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Economics and Philosophy: Interface and Agenda

Discussion Economics and Philosophy: Interface and Agenda A Layman

Discussion

Economics and Philosophy:Interface and Agenda

A Layman’s Comments

THIAGARAJAN MANOHARAN

A
nand Chandavarkar’s (hereafter AGC) essay (January 20) aims at comprehensiveness and is erudite at the same time lucid. It has some telling phrases, as the reader has by now learnt to expect from him: for instance, “… dividing the Nobel Prize for Physics between Ptolemy and Copernicus..”, “… the pathology of private truths and public lies…”

This commentator, a retired career international civil servant, has no pretensions to any knowledge of philosophy, nor of economics, nor of any natural sciences. The comments are made from the point of view of a layman: laymen are important stakeholders in the area!

He was anticipating and hoping to learn from the debate on AGC’s valuable contribution among the argumentative Indians: it has been an unconscionably long wait.

Back to Basics: What Basics?

While devoting comparatively larger attention to “Robbins-onian” definition of economics, AGC refers in some detail to two towering giants of modern economics and philosophy, Keynes and Wittgenstein, and concisely summarises: “Keynes viewed economics as a technique of analysis even as Wittgenstein insisted that philosophy was an activity and not a body of doctrine”. A layman would view philosophy as studying what we, as human beings, are and what we can/ should become, a universal framework to explain and guide human beha viour. Thus it overlaps epigenetic rules encoded in individuals’ cells. Whether the work of evolutionary biologists and neuroscientists should be demarcated from works of philosophy is a matter of classification and subject to limits of classification schemes in social sciences.

Basically human (economic) decisions are not conscious and individual but are subconscious and societal. In cases of interface of philosophy and economics, philosophy will overwhelm economics. “Economics, the imperial social science” will see its area shrinking; and even in its specialsed field (competition and allocation of scarce resources) it cannot completely escape philosophy’s sphere of influence (as will be seen below).

Bearing on (economic) decision-making there has been a ferment of ideas recently. The literature by now is voluminous: risk aversion (Kahneman and Tversky); emotions overpowering reasoning (Lowen stein, Camerer and Prelec); multiple systems in the brain, sometimes coope rating, sometimes competing (Jonathan Cohen); a version in game theory, “ulti matum game”, “…when participants reject an unfair offer it is not the result of a deliberate thought process, rather it appears to be the product of a strong (seemingly negative) emotional response”; tinkering with brain chemistry, “the trust game” (Ernest Fehr)

– “The more the first player invests, the more he stands to gain, but the more he has to trust the second player. If the players trust each other, both will do well. If they don’t, neither will end up with much money”; “asymmetric paternalism” (Camerer, Lowenstein et al) – “Asymmetric paternalism helps those whose rationality is bounded from making a costly mistake and harms more rational folks very little”.

There are experts who question whe ther the existing MRI scanners are fast enough for the experiments on which the some of the results are based. Nearly all seem to be laboratory experiments and there remain conceptual difficulties in making the big leap to inferences on mass behaviour. Considering the progress neuroscience is making at speed greater than photons it is conceivable, the problems will not be left unresolved for long. Meanwhile, the rational decision-making throne on which economics is seated is tottering on its legs.

“Economics is a leading example of uncertain knowledge”, as AGC cites Hicks. At the abstract level, there are failures in probabilistic reasoning. It is true that econometric/mathematical modelling has advanced far beyond the level of AGC’s discussion, for instance the algorithms deployed in global financial markets (hedge funds), or the recent concept of bounded rationality (rational decision-making with limited information). (AGC does not make any reference to the conspicuous case of Long-Term Capital Management where two Nobel Prize winners came a cropper). Indeed, with more and more sophisticated credit instruments sharing risk, financial journals speculate about the difficulties in locating the ultimate bearer of credit risk. The scientific method, with the criterion of falsifiability, which AGC lucidly elucidates, is applicable ex-post, but can such iterative procedure be applicable to the needs of urgent current policy decisions of instantaneous, momentous import?

AGC’s summing up of the role of prediction: “it must be a matter of estimating possible variations of parameters that indicate the predicted values of outcomes within specifiable ranges, rather than predicting that the outcome will be a particular point”. However, “we are always dealing with multiple and conflicting claims of truth, none of which can be conclusively established. We choose what to believe based on what is useful for us to believe” (Richard Rorty). There is also the factor of risk aversion in making a choice amongst different parameters and specifiable range of outcomes.

In the famous formulation by a deservedly discredited person there are “known knowns”, “known unknowns”, “unknown unknowns”. (One recalls Samuel Goldwyn’s remark: “never make predictions

– especially, about the future”!) Pragma tic approaches to prediction cannot transcend the barriers surrounding prediction. The economists have to live with uncertain predictions. The ultimate decision will, it seems, rest on our political masters.

