Home > Uncategorized > The social environment as a cause in economics

The social environment as a cause in economics

from Blair Fix

Have you noticed that economists are missing a word in their vocabulary? In microeconomics you’ll see words like ‘individual’, ‘utility’ and ‘maximize’. But you won’t see the word ‘environment’ anywhere. It seems that in microeconomics, individuals maximize their utility in a void. [1]

This lobotomy of the environment has led economists astray. By focusing only on differences between individuals, economists ignore a major part of human behavior. Individual differences are meaningful only in the context of an environment — especially a social environment.

The environment as a cause

To frame my argument, we need to leave economics behind for a moment. The problem is that economists treat the environment as something that is passive. It’s a stock of resources or a trove of ‘ecosystem services’. We can affect the environment, but it can’t affect us.

In contrast, I want you to think of the environment as something that is active. To get into this headspace, I want you to think like an evolutionary biologist.

In Darwinian theory, the environment plays an active role in evolution. To have evolution by natural selection, we need (heritable) differences between individuals. But without an environment, these differences won’t cause natural selection. Why? Because it’s the organism’s environment that determines if a trait is good or bad. The environment is an evolutionary cause.

Here’s an example. In the 19th century, the peppered moth population in Britain changed drastically. Before the industrial revolution, most peppered moths were white. But as Britain industrialized, most peppered moths became black.

What caused this evolutionary change? Biologists think it was the moths’ environment.

On natural-colored trees, white moths blend in with the bark. Black moths stick out. So in their ‘natural’ environment, white moths are better adapted. That’s why they dominated the moth population before industrialization. But as Britain industrialized, soot turned trees black. This made black moths better camouflaged. In this altered environment, black moths flourished and white moths declined.

The peppered-moth story is a clear case where the environment caused a species to change. The story has two ingredients:

  1. Individual variation
  2. An environment that acts on this variation

To have natural selection, we need differences between individuals (here, moth color). But these differences gain meaning only in the context of the environment (natural or soot-colored trees). The lesson is that we can’t separate individual variation from the environment in which it occurs.

Keeping individual variation, purging the environment

Having framed the ‘environment’ in an evolutionary context, I’ll return to where economists go wrong. Economists purge the environment from their theory of human behavior (neoclassical microeconomics). Instead, they focus only on individual variation.

I’ll use human capital theory to illustrate this environmental lobotomy. This theory explains income in terms of differences in human capital. Individuals with more human capital are more productive (the theory claims), and so earn more income.

Where is the environment in this theory? It’s nowhere to be found! In the world of human capital theory, individual variation happens in a void.

The story of cow capital

To see the problems with lobotomizing the environment, I’m going to tell you a story about ‘cow capital’. Think of this as a cautionary tale. It warns about the perils of purging the environment from a theory of animal behavior.

Our story begins with a biologist named Bob. Bob has set up camp on a farm and is studying the cows. These cows come in two colors: black and brown. Like a typical biologist, Bob is obsessed with fertility. So he asks: “Does cow fertility vary by color?”

To answer his question, Bob spends a year measuring cow reproduction. He finds that fertility does vary by color. Black cows have (on average) more offspring than brown cows.

Intrigued by this result, Bob tests for causation. He paints some black cows brown and some brown cows black. Then he measures the fertility of these painted cows.

His results are astonishing.

When brown cows are painted black, their fertility increases. And when black cows are painted brown, their fertility decreases. Color — whether natural or painted — affects cows’ reproduction!

Bob knows a sexy result when he sees one. He writes up his finding and publishes it in Nature. Then he returns to the field.

Back in the ivory tower, an economist named Nancy reads Bob’s paper. She thinks to herself: “Neoclassical theory can explain Bobs results!” So she writes a paper called “Cow Capital Theory”.

Here’s how the theory works. Color is a type of ‘cow capital’ — a skill that makes cows more productive. Nancy argues that black cows have more cow capital than brown cows. That’s why they have more offspring. But not only is cow capital a skill, it’s a skill that can be acquired. When brown cows get painted black, they acquire more cow capital. That’s why they become more fertile.

Pleased with her theory, Nancy publishes it in the American Economic Review. Economists read Nancy’s paper and celebrate the universality of human capital theory.

