Part Four: The Problems of Economics as a Science

February 8th, 1886 ten thousand British workers gathered in Trafalgar Square. The crowd consisted of unemployed and abused factory employees. The rally grew in size and as the protesters outnumbered the police there was massive looting and destruction. The reasons for the protest hold much in common with labor protests that have surged recently. From the particularly apt London riots to the recent occupy protests across the US. Marginalization and a feeling of inequality has brought the proletariat together for centuries. Of course this is just one of many ways of viewing the world. But the Marxist idea of conflict arising from class struggle is arguably his most accepted theory. During the Trafalgar Square protests, a leading scholar, Beatrice Webb was a supporter of socialism in the UK. She wrote that this unemployment and riots was due to a dysfunctional labor market. She read Smith, Ricardo, and Marshall (leading economists of the time and founders of the field) and was frustrated with their assumptions ignoring actual behavior. She understood the idea behind optimal efficiency, labor, and capital. However, she refused to accept it so fully that she would ignore child labor and suffering. She was born into aristocracy but went to work in a factory to learn how it felt (As a side note, Marx hardly worked and was subsidized by Engles). She was more interested in the idea of augmenting capitalism instead of the original solution that required a working class revolution. She argued in favor of a price floor for wages, also known as a minimum wage, as well as better working conditions; that the government should work to regulate maiming and killing of men from unsafe factories; and lastly that there should be a welfare state that supports and trains the young and elderly and is paid for by those earning a wage. In essence she believed the government should support the basic welfare of citizens. It was a novel and radical idea at the time. By 1907 more comprehensive and socialized healthcare was implemented In the UK.

Beatrice Webb was a policy oriented economist. Not a Marxist revolutionary. She brought together the pain and ache of the faces behind labor and crafted for them a safety net made of capital. While there are no free lunches, she believed that she did this while supporting the market. A stronger, healthier, and more educated workforce is more efficient and useful and the government can effectively solve collective action problems. For example, many firms want intelligent employees, but educating children aged four to twenty is not an easy investment. And many parents might not be able to afford to have their children educated. However, by having the state educate them the workforce remains intelligent and capable. Some counter-arguments of private sector solutions suggest firms or banks can sponsor children in return for a portion of their wages in the future. For example, a bank might find investors willing to pay for your childhood education in return for 15% of your life earnings. Less radical approaches just focus on this private ‘sponsorship’ for university level education. Most people find this to be too close to indentured servitude. Another example would be a society that agrees that there should be an advanced infrastructure with well trained personnel to respond to medical emergencies. But individual corporations cannot adequately manage such a service. Once again, it’s theoretically possible that many different corporations would offer these services, but if you are unable to pay than they would have no incentive to care for you. While some more radical economists insist the private sector could solve all these issues, most reasonable policy makers recognize that at a certain point the government should take responsibility to provide certain services. At the more micro level there are intelligent and quasi free-market solutions sponsored by the government. For example Milton Friedman’s famous idea of giving families school vouchers but having a private school system. However, at a fundamental level the government solves these collective action problems.

Corporate race to the bottom

The argument for healthcare, labor laws, education, and other welfare state policies come in two types. The first type is based on utility maximization, and the second is based on ethics (the truth is these two categories bleed together). Firstly, all arguments for welfare programs tend to be theoretical. Even if a return can be measured, what cannot be measured is what would have happened had there not been a government program. While most theorists agree that the private sector is not sufficient, some economists still argue that private sector solutions are crowded out by the government, and that the private sector would be more efficient. I believe a functioning government and democracy relies on a population without rampant inequality and suffering. Nations with huge gaps in wealth with those in the lower brackets dying of health or issues are rarely functioning democracies.

Secondly, even if the return on investment were known to be negative, it could still be an ethical imperative of the population. To be brief, even if the death of a homeless man wouldn’t impact our lives negatively, it would be the ethical thing to sacrifice to help him have a better life. The reason I mentioned these two fields bleed together, is since the idea of maximum utility is so vague, it can often be redefined to include different ethical arguments. It is also possible that it would seem most choices we make should by definition maximize our utility. Since if we decide to save the homeless person due to our ethical beliefs, it is now de facto maximizing our utility since we are ‘happy’ to have helped him.
As a result the second issue involving ethics is much more precarious. Yet as I mentioned, these two issues merge together. It is not possible to answer how to maximize utility without considering the ethics or moral consciousness of a population of group of people.The issue grows convoluted quickly and breaks down to the foundation of utilitarianism. Imagine that slavery was legalized again in Florida. As a result we all could buy cheaper orange juice. Nothing has directly happened to me in Washington. However, I would suffer disutility knowing that there are slaves in my country. As a result I would want to restrict markets and make a change that will cause prices of goods and services to increase in price for the entire population.

This is where the problems arise. Imagine a scenario where different economists are asked to optimize or help create a system of healthcare for the elderly that is most efficient will all have different answers based on their assumptions of how much they think a person should have to spend to keep an eighty year old alive an additional year. These questions raise from minor to extremely grave. However, economists can not escape the ethical ramifications of their field. It is not surprising so many economists have far more outspoken ethical and moral views compared to engineers.

To bring this back to the original thesis, this is the problem of capital and labor. The debate regarding capital and labor is a massive part of government, economics, and policy making. The conclusions help determine the welfare state, tax rates, and the lives of every person. Capital and labor combines the positive economic and empirical thought with the ethical premise of policy oriented goals. The end goal to impose the will of the people and monitor and adjust the market’s engine to move in a new direction or operate differently. I claim that there is no true laissez-faire equilibrium when considering the broad field of political-economy. Every market requires the protection and construction by a governing body. The government provides basic services, but where these services begin and end is debated and is rooted more in ideas of ethics, ideology, and dogma, than logical optimization. The issue of allocating goods between capital and labor, from the protests in Trafalgar Square in 1886 to the occupy protests in my city of Seattle in 2012 all hinge on the same fundamental debate. There is no easy answer, and there likely never will be an easy answer. But to flippantly dismiss one side or the other as simply being uninformed is to lack understanding and respect to the crux of the issue.

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