in the most generic sense of the term. The individual valorises her resemblance with members of (endo)groups and differences with members of (exo)groups. The cost-benefit calculation does not disappear, but transforms itself by mobilising other costs and other advantages. 9. Arrow, Kenneth J (1974) “Limited Knowledge and Economic Analysis” in American Economic Review, Vol. 64(1), pp. 1-10 10. Tajfel, H., Billig, M. G., Bundy, R. P. and Flament, C. (1971) “Social categorization and intergroup behaviour” in European Journal of Social Psychology (Vol 1:2 April/June 1971), pp. 149–178 11. Turner, John C, Hogg, Michael A, Oakes, Penelope J, Reicher, Stephen D & Wetherell, Margaret S (1987) Rediscovering the social group: A selfcategorization theory, Chapter 3 38

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- The ‘human’ level: identity is defined by de-affiliation from all social connection, without for all that returning to the isolation of the personal ‘I’: the individual is now constructed as member of the human race, notably by contrast with other species. Let us now see how this model illuminates that of homo economicus, for whom collective goals have no existence (according to the theory) beyond their repercussions on ‘private’ arguments within an individual utility function. Economic theory only recognises the ‘personal’ level of identity: no argument other than from the sources of ‘private’ utility figures in the utility function of the economist who is hard pressed to translate into his formal language such propositions as: ‘I prefer to work in an organisation whose management is aware of issues of justice’. (It is not enough to say that economic theory tackles all the problems of interpersonal relations with the handicap of a single ‘level of identity’, which is ‘personal’, into the bargain. The model of homo economicus in fact denies, through the way it is constructed, the basic and essential characteristics of the problem it has to deal with.) Let us take the example of cooperative behaviour, crucial for economic analysis. Self-categorisation theory straightway points up the way that economic theory makes such behaviour artificially difficult. How can cooperative behaviour be produced if homo economicus is prevented from defining himself as a group member - let alone consider himself as ‘A whole man, made of all men, worth all of them, and any one of them worth him’ (the wellknown final sentence of Jean-Paul Sartre’s Mots)? The response of economic theory is well-known: monetary and financial incentives are needed to make cooperation profitable in a noncooperative logic – more precisely these are necessary, as has been noted, to discourage the inclination to fraud, trickery and other such deceptions re-baptised in the language of insurance as ‘moral hazard’, and ‘adverse selection’. Homo economicus adopts honesty only because the contractual arrangements of the

ON THE RELATION BETWEEN ETHICS AND ECONOMIC THEORY

situation are such as to confuse honesty with rationality, and he is (only) programmed to be rational. Neighbouring disciplines to economics – here, social psychology – allow us to see the extraordinarily reductive nature of the method economics uses to come to grips with social reality, and with all forms of interaction between Homo economicus and his colleagues. A resulting naïve question: to approach cooperation, as a timid first step towards an ethical taking-into-account, would it not be easier to start from the ‘intermediate’ level where Homo economicus, without collapsing into altruism, calculates costbenefit as a function of his membership of a group or organisation, and to treat obtaining cooperation at the lower level as a limitcase? A (deceptively) naïve response from economic theory: their modest focus is on the singular case as the more interesting and more natural one in the field of economic phenomena. But we should listen to those practitioners of economics who are managers. The above apparent access of modesty is not a good strategy for economics given its imperialism. The problem is not that economics must revise its fundamental ambitions downwards, it is that even with reduced ambitions, economics is in error. The real world of business reveals that dogmatically to make cooperation rational is an irrational way to produce cooperation! 3. Social psychology and the economics of the firm Cooperative behaviour among employees is increasingly viewed as key to the flexibility or reactivity demanded of producer organisations under the pressure of competition in an unavoidable globalisation (something noted fifteen years ago by Aoki). 12 Systems of remuneration are coming to rely on classifications depending on ‘competences’ rather than ‘qualifications’, with considerable emphasis placed on aptitude for cooperation. However, employees are not tractable in attempts 12. Aoki, Masahiko (1989) Information, incentives and bargaining in the Japanese economy: a microtheory of the Japanese Economy, Cambridge University Press 40

