The psychological “foundations” for neoclassical economics
from Neva Goodwin
When I was beginning my studies in this field economist Robert Solow commented to me that the great strength of economics is that it is fully axiomatized; the entire edifice can be deduced from the basic rationality axiom, which says that rational economic man maximizes his utility. The origin of this axiom is often traced back to Smith, whose most widely quoted phrase comes from a passage in which Smith approvingly notes that merchants take what, today, we would call, a protectionist position – doing so, not with any thought for the good of society, but because their security and profit is tied to domestic industry. Thus, he says, the merchant “is in this as in many other cases, led by an invisible hand to promote an end which is no part of his intention.”[1] Excerpts such as this have been used as a justification for the 20th century economic model’s vision of an ideal world in which a society comprised of entirely self-interested economic actors would make the society as a whole better off, and the idea that pursuit of self-interest is the only thing that is done by rational economic actors – and that anything else is irrational.
When Alfred Marshall set out to codify the ideas of the economists before him, his starting point regarding human nature was essentially the same as Smith’s, with one interesting addition: Marshall took cognizance of a particular group of humans – economists; a group that did not exist, as such in Smith’s time. Though Marshall did not say so directly, it is evident from his writings that he assumed that the motivation for this particular group was to improve the human condition; specifically, to reduce poverty so as to allow people to develop their higher moral and intellectual faculties, rather than being condemned to lives of desperate effort for simple survival.
Traces of this optimistic view of economists’ motivations can be found in most texts since Marshall’s time, but they were increasingly buried beneath the far more pessimistic and narrow view of human nature in general that came in with Samuelson (even though Samuelson, as a person, would fit reasonably well within Marshall’s optimistic view about the character and motivations of economists).
The problem was the old desire, stemming from the beginning of the 20th century, to make economics truly a science, in the model of physics. As Philip Mirowski has spelled out[2], neoclassical economics clung to a physics template from the 19th century which natural scientists had mostly discarded by the early 20th. Among the problems with that template (and they were many) was a positivist view of knowledge – a view that physicists themselves largely abandoned as they confronted the indeterminacies rife in quantum mechanics, general relativity, chaos theory, Heisenberg’s uncertainty principle, etc.. The natural sciences have largely come to recognize that their practitioners are human beings, who have values, and that value-free science is virtually impossible. Neoclassical economics got stuck in an attachment to mathematics as the way to ignore the roles of values, history, institutions, politics, and other inconvenient subjects. Mathematics has much to offer to economics, but it is unlikely to find its best use when thus employed as a means of denial.
[1] To give the flavor of the full quote: “As every individual … therefore, endeavours as much as he can, both to employ his capital in the support of domestic industry, and so to direct that industry that its produce maybe of the greatest value; every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security, and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain; and he is in this, [as in many other cases] led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest, he frequently promotes that of the society more effectually than when he really intends to promote it.” Adam Smith, 1982, The Glasgow edition of the Works and Correspondence of Adam Smith, Oxford University Press. vol.2a, p. 456.
As an example of the widespread misuse of Smith’s writing, it is interesting to note that people often refer to the “invisible hand” in arguments that cite Smith as a proponent of free trade – ignoring that Smith’s use of the phrase speaks approvingly of protectionist merchants.
[2] In More Heat Than Light: Economics as Social Physics, Physics as Nature’s Economics; Cambridge University Press, 1989
Neva Goodwin, “The human element in the new economics: a 60-year refresh for economic thinking and teaching”, real-world economics review, issue no. 68, 21 August 2014, pp. 98-118,
http://www.paecon.net/PAEReview/issue68/Goodwin68.pdf
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Real-World Economics Review Blog 
I found this post very thought-provoking.
