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Monday, March 30, 2009

Philosophy of Economics

In the study of Philosophy of Economics, I think that four names stand out on this subject: Karl Marx, John Rawls, Robert Nozick, and F.A. Hayek. They each have each put forth some very powerful ideas and represent (more or less) communism, socialism, libertarianism, and (sort of) conservatism respectively. While none of their ideas are perfect and in any case subject to preference, I think each should be studied and the strength and weakness of the arguments understood in order to participate in any debate about economic policy.

Much to my surprise, in a recent informal poll of friends and acquaintances, I've found that very few have heard of any of these other than Marx. While Marx is certainly the most important since his teachings were the instigation for the radical formation of governments in countries containing billions of people, each of the other philosophers' ideas are very important as well.

Here is a quick overview of each of their ideas:

Karl Marx
Marx argued that capitalism, like previous socioeconomic systems, will produce internal tensions which will lead to its destruction. Communism, the ultimate heaven of earth with riches for all, will rise from the ashes of capitalism. "From each according to his ability, to each according to his needs" is the slogan popularized by Marx to describe the basic working of communism from the workers point of view.

John Rawls
Rawls makes the case for redistributive justice and socialism in A Theory of Justice. He does this by asking how one might choose to design a fair economic system if we had no clue (he calls this a "veil of ignorance") as to our position in that system. We might be at top in terms of talent and opportunity or we might be at the bottom. If this were the case, he argues that we would design a system that would maximize the position of the worst off (known as "the difference principal") in case we ended up being the worst off, and that such a system would have a great deal of redistribution in order to be just.

Robert Nozick
Nozick's Anarchy, State, and Utopia (1974), which received a National Book Award, argues among other things that a distribution of goods is just if brought about by free exchange among consenting adults and from a just starting position, even if large inequalities subsequently emerge from the process. He also argues that the only just system of government is a minimalist government dedicated only to the protection of the population, though he argues for progressive taxation to fund that government. Nozick turned Marx's slogan around to become "from each as they choose, to each as they are chosen".

F.A. Hayek
He shared the 1974 Nobel Prize in Economics with ideological rival Gunnar Myrdal "for their pioneering work in the theory of money and economic fluctuations and for their penetrating analysis of the interdependence of economic, social and institutional phenomena." He also wrote extensively on the distribution of information in an economic system and the relationship between that and liberty. He also wrote about evolution of human institutions that support economic activity ("the spontaneous order").

I find that when beginning a discussion about fairness and economics (a favorite topic of Left leaning friends and acquaintances), that a huge part of the effort ends up being dedicated to subtopics already thoroughly addressed by the economic philosophers I've mentioned above. I wish that instead of only teaching Marx in schools, that all four were taught. I think that everybody would then have a much better handle on the economic policy debates that are continually rehashed in the country.

13 comments:

Hey Skipper said...

I think everyone would have a much better handle on economic policy debates if, before teaching any of Marx, Rawls, etc, schools rigorously taught human nature itself.

That would put paid to Marx at the outset.

And it probably wouldn't help Rawls any, either. In order for his Theory of Justice to make any sense (full disclosure here, I have not read it, but rather only read of it), outcomes in life must be solely due to chance.

FWIW, I think free will is greatly over rated. However, one has to be willfully blind to ignore the fact that, whether due to innate characteristics or not, some people respond will take risks to obtain rewards, and that if those rewards are not available, those people will not take the risks.

People like, well, you Bret.

At the risk (here without any reward, I suppose) of overgeneralizing, essentially all material progress is due solely to risk-reward behavior.

Rawls wants fair. He will get poor.

That lonbud discussion I linked to in the previous post is also pertinent here. The Left continuously focuses on some concept of "fair", without either understanding, or acknowledging if they understand, the implications of getting what they want.

And when pressed (every time I have tried, anyway), it is absolutely impossible to get them to come to terms with those implications.

Bret said...

Hey Skipper wrote: "...schools rigorously taught human nature itself."

