Part One: The Problems of Economics as a Science

I began writing a post two months ago. The post turned into a paper, which has now turned into a serious paper. Instead of taking a break from writing this paper to create new posts I have decided to start posting a working version of the paper, one part at a time. I hope to end up posting around five parts, each around one to two thousand words in length. The paper is currently around 30 pages (or 10,000 words).

These posts are about the history of economics as a science. My goal has been to follow the academics of economics up into our contemporary economic and political environment. I will explain how economics acts as a strong science. And how it remains a science and method of thought whether in the hands of Marx or Milton Friedman. I have read and will focus on many past economists. The two who will receive my most time will be Marx and Schumpeter.

Once more, to all my readers and supporters I extend my gratitude.

Part One: The Creation of Economics and the Definition of Wealth and Utility

Bertrand Russell, a foremost scholar of the 20th century wrote on the subject of the problems of philosophy. He was one of the great philosophers and mathematicians of his time. He posited that there are two groups of philosophical questions: Those derived from religion and ethics and those derived from science. His argument was that ethical and religious arguments as a whole are a “hindrance to the progress of philosophy” and that they ought to be discarded in order to study philosophical truths instead. Philosophical truths are uncovered through the pursuit of science (what we now call ‘hard’ science) will always be applicable. Ethical and religious truths can become outdated and useless throughout time. It is important to keep in mind that at the time of his writing, philosophy was more active in the discovery of scientific methodology. Philosophers who worked on these problems helped create the scientific method, known as logical positivism, as well as other methodologies to rigorously uncover scientific truths. A positive philosophical pursuit for a philosopher might consist of creating the axioms and logical requirements for a complete mathematical proof. As an example, Bertrand Russell contributed to the mathematical logic beneath traditional mathematics in his famous book Principia Mathematica. Economics as a field uses logic and positive statements to function as a science. However its attempts to use traditional scientific models of proof are built upon our understanding of human nature. This means that it must consider fields such as morality and ethics . Economic analysis is inert without an a priori understanding of the specific feelings of social-obligation and behaviors of a demographic. Social-obligation is the general moral feelings of a demographic, and to which specific groups of humans (cultural, religious, and nationalistic) they feel that they must treat in a specific ethical manner. Economics has built a sturdy foundation of concrete and metal that rests upon a marshy wetland. The foundation is mathematics and allows for precise and tight models and equations. The marshy wetland is the philosophy of human nature that will forever keep the foundation destabilized.

There are many different schools of thought in economics and the differences between them are material. The reasons for differing schools of thought are troubling and often not mathematical in nature. One example is from a philosopher named Weber who wrote a seminal paper for the ages called the Protestant Work Ethic. The argument is that Protestants believed in manifest destiny as part of their religion. They believe their success in the earthly world was indicative of their reward in heaven. This is a seminal work known for its rigorous sociological theory, which argues that the success of capitalism that we embrace in North America and Northern European countries was a result of a religious work ethic. Other economists dismiss cultural arguments as less relevant, believing that they generally are used as a poor excuse for not discovering the root. The root is generally considered a more incentive based problem. This is a common clash and is based on deeper assumptions. The economists who are more willing to believe in cultural arguments argue that individual decision is also a function of culture as well as human nature. Whereas the more skeptical economists believe that individual decision making is constant due to human nature being constant, and culture rarely meaningfully makes an impact.

The most popular clash of economic thought in our society, as inferred from current politics, is the debate between more libertarian type arguments for ‘fixing’ our recession, or Keynesian stimulus arguments (although economists end to support the latter). While the differences can be modeled, they tend to come from deeper extrapolations on the difference between how individual humans act in the micro-economic assumptions contrasted against the way macro-economists believe the sum of an economy is greater than just individual actors. To understand the origin of this century long debate it is necessary to study the beginning of economics. Economics, similar to all social sciences, was once called philosophy. Finding the exact moment it spun off into its specialty is immaterial, but the reasonable consensus is that Adam Smith created the first seminal economics text. The study of economics at first was not of the ‘ethical and religious’ philosophical group. Instead it attempted to be part of the pursuit of scientific truths. With humans as subjects though, the truths could never be as universal and objective as laws of other sciences, such as physics.

Adam Smith is famous for using the phrase ‘the invisible hand’, which explains that free markets will be benefit the good of all through individuals seeking their own self-interest. This concept is arguably the most important idea of economics. In addition to creating some of the first theories on tax and trade he inspired a generation of students to enter and study the field of economics. Adam Smith, however, also had a deep interest in ethics. He considered his greatest work to be A Theory of Moral Sentiments, which falls into Bertrand Russell’s class of Ethical philosophy. Smith did not use the mainstream economic idea of utility as his definition of the benefit from goods and services. In fact he used a system he called sympathies, which was part of a complex ethical theory wherein our morality is grounded in our reactive emotions. His Theory of Moral Sentiments is no longer regarded as a strong piece, and the name only lingers due to Smith being such a strong name in economics. But this should make clear the immediate problems that economics faces in its assumptions on morality: The first brick in the foundation of economics was based on a theory of morality that has since lost support. The first scholars of economic thought have struggled with the combination of economics as a science combined with morality.

