Thursday, March 30, 2006

Economics of reason

I believe it illustrates this certain general slowness on the part of the free market fundamentalists that they have not thought of asking the obvious counter question to my previous posting, namely what would then disprove my conception of economics? Maybe even luckily for them as it would not really be a showstopper. So, let us continue unasked and describe how one should rationally deal with economical questions. First of all I must say that I don’t regard the economical arrangements of a society as any fundamental question about its nature. To quote a famous pioneer of capitalism “all cats are dark in the night – it only matters if they catch the mice”. I would use economical structures pragmatically as tools to maximice liberty in the society (from all constricting structures such as extreme poverty, steep unequality of social status, having freedom to think and organize politically, freedom to develope according to one’s abilities and inclinations, freedom from irrational power and belief structures etc. etc.). All constellations in our chaotic history are pretty unique: you can’t beforehand have an exact blueprint on which particular arrangement in a given historical moment would be the best. You have to rely on empirical observation and reason.

Currently the debate centres on the roles of the state and the market forces. The market fundamentalists have a very primitive slogan: “government bad, market good”. This regardless of actual empirical observations, actual situations - the Grand Theory tells them what to see and what to do, and what not to see, no counter arguments are accepted as legitimite. As I already wrote in a previous comment: these two need each other to work, especially the free market desperately needs the strong state to keep the playing field level and the competition honest and free. But even more importantly, these questions should be resolved without existing bias. Sometimes government action is far better and more efficient than the market forces. Often of course this is not case, especially in the traditional "purely" economical fields. But not always even there. We should not let ideology and irrational blind faith predetermine our decisions. It is very unfortunate that this dangerous, disastrous and reckless attitude is spreading so rapidly in our societies.

So, we should balance the roles of government and the market forces rationally on case by case basis. There are areas where the market forces are inherently quite unsuited – namely the areas where values are not best measured in money and profits, where overproduction is sometimes crucial; in areas where human value and dignity are paramount, such as health care and education, the market forces should be strictly guarded and given only a very limited space to operate. But they still can be harnessed even there to do the work for which they often are very suitable: to maximize long term productive efficiency. Unguided and unregulated they tend to devalue and dehumanize these sensitive areas (the same goes of course for the security field) leading to gross distortions and endangerment of liberty. On the other hand on the level of individual private interactions the state is usually not a very useful direct player. To concentrate too much power into same hands does not only lead to inefficiency but also to abuses and misrule. We have to be accordingly very careful when deciding into which private areas we can allow government safely to intervene. So, to encapsulate: firstly, I don’t have an all encompassing economic theory that would predetermine my attitude before seeing the particular state of affairs, the particular constellation, and secondly, my specific positions can easily be proven wrong using empirical observation and logical reasoning. Economics as non-religion.


susanna said...

thank you suomenkielista ei kannata kirjoittaa ?

stockholm slender said...

Totta kai! Olen vähän miettinyt välillä suomenkielisiä postauksia itsekin, mutta se vaatisi jotenkin erilaista asennetta, ei voisi vaan huvikseen rustata niin kuin nyt...

tomia said...

AS you know, economists talk about externalities, both positive and negative. Externalities can be seen as the area where the state (or some other institution) can step in and regulate an activity that causes negative externaly, like pollution, or it can step in and produce a positive externality, like education, if the market forces don't produce it or produces it less efficiently.

The most extreme market fundamentalists view that in a perfect market situation - their utopia - there are no externalities, that every externality will be internalized. If I've understood correctly this childish idea, it means, for example, that when somebody owns the atmosphere it becomes just like any other commodity and as such it or the right to use it can be bought and sold.

A more moderate view holds that there indeed are externalities but only in certain well-defined areas - like pollution and education.

Not so, in my opinion. At least in theory anything we do have an effect on others, some things more some less. So, it's evidently a question of a spectrum. Where exactly something I do turns from being my own business into an externality is a question of an opinion. In a country like Finland it's up to the courts and in the end the parliament to decide over such things. (With positive externalities it's a bit different.)

Well, that's about the same thing you said, I guess, just put in economic mumbo-jumbo.

There are, of course, a lot of economists who have pondered these things over the years, some of them Nobel laureates. It doesn't take much studying to relize that the most certain and out-spoken advocates of the free market have a very shallow understanding of economics, not to mention such devilish things like sociology. Perhaps psychology, rather than economics is the tool to use in order to crasp their worldview.

stockholm slender said...

That is a very clear and sense making summary! It never seizes to amaze me how intellectually superficial most free market fundamentally sounds (I mean regardless of its possible correctness) - one would have expected them to come up with something more sophisticated after all this time... Well, perhaps, the modern times don't make justice to them: it is always easier to go with the historical tide, and you don't have to so much analyse and understand the conditions when they appear "naturally" favourable. I am somewhat gloomy about the present trends I would have thought that we would have learned something from our experience, but that does not appear to be the case.

tomia said...

I think that the philosophy behind most economic theories is some sort of simple - or simplistic? - utilitarianims: when we want something we act to get it, and that's good because there are no other moral criteria than individual happiness. (This idea is a bit problematic because people are often willing to sacrifice their own happiness, even life, for all kinds of things: own children, a cause and so on. So, apparently utility can't be the same as individual happiness. But that, again, leaves us with "what I do is good" - unless we are willing to bring in social values - and that indeed is not very sophisticated;-)

The mechanism by which individual utility seeking (egoism, greed) brings about general good is of course the invisible hand, free markets. Here the idea is that people only make such voluntary contracts which benefit them. Thus every contract makes everybody involved better off (excluding those who are affected by the negative externalities). In a free market system everybody is constatnly looking for the best possible deal which makes everybody constantly better off. These millions upon millions contracts are thus always trying to reach the equilibrium, the most effective way of production (although never really reaching it).

This "philosophy" explains why there are so much of that tasty and inexpensive ketchup in the local supermarket, but otherwise it's a pretty unsatisfactory theory. Or ... it don't have to be, and often it's not. The unsatisfactory part really is that there are people who believe that this is the theory of all of the social sciences.

These people seem to think as if such things as market failures, institutions and non-individual values didn't exist, or that they were of little importance and unproblematic.