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CIAO DATE: 03/02
Critical Review
Winter–Spring 1998 (Vol.12 Nos.1–2)
The Self-Deception of Economics
By Robert Heilbroner *
Abstract
Formalization has led contemporary economics to turn its back on the study of capitalism as the social order to which it owes its origins and its intrinsic analytical focus. As a consequence, contemporary economics turns a blind eye to the empirical analysis of capital accumulation, the real-world properties of markets, and the bifurcation of political power that endow capitalism with its unique historical properties. Instead, economics takes scientific, not social, analysis as its model, a view that gives an ideological cast to its findings.
Peter Boettke’s brilliant article (1997) sets the stage. He has given many examples of the constraints that economics has placed upon itself by virtue of its identification of mathematical formalization with empirical analysis. I shall try to depict these consequences from the viewpoint of what Joseph Schumpeter (1954, 41) called the vision—the pre-analytic cognitive act—of economics itself. In the end, the consequences are the same: formalization throws out the baby with the bath water. From the viewpoint in which I am interested, the effect is the virtual disappearance of any substantive conception of what economics “is.”
Let me begin with a curious fact that has, so far as I know, entirely escaped the notice of the practitioners of modern-day economic analysis: the sedulous avoidance of the word “capitalism” to identify the social entity to which economics directs its attention. 1 In its place, the profession uses “society” or “system” or “market system” to describe the object of its attention—a usage that not only quietly announces the presumably apolitical nature of its field of inquiry, but which is demonstrably false. Let me attend to its falsity before speculating as to the reason for its hegemony.
What Capitalism Isn’t
As it is conventionally used in economic exposition, the word “society” refers to the organization of production and distribution necessary for survival. Is this organized activity accurately captured in the clarifying gaze of economics? As I have on many occasions, I shall answer this question by taking a concrete instance from the anthropologist Elizabeth Marshall Thomas’s remarkable book, The Harmless People, in which she describes how a group of Kalahari bushmen carry out the division of their prey. In Thomas’s words, “Gai [the hunter] owned two hind legs and a front leg, Tsetchwe had meat from the back, Ukwane had the other front leg, his wife had one of the feet and the stomach . . .” (Thomas 1958, 59).
Such a description could, with variations, be repeated for the contemporary inhabitants of the jungles of South America and the Inuit peoples of northern Alaska, the Indians of precolonial America, and, for some 200,000 years, for the earliest known life of Homo sapiens. My question is: Can economics—Classical, Neoclassical, Austrian, Marxian, or formalistic—explain the “economics” behind these distributive acts? More concretely, could any economist foretell, before witnessing the distribution of the kill, who would get what; or explain, after the fact, why who got what? My answer is negative, because the explanatory principle involved is alien to economics as we know it. The principle is kinship—the detailed network of familial relationships that determines the actors’ reciprocal social obligations. Economists may declare that the participants were maximizing their utilities, pursuing rational choice, or whatever, but I would maintain with assurance that without the missing concept of kinship, these explanations could convey nothing. Thus economics, as we understand the term, does not apply to societies in the hunting and gathering forms in which humanity has lived for over 98 percent of its time on earth.
Let us now move to the remaining three to four thousand years of early history. How useful is “economics,” as we know it, in explaining production and distribution in the stratified societies that emerge along the Euphrates, the Nile, the Pacific coast of South America, the Yangtse, or, for that matter, Russia during its Stalinist years? Could professors of economics enlighten us about the rationales behind the construction of the massive temples, city walls, pyramids, or industrial complexes (to bring Russia into the picture) that gave these stratified systems their distinctive organizational characteristics?
As before, my answer is No. To understand the Sumerian, Akkadian, Egyptian, Incan, and Soviet systems of production and distribution does not require the special explanatory insights of economists. Engineering problems, managerial problems, military considerations, yes. Economics? No. Put differently, just as production and distribution in hunting and gathering societies must be explained by a knowledge of their traditions, stratified societies can be “explained’’—that is, anticipated before the fact or rationalized thereafter—only by knowledge of their structures of command. Economics had or has nothing to say about Cheops’ pyramids, China’s Great Wall, or the Soviet industrial structure: the will of pharoahs and emperors and the Communist dictatorship said it all.
