Cafe Economique Talk
Presented in Nottingham, UK on 30th August 2012
The talk is presented below with its accompanying slides. Click on each slide to see a larger version.
Please note that the notes that go with the power point were written up after the talk had been given and thus differ slightly from the audio version. The arguments in the written version are slightly more detailed and the written version includes references and sources whereas this is not fully the case in the audio presentation.
To Aristotle you could not even consider this question without having a view of what is particular to human beings. For him the end of all human activity is sometimes translated as “happiness” but this can be misleading to a modern understanding of that word – because what Aristotle meant by happiness was a very specific idea of living a virtuous life in accordance with reason. The virtues included personal characteristics like integrity, honour, loyalty, courage and forthrightness. Ideally life meant developing oneself and flourished in and through ones dealings and particularly through participation in the community.
This did involve some need for provisions, and if fortune was on your side your women and your slaves could take of your needs in this respect, but Aristotle did not think that happiness involved accumulating lots of possessions.
To Aristotle the amount of property needed for a good life was limited. Taking this standpoint he saw there being two kinds of exchange and trade: exchange in order to satisfy a genuine need; and exchange in order to make money and accumulate possessions. The latter Aristotle thought of as unnatural, as he did usury, because it involved money growing without limits which violated the laws of nature – since everything in nature has limits.
Well, fast forward to Augustine and Aquinas. No doubt they too turned a blind eye to the power structures of the feudal society in which they lived but, as monks who had taken vows of poverty, they thought the reason for living was firstly, as it says in the Ten Commandments, to love God and also to love your neighbour. Life involved transcending yourself. Well, of course, this is very different from calculating your individual interest as assumed by modern economists. Instead it was assumed that you gave to and provided for the people that you loved and that you exchanged with strangers – in order, at the next stage, to have the things needed for the people that you love and for oneself.
To Augustine every person has a choice – to provide his or her goods for himself or to provide them for other people. This depends on the love people feel for themselves compared to the love they feel for other people. Thus distribution at the local and personal level, as economists describe it, involves a moral choice. With Aristotle there was also an idea that you shared wealth with a wider community, which in his case was the polis, the political community (of men and non-slaves).
Even when we exchange with people we do not love we had ethical obligations. For Aquinas exchange involved a just price – the price that emerged through haggling that cleared the market – but, and this is crucial, a just price is not imposed or experienced by some parties under conditions of duress. To charge someone high prices because there was a famine was most definitely not charging the just price.
So the context prevailing in the market is an issue too – indeed we can extend this idea to include monopoly control of the market and other conditions. Later in this talk I’ll argue that if you take away from people their means of support, like access to the commons, this is also putting them under duress.
The early medieval period was characterised by power structures somewhat akin to protection rackets where militarised hierarchical gangs effectively imposed themselves on the people and extracted labour and products, claiming that they had their authority and rights from God, but in effect having their power from their ability and preparedness to act as ruthless gangsters operating out of heavily fortified castles.
The church was no doubt complicit in all of this but it also acted as a form of social welfare agency in difficult times when the aged, sick and poor could turn to the monasteries. In addition, in England, the ordinary people had certain rights to use the forests, the wastes and commons lands for their own maintenance that were protected in the Charter of the Forests (the companion statement of rights adopted at the same time as the Magna Charter).
The rise of the merchant class and of commercial society in towns, and along trade routes outside the power of the military elite, changed all of this over a number of centuries. With the Reformation in England Henry VIII dissolved the monasteries and sold them to his courtiers dismantling welfare provision for ordinary people.
Economic theory changed with the times. According to Aquinas merchants did fulfil a useful function of bringing goods from where they were abundant to where they were scarce. However, that’s not all that they did. For example they helped create economic conditions where it paid the elite to take the commons land from the commoners to enrich themselves (with sheep for the wool trade). And trade could be in slaves or the goods from slave plantations – or from products extracted by taxes in colonies. In other words under conditions of duress.
Increasingly economics reflected the technical issues of the time, rather than being a theorisation of the morality of the market.
Elite theorisation of economics turned a blind eye to these processes, including in the ideas of Adam Smith in the 18the century. Smith was a professor of moral philosophy and was no doubt aware of scholastic economics. However for several centuries economic thinking had been changing from the ethical reflections of monks into more hard bitten ideas about how merchants and the aristocracy made money and accumulated wealth.
Thus Smith did not mention the Atlantic slave trade and plantations which created the wealth that flowed into places like Glasgow. Nor did he consider pillaging of India by the East India company. This international trade involved economic arrangements nothing like his cosy picture which he wrote about, although he must have been aware of it as the source of the riches of people in his own world.
Smith’s inquiry into the Wealth of Nations was not concerned with ethical issues about distribution and looking after the poor. He regarded himself as living in a different kind of age, an age of improvement – the commercial society had changed the game as far as economics was concerned. So Smith wrote about how more primitive societies might be more equalitarian – but, in his own society the labouring classes had their needs met and the more important thing was that the division of labour, specialisation, was making possible a continuous improvement in production . Thus everyone was much better off, even if unequally so.
Not for the first time or the last Smith was another economist who ignored less uplifting aspects of reality and chose to describe the further development of specialisation and of the market as the future for commercial society.
Of course, people still realised that human and social relationships were not always just, and that the ends that people pursued were less than perfect. However, it was increasingly assumed that these problems too required economic and technological progress. It would be when people were all much better off that they would be able to get to grips with these problems.
