Evolution of the economic dance

In my last post I wondered how the debate surrounding economic freedom could have gone so far off the rails among professional economists.  The answer, it turns out, was spelled out before I had asked the question, in this historical fable by Sophistpundit explaining the evolution of economic thought.

The first economists were Scottish moral philosophers.  As such, they understood that the goods of this world were infinite in number, but that seeking after some would make it impossible to attain others.  Tradeoffs defined human existence.  The problem of considerations for selecting among possible goods therefore lay at the heart of morality, of which economics was but a branch.

Let Sophispundit tell the story:

Looking at the role of money helps simplify things a bit. We know that people buy things with and sell things for money, whether it’s things like food and tools, or services that people provide with their skills, time, and effort. The use of money is a pretty clear case of trade-offs; the money you use to buy something is money you will not be able to use to buy anything else.

The Scotsmen understood that the things people bought and sold with money only accounted for one part of what makes up the whole of personal wealth. However, it is the part that is much easier to observe and quantify than the rest. So they drew largely on the goods and services bought and sold with money when building their theories, and were able to make great progress in the direction of answering the initial question.

The economists who followed the Scottish school, while forging ahead with technical advancements explaining monetary tradeoffs, lost sight of the fundamental fact that  “focusing on a model of trade-offs between goods and services purchased with money was itself a trade-off, one that sacrificed all of those things that people value and methods they have for obtaining them that are more difficult to quantify than those which are purchased with and sold for money.”  In other words, they raised money matters above morality, the branch above the tree.

As criticism from outside the field began to mount, the scholars responded by creating fictional units that people maximize across all decisions; the thing that is maximized whether it is through buying what they want or by making a new friend or any number of activity. This unit was called Utility, and for a time, the scholars believed they could measure this thing.

They admitted that the old model of people as monetary wealth maximizers only captured one piece of the picture. The new model of people as Utility maximizers, however, surely included the full package. Thus contented with their response to the critics, the scholars turned around and in practice changed nothing about the nature of their analysis. Utility in place of money was just a cosmetic alteration; in the end they still believed that they could or had reduced trade-offs to something entirely quantifiable and predictable.

In fact, maximizing Utility became such a dominant feature of the theory of wealth, that trade-offs began to take second saddle. Sure, there were limits to how much you could increase your Utility at a given moment. But people would work to reduce those limits. Scholars built up theories of how they could reduce those limits not only in particular circumstances but even over time. They spoke of people having Rational expectations about the circumstances of the future, and making Rational choices to maximize their Utility.

In the present day the discussion has devolved into a debate about whether or not people are really Rational or not. Some people came in and argued that people were not Rational all the times, or at all; that they often consistently failed to maximize their Utility. Defenders of rationality crafted “best of all possible world” arguments that would have better suited Dr. Pangloss than true scholars.

There’s the rub.  Economic debates sound dry and academic, but this one touches a foundational principle of liberal democracy.

Should I choose my own tradeoffs in life, or should some wise, concerned institution — say, the government — make most of the choices for me?  That question seemed answered two decades ago by the fall of Soviet Union.

Today, our own government behaves as if it is uncertain of the right answer.

The old Scottish philophers knew that the individual’s freedom to decide his own tradeoffs rested on his dignity as a person, that is, his moral standing:  the very reason we allow citizens to choose their own representatives, and limit the reach and authority of government.  Under our Constitution, the individual owns a substantial portion of his life.  Whether he administers this rationally is neither here nor there.  The government, which is composed of individuals, lacks the moral justification to intervene.

It is the custom among blogger to say, when linking, “read the whole thing.”  In this case, it’s more than worthwhile:  a brilliant exposition by Sophistpundit.  So do it.  You have no choice.



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