I think it would be interesting to examine (or speculate on) what Smith, and after him, what each of Ricardo, JS Mill, Marshall, Knight, Pigou, Keynes, Hayek and Samuelson said (or would have said) about the empathy (or lack thereof) that a rational economic actor feels for his or her family and descendants. His or her loyalty to his or her spouse, might for most of them be recognized to transcend his or her self-interest, as usually understood. But what about children and grandchildren and great-grandchildren and so on ? Herman Daly (in a critique of some rather off-the-wall theorizing by Gary Becker, as I recall) pointed out that the fact of sexual reproduction as the mode of reproduction of human beings, entangles ones descendants into the future, with the descendants of unrelated, but contemporary fellow members of one’s present socio-economic community.
So if a modicum of altruism, in opposition to pure atomistic self-interest, transcends even one generation – something for which the empirical evidence is quite overwhelming – and if such altruism can be expected to persist, if only in successively weaker pulses, as the generations progress into the future – we can conclude that any sensible economic theorizing must take account of it.
It would be foolish, obviously, to construct economic theory on the assumption that economic actors have no regard for their atomistic self-interest. But it is surely equally foolish to assume that they have no altruistic feelings whatsoever, for posterity.
And once one allows concern for posterity into economic theory, accepts the idea of long-term, ecological inter-dependence between species on a planet that has an ultimately finite carrying capacity, in general, for populations of virtually all living species. and rejects the fanciful notion of perfect substitutability between man-made and natural capital assets, the ecological-economics approach to the subject of economics becomes very compelling indeed !
Important subjects for future research then, alongside, obviously, the factors that influence the extent and limits of carrying capacity and the factors that determine the degree of substitutability between man-made and natural capital assets; are the extent, in time, and the strength over time of feelings of inter-generational empathy on the part of human beings, and the extent to which people recognize that their concern for their own descendants, should make them interested in the state of welfare of their own unrelated contemporaries – even those of other species.
Michael Barkusky
Pacific Institute for Ecological Economics
Vancouver BC
Canada
Hi Michael!
Nassau W. Senior proposed as a “first fundamental proposition” that he described as a law with the same universality and certainty as the law of gravity in physics the claim that “That every man is desirous to obtain, with as little sacrifice as possible, as much as possible of the articles of wealth.” One might even detect an affinity with Lionel Robbins’s definition of economics as “the science which studies human behavior as a relationship between ends and scarce means which have alternative uses.” In a word, it’s the maximization principle.
In “Expectation and Rational Conduct” (1937) Terence Hutchison argued that Senior’s first fundamental proposition shared “one remarkable characteristic” with “almost all” formulations of the utilitarian maximization doctrine: “they appear further to postulate, and only are applicable if the further postulate is made, that all expectations are perfectly correct.” In these formulations, uncertainty is relegated to an ambiguous ceteris paribus alibi which makes the utilitarian calculus immune from criticism.
Dear Neva :Do you rememberin the 1970s after you read my Creating Alternative Futures :The End of Economics ( G.P.Putnams Sons, NY, 1978 ,1996) , you asked me if I though you should go for an economics degree ? Of course, I said ” No , it would be a waste of your time” !
However, your diligent study of this dysfunctional disciple , made you a wonderful critic ! More power to you ! fond regards, as ever, Hazel
The expression of mankind’s endless desires and his/her unwilliness to produce the means to attain them with more than the least effort, also leads us to conclude that Man/Woman is not only greedy but slothful! Is this the premise upon which economics is built? No wonder its is regarded as being dismal.
However, it is the combination of the two opposing features, that of industry and of careful use of resources that actually results in our less dismal science becoming a reality, but the way it began hardly allow it to be regarded as being scientific at all. There was no proper definition of what kinds of activities were needed in order for society to function nor were there any attempts to classify these activities into groups that could be directed by specific agencies. It is as if the psychology of our process of thought has stipped us from lokking at the subject from sufficient a distance in order to appreciate of what it actually consists. We fail to see the woods for the trees! The importance of this kind of thinking is not appreciated today because it seems to most that the subject is so complicated and confused that any attempt at this analysis would have no useful outcome.
It is my sincere intention and belief that this attitude will change and that for our subject to become a proper formal science there must be better definition and classification. My attempt at achieving the is summarized in the model which may be see in Wikimedia, commons, macroeconomics as: DiagFuncMacroSyst.pdf
(which should be enlarged to see all of the 19 double functional flows of money and goods etc.)
This model comes about after taking an attidue not to the myriads of people making the activities, but to the limited kinds of economic activities (of functions) themselves. Once these activities have been defined and listed can one then ascribe them to specific idealsized and aggregated agencies (or entities) and by this means the dismal parts drops out and the science part falls properly into place. This model is unique because no other has all 3 of Smith’ factors of production not his 3 returning aspects as may be included within the whole system. It is indeed surprising that it has taken 250 years since Smith first suggested such a situation in 1776 for us to at last see the light!
I am not at all sure what purpose the author has in mind with this short piece but what the pieces does do is demonstrate a wilful ignorance of the literature. The history of utility theory has been documented several times. The two articles by George Stigler can be consulted. There are two strands to utility theory; ordinal and cardinal. Cardinal is so different from the older strand, ordinal utility, that many deny there is any link between the two at all. Ordinal utility can be traced back to Adam Smith but not cardinal utility, but not to Smith’s statement about the invisible hand. The axiomiatised rational expectations view comes from cardinal utility attributable to Von Neumann and Morgenstern. It is this concept which the mathematical economists found attractive. There is no direct link between mathematical economics and Adam Smith. The idea that economic theory and natural sciences have a link is yet a different strand again not directly attributable to Adam Smith. It is on this link that Marxism rests as is clear from Engels’ Socialism or Joseph Stain’s limited work. So how any author can take all these strands and place them at the feet of Adam Smith eludes me as does what she is attempting to say.
“The natural sciences have largely come to recognize that their practitioners are human beings, who have values, and that value-free science is virtually impossible. Neoclassical economics got stuck in an attachment to mathematics as the way to ignore the roles of values, history, institutions, politics, and other inconvenient subjects. Mathematics has much to offer to economics, but it is unlikely to find its best use when thus employed as a means of denial.”
Thanks for this, Neva.
On rationality, A N Whitehead said at a Presidential Address of the Mathematical Association in 1914: “The art of reasoning consists in getting hold of the subject at the right end, of seizing on the few general ideas that illuminate the whole, and of persistently organising subsidiary facts round them. Nobody can be a good reasoner unless by constant practice he has realised the importance of getting hold of the big ideas and hanging on to them like grim death”.
Neva’s last sentence above is one of the big ideas, memorably put.
Whitehead’s starting point is “getting hold of the subject at the right end”. What’s that in economics? Is it to follow Hume, summarising his Inquiry Concerning Human Understanding (1748) by saying “Morals and criticism are not so properly objects of the understanding as of taste and sentiment. … When we run over [the books in] our libraries, let us ask, ‘Does it contain any abstract reasoning concerning quantity or number? No. Does it contain any experimental reasoning concerning matters of fact and existence [demand and supply]? No. Commit it then to the flames'”. No. I think that is what economists (from Hume’s friend Adam Smith on) have begun with, but centuries of experimental demonstration have emphatically shown it to be not the right end, but rather, the way to war and the destruction of our environment.
What is “the right end”, I have myself concluded, is to go back to the foundations of everything as we understand it now (i.e. a Big Bang, rather than Hume’s consciousness imagining an infinite and eternal Newtonian universe already strewn purposelessly with things). At the Einsteinian time of the Big Bang there was nothing to count and no way of measuring, so no mathematics. One has to add temporal asymmetry to become able to account for the generation of things from the dynamic equivalent of spray, and the equivalent of latitude and longitude to point to them and the development of logical quantification (all, some, one, none). One ends up with two forms of science, a mathematical science of locations, and practical sciences of what types of bounded happenings are so localised: “how things work”.
