Category Archives: Economics

Phishing for Phools

Mainstream economics takes the particular features of capitalism a very recent form of economic organisation in human history as if they were universal, timeless and rational. It treats market exchange as if it’s the essential feature of economic behaviour and relegates production or work a necessity of all provisioning to an afterthought. It also focuses primarily on the relationship between people and goods (what determines how many oranges we buy?) and pays little attention to the relationships between people that this presupposes. It values mathematical models based on if-pigs-could-fly assumptions more than it values empirical research; so it pays little attention to real economies, having little to say about money and debt, for example! Predictably, the dismal science failed to predict the crisis. When the UK’s Queen Elizabeth asked why no one saw the crisis coming, the economists’ embarrassment was palpable. (Sayer 2015, 23-24)

Andrew Sayer (2015) Why We Can’t Afford the Rich

[M]any of our problems come from the nature of the economic system itself. If business people behave in the purely selfish and self-serving way that economic theory assumes, our free-market system tends to spawn manipulation and deception. The problem is not that there are a lot of evil people. Most people play by the rules and are just trying to make a good living. But, inevitably, the competitive pressures for businessmen to practice deception and manipulation in free markets lead us to buy, and to pay too much for, products that we do not need; to work at jobs that give us little sense of purpose; and to wonder why our lives have gone amiss. (…) The economic system is filled with trickery and everyone needs to know about it.” (Akerlof & Shiller, 2015, viii)

[F]ree markets do not just deliver this cornucopia that people want. They also create an economic equilibrium that is highly suitable for economic enterprises that manipulate or distort our judgment, using business practices that are analogous to biological cancers that make their home in the normal equilibrium of the human body. (Akerlof and Shiller 2015, x)

George A. Akerlof and Robert J. Shiller (2015) Phishing for Phools: The Economics of Manipulation & Deception

Many of the quotes above are from economists, experts in their field, some Nobel Prize-winning economists. One thing is clear; the Great Recession shook the very foundations of economics to its core. Only the blind leading the blind can pretend today that something isn’t amiss within the field of economics. The quotations above only represent a small sampling of the discontent rising to the surface within the field of economics today. There is actually a revolt underway in the younger generation of economic graduate students who lived through the Great Recession and the near melt down of the world’s economy yet witnessed their teachers being confounded by the Queen’s question. And if we value our children’s and our grandchildren’s economic future we can no longer afford to simply leave economics to the expertsthe Econocracy—for as these young graduate students tell us, we do so at our own peril. Amartya Sen in his essay Rational Fools: A Critique of the Behavioral Foundations of Economic Theory takes us on an intellectual journey back in time to the thoughts and reflections of one of the founders of the field of economics:

In his Mathematical Psychics, published in 1881, Edgeworth asserted that ‘the first principle of Economics is that every agent is actuated only by self-interest’. This view has been a persistent one in economic models, and the nature of economic theory seem to have been much influenced by this basic premise…. I should mention that Edgeworth himself was quite aware that this so-called first principle of Economics was not a particularly realistic one. Indeed, he felt that ‘the concrete nineteenth century man is for the most part an impure egoist, a mixed utilitarian’. This raises the interesting question as to why Edgeworth spent so much of his time and talent in developing a line of inquiry the first principle of which he believed to be false. The issue is not why abstractions should be employed in pursuing economic questionsthe nature of inquiry makes this inevitablebut why would one choose an assumption which he himself believed not merely inaccurate in detail but fundamentally mistaken? (Sen 1982, 84-85)

Amartya Sen (1982) Rational Fools

Imaginary Empty Balls

The answer, therefore, which the seventeenth century gave to the ancient question … “What is the world made of?” was that the world is a succession of instantaneous configurations of matter — or material, if you wish to include stuff more subtle than ordinary matter…. Thus the configurations determined there own changes, so that the circle of scientific thought was completely closed. This is the famous mechanistic theory of nature, which has reigned supreme ever since the seventeenth century. It is the orthodox creed of physical science…. There is an error; but it is merely the accidental error of mistaking the abstract for the concrete. It is an example of what I will call the ‘Fallacy of Misplaced Concreteness.’ This fallacy is the occasion of great confusion in philosophy. (Whitehead 1967: 50-51)

(….) This conception of the universe is surely framed in terms of high abstractions, and the paradox only arises because we have mistaken our abstractions for concrete realities…. The seventeenth century had finally produced a scheme of scientific thought framed by mathematics, for the use of mathematics. The great characteristic of the mathematical mind is its capacity for dealing with abstractions; and for eliciting from them clear-cut demonstrative trains of reasoning, entirely satisfactory so long as it is those abstractions which you want to think about. The enormous success of the scientific abstractions, yielding on the one hand matter with its simple location in space and time, on the other hand mind, perceiving, suffering, reasoning, but not interfering, has foisted onto philosophy the task of accepting them as the most concrete rendering of fact. (Whitehead 1967: 54-55)

Thereby, modern philosophy has been ruined. It has oscillated in a complex manner between three extremes. These are the dualists, who accept matter and mind as on an equal basis, and the two varieties of monists, those who put mind inside matter, and those who put matter inside mind. But this juggling with abstractions can never overcome the inherent confusion introduced by the ascription of misplaced concreteness to the scientific scheme of the seventeenth century. (Whitehead 1967: 55)

Alfred North Whitehead in Science and the Modern World

In the UK, for example, 97 percent of money is created by commercial banks and its character takes the form of debt-based, interest-bearing loans. As for its intended use? In the 10 years running up to the 2008 financial crash, over 75 percent of those loans were granted for buying stocks or houses—so fuelling the house-price bubble—while a mere 13 percent went to small businesses engaged in productive enterprise.47 When such debt increases, a growing share of a nation’s income is siphoned off as payments to those with interest-earning investments and as profit for the banking sector, leaving less income available for spending on products and services made by people working in the productive economy. ‘Just as landlords were the archetypal rentiers of their agricultural societies,’ writes economist Michael Hudson, ‘so investors, financiers and bankers are in the largest rentier sector of today’s financialized economies.’ (Raworth 2017, 155)