Then when does economics enter? The answer, of course, is with the advent of capitalism, a lengthy process that takes on recognizable form around the beginning of the eighteenth century. Let me make the point by quoting from the work of a remarkable English trader in France, Richard Cantillon, whose pathbreaking Essay on the Nature of Commerce, published (in French) in 1730, describes the emerging economy in a small French village square where meat vendors confront housewives:
| Suppose the Butchers on one side and the Buyers on the other. The price of Meat will be settled after some altercations, and a pound of Beef will be in value to a piece of silver pretty nearly as the whole Beef offered for sale in the Market to all the silver brought there to buy Beef. This proportion is come at by bargaining. The Butcher keeps up his Price according to the number of Buyers he sees; the Buyers, on their side, offer less according as they think the Butchers will have less sale; the Price set by some is usually followed by others. . . . Though this method of fixing prices has no exact or geometrical foundation, . . . it does not seem that it could be done in any more convenient way. (Cantillon [1755] 1964, 117, 119) |
Clearly this is a society in which production and distribution can be explained neither by Tradition nor Command. It is a society run by “economics,” although that word is not yet known, and its designation is “capitalism,” although that term will not enter the conventional vocabulary until the late nineteenth century. By way of passing interest, neither “capitalism” nor “economics” appears in the Wealth of Nations.
What Capitalism Is
It remains to make explicit the institutional characteristics of such a society. They are three; and although all are familiar, it is part of the general deficiency of modern-day economics that important aspects of each are virtually never spelled out.
The first of the three is acquisitiveness, both as a general characteristic of everyday “economic” life, and in the more structured form of capital accumulation. Both forms have today acquired more respectable names: everyday acquisitiveness has become maximization; capital accumulation, investment. That which interests us here is the neutralization of these once charged terms: the chrematistiké (acquisitiveness) that Aristotle considered to be a character flaw has attained respectability; the relentless drive to increase capital that Marx saw as the Achilles heel of the system has become the royal road to growth.
I mention these seemingly trifling matters of vocabulary because they concern aspects of behavior that cannot be reconciled with the assumptions of a formalized maximizing economic model. As we shall note, Aristotelian, Marxian, Veblenian, Freudian, not to mention Biblical, emphases on the moral and psychological wariness with which money-making has long been held may contribute to our “vision”—our pre-analytic grasp—of the behavior of agents in a capitalist economy, but they have no place in the depoliticized, depsychologized, and desociologized depiction of such behavior that forms the basis of the formal models Boettke criticizes. In a word, the energy that provides the vital force of a capitalist order is presented as a formal property of the larger system, without psychological origins, social influences, or political significance. It is “behavior” stripped of everything that is behavioral. 2
I turn next to the second characteristic element of capitalism. It is, of course, the market, the most important of the elements that lend themselves to formal analysis. The fascination with markets is entirely understandable and justified—they are unique institutional/behavioral mechanisms that endow society with a spontaneous self-corrective capability of astonishing properties: we recall Cantillon’s use of “exact” and “geometric” in describing the outcome of the confrontation of the Butchers and the Buyers.
What is missing in this imaginative and insightful representation? Samuel Bowles and Herbert Gintis attempt to throw some light on the matter in an essay otherwise very much in general accord with my own view. They write: “We have deliberately attempted to model the capitalist economy rather than economies in general. . . . It is well known that markets are allocation mechanisms . . . but they are also disciplinary mechanisms” that “determine and shift the production possibility frontier” (1990, 203). But if the word “economy” is to have any relevance to their and my inquiry, what light is thrown by contrasting the operations of a “mechanism” that operates only within the sociopolitical ambit of capitalism with its operation in “economies in general,” which, as we have seen, do not exist? We are delighted when Cantillon sees that markets are not merely the scenes of petty altercations, but the loci of an order-bestowing process, and we would be disconcerted if Bowles and Gintis did not make that understanding central to their analysis. Why, then, do even such politically sensitive economists pass over, rather than drive home, the specific and exclusive relevance of markets, whether as allocational or disciplinary “mechanisms,” to the social formation called capitalism?
This brings us to a second element in market behavior that also escapes the general notice of economists who depict the market as an interaction among “factors of production” viewed as economic equals. Exchange among marketers is thereby made to seem utterly unlike that between the feudal lord and his peasants and slaves, in that it is determined by the free choice of its participants, motivated solely by a desire to “maximize” their well-being. I would be the last one to deny the gulf that separates the workings of a market society from one run by command, but one needs also to bear in mind the continuance of inequality, albeit on a much smaller and less cruel scale, that makes markets “disciplinary” as well as “allocative” mechanisms, to repeat the description by Bowles and Gintis (who are, I hasten to add, thereby excused from this generalized oversight).
