Modern Economics, solution or problem
Poverty and inequality are large and growing. Geopolitical threats abound. The environmental problems seem uncontrollable. It looks like we live on a volcano, which sounds to become active. It might take another series of decades before a great collision. But we are obliged to the generations to come, to tackle our problems on a more fundamental way, not just by symptom relief.
For economists it means that they must carefully formulate the foundations of their economic science, and see what might be improved. When studying the history of economic thought, we see that the principal debates always ended in winners and losers, as if science is a battle, not ongoing conversation. In this essay, I will show that economics today is the result of a process of reduction, thereby making models or frames, in which important aspects are ignored. This appears typical for a so-called modern approach. Focus on the material and empirical, and abstract from the metaphysical aspect. ‘Social’ means the aggregate of individuals, ideality is just about fantasies, a human is his body, cognition is separated from esoteric emotions, and the mind can be reduced to the brain. In this way humans are reduced to machines.
About a few decades many tasks are fulfilled by robots, which are taking the decisions. That’s the way we try to get rid of our fallible subjectivity. The big problem is that the inseparable is separated, and the inspiration does not play a role in our life and in our solutions to the problems.
First I’ll present some cultural history, showing the reductionist trend. Then I’ll discuss the reduction in economics, and in human science in general. In the end I draw some conclusions in terms of what to do.
A long time ago some animals became slowly aware of their Self. They learned to communicate with their fellow animals who appeared aware of their Selves too. Nowadays every toddler discovers his Self, and learns to think in terms of ‘I’ do this, and ‘I’ don’t do that. This property makes it possible to approach children in terms of explanation rather than just teach them the carrot and the stick. Increasingly children learn to think, also about the own self, and to draw conclusions. The young person learns to experience some freedom, combined with some responsibility.
So far life develops in a family context. Adults know that it is their responsibility to deliver food, drinks, and safety. When various families group together, specialisation and innovation makes it possible to live a good life: economically, socially, politically and from a religious point of view. From the very beginning there was specialisation already. Father versus mother figures, parents versus children figures, boys versus girls figures. When families appeared successful, they tended to settle in fertile areas. The population grew, and their ‘societies’ became more complex.
So far societies were run by older men, who taught the younger people the traditions, evolved in the past. The priests were responsible for the execution of the religious rituals. The headmen were responsible for law and order. Professionals dealt with health care problems, and teachers taught the children. The mass of the people worked on the land, and traders took care of the ‘foreign’ exchange of goods and capital. The traditional society was embedded in rules of many kinds. Innovation in the techniques of production, however, challenged the way of thinking of people. The societal structure was hierarchical: children – parents; subordinates and bosses, the clergy and the laymen, the elite and the masses. At the top was one man, the King, and he was only responsible to God. The relationship between the Church and the State has been a conflictuous one most of the time. Which institution should be at the top of the societal hierarchy?
In Northern Italy some city-states were erected. Their politicians operated in close harmony with some traders. By financing their long journeys, these states became very rich. They used their capital to get control over large areas. Their experiences were a stimulus to further innovate their way of thinking. Priests were inexperienced, and could not prescribe how to think about the world. The earth is not the centre of the universe anymore, persons were not painted as people blessed by god, a thunderstorm is not the voice of god, but just a phenomenon of physical nature. Increasingly God was only accepted as the creator of the universe. But when he had finished his creation, he was gone. Now we have to discover the mechanisms ruling our world. This view is called deïsm. It was the beginning of a historical process of modernisation.
Now we can describe what is called pré-modernism. As far as we know from history man has always been religious man. From the very beginning humans have always asked the question “why is there anything rather than nothing”. There must be ‘forces of creation’, which are higher in the pecking order than we are – we can simply not understand it. We must honour them, we must sacrifice valuable goods to beseech them, and if we face severe problems, apparently we did something wrong. Angry gods must be approached through religious broker – he could tell the people what to do. Research shows that tribes had the idea that rivalling tribes had different gods (Girard, 1978). To please their own gods, they attacked their enemies. When they took their scalps, they could show their god, that he is a winner.
