Pluralist Economics

Edward Fullbrook, Edward Fullbrook

• Publisher: Zed Books
• Year: 2013
• ISBN:
  9781848137509
• Edition: 1
• Topic: Économie
• Subtopic: Théorie économique

This book is an authoritative and accessible guide to the pluralist movement threatening to revolutionise mainstream economics. Leading figures in the field explain why pluralism is a required virtue in economics, how it came to be blocked and what it means for the way we think about, research and teach economics. The first part of the book looks at how neoclassical economics gained its stranglehold, particularly in the United States, and how the social and intellectual underpinnings of economics have enabled it to maintain this in the face of inconsistent evidence from the real world. This is then contrasted with different approaches to pluralism. Pluralist Economics then goes on to address the array of arguments for establishing pluralism, showing how economics came to function as a concealed ideology and not as a science, and how value-free economics is an illusion. Finally, it addresses the practical problems presented by this different way of doing economics.

PART I

What Is Pluralism?

1

Neoclassical Economics Three Identifying Features

CHRISTIAN ARNSPERGER AND YANIS VAROUFAKIS

There is nothing more frustrating for critics of neoclassical economics than the argument that neoclassical economics is a figment of their imagination; that, simply, there is scientific economics and there is speculative hand-waving (by those who have never really grasped the finer points of mainstream economic theory). In this sense, neoclassicism resembles racism: while ever present and dominant, no one claims to be guided by it. Critics must find a clear definition of neoclassicism if only in order to liberate neoclassical economists from the temptation to barricade themselves behind infantile arguments, namely the non-existence of their school of thought. Then, the good debate may begin.

In this chapter, we offer a definition of neoclassical economics that turns on three crucial axioms and which, in conjunction with one another, as we shall claim, underpin all (and only) neoclassical theory.¹ Later, we argue that these very axioms are simultaneously responsible for: (a) the difficulty mainstream economics faces when it comes to illuminating economic and social reality, and (b) the discursive success of neoclassical economics which gives it an effective (politically driven) stranglehold over alternative modes of economic reasoning.

We think our definition of neoclassical economics is important because critics are often caught off guard by sophisticated neoclassicists (see Dasgupta 2002) who take advantage of gaps in existing definitions in order to turn criticisms on their head. In short, the critique of neoclassical economics is bound to be as effective as its definition of the opposition is sophisticated. For instance, criticism that neoclassical economics necessarily posits hyper-rational bargain-hunters, never able to resist an act that brings them the tiniest increase in expected net returns, is apt but not telling. There are plenty of neoclassical models featuring boundedly rational agents; even utterly irrational agents (for example, evolutionary game theory; for a critical review in the spirit of this chapter, see Hargreaves-Heap and Varoufakis 2004). Similarly ineffective is criticism focused on ‘neoclassical features’ like market-clearing, selfish individualism or Pareto optimality. None of these cut ice because, though these features are usually present in neoclassical modelling, they are not necessary features of some neoclassical model.

Thus, so long as critics’ slings and arrows are directed against features of neoclassical economics that the latter can shed strategically, like a threatened lizard ‘loses’ its tail, they shall miss their target. Nevertheless, we do believe that there are at least three features of neoclassical economics that cannot be so shed; and, therefore, if the critics concentrate on them these critics shall, at the very least, force neoclassicists to engage in a fruitful dialogue. The single most promising prize from such a development ought to be the clarification of the origin and nature of the greatest paradox in social science: that mainstream economics is as dominant as it is unappetizing (even to some of its own practitioners).

In this sense, our axiomatic definition of neoclassicism, rather than being an idle methodological exercise, aims at exposing the root cause of mainstream economics’ failure to say much that is helpful about the contemporary economic world. And it throws useful light on the reasons why such failure, instead of weakening neoclassicism, has reinforced its hold over the imagination of both the elites and the public at large. However, this is a longer argument which we shall only touch upon here (see Arnsperger and Varoufakis 2005 for more).

Once upon a time, it could be argued that neoclassical economics is typified by a familiar mélange of theoretical practices: positing an equilibrium in the labour market, the habitual recourse to Say’s Law, the assumption that the interest rate will adjust automatically so as to equalize investment and savings, the depiction of capitalist growth à la Robert Solow and company, the imposition of Cobb-Doublas or CES production and utility functions, etc. Nowadays, any attempt to define neoclassicism by reference to these practices is music to the neoclassical ear; for there is a seemingly endless list of mainstream models that distance themselves from some, if not all, of the above. One of two conclusions appear in front of us: either the mainstream has moved on from neoclassicism (as neoclassical economists claim) or the definition of neoclassicism needs to be rethought and abstracted from a list of neoclassical practices like the one above. We choose the latter. So, the remainder of this chapter concentrates primarily on the three axioms that we think lie at the heart of neoclassical economic theory, old and new alike.

The First Axiom of Neoclassical Economics: Methodological Individualism

Unsophisticated critics often identify economic neoclassicism with models in which all agents are perfectly informed. Or fully instrumentally rational. Or excruciatingly selfish. Defining neoclassicism in this manner would perhaps be apt in the 1950s but, nowadays, this definition leaves out almost all of modern neoclassical theory therefore strengthening the mainstream’s rejoinders. Indeed, the past thirty years of neoclassical economics have been marked by an explosion of models in which economic actors are imperfectly informed, sometimes other-regarding, frequently irrational (or boundedly rational, as the current jargon would have it), etc. In short, homo economicus has evolved to resemble us more.

