It is no secret that modern economic theory fails miserably at explaining the tremendous explosion in economic activity and income levels that has taken place since the 18th century. We don’t have a good story of why in 1800 an ordinary person lived on $3 a day, whereas today an ordinary person in a “bourgeois” country earns over $100 a day.
In her new book, Bourgeois Virtues, Deirdre McCloskey attempts to tell such a story of why the past two centuries have been so good to ordinary people in bourgeois countries [ht:sn]. She describes how economic theory in its current state is useful for explaining how resources are allocated – but in order to explain the economic revolution that took place since 1800, economic theory needs rhetoric:
I am claiming that the economy around the North Sea grew far, far beyond expectations in the eighteenth and especially in the nineteenth and most especially in the twentieth century not because of mechanically economic factors such as the scale of foreign trade or the level of saving or the amassing of human capital. Such developments were nice, but derivative. The North Sea economy, and then the Atlantic economy, and then the world economy grew because of changing forms of speech about markets and enterprise and invention.
She takes the usual line that innovation drove the Industrial Revolution. But she has an uncustomary explanation for innovation:
But I also argue—as fewer historians and very few economists would—that talk and ethics and ideas caused the innovation. Ethical (and unethical) talk runs the world. One-quarter of national income is earned from sweet talk in markets and management. Perhaps economics and its many good friends should acknowledge the fact. When they don’t they get into trouble, as when they inspire banks to ignore professional talk and fiduciary ethics, and to rely exclusively on silent and monetary incentives such as executive compensation. The economists and their eager students choose Prudence Only, to the exclusion of the other virtues that characterize humans—justice and temperance and love and courage and hope and faith—and the corresponding sins of omission or commission.
One will need to read the entire book to see if her argument is persuasive. I appreciate her attempts to integrate virtue into economic discourse, seemingly reminiscent of the origins of the discipline in moral philosophy. But at the same time, she endorses neoclassical economic theory as the main tool for economic analysis – a tool which grew in popularity because of its supposed value-neutrality.
“. . . changing forms of speech . . .”
Words are important. Take the words “debt” and “deficit.” These may be the most misunderstood words in all of economics, and may also be responsible for many if not most of the recessions and depressions in U.S. history.
.
Because “debt” and “deficit” have negative connotations for monetarily non-sovereign entities (i.e., Ireland, Illinois, GM, you and me), those who do not understand Monetary Sovereignty, think these words have negative connotations for the federal government.
.
They do not.
.
For the federal government “debt” is neutral, in that it merely is the total of T-securities created out of thin air — something the federal government can do forever. And “debt”is positive in that it is the net amount of money created by the federal government.
.
Federal “debt” could be eliminated tomorrow, with no adverse effects on the economy. If federal “deficits” were eliminated, there would be no money in the economy.
.
Failure to understand Monetary Sovereignty is the primary economic crisis in the world. Those who make economic decisions without understanding Monetary Sovereignty are like those who made sailing decisions based on the belief the world was flat.
.
Rodger Malcolm Mitchell
Correction: Should have typed, “deficit” is positive.
Western Civilization and Classical Economics: The Immorality of Austerity by John Kozy
Kozy’s post is about Adam Smith as the prophet of economic liberalism as seen through the eyes of a philosophy professor.
Kozy draws a distinction between what is legal and what is just as the definition of “right.” He finds Smith’s work, and by extension the principles in which economic liberalism is grounded, to be based on specious premises and fuzzy thinking that benefit capital at the expense of labor, and exalt economic efficiency at the expense of social and political effectiveness.
Once this view is legislated, might become right, and the justification for socially egregious behavior becomes, “We didn’t do anything illegal.”
Tom, I find Kozy’s post very interesting. I must say, I do wish I knew more about the development of law in Western society – do you have any other resources? Especially with regards to the interaction between law and ethics.
The issue is the relationship of law, justice and right. The foremost thinker of the 20th century in this regard was John Rawls.
“In his most famous book, Theory of Justice (1971), John Rawls proposed the idea of ‘original position’, a mental exercise whereby a group of rational people must establish a principle of fairness (such as distribution of income) without knowing beforehand where on the resulting pecking order they will end up themselves.
John Rawls used this device to argue that the optimal arrangement will be to ‘maximize the welfare of society’s worse-off member’, which effectively justifies an egalitarian “no-substitution” social welfare function.”
http://www.economyprofessor.com/theorists/johnrawls.php
This is a game theoretical justification of the Golden Rule as the basis for the social compact.
The Libertarian position was put forward in Bastiat’s The Law (1850), in which he equates law with justice, and justice with liberty. It finds its extreme in Ayn Rand’s Objectivism, in which unfettered pursuit of self-interest is foundational.
Historically, Aquinas, Kant, and Hegel stand out as influential thinkers in this area. See an encyclopedia for a summary of their views. The Enlightenment was formative of the US Constitution and the thinking of the Founding Fathers, many of whom held influential positions in government and the courts, particularly James Madison. The challenge was and remains balancing “liberté, égalité, et fraternité.”
Also take a look at the liberal paradox proposed by Amartya Sen (Nobel in economics, 1998).