Now we call these cultures primitive. But modernity is not the successor of primitivity. About 2000 BC many Jews lived in exile in Mesopotamia. One of them, Abram, was confused by the many gods, who were honoured by means of sacrifices. He could not believe in cruel and jealous gods, and decided to move back to the original Jewish region. Uncle Laban companied Abram, and when they arrived in their original land, he opted for a fertile area in the neighbourhood of the cities Sodom and Gomorra. Abram, however, preferred a seemingly unfertile region. Over time it became increasingly clear that Abram was very successful, while his uncle Laban had to flee from the godless cities. One of the successors of Abram was Jesus – about 4000 years later he claimed to be the son of god, and called all people in the world to love their neighbour. Many people believed that his claim was right, and called him the Christ.
In the course of time Europe Christianised, and the Roman Catholic Church dominated the religious scene. Daily European practice appeared a mixture of primitive rivalry and Christian rituals. The Church became rich and behaved as a capitalist exploiter. People could buy indulgencies from the church, and were told that God had forgiven them their sins. In 1517 Maarten Luther revolted against these practices. He translated the bible into German and asked the laymen to read the bible themselves rather than listen to the Latin sermons of the priests.
Later, cultural philosophers indicated Luther’s actions as the beginning of Protestant individualism. Individual persons are essentially free and responsible for their own life. Parents are free and responsible for the upbringing and education of their children. Luther’s ideas of individual responsibility, changed especially the culture in Northern Europe significantly. Essentially it was a movement towards less hierarchy, which means less control of the elites over the lives of the ordinary people.
In Eastern Asia we see a different cultural development. About 600 BC there was a man, called Buddha. He lived in Northern India, close to the borders of Nepal and Tibet. He became increasingly shocked by the poverty of so many people. He made a long travel to the South, and everywhere he met people, he made them hopeful. They felt inspired by his attention, and Buddha’s teaching made it possible for many people to accept their destiny. Justice and peace were the keywords, and Buddha gathered many followers. Stop the rivalry, stop the exploitation of one group by another group was his advice. Now 2600 years later, there are still many Buddhists, and their teachings reduced the influence of the primitive ideas.
Western European culture was a mix of Christian and primitive culture. In this world we see the first serious steps in the direction of modernity. Modern ideas were: religion is a private affair. Society should be founded on the idea that humans are able to control their own lives. Technological progress is the main instrument to improve the human condition. All meta-physical, non-material elements are esoteric, and must be cancelled from our ‘body’ of knowledge.
In Asia religion did not challenge the conservative, hierarchical power structures. Italian city-states were able to reduce the clerical power, or even used it to extend their regions of control. Luther protested against the clerus, and called the people to ignore their authority. Kings and emperors felt challenged too – people might ignore their political authority. So Protestants were considered very dangerous people, who did not accept any earthly authority. This view applied to natural science led to Newtonian physics. Nature was created by God, and now we have to use our capacities to discover His laws of nature. For the natural and social sciences theology was not necessary anymore. Mathematics searched for the laws of figures and numbers, and physics was looking for the laws of physical phenomena such as sound, light, magnetics, and forces of gravitation. Chemistry focussed on the properties of fixed and liquid material and gasses. They found a very large number of combinations, each with their own properties. Biology payed attention to everything that appeared alive: plants, animals, and humans. Later medicine, part of human biology, gave birth to psychology. Its core concept was perception – a human person does not observe reality directly. The combination of the mind system and physical organ systems create impressions, which must be interpreted to understand what the observed phenomena mean. Economy manifested itself when moral philosophers began to search for mechanisms, which rule economic life. Sociology emerged when some people, dealing with economic matters, were dissatisfied with the results of the economists. Increasingly all these specialisations considered itself autonomous – not just part of a bigger whole.
