Fair Economics

Nature, money and people beyond neoclassical thinking

Irene Schoene

• Publisher: Green Books
• Year: 2015
• ISBN:
  9780857843104
• Topic: Economía
• Subtopic: Economía medioambiental

Modern economics bases its world view on assumptions Adam Smith made about nature and people nearly three hundred years ago, when people travelled by horse and carriage and wrote by the light of candles. We now live in a globally-connected, post-industrial world of digital communication and advanced technology - and yet, our economic model remains unchanged, stuck in the past. Taking a thorough look at economics and the origins of our current way of thinking, Irene Schoene puts forward an alternative economics that is not only relevant to our modern world of technology and industry, but which also shows an awareness of environmental considerations.

1.   Prologue

Will Hutton, in his book Them and Us, Changing Britain – Why We Need A Fair Society (London, 2011), spoke of the problems with the current economic system:

“The problem with capitalism is that most of its proponents genuinely believe that it is an immutable force of nature. They think that, like the rest of nature, it works by itself and is best left alone... This is an expression of the best and the worst in human nature – the struggle for improvement and self-betterment and the struggle to defeat the other man or woman. There is only a very limited role for the social or the public in all this. Capitalism is about economic hunter-gatherers being allowed to follow their primeval instincts. Any economic and social construction that gets in the way of those instincts will be counter-productive...

“I argue... that capitalism quickly becomes dysfunctional when it surrenders to primeval hunter-gatherer instincts without fairness. Capitalism is a much more subtle system than most capitalists think. There is a co-dependency between the public and private spheres that creates innovation and business franchise. The public realm is the custodian of fairness, houses the checks and balances that keep capitalism honest and is the architect of the institutions that allow whole societies to take risks and drive forward their economies. There is a genius in capitalism, but the paradox is that it flowers best in an environment that capitalists themselves think is hostile. Paradoxically, fairness is capitalism’s indispensable value.”

In this book, we examine the origins of the received wisdom, see how it is flawed in the context of the modern world, and how economics can embrace fairness to man and nature.

“A system of natural philosophy may appear very plausible, and be for a long time very generally received in the world, and yet have no foundation in nature, nor any sort of resemblance to the truth.”¹

Adam Smith

2. Introduction

We live in a curved four-dimensional space-time continuum, in an expanding universe which came into being with a Big Bang, and our understanding of its history continually increases. What was regarded as a true explanation 250 years ago is no longer seen as such, as new questions are asked, new experiments conducted, and new data collected. As more and more facts are gathered and new, different evidence obtained, our understanding of the world evolves. Events that could not be understood before can now be explained. New theories emerge replacing traditional ones in due course. Views formerly treated as facts become, in the light of new evidence, outdated ideas. This is the ongoing process of scientific discovery.

Here is one example: until medieval times, people thought that Earth was the centre of the universe with every heavenly body moving around it. Our planet was seen as a specially created place, which humans were to rule accordingly. Then, in the 16^th century, Nicolaus Copernicus (1473–1543), a lawyer and physician,² who was also interested in mathematics and astronomy, proved that the Sun rather than the Earth is the centre of the universe. The planet Earth moved around the star we call the Sun. Today we call his insight the Copernican turning point – the change from a geocentric to a heliocentric system. Adam Smith, the so-called ‘father of economics’, described this turning point as follows³ (EW p. 76): “As, in the instance before us, in order to connect together some seeming irregularities in the motions of the Planets, the most inconsiderable objects in the heavens, and of which the greater part of mankind have no occasion to take any notice during the whole course of their lives, she (ie philosophy) has, to talk in the hyperbolical language of Tycho Brahe, moved the Earth from its foundations, stopped the revolution of the Firmament, made the Sun stand still, and subverted the whole order of the Universe.” When Copernicus “had completed his ‘Treatise of Revolutions’, and began coolly to consider what a strange doctrine he was about to offer to the world, he dreaded so much the prejudice of mankind against it, that, by a species of continence, of all others the most difficult to a philosopher, he hid it in his closet for thirty years together. At last, in the extremity of old age, he allowed it to be extorted from him but died as soon as it was printed, and before it was published.”

“The conviction that all physical structures could be described in terms of a set of perfect forms – circles, squares, and triangles – limited the development of astronomy until Johannes Kepler broke the bonds of classical thought and discovered that the orbit of Mars was elliptical – a finding that Kepler himself initially considered to be no ore than a pile of dung,”⁴ while these insights were major changes in man’s understanding of the world – and of himself.

Thomas Kuhn named this revolution in the history of thinking a “paradigm shift”,⁵ which he explained as a process whereby “former expressions, definitions and experiments get into a new relation with each other.”⁶

When, nearly one hundred years after Copernicus, the philosopher, mathematician and astronomer Galileo Galilei (1564–1642) published his support for his system, the Roman Catholic Church placed his work on their list of forbidden books. He had to answer to the Inquisition. It took the Roman Catholic Church until 1992 to rehabilitate Galilei who is seen today as the founder of modern, mathematics-based physics.

