PIET KEIZER (MAY, 2015), MULTIDISCIPLINARY ECONOMICS, A METHODOLOGICAL ACCOUNT, OXFORD: OXFORD UNIVERSITY PRESS.
The most important misunderstanding in economics is the idea that orthodox economic theory, as we know from regular textbooks, offers an acceptable foundation for the study of real life economies. Orthodox economics, however, analyses the economic ASPECT, thereby – on purpose – ignoring the other two primary aspects of human life: the psychic and the social aspect.
This book discusses orthodox economic theory thoroughly, and compares it with a whole series of heterodox economic approaches. It draws the conclusion that heterodoxy does not offer a serious alternative. The book discusses a whole series of psychological and sociological approaches, to find out what these disciplines has on offer for economists. A lot! The book develops an analysis of the psychic and of the social aspect of human behaviour. These two aspects are integrated with the typical economic analysis. In this way, a paradigm and analysis is developed, which functions as a more realistic context for the meaning of familar concepts, such as rationality, morality, efficiency, technology and institutions.
ABSTRACTS OF THE BOOK AND OF EACH CHAPTER
Human motivation offers energy, and circumstances possibilities. Only in combination human action takes place. Over time desires and opportunities to satisfy them are in close interaction with each other. Orthodox economics analyses only the economic motivation in interaction with the economic resources. By assuming perfect rationality and non-sociality it creates a so-called economic world, and analyses the economic mechanism of allocation of scarce resources. Neoclassical economists use this world as theoretical foundation for their empirical research. Heterodox economics rejects this strategy of isolating one motivation, thereby ignoring the psychic and the social problem. But after thorough analysis of a series of heterodox schools of thought, the book concludes that the heterodox idea of human motivation being variable and endogenous, is badly analysed.
This leads the author to discuss a whole series of psychological and sociological approaches from a methodological perspective. The result is a mass of paradigms, analyses and theories, which make it possible to construct a psychic and a social world respectively – completely comparable with the agent-structure model of the economic world. The three isolated worlds are integrated by analysing the interactions between the three worlds. In the integrated world the economic structure, the psychic structure and the social structure are each other’s embeddedness and foundation. This human world gives familiar economic concepts, such as utility, efficiency, rationality, price, value, cost and benefit a different meaning. So with psychic concepts, such as self, will-power and personality, and social concepts, such as status, power, culture and morality.
To make the model more realistic it should be made dynamic and historical and be placed in the context of the world as an open system.
Chapter 1 Introduction
This book discusses orthodox and heterodox economics at length. The conclusion is drawn
that not any economic approach offers an acceptable analysis of economy and society, in which the three primary human motives, namely the economic, the psychic and the social motive, are carefully distinguished and analysed in their interactions. Therefore a whole series of psychological and sociological analyses and theories are discussed and assessed from the methodological point of view. Orthodox economics analyses the operation of the economic motive only, and constructs the so-called economic world. Since psychology and sociology has not constructed such an isolated world, economists should do this so as to make their analysis more realistic. This book develops such a three-dimensional world. A more realistic model should also take into account the historicity of reality, and its open character.
Chapter 2 The Character of Science
Historically science is a reaction to the claims of religions. It gave science an empiricist, anti-meta-physical bias. Kant, however, showed that empirical observation and rational thinking are two sides of the same coin. In the beginning of the 20th century the so-called Vienna-circle started a debate, thereby making meta-physics and introspection, again, suspicious. Popper sharply disagreed and went to London. His idea about the theoretical character of facts and the role of paradigms, was extended by Lakatos and Kuhn. In our methodological account we distinguish four elements in the structure of knowledge: paradigm, analysis, theory and (empirical) hypothesis. Moreover, we use the generally accepted distinction between ontology and epistemology. Nowadays especially in circles of social sciences post-modernity criticises the modern idea of controllability of nature, including human nature. According to post-modernists knowledge is just a human construction.
Chapter 3 Genesis and Development of Economics and Sociology
Economics originates from moral philosophy, as is shown by Adam Smith . In the 19th century Classical Political Economy – Ricardo, Malthus, Marx – tried to explain the functioning of the capitalist economy of that time. Classical Sociology focussed on the functioning of this economy in the context of the whole of society. In the 20th century orthodox/neoclassical economics increasingly dominated the economics’ scene. It aimed at the formulation of universal laws rather than analyses of real-life economies. Its orthodox foundation offers an isolated abstraction, focussed on the analysis of the operation of the economic motivation. The Great Depression showed the problem of the empirical application of orthodox analysis. It triggered the rise of macroeconomics (Keynes) and microsociology (Parsons). After World War II many West-European countries accepted full employment as an important political goal and began to construct a welfare state, meant to guarantee every citizen a minimum of social-economic rights.