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to incentivise such behaviour; instead there arises a ‘paradox of cooperation’.13 French public sector managers14, attempting to link positive evaluation of cooperative attitudes with financial reward, encountered surprising resistance in the employees being assessed. Most surprising was the contrast between the employees’ bitterness when they felt their cooperative behaviour was not recompensed, with an almost indignant rejection of its immediately receiving an automatic reward. The recurrent general character of this apparent contradiction, noted by an increasing number of Human Resources managers, is what makes for the ‘paradox of cooperation’: it is as though cooperation ought, and ought not, to be rewarded. On the one hand, cooperation is not to be bought by material incentives; on the other, cooperation is not to remain unrecognised indefinitely. This recalls the penetrating analyses of Pierre Bourdieu on the time-interval needed between gift and counter-gift if one wishes the gift to retain that character and not see it degenerate into ‘donnant-donnant’.15 This suggests that the difference between the self-categorising individual and standard economic man is not simply a difference between having several levels of identity, and having only one, for in the first case the individual must also choose among them. He must decide who he wants to be, taking account of the relations with others that this implies. Homo economicus on the other hand has no problem with his identity. Who he is, is not affected by any initiative whatsoever on the part of his vis-à-vis. As for this vis-à-vis, he has no choice in who he thinks he is, either: each homo economicus is the same as all the others; dishonest if it is in his interest to be so. He has plenty of reason to mistrust others but no reason to dislike it if those others mistrust him: he is their exact double. 13. Richebé, Nathalie (2003) “La gestion et la remunération des compétences peuvent-elles inciter les salariés à coopérer?’ Refléxions sur le paradoxe de la cooperation”, Document de Recherche, ESC Nantes 14. Richebé, Nathalie (2002) “Les réactions des salariés à la logique compétence : vers un renouveau de l’échange salarial?”, Revue française de sociologie, 43 (1), pp. 99-126 15. Bourdieu, Pierre (1994) Raisons pratiques: sur la théorie de l’action (Vol. 4). Paris: Seuil., Chapter 6 41

ON THE RELATION BETWEEN ETHICS AND ECONOMIC THEORY

This is not the case for the self-categorising individual. He has continually to be choosing between two identities: his ‘personal’ self, abstracted from links with his work companions, and his ‘social’ self, as a member of a particular work-collectivity. In the above example of management’s mechanically seeking to engage his individual interest, it has clearly indicated that it does not believe in his solidarity with his work companions, and instead publicly rewards his egoism. Here is a first analysis of the ‘paradox of cooperation’: standard economic theory is mistaken in founding cooperation on egoism at the personal level, as this reinforces the malady that is supposed to be cured. The organisation, afraid that its employees will not feel themselves part of it, has recourse to exactly the sort of intervention which will persuade them to regard themselves as individual ‘egos’! This might resolve the problem in the immediate term, but also contributes to making it structural. We have not yet finished with self-categorisation. There is a third level of construction of the self, as ‘human’. To understand this we must see that the employees’ responses imply a necessary element of what should be gratis in cooperation. The gift awaits a counter-gift, but this still requires that a gift should have been made and would be undermined by too rapid or predictable a counter-gift. How to understand this balance between rationality and altruism? In this way: nothing sustains my human identity more than what I freely give, however slight, and that ‘I’ cannot be displaced when altruistic behaviour is expected of me. Thus, in aiming for external control of cooperative behaviour through financial inducement (or other symbolic forms of recompense) management deals a mortal blow to the element of freedom that the employees wish to preserve. That which in each individual is unique is, even with the best intentions in the world, reduced to the mechanical: input matches output. The human is degraded into the non-human. Here, then is a second approach to the ‘paradox of cooperation’: an efficacy desired by contemporary economic organisations is incomprehensible on the standard homo economicus model. It will continue to be so as long as that

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model cannot integrate a capacity for ethical judgement, at least in a minimal form: the rationality in interaction with others is not equivalent to rationality in gaming against nature.

POLITICS, ETHICS AND ECONOMICS Professor Elizabeth Frazer ISRF Academic Advisor, Head of Department, Department of Politics and International Relations & Associate Professor of Politics, University of Oxford

oncerns about the discipline of economics are expressed in terms of an ethical deficit - but equally we should speak of a political deficit. This shows itself in the recent academic split between economics as a scientific technique and field of study, and political analysis of public policy, social structure, and economic flows and distributions. In academic teaching, and in research, the ‘political economy’ focus out of which the late twentieth century disciplines of political science and economics evolved has been abandoned by the latter, and insofar as political economy now exists it is as an optional paper in politics degrees. I hope that these remarks amount to the beginnings of a persuasive argument for the reinvigoration of political economy in relation to ethics. Critics of recent economics, both the academic discipline and the professional practice, also speak of the loss of ‘ethical foundations’ or loss of economics’ moral compass. Here I want to pose the question what is, and should be, thought of as the foundation of what. First, it might surely be less that economics has lost touch with morality or ethics, and more that it remains a deeply moral or ethical subject, but that it has the wrong kind of morality or ethics in play. Second, both the metaphor of foundations, and that of compass, make ethics or morality independent of, and indeed prior to, economics, and we might argue that this is

