by Iberk
Please apologize for any grammatical or spelling mistakes.
Economics: the study of the allocation of scarce resources among alternative uses. Contemporary society has seen the academic pursuit of economics as a science unto itself. However economics can alternatively be seen as a set of rules governing human behavior, these guidelines predating any study thereof.
In a sense, economics has failed. It failed to predict the “Great Recession” that we are currently in the midst of (or recovering from, depending on who is asked). More importantly, conventional economics has utterly failed at providing an escape from this recession. In the United States, a relatively liberal government has resorted to the use of almost Keynesian spending; injecting money into the economy in the hope of stimulating growth. This is coupled with the use of monetary policy designed to promote spending. Not all economists, however, agree that stimulus spending is an effective tactic.
Paul Krugman describes the differences between the major economic schools of thought in the United States as the conflict between “Saltwater” and “Freshwater” economics. Freshwater economics is concentrated towards the central US, and has historically been particularly strong at the University of Chicago, leading to an alternative title as the Chicago School. This Chicago School is itself based upon the ideals of Austrian economics, on the absolute supremacy of the market. Freshwater economists tend to completely dismiss the ideals of Keynes as totally absurd. In itself, this is demonstrative of discontinuity in economic ideals: at saltwater universities Keynes is taught, not necessarily as truth; however his ideals are not completely dismissed as lunacy. In the context of American society today, the broader lesson that can be taken from this conflict is whether the free market should be considered absolutely supreme, and above all regulation. There are those who believe that, left to its own devices a truly free market will come to an optimal equilibrium; where the greatest total utility is achieved. This theory is flawed in its own right; however there are certain lessons that may be taken from it.
A belief in market supremacy is interesting when considering single-individual economies. In this case, the broader concept of a market can be specified to indicate the choices that this individual will make in optimizing his or her total utility. The assumptions of a “Robinson Crusoe” model are based upon that of the “Economic Man”, who makes decisions with perfect knowledge of his general environment, able to quantify how each may affect himself. This assumption of the economic man is flawed; no one can have perfect knowledge of their surroundings and the consequences of their actions. Even in a simple model, if variables that even approximate the complexity of life are introduced, it seems impossible that anyone could possibly keep up. Even with the theory of the true “Economic Man” debunked, however, lessons may be taken from it. It seems probable that, if he were to remain on the island for long enough, Crusoe would eventually optimize his labor, creating a situation of maximal utility. This lesson, which still can be viewed in keeping with a true free enterprise system without external regulation does have broad reaching implications on today’s society; even if individuals are not consciously aware of their tendency to optimize, these traits still exist. It seems that most individuals will act in their own self-interest, even if not consciously.
This perhaps raises an interesting progression of thought. Economics assumes that individuals will act in their own self-interest. The concept of an Economic Man is often coupled with this dogma. As shown however, even if an individual does not have or even desire perfect knowledge of their surroundings, they will still make decisions that will optimize their total utility. Pure market theory states that optimal utility will be found with every individual pursuing his or her own self-interest. Maybe this can be seen as even a natural state of being, where individuals do not think about what will give them the maximum utility, but subconsciously act in their own behalf. This society clearly does not exist; human selfishness leads to a conscious acceptance of self-aggrandizement as a goal. Economic anthropology points to hunter-gatherer society as a low point in this selfishness; however it seems doubtful that human nature has actually been fundamentally altered.
An economic anthropological study of Hunter-Gatherer societies offers an interesting commentary as to the nature of our own civilization. A distinguishing feature of these societies is found in Gowdy’s title: Limited Wants, Unlimited Means. Hunter-Gatherers were able to account for their own subsistence with relative ease; they were at no risk of exhausting their surrounding natural resources. This is not to say that life as a Hunter-Gatherer was not without risk. If each individual attained resources absolutely for themselves, then if they were unsuccessful for a day, it is conceivable that they not eat for that day. This led to the creation of insurance pools. If one individual were to be unsuccessful for a day, the entire pool would compensate, maintaining the well being of the entire pool. This is quite parallel to systems of insurance today, in particular healthcare seems relevant. Everyone contributes to a mutual pool which pays for the instances where a certain individual needs assistance. A key flaw with this concept is that of Adverse Selection. In the hunter-gatherer model, if an individual is a particularly proficient hunter, they may chose to remain outside of the insurance pool. This may serve his individual self interest, yet when in aggregate it creates a cyclical effect. The average product of the insurance pool drops, and suddenly the next highest individuals drop out. In all examples, this could lead to a collapse of the insurance system, so some control must be in place to ensure that everyone participates. In hunter-gatherer times, this was simply that there was no added prestige, no added power in acting individualistically.