Three-hundred and fifty years later we know that the Sun is not situated at the centre of the universe, but in a side spiral of the Milky Way, our galaxy, and we can suppose with reason that there must be millions more planets like Earth within the Milky Way capable of carrying life. Earth was ousted by science from her supposed special place to a more ordinary one. The idea that man and the planet on which he is born have been especially chosen became obsolete. This still seems to cause a kind of humiliation to people who grow up believing that religion gives them the true explanation for their existence, and one cannot help thinking that even today this may be one reason why so many people seem to turn away from science.

In the 18^th century, six planets were known to be moving around the Sun: Mercury, Venus, Earth, Mars and Jupiter. In 1781, a seventh planet was discovered by William Herschel (1738–1822) and his sister Caroline, which was later named Uranus.⁷ Consequently, humanity’s view of the world changed again.

This is the normal progression of science, as normal to us as it obviously was to Adam Smith who, in the 18^th century, wrote the first and still highly-respected body of ideas that we today call ‘economic theory’. The opening quotation shows that Smith was indeed aware that science is an evolving process and this analysis should be applied to his own theory.

The renowned US thinktank, the Pew Research Center in Washington, reported in July 2012 that an increasing number of people seem to have lost the belief in a free market society. Only ten per cent of people in Europe and Japan think that their children will be able to enjoy a better life than theirs. It is therefore, as this study shows, high time we developed other models for our life.

That is what this study aims to do: to analyze Adam Smith’s work against the background of his time, in order to find out if and how it can still give us a true explanation of events we observe today, and so build a model for life in the 21^st century.

At first this might seem to be a strange proposition, as economists and politicians still claim that, “Adam Smith could save the world”. Adam Smith’s name and his 250-year-old political recipes are so deeply embedded in our society that one might consider analyzing Smith and with him the history of economic thinking a needless and fruitless task.

When we think back to Adam Smith in the 18th century, it seems almost impossible to imagine what life must have been like in his day. When he gives advice, for example, to the colonies in North America, 13 of which declared their independence in 1776, we cannot compare these 13 colonies to the democratic republic of the modern-day United States of America. When he talked about Germany, we should remember that Germany only came into existence in 1871, while before there were various independent German kingdoms such as Hannover, Preussen, Hessen, Bayern, Sachsen and others. Germany as a united kingdom did not become a republic until 1918. The United Kingdom, the kingdoms of England and Scotland were only united in 1706/7, with Ireland joining in 1800, ten years after Smith’s death.

When I started studying The Early Writings of Adam Smith (EW), consisting of published and unpublished articles,⁸ printed five years after Adam Smith’s death, The Theory of Moral Sentiments (TMS), first published in 1759, when Smith was 36 years old, and An Inquiry into the Nature and Causes of the Wealth of Nations (WN), first published in 1776, when Smith was 53 years old, I found that, even though most of Smith’s ideas seem still self-evident today, a lot of them are not known at all, while more need to be updated for the 21^st century.

The following analysis will explain in detail why Adam Smith’s view of the world, the nature of government and economics with the traditional assumptions about ‘land’, ‘labour’ and ‘money’ need to be modernized in order to apply to us today.

This task of modernizing economic thinking is long overdue, and it is essential if we want to understand the environmental as well as the financial crisis⁹ we are in and find solutions to them. No real understanding or solution has been offered by today’s mainstream economists. They seem only to be able to repeat Smith’s recommendations without considering that our explanations of the world have moved on. I will use a lot of reports from today’s media, both print and digital, to compare 18^th-century life to that of the 21^st and help us formulate an economic theory that is appropriate for our time.

Basing economic theory on real facts, means using a technique which is called “inductive reasoning” “in which individual instances are used to infer a general conclusion. Those individual instances are gained by observation of the world,”¹⁰ remarked Laura J. Snyder, associate professor philosophy at the US St. John’s University. She cited the English philosopher Francis Bacon (1561–1626) who overcame the deductive scientific process of Aristotle, that the man or the women “of science must be like the bee, not the spider or ant. The spider ‘spins webs out of his own substance’, creating theories based only on what he already knows or believes; nothing comes from outside his mind... Bacon also rejected the method of the philosophical ant, which ‘only collects, but does not use’. This kind of thinker piles up numerous facts about nature from observation and experiment, but does not create theories that explain those facts... Bacon noted that, contrary to these approaches, the bee both collects and digests the pollen, to make something new: honey. The modern, reformed man of science was to emulate the bee: he must use both observations about the world and reasoning about those observations, to create new scientific theories.”¹¹ So, let’s be bees.

I also hope that this study can contribute a little to a better understanding of the so-called ‘Adam Smith problem’, which refers to an element of contradiction between the multiple ideas in his books. Let’s also see what can be done about this.

Giving up assumptions beliefs which were rational in the 18th century and replacing them with rational views based on evidence and facts available rational in the 21st century, can also mean modernizing some political structures, and diverging from Smith’s original recommendations. However, this is necessary if society is to develop and attain a truly modern and enlightened structure. It is of course easier said than done. It still seems simpler to invent new products and sell them to customers, who in turn need to learn how to use them, and then, after a certain period of use, find that t...