Ploys for Exaggerating the Scientific Status of Economics

Rationality and the neoclassical economist’s magic tricks

There’s a curious transition from the early economist’s assumption that economic activity is driven by rational selfishness, to the later one’s assumption that that activity is more open-ended, that it’s instrumentally rational but potentially altruistic.

The assumption of egoism in classical economics

Here’s what I mean. John Stuart Mill and Adam Smith were early modern economists who argued, respectively, that the scientific status of economics and the miracle of capitalism depend on assuming the rational selfishness of buyers and sellers.

Specifically, Mill said that economics presupposes “an arbitrary [idealized] definition of man, as a being who invariably does that by which he may obtain the greatest amount of necessaries, conveniences, and luxuries, with the smallest quantity of labour and physical self-denial with which they can be obtained in the existing state of knowledge.”

Moreover, economics or “political economy,” as it was called in the eighteenth century,

does not treat of the whole of man’s nature as modified by the social state, nor of the whole conduct of man in society. It is concerned with him solely as a being who desires to possess wealth, and who is capable of judging of the comparative efficacy of means for obtaining that end. It predicts only such of the phenomena of the social state as take place in consequence of the pursuit of wealth… Political Economy considers mankind as occupied solely in acquiring and consuming wealth; and aims at showing what is the course of action into which mankind, living in a state of society, would be impelled, if that motive…were absolute ruler of all their actions.

The reason for this exclusive focus on the seeking of wealth, Mill says, is that this analytical approach makes for a scientific method:

Not that any political economist was ever so absurd as to suppose that mankind are really thus constituted, but because this is the mode in which science must necessarily proceed. When an effect depends upon a concurrence of causes, those causes must be studied one at a time, and their laws separately investigated, if we wish, through the causes, to obtain the power of either predicting or controlling the effect…

And Adam Smith’s invisible hand argument says that capitalism only indirectly or unintentionally benefits society because each economic actor is supposed to be pursuing his or her exclusive self-interest. Charity is explicitly ruled out as counterproductive for economic purposes.

Thus, says Smith, the individual “neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry,” for example,

he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.

Another reason for this assumption of egoism in capitalistic economies derives from the economist Lionel Robbins’ influential definition of “economics” as “the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses.”

That definition assumes, then, something like Thomas Malthus’s pessimism about sustainable progress, due to the scarcity of resources which forces us to compete for a limited share. This constraint enjoins us to be less than saintly in competing, or to be narrowly focussed on ensuring our private advantage even if that should put our rivals at a disadvantage.

But the miracle of capitalism is that this amoral, ruthless competition ends up benefiting society after all so there was no need for despair even as feudalism gave way to mercantilism and to capitalism. That historic shift was progressive, as the modern metanarrative would have it.

The subjectivity of neoclassical utility

But later, neoclassical economists shy away from positing that egoism. Instead, they assume a more neutral conception of economic decision-making, allowing for a wider variety of subjective preferences. Indeed, economic rationality supposedly ends up as little more than the instrumental optimizing of means to ends, which allows for any ends or goals.

In its explanation of economic rationality, for example, Britannica explicitly contrasts this instrumentalism with the earlier egoism:

Although there is no single notion of rationality appealed to by all economic theories, there is a core conception that forms the basis of much economic theorizing. That view, termed the neoclassical conception of economic rationality, takes rationality to consist primarily of the maximization of subjective utility — that is, the maximization of one’s own personal desires. Although it is sometimes assumed that subjective utility is equivalent to self-interest (concern for getting one’s own wants and needs met exclusive of the effects on others), these are not identical, because the notion of subjective utility allows that one might have preferences that are not purely motivated by self-interest.

Here’s another definition of “economic rationality” that highlights this subjectivity:

Rationality, for economists, simply means that when you make a choice, you will choose the thing you like best. This is very different from the way we normally think about rationality. Usually when we talk about rationality we use it to mean sensible, or reasonable. To economists — as long as you’re doing what you want given your situation, you’re acting rationally.

That means that the craziest behavior you can think of could be rational for economists. Burning money is a good example.

Similarly, in An Essay on the Nature and Significance of Economic Science, Lionel Robbins says that

The fundamental concept of economic analysis is the idea of relative valuations; and, as we have seen, while we assume that different goods have different values at different margins, we do not regard it as part of our problem to explain why these particular valuations exist. We take them as data. So far as we are concerned, our economic subjects can be pure egoists, pure altruists, pure ascetics, pure sensualists or — what is much more likely — mixed bundles of all these impulses.

