How Social Forces Impact the Economy

Steven Pressman

• Publisher: Routledge
• Year: 2020
• ISBN:
  9781000062977
• Edition: 1
• Topic: Commerce
• Subtopic: Commerce Général

Social forces are important determinants of how people behave, how economies work at the macroeconomic level, and the effectiveness of economic policies. However, this dimension is generally overlooked in mainstream economics. How Social Forces Impact the Economy demonstrates that a broader conception of social economics provides for a better understanding of how economies work as a whole. This book argues that adopting a truly social approach to economics opens the door to studying how people form preferences, and how they learn by taking cues from others about how to behave and what to consume. Each chapter contributor works to highlight the breadth of new insights and possibilities that emerge from a fuller understanding of social economics. Part I focuses on microeconomics, bringing individual behaviors and individual entrepreneurs into a more social context. Part II focuses on macroeconomic topics, such as how money and quasi-monies (like Bitcoins) are social, how money developed as a social institution, and how social forces matter for economic development. Finally, Part III looks at the consequences of considering social factors when it comes to policy: environmental policy, industrial policy, and policies promoting greater equality. This book is invaluable reading to anyone interested in the relationship between economics and sociology, how social forces affect policy effectiveness, human behavior, and the overall economy.

1 Introduction

Putting the social back into economics

Steven Pressman

The revival of classical economics in the late twentieth century, following from the work of Piero Sraffa (1960), has been primarily technical in nature. It has focused on production relations rather than on social relations. For historical reasons, this is understandable. The classical revival began in response to the circularity of the marginal productivity theory of distribution that comprised part of the core of the dominant neoclassical paradigm (Robinson 1953–1954, Harcourt 1972). It then developed an alternative theory of distribution from production technologies, augmented with classical (i.e., class-based) theories of income determination. Nonetheless, the great classical economists of the past did not shy away from the social, or how social relations impact economic outcomes. Social relations were an integral part of classical economics. This is what made the great classical economists, according to Robert Heilbroner (1953), worldly philosophers rather than technocrats. Let us consider a few examples.

Francois Quesnay developed the first macroeconomic model in the mid eighteenth century—the Tableau Économique (see Pressman 1994). That model showed how economies reproduced, grew, and declined. One factor impacting economic growth, according to the Tableau, were the spending propensities of people. Of particular importance was whether people tended to spend relatively more on goods produced by “productive economic sectors,” those sectors producing a large surplus. To make their model work, and to improve national living standards, it was necessary to get people to spend in the manner that the Tableau theorized would promote economic growth in France (i.e., on goods produced by the more productive economic sectors). As Liana Vardi (2012) has shown, the Physiocrats agonized over how to change the behavior of people, recognizing the powerful social forces that influenced spending and how difficult it was to counter them. The inability to change social behavior without great coercion, Vardi argues, led to the downfall of this first school of economic thought.

Adam Smith noted that businessmen (they were all men at the time) rarely got together without discussing ways to reduce wages and/or increase prices. He also thought that wages would naturally gravitate toward subsistence. But subsistence for Smith (1776/1937, Part 2, Article 4) was a social phenomenon rather than the bare minimum that people needed to survive and reproduce; it involved the ability of people to appear in public without shame.

By necessaries I understand, not only the commodities which are indispensably necessary for the support of life, but whatever the custom of the country renders it indecent for creditable people, even of the lowest order, to be without. A linen shirt, for example, is, strictly speaking, not a necessary of life. … But in the present times, through the greater part of Europe, a creditable day-laborer would be ashamed to appear in public without a linen shirt … Custom, in the same manner, has rendered leather shoes a necessary of life in England.

Because subsistence was social, Smith was not driven to the Malthusian conclusion of mass starvation unless population growth was controlled. Instead, he looked toward a future where wealth and living standards in England would rise continuously, and where capitalism would help ensure this result. Once people regarded a higher living standard as the new social norm, it would be hard for wages to fall back to physical subsistence. During good economic times, when more workers were needed and wages rose, social views of subsistence would increase; as a result, during bad economic times, wages would not fall.