Chapter 4 Orthodox Microeconomics
Orthodox economics is built on four axioms. Humans are supposed to be economic, rational, and non-social beings, and the real world is closed and determined by a few natural forces and motivations. They live in the so-called economic world, which is ruled by a number of economic laws. In the simplest case there is perfect competition on markets, but the 9 assumptions, which constitute this concept, can be relaxed to create a more realistic economic world. New Institutional Economics is discussed to see what kind of institutions – conceptualised as cost-saving devices – belong to the economic world. Property rights, markets and other governance structures are examples of economic institutions. Public choice, being the orthodox economics of the public world, is presented as well. Democracy, bureaucracy, and the role of pressure groups are discussed. Attempts to apply orthodox analysis to the empirical private and public world mostly fail.
Chapter 5 Orthodox Macroeconomics
Orthodox macroeconomics is the orthodox economic analysis of the economy as a whole, which is the aggregate of all micro markets. All markets are assumed to be close to equilibrium. Explanation of business cycles and of inflation result when we make the basic model dynamic. Economic growth theory is based on the assumption of long term equilibrium on all markets, and shows the main determinants of growth in the economic world. Neoclassical economists assume that the orthodox analysis can be applied to the empirical world. Econometrics, however, shows time and again that empirical relationships are stable only in times in which the economy as a whole is quite stable. Economic history shows that stability is the exception rather than the rule. At last the difference between GDP and happiness is discussed. It appears that well-being hardly grows anymore after a particular level of income and wealth – the so-called Easterlin paradox.
Chapter 6 Evolution and entrepreneurship, an Evolutionary and an Austrian View
The two views are based on the idea that reality is an open and organic system rather than a closed and deterministic one. Life, also economic life, is historical rather than logical. It means that future action is significantly affected by what happened in the past and what are the future expectations. These views do not work with the notion of equilibrium. Dissatisfaction leads to innovation! Evolutionary economics is based on Darwinian as well as on Lamarckian principles. The Austrian view describes market competition as a Darwinian process. Monopolies are not necessarily bad – they trigger newcomers. Austrians consider free markets as superior to central planning: in terms of information diffusion as well as in terms of incentives for people to work and to save and invest. At last Schumpeter is discussed – he does not fit in any of the ‘official’ views, but does definitely deserve a place in this chapter.
Chapter 7 Radical Economics
Originally radical economics was based on the economics of Marx. Inequality of incomes and wealth are seen as the sources of disequilibria in market economies. According to Marx the growth of the capital coefficient is higher than the growth of the labour productivity. It means that the rate of return will decrease over time – until the system collapses.
Under the influence of neo-Marxian sociology radical economics paid increasingly attention to social, political and moral aspects of the capitalist system. Bowles and Gintis stresses the interest of cooperation rather than competition, and Cohen discusses the undemocratic and immoral aspects of capitalism. Sheehan sees the growth of the institutions of marketing as an important phenomenon, which explains why capitalism is still alive. Piketty shows an incredible number of statistics telling us that low-growth and strong inequality go hand in hand. He advocates a global wealth tax to stimulate economic growth.
Chapter 8 Post-Keynesian Economics
In contrast to Marx Keynes interprets reality as an open system, in which humans are quite uncertain about future developments. They are not economic machines; also changes in their mood – animal spirits – affect their behaviour. So many neoclassical income, wealth and substitution effects are difficult to calculate and sometimes negligible. The Great Depression showed that the capitalist system is an unstable system. Neoclassical economists interpreted Keynes’ theory as an explanation of a special case – not a general theory. Leijonhufvud developed the idea of the two corridors, which differ with respect to the mood of most spenders – being (over)optimistic or (over)pessimistic with respect to the future. Akerlof and Shiller analysed the concept ‘animal spirits’ thoroughly and applied it also to the financial world. In1982 Minsky formulated his financial instability hypothesis already. The crisis illustrates the practical value of his theory.
Chapter 9 Social Economics
Human behaviour is socially embedded – also when people are buying and selling on markets, work in organisations and participate in elections. This approach interprets embeddedness as institutions, which rule our economic life most of the time – it does hardly refer to the character of human motivation. The chapter discusses contributions of Greif, Ostrom, Acemoglu and Dolfsma and Spithoven. Socio-economics starts with the orthodox economic model and modifies it by attributing psychological and sociological variables to it. Contributions by Van der Lippe and Siegers on the male-female division of labour, Schenk on the merger & acquisition wave, and Keizer on the over-optimistic ideologies and attitudes of unions and political parties pass in revue. The philosophical roots of social and socio- economics are developed by Amartya Sen. He extensively analyses the meaning of concepts, such as rationality and morality, thereby regularly referring to Adam Smith.
Chapter 10 Psychology for Economists
Here we search for analyses of the psyche, which could function as a complement of our economic world. The behaviourist and the cognitive approach offer insights into the automatic and the deliberate parts of human behaviour. The biological and the social-psychological approach show that the brain as well as the social context of a person are important environmental variables. The psycho-dynamic and the humanist approach, however, are about the psyche as a system, the elements that constitute the system and the mechanism(s),which determine the way the psyche functions. Behavioural economics pretends to link psychology and orthodox economics. But this approach fails to offer a proper conceptualisation and analysis of the phenomenon of (ir)rationality. The psycho-dynamic and humanist perspective offer the elements, necessary to construct our so-called psychic world. Will-power can reduce the conflict between actual self and true self in such a way that the person maximises his self-respect.