PROFESSOR ELIZABETH FRAZER

misrepresenting the relationship between them. Third, in any case, in this kind of vein we might equally speak of the political foundations of economics, or its political compass. Depending on what we mean by politics, this might be an illuminating and inspiring idea, or it might fill us with sceptical dread. I’m a fan of political power and relations, but many people aren’t; and in a good deal of common sense and also political theory, ‘politics’ (roughly, the competition for the power to govern, and government in the context of that competition) has a corrupting or distorting effect on economics. According to this view economics - defined here as the flows, exchanges, and circulations of goods and bads, including crucially but not only material goods and finance, and the academic study of the logic and systematic and structural nature of those flows and exchanges - has its own dynamic which is upset by the interference of politics. Political action in democracies is driven by electoral logic, in autocracies is driven by the demands of security, so governors set fiscal and financial variables - taxation rates, public investment sums - at sub-optimal levels, from the point of view of economics. Political pressure groups and movements press for policies that distort markets. And so on. It’s worth noting here that it’s not only economists who view politicians with this degree of sceptical contempt: from an ethical point of view, political actors’ use of rhetoric in order to be persuasive compromises truth; they engage in endless discussion and non-decision instead of doing the good or right thing; they compromise with positions that shouldn’t (from certain ethical points of view) be compromised with. At this point I want to note that all of this presents ethics, politics, and economics, as independent of one another, usable as sticks to beat the others with. Politicians after all reproach ethicists for having insufficient pragmatism or realism. Ethics, as our proceedings exemplify, has something to say to economics. There is debate about whether it is more appropriate to speak of the ethical foundations of politics, or rather the political foundations of ethics. An alternative view is less agonistic: rather

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than mutual recrimination, the three can be seen as providing checks and balances, constraints and thresholds, for each other. Political actors can use ethical judgement to frame ideal political (and economic) outcomes, and they can formulate, and attempt to implement, policy accordingly. Economists can make policy prescriptions in light of their best social theory, including human psychology, and in the framework of the constraints and opportunities afforded by the political system, with its electoral cycle and particular points of pressure and resistance, just as they make economic policy prescriptions in the light of an economy’s endowment of natural resources and other economic goods and bads. These are considerations of disciplinarity and interdisciplinarity - how should the disciplines of economics, politics, and ethics relate to one another? how do we understand their respective objects of study - economic flows, political power and institutions, ethical values - in relation to each other? I’m going to go on to suggest that the three are, and should be, less independent than current disciplinary specialism and, indeed, isolationism, makes them. We can trace my reasoning through consideration of Rawls’ theory of justice - an interesting case in striking a balance between economics, politics and ethics. 1 This is a normative theory of justice - designed to persuade and convince citizens of democratic polities what level of welfare redistribution is justified, and can and should be implemented. It is interesting, from my point of view, that Rawls shares the commonsense and ethical disquiet about politics. The theory of justice is designed to fashion constitutions, to entrench rights and equality such that certain issues are removed from the political agenda once and for all. Politics, in Rawls’ view, falls distinctly far short, ethically speaking, and so do the outcomes of economic exchanges if they are unconstrained by law or morals. The theory begins with ethical intuitions or truths, the equivalent of the golden rule, or the 1. Rawls, John (1971) A Theory of Justice, Harvard University Press 46