John Stuart Mill followed Smith in this regard. The Malthus–Ricardo corn model, the workhorse of classical economics, led to the logical conclusion that at some point wages would fall to subsistence levels and economies would no longer be able to grow because England would run out of productive land. While most classical economists viewed this end in negative terms, Mill (1848, Book 4) argued in favor of the stationary state. He thought, following Smith, the stationary state could be a place where wages would enable people to live a decent life because substance was social, and he argued that a stationary state would enable people to enjoy substantial leisure time and not have to partake in the rat race in an attempt to get ahead (see Pressman 2014, Persky 2016).

Finally, as Vivian Walsh (2000) argues, all of classical economics had an ethical side to it—although both the historical classical economists (following Ricardo), and the classical revival (following Sraffa), downplayed this. Walsh credits Amartya Sen (1967) with being the first economist to make the case that logical arguments, based on factual premises, could have normative implications. This contradicted the accepted position in the economics profession at the time, a view that was handed down by Lionel Robbins (1932, p. 132). The case for a moral component to economics received further support from the work of philosopher Hilary Putnam (2002), who argued that there is no sharp distinction, or dichotomy, between value statements and factual statements. This opened the door for the possibility of an economics that is ethically enriched, an economics that focuses on things like capabilities, and an economics that accepts the possibility of interpersonal comparisons of utility (Putnam and Walsh 2009). From this perspective, social values again constitute part of the core of economic analysis and do not get dismissed for being “ethical rubbish,” as Joan Robinson characterized the philosophical interests of her student, Amartya Sen (see Pressman 2014).

Making moral values an integral part of economics disappeared with the rise of marginalism and the use of calculus to do economic analysis. Marginalism focused on technique rather than the social aspects of economics. It soon led to the neoclassical paradigm, an attempt to merge the insights of marginalism and classical economics, which rested on a few very simple assumptions about people and how they behave. According to the neoclassical model, individuals are rational optimizers. They are also assumed to know the utility they will get as a result of every possible decision that they might make; and they know this before they actually make a choice. Individual self-interest then leads (by some invisible hand, to use the popular metaphor from Adam Smith) to the best possible outcome for everyone. From this perspective there are few ethical issues. The positive and the normative are seen as separate and distinct, as Robbins claimed. Economics thus became amoral.

Standard economic theory also examined individuals in isolation from other people; others do not really matter or, to the extent that they do matter in contemporary economics, they matter only because the economic behavior of others affects prices. The individual is effectively Robinson Crusoe, all alone on a deserted island (see Chapter 3 by Roger Johnson). People consider only their own tastes and utility; according to the standard wisdom, this is known by the individual through introspection and cannot be disputed (Becker and Stigler 1977). Individual tastes or preferences are also not subject either to social forces or to manipulation through advertising. There are few ethical issues for Robinson Crusoe living alone on his island,¹ as ethical issues arise mainly in the context of the social. Even in the real world, a world with many people, standard economic analysis sees social problems arising mainly due to externalities, cases where the market does not maximize utility because nonmarket participants are impacted by market activities. In a world with other people and “market imperfections,” the preferred policy solution requires that we figure out how to internalize these externalities.

Having said all this, there has been a growing recognition more recently that individual behavior is influenced by social behavior. Led by Gary Becker (Becker and Murphy 2000), economists have sought to reintroduce social forces into economics. However, this attempt has been narrow in its focus and suffers from many problems. One key problem (as Ross Tippit points out in Chapter 2) is that it ignores insights from social economics, where the behavior of other people impacts the preferences and therefore the behavior of each individual.

It is not entirely clear how and why this recent interest in the social by conventional economics came about. One possibility, following the work of Thomas Kuhn (1962) in the sociology of science, is that graduate students and young assistant professors had reached a satiation point with the neoclassical model. It was becoming nearly impossible to come up with dissertation topics, or papers that built upon the standard economic model and would lead to publications in top journals, tenure, and promotion. So, for social reasons, the social got incorporated into economic analysis.

Another possible reason for growing interest in the social is more technical—the development of game theory, where the behavior of one individual depends on their (contingent) preferences and what they expect others will do. Game theory arose in an attempt to analyze strategic decision-making during the Cold War, especially nuclear deterrence. The economist most involved in this effort was Thomas Schelling (1966), who won a Nobel Prize for his efforts. Schelling later turned his attention to economic uses of game theory. His influential paper on migration and the racial composition of neighborhoods (Schelling 1971), as well as his work analyzing things such as why hockey players didn’t want to wear helmets for their own safety (Schelling 1978), did bring social elements into economics. However, like Becker, Schelling began with the individual and with individual preferences that were given, albeit contingent on the choices that others make. People acted to maximize their utility based on their reasoning about what others would do given the situation that they faced.