The slide on the right quotes philosopher David Hume, a contemporary of Smith. This idea is still with us today and has been shared by many subsequent thinkers. Karl Marx thought that the highest phases of communism would be prepared by the ability of capitalism to create an economy of abundance. In this context all sorts of problems between people would “wither away”. Without believing in the need for revolution Keynes also believed that in the distant future humanity would overcome its scarcity problem and thus its psychology of self interestedness. (See his essay, “The Economic Possibilities for our Grandchildren” published in Essays in Persuasion). The problems for humanity were no longer problems between people and God (or between people and Nature) nor between people – they were problems of inadequately developed technology.
Even more important was Smith’s abandonment of the ideas of Augustine and Aquinas, about an obligation in economic activity, towards loving your neighbour. For him a properly working market delivered socially beneficial results even though people were pursuing their self interests – or perhaps I should say, because people were pursuing their own self interests.
The famous quote from Adam Smith on the slide illustrates this idea.
Having abandoned considerations of distribution which were rooted in ethical considerations of love for one’s neighbour and ones obligations to a wider community, the new economics asserted that by pursuing one’s private advantages – and self love – the market would in any case organise a social outcome in the interests of everyone.
In this theory people got what they wanted through the “invisible hand” of the market because if they decided they wanted more beer and less bread they would seek to buy more beer and less bread, the price of bread would fall and that of beer would rise. Some bakers would switch to brewing and some farmers would switch from wheat for flour to hops and barley for brewing…Prices would act as signals that resources needed to be re-directed. As long as there were no restraints to resources flowing from one use to another there was no need for the state to intervene.
This was not a revolutionary new idea in his day – these kind of ideas that the market activities motivated by self interest, delivered what people wanted, can be found over a hundred years before Adam Smith. Moreover we should try to understand it as contemporaries would have understood it. Humanity had fallen – we’re sinners. And yet God had a providential plan for the world and he realised his plan through the self love of people operating through the “laws of the market”, that Smith described. At the time of Smith it was big thing that Newton had showed that things did not happen because of continual interventions by God. So instead people now thought that God set up the basic design of the universe and then it ran itself. In a similar way, the market and the “social physics” of economics worked through the predictable self interested behaviour of people giving rise to economic laws. As the poet Pope put it: “Thus God and Nature formed the general frame, And bad self-love and social be the same”.
It’s a nice parable but what economists are well aware of is that prices and the allocation of resources depends on the prior allocation of rights to the different factors of production. What was being ignored and relegated to the small print was what Aquinas had been aware of – the issue of duress. Smith was an apostle of the market and commercial society at a time when labour and land were being forced into becoming market commodities by land enclosure and when the state, by attacking the poor law for the support of destitute people, was ensuring that the poor worked on terms that can be dictated by their employers.
Neither land nor labour are originally “produced” with the explicit purpose of becoming commodities. Land is part of the living natural system and labour is people who have been forced to work on terms dictated by the owners of the means of production.
In this context the market does indeed produce according to the wishes of those with purchasing power – but how purchasing power is distributed, reflecting the economic and property system, was the deeper question.
Economists came up with a solution – there were no absolute measures of utility but this did not matter because in choosing between options people demonstrated in practice what their comparative utilities were between different goods. They demonstrate their relative preferences by what they are prepared to pay as they allocate their limited purchasing power between different purchasing options for goods and services. What people are prepared to pay is a proxy measure of their utility for the last unit of a good that they purchase.
This idea of willingness to pay (or willingness to accept in payment) is then used by economists as a proxy measure for how much people value things that do not normally appear on markets. It is thought to be a convenient idea too because the same situation can involve losers as well as winners, and here is an idea here that this can be solved by cash compensation payments. If an action involves increased welfare for one person and decreased welfare for someone else then it still might involve a greater happiness overall and one can tell that is so if the gainer can compensate the loser and still be better off. (This is the so called Kaldor Hicks principle. Note that winner does not actually have to compensate the loser, they merely have to be able to in theory).
What people are prepared to pay thus measures how much things matter to them – their ethical values were reflected in their monetary values. Economists are enthused with this idea as it appears to them to give a common measuring rod that can be used for all sorts of situations, including policy decisions about issues that do not normally appear in an ordinary market at all – for example, environmental decision making.
Thus the importance of protecting a species threatened with extinction is measured by what people are prepared to pay to protect it – or prepared to accept in compensation if it goes extinct.
This is actually nonsense because it assumes informed preferences and most people do not have preferences about such natural things as they live separated from the species anyway. What’s more it leads to a beauty contest where pandas and popular animals would score highly but the creepy crawlies or snakes that are crucial parts of eco-systems get no offers to pay at all. If people are then informed about the species and the ecological issues the obvious point to make is that value is created by being informed about the things, highlighting a need for education, not by spontaneous preferences.
|So this point of view is highly challengeable and it has been claimed that economists are involved in corruption – see right.|
This leads me on to what it is economists actually do – and why these things matter. And the answer is that economists are actually there as advocates for a particular kind of value system. They are not unlike priests whose job it is to argue for their belief system.
This is a quote from economist Robert Nelson who describes what it was like to work as an economist in the US Department of the Interior which was and is responsible for the upkeep of national parks and landscapes in the USA:
“If economists had any inﬂuence—which they sometimes did, if rarely decisive—it was seldom as literal ‘problem solvers.’ Rather, the greatest inﬂuence of economists came through their defence of a set of values. Much of my own and other efforts of Interior (Ministry) economists were really to persuade others in the department to act in accordance with the economic value system, as compared with other competing priorities and sets of values also represented within the ranks of the department.” Robert Nelson Economics as Religion Pennsylvania State University Press, 2001 p xiv
|So how do economists actually do this?
In fact economists mostly create models from assumptions that are assumed to be self evidently true…or claimed to be true enough for practical purposes.. and then analyse the logical consequences with mathematic symbols and diagrams. With enough simplified assumptions it then seems possible to show that competitive markets deliver efficient outcomes defined in the way economists want.