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principle of human dignity and equality - not universally accepted to be sure but difficult for any individual (right or left, religious or secular, powerful or powerless) from a pluralistic more or less liberal society not to endorse. These are brought into relation with economic principles, such as the axiom of rational choice and preference satisfaction. The point is to generate a policy prescription (a certain measure of redistribution of goods, by the state, from rich to poor) which is philosophically and ethically justified, is politically legitimate, and is administratively practical and realisable. One objection to Rawls’ theory and philosophy is that the conceit of the independence of moral, political, and economic reasoning, such that they generate a satisfyingly coherent theory for human life, is only a conceit. Rather, Rawls’ philosophical anthropology, his understanding of governmental authority and capability, and his use of marginal economics, tie ethics, politics and economics together, unify them under a single theory. They share, in Rawls’ philosophy, a critical set of presumptions about calculability of satisfaction and reward, about the status and nature of social relations, which are not independent of each other. In particular, Rawls’ method underestimates the extent to which ethics are internal to economics and to politics. As soon as we put the matter this way, it is evident that what that ethic consists of, and what we mean by politics, can by no means be taken as read. Further, we must be critical of how particular procedures, institutions and cultures of politics, and ethics, and economics, bring about particular outcomes for individuals, for groups, for societies, polities, economies and the planet. Furthermore, we need to bring conceptualisations of good and bad, right and wrong, to bear in our judgements and evaluations of these outcomes. This is not to say, as with some ethical systems, that we conceive of good and bad, right and wrong, as metaphysical objects, or as truths, or as independent of human lives and purposes. But it does mean that we have to bring goods and bads, rights and wrongs, into play with one another in evaluating what

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we should seek to change, and how. Let me try to illustrate. Political rule and relations are to be distinguished from other forms of order. Politics might be natural for human beings, but it is not natural in the way that biological and zoological forms of order and interaction are natural, let alone the ways that the workings of the human alimentary system are. Essential to politics is the peculiar human capacity not only to come up with ways of making decisions, implementing them, assigning responsibilities, and so on, but also to come up with ways of deciding how to decide, implementing strategies for implementing decisions, and assigning responsibility for assigning responsibility. In political order, those who are ordered do the ordering. The spirit in which they do this will vary - it may be more or less contestatory, sometimes half-hearted, sometimes playful. Itâ&#x20AC;&#x2122;s all very well for Rawls to say that the point is to get certain issues off the political agenda once and for all, but this is impossible. The thing is that there are no issues of human interest that are really off the political agenda because somewhere, someone will be arguing that they should be done differently, or not at all, in more egalitarian fashion, or more authoritatively, or more efficiently, or more ethically, or more beautifully. Political contestation focusses both on the values that are the criteria for goodness, rightness, acceptability, or endorseability in any human institution, and on the way the institution should be designed and ordered, specifically on how it might be changed. These considerations affect the way we think about ethics. In particular, there is an ethics of relationality and contestation, of action in concert and in competition, which presupposes not isolated individuals who might or might not enter into relations with others, but which presupposes individuals in relations with others, which relations are always subject to political contestation. Similarly, this way of thinking about human life - with politics at its heart - frames economics and economic action and behaviour differently. Rather than being thought of as a quasi-natural system, like thermo-dynamics, it is thought of as a contested

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realm of human relations, like the rest of political and ethical life. Such considerations also affect the way we think about matters of methodology and social science. In the case of economics some critics ask not much more than that economists should take proper account of the interaction of economic circulation with political power and institutions. Political power is a context for economy, as economy is both context for and the object of political action. If we add to this the ethical evaluation of economic outcomes, and deny that it is satisfactory for economists to simply invoke the division of academic labour and leave ethics to the ethicists and political power to the political scientists, then our methodological prescription might be that economics must take account of political context and ethical outcomes. That will involve a widening of the range of phenomena that are conceptualised and observed, and incorporated into models. Other critics, though, want to extend methodological strictures against orthodox economics further. In particular, it can be argued that economics has gone wrong at the level of philosophical anthropology. We need a more complex account of human motivation, action and relations than is encompassed by homo economicus. Models of human action and interaction have to take into account the standards of people in their roles of citizen, creator, producer, and others. And this will involve more than simply aggregating homini economicus, politicus, faber and all the rest, although understanding the pulls and tensions between the diverse sets of standards that shape and constrain humansâ&#x20AC;&#x2122; motivations and actions is an important first step. It will rather involve understanding, for any human society in its historical and global context, exactly how the human capacity for participating in, and contesting, the structures that govern intersect with exchanges and flows of goods and bads, and with standards of conduct in diverse domains of life. More complex is the idea that all of these models betoken an epistemological and methodological mistake, which lies in the