As a result of the dismissal of Smith’s moral philosophy, some logical arguments Smith made are no longer supported in economic analysis. In The Wealth of Nations Smith makes moral judgments on some types of labor. For example, owning a servant is considered unproductive labor. Since the servant is not manufacturing a product the labor does not produce value. Receiving labor from a servant is considered lazy and not a respectable trait. Smith isn’t wrong we just no longer classify value based on a set of objective moral code. Unproductive labor, based on a value judgments, is no longer part of the lexicon of economists. Generally speaking economists do not bring moral code into their analysis to dub some types of consumption or labor better or worse than others. However, economists are not as far from value judgments as it might appear. Prostitution is labor that is determined illegal since it is not fitting with our values. Or a less controversial example is child labor laws that prevent fifteen year old teenagers from working with the consent of their parents. Economists can still make models and try to understand what type of efficiency is being conserved or lost from these policies, and often economists work with policy makers to help enact these policies. But they end up being based on values that society might hold. Such as it is wrong to pay to have sex with a person or that a teenager is required to study instead of work at the age of fifteen. As more proof, consider the notion of a ‘sin tax.’ That is the idea that we should tax cigarettes and alcohol because it is ‘sinful’ or ‘bad.’ As a result there is less production of those goods. That is a policy statement that creating cigarettes is unproductive labor, and that there should be less production of those goods. These value judgments are still made by politicians and economists who create the rules of our economic market.

These values that are present in economic study are part of the field of ethics. The ethical thought that is applied to economics is utilitarianism, a philosophical school of thought put together by Jeremy Bentham.  John Stuart Mill, a founder of economics and a student under Bentham, combined utilitarianism with economics in a textbook he wrote. Utilitarianism, in its purest form, is that the action that brings about the greatest happiness of the greatest number of people is the measure of right and wrong. Utilitarianism was most in line with economics for two reasons. The first reason is because it allows for the quantification of efficiency. Maximizing wealth, as measured with dollars, is useful. Secondly, it is a relative philosophical argument. What is efficient is simply the will of the people. It does not rely on any objective measure of morality, just the will of the people. These core qualities of utilitarianism are necessary for economics to succeed.

Utilitarianism has faults that by proxy affect economics. Although it should be stated that while economics purports to follow utilitarianism and measures actions in ‘utility,’ it’s adherence to the philosophy is cursory. The most argued point against the success of utilitarianism as an all-encompassing philosophy is the tyranny of the majority. The tyranny of the majority would be when a large demographic denies rights to a minority group. These same faults can manifest themselves in economics.

To understand how issues of differing moral codes and values can appear, imagine an economist who is measuring wealth added due to increased employment numbers to see if it has been efficient. While he is studying it he notices that a new law which allows some factories to not be responsible for offering any health-care benefits to their employees. Now some factories can employ more people because they do not have to provide the same health benefits. Let’s assume that these jobs are quantitatively equal, from the perspective of a central economic agency gathering data, to an identical amount of persons employed as ‘dog walkers’ for various firms. By this I mean that they make the same money, contribute the same gain to the overall economy, pay the same taxes, have the same risk of injury, and so forth. While there are inevitably ways in which they would differ, a central agency (such as the Fed) can only gather information on select number of variables. It would be reasonable to assume that these new workers in a factory are less happy than dog-walkers who are able to walk in the sunshine. That theory would be based on the general mood of the laborers. This is non-quantifiable (not easily at least), but still important as a quality of life measure. After all we use money to measure happiness and efficiency. But I’m sure most of us would prefer making the same numbers walking a dog instead of doing an awful factory job.

Interpreting this data to decide whether it passes cost benefit analysis will be different from the perspective of different economists. Some economists think long-term societal efficiency would be maximized by not lowering health benefits, and instead that we should subsidize the unemployed during a recession until they can receive safe jobs with strong benefits again. Others might think that even though there is benefit from added new jobs, it is not sufficient to make up for a lack of healthcare for many workers. Some economists might come to different conclusions regarding the fact that the work is grueling and painfully difficult and feel that this more qualitative analysis must be overlayed on the quantitative data; or that the additional jobs gained from lowering benefits are not sufficient to compensate for the fact that those already working the hypothetical job will have their benefits lowered as well; or perhaps that it sets a precedent that cutting health at difficult times is permissible, and that this is a bad because health-care is important to keep a population healthy. Then there is a completely different point of view: An economist might argue that health care is not in the realm of an employer. He might argue that the government has no ‘right’ to force an employer to provide a benefit. While many libertarian economists claim this logically follows from models of efficiency, it appears as though all economists have models that show that their policy is the most efficient. Interestingly enough the models an economist tends to claim are the most efficient tend to follow from an ethical belief on morality that is most consistent with their own.

 

Please post any criticisms, suggestions, comments, or thoughts. I hope to eventually put all these posts into a more revised and academically robust paper. This is my ‘blog-worthy-test-run.’  Since I plan on re-writing it I welcome any ideas or areas that are confusing.

3 thoughts on “Part One: The Problems of Economics as a Science

  1. Quite a read, but well written. I’m pretty sure I’m an authority on how utilitarianism relates to economics now. I never actually had to read Wealth of Nations, just act like I did.

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