Once the current design of money is spelled out this way—its creation, its character and its use—it becomes clear that there are many options for redesigning it, involving the state and the commons along with the market. What’s more, many different kinds of money can coexist, with the potential to turn a monetary monoculture into a financial ecosystem. (Raworth 2017, 155)

Imagine, for starters, if central banks were to take back the power to create money and then issue it to commercial banks, while simultaneously requiring them to hold 100 percent reserves for the loans that they make—meaning that every loan would be backed by someone else’s savings, or the bank’s own capital. It would certainly separate the role of providing money from the role of providing credit, so helping to prevent the build-up of debt-fuelled credit bubbles that burst with such deep social costs. That idea may sound outlandish, but it is neither a new nor a fringe suggestion. First proposed during the 1930s Great Depression by influential economists of the day such as Irving Fisher and Milton Friedman, it gained renewed support after the 2008 crash, gaining the backing of mainstream financial experts at the International Monetary Fund and Martin Wolf of the UK’s Financial Times. (Raworth 2017, 155-156)

Kate Raworth in Doughnut Economics

Suggestions are anchored in neoclassical theory

Despite growing diversity in research, the theory flow of economics, often referred to as neoclassical, continues to dominate teaching and politics. It developed in the 19th century as an attempt to apply the methods of the natural sciences and especially physics to social phenomena, In the search for an “exact” social science, social relationships are abstracted to such an extent that calculations are possible. The neoclassical economics department primarily asks one question: How do rational actors optimize under certain circumstances? This approach is nothing bad in and of itself. However, in view of the ecological crisis, we have to ask ourselves completely different questions in society: How can the planetary collapse be prevented? What can an economic system look like that is social, fair and ecological?

Katharina Keil and Max Wilken

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The dematerialization of the value concept boded ill for the tangible world of stable time and concrete motion (Kern 1983). Again, the writer Jorge Luis Borges (1962, p. 159) captured the mood of the metaphor: (Mirowski 1989, 134. Kindle Location 2875-2877)

I reflected there is nothing less material than money, since any coin whatsoever (let us say a coin worth twenty centavos) is, strictly speaking, a repertory of possible futures. Money is abstract, I repeated; money is the future tense. It can be an evening in the suburbs, or music by Brahms; it can be maps, or chess, or coffee; it can be the words of Epictetus teaching us to despise gold; it is a Proteus more versatile than the one on the isle of Pharos. It is unforeseeable time, Bergsonian time . . . (Mirowski 1989, 134-135. Kindle Location 2877-2881)

It was not solely in art that the reconceptualization of value gripped the imagination. Because the energy concept depended upon the value metaphor in part for its credibility, physics was prodded to reinterpret the meaning of its conservation principles. In an earlier, simpler era Clerk Maxwell could say that conservation principles gave the physical molecules “the stamp of the manufactured article” (Barrow and Tipler 1986, p. 88), but as manufacture gave way to finance, seeing conservation principles in nature gave way to seeing them more as contingencies, imposed by our accountants in order to keep confusion at bay. Nowhere is this more evident than in the popular writings of the physicist Arthur Eddington, the Stephen Jay Gould of early twentieth century physics: (Mirowski 1989, 135. Kindle Location 2881-2887)

The famous laws of conservation and energy . . . are mathematical identities. Violation of them is unthinkable. Perhaps I can best indicate their nature by an analogy. An aged college Bursar once dwelt secluded in his rooms devoting himself entirely to accounts. He realised the intellectual and other activities of the college only as they presented themselves in the bills. He vaguely conjectured an objective reality at the back of it all some sort of parallel to the real college though he could only picture it in terms of the pounds, shillings and pence which made up what he would call “the commonsense college of everyday experience.” The method of account-keeping had become inveterate habit handed down from generations of hermit-like bursars; he accepted the form of the accounts as being part of the nature of things. But he was of a scientific turn and he wanted to learn more about the college. One day in looking over the books he discovered a remarkable law. For every item on the credit side an equal item appeared somewhere else on the debit side. “Ha!” said the Bursar, “I have discovered one of the great laws controlling the college. It is a perfect and exact law of the real world. Credit must be called plus and debit minus; and so we have the law of conservation of £. s. d. This is the true way to find out things, and there is no limit to what may ultimately be discovered by this scientific method . . .” (Mirowski 1989, 135. Kindle Location 2887-2898)

I have no quarrel with the Bursar for believing that scientific investigation of the accounts is a road to exact (though necessarily partial) knowledge of the reality behind them . . . But I would point out to him that a discovery of the overlapping of the different aspects in which the realities of the college present themselves in the world of accounts, is not a discovery of the laws controlling the college; that he has not even begun to find the controlling laws. The college may totter but the Bursar’s accounts still balance . . . (Mirowski 1989, 135-136. Kindle Location 2898-2902)

Perhaps a better way of expressing this selective influence of the mind on the laws of Nature is to say that values are created by the mind [Eddington 1930, pp. 237–8, 243]. (Mirowski 1989, 136. Kindle Location 2903-2904)

Once physicists had become inured to entertaining the idea that value is not natural, then it was a foregone conclusion that the stable Laplacean dreamworld of a fixed and conserved energy and a single super-variational principle was doomed. Again, Eddington stated it better than I could hope to: (Mirowski 1989, 136. Kindle Location 2904-2907)