Chapter 11 Macro and Micro Approaches in Sociology
Sociology is about the societal context of individual behaviour. Classical sociology – Marx and Durkheim, for instance – is based on a collectivist methodology. Its primary concern is the question whether severe conflicts are necessary vehicles for progress or not. Microsociology came up in the Thirties of the 20th century. It is based on an individualist methodology, whereby the individual is supposed to be a social being. In relatively small groups such as families and labour organisations ongoing interaction leads to the formation of culture. The sociological idea of culture – in contrast to its meaning in daily life – concerns the way groups of people interpret and understand their lives. Their maps of the world give them their values and norms of behaviour. Increasing synthesis between macro-level and micro-level analysis has led to more knowledge about the way agents, individuals as well as well as groups, interact with their social environment.
Chapter 12 The Historical Approach in Sociology
The historical approach is dynamic rather than static. Action is interpreted as the result of past experience and the actual situation. Some sociologists, such as Girard, are approaching our historical reality from an idealistic point of view. Ideas rule the world, which means that societies where conservative ideas rule stay backwards, in comparison to progressive societies. Others, such as Marx and Lenski, are more materialistic: the amount of material resources available determines the way people approach their problems. Societies, which are open to economic novelty and innovation show more progress. Globalisation is an important historical trend. Many sociologists observe the emergence of a powerful global system, often called the Juggernaut, which is beneficial for some people. For other people it might even turn out to be a threat to their daily life world. Post-modern and Post-social theoreticians consider social systems as human constructions, of which some should be deconstructed.
Chapter 13 Multidisciplinary Sociology and the Social World
Psychological sociology is about the psychological foundation of sociology. The solidarity with the people, who are member of the same group, and the rivalry with people, who are member of a different group, are based on the drive for security and for the manifestation of the self – if necessary on an aggressive way. Economic sociology is the sociology of the economy. It analyses the social context of individuals, organisations and markets. Social processes create links between firms and government agencies, which hinder a well-functioning of competitive markets. In this chapter we construct a so-called social world, in which all people are rich and rational. In this way we can isolate the analysis of the typical social mechanism, which is responsible for the cleanness of the group: sufficient obedience to the common cultural standards by exorcising deviants. Historical processes of rationalisation and moralisation take place to limit violent behaviour.
Chapter 14 Integration of the Three Worlds.
In chapters 4, 10 and 13 the book has presented the economic, the psychic and the social world respectively. The first shows the economic mechanism of (optimal) allocation of scarce goods. The second models the typical psychic conflict between the actual self and the true self, the outcome of it is ruling the emotions, feelings and thoughts. According to this mechanism every person is irrational to some degree. The social world models the typical social conflict, the outcome of it is establishing a generally accepted status ranking of groups. In this world every person is moral to a certain extent. In this chapter we integrate the three worlds, thereby creating a world in which people try to maximise their wealth, their social status and their self-respect. This integrated world is much more realistic, and can therefore better serve as theoretical foundation, necessary to understand and explain the (empirical) world.
Chapter 15 Application of the Multi-motivational Framework of Interpretation
The meaning of a concept is determined by its context. In our integrated world typical economic concepts, such as utility, rationality, efficiency, technology, price, costs and benefits get a broader meaning. So with typical psychological and typical sociological concepts: because of the broader context the meaning of self, will-power, mentality and also of morality, institutions, culture, values and norms change. Multi-disciplinary economists make cost/benefit analyses, which differ significantly from the traditional economic analysis. Main phenomena as discrimination, inequality and European integration will be approached more realistically. The model can be improved by making it dynamic and by placing it in the context of an open system. Parsimony requires analyses as simple as possible. If in a particular case it is obvious that the economic or the psychological or the sociological aspect does not play an important role, that part of the analysis can be skipped, of course.
Chapter 16 Conclusions
Twentieth Century economics has been dominated by the neoclassical idea that the orthodox economic world is a useful theoretical instrument for empirical economic research. Keynes disagreed, but Hicks gave an interpretation of Keynes’ theory, making it to a special case. Competitive markets make it impossible for irrational economic subjects to survive. So with subjects, who are social rather than strict economic. This book offers a thorough methodological account of orthodox/neoclassical and heterodox economics, of a whole series of psychological and sociological analyses and theories. It leads to the construction of a psychic and a social world, in structure highly comparable with the orthodox economic world. Integration of the three worlds shows that especially combinations of psychological and sociological factors can hinder free markets to remain competitive. The multi-motivational model should be made historical and be placed in the context of an open system. Then empirical research might deliver meaningful results.