The Microeconomics of Wellbeing and Sustainability

Recasting the Economic Process

Leonardo Becchetti, Luigino Bruni, Stefano Zamagni

• Publisher: Academic Press
• Year: 2019
• Print ISBN: 9780128160275
• eBook ISBN: 9780128162927
• Topic: Economics
• Subtopic: Decision Making
• Index: Economics

The Microeconomics of Wellbeing and Sustainability: Recasting the Economic Process explores the civil economy tradition in economic thought. Gaining increasing consensus worldwide, this alternative—not heterodox—view of the economic process and agents explains how modern economics is placing increasing emphasis on the determinants of subjective wellbeing and environmental sustainability. With support from behavioral economics, this book makes a foundational contribution that will help users better understand and prepare for future economic challenges.- Marries criticism of the neo-classical model with empirical work on the possibilities of alternative frameworks for action- Links new ideas (homo reciprocans, happiness, relational goods) to established microeconomic concepts (the market, perfect and imperfect competition, utility maximization)- Devotes specific attention to relevant elements in economic history, explaining how we evolved to the current paradigm and to its challenge

Chapter 1

Economics

What it studies, with what methods, and how it evolved

Abstract

In this chapter we will answer two questions, with a specific section dedicated to each. First, we will focus on understanding what it means that economics is a science, and what sort of science it is; that will enable us to understand what our discipline studies. Second, we will briefly review the main schools of economic thought spanning from the end of the 17th century through the 20th century. The intent is to show that the need to elaborate economic theories and models arises from our awareness of the problems that emerge from society and from the desire to propose solution for these problems.

Keywords

The scientific method in economics; The use of models; The ethical responsibility of the economist; Positive and normative analysis; The problem of rational choice under constraints; The relationship of economics to the other social sciences; The physiocratic and classical schools; The civil economy: Milan and Naples; The marginalist revolution and neoclassical; Economics; Marxian thought; The Keynesian school

1.1. What is a science?

For scholars of economic science (that is, economists), economics is a science, but in what sense can we speak of economics as a science?

To answer that question we must first answer a more general question: what is a science? If by science we mean a rational body of knowledge shared by a community of scholars that enriches over time through critique and subsequent revisions, then without doubt economics is a science, just as are philosophy, biology, and mathematics.

If instead we understand science to be knowledge based on facts, developed with the empirical or scientific method, then doubts begin to arise whether economics is really a science. Even though economics has always sought to imitate the natural sciences (such as physics) and to base its theories on facts, it cannot be considered an exact science that is able to provide answers and give valid interpretations in any historical era. Because it deals with people's behaviors and decisions in a given social context, it must adapt to the time and place in which those decisions develop.

1.1.1. Economics is a social science

Historical data and statistical research can be used in the natural sciences as a reliable and safe basis for making predictions. For example, we can predict in advance the moon's motion – barring extraordinary interference such as the passage of a meteorite – since it will follow the same orbit today as yesterday. Predicting the future in economics is more difficult because it studies the behavior of human beings who can change their decisions at any time; that is why it is more similar to philosophy than to physics.

Unlike a mathematician or a physicist, an economist cannot formulate a law that is valid for all times and places; what the economist can formulate is a tendential law, or a relationship that is true in most cases.

Empirical research in economics is doubtlessly important, but it is frequently used by economists as a rhetorical tool to persuade the opinions of the public, politicians, or their colleagues. However, the data they present always refer to the past, while the predictions requested of economists are about the future – a future that is never the same as the past, given the high number of variables that influence human behavior.

1.2. The investigative method of economic science

Different paths can be followed to collect the information useful for developing a theory.

Proceed from the particular to the general, or the inductive method. Example: observing the fall of an apple led Newton to formulate the laws of universal gravitation.

Proceed from the general to the particular, or the deductive method. Example: from Newton's law I deduce that not only does an apple fall, but that objects attract each other.

This is why economists find it more appropriate to follow a logical course that is the result of a combination of the inductive and the deductive methods: Starting from an observation in reality (the inductive method) they formulate abstract assumptions of human behavior, such as rationality, pursuit of their own self-interest, and so forth; on the basis of these assumptions they deduce laws in light of which (the deductive method) they attempt to explain individual economic facts that, since they are inserted into a given social context, are not entirely predictable.

The typical reasoning of economic science is: “if…then.”

Example: if the price of gasoline rises, then on average its consumption will decrease.

On the basis of these considerations, we can say that

economics is a science based on facts that has the goal of generating models that indicate tendencies on which predictions are then based.

1.3. What is an economic model?

In a certain sense, all sciences (including philosophy or theology) make use of models, or simplified representations of reality. Economics also makes use of formal models using mathematical, graphic, and geometric languages.