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abstraction of any stylised model of human motivation and action at all. Some criticisms of the unwarranted objectivism that is an epistemological, and hence an ethical, principle of positivist methodology and the methods of formalism and abstraction, would take issue with my analytical distinction between ethical, political, and economic. This kind of criticism can proceed from a variety of philosophical starting points between subjectivism, phenomenology, and pragmatism. The argument would be that the premise of ethics, politics, and economics, whether independent of each other, or entailed by one another, is an analystâ&#x20AC;&#x2122;s imposition on the world. I donâ&#x20AC;&#x2122;t accept this latter step, although I do believe that its challenge has to be taken seriously. My (partial, obviously) understanding of human societies is that wherever we are human beings argue the toss, try to make changes, and try to prevail in matters regarding how we should treat one another. They also argue about what may and what may not be bought and sold; how social institutions should interact with freedom and with welfare. Political contestation, ethical judgement and economic analysis can hardly be pulled apart; and they can hardly be wished away either.

WHAT DOES ECONOMICS LOOK LIKE? Dr. Jamie Morgan Senior Lecturer in Economics, Leeds Beckett University

hat is economics? To a non-economist this may seem a trivial question. Definitions abound and surely economists have a sense of what their discipline is. The question, however, has multiple aspects that go some way to accounting for the continued and growing scepticism in the world regarding the substance and role of economics. In 1941, referring probably to a prior usage by Jacob Viner, Kenneth Boulding stated, “Economics is what economists do”.1 Though pragmatic in orientation the statement is essentially a permanent deferral of comment on substance. It is truistic but uninformative in and of itself. A discipline has a form and a substance at any one time. However, the two can be more or less diverse, so it might still be relatively unilluminating to talk of “economics”. There are thousands of academic and other economists, thousands of papers written, many journals, many sub-disciplines and research foci. There is a social world that is constantly changing and one might expect that economics is similarly changing as part of the social world (being an aspect and product of education systems), so it may seem in some sense strange to attribute anything in particular to economics at the broadest level. It may be possible to produce a general definition but this may not be particularly useful as a source of insight as the definition to which all else can be reduced. The field exceeds the definition. The standard definition of economics (its mainstream point of departure) remains Robbins, 1932: 1. Boulding, K (1941) Economic Analysis New York: Harper, p. 3 51

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“The science which studies human behaviour as a relationship between ends and scarce means, which have alternative uses.”2 Robbins specifically states that this definition encapsulates the “unity” of the field as it then existed and that there was “no limit” on economics as a science beyond this focus on analysing choice in terms of relative scarcity. It was not a judgement on whether in fact this unity was to be desired. Nor was it a statement that unity lacked distinctions. The positive-normative divide is also rooted in Robbins’ 1932 work, though again he was ambivalent regarding the basis, tenability and desirability of this distinction.3 What is more significant regarding Robbins’ definition is that it has endured, the way it has been transmitted and the context in which this transmission has occurred. Variations on Robbins’ definition are found in many textbooks up to the present day. It remains the point of departure of the field as a knowledge statement – economics concerns x. This is despite rather than because of its conceptual coherence. Not everything is scarce, not everything is relatively scarce – some things are 2. Robbins, L. (1932) An Essay on the Nature and Significance of Economic Science London: Macmillan, p. 15 3. “I would emphasize that to say of a judgment that it is a judgment of value does not mean that it is merely arbitrary judgment. I don’t know how values arise in the world or how we come to perceive them. But I am sure that judgments of value are an essential ingredient of purposeful action. And I like to think that when we argue about them, although we cannot test our results in the way in which we can test purely scientific arguments, we are not merely arguing to decide who is master of the world… For good or for bad, what we are doing in this connection is to make statements about the logical implications of certain conventions which, at bottom, are political… far better to introduce our supplementary assumptions explicitly and attempt to vindicate them for what they are – conventions imported into applied economics from the sphere of political philosophy… Why should it vitiate the utility of a scientific discipline to admit that it cannot anywhere be used for purposes of appraisal without invoking criteria that come from outside… I incline to a narrower view of what can be got out of economics alone and exhort the economist, if he hopes to be at all useful, deliberately to look outside.” - Robbins, L (1953) ‘Robertson on utility and scope,’ Economica 20(78) 1953, pp. 109-111 52