Economic and Political Weekly September 8, 2007

Shrinking Interface

With his obvious gift for concise yet clear exposition, AGC could have illustrated the interface of philosophy and economics with specific instances. A few themes, out of many possible, from contemporary economic debate are listed briefly below. National well-being: With the well known limitations of gross national product (GNP), and of the adjustments to it, as a measure of national well-being, an increasing attention is being paid to other indicators, as for instance, lifework balance. A recent pathbreaking work (Richard G Wilkinson, The Impact of Inequality), based on epidemiological studies, under lines how income inequality leads to health inequality; the interconnectedness rests on psychosocial variables shaping differences in morbidity and mortality through stress factors in inegalitarian societies. The study also delineates in detail the pathways in which income inequality adversely affects the quality of social relations, public spiritedness and social capital. The contrast in relationships in egalitarian and in unequal societies are those “based on power and fear” and those “based on social obligations, equality and cooperation”. Egalitarian societies (more or less, as in Scandinavia) tend to be happy and harmonious societies. Though Wilkinson’s studies pertain to developed western societies, they hold valuable lessons for developing countries rapidly gaining in affluence.

No discussion of well-being, however short, can take place without reference to two subtle and complex studies: Amartya Sen’s Development as Freedom (1999) and Partha Dasgupta’s An Inquiry into Well-Being and Destitution (1993). The potential to achieve a person’s possibilities, with an area of choice for interaction, as posited by Amartya Sen and under Dasgupta’s measures of freedom from arbitrary interference are severely constrained in the inegalitarian societies, in ways Wilkinson has discussed. Communitarian institutions: A significant omission in AGC is the absence of any discussion of communitarian institutions which have evoked recently a great deal of attention. They are viewed by many social scientists as alternatives to the impersonal working of market mechanisms and to the remote (coercive?) centralised. State apparatus: (In this context Amartya Sen, in How Does Culture Matter? (2004), sounds a note of caution: “Identity-based thinking can have dichotomous features, since a strong sense of group affiliation can have a cementing role within that group while encouraging rather severe treatment of nonmembers…”.) Since Robert Putnam’s

Bowling Alone: The Collapse and Revival of American Com mu nity (2000) and, parallel with it, discus sions of “social capital”, the con tri butions are largely urban oriented. (Another relevant contribution, Putnam’s index of “civic community” is closely related to measures of income inequality. See Robert Putnam, with Robert Leonardi and Raffaella Y Nanetti, Making Demo cracy Work: Civic Traditions in Modern Italy (1993).) In developing countries, particularly in rural societies, communitarian institutions have historically played a significant role, and still do so, in rural organi sations, personal and family law and rural natural resource management. The economist’s approach is based on variants of game theory. A few illustrations: theory of repeated games (Partha Dasgupta, EPW, April 16-22, 2005); Samuel Bowles, Micro economics, chapters 12 and 14: pioneering contributions by Elinor Ostrom; empirical studies of social capital and intra-group games (Economic Journal, November 2002). Basics to all such approaches are social norms and behaviour, trust and credibility; economics has no causal explanation for such behaviour and one has to depend entirely on other disciplines, for instance; evolutionary biology and gene-based sociobiology (E O Wilson; Richard Dawkins) – kin selection, boosting the chances of our genes being carried in our relatives’ bodies, making it through to the new generation; altr uism related to kith and kin (e g, clans); reci procal altruism, the basis of group interaction, etc. Consumer sovereignty: Consumer sovereignty and its virtuous connection to free market allocation of resources are hoary themes in economics. However, a couple of aspects of the seemingly auto nomy of consumers’ decisions deserves to be stressed. ‘Choice architecture’ (Richard Thaler): The way the choices are presented to people has an immense impact on the decisions they make, an aspect behavioural econo mics can only describe, but not analyse in their causal pathways. Market structure: A little more than a quarter of a century ago Amartya Sen pointed out, with detailed statistical analysis of centrally planned economies’ post-communist transition, the “power of income distribution and poverty reduction to improve health” (‘Public Action and the Quality of Life in Developing

Economic and Political Weekly September 8, 2007

Countries’, Oxford Bulletin of Economics and Statistics, Vol 43). Inequality: People’s satisfaction with their incomes (and from expenditure) is deeply influenced by how they compare with others than by their absolute level; greater inequality increases the social pressures to maximise one’s own expenditures, a never-ending pursuit of keeping up with the Jones’. A new avatar: Inflation targeting linked to the Phillips curve (depicting a trade-off between unemployment and inflation) figures prominently in recent debates. In the discussion on Phillips curve some of the main points featured are: methodological (the curve is a disequilibrium adjustment process estimated on macro data and can be shown to be untenable when based on micro data, according to David Blanchflower and Andrew Oswald in The Wage Curve (1994)); the curve conceived as vertical (workers demanding higher wages as hedge against the rise in inflation, increasing inflation for an unchanged level of employment); yielding place to the concepts of non-accelerating inflation rate of employment (NAIRU) and output gap: the recent stability in the relationship between unemployment and inflation (flattening of the curve) (‘Curve Ball’, The Economist, September 28, 2006); the impact of globalisation, bringing import prices down but increasing the prices of raw materials and other intermediate goods; the consequent necessity for central banks in their inflation targeting to focus on headline price index, not alone on core inflation index (again, ‘Curve Ball’, The Economist, September 28, 2006).