[Classical determinism] was the gold standard in the vaults; [statistical laws were] the paper currency actually used. But everyone still adhered to the traditional view that paper currency needs to be backed by gold. As physics progressed the occasions when the gold was actually produced became career until they ceased altogether. Then it occurred to some of us to question whether there still was a hoard of gold in the vaults or whether its existence was a mythical tradition. The dramatic ending of the story would be that the vaults were opened and found to be empty. The actual ending is not quite so simple. It turns out that the key has been lost, and no one can say for certain whether there is any gold in the vaults or not. But I think it is clear that, with either termination, present-day physics is off the gold standard [Eddington 1935, p. 81]. (Mirowski 1989, 136. Kindle Location 2907-2913)

The denaturalization of value presaged the dissolution of the energy concept into a mere set of accounts, which, like national currencies, were not convertable at any naturally fixed rates of exchange. Quantum mechanical energy was not exactly the same thing as relativistic energy or thermodynamic energy. Yet this did not mean that physics had regressed to a state of fragmented autarkies. Trade was still conducted between nations; mathematical structure could bridge subdisciplines of physics. It was just that everyone was coming to acknowledge that money was provisional, and that symmetries expressed by conservatiori principles were contingent upon the purposes of the theory in which they were embedded. (Mirowski 1989, 136. Kindle Location 2913-2918)

Increasingly, this contingent status was expressed by recourse to economic metaphors. The variability of metrics of space-time in general relativity were compared to the habit of describing inflation in such torturous language as: “The pound is now only worth seven and sixpence” (Eddington 1930, p. 26). The fundamentally stochastic character of the energy quantum was said to allow nuclear particles to “borrow” sufficient energy so that they could “tunnel” their way out of the nucleus. And, inevitably, if we live with a banking system wherein money is created by means of loans granted on the basis of near-zero fractional reserves, then this process of borrowing energy could cascade, building upon itself until the entire universe is conceptualized as a “free lunch.” The nineteenth century would have recoiled in horror from this idea, they who believed that banks merely ratified the underlying real transactions with their loans. (Mirowski 1989, 136-137. Kindle Location 2918-2925)

Goldman Sachs and Flash Boys

I suppose this book started when I first heard the story of Sergey Aleynikov, the Russian computer programmer who had worked for Goldman Sachs and then, in the summer of 2009, after he’d quit his job, was arrested by the FBI and charged by the United States government with stealing Goldman Sachs’s computer code. I’d thought it strange, after the financial crisis, in which Goldman had played such an important role, that the only Goldman Sachs employee who had been charged with any sort of crime was the employee who had taken something from Goldman Sachs. I’d thought it even stranger that government prosecutors had argued that the Russian shouldn’t be freed on bail because the Goldman Sachs computer code, in the wrong hands, could be used to “manipulate markets in unfair ways.” (Goldman’s were the right hands? If Goldman Sachs was able to manipulate markets, could other banks do it, too?) But maybe the strangest aspect of the case was how difficult it appeared to be—for the few who attempted—to explain what the Russian had done. I don’t mean only what he had done wrong: I mean what he had done. His job. He was usually described as a “high-frequency trading programmer,” but that wasn’t an explanation. That was a term of art that, in the summer of 2009, most people, even on Wall Street, had never before heard. What was high-frequency trading? Why was the code that enabled Goldman Sachs to do it so important that, when it was discovered to have been copied by some employee, Goldman Sachs needed to call the FBI? If this code was at once so incredibly valuable and so dangerous to financial markets, how did a Russian who had worked for Goldman Sachs for a mere two years get his hands on it? (Lewis 2014, 40-53)

[I]n a room looking out at the World Trade Center site, at One Liberty Plaza … gathered a small army of shockingly well-informed people from every corner of Wall Street—big banks, the major stock exchanges, and high-frequency trading firms. Many of them had left high-paying jobs to declare war on Wall Street, which meant, among other things, attacking the very problem that the Russian computer programmer had been hired by Goldman Sachs to create. (Lewis 2014, 53-56)

(….) One moment all is well; the next, the value of the entire U.S. stock market has fallen 22.61 percent, and no one knows why. During the crash, some Wall Street brokers, to avoid the orders their customers wanted to place to sell stocks, simply declined to pick up their phones. It wasn’t the first time that Wall Street people had discredited themselves, but this time the authorities responded by changing the rules—making it easier for computers to do the jobs done by those imperfect people. The 1987 stock market crash set in motion a process—weak at first, stronger over the years—that has ended with computers entirely replacing the people. (Lewis 2014, 62-67)

Over the past decade, the financial markets have changed too rapidly for our mental picture of them to remain true to life. (Lewis 2014, 67)

(….) The U.S. stock market now trades inside black boxes, in heavily guarded buildings in New Jersey and Chicago. What goes on inside those black boxes is hard to say—the ticker tape that runs across the bottom of cable TV screens captures only the tiniest fraction of what occurs in the stock markets. The public reports of what happens inside the black boxes are fuzzy and unreliable—even an expert cannot say what exactly happens inside them, or when it happens, or why. The average investor has no hope of knowing, of course, even the little he needs to know. He logs onto his TD Ameritrade or E*Trade or Schwab account, enters a ticker symbol of some stock, and clicks an icon that says “Buy”: Then what? He may think he knows what happens after he presses the key on his computer keyboard, but, trust me, he does not. If he did, he’d think twice before he pressed it. (Lewis 2014, 72-78)

The world clings to its old mental picture of the stock market because it’s comforting; because it’s so hard to draw a picture of what has replaced it; and because the few people able to draw it for you have no [economic] interest in doing so. (Lewis 2014, 78-80)