In the period up to the modern time empires were controlled by rulers, who applied mercantilist ideas. They saw the people as their servants, who should pay tributes in exchange for ‘safety’. The royal households were paid out of it, and wars could be financed. Kingdoms were trying to build up monetary reserves by creating surpluses on the current account of the balance-of-payments. Robbing gold and silver was a cheap alternative.
In the eighteenth and nineteenth century moral philosophers saw the economy as an interesting field of study. They took some distance from the interests of the elite. Classical political economy criticized the mercantilist protection (Smith), analysed agricultural productivity (Ricardo), the problem of population growth (Malthus) and the incongruence of a capitalist mode of production (Marx). The general interest was their focus, not the interests of the rulers.
Under the influence of developments in philosophy and physics, people such as Mill, Menger, Walras and Pareto applied the idea of isolated abstraction to economics. In physical experiments scientists tried to isolate a factor A from other variables and see what happens with problem B if the experimenter changes A. They called this protocol ‘ceteris paribus’, which means that other explanatory variables are constant. Applied to economics they assumed that human behaviour is driven by the economic motive only. Other important motives are assumed to be constant, or easier: are non-existent. Another, more specific example of the ceteris paribus clause is the effect of a change in the price of a good on the quantity demanded for the good. Here the level of the budget available and the preferences are assumed to be given. Not only markets were analysed, but the behaviour in the public sector as well. Public choice analysed decisions taken by politicians and bureaucrats. Especially when problems of externality and public goods in a democratic political sector were tackled, it appeared problematic whether the system was able to offer optimal solutions. Especially Walras and Pareto are still taught under the heading welfare economics, and are important tools in modern micro- and macroeconomics.
Their work is called orthodox economics – it analyses the economic aspect-system. It means that their theoretical work cannot be applied empirically. Daily economic life is far more complex; very important other-than-economic factors are playing a significant role.
From the very beginning of orthodoxy many economists had the idea that free-market behaviour could be explained by the typical economic ideal-type of explanation. Competition made it impossible for market participants to be irrational and pro- or antisocial. We call them neoclassical economists, and they have dominated economics during the twentieth century, up to now. A famous modern economist is Samuelson. He advocated reduction as an important scientific strategy. In the economic analysis preferences of the people are assumed to be given. If a person buys a motor car, this purchase reveals his preference. Nobody is allowed to say that it is an irrational decision – a person knows best what pleases him. The same holds for the question whether a particular purchase is immoral. A person is autonomous in his choices, period! Economics is reduced to a very large set of data about prices, quantities sold, incomes and wealth. Modern economics ends up in econometrics, a field that is dominated by mathematical and statistical procedures. Computer programmes predict what will happen during the next period. Robots take decisions on the basis of the computer calculations. Finally economics has become objective, and not stuck in subjective judging of humans. Economics has reached its paradise.
Concepts such as mercantilism, classical political economy, orthodox economics, neoclassical economics are ideal-typical. Economists are persons of flesh and blood. They are subjects, who has their personal frames. These frameworks of interpretation are always under the influence of prevailing ideas, expressed in ideal-typical analyses. But not any economist is purely neoclassical, or Keynesian, or an original institutionalist. Everyone is influenced by his colleagues, and the daily news. Currently universities cooperate closely with people from business and government. In a capitalist society civil servants are under constant pressure of capitalist interests and views. In a welfare state economic scientists are regularly asked to support welfare bureaucrats. The interests behind research questions have a strong effect on the outcomes. If a department of economic affairs asks for a calculation of the economic effects of a new subsidy to stimulate R&D expenditures, econometricians make a simple model relating the expenditures to economic performance. The way they design a model is highly affected by the ideas of the client, mostly those who are rich.
Economists have become econometricians, who are disciplined in mathematical and statistical content, including its professional values – not in terms of human behaviour.
The following examples are illustrative for the protocols, which are developed to reduce human influence by sticking to β-technique. The Dutch central Bank (DNB) has developed software making it possible for the students to play policy games. A number of instrumental and target variables are given. Now the policy-maker can specify a change in one of the instrument variables, and by pressing a button he reads the effects on the target variables. So, if he want to increase the level of employment, he learns from the computer that a reduction in the wage rate leads to the desired result. Now the problem is that the player is not aware of the model, and cannot change it. In other words, the software maker has decided which relations dominate the functioning of the Dutch economy. Moreover, in practice economic developments in other EU-countries have a significant effect on Dutch economic performance. If wages are increasing in the EU-area, we all know that increases in Dutch wages will have an effect, which is different from the case, in which the developments in other countries are taken as given as given. The implicit assumption of this software is that the model behind the game, is empirically tested, and therefore reliable. A typical modern argument. Empirical figures are not empirical indicators of particular theoretically defined and analysed phenomena. These figures are based on empirical definitions, and so empirical studies can be executed without any analysis and theory. Reduction pur sang, resulting in meaningless results. Inflation and unemployment are good examples – very serious policy mistakes are the result of this methodological flaw (Keizer, 2015, 2017). The Central Planning Bureau, an independent part of the Dutch Ministry of Economic Affairs, have constructed a whole series of models. Not any member of Parliament has knowledge of the ins and outs of the models and their eventual alternatives. Nevertheless, they all accept the numerical outcomes for their policy proposals. Many academic economists consider the CPB models as meeting scientific standards. In election time the CPB calculates the effects of the programmes of most political parties over period of several decades. In 2016 the Liberal Party appeared the most employment-friendly party after about 30 years – a pure example of misuse of mathematics and statistics in the economic area.
A second illustration o typical modern practice is the way test scores are calculated quite often. At the Maastricht University students were tested by a true/false format. Suppose 100 questions had to be answered. There are three options: true, false, I don’t know. A computer determines the scores by calculation the (right minus wrong) number of questions as a percentage of the total number of questions. On the basis of the results the computer calculates which percentage leads to 80% of the students, who passes the test. This protocol led to tough discussions. Almost all econometricians were in favour of this procedure. Students answer the questions and the computer gives the results. Later it appeared that the statisticians of the test centre also intervened in other ways. They calculated the score per student per question. If the ‘good’ students scored relatively low on some questions, these ‘bad’ questions were cancelled. Some economists were furious. The implicit statistical assumption is that the body of knowledge, which is tested, is perfectly homogeneous in character. So, ‘good’ students score relatively high on all questions. If there is a question which is badly answered by ‘good’ students, then we know that the question is bad. The problem is that the assumption of homogeneity is far from realistic. Some questions were of a quantitative modelling type, others of a paradigmatic and analytical sort. Most questions were of the first type. So, students who are good in the first type had relatively high scores. It is obvious that it leads to cancelling of the questions of the second type. It implies that statisticians, not economists, decide about the content of the economics test. This example of modern science shows that statisticians are not aware of the paradigms of their own discipline. When introducing robots in education this will be a serious threat.
The hard core of a human science
Modern society, whether capitalist or centrally planned, has wealth accumulation as its ultimate goal. Producer interests have a strong impact on consumer interests. The government and the big producers are in close interaction with each other. In a capitalist system the producers are the dominant factor. In a centrally planned society is the government the ultimate authority. Production and consumption are highly institutionalised. There is no place for unpredictable whims, for private creativity – planning and disciplined execution are the panacea to instability. Even the expression of anger or pride can be channeled in fair rounds, boxing clubs and heavy metal performances.
The costs of a ideal-typical modern society consists of the oppression of genuine human emotions, such as care for poor people, and human rights, which are ignored. Freedom of speech for all, and critique of modernity must be exorcised. In dictatorial countries protesters simply disappear. In capitalist countries they are ignored. True individualism is out, and group think is in, even at universities. Individual responsibility and freedom are seen as a threat to the collective interest of society as a whole – as something unpredictable and unreliable.
Some modern thinkers, such as Marx and Keynes, saw the capitalist stage as necessary on our road to prosperity. According to Marx the capitalist system has the potential to produce enough wealth for all. But the distribution of it will increasingly be unequal. When capitalism approaches its mature state, workers should take control over the system. Then the means of production are possessed by us all. A period of equality and freedom for everyone begins. There are no severe conflicts anymore, and there will be ample room for creative and artistic work. According to Keynes capitalism can survive, when it is properly managed by the government. In this way we all reach the stage of affluence, making it possible to reduce working time significantly. Then we can develop our talents, and do much satisfying ‘work’. It is the end of bullshit jobs. It is typical modern economics to think this way. The problem is, however, that in the course of the capitalist period the mentality and morality of the mass of the people – also the high-skilled people with their nice salaries – are corrupted. Modern people have no inner standards of virtuousness. They do not resist all the temptations of mass consumption, they are not empathetic towards the people who are living in bad situations. And true love for nature? Nature is just something you can buy or sell and earn much money with it. Wealth is comfortable and prestigious – it offers plenty possibilities to buy safety by isolating oneself and the own group from all the misery of so many other people. Marx and Keynes do not spend not much attention to that problem. Also the modern economist par excellence Samuelson justifies mass behaviour as a matter of revealing preferences. Nobody can criticize other people, except in case property rights are being violated.
Alternatives to the modern society are based on persons, who feel responsible for the general interest. All humans have intrinsic value, which is a yardstick which is different from market value. The same holds for animals, plants, and impressive landscapes. Economies have the function of delivering the resources necessary for living a genuine life. Control does not only come from governments and capitalists. Free and responsible persons have developed their own self-control. Every family and neighbourhood has its own social control. Every organisation, including governmental departments have developed their systems of control. A person can be interpreted as a system, being part of the whole of reality . Knowledge is like blood: all systems must be part of the blood circulation. Dams in the bloodlines are a threat to the whole of the body. So with social stratification, which can lead to a disintegration of society. Some clubs adopt interests of particular animals, and other clubs are protecting valuable plants or landscapes.
Progress results from improvements in our knowledge – not only of a β-kind, but also of an α- and a γ-type. While β-science is focussed on control of natural forces, must human science promote its own values: every person must have a privacy and a discretionary room to serve the own as well as the general interest, in the way the person understands it. Human subjectivity and judgement should not be replaced by β-type of innovations. It should be improved. A better alternative is the growth of self-knowledge and knowledge of the laws that determine personal and group behaviour.
Keizer (2015, 2017) has integrated the economic, the social and the psychic aspect of human behaviour. The economic aspect refers to the relationship between a human and his natural environment. The social aspect is about the relationship between individual humans and between groups of humans. Since humans experience natural resources being scarce, they are motivated to economise on the use of these resources. They specialise on particular parts of the production, and exchange their outputs via markets. In case of an excess demand the price wil increase, and in case of an excess supply the price will decrease. Flexible prices are responsible for the stability of market mechanisms, which determine the allocation of goods. The social aspect refers to the relationships between humans. They form groups, characterised by a common culture. Different groups consider each other as a rival.. Some groups are superior to other groups, which are inferior. This leads to a continuing status battle. If conflicts become manifest, group internal solidarity is guaranteed by pressing the members to be loyal to the common values and norms. Persons, who appear too individualistic are exorcised. Social battles take place arenas, and the scape-goat mechanism is responsible for equilibrium on the status ladder. The psychic aspect refers to the relationship of the ‘I’ of a person with his ‘actual self’. The ‘I’ is the decision-maker, and the actual self is a bundel of emotions, which react immediately, without using much energy. The ‘I’ disposes of a strategic officer, called the ‘true self’. It is a bundle of emotions that are deliberately checked whether they serve the long-term interest of the person. So, the true self is reasonable. The ‘I’ of a person has the ability to invest in will-power. With this power station he can control the actual self, to a certain extent at least. The rate of (ir)rationality of the person can be indicated by the degree of self-control.