Crucial elements to which only pas sing references are made are public’s inflationary expectations and trust in central bank’s adherence to inflation targets. Factors beyond economic calculus, like risk aversion and trust, mentioned above, operate.

Tread Softly!

In the sphere of religions and their impact on societies, economists should not rush in but tread softly. Ultimately “the heart has its reasons which the head cannot understand”. AGC looks for, as he terms it, “specific economic content” in religious texts and finds it missing. However, the economics of religion’s impact is to be searched for in its shaping of ethical behaviour, man’s behaviour towards fellow human beings and towards society. If measured by a select set of factors and cross-section analysis even within a single country, the results obtained are basically “juxtapositional” observations not causal explanations. As a statistician would say, the sample of observations does not come from the same “population”; viewed in the overarching context of ethical behaviour and belief in a divine presence in sanctioning it and grossly, very grossly, simplifying millennia of subtle theological discussion, some observations are presented below.

There are doctrinal differences among religions making it hazardous to run a cross-section analysis, not only in a multireligious society in a country, but also in a particular religion in a country. Hinduism ranges from questioning Prajapati, the creator of gods, on the existence of divine presence, to bhakti cult; the sanction depends on the strand of Hinduism one subscribes to. Islam’s self-perception is as the flawless and all-comprehensive expression of god’s monotheistic message and the Koran is god’s final and definitive statement; the reward for a life led according to its tenets awaits in heaven. Some scholars analysing the traditional practice of ‘ijtihad’ advance the view that, while the god-given laws are immutable, human interpretations can vary according to local norms and practices. Gautama Buddha was ambivalent regarding the existence of god and Buddhism’s chief attraction for many of us is that its ethical code of conduct is independent of any divine sanction. Confucianism is not a religion with a belief in god. It is basically the worship of ancestral spirits (The World of Thought in Ancient China, Benjamin Schwartz), later regularised on the basis of families organised on the lines of clans. Christianity has many denominations; one would not be too far wrong to state that its ethical system generally rests on this: do unto others what you would like to be done to you.

The issues in cross-section analysis are compounded when one notices the recent trends. While with increasing secularisation the number of believers in religion without belonging to organised forms are growing, there has been recently the deepening of the line of demarcation of religions: for instance, the Pope’s recent pronouncements on Islam and the Vatican’s disapproval of Latin American liberation theology; the Hindutva right-wing movement; the rise of extremism in Muslim societies.

An arguably more valid approach is to base it on specific strand of religious belief/religious institution, country and time-specific. A few instances:

Faith-church based activities currently officially encouraged as in the US: ‘zakat’ (capital levy on affluent Muslims as a transfer payment to the needy and poor): traditional Hindu religious endowments. The magnitude of the sums involved, the purposes to which they are directed, supervision if any over them and, above all, their efficacy as a substitute to public action – all these and more still remain to be studied in depth.

AGC’s account of the “sharia-compliant” financial instruments is the clearest this reader has so far come across. To his account remain to be added fee-based Islamic credit cards and Islamic mortgages, an arrangement under which the bank sells, with a mark-up, by instalments, a property it has bought in advance.

Conventional wisdom attributes the success of the overseas Chinese to their Confucian practices: respect for the authority of the head of the family, family and group cohesiveness based largely on ancestor worship, pursuit of education, etc. How far they reflect the defence mechanisms of a generally affluent minority surrounded by sections of society hostile to it remains to be further explored. The party in the People’s Republic of China had so far been against Confucian doctrines and practices, though party cadres in effect have been flouting the party line. Of late, the success of Confucian attri butes could probably explain the encouraging noises coming from official quarters whose official policy emphasises “harmonious society”; in fact, generous official funding is made available abroad for study of Confucianism!

Economics As We Know It

Inter-disciplinary approach is, to use a cliché, like motherhood and apple-pie: nobody can be against it. There are references to it at every stage of discussion above for trust and credibility. Economists are content to make passing references to it: even game theoretic exercises depict alternative scenerios without providing causal explanations. Arguably, economics is the only social science where for its very basis it has to rely completely on other disciplines like evolutionary biology. It is not merely an issue of its stand-aloneness or of pedagogy: it is crucial for policymaking. It has to undergo a “sea-change, into something rich and strange”.

EPW

Email: manoharan@get2net.dk

Economic and Political Weekly September 8, 2007

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