Anti-Human Economics

Emily Northrop (2000) questions whether the fundamental cause of scarcity unlimited wants is really innate, and argues that it may be merely constructed [see Diamonds are Bullshit]. She notes that some people manage to resist consumerism and choose different lifestyles embodying simplicity, balance or connection (to the earth and to others). The fact that some are able to do this suggests unlimited wants aren’t innate. In arguing that our wants are constructed, she emphasizes the power of social norms and the power of advertising: some of society’s cleverest people and billions of dollars a year are spent creating and maintaining our wants. (Hill and Myatt 2010, 16)

Northrop also points out that the notion of unlimited wants puts all wants on an equal footing: one person’s want for a subsistence diet is no more important than a millionaire’s want for precious jewellery. This equality of wants reflects the market value system that no goods are intrinsically more worthy than others just as no preferences are more worthy than others. This is clearly a value judgement and one that many people reject. Yet economics, which unquestioningly adopts this approach, claims to be an objective social science that avoids making value judgements! (Hill and Myatt 2010, 16)

It is noteworthy that Keynes disagreed that ‘all wants have equal merit’. Rather than identify the economic problem with scarcity, he identified it with the satisfaction of what he called absolute needs: food, clothing, shelter and healthcare (Keynes 1963 [1931]: 365). This definition of the economic problem puts equity and the distribution of income front and centre. It contrasts with the textbook approach of treating equity as a political issue outside the scope of economic analysis. (Hill and Myatt 2010, 16)

Another economist who rejects the ‘innate unlimited wants’ idea is Stephen Marglin (2008). Unlike Northrop, he doesn’t blame advertising or social norms. Rather, he sees the fundamental cause to be the destruction of community ties, which creates an existential vacuum: all that’s left is stuff. Goods and services substitute for meaningful relationships with family, friends and community. His conclusion: as long as goods are a primary means of solving existential problems, we will always want more. But what or who is responsible for undermining community ties and bonds? Marglin argues that the assumptions of textbook economics, and the resulting policy recommendations of economists, undermine community…. (Hill and Myatt 2010, 16-17)

According to Marglin, the textbook focus on individuals makes the community invisible to economists’ eyes. But it is our friendships and deep connections with others which give our lives meaning. So community ties, built on mutual trust and common purpose, have a value a value that economists ignore when recommending policy.

Furthermore, Marglin argues that rational choice theory emphasized in the mainstream textbooks reduces ethical judgements and values to mere preferences. Are you working for the benefit of your community? That’s your preference. Are you cooking the books to get rich quick and devil take the hindmost? That’s your preference. Being selfish is no worse than being altruistic, they are just different preferences. (Hill and Myatt 2010, 16)

Indeed, according to mainstream textbook economics it is smart to be selfish. It not only maximizes your own material well-being, but through the invisible hand of the market it also produces the greatest good for the greatest possible number. This view influences the cultural norms of society and indirectly erodes community. This influence of economics on attitudes isn’t mere speculation. Marwell and Ames (1981) document that exposure to economics generates less cooperative, less other-regarding, behaviour. Frank et al. (1993) show that uncooperative behaviour increases the more individuals are exposed to economics. (Hill and Myatt 2010, 17-18)

(….) Marglin argues that the textbook focus on individuals is problematic. John Kenneth Galbraith went farther. He thought the textbook focus on individuals was a source of grave error and bias because in the real world the individual is not the agent that matters most. The corporation is. By having the wrong focus, economics is able to deny the importance of power and political interests. (Hill and Myatt 2010, 18)

Further, textbooks assume that the state is subordinate to individuals through the ballot box. At the very least, government is assumed to be neutral, intervening to correct market failure as best it can, and to redistribute income so as to make market outcomes more equitable. (Hill and Myatt 2010, 18-19)

But this idealized world is so far removed from the real world that it is little more than a myth, or ‘perhaps even a fraud’ (John K. Galbraith 2004). The power of the largest corporations rivals that of the state; indeed, they often hijack the state’s power for their own purposes. In reality, we see the management of the consumer by corporations; and we see the subordination of the state to corporate interest. (Hill and Myatt 2010, 19)

(….) Galbraith argues that the biggest corporations have power over markets, power in the community, power over the state, and power over belief. As such, the corporation is a political instrument, different in form and degree but not in kind from the state itself. Textbook economics, in denying that power, is part of the problem. It stops us from seeing how we are governed. As such it becomes an ‘ally of those whose exercise of power depends on an acquiescent public’ (John K. Galbraith 1973a: 11). (Hill and Myatt 2010, 19-20)

Spotting the Spoof

According to this view, individuals within an economy follow simple rules of thumb to determine their course of action. However, they adapt to their environment by changing the rules they use when these prove to be less successful. They are not irrational in that they do not act against their own interests, but they have neither the information nor the calculating capacity to ‘optimise’. Indeed, they are assumed to have limited and largely local information, and they modify their behaviour to improve their situation. Individuals in complexity models are neither assumed to understand how the economy works nor to consciously look for the ‘best choice’. The main preoccupation is not whether aggregate outcomes are efficient or not but rather with how all of these different individuals interacting with each other come to coordinate their behaviour. Giving individuals in a model simple rules to follow and allowing them to change them as they interact with others means thinking of them much more like particles or social insects. Mainstream economists often object to this approach, arguing that humans have intentions and aims which cannot be found in either inanimate particles or lower forms of life.

Kirman et. al. (2018, 95) in Rethinking Economics: An Introduction to Pluralist Economics, Routledge.