This shift to subjective value is largely what distinguishes neoclassical from classical economics, and thus economic orthodoxy from heterodoxy since the neoclassical paradigm holds sway over the field and over the public impression of the academic study of economies. The neoclassicists define the economic value that determines a product’s price as depending on the consumer’s perception. We’ll pay whatever we think the product’s worth.

Bids for scientific status

In effect, then, there are two approaches to establishing the economist’s scientific credentials. The classical one was to analyze economic phenomena by describing them in substantive, historical, and sociological terms. Mill did this by delving into the mindset of those engaging in economic behaviour, while Smith did so by emphasizing the government’s role in offsetting the destructiveness of egoistic competition, with regulations that reinforce prosocial sentiments. Karl Marx analyzed the economic sector in terms of the history of class struggles.

What made that approach at least quasi-scientific was that the resulting models were falsifiable. Marx’s prediction of a declining rate of profit in capitalistic economies turned out to be false or at least problematic.

By contrast, the early neoclassicists, such as Leon Walras, William Stanley Jevons, and Alfred Marshall replaced those sociological hypotheses with abstract, mathematical formulations of economic patterns.

For instance, they explained the oddity that diamonds are worth more than water even though water is more useful, by positing a mathematical relationship known as marginal utility. What determines the value of these two goods isn’t their uses but their quantities. Water is much more abundant, and the economic value of something tends to decrease as its supply increases. One additional unit of diamonds is worth much more than one additional unit of water because water is easier for anyone to obtain, and the more you consume something, the more toxic the good becomes.

Walras and Jevons studied engineering and physics and they treated the economy as a mechanical system that reaches a state of equilibrium because of its inherent properties. Thus, government shouldn’t impede the competition between individual calculators of the means of maximizing their utility, with regulations and taxes. And the neoclassicist’s approach to establishing economics as a science was to posit abstractions or theoretical entities, such as utility or supply and demand curves, and to describe them mathematically rather than sociologically, thus making economics potentially as rigorous as physics.

As the historian Philip Mirowski explains in Cyborg Dreams, the genesis of neoclassicism in the 1870s can be traced ‘to the enthusiasm for “energetics” growing out of the physics of the mid-nineteenth century.” Indeed, Jevons, Walras, Pareto, and others admitted that their concept of “utility”

was patterned on potential energy in classical mechanics, as were their favored mathematics of extremum principles. Their shared vision of the operation of the market (and of the mind of the agent, if they were willing to make this commitment) was avowedly mechanical in an eminently physical sense of the term. Their shared prescription for rendering economics as a science was to imitate the best science they knew, right down to its characteristic mathematical formalisms. It was a science of causality, rigid determinism and preordained order; in other words, it was physics prior to the Second Law of Thermodynamics, a science most assuredly innocent of the intellectual upheavals beginning at the turn of the century and culminating in the theories of quantum mechanics and statistical thermodynamics.

Paradoxically, though, from the later economic standpoint, this meant that while classical economics posited concrete phenomena and objective norms, the cost of doing so was that the analysis itself was more philosophical — and thus subjective — than scientific. Yet by positing subjective economic values, neoclassical economics is supposed to have become scientific because of the objectivity of its mathematical (non-concrete or contextual) explanations.

Assessing the scientific status of economics

This transition, though, represented a magic trick. You’d be forgiven for thinking that the dream of scientific economics would have gone up in smoke with the realization that economic value is subjective, that there’s no objective basis for prices since what matters is just the consumer’s perception of a thing’s value. If you can convince a customer to pay $100 for a hamburger, then that’s a fair price and there’s nothing more to economic value than that.

At first glance, then, there ought to be as little chance of scientifically explaining an economic pattern as a function of subjective taste, as there is of doing so in the case of the arts. If the value of economic goods is as subjective as the values of paintings or rock bands, how could economics be scientific while aesthetics or pop cultural criticism isn’t so?

Math is supposed to have saved the day for economists since the supposed difference is that the subjectivity of artistic value is arbitrary, whereas there are mathematical relationships that determine economic utility.

