The Dull Compulsion of the Economic (#3)

by Dollars and Sense

A series of blog entries by D&S collective member Larry Peterson.

In the last few weeks an interesting debate has been going on, primarily in the blogosphere, about the relationship between so—called heterodox and orthodox economics. The debate was set off by an article posted by The Nation in which Chistopher Hayes surveyed the history of a relationship characterized for many years by utter dismissiveness on the part of the orthodox towards the rebels (Paul Krugman has gone so far as to characterize the kind of work of economists acclaimed by the heterodox, like John Kenneth Galbraith, for instance, as, essentially, not even wrong; an apologia of sorts, by Galbraith's son, James, is here), and taunts of reaction, narrow-mindedness, and hostility to empirical evidence on the part of conventional economics by the heterodox. But he also noted that this standoff is beginning to ease. He mentions, too, the strange role of behavioral economics in mediating this relationship, and leaves us with the sense that there is much dissatisfaction with the status quo on all sides.

I'm going to provide links to the subsequent debate, which should, in turn, fill in some of the contours in the picture of the development Hayes tracked in his Nation article. Much of the relevant discussion can be surveyed here, but I'd also add Dani Rodrick's contribution (see his May 30th entry and Brad DeLong's).

Since I am a proud member of URPE (the Union for Radical Political Economics), it probably won't surprise many people where I come out on many of the issues brought up in the debate. But I would like to discuss two specific aspects of the debate which seem most important to me. The first concerns the place of methodological individualism in the dispute. Just about every conventional Econ 101 textbook contains in chapter one four basic assumptions of economics, of which that of methodological individualism is almost always given the most prominent place. My desk-reference (REA's Economics Problem Solvers) defines methodological individualism thus: "Societies are composed of individuals. All actions by societies are really the actions of many individuals. Consequently, economists place great emphasis in the study of individuals" (p.1-B). Such a schematic and in ways tautological rendition is often all that beginning students will encounter by way of the presentation of one of the fundamental assumptions of the entire discipline of economics. But, as Marx outlined so well in the Grundrisse (see especially pages 266-274 in the Penguin edition), the exchange of labor for wages involves different presuppositions which structure the logic of the exchange for the different individuals involved, and which become specifically relevant to initiating the exchange based purely on the socially mediated relation of class, rather than a more abstract one involving the self-interest of individuals. You can't engage analytically with the phenomenon unless this relational element provides the context in which individual decisions, intentions and incentives are shaped. Heterodox economics has unearthed many such asymmetries in what were considered basic and elemental economic relations throughout the years.

The other topic I'd like to discuss briefly concerns behavioral economics. Behavioral economics, which has attempted to import the findings of cognitive science and even neuroscience into economics, by both interrogating some of economics' basic assumptions—especially that of rationality, another one of the big 4 mentioned in intro texts—and attempting to structure experiments which might provide a firm empirical basis for economic behavior, has thereby attained a stature that many of the orthodox cannot but respect, notwithstanding its attacks on the rationality assumption. After all, studies on live human subjects—on real individuals—were precisely the sort of thing orthodox economics couldn't achieve (there are few ways to introduce controls in studies, particularly if the subject matter involves interactions in free markets); and that contributed to the orthodox insistence on modeling and the excessive reliance on mathematical abstractions of which the heterodox have long complained.

My concern with behavioral economics is that while it relaxes the rationality conditions, it seems to be reinforcing that of methodological individualism, particularly inasmuch as it is precisely consumer behavior that is most amenable to neurological—type experimentation (it's a lot easier to wire up a subject and test her reactions when presented with choices between receiving objects and giving up tokens rather than, say, evaluating job offers for real cash or learning new tasks; and such studies are difficult to structure over long periods of time, which, after all, provides much of the sense of economic decision making). And while behavioral economics is fast becoming more sophisticated (it has shown how subjects tend to prefer punishing freeloaders rather than maximizing values in replays of game settings), I fear that these very gains may prompt its practitioners to cast elements of economics, like labor economics, under the inappropriate guise of that which can more successfully be studied using its methods, like consumer behavior. And even then, given the role of advertising and whatnot (as John Kenneth Galbraith would have insisted), we must be very careful in attributing this kind of behavior to individual choice alone.

Labels: behavioral economics, Brad DeLong, Christopher Hayes, Dani Rodrick, heterodox economics, James K. Galbraith, John Kenneth Galbraith, Paul Krugman, URPE

 

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6/20/2007 11:43:00 AM