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 selfinterest 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?