Even such purely academic theories as interpretations of human nature have profound practical consequences if disseminated widely enough. If we impress upon people that science has discovered that human beings are motivated only by the desire for material advantage, they will tend to live up to this expectation, and we shall have undermined their readiness to moved by impersonal ideals. By propagating the opposite view we might succeed in producing a larger number of idealists, but also help cynical exploiters to find easy victims. This specific issue, incidentally, is of immense actual importance, because it seems that the moral disorientation and fanatic nihilism which afflict modern youth have been stimulated by the popular brands of sociology and psychology [and economics] with their bias for overlooking the more inspiring achievements and focusing on the dismal average or even the subnormal. When, fraudulently basking in the glory of the exact sciences, the psychologists [, theoretical economists, etc.,] refuse to study anything but the most mechanical forms of behavior—often so mechanical that even rats have no chance to show their higher faculties—and then present their mostly trivial findings as the true picture of the human mind, they prompt people to regard themselves and others as automata, devoid of responsibility or worth, which can hardly remain without effect upon the tenor of social life. (….) Abstrusiveness need not impair a doctrine’s aptness for inducing or fortifying certain attitudes, as it may in fact help to inspire awe and obedience by ‘blinding people with science’.

— Andreski (1973, 33-35) in Social Sciences as Sorcery. Emphasis added.

Complexity theory comes with its own problems of over-reach and tractability. Context counts; any theory taken to far stretches credulity. The art is in spotting the spoof. It is true irony to watch the pot calling the kettle black! To wit, mainstream economists questioning the validity of complexity theories use of greedy reductionism — often for the sole purpose of mathematical tractability — when applied to human beings; just because mainstream economists also have unrealistic assumptions (i.e., homo economicus) that overly simplify human behavior and capabilities doesn’t invalidate such a critique. Just because the pot calls the kettle black doesn’t mean the kettle and the pot are not black. Building models of human behavior solely on rational expectations and/or “social insects” qua fitness climbing ticks means we are either Gods or Idiots. Neither Gödel nor Turing reduced creatively thinking human beings to mere Turing machines.

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The best dialogues take place when each interlocutor speaks from her best self, without pretending to be something she is not. In their recent book Phishing for Phools: The Economics of Manipulation and Deception, Nobel Prize–winning economists George Akerlof and Robert Shiller expand the standard definition of “phishing.” In their usage, it goes beyond committing fraud on the Internet to indicate something older and more general: “getting people to do things that are in the interest of the phisherman” rather than their own. In much the same spirit, we would like to expand the meaning of another recent computer term, “spoofing,” which normally means impersonating someone else’s email name and address to deceive the recipient—a friend or family member of the person whose name is stolen—into doing something no one would do at the behest of a stranger. Spoofing in our usage also means something more general: pretending to represent one discipline or school when actually acting according to the norms of another. Like phishing, spoofing is meant to deceive, and so it is always useful to spot the spoof.

Students who take an English course under the impression they will be taught literature, and wind up being given lessons in politics that a political scientist would scoff at or in sociology that would mystify a sociologist, are being spoofed. Other forms of the humanities—or dehumanities, as we prefer to call them—spoof various scientific disciplines, from computer science to evolutionary biology and neurology. The longer the spoof deceives, the more disillusioned the student will be with what she takes to be the “humanities.” (Morson, Gary Saul. Cents and Sensibility (pp. 1-2). Princeton University Press. Kindle Edition.)

By the same token, when economists pretend to solve problems in ethics, culture, and social values in purely economic terms, they are spoofing other disciplines, although in this case the people most readily deceived are the economists themselves. We will examine various ways in which this happens and how, understandably enough, it earns economists a bad name among those who spot the spoof.

But many do not spot it. Gary Becker won a Nobel Prize largely for extending economics to the furthest reaches of human behavior, and the best-selling Freakonomics series popularizes this approach. What seems to many an economist to be a sincere effort to reach out to other disciplines strikes many practitioners of those fields as nothing short of imperialism, since economists expropriate topics rather than treat existing literatures and methods with the respect they deserve. Too often the economic approach to interdisciplinary work is that other fields have the questions and economics has the answers. (Morson, Gary Saul. Cents and Sensibility (pp. 2-3). Princeton University Press. Kindle Edition.)

As with the dehumanities, these efforts are not valueless. There is, after all, an economic aspect to many activities, including those we don’t usually think of in economic terms. People make choices about many things, and the rational choice model presumed by economists can help us understand how they do so, at least when they behave rationally—and even the worst curmudgeon acknowledges that people are sometimes rational! We have never seen anyone deliberately get into a longer line at a bank. (Morson, Gary Saul. Cents and Sensibility (p. 3). Princeton University Press. Kindle Edition.)

Even regarding ethics, economic models can help in one way, by indicating what is the most efficient allocation of resources. To be sure, one can question the usual economic definition of efficiency—in terms of maximizing the “economic surplus”—and one can question the establishment of goals in purely economic terms, but regardless of which goals one chooses, it pays to choose an efficient way, one that expends the least resources, to reach them. Wasting resources is never a good thing to do, because the resources wasted could have been put to some ethical purpose. The problem is that efficiency does not exhaust ethical questions, and the economic aspect of many problems is not the most important one. By pretending to solve ethical questions, economists wind up spoofing philosophers, theologians, and other ethicists. Economic rationality is indeed part of human nature, but by no means all of it.

For the rest of human nature, we need the humanities (and the humanistic social sciences). In our view, numerous aspects of life are best understood in terms of a dialogue between economics and the humanities—not the spoofs, but real economics and real humanities. (Morson, Gary Saul. Cents and Sensibility (pp. 3-4). Princeton University Press. Kindle Edition.)

Value Crisis of Modernity

There are many examples in the modern world showing how this doctrine of the free market—the pursuit of self-interest—has worked out to the disadvantage of society.

— CAMBRIDGE PROFESSOR JOAN ROBINSON, 1977, cited in Buddhist Economics.

The approach used here concentrates on a factual basis that differentiates it from more traditional practical ethics and economic policy analysis, such as the “economic” concentration on the primacy of income and wealth (rather than on the characteristics of human lives and substantive freedoms).

— NOBEL LAUREATE AMARTYA SEN, DEVELOPMENT AS FREEDOM, cited in Buddhist Economics

In Buddhist economics, people are interdependent with one another and with Nature, so each person’s well-being is measured by how well everyone and the environment are functioning with the goal of minimizing suffering for people and the planet. Everyone is assumed to have the right to a comfortable life with access to basic nutrition, health care, education, and the assurance of safety and human rights. A country’s well-being is measured by the aggregation of the well-being of all residents and the health of the ecosystem.

Brown (2017, 2), in Buddhist Economics

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In the most dramatic moments of Italy’s debt crisis, the newly installed “technical” government, led by Mario Monti, appealed to trade unions to accept salary cuts in the name of national solidarity. Monti urged them to participate in a collective effort to increase the competitiveness of the Italian economy (or at least to show that efforts were being made in that direction) in order to calm international investors and “the market” and, hopefully, reduce the spread between the interest rates of Italian and German bonds (at the time around 500 points, meaning that the Italian government had to refinance its ten-year debt at the excruciating rate of 7.3 percent). Commenting on this appeal in an editorial in the left-leaning journal Il Manifesto, the journalist Loris Campetti wondered how it could be at all possible to demand solidarity from a Fiat worker when the CEO of his company earned about 500 times what the worker did.1 And such figures are not unique to Italy. In the United States, the average CEO earned about 30 times what the average worker earned in the mid-1970s (1973 being the year in which income inequality in the United States was at its historically lowest point). Today the multiplier lies around 400. Similarly, the income of the top 1 percent (or even more striking, the top 0.1 percent) of the U.S. population has skyrocketed in relation to that of the remaining 99 percent, bringing income inequality back to levels not seen since the Roaring Twenties. (Arvidsson et. al. 2013, 1-2)

The problem is not, or at least not only, that such income discrepancies exist, but that there is no way to legitimate them. At present there is no way to rationally explain why a corporate CEO (or a top-level investment banker or any other member of the 1 percent) should be worth 400 times as much as the rest of us. And consequently there is no way to legitimately appeal to solidarity or to rationally argue that a factory worker (or any of us in the 99 percent) should take a pay cut in the name of a system that permits such discrepancies in wealth. What we have is a value crisis. There are huge differentials in the monetary rewards that individuals receive, but there is no way in which those differentials can be explained and legitimated in terms of any common understanding of how such monetary rewards should be determined. There is no common understanding of value to back up the prices that markets assign, to put it in simple terms. (We will discuss the thorny relation between the concepts of “value” and “price” along with the role of markets farther on in this chapter.) (Arvidsson et. al. 2013, 2)

This value crisis concerns more than the distribution of income and private wealth. It is also difficult to rationalize how asset prices are set. In the wake of the 2008 financial crisis a steady stream of books, articles, and documentaries has highlighted the irrational practices, sometimes bordering on the fraudulent, by means of which mortgage-backed securities were revalued from junk to investment grade, credit default swaps were emitted without adequate underlying assets, and the big actors of Wall Street colluded with each other and with political actors to protect against transparency and rational scrutiny and in the end to have the taxpayers foot the bill. Neither was this irrationality just a temporary expression of a period of exceptional “irrational exuberance”; rather, irrationality has become a systemic feature of the financial system. As Amar Bidhé argues, the reliance on mathematical formulas embodied in computerized calculating devices at all levels of the financial system has meant that the setting of values on financial markets has been rendered ever more disconnected from judgments that can be rationally reconstructed and argued through.5 Instead, decisions that range from whether to grant a mortgage to an individual, to how to make split-second investment decisions on stock and currency markets, to how to grade or rate the performance of a company or even a nation have been automated, relegated to the discretion of computers and algorithms. While there is nothing wrong with computers and algorithms per se, the problem is that the complexity of these devices has rendered the underlying methods of calculation and their assumptions incomprehensible and opaque even to the people who use them on a daily basis (and imagine the rest of us!). To cite Richard Sennett’s interviews with the back-office Wall Street technicians who actually develop such algorithms: (Arvidsson et. al. 2013, 2-3)

“I asked him to outline the algo [algorithm] for me,” one junior accountant remarked about her derivatives-trading Porsche driving superior, “and he couldn’t, he just took it on faith.” “Most kids have computer skills in their genes … but just up to a point … when you try to show them how to generate the numbers they see on screen, they get impatient, they just want the numbers and leave where these came from to the main-frame.” (Arvidsson et. al. 2013, 3)

The problem here is not ignorance alone, but that the makeup of the algorithms and automated trading devices that execute the majority of trades on financial markets today (about 70 percent are executed by “bots,” or automatic trading agents), is considered a purely technical question, beyond rational discussion, judgment, and scrutiny. Actors tend to take the numbers on faith without knowing, or perhaps even bothering about, where they came from. Consequently these devices can often contain flawed assumptions that, never scrutinized, remain accepted as almost natural “facts.” During the dot-com boom, for example, Internet analysts valued dot-coms by looking at a multiplier of visitors to the dot-com’s Web site without considering how these numbers translated into monetary revenues; during the pre-2008 boom investors assigned the same default risks to subprime mortgages, or mortgages taken out by people who were highly likely to default, as they did to ordinary mortgages.8 And there are few ways in which the nature of such assumptions, flawed or not, can be discussed, scrutinized, or even questioned. Worse, there are few ways of even knowing what those assumptions are. The assumptions that stand behind the important practice of brand valuation are generally secret. Consequently, there is no way of explaining how or discussing why valuations of the same brand by different brand-valuation companies can differ as much as 450 percent. A similar argument can be applied to Fitch, Moody’s, Standard & Poor, and other ratings agencies that are acquiring political importance in determining the economic prospects of nations like Italy and France. (Arvidsson et. al. 2013, 3)