The mathematical “framework theory” amounts to dynamic error correcting logic, which applies to everything, with static logic as a special case. The practical theories evolve as the same things (considered as representing themselves), having become fully developed themselves, become parts of higher-level entities performing different functions. Thus animals having become human use linguistic symbols to locate things, begin to invent linguistic systems like arabic numerals which model their own evolution, functional systems like computers which model how their physical brains are able to communicate, be programmed with habits, coordinate family functions via some of those habits and model e.g. an economy programming its members to use symbolic money to coordinate the activities the real economy is capable of. Take the subdivision of economic activities further and we end up where we now are: with theory not of a moral economy working reliably by using information-theoretic redundancy (spare capacity) to make good local deficiencies, but an inhuman financial system coordinating the activities of money.
Looking at the responses of Macrocompassion and Robert Vivian which came in as I was drafting this, it seems to me the former’s model may be getting near to my logical model, though I wasn’t able to find it from the clues he gave as to its location. What I did find from Wikimedia’s indexes is that, astonishingly, no-one there seems to have heard of information science or even information technology.
Robert Vivian seems to be trying to rubbish Neva’s obvious concern with values (i.e. purpose and morality) by accusing her of “wilful ignorance of the literature” about mathematics. I wonder how many of the books in my library he has read? As I indicated above, I found the direct link between mathematical economics and Smith in Hume’s “Enquiry”. http://en.wikipedia.org/wiki/Cardinal_utility says “The idea of Cardinal Utility is considered outdated except for specific contexts such as decision making under risk”, and that it began not with von Neumann but with Bernoulli in the 18th century. Read what Neva said, Robert: “Mathematics has much to offer to economics, but it is unlikely to find its best use when thus employed as a means of denial.”
PS. Having cut an irritated reference to James Gleick’s ‘The Information’ from my penultimate paragraph, I also omitted the point of it: that Shannon’s noise and encoded messages may both look random, but the message turns out to be meaningful if you know the key. The empirical neo-classical mathematical economists theorised entropy on the basis of appearances, Shannon as a measure of maximum possible information content. Below this, finger-prints of non-random structure suggest and offer the key to the decoding of flows of meaningful information.
Sorry to see that you failed to find my model in Wikipedia Commons. Its there under the letter A amongst a whole host of other economics diagramatic models, I just checked up.
This model I regard as being absolutly vital for getting into the science of macroeconomics. It is the only model which is fully comprehensive because it deals with functions and not all the kinds of sectors, although it does have 6 entities which are necessary and sufficient to be able to play all 19 roles of mutual exchange.
It covers the total possible kinds of macroeconomics activities and not by repeating them for different kinds of agents. Thus it is the most simple model which is fully comprehensive. It contains the 3 Smithian factors of production and their resulting effects which is unique and it makes this model the sole means for this kind of analysis. I would be glad to see a model which betters these critical aspects.
Is this the 19-path diagram you mean? If so, why not refer to it unambiguously this way?
http://commons.wikimedia.org/wiki/File:Activity-based_Costing.png.
This does seem to account functionally for capital, labour, money and distribution, but not for purpose, people, development, consumption and recycling.
The simpler diagram you are looking for has four (human) types of entity with its activities represented by the channels which connect each to all the others. (People incidentally have four interconnected parts to their brain similarly interconnected, these forming parts of the system’s communication channels). Reduce this to a generic (hence abstract or macro) model of a human family, and it presents human development from Children to Dad and Mum to Old Folk, taking natural resources from a similar ecology, producing goods and distributing them to the “children”, who recycle it to Nature), with Old Folk having the experience to see the need to save some for the coming “winter”. The system thus rests on recycling of goods from nature, supplemented as necessary by goods intelligently banked in the freezer, with the old folk developing (physical) capital equipment to help production and (symbolic) accounting systems to help distribution. The problem arises when one introduces symbolic money and replaces the goods cache with another diamond representing unintelligent (rule-based) circulation of monetary information: banking symbolic money rather than real goods and losing contact with Nature (which has no money account for).
Something wrong here. The reference you gave was for a diagram which has only 18 not 19 links and they are single not double ones with mutual flows of money and goods, services and valuable documents. I use 6 entities which are:
Landlord, Government, Producer, Householder, Capitalist and Finance Institution.
