Inclusive Economic Theory

Steven Rosefielde, Ralph W Pfouts

• Publisher: WSPC
• Year: 2014
• eBook ISBN: 9789814566667
• Topic: Biological Sciences
• Subtopic: Science General
• Index: Biological Sciences

The goal of “Inclusive Economics” is to tie together various authoritative strands of contemporary economic theory into an easily comprehensible whole that illuminates the need for a broader approach to contemporary economic policymaking undistorted by obsolete 18th century rationalist assumptions about utility, ethics, worthiness and traditional culture. This is accomplished by elaborating the rationalist competitive ideal along the optimizing lines pioneered by Paul Samuelson (neoclassical economics); plumbing modifications necessitated by Herbert Simon's realist concepts of “bounded rationality” and “satisficing”; refined further by applying a pragmatist outlook to probe the consequences of relaxing Enlightenment teleological, ethical, spiritual and cultural taboos. The exercise will explain why competitive market economies guided by rational utility-seeking invariably are less productive, efficient, just and beneficent than most theorists concede, and will illuminate the full range of interventions needed to achieve better outcomes. We call this program in its entirety “Inclusive Economics”, including the integration of micro and macroeconomics.

Contents:

• Introduction
• Neoclassical Economics:
  • Rational Utilitarianism
  • Competitive Ideal
  • Bounded Rationality
  • Core Consumer Behavior Theory: Ideal and Realist
  • Production and Costs
  • Institutions
  • Macroeconomics
  • Governance
  • Democracy
• Neo-realist Economics:
  • When Reason Fails
  • Why Reason Seldom Prevails
  • Dangers
  • Opportunities
• Inclusive Economics:
  • Umbrella of Complementary Paradigms
  • Truth
• Mathematical Appendices:
  • Bergsonian Social Welfare Functions
  • Idealist Neoclassical Consumer Utility Optimization
  • Idealist Neoclassical Production: Multiproduct Firm
  • Realist Profit and Revenue Seeking: Multi-firm Interaction Effects
  • Realist Retail Satisficing

Readership: Undergraduates, graduates, academics and professionals who are interested in economic theory and mathematical economics. Policymakers who are in need of a broad practical approach to contemporary economic policymaking.

Part I

Neoclassical Economics

Chapter 1

Rational Utilitarianism

Economics Before the Age of Reason

The first treatise on economics before the Age of Reason, once ascribed to Aristotle (384–322 BC), is now attributed to one of his successors. It was written in three short volumes, only two of which survive in the original Greek. Oeconomicus (oίκoυoμία) elaborates the principles of gentlemanly farming and is a manual on good household administration. The others provide examples and extensions, but neither explores markets nor political economy. The post-Aristotelean literature likewise addressed special topics instead of universal principles connecting production, consumption, distribution, transfer and finance throughout the Roman period and the Middle-Ages. There were no systematic, integrated scientific treatises or theories which today constitute the “neoclassical” core.

Foundations of Modern Economic Theory in the Age of Reason

The hypothesis that the independent endeavors of “household managers” with disparate skills and abilities promote the wealth of nations eluded political and social thinkers for 2000 years after Aristotle. It first surfaced in the Enlightenment (1650–1790), often described as the Age of Reason. The period is bounded by the works of Baruch Spinoza (1632–1677) and John Locke (1632–1704) at one end of the spectrum, and the French Revolution (1789) at the other. The Enlightenment coincided with the Age of Absolutism and was superseded in the 19th century by Romanticism.

The goal of Enlightenment thinkers, which required the entire tool box of the neoclassical core, was to create a design for living that allowed everyone to achieve superior states of wellbeing (utility) by choosing rationally, free from the counterclaims of state, community, family and religious authority. The Philosophes asserted that individuals regardless of rank, gender, race, ethnicity or religion were autonomous, and in this sense were born equal, but found themselves everywhere in chains.¹ Authority unjustly deprived them of the right to choose in their mundane pursuits, and more subtly the right to seek personal fulfillment. Authority had to be overthrown and mankind liberated.²

The validity of this concept of autonomy, equality, freedom, fulfillment and justice was attributed to “reason,” understood as a set of logically consistent idealist axioms and constructs. Enlightenment thinkers were able to show to their own satisfaction that if their “plausible” assumptions were accepted and applied, then the results would be beneficial.

Most of these axioms (the virtues of equality, freedom, etc.) were normative and could be easily challenged on philosophical grounds,³ but one was behavioral and involved reason in a different sense. Enlightenment thinkers, following Socrates,⁴ claimed that all humans possessed intellect; that every individual had the capacity to analyze, evaluate and choose based on ethical imperatives and a multitude of perceptive, cognitive, conceptual, emotional, spiritual, and physical factors. Individuals consequently were not only free to choose, but more importantly everyone was able to make the right choices by using reason to thoroughly appraise and select best options. People didn’t need authority because they could act rationally on their own behalf.

The same principle was said to hold in people’s public pursuits. Enlightenment thinkers contended that every person should be able to participate in governing on an equal footing within families, communities and states because reason empowered them to do so, and any other form of authority was rejected as oppressive. This made democracy (people’s rule) the only legitimate form of government. The people themselves must govern public life, just as their private existences, a concept that eventually became the touchstone of contemporary notions of democratic free enterprise.⁵

Sin and Practical Reason

The rationalist manifesto was vulnerable to a wide array of religious critiques from the broadly accepted Christian doctrine of Original Sin to the Calvinist premise that mankind was “totally corrupt.”⁶ The Enlightenment claim that rationality provided a stout defense against corruption appeared absurd to pious Christians, undermining the credibility of Spinoza’s, Locke’s and Rousseau’s (1712–1778) revolutionary program. If bad people liberated themselves from authority devout Christians expected evil consequences.

The Right Thing to Do

A solution to this conundrum was proposed by Immanuel Kant (1724–1804) in a series of treatises published between 1785 and 1797.⁷ He identified a class of widely accepted moral laws called “categorical imperatives” founded on reason like the Christian golden rule: “Do unto others as you would wish others to do unto you.”⁸ Kant argued that these moral laws allow individuals to operate autonomously in beneficent ways without external authority solely on the basis of reason, and conjectured that people would feel morally obligated to do so.

Kant’s construct provided much needed support for Spinoza’s, Locke’s and Rousseau’s claim that human liberation and democracy would yield positive results, despite mankind’s alleged “total depravity.” It didn’t prove that individuals would behave as reason taught they ought, but the categorical imperative did create a presumption that they might. If people convinced themselves that behaving righteously was the “right thing to do,” then liberation and democracy might be blessings. Achieving a virtuous outcome wouldn’t be easy. Philosophers would have to create a set of Kantian moral laws to cover most contingencies, and ordinary people would have to master their rational obligations, but the undertaking no longer could be dismissed as fatuous.

Self-Interest and the Invisible Hand

Kant’s moral imperative despite its rational appeal was effectively dead on arrival as a scientific explanation of human behavior because few could master its requirements, and fewer tried. Perhaps, mankind could do the right thing, but it wouldn’t if everyone had to be an accomplished Kantian moral philosopher.

A more convincing solution to the paradox of personal freedom and democracy was needed and it was provided by Adam Smith (1723–1790) who had the wit to see that humanity was only partially corrupt, and that the evil men wish to do can be greatly mitigated by competition in business, private affairs and government. Smith applauded righteous self-discipline in his The Theory of Moral Sentiments (1759), but realized that people could improve their own wellbeing and others even when operating with mixed motives.

The mixed motive that impressed Smith was the desire to better oneself by exploiting (1) opportunities and (2) people. The first motive he showed was constructive. People seek the best education and training, the best employment, and strive to use their resources wisely. Proprietors, manufacturers, and merchants endeavor to satisfy customers and maximize profits. Elected officials have an interest in pleasing voters. Spinoza’s, Locke’s and Rousseau’s advocacy of liberation and democracy on these scores was likely to be more beneficial than they themselves may have understood precisely because the rational pursuit of self-betterment enabled people to realize part of their untapped potential.

Smith conceded that individuals often had ulterior motives; that they were inclined to advance their personal interests at the expense of others, raising the possibility that their evil doings might outweigh the good. But he observed that the problem could be mitigated by establishing proper institutions, including Locke’s social contract, Roman rule of law, and unfettered competition. Yes, there was Original Sin, but this didn’t invalidate the Enlightenment case for liberation and democracy. All the good things that Spinoza, Locke, Rousseau and Kant promised could be achieved by combining people’s rational desire for self-betterment with the “invisible hand.”

Utilitarianism

Smith’s insight that people competitively pursue their self-interest struck his supporters on reflection as self-evident, but concealed an important perplexity. How did people go about evaluating their self-betterment? How did they commensurate the comparative worth of coffee and tea?

Jeremy Bentham (1748–1832) proposed a hedonistic solution in his The Principles of Morals and Legislation (written in 1780) where he argued first that people desired things that gave them utility (enhanced happiness or reduced suffering),⁹ and second that “utilities” could be ordered, ranked, quantified, added and multiplied across individuals.¹⁰ These claims meant that the human mind reduces “expected” sensations to a common denominator that allows individuals to choose rationally and consistently. Smith as Bentham saw the matter not only was right that people could beneficially pursue their self-interest, but he contended they could do so with precision, and compute aggregate societal happiness too.

Bentham’s claims led economists in two disparate directions. The possibility of a precise utilitarian calculus fostered a marginalist revolution that enabled analysts to comprehensively investigate human choice on the supposition that Bentham was correct, at least with respect to ordinality. This advanced the Enlightenment project.

Bentham’s belief in the cardinal additivity of interpersonal utility (a more demanding assumption than ordinality),¹¹ however went further. It created a metric that could be used to evaluate the collective merit of individual self-seeking. Where Smith, Spinoza, Locke, and Rousseau thought that liberation was enough (that there was no need for cardinal additivity), Bentham’s human happiness calculus implied that an objective case could be made for subordinating individuals to moral and social authority (the greatest happiness of the greatest number is the measure of right and wrong).¹² Where Kant had sought to create a virtuous society by preaching the gospel of personal duty, Bentham strove to create the foundation for morally principled state regulation and transfers on a cardinal utilitarian basis for society’s hedonistic betterment. Societies that maximized collective utility, as distinct from each individual maximizing his or her utility were best. Benthamite “social” (collective) democracy on this score trumped democratic free enterprise.¹³

Marginalist Revolution

The power of Bentham’s utilitarianism didn’t lie in its objective validity,¹⁴ but came from its analytic fruitfulness. While the physics, psychology and meaning of expected utility still remain obscure, the concept allowed William Stanley Jevons (1835–1882),¹⁵ Carl Menger (1840–1921),¹⁶ and Marie-Esprit-Leon Walras (1834–1910) to elaborate how incremental choices are made by individuals operating interactively in markets.¹⁷ Their approach remains the cornerstone of contemporary neoclassical economic theory in Adam Smith’s Enlightenment tradition stressing the explanatory power of self-interest and competition whether or not people are fundamentally moral or utility is cardinally additive.¹⁸

Marginal ordinal utility theory is compatible with Bentham’s assumption that individual utilitarian experiences (but not collective) can cumulate into better and better states of wellbeing, if and only if physically and mentally healthy people always choose wisely. Otherwise, marginalism merely illuminates momentary intent without connecting a sequence of independent experiences with rationally constructed psychological states.

Beyond the Enlightenment Project

The Enlightenment faith in the power of reason to beneficently liberate humanity from all authoritarian oppression explains why economists remain broadly content with marginalism despite a welter of mixed evidence.¹⁹ Theoreticians advocate competitive markets in a world where individuals in a strict sense seldom utility optimize and big business, big social advocacy and big government sometimes collusively craft national economic policies to further ...

Table of contents

• Cover Page
• Title
• Copyright
• Dedication
• Contents
• Acknowledgments
• Preface
• About the Authors
• Introduction
• Part I Neoclassical Economics
• Chapter 1 Rational Utilitarianism
• Chapter 2 Competitive Ideal
• Chapter 3 Bounded Rationality
• Chapter 4 Core Consumer Behavior Theory: Ideal and Realist
• Chapter 5 Production and Costs
• Chapter 6 Institutions
• Chapter 7 Macroeconomics
• Chapter 8 Governance
• Chapter 9 Democracy
• Part II Neo-realist Economics
• Chapter 10 When Reason Fails
• Chapter 11 Why Reason Seldom Prevails
• Chapter 12 Dangers
• Chapter 13 Opportunities
• Part III Inclusive Economics
• Chapter 14 Umbrella of Complementary Paradigms
• Chapter 15 Truth
• Mathematical Appendices
• Appendix 1 Bergsonian Social Welfare Functions
• Appendix 2 Idealist Neoclassical Consumer Utility Optimization
• Appendix 3 Idealist Neoclassical Production: Multiproduct Firm
• Appendix 4 Realist Profit and Revenue Seeking: Multi-firm Interaction Effects
• Appendix 5 Realist Retail Satisficing
• Bibliography
• Postscript
• Index