Not surprisingly, the market’s disciplinary function is particularly applicable to relations between workers and employers. Both own their own means of production—laboring power in one case, land or capital in the other. Neither can be forced to supply their means of production if they are unwilling to do so. But whereas the worker is compensated only to the extent of his market wage, the employer retains ownership of the product of his employee’s labor, and can claim as his own whatever that product yields over its cost. This asymmetrical distribution of product reflects the presence of social disparity, however unrecognized. The market’s determinations can, of course, be resisted, by the exercise of a counter-power, as when workers mount an effective strike. In general, however, the market relies, as do all stratified systems, on what Adam Smith (1776, 532, 670) calls the “habit of subordination”—itself assuredly a sign of inequality.
I move finally to the third element of capitalism—its bifurcation of power between the “public” and the “private” sectors. The sectors are differentiated in many ways, but the most striking is the allocation of direct and indirect power. The role of the private sector is essentially one of indirect power—let us call it “domination”—that exercises its influence over the institutions and purposes that establish the economic agenda of the larger society, in particular its “business” goals and values. Note, however, that this does not grant the private sector rulership. Capitalists dissatisfied with the performance of their workers may fire them, but cannot imprison or otherwise harm them; business may lobby for legislation favorable to its interests, but cannot enact it.
The public sector does indeed rule, in the sense of possessing the right to punish, to establish laws, to declare war—all within the bounds of democratic constraints that did not exist to inhibit rulership in precapitalist times. Nonetheless, this exercise of rulership is on the whole easily accommodated to the domination of the private sector. Needless to say, conflicts of interest and interpretation are common, as well as tensions between the strategies of the business community and those of the political leadership, but these conflicts do not threaten the legitimacy of the system, although they may on occasion endanger its effectiveness.
Insofar as there exists no frank and self-assured political discourse within capitalism, comparable to that which enabled aristocratic orders to speak openly of their rights and privileges, one sees little explicit discussion of these issues in the professional economic literature. At best, there is a recognition of business “influence,” and of the struggle within the system between business interests and those of the regulative function of government. But at a deeper level, the political nature of capitalism is obscured in a kind of studied denial. The bifurcation of power which is indeed a central feature of capitalism thus becomes a means of obfuscating the hierarchical nature of the system as a whole.
One important point must be added to this defining triad of capitalist chracteristics. It is a recognition that variants in these three essential structures give rise to significant variations in the operations of different national capitalisms. One has only to reflect on the social textures and operational performances of the Japanese, Norwegian, Italian, Brazilian, and U.S. economies to recognize that there is a spectrum of capitalisms, all recognizable by their similar social architectures, but each distinguished by the intensity of its acquisitive drive, by the formal and informal operations of its market system, and, perhaps of greatest significance, by the relations between the two sectors. The structure of capitalism, as I have outlined it, is therefore an ideal type capable of encompassing societies whose workings display considerable differences. Not surprisingly, the existence of such a spectrum of capitalisms attracts little attention from the economics profession. Absorbed in the formal properties of equilibria of various kinds, economists have little time to waste on such “cultural” questions as why Dutch capitalism is tangibly different from French, or whether the exploration of such questions might not possibly lead to a better understanding of the successes and failures of capitalism in the United States.
What Went Wrong with Economics?
What lies behind the lack of interest of economists in examining, much less speaking frankly of, the sociopolitical architecture of capitalism? Some light is surely thrown on the matter if we reflect on the long historical ambivalence surrounding acquisitiveness in general, and the more recent reluctance of democratic societies to speak openly of class structure. However, I join Boettke in ascribing much of the responsibility for the increasingly myopic vision of the economics profession to its infatuation with science.
As the most esteemed (and sometimes feared) human activity, science has today taken the place once occupied by religion in allaying what Adam Smith (1980, 45–46) called “the tumult of the imagination.” The voice of science thus becomes that desired by Economics, in contrast to the transparent values and preferences that make the second word in “Political Science” a mere honorific. Yet even the most distinguished economists freely violate this presumed neutrality of discourse.
A few egregious examples, cited in the end notes, 3 will make the point, but the deeper issue is not revealed in embarrassing revelations that betray a speaker’s undeclared value preferences. It lies in the revelation of those preferences in presumably value-free statements, such as those made by economists in the name of a value-neutral “scientific” viewpoint. This brings us to the delicate subject of ideology, to which the remainder of this paper will be mainly devoted.