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abundant in some places, some things are materially limited (and so the issue for some things is not relative but absolute limits to extraction, exploitation and use, and how these affect all other aspects of society and ecology, rather than undifferentiated substitutability)4. Moreover, there is no clear reason why scarcity should be the prime orienting position of economics, unless one translates an amenability to quantities as a focus for our understanding of the economic into a framework that restricts the main focus to what can be counted and quantified.5 In any case, to separate the issue of the framework of choice from the choices made is to externalise the full context of the decisionmaking process, which gives rise to the conditions under which choices are then made. It is to abnegate economics from responsibility for its role in the deeper question of: how do we want to live? Economics merely describes a path along a trajectory of what we are already doing (or rather a stylised account under particular conditions of what counts as economic knowledge that references itself to this). Variations on Robbinsâ&#x20AC;&#x2122; definition are not just found in modern textbooks, they are integral to the constitution of those texts. Economics is not alone in being taught by textbook. But the presentation of an economics textbook is unusual among the social sciences. Economic textbooks are set out as a sequential set of additive concepts and problem fields with a range of standardised theoretical positions and a set of solutions for each, which can be demonstrated. Within the textbooks currently available there is no sense that there are prime orienting questions, deep disputes, historical divides and continued possibility of disagreement on fundamentals regarding socioeconomies that we create. So a field of knowledge whose subject matter is social and historical, and whose theory has a history, is presented not just selectively but synthetically, and more in the style of a natural science textbook (though after a while one 4. See: Spash, C (2013) â&#x20AC;&#x153;The shallow or the deep ecological economics movement?â&#x20AC;? in Ecological Economics No. 93, pp. 351-362. 5. See: Martins, N (2014) The Cambridge Revival of Political Economy London: Routledge 53

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reads them as car manuals for vehicles that cannot be driven). In terms of socialisation of the trainee economist and presentation of the discipline to others this fosters a significant sense of a natural science analogue identity. This is despite that natural science bears little resemblance to the sense of that science most economists have as philosophy of science, and there are clear differences in any case between the constitution of society/ economy and the constitution of the extra-social world. By the time would-be economists begin to read academic articles in earnest and to engage in research they are already socialised to a mindset regarding their field based on textbooks. This then tends to affect what they subsequently read and how they read it. A trainee physicist reads textbooks on physics and then cutting edge research on the arising problems, read through the anomalies and issues arising from this state of the field. An economist does the same (and so transitions from an initial technical mindset to a technical focus, reading and orientation). A physicist does not read Newton so why should an economist read Adam Smith, Thorstein Veblen, Keynes, Marx or Daly? So, the definition in economics is not irrelevant, even if the field exceeds the definition. It has a context. Moreover, that context is broader than simply the textbook form. One must ask why Robbins’ definition endures (and does so without some of his own ambivalence). This concerns the reproduction of knowledge. We may be tempted to think of knowledge in Platonic terms based on its standardised meaning in epistemology – the “true justified belief” of Theaetetus (albeit cross-cut by many competing philosophical claims regarding deflationary forms, truth claims, warrantability and so forth). But the context of discovery and inquiry involves also the sociology of knowledge. That is, the terms of orientation and focus that mediate what is considered knowledge, and how it is pursued in any particular time and place. Knowledge is produced and reproduced. As such, it involves a system that affects selection –something broadly evolutionary, though evolutionary in a way situated to a social rather than a biological system. These are issues taken up by Thorstein

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Veblen in economics, and more laterally by Geoff Hodgson6 and Tony Lawson7, though beyond economics they are also familiar territory from Mannheim onwards, and via Foucault, Bourdieu etc. In economics the issues involve the Marshallian insight that there are selection criteria and an environment that affects the survival/success of whatever is then reproduced, but that success in terms of survival and proliferation (in this case of a knowledge form) does not necessarily (merely because of reproduction) imply any determination or judgement regarding the rightness, good, desirability or adequacy of what is reproduced and what proliferates. Whether it does so depends on how reproduction occurs and whether in fact reproduction, including variation and change, are occurring based on deliberative, reflexive or critical points of reference that are able also to demonstrate the good, the right, the adequate, the desirable and so forth. It should then be fairly clear that in so far as economics adopts a particular socialising form that emulates a (dubious) image of natural science procedure, it will tend to reproduce based on criteria other than critical reflexivity regarding its own form and its own place within the social sciences, and regarding its own contribution to society. It will continue to have effects on society and an instrumental justification for its position within society, but not necessarily reflect on the issues that arise from this and that condition this. The more “scientific” (or more accurately in Hayek’s phrase, scientistic) economics becomes, the less it is able to produce economists and create space to consider its own role. Boulding’s truistic statement then becomes even emptier, as doing what is done takes precedence over auto-critique regarding the adequacy of the field (in ways that can adjust or transform the field). This state of affairs has been confirmed many times by particular economists (a curious mix of prominent mainstream economists leveraging the influence acquired through technical proficiency to critique the overly technical state of the field, and heterodox economists speaking from exile at the margins of the 6. Hodgson, G (2004) The Evolution of Institutional Economics London: Routledge 7. Lawson, T (2003) Reorienting Economics London: Routledge 55