Meanwhile, Bob has discovered the real reason that black cows outbreed brown cows. The cows are owned by a farmer who breeds them for color! Every generation, the farmer chooses mostly black cows for breeding. The farmer is also nearly blind and can’t tell the difference between natural-colored and painted cows.

Contrary to cow capital theory, black cows are not innately more fertile than brown cows. Instead, the cows live in an environment where being black is advantageous. The environment (the farmer) causes black cows to outbreed brown cows.

The moral of our story is this: remove the environment from a theory of animal behavior and you’ll be led astray.

When all you see is individual variation, you attach undeserved significance to individual traits. Cow color becomes ‘cow capital’ — a magical source of fertility. The reality, however, is that the environment is what makes traits good or bad. Black cows don’t have more cow capital. They’re just favored by the farmer.

The social environment

In our story of cow capital, the most important part of the cows’ environment was the farmer — another species. Among social animals like humans, though, much of the environment is created by the species itself. We’ll call this the ‘social environment’.

Like the physical environment, the social environment determines if a trait is good or bad. Again, it’s worth contrasting this evolutionary view with neoclassical economics. In neoclassical theory, traits are significant in their own right.

Take education.

According to neoclassical theory, education makes people more productive, and this productivity makes them earn more income. In our evolutionary theory, however, education isn’t innately connected to productivity. Instead, it’s a trait that the social environment acts on.

Put a person with PhD in a hunter-gatherer society and they won’t be rewarded for their higher education. Put the same person in an industrial society and they will be rewarded. It’s the social environment, not the trait itself, that determines rewards.

Hierarchy: the farmer and the cows

Now that you’ve laughed at the story of cow capital, I’m going to show you that it’s not that far-fetched. It’s a good metaphor for how traits are rewarded in a hierarchy, and for how economists misinterpret these rewards.

In our story of cow capital, the farmer and the cows form a hierarchy. The farmer has power over the cows, who surrender their reproductive decisions to him. Because the farmer breeds mostly black cows, the black cows are rewarded.

The same logic applies in a human hierarchy. The farmer represents those with power. In a hierarchy, the powerful determine which traits get rewarded.

And the cows? They’re a metaphor for the masses at the bottom of the hierarchy. After the powerful create the reward system, the masses are at the mercy of this environment.

And cow color? It’s a metaphor for traits that are valued by the hierarchy. (Given humanity’s history of racism, you could take the trait of color literally though.)

Having fleshed out the metaphor, let’s look at hierarchy from a biologist’s point of view. A hierarchy is a social environment characterized by concentrated power. In this environment, those with power get more resources. (I’ve proposed, that this is a universal feature of hierarchies). So you get rewarded by climbing the hierarchy.

What varies between hierarchies are the traits that get you power. Historically, most societies rewarded birthright. (Think of feudal caste systems in which rank was fixed at birth.) In contrast, modern societies award power by ‘merit’. In these societies, you climb the hierarchy if you have credentials.

From the biologist’s point of view, we have two factors at work in a hierarchy:

  1. Individual variation
  2. An environment that acts on this variation

If this seems familiar, it’s because it’s the same two factors as in the peppered-moth story and the cow capital story.

Now let’s look at hierarchy from the economist’s point of view. To do this, we keep individual variation but we ignore the social environment. So let’s forget that hierarchy exists. When people move up the hierarchy, we see only their traits and their reward.

In modern societies, we see that educated people are rewarded. So we propose that education makes you more productive.

We can apply the same thinking to hierarchies that reward birthright. We ignore the hierarchy and see only that family lineage determines rewards. We conclude that highborns are innately better than lowborns.

So neoclassical economists are actually continuing the tradition created by feudal apologists. Ignore the social environment and glorify individual traits. By doing so, you legitimize the social hierarchy.

Notes

[1] Yes, there is a sub-discipline of economics called ‘environmental economics’. But this field is an afterthought, tacked onto microeconomics like Eeyore’s tail. Environmental economics takes the principles of microeconomics and applies them to problems like pollution. What the field doesn’t do is put the environment into economists’ core theory of human behavior.

