Philosophy of Economics

This post aims at discussing the philosophic bases of economics. It is in fact possible to distinguish four levels in the economic debate:

  • A technical debate which doesn’t take into account any “values” or any ideology (e.g., the effectiveness of a certain policy on employment or growth)
  • A debate about the hierarchy of values: freedom vs equality, material vs spiritual well-being, individual vs collective responsibility.
  • A reflection on human nature: is humanity innately “good” or “bad”, altruistic or selfish?
  • A debate on how humans grow, build themselves, think, decide, act. Are his preferences innate or learned? Is there a human nature, some constancy in human behavior?

The economic debate rarely goes beyond the second level and a lot of hypotheses about human nature are taken for granted. The main goal of this post is to understand when and how the perspective on mankind that is predominant today in economics has been built.

The central view that has been pursued by economists is that of the Homo œconomicus, which assumes that human beings are rational (they maximize their utility), autonomous (their preferences are independent from others’), selfish (they are only interested in their own welfare) and have stable preferences.

This idea of a rational individual comes from the moral philosophy of the 17th-18th century and is rooted in abstract anthropology; it was developed to satisfy the need for economics to become a “mathematical science”. The goal here is not to judge whether the evolution of these philosophies was positive or negative, nor to determine which philosopher is worth reading or agreeing with. However, it is undeniable that, through these schools of thought a theory of “human nature” was developed without having any access to the knowledge on neurology, psychology, or anthropology that we have today. And since this philosophy is the ground for today’s economic beliefs, and for the main assumptions that we often take for granted, it is worthwhile to analyse the history of how it evolved.

Since I only have limited room here, I will try to shortly summarize these philosophical foundations, focusing on the branches that, in my opinion, have had the largest influence on economic thought. Multiple postulates that are logically linked together form the “philosophical system”; we will go through them one by one.

  • Assumption 1: The individual pre-exists to society

Before the emergence of ‘modern liberal’ philosophy, individuals only existed within society – especially in the Greek philosophy of Plato and Aristotle. Human beings were defined as “political animals” who are not self-sufficient: they are defined by the inter-dependency and the interaction with others.

“The proof that the state is a creation of nature and prior to the individual is that the individual, when isolated, is not self-sufficing; and therefore he is like a part in relation to the whole.”

Aristotle – Politics Book I, Part II

The great rupture with this philosophy comes with Descartes (17th century) who affirms that the world is only a machine that cannot teach anything to us, but its own mechanism. It’s only inside of themselves that men can learn the “truth about himself and the world”. In this version, the individual is dissociated from its environment and even from its own body.

  • Assumption 2: The individual is auto-determined and independent

These philosophers consider the individual as an atom (see the theory of monads of Leibniz). For Locke, Descartes, Hobbes, every human action comes from an interior process of deliberation which is independent of other individuals of society. It is especially clear in Hobbes’ theory, which portrays human as an instantaneous “calculation machine” for pleasure and survival. This postulate of independence is crucial for mathematic economic science.

  • Assumption 3: Since the individual is auto-determined, he or she is also responsible

Every action comes from individual will: as soon as an action exists, this action is “free”. In this system, since individuals are responsible for their actions, they in the end are also responsible for their social position – economic agents choose their social position, given their aptitudes and subjective preferences, hence the only possible inequalities are the natural ones.

  • Assumption 4: Since the individual is independent and auto-determined, he is rationally selfish

Strict independence means that individuals cannot search any other interest but their own. We can see this idea in the philosophy of Hobbes (Leviathan, 1651) which says that we don’t look for companionship due to some natural propensity, but for the utility he brings to us:

“Individual interest is the basis of this society, it’s not for pleasure of company that we gather but for the progress of one’s particular affair”

Hobbes Leviathan

The idea is even stronger in the ‘Fable of the Bees’ (1714) by Bernanrd Mandeville, for which the altruistic moral is an instrument of the powerful to better subjugate people. This in turn leads to the utilitarianism of Jeremy Bentham (‘A Fragment on Government’, 1776) where the aim of society is the general utility, that is, the greatest sums of individual utilities.

