The Basics of the Philosophy of Economics

“[H]e 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” (1776, Book II, Ch. 4), this quote by Adam Smith from his Inquiry into the Nature and Causes of the Wealth of Nations is the one that most people think of when they think about economics.

It may not be word for word what you think but this is the invisible hand and the idea of trickle-down economics in one handy bite-sized quote. Smith came to this thinking from an idea mooted by David Hume. Hume was thinking about international traders and how when the sold/bought goods they changed international price levels without realising that they had. They were unintended consequences to their actions, they were being guided by an invisible hand.

In order to be able to understand exactly how these prices change we need to know the causal factors. This goes deeper than worker’s wages, profits, transport costs.. The price is also affected by weather, disease, quality, local culture.. To understand how our invisible hand is guided we need to have a central idea on which to underpin economic thought. Enter John Stuart Mill.

“Political economy…[is the] consequence of the pursuit of wealth. It makes entire abstraction of every other human passion or motive, except those which may be regarded as perpetually antagonising principles to the desire of wealth” (1843, Book VI, Chapter 9, Section 3)

This is the beginnings of a thought that people will always act in a rational way so as to gather wealth. This allowed Mill to believe that it was human interaction that created economics and he could ignore external stimuli to prices, he also misses a complete way to describe resource allocation but we have the tenant now that people will act in a rational way so as to accrue wealth. It is all about the individual and their choices.

We then have Jevons who argued that we acted so as to increase our own happiness. We are happiness maximisers. This means if you buy a cola or a water and both cost a pound but you prefer cola, you will buy the cola as it maximises your happiness. The marginal utility of the cola is then higher than the marginal utility of water. This would also make Mill happy as we have rationally picked the cola in order to increase our feelings of wellbeing.

In the 20th century, economists started to unpick this thinking, slowly pulling at the thread of rational human actors in the scene. Economists, such as Pareto, moved on from thinking about how an agent ranked their happiness to how they decided on rankings.

This is because agents can rank every alternative that they could be faced with. The easiest way to do this is to think of two alternatives. We have cola and we have water. Our agent prefers cola to water, they could just as easily prefer water to cola though or even not care about either one, they could be indifferent to the choice of cola or water. This would be our first ranking. We now have to assume that our alternatives rankings are transitive. This would mean that if our agent preferred water to beer we can safely assume that our agent would prefer cola to beer. Their preferences would be cola, water, and then beer. We can then work from the presumption that this would be true for all alternatives, even if they prefer wine to cola we would then have a preference list that goes wine, cola, water, beer. This theory could go to an infinity of choices. We will like all good economists consider that these preferences are rational complete and transitive, our agent is not suddenly going to gamble on a different preference or choice.

This helps to highlight the difference between economists and other groups within the social science banner. Economists believe that preferences are tied into a rational desire for wealth and accumulating more bundles of stuff that we believe we need. You could not, for example, be seen as being rational by selling the majority of your worldly goods and give the money to a charity or cause you believe in. Philosophy can explain this but economists cannot as it is outside the narrow remit we are working with from above.

There have been a few examples of economists who have tried to extricate themselves from such a narrow remit. Lionel Robbins is the person most often quoted here. His work, An Essay on the Nature and Significance of Economic Science, is concerned with “the science which studies human behavior as a relationship between ends and scarce means which have alternative uses”. For Robbins’ economics should not just be about productivity, consumption, or how we exchange money but should be about every and all human actions. It is the study of why we do everything from voting, create laws, or how we just go about our day to day existence. It does, however, all tie in with foundations laid by Hume, Smith, and Mill.

The future is now

From this modern or contemporary economics has split off into many diverse fields. Obfuscating what can even be said to be mainstream economic thinkings from even more esoteric ideas.

If we split economics into applied economics and theoretical economics we can then split both of those categories into microeconomic or macroeconomic fields. Think of microeconomics as how individuals work. Be that you, me or a business. Macroeconomic thought deals with aggregates, how does a state’s economy function as opposed to how do I function in the economy. We will discuss the difference in more detail in a further blog, which is probably something I say far too much.

The 6 philosophical problems for economics

Positive versus normative economics

Imagine you are a politician and you are setting out your manifesto. It may be reasonably expected that you will use economics to guide your thinking. The question though is do you use positive inquiry (facts) or do you use normative inquiry (what ought to be)? Will normative thoughts overrule your positive inquiry?

For people who treat economics as a science, they will believe that positive science will overrule normative inquiry and that there will be a clear distinction between the two. In this view, economics should be used to guide political policy.

You might already have objections to this idea and many people have. Imagine you a football player, your job is to score a goal. That is your end but how do you do accomplish that. This is what a policymaker will be giving an economist, we want this but there is no guide or specification to how to do this. We then have the problem of human activity. Human activity is ruled by values. These values can be very different from what the policymaker wants or wishes. How do we separate these values and make sure we are only using the policymakers values?

We then have the problem that people will already be shouting about. Are humans really rational? If we accept they are, our next problem is what about their beliefs? Our beliefs will shape what we believe to be right or wrong and this will, in turn, affect how we behave and what we feel is rational behaviour. Then we come to ideology, our ideology is shaped by what we are self-interested in again and will affect any and all rational or irrational ideas.

Economic reasons versus causes

Nearly all economics theories believe that people will act rationally. Rationality and reason are then built into nearly all economic thought. As philosophers will undoubtedly tell you there are many, many ideas about reason. Without reason we cannot act rationally, it will, therefore, make sense to look at reason in great depth in order to understand economics.

Simply reason is how we look at things from inside ourselves but that does not mean that is ectly how things will be on the outside of ourselves.

Social scientific naturalism

Unlike many other area of the social sciences, economics believes it is also allied deeply with the natural sciences. This brings three questions.

1. Are there fundamental differences between the structure or concepts of theories and explanations in the natural and social sciences?
2. Are there fundamental differences in goals?
3. Owing to the importance of human choices (or perhaps free will), are social phenomena too “irregular” to be captured within a framework of laws and theories?

Have a think.

Abstraction, idealisation, and ceteris paribus clauses in economics

Think back to our rational person, is that an abstraction or an idealisation too far? If so it is at the heart of nearly all economic theories.

As such economist also tend to use ceteris paribus (other things equal), this allows economists to hold things as exactly as they want in their model. Does this work in real life, we are not all living in a textbook where we have become an abstracted, perfect person.

Economic causation

Everyone knows the idea of supply and demand. One of the things most people believe is that as price of a good decrease (ceteris paribus) the amount demanded will increase. Is this a true causal reaction or has the good for instance just become really fashionable at the same time as its price dropped?

Structure and strategy of economics

What guides the study of economics? Is there structure and stragey that unites economics research?

This is just the beginnings and I will go over issues as time goes on.

Feel free to point out where I am wrong or right.

Originally published at ethicallynull.wordpress.com on November 3, 2017.