Except that the Left and Right have completely different views of human nature. Indeed, in my perception the whole problem is that the Left, which runs the schools, does teach what they think human nature is. That's why they can also teach Marx with a straight face.

Hey Skipper wrote: "Rawls wants fair. He will get poor."

Not necessarily poor - poorer.

Western civilization, especially Europe is not all that far from the Rawlsian ideal (closer to Rawls than the other three, at any rate). Life in Europe is not exactly poverty stricken.

Hey Skipper also wrote: "...it is absolutely impossible to get them to come to terms with those implications."

Nobody seems to be able to grasp implications (except maybe Hayek). People are equally oblivious on the libertarian and conservative sites I visit. We probably have many blind spots but can't (by definition) see them either. However, your exchange with lonbud was a particularly good example of someone desperately making sure they don't have to think about such implications.

Hey Skipper said...

Except that the Left and Right have completely different views of human nature.

Yes. Religious literalists and geologists have completely different views of how old the earth is. That doesn't mean they deserve equal time or regard.

The blank slate notion of human nature is, by now, completely rubbished for anyone with more regard for evidence than a young earth creationist.

If schools taught not what some find comfortable to believe, but what we know about human nature, then things will go very badly for Marx and Rawls.

That isn't to say the Left does not have a moral argument. There is one to be had simply by hoping to ameliorate the fact that some people have been dealt a very bad hand, indeed, and that there are things we can do which will not penalize virtue or impinge upon freedom.

(I can't remember the name, but there is a very recent book out -- from an author on the left -- about how we should view poverty, particularly with regard to social pathologies in poor African-American communities. Sounds like it is worth reading.)

Europe is not all that far from the Rawlsian ideal ... . Life in Europe is not exactly poverty stricken.

No, it isn't. But the closer those countries get the Rawlsian ideal, the less sustainable the economy becomes.

It is also worth noting that at least some of those countries (Germany, for instance) are explicitly export oriented.

Which means they rely upon non-Rawlsian economies for their Rawlsian indulgence.

Bret said...

Hey Skipper wrote: "The blank slate notion of human nature is, by now, completely rubbished..."

Sort of. Some on the Left persist in the belief of a completely blank slate. However, the more nuanced argument from the Left these days is that sure, the slate isn't completely blank, but humans can overcome their nature when presented with the correct incentives. And that's true to some extent: most humans can overcome much of their nature in many circumstances with certain incentives. I think that any society based on that is gonna fall apart because not enough humans will overcome enough of their nature often enough without horribly onerous incentives. The Left disagrees and can therefore be enthralled with Marx and Rawls.

Hey Skipper also wrote: "Which means they [Germany, for example] rely upon non-Rawlsian economies for their Rawlsian indulgence."

I'm not following this argument. Why does Rawlsian imply export-oriented (or vice versa)?

Susan's Husband said...

I always wondered about the Rawlsian conclusion because people by lottery tickets.

Personally, I would favor a system with the largest expected value, rather than the maximum minimum. I always wondered as well if the Veil of Ignorance was temporal as well as social - i.e., do you know how soon after the start you arrive? People might well make difference choices depending on the answer to that.

Bret said...

Susan's Husband,

I think everybody in the post-Judd alliance except Harry prefers the largest expected value.

You also hit on my biggest problem with Rawls. It's a static analysis: if the socio-economic system is exactly the same for all time, then maybe the max-min makes sense. But one is almost certainly going to be better off with a system that maximizes growth unless you happen to be a bottom lurker near the very beginning. In addition, what parent would impoverish his descendants just to limit his own risk?

Hey Skipper said...

It's a static analysis: if the socio-economic system is exactly the same for all time, then maybe the max-min makes sense.

It also fails in another respect -- distribution.

If the distribution of outcomes is Gaussian, then the self-interested preference should be to advocate a system where the correlation between and individual roll of the dice and the most likely outcome have the greatest correlation.