Here I think it useful to return to the distinction between Vision and Analysis. Schumpeter himself feared that the ideological content of vision might knowingly bias the analytic inquiry on which economic theory was based (1953, 42). Unlike Schumpeter, I believe that ideological considerations express unconsciously held value judgments, rather than deliberate distortions of what the speaker knows to be the “truth.” As such, ideological views are discoverable in many kinds of pre-analytic visions, from social stereotypes to blanket institutional endorsements or denunciations. Such distortions can be avoided only to the degree that we become aware of a bias in our vision, and decide it to be untrustworthy or mistaken—an experience common in matters of small personal account, but much more unusual when the issue challenges our broad social views.
Thus, I do not see ideology as referring to the propagation of conscious values, as when a citizen of a democratic country argues for the “self-evident” virtues of open elections. In sharp contrast, I see ideology in assertions with respect to whose sociopolitical content the speaker is quite unaware. As the reader already knows, this applies with a vengeance to the identification by economists of the object of their study as the behavior of “society,” leaving unmentioned the stratified character of the social order to which they direct their gaze. In the same fashion, I deem modern economics to be ideological when it describes its analytic procedures as “dispassionate” (Mankiw 1998, 18) or as embodying a “scientific view” (Stiglitz 1997, 18), again ignoring the value judgments implicit in its arguments.
Here I content myself with a single but strategically important example regarding the relative social usefulness of public versus private borrowing and spending. Only to give specificity to a nearly universally held view, I shall again cite the words of two highly regarded economists, Gregory Mankiw and Joseph Stiglitz. After what is clearly meant to be a balanced discussion of both sides of the issue, Mankiw concludes (1998, 557, his italics): “When the government reduces national saving by running a budget deficit, the interest rate rises, and investment falls. Because investment is important for long-run economic growth, government budget deficits reduce the economy’s growth rate.” Similarly, Stiglitz (1997, 309) sums up his own discussion with: “Reducing the deficit . . . allows interest rates to fall, stimulating investment, and thus promoting growth and better future living standards.”
Why are these ideological statements? Because both depend on the unproved assumption that government spending will be less productive of growth than private spending. Will it? The answer obviously depends on what the two sectors do with their borrowed funds. Thus, suppose the government’s spending was designed to strengthen the nation’s education structure and to finance housing for the nation’s poor, whereas the private investment was intended to create a new chain of Disneylands and gambling casinos. Is it not extremely probable that such a program of public borrowing and spending would bring more future benefit than that of the private sector?
My example is deliberately made ridiculously one-sided. One has only to substitute egregiously wasteful government projects and beneficial private ones to reverse the verdict. But is that not the very point? Does not private investment win the economists’ vote because it is assumed that public investment will be less beneficial than that of the private sector—with one enlightening exception? The exception is the case of war, when all agree that government spending for military purposes must have priority over private expenditure. Aside from that, there is no “scientific” reason to award priority to either sector on the undemonstrated assumption that its projects will be more beneficial than those of the other. But in the specific quotations cited above—citations whose conclusions will be found in all major economic texts of which I know—private expenditure, especially for investment, is deemed to be more beneficial than its public counterpart, without a shred of empirical evidence.
I need hardly add that there are many difficulties in devising convincing comparisons of the effects—especially the welfare effects—of public and private spending. Social and political considerations aside, there are genuine statistical and other problems in making such judgments, both within each sector and between them. But difficulties are one thing; blanket determinations another. The first leads to a relatively “scientific” resolution of the problems of ranking the projects best suited to the future; the second to an ideological decision in favor of private spending, especially for capital accumulation, because that is the ranking favored by capitalism.
Setting Economics Right
Here we return to the central defect of economic thought, as I see it: its reluctance to admit its exclusive relevance to the sociopolitical formation whence it springs. Why this reluctance? I have already mentioned the difficulty of speaking frankly about power in a system in which stratification—that is, class structure—is unacknowledged, and in which the ambivalent reputation of acquisitiveness is rarely, if ever, taken into account. Beyond these considerations there is the fact that economists derive considerable prestige from their role as the high priests of the system’s dynamics, hardly a function likely to encourage a skeptical view of its generally accepted institutional structure.
