ECONOMICS AS BOX • WHAT IS ECONOMICS ABOUT?

• HOW DID IT START?

• WHY ARE YOU ASKING ME SUCH HARD QUESTIONS???

• HOW CAN YOU EXPECT bla bla bla ME TO ANSWER THEM???

• Well, let´s ask Adam Smith• He is called THE FATHER OF

ECONOMICS • He should know what it is about• ….if anybody does ….

SMITH´S CLASSIC 1776 BOOK THAT FOUNDED ECONOMICS IS TITLED

• AN INQUIRY INTO THE NATURE AND CAUSES

• OF THE WEALTH OF NATIONS

SO ECONOMICS IS ABOUT WHAT CAUSES THE WEALTH OF NATIONS ??

• So what does cause the wealth of nations, according to Smith??

We cannot really answer that question without going back to 1759

• The question assumes that something causes the wealth of nations

• And the title of the book assumes that an inquiry, meaning a scientific inquiry, can find out what that something is

• Why does Smith make those assumptions?

• Let´s look at his earlier book The Theory of the Moral Sentiments published in 1759

The Theory of Moral Sentiments was Smith´s book about ethics

• Smith wrote his ethics first, and then

• Invented economics building on his

ethics.

Bla bla bla bla Like Kant, Smith tthought all bla bl thought the ethical theories prior theories prior to his own

were mistaken.

Prior theories of morals and ethics according to Smith

• Were about how humans should make ethical judgments*

• His book is about how humans actually do make ethical judgments

• He claimed to write the first scientific study of morals

• However we today might not call his book scientific because a lot of it was theology

• * with the exception of the early philosophers called “stoics”

A first key point from his 1759 book

• Divine providence has decreed that humans do and should pursue self-interest

• So people who do not pursue their self-interest are not only unnatural

• They are also rebelling against God´s providence

• (In Smith as in many early modern thinkers “what is natural” and “what God intended” tend to merge.)

A second key point from the Theory of the Moral Sentiments of 1759

• Providence had also arranged that the result of everybody pursuing their own self-interest…

• …would be that the general good of all would be served “as if by an invisible hand”

• By the invisible hand all-knowing providence harmonizes the work of individuals, to that the good of all results from each pursuing his own good.

The self-regulating market

But to really understand The Wealth of Nations We have to go all the way back to one of the first

papers Smith is known to have written It was a history of astronomy believed to have

been written around 1751, but not published in Smith´s lifetime

Its conclusion was that Sir Isaac Newton had discovered the right way to do astronomy and the right way to do science.

So by 1776 Smith was ready to found a new science Although people are “free,” their actions are

predictable because they always seek to do what is in their self-interest

Self-interested and therefore predictable behaviour is part of the great plan of the universe established by divine providence

As Newton synthesized the work of his predecessors to define the laws of astronomy, Smith could synthesize his predecessors to define the laws of economics (of “political economy” in his terminology)

All phenomena observed are linked by chains of causes and effects, in economics as in physics. Everything is caused by something, and science can find out by what.

Now we can go back to the book that founded economics. What does it say?

What causes the wealth of nations, according to Smith??

Economics as it started was about the causes of wealth

Smith draws a contrast between the “savages” who are poor

…and the “civilized” who have wealth. The great cause of wealth is the

division of labour. The “civilized” have it but the “savages” do not.

The division of labour requires sales. Sales require markets.

Notice by the way that what we call innovation today and regard as the great source of productivity gains …

What causeis acccording to Smith the wealth a result of the nations, ac division of labour.

What do markets require?

Free individuals (what Smith calls “natural liberty”)

Property rights and enforcement of contracts (what Smith calls “administration of justice” and sometimes “civilization”)

Later Smith adds another cause of the wealth of nations

• It is the accumulation of capital.• When more capital is accumulated through

saving and the accumulation of profits, then

• --there is more money to hire workers and more workers are hired, and

• --there is more money to increase productivity through capital investments in what Smith calls “improvements”

What does the accumulation of capital require?

• Property rights and enforcement of contracts (what Smith calls “administration of justice” and sometimes “civilization”)

• BUT A LONG TIME HAS PASSED SINCE ADAM SMITH

• DOES ECONOMICS STILL HAVE THE SAME ETHICAL UNDERPINNING IT HAD IN 1776?

Today “liberals” and “neoliberals” heavily influence mainstream economics.

• They write the textbooks and edit high prestige journals.

• They staff governments, international agencies, and universities.