This irrationality goes even deeper than financial markets. Investments in corporate social responsibility are increasing massively, both in the West and in Asia, as companies claim to want to go beyond profits to make a genuine contribution to society. But even though there is a growing body of academic literature indicating that a good reputation for social responsibility is beneficial for corporate performance in a wide variety of ways—from financial outcomes to ease in generating customer loyalty and attracting talented employees—there is no way of determining exactly how beneficial these investments are and, consequently, how many resources should be allocated to them. Indeed, perhaps it would be better to simply tax corporations and let the state or some other actor distribute the resources to some “responsible” causes. The fact that we have no way of knowing leads to a number of irrationalities. Sometimes companies invest more money in communicating their efforts at “being good” than they do in actually promoting socially responsible causes. (In 2001, for example, the tobacco company Philip Morris spent $75 million on what it defined as “good deeds” and then spent $100 million telling the public about those good deeds.) At other times such efforts can be downright contradictory, for example when tobacco companies sponsor antismoking campaigns aimed at young people in countries like Malaysia while at the same time targeting most of their ad spending to the very same segment. Other companies make genuine efforts to behave responsibly, but those efforts reflect poorly on their reputation. Apple, for example, has done close to nothing in promoting corporate responsibility, and has a consistently poor record when it comes to labor conditions among its Chinese subcontractors (like Foxconn). Yet the company benefits from a powerful brand that is to no small degree premised on the fact that consumers perceive it to be somehow more benign than Microsoft, which actually does devote considerable resources to good causes (or at least the Bill and Melinda Gates Foundation does so). (Arvidsson et. al. 2013, 3-4)

Similar irrationalities exist throughout the contemporary economy, ranging from how to measure productivity and determine rewards for knowledge workers to how to arrive at a realistic estimate of value for a number of “intangible” assets, from creativity and capacity for innovation to brand. (We will come back to these questions below as well as in the chapters that follow.) Throughout the contemporary economy, from the heights of finance down to the concrete realities of everyday work, particularly in knowledge work, great insecurities arise with regard to what things are actually worth and the extent to which the prices assigned to them actually reflect their value. (Indeed, in academic managerial thought, the very concept of “value” is presently without any clear definition; it means widely different things in different contexts.) (Arvidsson et. al. 2013, 4)

But this is not merely an accounting problem. The very question of how you determine worth, and consequently what value is, has been rendered problematic by the proliferation of a number of value criteria (or “orders of worth,” to use sociologist David Stark’s term) that are poorly reflected in established economic models. A growing number of people value the ethical impact of consumer goods. But there are no clear ways of determining the relative value of different forms of “ethical impact,” nor even a clear definition of what “ethical impact” means. Therefore there is no way of determining whether it is actually more socially useful or desirable for a company to invest in these pursuits than to concentrate on getting basic goods to consumers as cheaply and conveniently as possible. Consequently, ethical consumerism, while a growing reality, tends to be more efficient at addressing the existential concerns of wealthy consumers than at systematically addressing issues like poverty or empowerment. Similarly, more and more people understand the necessity for more sustainable forms of development. And while the definition of “sustainability” is clearer than that of “ethics,” there are no coherent ways of making concerns for sustainability count in practices of asset valuation (although some efforts have been made in that direction, which we will discuss) or of rationally determining the trade-off between efforts toward sustainability and standard economic pursuits. Thus the new values that are acquiring a stronger presence in our society—popular demand for a more sustainable economy and a more just and equal global society—have only very weak and unreliable ways of influencing the actual conduct of corporations and other important economic actors, and can affect economic decisions in only a tenuous way. More generally, we have no way of arriving at what orders of worth “count” in general and how much, and even if we were able to make such decisions, we have no channels by means of which to effect the setting of economic values. So the value crisis is not only economic; it is also ethical and political. (Arvidsson et. al. 2013, 4-5, emphasis added)

It is ethical in the sense that the relative value of the different orders of worth that are emerging in contemporary society (economic prosperity, “ethical conduct,” “social responsibility,” sustainability, global justice and empowerment) is simply indeterminable. As a consequence, ethics becomes a matter of personal choice and “standpoint” and the ethical perspectives of different individuals become incommensurate with one another. Ethics degenerates into “postmodern” relativism. (Arvidsson et. al. 2013, 5, emphasis added)

It is political because since we have no way of rationally arriving at what orders of worth we should privilege and how much, we have no common cause in the name of which we could legitimately appeal to people or companies (or force them) to do what they otherwise might not want to do. (The emphasis here is on legitimately; of course people are asked and forced to do things all the time, but if they inquire as to why, it becomes very difficult to say what should motivate them.) In the absence of legitimacy, politics is reduced to either more or less corrupt bargaining between particular interest groups or the naked exercise of raw power. In either case there can be no raison d’état. In such a context, appeals to solidarity, like that of the Monti government in Italy, remain impossible. (Arvidsson et. al. 2013, 5-6)

There have of course always been debates and conflicts, often violent, around what the common good should be. The point is that today we do not even have a language, or less metaphorically, a method for conducting such debates. (Modern ethical debates are interminable, as philosopher Alasdair MacIntyre wrote in the late 1970s.) This is what we mean by a value crisis. Not that there might be disagreement on how to value social responsibility or sustainability in relation to economic growth, or how much a CEO should be paid in relation to a worker, but that there is no common method to resolve such issues, or even to define specifically what they are about. We have no common “value regime,” no common understanding of what the values are and how to make evaluative decisions, even contested and conflict-ridden ones. (Arvidsson et. al. 2013, 6)