Society imposed the expectation that everyone act in the mutual self interest, yet what was this self interest. Central to hunter-gatherers was the problem of storage. There was no object to accumulating meat if there were no efficient means of storage. Because portability was at a premium, the fewer material goods an individual possessed the better. In today’s society, the accumulation of material wealth is looked upon as a good thing. In hunter-gatherer times, it would have been viewed in contrary, because of its counter-efficient tendencies. If an individual did choose to not share a catch with their group, it was not merely impractical and therefore contrary to self interest, but also looked down upon. Because there was no practical application to food storage, or to the amassing of wealth, there was no prestige associated with such accumulation.
The question therefore becomes whether individuals of that time were actually less selfish than the individuals of today. Fundamentally, it seems that human nature has not been altered. Individuals of that time acted as selfishly we they do now, however the nature of society has evolved. In a hunter-gatherer civilization, the selfish desires of an individual were aligned for the most part with the self interests of society. This yields an appearance of selflessness. Given what has been previously discussed about the nature of economic thinking and behavior, however, this display is an illusion. Even if the individual is not consciously thinking about what will maximize their total utility, they will eventually arrive at optima, which in this case will be close to that of society.
In considering the evolution of society, one must wonder why we changed from this self sufficient economy. It seems that the best answer is found in grains, which can apparently act as a mild opiate. Farming offered a detriment in quality of life, yet it seems as though there was a perceived benefit to consumption. Drugs skew logic, and it seems that the existence of this simple opiate effect changed society forever. Agriculture and, later, industrialization allowed for increased selfishness. Roles of economic producers and consumers could be created, laying the roots for economic inequality. Most importantly, the interest of societies and individuals were no longer aligned. Insurance groups no longer had to span entire bands as farming itself offered a form of insurance. If nothing was produced in a season, the product of other seasons could theoretically make up for a loss of production. Alternatively, the time-line was altered, from day to day subsistence to a seasonal pattern. Whatever the reason for this shift, however, society can no longer return to the days of hunting and gathering. Civilization has gotten too big; the natural, undomesticated resources of the earth could in no way support the 6.5 Billion+ population of earth.
The economy of human society continued to evolve, into the monstrously complex system of today. Perhaps born out of the Romantic ideal of the Noble Savage, the hunter gatherer is held up as a selfless example; however this is clearly not true. It appears that individuals will act in their own self interest, whether or not they are trying to. It is only through purposeful altruism or external control that this psychological truth can be beat, yet as evidenced by our current crisis altruism is not enough. The best explanation for the Great Recession is that a lack of regulation led to runaway lending. Mortgages were given to individuals that never should have been allowed to take them, and this persisted until the bubble burst. A secondary flaw of our economic system is the use of credit. The entire economy is seemingly based on borrowing, on individuals living above their means. More importantly, we as a society are living above the means of our planet. This is what the free market has done; it has many benefits, yet externalities must be internalized, record levels of inequality should not be allowed to remain, and we should begin to return to an economic reality.
The industrialization of society disconnected individual welfare from the overall welfare of a society; however governments have a fundamental duty to all members of that society, not just those that possess all of the money. A frequent refrain of the economic right is that, in our society, every individual is uniquely able to make their own fortune, to improve their own lives. This is fundamentally untrue. We are each born into an economic reality, a reality that is becoming increasingly polarized. In feudal Europe, the monarch would frequently forgive all debts, and redistribute wealth, ensuing relative equality. In today’s world this would be impossible. Most importantly, most debts are not owed to the government, so the government could not easily forgive them. However, we like to say that our society does not have a class structure, that the free market allows any individual to rise to a position comparable to their level of talent. This is obviously not true. There is a fundamental reaction against any program that “redistributes wealth” and perhaps such a program is not just. However the current level of inequality, where individuals are denied basic human rights is unacceptable. Society does not have to be completely leveled, the government does not have to exercise absolute control over the market; but it should act to ensure that every individual is guaranteed an acceptable standard of living. It can be said that what is considered within our society an acceptable standard of living is much better than any other society in the world, or in history. Ultimately, this does not necessarily matter. There is no reason that such inequality should exist within a society. It is counterproductive, and few would argue that it is actually moral.
From a more concrete stance, we are still left without a concrete solution to the Great Recession. Economics offers a valuable perspective in the study of human interactions, and in the distribution of resources. In the complexities of today’s society, it must be remembered that analyses should not start with a fully developed model, but should consider the fundamentals, building from the ground up. By utilizing such a perspective, valuable insight stands to be gained, hopefully insight that can guide society to a solution of both equality and efficiency, not one where the two are mutually exclusive.
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