Yet those relationships are clearer in the economist’s imagination than in the real world. One problem with the neoclassical model, for instance, is that if you’re dying of thirst, the value of water for you will skyrocket regardless of water’s total abundance, and you’d gladly exchange ten diamonds for ten drops of water, under those circumstances.

Moreover, as Thorsten Veblen pointed out, the value of luxury goods often increases at the margins, or as the goods multiply, contrary to the alleged law of diminishing marginal utility, because you’d consume them to signal your dominant status in society. You’d buy a fleet of cars if you could, just to be seen as being able to do so.

How does the neoclassical economist respond to these biological and sociological observations? Do they falsify the mathematical abstractions? No, the neoclassicist would say, because these abstractions aren’t meant to be realistic; rather, they’re supposed to simplify the subject matter in modelling it, to increase the model’s predictive power.

How, though, can we tell the difference between a scientific model and a sheer fiction or a pseudoscientific, fraudulent distortion? In physics, one difference is that the usefulness of positing unobservable entities can be tested in laboratories. Predictions borne out by rigorous, independent tests are deemed reliable. In economics, experiments can’t take center stage because the subject matters are people and societies, not natural forces, elements, or systems.

To be sure, behavioural and experimental approaches in economics arose over the last few decades, but they’re naturally susceptible to the replication crisis that bedevils the social sciences. Natural systems can be rigorously tested in the laboratory because there are no ethical qualms in doing so, the scientific discovery being that nature is fundamentally mindless. People can volunteer to be experimented on, but those experiments are limited by the subject’s fundamental rights and by the mind’s very subjectivity, by his or her immersion in consciousness and values which are the opposites of natural physicality.

According to one study, economic experiments fail 40% of the time, while psychological ones fail 60%. Neither result makes the social “science” as rigorous or as reliable as physics, and if economics seems more reliable than psychology, that could be because its well-tested findings don’t stray much further than common sense, whereas cognitive science doesn’t defer to the intuitions of folk psychology. Another study found the success rate in experimental economics is a lot worse than 60%.

Another critic of the social sciences points to the problem of “p-hacking,” which is the way in which

unspectacular results can be made more spectacular. This is done by subtly or crudely altering the data analysis to improve the statistical significance level, expressed in terms of the p-value. In economics, p-hacking is especially problematic because the share of secondary data-based studies is much higher than in other disciplines like psychology or medical research, where larger parts of the literature are based on laboratory experiments or Randomized Controlled Trials (RCTs).

Besides the testing of hypotheses, there’s the humanistic culture of skepticism and of repudiating dogma and politics, which distinguishes science from pseudoscience. As I argue elsewhere, economics is highly politicized because its subject matter is tendentious and readily exploited by special interests. Neoclassical abstractions mask that predominance of tribal dynamics in the field because the economist’s arcane maths seem to address only academic matters to which few could be emotionally committed. But pseudoscientists, too, would shield their manipulations with a misleading sales pitch.

Why is neoclassical economics pro-capitalist?

In any case, there’s another problem with the mathematical gambit in neoclassical economics. If this orthodox economist is meant to be neutral, so that the definition of economic value is subjective and open-ended, how is that approach any longer distinctively economical? Without the sociological assumptions about egoism, government, or social classes, what makes pure instrumental rationality, the efficient tailoring of means to individually preferred ends economic? Conceivably, at least, a discourse can become so abstract that it’s no longer about anything at all.

Typically, sociology is brought in through the backdoor of neoclassical models, as these economists stipulate, of course, that the instrumental rationality in question is that which is employed by “consumers” and “producers” as they “buy” or “sell” “goods” in a “market.” And, of course, Robbins specifies that resources must be scarce, for a choice to be distinctively economical, which is an empirical rather than a mathematical assumption.

This, too, is how neoclassicists end up supporting capitalism despite the alleged neutrality and open-endedness of their mathematical abstractions. The idea is that, just as the social contract emerges from the lawless state of nature, capitalism’s supremacy springs from an imagined open-ended competition between individual preferences. Markets emerge to coordinate these disagreements, and capitalism is just the most optimal such arrangement. Capitalism ends by maximizing utility or happiness (the satisfying of desires) as much as possible, given the suboptimal starting point of the plethora of conflicts between free individuals.