  • Assumption 5: Since the individual is rationally selfish and resources are scarce, he is a predator

One can distinguish here a debate between:

  • Philosophers who think that human beings are mean by nature – Machiavel and Hobbes are two of the main exponents – believe in the dictum Homo homini lupus est (“A man is a wolf to another man”). The scarcity of resources is the driver in this pre-social imaginary of war among men.
  • Philosophers like Jean Jacques Rousseau, who thinks that human nature is fundamentally good (the myth of the good savage) but has been perverted by society, or Karl Marx, who believes that the history of societies until today has been a suequence of class struggles.

Nevertheless, the conclusion is always the same: human beings are less predisposed to peacefully live in a society than to fight other individuals or other social classes.

“The natural state of men, before they entered into society, was a mere war, and that not simply, but a war of all men against all men”

Hobbes, Leviathan

  • Assumption 6: Society is a “utilitarian agreement”

Since men are selfish predators, its conception of society is utilitarian: the only reason to associate itself with others is the certainty that he will maximize the satisfaction of his own needs. Therefore, society is a win-win pact between rational individuals – the “theory of contract” represented by Rousseau, Locke and others is pivotal for this assumption.

Here, there is no real “social tie” between people; men are only a network of atoms, individuals linked by rights, obligations, exchanges of goods and services. This is what Margaret Thatcher meant when she said “there is no society. There are individuals, men and women, there are families”. The society is only necessary to face the situation of scarcity and a mean to pacify violent relations between individuals, but it does not have a purpose by itself.

“Each man, in giving himself to all, gives himself to nobody; and as there is no associate over whom he does not acquire the same right as he yields others over himself, he gains an equivalent for everything he loses, and an increase of force for the preservation of what he has.”

The social contract, I, Ch. 6.  J.J.Rousseau

  • Assumption 7: Since the society is only a necessary evil, the state has to be minimized

In order to guarantee freedom and security against a state of violence, we need to impose something negative: laws that limit freedom. In this sense the “state production” (laws, institutions, public services) are only means that have been mobilized for private goods. It represents a cost that reduces the freedom of individuals and uses resources that individuals cannot use anymore for private use. To that extent, the goal is to limit this as much as possible: the private initiative is the rule, state the exception.

  • Assumption 8:  Material abundance is the necessary condition for freedom

Therefore, the ideal society is the one which releases the individual from the necessity to live with others. Its goals are production and abundance. We find this idea both in:

  • Classical philosophy (Adam Smith) which lauds investments and savings as a source of wealth growth – even when not associated to a consumerist philosophy.
  • The socialist philosophy of Marx (and Saint-Simon, and Fourrier) in which communism and working class dictatorship have to lead to material abundance. The ideal society has to be conceived as a big industrial enterprise (which is only managed differently).

Here are in summary the philosophical postulates that determine the idea of men and society that are dominant in economics. We could add to that a last one which is specific to orthodox economics science: free competition and free market lead to economic optima and are the best way to reach this state of abundance (postulate 9). Some observations, before concluding this post.

Firstly, this homo œconomicus has not always been the rule in classical economy. Indeed, a lot of economic theories were still thinking in term of classes rather than in term of atomistic individual, and were more concerned with macroeconomics – in which there is no need to formalize too much human behaviour. Secondly, it is obvious that some new field of research in economics – like behavioral economics and neuroeconomics – are trying to question these postulates. Nevertheless, it would be hard to deny that they are still implied in most of today’s economics and political discourses.

This is why it is even more important to be able to question this abstract and reductionist vision of human beings, which assumes an empty or neutral social setting. By doing so, it evacuates the role of history, social conventions, institutions and ratio of power. I think one to challenge this vision is to be interested in the new findings of anthropology, psychology, neuro-biology etc, that can give us new insights on what a human being is, how he or she constructs him or herself, why he or she lives in a society, and similar questions (which I will try to approach in a latter blog post).

N.B: All the knowledge that I share here comes from a course that I had during my second of Bachelor with a great teacher, Jacques Généreux. He is politically involved in the left party and wrote two books (in French) “La dissociété” and “L’autre société” which contain all these ideas and much more.

P&C

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