None of these brilliant theoretical advances have, however, dislodged the neoclassical vessel from its methodological anchorage. Neoclassical theory retains its roots firmly within liberal individualist social science. The method is still unbendingly of the analytic-synthetic type: the socio-economic phenomenon under scrutiny is to be analysed by focusing on the individuals whose actions brought it about; understanding fully their ‘workings’ at the individual level; and, finally, synthesizing the knowledge derived at the individual level in order to understand the complex social phenomenon at hand. In short, neoclassical theory follows the method of the watchmaker who, faced with a strange watch, studies its function by focusing on understanding, initially, the function of each of its cogs and wheels. To the neoclassical economist, the latter are the individual agents who are to be studied, like the watchmaker’ cogs and wheels, independently of the social whole their actions help bring about.

So, the first feature of the ‘body of theory’ we think of as neoclassical is its methodological individualism: the idea that socio-economic explanation must be sought at the level of the individual agent. Note two things: First, this was not the method of classical economists like Adam Smith and David Ricardo, or, indeed, of Keynes or Hayek. Second, this proclivity is fully in tune with the mid-nineteenth century angloceltic liberal individualism (though the opposite does not hold) as it imposes axiomatically a strict separation of structure from agency, insisting that socio-economic explanation, at any point in time, must move from agency to structure, with the latter being understood as the crystallization of agents’ past acts. We shall argue later that this strict separation is central in not only defining but also undermining the most recent claims of neoclassicism.

It is, we think, indisputable that all the new manifestations of what we term neoclassicism still subscribe to methodological individualism. While it is true that mainstream economists have, during the past few decades, acknowledged that the agent is a creature of her social context, and thus that social structure and individual agency are messily intertwined, their models retain the distinction and place the burden of explanation on the individual. Individual worker effort is nowadays often modelled as a function of sectoral unemployment (for example, efficiency wage models), and the firms’ micro-strategies reflect the macroeconomic environment. Nevertheless, and despite these interesting linkages between the micro-agent and the macro-phenomenon, the explanatory trajectory remains one that begins from the agent and maps, unidirectionally, onto the social structure.

The Second Axiom of Neoclassical Economics: Methodological Instrumentalism

We label the second feature of neoclassical economics methodological instrumentalism: all behaviour is preference-driven or, more precisely, it is to be understood as a means for maximizing preference satisfaction.² Preference is given, current, fully determining and strictly separate both from belief (which simply helps the agent predict uncertain future outcomes) and from the means employed. Everything we do and say is instrumental to preference satisfaction: so much so that there is no longer any philosophical room for questioning whether the agent will act on her preferences. In effect, neoclassical theory is a narrow version of consequentialism in which the only consequence that matters is the extent to which a homogeneous index of preference satisfaction is maximized.³

Methodological instrumentalism’s roots are traceable in David Hume’s Treatise of Human Nature ([1739/40] 1888) in which the Scottish philosopher famously divided the human decision-making process in three distinct modules: Passions, Belief and Reason. Passions provide the destination, Reason slavishly steers a course that attempts to get us there, drawing upon a given set of Beliefs regarding the external constraints and the likely consequences of alternative actions. It is not difficult to see the lineage with standard microeconomics: the person is defined as a bundle of preferences, her Beliefs reduce to a set of subjective probability density functions, which help convert her preferences into expected utilities, and, lastly, her Reason is the cold-hearted optimizer whose authority does not extend beyond maximizing these utilities. However, it is a mistake to think that Hume would have approved. For his Passions are too unruly to fit neatly in some ordinal or expected utility function. It took the combined efforts of Jeremy Bentham and the late nineteenth-century neoclassicists to tame the Passions sufficiently that they could initially be reduced to a unidimensional index of pleasure before turning into smooth, double differentiable utility functions.

During the tumultuous twentieth century, neoclassicists invested greatly in bleaching all psychology out of the rational agent’s decision-making process. All hints of a philosophical discussion regarding the rationality of homo economicus were thus removed. People could, and ‘should’, be modelled as if they possess consistent preferences which guide their behaviour automatically. The question of whether all rational women and men are condemned to maximize some utility function all the time became … nonsensical. Thus, instrumentalism lost its connection to the philosophies of Hume, Bentham or Mill and became a technical move that economists made instinctively with the same nonchalance as that of an accomplished artist preparing his oils and canvass before getting down to business.

However, it is false to claim that this state of affairs, even though ubiquitous in economics departments the world over, is essential for neoclassical economics. The first signs that it need not be came with the literature on endogenous preferences. Neoclassical economists increasingly sought to distance themselves from the assumption that preferences are fixed and exogenous. During the past twenty-five years or so, homo economicus has developed a capacity to adapt his preferences in response to past outcomes (see Bowles 1998). However, while the assumption that current preferences are exogenous was dropped, they remained fully determining. Thus, instrumentalism was preserved albeit in a dynamic context.

A more recent development has taken neoclassicism, and homo economicus, onto higher levels of sophistication. The advent of psychological game theory (see Rabin 1993, and Hargreaves-Heap and Varoufakis 2004, Chapter 7) has brought on a reconsideration of the standard assumption that agents’ current preferences are separate from the structure of the interaction in which they are involved. Suddenly, what an agent wants hinged on what she thought others expected she would do. And when these second-order beliefs (her beliefs about the expectations of others) came to depend on the social structure in which the decision is embedded, the agent’s very preferences could not be linked just with outcomes: they depended on the structure and history of the interaction as well.

In view of the above, there is no future in criticisms of neoclassicism based on the charge that the latter must take for granted preferences that are either exogenous or independent of the agents’ socio-economic relationships. Critics toeing that line will be met with the scornful rejoinder that they criticize out of ignorance. However, our point that neoclassicism is still rooted...

Table of contents

• Cover
• Title
• Copyright
• Contents
• Notes on Contributors
• Introduction
• Part I - What Is Pluralism?
• Part II - Arguments for Pluralism
• Part III - Pluralist Practice in Economics
• Index