To better understand what a model is, consider a map or a diagram of a mountain. Such representations do not depict the “real” mountain, nor are they photographs of the mountain, but rather they are simplified representations of the real mountain that only note a few of its essential characteristics, such as altitude, shelters, or woods. They overlook many others (abandoned cabins, bushes) that are not considered relevant to the map's users (e.g., hikers or hunters) who are not interested that there is a farmer's tool shed at mile marker such-and-such, while they are interested in knowing where there is a shelter or a village with water and food.

Something similar happens with the models that economic science uses. When an economist wants to study someone's cookie consumption behavior, she is not interested in the color of his eyes or his height, but in his income and his tastes in food. Here too she uses a “map” – a model – that includes a few characteristics and ignores others.

Some may ask why a more complete model or map, the most realistic one possible that includes every defining element of a mountain or a consumer, is not useful.

Actually, were the map too “real” it would not be very useful, just as a “real” photo of a mountain that did not indicate its paths and their altitude changes would not be very useful.

Taking a photo requires engineers – not scientists – to build a camera, just as making a map requires cartographers who have a theory about what is useful to a hiker entering new territory, such as altitude changes, paths, and so forth. Similarly, in economics journalists, sociologists, and writers are quite effective at describing consumption in all its aspects; however, studying the energy consumption choices of a country's families this year requires turning to economists. In fact, after developing a theory to identify a few key variables they only focus on those few (as do cartographers), which they then use to build a model with which to understand things not commonly visible to the naked eye.

An economic model is a theoretical scheme that represents the basic elements of one or more phenomena one wants to study.

One last consideration: paths and altitude changes are not visible to the naked eye when looking at a photo; reflection and scientific work are required to first “see” them, and then make them known to everyone. Every science is truly such when, thanks to study and research, it is able to see and make visible things that are not obvious.

An economic model is a good model and the economist who defines it is a good economist, when, due to the model, first the scholar and then the society are able to see things that were not previously visible.

If all of reality were comprehensible by paying close attention with the naked eye, by simple observation with the senses and with common sense, there would be no need for science. The social and civil value of science, not just of economics only, is to make us see something more and different.

1.4. The ethical responsibility of the economist

In the first half of the 19th century the economist and philosopher John Stuart Mill defined economics as a science that generates tendencies. By this the English economist meant that, while in the natural sciences scientists’ theories do not alter the behavior of the objects studied (with a few important exceptions in particle physics), in the social sciences a relationship of mutual influence exists between theories and actual behaviors, in the sense that economic theories about human behavior have an impact on the behavior itself, at times modifying it to a significant extent.

Prior to Copernicus the planets in their orbits behaved exactly as they do today, and they obeyed the law of gravity before Newton discovered it. However, if a prominent economist writes an Internet article today announcing that the stock market will crash tomorrow, his prediction, even if wrong or made in bad faith for speculative reasons, can actually affect stock prices tomorrow, since there is a relationship between predictions and their fulfillment. This is the source of the civil and ethical responsibility of the economist, and of the social scientist in general.

Political economy is not a theoretical discipline in the same sense as in, say, philosophy. To clarify this, the great economist J.M. Keynes liked to say that economists must think and act like dentists! In effect he was saying that economists cannot behave like naturalists. The latter are quite interested in knowing why, for example, a certain species of animal becomes extinct, but that cannot worry him or draw him in personally beyond a certain level. The economist as well is interested in explaining why certain people are unable to find work, or why certain companies fail, and so forth, but her work is not finished until she can show how her model or theory might offer – even indirectly – suggestions for courses of intervention or for actions of one sort or another that might improve the situation. If this element is missing we might talk about mathematical economics or of philosophy of economics, both of which are useful and interesting, but certainly not about political economy.

This characteristic of our discipline sheds light on a special dimension of the responsibility of the scholar who studies economic questions, that of considering the use and implementation of the results of scientific practice in economics and making these known to non-specialists. Hans Jonas wrote that

Just how much this “scientific asceticism” has harmed a proper understanding of the nature of political economy and its functions is evident to all, and the recent 2008 economic and financial crisis is a sad confirmation.

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Table of contents

• Cover image
• Title page
• Table of Contents
• Copyright
• Attributions
• Preface
• Chapter 1. Economics: What it studies, with what methods, and how it evolved
• Chapter 2. The market
• Chapter 3. The theory of consumption
• Chapter 4. The theory of production decisions
• Chapter 5. Perfectly competitive markets
• Chapter 6. Non-competitive markets and elements of game theory
• Chapter 7. New theories of the firm
• Chapter 8. The utilitarian view of welfare economics
• Chapter 9. The theory of Homo reciprocans
• Chapter 10. Not just for profit: civil enterprises and values-based organizations
• Chapter 11. Corporate social responsibility
• Chapter 12. Happiness, relational goods, and social progress
• Chapter 13. Growth and the environment in the era of globalization
• Epilogue: from “homo oeconomicus” to “civil animal”
• Index