• Three of their great intellectual leaders are the “Austrians” Friedrich von Hayek and his teacher Ludwig von Mises

• And the “Chicagoan” Milton Friedman.

Let´s listen to Friedrich von Hayek

“Only the morality of freedom…

• …has made it possible to produce enough to sustain seven billion people on this planet.The two basic principles of the moralty of freedom are property rights and freedom of contract.”

Let´s listen to Ludwig von Mises

• “Every step away from respect for property rights and freedom of contract is a step away from rationality and into irrationality.”

• But not all economists are liberals

• What do radical economists say about the ethics underpinning economics?

The market according to Marx

• “There alone rule Freedom, Equality, Property and Bentham. Freedom, because both buyer and seller of a commodity, say of labour-power, are constrained only by their own free will. They contract as free agents. Equality, because each enters into relation with the other, as with a simple owner of commodities, and they exchange equivalent for equivalent. Property, because each disposes only of what is his own.

The market according to Marx continued

• And Bentham, because each looks only to himself. The only force that brings them together and puts them in relation with each other, is the selfishness, the gain and the private interests of each. Each looks to himself only, and no one troubles himself about the rest.”

• You said that Smith was inspired by Isaac Newton to found a science like astronomy.

• Does this mean that humans are predictable because they are governed by laws like the laws that govern the orbits of the planet around the sun?

Well, let´s suppose that people have been living in the box…

• …for several generations…• ..and they have gotten used to the practice of

sellings things they own to get money to buy the things they need.

• (Notice that sales are contracts, i.e. free agreements between buyer and seller. Prices are contracts too.)

• And then people get to the point where they need to sell because if they cannot sell they cannot buy the things they need.

Some consequences of

• At some point it becomes a general custom to buy in order to sell later at a profit.

• And then it becomes the custom to produce in order to sell at a profit. Basically the purpose of production becomes profit.

• And if there is no profit there is no production. No employment. Nothing to sell, nothing to buy.

• Karl Marx coined a term to describe this situation. He called it “capitalism.” (This is where the word “capitalism” comes from.)

From Marx´s Capital, 1867

• Where there is accumulation of profits there is capitalism, and where there is capitalism there is accumulation of profits.

• Profits are re-invested to start another round of accumulation.

• Did Marx mean that business people have little or no

choice ? Did he mean they have to do what they have to do

• whatever they may

• want to do?

• And are we saying that once our ethics is strictly defined as the ethics of the box, then sooner or later we will lose our freedom to the requirements of a

system based on the box?

He did. And many both on the left and on the right agree with him …

• People are “free” but they must do what they must do. Economics is a science because people are predictable.

• According to his friend Friedrich Engels, Marx discovered the “Newtonian laws of motion of society.”

• Let´s listen now to the right-wing economist Milton Friedman:

From Friedman, Essays in Positive Economics, 1963

• “Any business that does not act to maximize profits will not be in business for long.”

• What did Friedman mean by that ?

Friedman meant that even if you do not maximize profits your competitors will

• Your competitors will have more retained earnings.

• They will have more resources to capture market share.

• They will have more resources to cut costs by investing in technology and by achieving economies of scale.

• Your competitors will drive you to the wall and you will be out of business.

Can ethics and economics come together?

• So are you saying that left and right agree that economics is a science because people do what they have to do and not what they want to do and not what they think is the right thing to do ?

What does Max Weber say?

• The great founder of sociology Max Weber compared modernity to an “iron cage.”

• Traditional peoples can get in, but they cannot get out.

• They can give up their traditional ways and join capitalist modernity, but from then on out they have to do what the market compels them to do like anyone else.

Does the failure of central planning support Weber?

• In Russia, China, Cuba, and other places the governments did not try to go back to traditional ubuntu, but they did try to downplay the profit motive as an incentive for production. Does their failure confirm Weber´s thesis that capitalism is an iron cage you can get into, but you cannot get out of?

I would suggest that the facts are better explained by a different concept.

• The system is homeostatic.

• It is like air conditioning governed by a thermostat.

• When it gets too hot or too cold the system automatically adjusts.

• The modern economic system relies on price signals that drive investment.

• When rates of profit fall

• And confidence falls, • Then….

… then society does whatever it must do to make business profitable again

• Society adjusts “automatically”

• because it really has no choice

• It must do what it must do to repair the bread machine that produces everybody´s daily bread.

So where does that leave ethics?

• Kant had to prove that humans were free of determination by the laws of physics to make morality possible.

• But what if humans are determined by the laws of economics?

•What do you think?