What’s crucial here, then, is the ambiguity in speaking of maximizing “your own” interests or utility. On the one hand, you could be referring to the interest’s possessor, and on the other you could be talking about the interest’s object or its intended outcome. If Fred wants to buy Susie flowers and he does so, that might be taken as increasing Fred’s utility since it’s Fred’s goal, but the act satisfies Fred only by increasing Susie’s utility since Fred’s goal happens to be altruistic, so it benefits her, assuming she likes flowers.

Taking a more extreme case, suppose that a saint is interested only in helping other people, even if doing so should sacrifice his or her personal welfare. Indeed, in the end, the saint dies helping others. Was the saint acting out of “self-interest”? In other words, is the saint economically rational in the neoclassicist’s pro-capitalistic sense?

The answer seems to be yes because like everyone else the saint is entitled to his or her priorities. Whether we’re selfish or selfless, we’re trying to achieve our goals in the most efficient manner possible, and capitalism is the system that best addresses the inevitable rivalries and conflicting evaluations. The saint is instrumentally rational, and she furthers the aims of capitalism even by being irrational in the classical economist’s terms, because the saint contributes to capitalism’s great crunching of the numbers.

You feed billions of conflicting motives into the capitalist algorithm, as it were, and out pops the market equilibrium (in the limit case), as each competitor gets what he or she wants (that is, profit or the product or service at a fair price). The saint wants to die helping others, and capitalism gives the saint that freedom. Moreover, the saint is rational in pursuing that goal with the greatest efficiency, which makes the saint instrumentally rational.

My point, though, is that this genealogical framing of capitalism’s advantage is implicitly classical, as in egoistic and therefore empirical and falsifiable. The neoclassicist begins with open-mindedness in entertaining a wide variety of individuals’ subjective preferences, casting no aspersions on those judgments. But this economist predicts that capitalism emerges as the best system for negotiating the various demands, tastes, and abilities.

Notice that the neoclassical economist can’t afford to be explicitly pro-capitalist while retaining her discipline’s scientific status. All she can say is that capitalism is the likely outcome of a social problem. Capitalism maximizes collective utility by enabling buyers and sellers to freely sort out and to cater to their interests. That was the point of Adam Smith’s invisible hand argument, and the neoclassicist’s mathematical models only systematize that argument.

Yet the emphasis on math here tempts the neoclassicist with Platonism. Instead of saying tentatively that capitalism is expected to have such and such advantages (and disadvantages) in the real world, depending on all sorts of sociobiological, political, and historical complications, the neoclassicist is liable to idolize capitalism by mistaking its advantages for eternal truths living in Plato’s heaven of abstract ideas along with the neoclassicist’s maths.

Consequently, even when history falsifies the neoclassicist’s predictions, and when the disadvantages of capitalism arguably outweigh its advantages, this economist shrugs off those problems and hides behind her model’s abstractness. In this case the model functions more like a theological dogma or a piece of propaganda than like a scientific analysis.

When left to its devices, with low taxes and minimal government regulation, what’s revealed in runaway capitalism isn’t a tendency towards a happy equilibrium but a reversion to an animalistic state in which a minority of winners lord it over the losers. The winners form monopolies that capture government agencies to entrench their dominance in society, stifling competition and practically enslaving the majority by freezing their wages and indebting them.

Or the winners send manufacturing jobs to Third World countries to exploit the lack of human rights there and to maximize their profits. Or the winners replace human workers with machines to increase productivity, threatening the majority with unemployment. Or the richest ten percent of the population identify as consumers to the point of infantilizing themselves with fallacious advertisements and addictive techno toys, turning a blind eye to capitalism’s despoliation of the biosphere.

The real-world problems here are like those of democracy since in either case what’s at issue is liberalism, the reverence for individual liberties. As we see from the global populist backlash against neoliberalism, democracies are vulnerable to demagogues, so there’s no apparent force of nature that makes democracies stable, as has been known since the time of ancient Greek philosophy.

Contrary to the neoclassicist’s optimism, what emerges from nature’s undirected competitions is temporary stability, at best, as one stage of a larger process is eventually replaced by another. Even in natural competitions, species emerge but evolve into each other as the genes test out variations to adapt to the changing environments. Likewise, capitalism may emerge as temporarily effective, only to be replaced by another system in the evolution of human societies.

