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Archive for November 30th, 2010

When all you have is a hammer

Samuel Bowles’ has an excellent forthcoming book, “Machiavelli’s Mistake: Why good laws are no substitute for good citizens”, which argues that there are not separate conversations between markets and incentives on the one hand and philosophy and ethics on the other.

His story starts with ¬†Aristotle, who wrote in the Ethics that a constitution should “make the citizen good by inculcating habits in them.” There is a long line of political philosophers who similarly argued that essence of good government was the cultivation of civic virtue. However, ethics and government eventually became disassociated, exemplified by Machiavelli who argued that the purpose of laws was to make bad citizens behave. This argument was followed and perfected by Hobbes, Mandeville, Hume, Smith, and Bentham. Essentially, this line of thought argued that a constitution should be written as though citizens were wicked. [N.B. they were not all necessarily saying that humans were in fact wicked, but only that a good constitution should be written as if they were]. This assumes a “separability” between ethics and the material world, that laws have no impact on a person’s preferences or ethics. And it is the basis of all public policy issues when addressed by economics. And this is Machiavelli’s mistake.

The line Bowles takes is that maybe writing a constitution that supposes humans are selfish will make them so. That is, the “separability” assumption between economics and ethics is very false. To use the language of economics, Bowles is essentially arguing that preferences are endogenous. However hard it may be for non-economists to believe, the truth that is that economic analysis depends on preferences being exogenous (given) and stable. There is very, very little economic research that addresses endogenous preferences, that is, asking how preferences change and where they come from.

The reason for this is that the economist’s toolkit is not at all equipped to deal with endogenous preferences. Once endogenous preferences are introduced, one can no longer use the standard economics toolkit. This situation in economics reminds me of the Mark Twain quote: when all you have is a hammer, all problems start to look like nails. It is not hard to believe that people’s preferences change and come from somewhere. Perhaps it is time that economists get a new toolkit that is better equipped for the problems we face in the world today.

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