This has not always been the case. Industrial society—that old model that we still remember as the textbook example of how economics and social systems are supposed to work—was built around a common way of connecting economic value creation to overall social values, an imaginary social contract. In this arrangement, business would generate economic growth, which would be distributed by the welfare state in such a way that it contributed to the well-being of everyone. And even though there were intense conflicts about how this contract should apply, everyone agreed on its basic values. More importantly, these basic values were institutionalized in a wide range of practices and devices, from accounting methods to procedures of policy decisions to methods for calculating the financial value of companies and assets. Again, this did not mean that there was no conflict or discussion, but it did mean that there was a common ground on which such conflict and discussion could be acted out. There was a common value regime. (Arvidsson et. al. 2013, 6)

We are not arguing for a comeback of the value regime of industrial society. That would be impossible, and probably undesirable even if it were possible. However, neither do we accept the “postmodernist” argument (less popular now, perhaps, than it was two decades go) that the end of values (and of ethics or even politics) would be somehow liberating and emancipatory. Instead we argue that the foundations for a different kind of value regime—an ethical economy—are actually emerging as we speak. (Arvidsson et. al. 2013, 6)

Crystal Balls and Econometrics

The growth of economic knowledge over the past 200 years compares quite favourably with the growth of physical science in any arbitrary 200 year stretch of the dark ages or medieval period. But one is reminded of Mark Twain: “it ain’t what people don’t know that’s the problem; it’s what they know that just ain’t so.” Along with the accumulation of knowledge there has been a proliferation of abstract theorizing that is only too easy to misapply or apply to situations where it is inappropriate. The low power of empirical tests and indifference of too many people to empirical testing has allowed useless models to persist too. Ideology also plays a bigger part than it does in most sciences, especially in macroeconomics. So it is easy to point to cases where economists offered terrible advice. No reason to despair. Smith, Marx, Keynes, Kalecki, Simon and Minsky all advanced understanding somewhat while Marshall, Hicks and others clarified and formalized concepts. Macroeconomics took a wrong path and a sharp turn for the worse in the1970s and we are barely emerging now. Still, what is 50 years in the eye of history?

— Gerald Holtham on RWER Blog

The modern forecasting field, which emerged in the early twentieth century, had many points of origin in the previous century: in the field credit rating agencies, in the financial press, and in the blossoming fields of science—including meteorology, thermodynamics, and physics. The possibilities of scientific discovery and invention generated unbounded optimism among Victorian-era Americans. Scientific discoveries of all sorts, from the invention of the internal combustion engine to the insights of Darwin and Freud, seemed to promise a new and illuminating age just out of reach. (Friedman 2014, ix)

But forecasting also had deeper roots in the inherent wish of human beings to find certainty in life by knowing the future: What will I be when I grow up? Where will I live? What kind of work will I do? Will it be fulfilling? Will I marry? What will happen to my parents and other family members? To my country, to my job? To the economy in which I live? Forecasting addresses not just business issues but the deep-seated human wish to divine the future. It is the story of the near universal compulsion to avoid ambiguity and doubt and the refusal of the realities of life to satisfy that impulse. (Friedman 2014, ix)

Economic forecasting arose when it did because while the effort to introduce rationality—in the form of the scientific method—was emerging, the insatiable human longing for predictability persisted in the industrializing economy. Indeed, the early twentieth century saw a curious enlistment of science in a range of efforts to temper the uncertainty of the future. Reform movements, including good, bad, and ugly ones (like labor laws, Prohibition, and eugenics), envisioned a future improved through the application of science. So, too, forecasting attracted a spectrum of visionaries. Here were “seers,” such as the popular prophet Roger Babson, Wall Street entrepreneurs, like John Moody, and genuine academic scientists, such as Irving Fisher of Yale and Charles Jesse Bullock and Warren Persons of Harvard. (Friedman 2014, ix)

Customers of the new forecasting services often took these statistics-based predictions on faith. They wanted forecasts, John Moody noted, not discourses on the methods that produced them. Readers did not seek out detailed information on the accuracy of economic predictions, as long as forecasters proved to be right at least a portion of the time. The desire for any information that would illuminate the future was overwhelming, and subscribers to forecasting newsletters were willing to suspend reasoned judgment to gain comfort. This blend of rationality and anxiety, measurement and intuition, optimism and fear is the broad frame of the story and, not incidentally, why forecasters who were repeatedly proved mistaken, as all ultimately must be given enough time, still commanded attention and fee-paying clients. (Friedman 2014, x)

(….) Forecaster’s reliance on science and statistics as methods for accessing the future aligns their story with conventional narratives of modernity. The German sociologist Max Weber, for instance, argued that a key component of the modern worldview was a marked “disenchantment of the world,” as scientific rationality displaced older, magical, and “irrational” ways of understanding. Indeed, the forecasters … certainly saw themselves as systematic empiricists and logicians who promised to rescue the science of prediction from quacks and psychics. They sought, in the words of historian Jackson Lears, to “stabilize the sorcery of the market.” (Friedman 2014, 5)

The relationship between the forecasting industry and modernity was an ambivalent one, though. On the one hand, the early forecasters helped build key institutions (including Moody’s Investors Service and the National Bureau of Economic Research) and popularize new statistical tools, like leading indicators and indexes of industrial production. On the other hand, though all forecasters dressed their predictions in the garb of rationality (with graphs, numbers, and equations), their predictive accuracy was no more certain than a crystal ball. Moreover, despite efforts of forecasters to distance themselves from astrologers and popular conjurers, the emergence of scientific forecasting went hand in hand with rising popular interest in all manner of prediction. The general public, anxious for insights into an uncertain future, consumed forecasts indiscriminately. (Friedman 2014, 5)