  1. December 15, 2019 at 2:22 am

    I was a forest biometrician always influenced by ecological and systems thinking, Howard Odum for example. I retired to become a rancher? Spent much of my retirement income on cows, natural breeding as well as some Artificial Insemination. I have read rwer for 10 years complaining frequently of the failure of economists to recognize the persistent refusal to account for externalizations and for damages to the environment. So finally a hint of economics with a real ecological under tone. How did you ever think to choose cows for capital, (i think of them as partners in range management and even have a couple of retired partners since i am now mostly retired from ranching too ).

    thanks for this article and the choice of cows.

    charlie

  2. John deChadenedes
    December 15, 2019 at 7:14 pm

    I appreciate Mr. Fix’s analysis but I don’t think it’s quite that complicated. There are no externalities. There are only costs economists choose to leave out of their equations. Their reasons? Well, I think we all know their reasons because we know who pays their salaries. Is “environment” irrelevant and infinite? No, obviously not, on both counts. The changing global climate shows that puny humans have the capacity to destroy the world we all depend on. If economists did decide to include in their analyses the cost – present and future – of environmental exhaustion and destruction, how many global corporations would be profitable? Any of them? Perhaps not. Would you buy stock in a company whose business model depends on the destruction of the planet and the pretense that everything is OK? Do you currently own stock in such a company? It’s time to act and if economists can’t get with it we should leave them behind.

    • Craig
      December 15, 2019 at 7:33 pm

      “There are only costs economists choose to leave out of their equations.”

      This is a great insight. If the economy is financially unstable as Steve Keen has re-discovered because the current paradigm of Debt ONLY enforces the continual build up of additional costs, then the ONLY way to resolve that situation is to PAY those costs with sufficient amounts of monetary gifts directly with a universal dividend to the individual and directly to consumers at retail sale and then reciprocally back to retail merchants so that they can be made whole on their overheads and profit margins.

      • Craig
        December 17, 2019 at 7:02 pm

        The economy is rigged around the imperatives of the current monetary paradigm of Debt Only. The set of increasingly unworkable and inhumane economic factors is transformed and broadened into a humanomics by integrating the new monetary paradigm of Gifting into the aligned structures of it.

        “Systems were made for man, not man for systems.” C. H. Douglas

    • Charlie Thomas
      December 16, 2019 at 6:18 pm

      There are no externalities. There are only costs economists choose to leave out of their equations.
      I differ there are cultural issues which are virtually impossible to apply the idea of money cost to them. The loss of native american spiritual sites to development, the loss of language and tribal relationships. Please assign a ‘cost’ to the loss of species currently occurring at an accelerating rate. I have actually participated in groups trying to do this. THERE IS NO WAY.’ hence I chose the word externalities.

  3. John deChadenedes
    December 17, 2019 at 6:40 pm

    Mr. Thomas, the fact that a monetary value cannot be placed on something doesn’t mean it’s not a cost, at least to the person who suffers it. A more complete statement of my observation would be, “There are no externalities, only (1) costs economists choose to leave out of their equations, and (2) costs economists can’t quantify and therefore choose to ignore.” It’s a fundamental flaw of economic reasoning that economists simply leave out everything they can’t place a monetary value and also many things that do have a quantifiable monetary value. In my view, it is fundamental that no one has a right to destroy or impair what other people need for a decent life, including clean air and water, shelter, food, security, and so on. If we do develop a new way of thinking about the economy and economics this would be the first theorem, derived from the principle that every person is born with an equal and unalienable right to these elements of a decent and productive life.

    • Robert Locke
      December 18, 2019 at 9:06 am

      In 1971, McCloskey wrote in a comment about the use of the idea of entrepreneurialims when measuring success, “If one starts with the entrepreneurial hypothesis, there are no guides as to how to put the argument in quantitative form.” That’s a 48 year old quotation, which is one reason historians are so irked when it comes to discussing economics with economists. They don’t know any history. I cite this in The End of the Pradtical Man, a 1984 book.

  4. Calgacus
    December 23, 2019 at 7:19 am

    Yes, there is a sub-discipline of economics called ‘environmental economics’. But this field is an afterthought, tacked onto microeconomics like Eeyore’s tail. Environmental economics takes the principles of microeconomics and applies them to problems like pollution. What the field doesn’t do is put the environment into economists’ core theory of human behavior.

