Economics, Law, Philosophy, Politics

Markets Are Government Creations: A Resource Guide

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[Note: This post is unlike the other posts on the blog, for the reasons described here. It offers a series of very rough notes toward a historical sketch of the idea that markets are government creations — in other words, the rejection of the neoliberal, neoclassical, or Reagan Era idea of a conceptual opposition between government and markets. More specifically, it fleshes out the claim in an earlier post that the idea of markets as government creations has been widely accepted by legal scholars, yet largely ignored by academic economists.]

“[T]he market is rational and the government is dumb.” Dick Armey[1]

“[T]he self-regulating economy does not always work as well as its proponents would like us to believe.” Joseph E. Stiglitz[2]

The idea that government plays a constitutive role in markets, including classical liberal markets, is not a new one. But it has never achieved dominance in either public or academic debates about what we would now identify as economic issues. It has never gained the status of a widely shared assumption in the way that its contrary has—the notion of a conceptual opposition between government and the market, public and private. Here, I will offer a brief history of the idea of markets as creatures of government, partly with the simple aim of bringing together in one place the disparate legal and economic contexts in which the idea has been expressed.[3]

At least in the United States, the peak influence of the idea that government constitutes markets arrived a century ago during the Progressive Era, when the “legal realist”[4] and (intellectually related) “institutionalist economics”[5] movements rose to prominence in academic and professional legal and economic thought, respectively. Both movements reacted against the orthodoxies of late-nineteenth-century thought in their respective fields. In law, this orthodoxy is sometimes referred to as “Classical Legal Thought” (CLT).[6] In economics, the orthodoxy often goes under the name “neoclassicism.”[7] A more general term encompassing both threads of intellectual history, but also extending beyond them, would be “classical liberalism.”

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Economics, Philosophy, Politics

Thucydides and the Social Sciences (Autobiographical)

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This post offers a little piece of intellectual autobiography that I hope will place some other posts in a clearer light — especially the posts related to the later Wittgenstein, and the posts on economics. For me, it’s a chance to sort out some of my current thinking by considering what preceded it.

There was a time, shortly after my first exposure to the history of economic ideas, following years of being focused almost exclusively on the humanities, when I thought that what the scholarly world really needed was a kind of new grand unified theory of the social sciences. All I look for from a social science — from any science — is an increase in the power to predict and control nature in ways that serve our purposes, whatever they are. The intellectual run-up to the global financial crisis seemed to show that orthodox economics, as practiced by the world’s leading economists, was failing by this standard.

And economics appeared to be at the vanguard of the social sciences. If economics was driven by “physics envy” — the scientistic desire to emulate the mathematico-deductive rigor of theoretical physics — then other social sciences, such as political science, seemed to be afflicted with “economics envy.” But the global financial crisis called into question whether the emperor was wearing any clothes. Under such circumstances, it seemed to me, wasn’t it worth questioning the reigning assumptions? Might it not be time for some revolutionary science?

Once I began reading about the history of economic ideas, along with critiques of contemporary economic thought, my enthusiasm for this idea grew. To begin with, the secondary literature on economic thought is full of persuasive critiques of the intellectual underpinnings of a great deal of contemporary academic economics, especially the kind practiced in “freshwater” economics departments and by business school professors teaching finance. The more one reads about rational choice theory and the assumptions of quasi-omniscient, hyper-mathematical rationality that dominate so much of mainstream academic economics, the more the field seems ripe for a paradigm shift based on a skeptical rethinking of the basic phenomena under investigation.

In fact, it occurred to me that the predictive successes of modern economics, such as they are, might be largely attributable to the fact that when one is investigating human behavior related to money and closely related subjects — the core focus of economics as a subject matter — the single most important factor in human behavior is calculated self-interest, or, as economists sometimes call it, “rationality.” When making money, people will generally try to make as much as they can with as little effort as possible; when spending money, people will generally try to spend as little as they can for the greatest possible return; and so on. If you’re trying to predict money-related human behavior using as simple a model as possible, a model based on the assumption that individual actors are more or less rational agents (in the economic sense of rationality) is probably your best bet.

But even if you achieve good predictive results with this model in the context of money-related activity, this success obviously does not imply that rationality will always be the most useful model for predicting human behavior, especially in contexts less directly related to money, or where we have good reason to believe that non-pecuniary concerns may trump pecuniary ones.

For example, when we try to imagine what contemporary American political life would look like if all the political actors behaved purely based on calculated self-interest — without gaming the results ahead of time by redefining “self-interest” to include all sorts of ad hoc preferences and motivations that we would not ordinarily view as “self-interested” — the thought experiment leads to absurd results. Do we live in a world with no voters, where politicians run for office without any ideological commitments, tribal affiliations and moral commitments play no role, and officials attract the public’s support by offering generous populist benefits, such as lavish infrastructure and a guaranteed minimum income, with no concern for the deficit? Not at all. Many of the central features of our political life are phenomena that one would not expect to see if the relevant actors were behaving purely as rational actors — unless, again, the idea of rationality is transformed beyond recognition or usefulness.

So, when one discovers that the rational choice methodologies of economics have expanded, perhaps based partly on economics’ scientistic allure, to other domains in the social sciences, the case for a new grand unified theory of the social sciences seems even stronger. If the use of rational choice theory in economics invites skeptical questioning, the use of rational choice theory in, for example, political science — in so-called “public choice theory” — can sometimes seem not only absurd but useless. What unexpected predictive successes can public choice theory claim, against the countless instances where its models would lead us astray? The same could be asked of many rational-choice-based forays into sociology, such as the study of family life.

Certainly, focusing on calculated self-interest may help to dispel comforting illusions about human behavior — for example, if anyone thinks that crime results from some kind of mental pathology, it could certainly be useful to show the contexts in which rationality helps explain crime. But how many comforting illusions are there left to dispel today? Hasn’t the Machiavellian assumption of cold, calculating rationality as the driving force in all human behavior become our own dominant illusion — comforting us not by flattering our moral characters, but by flattering our cold-eyed realism, our courageous perceptiveness and freedom from childish illusions — even where an equally tractable alternative model might yield superior predictions?

With these thoughts in mind, I asked myself: why doesn’t someone develop a better alternative to rational choice theory that can displace its imperialistic role within the social sciences? Why, for example, doesn’t someone follow the lead of Thucydides, who recognized the great importance of self-interest to human behavior, but saw self-interest as one only one of human beings’ three central motivations — the other two being fear and honor?

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