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field). Moreover, it has been systematically confirmed by research from sociology and most notably by Marion Fourcade and a series of colleagues.8 Fourcade makes it clear that economics is not quite like the other social sciences. It is more unified, its key professional organizations exert greater and a more effective degree of top-down power, it is more tightly disciplined in terms of its PhD foci, supervisor-postgraduate relations, career paths, and in terms of the international dissemination of standardised textbooks and curricula, as well as in terms of its publication and research profiles. Economics is then inherently conservative in the sense of conserving or preserving. It changes slowly, and does so based on the current orientation to method and theory, rather than in response to (as broader critical reflexivity would allow) the fundamental terms or positioning that cause any given method or theory to fail. To be clear none of this implies economics lacks change or diversity. What it does entail is that economics writ-large has a recognized history. This is typically articulated as the emergence of a mainstream9: a gradual adoption of a particular set of key concepts and conditioning methods and tools, developed from the marginal revolution of the late nineteenth century and involving over an extended period a shedding of classical political economy (and of Marxist historical materialism as one development of this) and of old institutional economics (and insights from the German historical school), and then also of key aspects of Keynes’ and UK Cambridge School positions that briefly informed the field – notably a scepticism regarding econometrics, the emphasis on fundamental uncertainty and conventions, a special position for labour not reducible to a simple equivalent factor of production, a centrality for derived demand and effective aggregate demand related to investment multipliers etc (all of which was lost in what continued for some time to be called Keynesian economics, but then mutated through a New-Classical 8. Fourcade, M, Ollion, E and Algan, Y (2015) ‘The superiority of economists.’ Journal of Economic Perspectives 29, (No. 1) pp. 89-114 9. See: Milonakis, D and Fine, B (2009) From Political Economy to Economics London: Routledge 56

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Synthesis into something quite different). Concomitantly, in becoming this, mainstream economics has shed from the core concerns of its curricula and hence from the interest and skill set of the economist: economic history, the history of economic thought, consideration of schools of thought, and philosophy of economics. At the same time, and through the twentieth century in particular, economics became gradually more mathematical (or in Steve Keen’s apt phrase “mythematical”)10 , and more focused on a narrow range of methods – particularly involving the construction of tractable models and the use of analytical statistics. This has rendered the field narrow in terms of the skill set for methods that economists are familiar with, and that they can transmit to their students and postgraduates, and that can be published in key journals. Economics has thus become less about multi-methods to interrogate a problem and more about monomethods reproduced in terms of a set of technical problems of modelling (iteration and innovation in the modelling form has come to dominate). Consider then if one sheds genuine diversity of theory, critique and engagement between schools of thought, the history of actual economies, and the history of the discipline itself, and then simultaneously narrows the skill set and training in theory and method of the economist, it can hardly be surprising that economics reproduces itself in ways that are narrow, conservative and have great difficulty in critiquing the state of the field (since this is facilitated by some philosophical training or awareness, and some sense that a social science has a history and there are many ways to conduct research and pursue knowledge). The very nature of contemporary economics is antithetical to pluralism, genuine inter-disciplinary endeavour, and to open critical inquiry based on many methods that are chosen because they suit the conditions of the inquiry, rather than because they are all that the researcher knows. 10. Keen, S (2016) ‘Is neoclassical economics mathematical? Is there a non-neoclassical mathematical economics?’ pp. 238-254 in Morgan J (Ed.) What is Neoclassical Economics? London: Routledge, forthcoming 57