(I hope that makes sense, but I already have one martini between me and lucidity, so who am I to know?)

Bret said...

Hmmm.

Now that martini has worn off, could you give it another try?

I didn't follow that.

Hey Skipper said...

Okay, take two.

From Rawls:

He does this by asking how one might choose to design a fair economic system if we had no clue (he calls this a "veil of ignorance") as to our position in that system ... he argues that we would design a system that would maximize the position of the worst off (known as "the difference principal") in case we ended up being the worst off, and that such a system would have a great deal of redistribution in order to be just.

Any society has a distribution of outcomes. Some societies, think almost any in Africa, are heavilly skewed towards the left (poor) end. If you were to be put into such a society, the odds are very good you will end up at the bottom; consequently, with no foreknowledge of the outcome, most people would do just as Rawls suggests.

However, assume a society where the material outcomes for its population resemble a standard Gaussian distribution. The odds are that very few people are going to end up in the left hand tail. "We" would not design a system that maximizes the position of the worst off because, most of those constituting "We" are not going to be in that position.

And that is even before getting to the very real problem that designing a system maximizing the position of the worst off will make everyone, including the worst off, worse off.

I'm not following this argument. Why does Rawlsian imply export-oriented (or vice versa)?

Admittedly, I'm just guessing here, but... In order to approach Rawlsian conditions, an economy becomes so redistributive that it becomes less productive. In order to support the redistribution and lack of productivity (and consumption) such economies rely upon non-Rawlsian economies to pick up the slack.

Germany replies on exports for about 30% of its GDP.

What would happen to its Rawlsian economy if the US was to permanently reduce its consumption so that its exports went from about 10% of GDP to, say, 12%?

(BTW, The Economist, to which I both subscribe and like to slam, thinks that roughly 10% of GDP of exports is the sign of a well balanced economy ...)

(BTW II -- I have just finished my first martini of the day, all of it after the distribution part of this post. That means I do not have a diminished capacity defense for any buffoonery.)

Bret said...

That's clearer. I don't think any society has a Gaussian distribution of incomes. Clearly, if you're very likely to be in extreme poverty, then you're more likely not to be willing to roll the dice. If nearly everybody is poor, I'm not sure the Rawlsian approach would help much though.

As far as Germany an exports go, wouldn't it be better to look at the trade surplus as opposed to exports alone? The surplus is only between 5% and 10%. In other words, they import a lot also.

Either way, exporting or having a trade surplus doesn't necessarily seem to be a sign of low productivity. A trade surplus (which is an investment deficit) does seem to be a sign of lower future productivity relative to the rest of the world, but that may be partly due to low birthrates.

Susan's Husband said...

"Clearly, if you're very likely to be in extreme poverty, then you're more likely not to be willing to roll the dice."

Aren't you? That's what I was getting at with my lottery comment. In fact, we see that what passes for poverty in the USA is strongly correlated with rolling the dice on the very small chance of becoming one of the wealthy. If they do it in real life, why not behind the Veil?

Bret said...

Susan's Husband,

That's a good point. However, given that people are so desperate to get out of poverty (as opposed to being addicted to gambling?) then wouldn't that be evidence that they would vote for equalization of outcomes if they had that opportunity from behind the veil?

Susan's Husband said...

Perhaps. But perhaps not -- it may be that they would figure poor is poor, so it's worth some additional impovershment in order to have a bigger payoff. After all, that's precisely what they do with in real life.

Moreover, and this is a variant of Skipper's point on a micro scale, which is -- what does it take, personally, to maintain the status received after passing through the Veil? Might not many people optimize for effort minimization rather than wealth? In which case have a few lucky winners despite lots of losers would be the choice. Or perhaps lifestyle choices (i.e., the amount of self restraint and delayed gratification) would be the dominant factor.

Rawls is, as Mickey Kaus called them, a "money liberal" who is obsesses with money and, far more than a libertarian, reduces all social questions to the single dimension of money. That's the true impovershment of his vision.