Indeed, capitalism has already evolved. As Paul Ormerod says in The Death of Economics, whereas the neoclassical economist makes her math tractable by abstracting away the real-world tendency of companies to overpower each other and to dictate prices, and by assuming that all firms are small and even that they make identical products,

Ironically, at precisely the time when marginality and diminishing marginal returns were capturing the academic discipline of economics, the United States was moving towards world economic dominance by exploiting the unprecedented and massive increasing returns to scale of production and distribution which its rapidly expanding economy permitted. In other words, by taking advantage of the benefits of being big.

As we know from the history of “free-trade” in the US and elsewhere, what happened next isn’t just that some superpowerful countries emerged on the global scene, but that some companies became transnational and “too big to fail.” Arguably, capitalism turned into a neofeudal throwback, as Yanis Varoufakis argues.

Hidden assumptions and the essence of capitalism

Yet neoclassical economics isn’t as neutral about capitalism as you’d have expected from a scientific discipline that supposedly doesn’t discriminate against certain individual preferences. One reason for this has to do with an unintended result of this economist’s abstract analysis.

When physicists abstract from the agglomerations of matter and energy (from trees and planets and stars and so on), in positing “masses” and “forces,” that’s supposed to help them understand the essence of these natural products. In so far as they’re physical, the products or everyday objects in question have no choice but to reveal their true nature or their inherent properties, as it were, because they have no mind or freewill.

But what happens when an economist performs the same type of abstraction on members of society? What happens when she imagines Homo economicus, the ideally rational, utility-maximizing economic agent that calculates means and ends in isolation from all historical, cultural, and political contexts and complications? Who, in effect, is the economist imagining?

Again, Mirowski shows that the neoclassical economist intended to be picturing physical systems, and later, during the Cold War, computers or cyborgs, the state-of-the-art technologies of the periods, which metaphors helped the economists’ bids for scientific status. But what the economists intended was one thing, and why those bids succeeded is another.

In effect, as I argue elsewhere, these economists were modelling the type of sociopathic mindset that tends to excel in capitalistic economies, that of the robber baron or other captain of industry who does indeed calculate means and ends in a selfish, anti-social, cold-blooded fashion. The scientist’s analytical method of abstracting from context coincides with the sociopath’s antisocial disposition: both are myopic forms of objectification, in that the scientist leaves personal attachments out of the hypothesized operations of some natural system, and the sociopath doesn’t view others as ends in themselves since the sociopath lacks emotional attachment to them.

Similarly, Machiavelli arrived at the essence of politics by writing on behalf of the unapologetic, power-hungry prince. The essence of capitalism might be found in its leaders who are taken to represent the social system’s telos, just as the relevant virtues of a footrace’s winners might be more closely identified with excellence in that field and thus with the purpose and essence of running. You’d learn more about capitalism from observing the behaviour of plutocrats than you would from homeless people or other losers in the system.

At least, that’s a result of the orthodox economist’s penchant for ignoring social factors in her unrealistic models. In effect, the models are unrealistic only because most people aren’t as sociopathic as Homo economicus. But some individuals are that sociopathic, and they’re disproportionately found in positions of economic power (because they acquire most of the wealth).

Thus, the neutrality of this subjective conception of utility looks like a ruse. In so far as this approach to economics amounts to cheerleading for capitalism, you can count on the fact that the neoclassicist’s maths will bury the model’s philosophical and sociological presumptions because those presumptions are dubious in a crucial respect: Homo economicus is all too real and bad a character, heralding capitalism’s infamous instability.

Perhaps we all calculate ways to maximize our utility, and we do so when we’re thinking economically. But “economic rationality” would then be a euphemism for behaviour which is modelled on sociopathy. After all, if values are subjective, and we started to think more altruistically on a collective basis, such that we cooperated and sacrificed ourselves more often than we fought over resources, capitalism and private property might soon be things of the past.

Thus, if the neoclassical economist wants to defend capitalism on what are likely to be libertarian grounds, she can’t afford to be too neutral in her crediting of utility’s subjectivity. She must slip in some classical specifications of egoism or sociopathy to load her terms.

And because the ultimate results of capitalistic competition are amoral at best, as that system tends to award a minority of sociopaths with the greatest wealth for leading the way in ruining the biosphere, a quasi-scientific apologist for that system couldn’t afford to be as upfront as the classical, more philosophical economists. No, the apologist would have to hide her presumptions behind an impenetrable wall of arcane maths, downplaying her assumptions at least for the wider public.

And that’s what we still find in orthodox economics.