What is unique about the work of Becker and Schelling is that they introduce a social factor into individual decision-making; people had to consider what others might do before acting. What they didn’t do was take the next step—analyze the impact of social preferences, social norms, values, and one’s social group on individual preferences.

A first step toward recognizing the importance of these social factors was the ultimatum game developed by Nobel Laureate Daniel Kahneman et al. (1986). In this game one person gets to divide a sum of money; the other person can either accept it or reject this division. If accepted, each player gets the sum stipulated by the first player; if rejected, both players get nothing. Decades of playing this game for real stakes, under experimental conditions, including many instances when the amount of money involved was more than a month’s pay, demonstrated that people care about distribution—they were willing to give up money, sometimes a lot of money, in order to reject a distribution of income that they regarded as unfair (Bowles 2016; Henrich et al. 2001).

Another step forward was the development of macroeconomics following the path blazed by John Maynard Keynes. Keynes recognized the importance of social factors in decision-making, including business investment in new plant and equipment. This was important because the investment decision, according to Keynes, is the major determinant of overall macroeconomic performance.

Keynes (1936, Chapter 12) emphasized that investment decisions were a function of expectations, and that these expectations were social in two ways. First, expectations were necessarily subjective. Business leaders made investment decisions based on what other business leaders were likely to do, and these leaders also based their investment decisions on the decisions of other business leaders. Keynes (1936, 156), in a memorable passage, likened this to a contest where people had to select the prettiest face from a bunch of pictures based on what they thought other people would select as the prettiest face. Similarly, in the real world the success of any business investment depends on future demand for the product produced, and future demand depends on the amount of investment in the economy as a whole, or what other firms see as beautiful investment opportunities. Second, the investment decision also depends on the entrepreneurial spirit, or on something like what Keynes (1936, 136) called “animal spirits.” In the short run, rational businessmen balanced expectations about future profits and current interest rates. In the long run, business leaders face uncertainty about the future and have to make decisions without the aid of probabilities or logical analysis. Joseph Schumpeter carried this one step further. He examined the role of the entrepreneur, someone who sought to change tastes and expectations (see Austin Landini on Schumpeter and the entrepreneur in Chapter 4).

In addition to investment, money was of great importance for Keynes. But Keynes mainly focused on its economic functions—how money affected interest rates, investment, economic growth, and employment. He also recognized that expectations affected interest rates. Missing from Keynes, however, was an analysis of the social import of money, what difference it makes that people have money and what having a lot more money than other people means. This topic is explored by Ann Davis in Chapter 5 of this volume. Carrying this line of analysis even further, in Chapter 6 Anita Dancs and Valérie Racine look at the new cryptocurrencies from both a traditional angle and a social angle.

The move toward putting social factors back into economics has been a positive professional trend over the past several decades. Still, most attempts to do so by mainstream economists fail to dig deeply into the question of where preferences come from and the question that destroyed the Physiocrats—whether preferences can be and should be manipulated for economic or political gain. In contrast to this individual-centered view of the economic world, social economics can be described as a study of how individual behavior is affected by group-level factors, and how social factors in addition to economic incentives affect human behavior.

Substantial work in evolutionary biology and psychology contends that many of our preferences are the result of hundreds of thousands of years of evolution (Buss 2004, Pinker 2002, Tooby and Cosmides 2005). Our ancient ancestors, living on the African savannah, needed to have these preferences in order to survive. For example, one trait likely leading to survival by our ancient ancestors was the willingness and ability to consume large quantities of food whenever an abundant supply of food was available. It was never clear when there would be another kill and plentiful food; food not ...

Table of contents

• Cover
• Half Title
• Series Information
• Title Page
• Copyright Page
• Dedication
• Table of Contents
• List of Contributors
• 1 Introduction: Putting the social back into economics
• Part I Individual behavior
• Part II Macroeconomics and money
• Part III Policy issues
• Index