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To reiterate, this shedding does not imply a lack of change within economics. Rather it conditions the nature of change. One need only consider some of the more recent instances when the discipline has been motivated to consider the state of the field. In the late 1980s and early 1990s the American Economic Association and its elite university departments became concerned that economics was in danger of evolving itself out of existence. The resultant COGEE Report noted that economics was becoming ever more mathematical and remote from broad-based real world concerns, and that this was creating a selection bias for mathematically inclined students, but to the detriment of future generations of more creative economists.11 Despite these concerns, the 1990s was dominated by the general growth and dissemination of mathematical formalism, and of a tacit split between pure theory and increasingly theoretically empty forms of applied economics. 12 This period was also a high point for economic imperialism (as economics colonised the subject fields of other disciplines, following Gary Beckerâ&#x20AC;&#x2122;s lead), and of a Washington Consensus political expression of an economic orthodoxy. The twenty first century has seen another shift towards a more empirically directed economics that also embraces deviations from prior core concepts and commitments. Methodological individualism has been loosened, agents are deemed to be positioned and subject to bounded rationality, some sense of institutions and behavioural variation have been allowed for, and multiple equilibria and disequilibrium have been acknowledged as significant. Economists now consider themselves more diverse in terms of research, theory and method because they have embraced subdisciplinary concerns under such headings as behavioural and info-theoretic economics, neuro-economics, and experimental economics (including the use of natural experiments). However, these are deviations from prior commitments not repudiations of them. They are limited by their point of reference and by what is 11. The Commission on Graduate Education in Economics (COGEE) 12. See: Dow, S (1997) â&#x20AC;&#x153;Mainstream economic methodologyâ&#x20AC;? in Cambridge Journal of Economics 21(1), pp. 73-93 58

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preserved even as change occurs. The empirical remains a data processing exercise rather than a multi-method interrogation of a problem field that starts from the basic question – what is the nature of the phenomena under scrutiny and how might it be investigated? It is curious to consider quite what innovation and “better”, perhaps more realistic, theory can possibly mean when the context remains one of selection and evolution that excludes so much that seems essential to a non-pathological trajectory of change within the field. One cannot escape the conclusion that the concepts and methods of mainstream economics remain mainly inappropriate to the study of social reality 13 , and this must in part be because the discipline simply does not ask, what concepts and methods are appropriate to the study of social reality? It is in the absence of this kind of question that economics contributed through its theory and practice to the Global Financial Crisis (GFC), and it is in the absence of this kind of question that it has responded to the GFC. The aftermath of the GFC is another illustration of how economics is changing to stay the same. Despite the emergence of a new generation of critique from students around the globe (PostCrash and related movements), and despite the initial impetus given by the creation of the Institute for New Economic Thinking (INET), the mainstream response to the GFC has been to translate recognition of profound disciplinary failure into provisional success: there are many things we do well, the GFC was a major event, but a matter explicable in terms of finance related specifics, rather than an indication of more profound problems (that it illustrates but which are not reducible to it). One sees this, for example, in the small changes of approach so far developed in INET’s CORE curriculum project, or in the recent modifications to the UK Quality Assurance Agency for Higher Education (QAA) economic subject benchmarks (which form the basis of the curriculum in the UK). The QAA, for example, introduces the concept of sustainable 13. See: Pratten, S (Ed.) (2015) Social Ontology and Modern Economics London: Routledge 59

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development as a dynamic allocative problem, which economics investigates. However, the primary focus of economics, and the point of departure, remains the scarcity concept, with its substitutability dilemmas for relative scarcity, rooted in Robbins’ 1932 definition. Given that human induced global warming due to carbon emissions is now an accepted fact, and warming is just one among many ecological events that economic “development” (qua growth and consumption) is creating, it seems extraordinary that the “problem” of “the environment” has been delegated to a sub-discipline, as though the rest of the economy were weightless or without consequences, and no other economist need be aware of the ramifications of economic activity in this context.14 One can only be amazed that the most profound challenge to social design is not also central to what contemporary economics looks like. Amazed, but not surprised. Economics may not be reducible to any given definition but it remains remarkably (so remarkable that it is not remarked upon by mainstream economists) coherent in terms of the evolution of its form, and as it pertains to the trajectory of its substance. So, what does economics look like? It doesn’t look right, but resists the conclusion that it is wrongly posed and overly narrow. This raises the question of what could economics look like and I turn to this in Part 2 of this essay in the next ISRF Bulletin.

14. Though the rate of warming and the thresholds of fundamental changes in weather and eco-systems are disputed, since they are basically unprecedented. 60

This issue features: Olivier Favereau Elizabeth Frazer Tony Lawson Axel Leijonhufvud Jamie Morgan Constantinos Repapis