What is then to be done? It must be obvious that I would urge a movement away from the assiduous modelling of an institutionally imprecise, ahistorical society toward the examination of a specifically identified, historically unique social order. Alas, this is precisely the opposite direction of that in which Boettke shows the discipline to have been headed since at least the mid-1930s. After all that I have said with regard to the deep roots of ideology, is it mere wishful thinking to hope for such a turnaround? For all its widespread presence, ideology does not make us hapless creatures. As I have mentioned earlier, we all experience personal changes of heart, and on occasion changes of mind. Admittedly, it is difficult to make such changes in our social visions, but pronouncing them impossible would ignore that more than one deep-rooted ideological position has changed—the unquestioned support of slavery and absolute monarchy, as instances—and, looking to contemporary visions, would overlook the slow process of change with respect to racism and male supremacy.
More cogently, perhaps, one might argue that the greatest obstacle to getting economics right is likely to be the breadth and depth of the required knowledge. To give to economics the grasp of social reality it now lacks will require a consideration of many sociopolitical matters of which it is today largely ignorant—worse, indifferent. Such a broadening of the scale of inquiry may well lead to less clearly “modeled” economic depictions than those of which economists boast today. That is why I prefer the vaguer designation of “explanation system” to the more prestigious title of “theory,” as the self-description of the discipline-to-be. To the extent that economists turn away from such an undertaking, I can only conclude with pain that the worldly philosophy, which began with such rich promise, seems unlikely to become the source of illumination that was once its singular gift—an illumination that will be urgently needed in the years to come.
References
Boettke, Peter. 1997. “Where Did Economics Go Wrong?” Critical Review 11(1): 11–64.
Bowles, Samuel, and Herbert Gintis. 1990. “Contested Exchange: New Microfoundations for the Political Economy of Capitalism.” Politics and Society 18 (2).
Cantillon, Richard. [1755] 1964. Essai sur la Nature du Commerce en Général, trans. Henry Higgs. New York: Augustus M. Kelley.
Fenichel, Otto. 1938. “The Drive to Amass Wealth.” Psychoanalytic Quarterly no. 1.
Freud, Sigmund. 1957. Collected Papers, Vol. II. London: Hogarth Press.
Friedman, Milton, and Rose Friedman. 1980. Free to Choose. New York: Harcourt, Brace, Jovanovich.
Heilbroner, Robert. 1956. The Quest for Wealth. New York, Simon & Schuster.
Klamer, Arjo. 1984. Conversations with Economists. Totawa, N.J.: Rowman & Allanheld.
Mankiw, N. Gregory. 1998. Economics. New York: Harcourt Brace.
Schumpeter, Joseph. 1954. History of Economic Analysis. New York: Oxford University Press.
Smith, Adam. [1776] 1937. The Wealth of Nations. New York: Modern Library.
Smith, Adam. [1790] 1980. “The History of Astronomy.” In idem, Essays on Philosophical Subjects. Oxford: Oxford University Press.
Stiglitz, Joseph. 1997. Economics, 2nd ed. New York: W.W. Norton.
Thomas, Elizabeth Marshall. 1958. The Harmless People. New York: Vintage.
Endotes
*: Robert Heilbroner, Department of Economics, Graduate Faculty, New School for Social Research, 55 Fifth Avenue, New York, NY 10003, telephone (212) 229-5717, most recently the author of Teachings from the Worldly Philosophy (Norton, 1996), thanks William Milberg and Jeffrey Friedman for many helpful comments. Back.
Note 1: Although I do not have the expertise to pursue my inquiry in terms of the Austrian versus non-Austrian approaches to economic analysis, I should mention that the Austrian work with which I am familiar is expressly excused from this striking omission. Back.
Note 2: See Freud 1957 and Fenichel 1938; for an overview see Heilbroner 1958. Back.
Note 3: Nobel laureate Robert Lucas, asked by economist Arjo Klamer whether governments did not try to resolve social injustice, replied: “That wouldn’t be anything like my view. I can’t think of explaining the Pharaohs as being in existence to resolve the social injustice in Egypt. I think they perpetrated most of the social injustice in Egypt” (Klamer 1984, 52). The violation of “dispassion” lies, of course, not in Lucas’s assertion that the Pharoahs committed monstrosities, but in his choice of Pharaonic Egypt and not Western democracy to represent government. So, too, Nobel laureate Milton Friedman and his wife Rose, admitting freely that of course the distribution of property could be “unfair,” go on to assert that unfairness can take many forms—for example, the distribution of talent. “From an ethical point of view,” they ask “is there any difference?” (1980, 136). It does not seem to occur to the Friedmans that the unfairness of property can be remedied by social action, but not that of the inequality of talent; or that equalizing resources could help compensate for unequal talents. Back.