This brings us away from psychology and back to our basic theme of macroeconomics.
Goodwin’s contribution has in parallel been commented on. For the complete picture see the thread referring directly to RWER no. 68:
So why haven’t you given us a link to the right diagram? And incidentally, have you given any thought to the one I gave you instructions on how to construct?
I took your point on the diagram I found having only 18 explicit links, but it does appear to implicitly link in internal labour and resources.
My six group entities in the economy (as against our money-making system) were the notional family plus humans as “stewards of nature” (input-outputs) and humans as “harmonisers of time-scales” (control). It can be shown that the group entities and multiplexed links are analytically inter-changeable. Codd’s method of entity normalisation uses the relational concept of ‘many to one’ to replace ‘many to many’ links with subsidiary entries linking individuals in one group to individuals in another (as in stores linking each of many customers with each of many suppliers). My four points interlinked have six such subsidiary entities with some correspondence with yours.
In a 2005 Critical Realist conference paper on Mondragon as a model of the economy, my cross links were government and local (e.g. farmer’s) markets. Interesting what Merijn Knibbe is saying about Mondragon at https://rwer.wordpress.com/2014/09/29/links-meat-weights-ireland-spain-and-a-man-needs-a-hobby/#more-16744.
“This brings us away from psychology”? I think you are missing the point of this extract from Neva’s paper on “The Human Element in the New Economics”: the diversity of this being conspicuous by its absence from the robot psychology of Economic Man.
My own point here is not to appear cleverer than anyone else. (Having had these ideas for the best part of thirty years I don’t feel very clever not being able to interest anyone in some demonstrable and extremely significant truths). As a scientist I am simply trying to share here what I’ve learned over sixty years about the physiological causes of psychological phenomena, which include perpetuating self-fulfilling prophecies, men and women thinking differently (see Michael Moseley’s BBC2 program, on iplayer 29/09-06/10/2014), and the unanswered economic questions: Why do people specialise and do things it is clearly not in anyone’s best long-term interest to do?
The crunch is we have four parts to our brain performing different functions, but need only three of them to think. Thus there are four different ways of thinking and four types of “blind spot”, so we cannot always see what others see, or understand what they say. (We learn by trying out their different points of view). In short, physiological psychology shows Robert Solow’s fundamental axiom of economics, “rational economic man maximizes his utility”, to be fundamentally mistaken because there is no such things as “rational man”. We’re all a little crazy in our own way.
Egmont has come in, again while I was composing the above. His blind spot seems to be the very point of Neva’s which I praised: on the natural sciences understanding the nature of man as goal-oriented and diverse. He’s been taken in by the dogmatic Humean contraction of the concept of science which I criticised, forgetting the still-Christian purposes of modern science captured in Bacon’s “for the glory of God and the relief of Man’s estate”: the first then well provided for but the second in need of improvement.
Egmont quotes Klant saying “he who contradicts himself proves nothing” without seeing that a scientist reporting contraries in nature is not talking about himself.
He quotes Popper saying “a principle that is not universally true is false”, and concludes “the solution to the methodological problem spotted by Goodwin consists in this: theoretical economics must not be based on behavioral axioms but on objective structural axioms”.
On these I agree with him, which is why I have been discussing the circuit principles of dynamic error correcting logic and the representational basis of information science and physiological psychology. I too was less than happy with Neva’s conclusions in sections 9 and 10 of her paper.
But I totally disagree with Egmont about even human science not including ethics. The difference between the behavioural logic he takes for granted and Shannon’s switching circuit and error-correcting logics is that axioms are assumed to stay true but reality needs to be kept true. When I was working with Algol68 computer programming, the way Shannon’s logic recognised errors was via events occurring which were bad for the success (true computation) of the program, like trying to divide by zero or addressing a non-existent part of memory. Economies likewise maybe as well-intentioned as one may wish, but will never work satisfactorily unless the fact is accepted that some things, (e.g. starving) are bad for people, and until capabilities are built in of recognising and dealing with such facts, as they are occurring, .