The reasonable true self informs the decision-maker on a regular basis. But the actual self also signals to the ‘I’, that its behaviour is reasonable – ‘yes, you took the right decisions’. These ‘ideological justifications’ make it difficult to distinguish between the voice of the true self and that of the actual self. Humans are not truth-seekers, but aim at the survival of a comfortable life. In case of serious critique they are inclined to deny the obvious. This mechanism can be called the ostrich-mechanism.
Now three mechanisms are at work simultaneously. So, the actual behaviour is the result of these three mechanisms. They are of an ideal-typical kind. When integrated they have the potential to become a real-type of analysis.
Keizer (2015) ends with the conclusion that we must inspire ourselves to serve the long-term general interest. If everyone serves his own short-term interest, it leads to disasters in the end. We all are irrational and immoral, at least to a certain extent. And we all should improve our reason step-by-step. Sometimes a few steps forward, then – because of a lack of will power – a few steps backward. Some problems must be solved individually. But many problems must be solved by groups of inspired people.
A last problem: we cannot produce inspiration. All will-power together is not enough. There is just one thing we can do: we open up ourselves to become inspired – listen to your inner voice, listen to people who think and behave differently, get in touch with animals, plants and impressive land- and seascapes. Suddenly your ‘I’ has combined that what the situation requires and which talents are hidden in the own person. A religious moment.
Summary and conclusion
The first groups of humans developed primitive cultures. They prayed ritually and sacrificed valuable things to please their god(s). They fought against other groups and assumed that they were ruled by rivalling gods. But they also discovered that people from different groups need each other – at least to prevent inbreeding. Rituals, such as gift exchange were used to keep peace. Later groups settled, and headmen began to rule over large groups. An elite was formed, which exploited the mass of the people, sometimes in the name of his god. Buddha, and later the Jews were different. Especially one Jew, Jesus, spread the news that there was just one God, and He loved his creation. Humans were called to operate as stewards in his Garden, and take care of the Self, of other people and of every other element of intrinsic value. Even this message was abused, and many Jesus followers became as corrupt as the primitive rulers. Luther (1517) protested against the exploitation of the ordinary people. His followers were more caring and democratic. Northern Europe bears the spurs of Lutheranism: a sophisticated welfare state, which functions way better than the welfare states in other parts of the Western world. Within a few decades after WWII, Europe underwent a process of secularisation. Secularised people appear vulnerable for modernist ideas – but Christian and Humanist values are still quite strong.
Modernisation means a trend towards reduction of human subjectivity in all institutions of society. Science is supposed to offer the modern systems the objective knowledge, necessary for robots to run the world. Unfortunately empirical knowledge without any paradigmatic meta-physics is not understandable – just an endless flow of statistical correlations, which are not always that congruent. Paradigm and its logically implied analysis offers meaning. Nobody can react on developments without being able to interpret them. Every human subject should develop his own meaningful knowledge. In practice, there are just a few frames of interpretations. But this ‘fact’ – different interpetations of human behaviour – is a major source of anger of modernists. By writing the software they hope to dominate, and to determine policy advice. Modern economics is primarily characterised by mathematical and statistical procedures, and their own values. The human, who is economically motivated has disappeared and only incentives, that serve as a carrot or a stick are tested in their effects
To turn to a world where persons are free and responsible for the consequences of their behaviour, scientists must re-introduce these persons in their models. To include social and psychic effects, a framework of interpretation has been developed with much more flesh and blood (Keizer, 2015). We can learn from this framework that every person must discover his own irrationality and immorality. By opening up their own Self to become influenced by the interests and views of others, people might get inspired to do the right thing.
Girard, R. (1978), Things Hidden Since the Formation of the World, Stanford: Stanford
Keizer, Piet (2015), Multidisciplinary Economics, A Methodological Account, Oxford: Oxford University Press.
Keizer, Piet (2017), Hoe de crisis het economische denken verandert, Amsterdam: Amsterdam University Press.