    Well, there is also “ecological economics” of Herman Daly et al, the point of which is to start from the environment, as you suggest.
    There’s an interview with him in the current issue of the RWER.

    I disagree with him in some details, but endorse his philosophical approach, his critique of GDP and growthism is rather bettter than degrowthers like Hickel who writes here. Reading his book Beyond Growth, he has some of my favorite philosophical quotes from Whitehead and George Gaylord Simpson – with a very uncommon understanding that might be congenial. Basically the common contemporary philosophy of almost any stripe gets logical dependencies exactly backwards. That goes double for economics.

  5. Ken Zimmerman
    December 24, 2019 at 3:38 pm

    Blair, as the adage notes, where one ends up often depends on where one begins. Economics begins with an incomplete and twisted picture of the events and actors around them. This picture derives both from deliberate propaganda and from lost or rejected opportunities to open economists to what’s going on around them. I suggest economists could use anthropology as a model (economists, I’m told like models) to move out of and away from this trap in which they find themselves.

    Economic actions and actors can be studied scientifically. Anthropologists do it. Economists can’t follow that lead primarily due to their insistence on removing the actions and actors from the scene. Anthropologists consider and locate aspects of people’s individual and collective lives, which is to say their lives and societies, in terms of how these aspects relate to one another in an interconnected, though not necessarily bounded or always orderly, whole. For example, an anthropologist might want to study how household organization among a particular set of people is related to, say, wealth and changes in wealth, and vice versa (in an ideal world an anthropologist would want to know how all the elements of people’s lives and societies are related to one another). As this suggests, anthropologists tend to want to see people’s lives in the round. Holistically. Anthropologists also want to know about the relationship between what people think and say on the one hand, and on the other what they do. Generally, anthropologists distinguish the two as culture and culture performed (society). Mostly through experience, anthropologists have learned that observing people’s actions provides a profounder and more complete understanding of their culture than just listening to what people say and write. Historians do not have this opportunity except through questioning of the past. But they cannot observe this history as it occurs. Economists attempt neither, however. They do not question (interact with) past events and actors. Nor do they observe or experience actions and actors available to them in their own time. How can economists expect to describe or write about either past or current economic actions and actors from this base of nearly complete disinterest?

    Finally, two general features of anthropology are important. First, the perspective is fundamentally empirical and naturalistic. Extended participant observation, empirical naturalism, has come to define the field. Which means that anthropology is both a semi-humanity and semi-science. My position is that this is the only genuine science. Second, in part because of the importance of extended participant observation and in part because of the concern to approach people’s lives in the round, anthropologists in general, are reluctant to think in terms of social laws and universals. Anthropologists have studied many societies in different parts of the world and have come up with almost no social laws that apply throughout specific regions, much less that apply globally. Put differently, anthropology tends to be an idiographic or particularizing discipline, rather than a nomothetic or generalizing one. Economics has the opposite priority. Coupled with economists near complete disinterest in economic actions and actors, past or current, this leaves economists spouting groundless drivel while simultaneously ridiculing any person, scientist or not who dares point out their errors.

    Perhaps an example may help. Stephen Gudeman argues in Economics as Culture: Models and Metaphors of Livelihood that economies and economic theories are social constructions, and that the central processes of making a livelihood are culturally modeled. That is, opportunities for provisioning one’s life are modeled directly and by others with which one interacts as one grows to maturity in a culture. This is clearly the case today. As American culture became financialized, large numbers of mathematics oriented maturing youth entered financial modeling as opposed to engineering, statistical analysis, or sciences such as physics than was the case 25-30 years ago. Financial occupations were frequently modeled for them in the media, in school, and in conversations with friends. Also, an infrequent occurrence 25-30 years ago.

    These are some of the pertinent features of the anthropological perspective, through which economic anthropologists generally view economic life. Although the specific aspects of economic life differ among cultures, there are some features that are common among most human cultures. In general, economic life is the activities through which people produce, circulate and consume things, the ways that people and societies secure their subsistence or provision themselves. ‘Things’ as used here is an expansive term, however. It includes not just material objects, but also includes the immaterial: labor, services, knowledge and myth, names and charms, and so on. In different times and places, different ones of these will be important resources in social life, and when they are important, they come within the scope of economic anthropologists.

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