Saturday, September 15, 2012

Symbiotics, I mean, Economics

Earlier this week a package arrived. It was heavy like a box of rocks but contained about twelve books and a large packet of reading material. The Mercatus Center holds its first meeting for the Adam Smith fellows in mid-October and there is quite a bit of material to digest before we meet. So, I thought the blog would be an opportunity to (A) Pass along what I am learning, and (B) Serve as a repository so I don't forget what I'm learning.

This post will be a brief discussion of the first two articles in the packet Lord Lionel Robbins on "The Significance of Economic Science" circa 1935 and a later 1964 vintage by Nobel-Laureate James Buchanan called "What Should Economists Do?". In historical context both of these articles have important messages about economic method that are still relevant for modern discourse.

Robbins' central point was that economics is incapable of conducting interpersonal comparisons of utility. Other scholars at the time were using the law of diminishing marginal utility as justification for the redistribution of wealth. While Robbins upheld the belief that we could measure marginal changes for an individual he eschewed the notion that we could compare between individuals.

For example, at the extreme, there are two brothers, one named Rich N. Come and the other named Noel N. Come. Robbin's contemporaries said that Rich received less satisfaction from $1 more money than Noel received from that same dollar. Thus, the government could transfer wealth from Rich to Noel because that would result in higher social utility. However, Robbins' main point is that this justification relies on knowledge of the magnitudes of utility. In fact, there is no science that can accurately obtain such magnitudes.  Side Question: Does the literature on happiness and advances in neuroeconomics hold out hope for measuring such things? (To be discussed later)

Additionally, Robbins attempted to make a sharp distinction between (1) The objective function and (2) The economical way in which that objective is obtained. As economists Robbins said we have no way of knowing what is the best objective: more equal distribution of wealth, more meritorious distribution of wealth, etc. But, given a particular objective we should be able to talk about the lowest cost way to achieve that goal. He writes, "Without economic analysis it is not possible to rationally choose between alternative systems of society".

Buchanan uses Robbins' arguments to discuss how economists have been obsessed with the allocation of scarce resources among competing ends. Briefly, he discusses how his contemporaries got around Robbins' problem of interpersonal utility comparisons. These people created mathematical constructions called "social welfare functions" to arrive at aggregate levels of utility. While Buchanan understands the reason economists have focused on allocation he endeavors to suggest that economists would gain greater insight about human nature through studying the process of exchange ---not outcomes alone.

One passage I found particularly interesting, and summarizes his thoughts nicely, was his discussion about the name "economics". Buchanan writes, 
"Were it possible to wipe the slate clean [change the name economics to something else], I should recommend . . . "symbiotics" . . . Symbiotics is defined as the study of association between dissimilar organisms, and the connotation of the term is that the association is mutually beneficial to all parties. This conveys more or less precisely the idea that should be central to our discipline. It draws attention to a unique sort of relationship that which involves the cooperative association of individuals, one with another, even when the individual interests are different."
In 1964 Buchanan made arguments that our focus on outcomes was leading us to become a backyard of mathematics. However, when we focused on the process we learned something useful. How are human actors considering costs and benefits? What social or legal rules are salient in their decision-making process? What social or legal rules will people invent to overcome problems? For example, Buchanan said that the free-rider problem in public goods provision could be overcome through the creation of a constitution that had coercive power. He thought this was an economic action where at least a subset of people were able to pen a mutually beneficial agreement. This was symbiotics. 

Since Buchanan wrote this article there has been some progress towards becoming a process-oriented rather than allocation-oriented science. I will expound on this in a future post.  The question I'm asking myself now is, "Why did the Mercatus Center want us to read these?" I think that the overall goal is to get us to think about the market as an emergent process rather than something that is "in equilibrium". Such a framework for thought would put emphasis on institutions as well as entrepreneurial action (either new products or via collective action). In essence, focus on the process puts humans, not allocations, at the center of economics. I think this will prove to be a useful window through which we can look at the world.

This is not esoteric economics but matters in the following sense. If we are a science that focuses on outcomes without much regard for the process in which outcomes happen we will be less attuned to opportunity costs and unintended consequences, two things we profess to teach our students (and on this blog we have professed could help make the world a better place). More to come.

No comments: