8 Aug 2012

Debunking Economics I - Utilitarianism

My inspiration for starting this blog as hearing Steve Keen on the radio in April 2012. I've just now got around to reading his book Debunking Economics. It's all quite complicated and so in order to help myself understand it, I'm going to try to explain the ideas here in a series of posts.

So let's begin with Bentham. Jeremy Bentham was a philosopher around the turn of the 19th century. He is very influential in economics amongst other fields. Steve Keen (SK henceforth) identifies his ideas about utility as being particularly influential. Bentham characterised human experience in terms of pleasure and pain. This is actually similar in some respects to Buddhism. However unlike the Buddha Bentham characterised happiness as maximum pleasure and minimum pain. Seeking happiness, in this view is synonymous with seeking pleasure. Indeed Bentham the seeking of pleasure and avoidance of pain became the primary motivating factors of all human beings. In this view even altruism is seen as pleasure seeking. Bentham thought that actions which produce happiness had "utility". And utility could be measured.

Collectively the community is simply a collection of individuals - a view echoed by Margaret Thatcher when she said "there is no such thing as society". And that individual is a kind of idealised Victorian gentleman: who always acts rationally to seek their own best interests, usually in a benign sort of way. The best interest of the community is served by the serving the interests of the individual (this is all sounding familiar, right?); and any action which increases the aggregate happiness of the individuals was useful to the community.

Economics is fundamentally a utilitarian discipline, in that it accepts Bentham's axioms about utility. The task that early economists set themselves was to express utility mathematically, and to use this mathematics to demonstrate the Bentham's ideas were a reflection of how societies function. And this project still lurks at the heart of economics.

As a result economists--despite vast leaps of progress since Bentham--still see the individuals as fundamentally self-serving and rational.


Economists recognise three factors of production: labour, capital, and land. Labour earns wages, capital earns profit, and land earns rent. Members of society tend to be split according to whether their main income is from wages, or whether it is from profit and rent. In an economic utilitarian view (presumably) happiness is found in the maximisation of wages, or profit and rent.

However we cannot both maximise profit and wages, since from the firms point of view wages are a cost. So the firm seeks to maximise profit, but it also seeks to minimise wages. And actually in Bentham's view this must be evil since it necessitates a struggle between labour capitalists. Which is presumably what Marx was talking about? As I understand it, one of the ways to prevent this clash was for labour to won the means of production (the factories in Marx's day). This is actually used in practice in a very few firms, such as John Lewis, which give shares in the company to employees so that they share in profits and well as receiving wages. Workers don't exactly own the means of production, but they do have a share in it.

In general what happens is that maximisation of profit takes precedence. Ironically this is especially so under governments more strongly influenced by Utilitarianism, i.e. conservatives, probably because the people in such governments invest capital and own land.

Modern law treats the firm as an individual with the same rights and obligations as a person. But the typical firm does not behave like a person. The typical firm maximises profit without regard to the consequences for the environment or the community. People are naturally gregarious whereas firms are naturally individualistic. People natural cooperate, firms naturally dominate. Indeed if we psycho-analysed many firms it's apparent that their behaviour is consistent various forms of psychopathology that would get a person locked up and treated against their will.

There has been a great deal of study of the dynamics of societies in the intervening years, but very little of this progress in knowledge has made an impact on economics. Fundamentally the 19th century worldview still informs mainstream economics. Neither have advances in mathematics, such as chaos theory, been incorporated into economics. And you have to wonder why economics is such an intellectual cul-de-sac?

Incidentally Bentham is apparently the source of the views of Ayn Rand as well, though she herself  acknowledged no debt to any philosopher except Aristotle. There is really no difference between Rand's Objectivism, and Bentham's Utilitarianism: a society composed of rational individual seeking their own self-interest with no reference to other. The only acceptable limits being that one should not harm others in the process. Rand did take this to an extreme, e.g. describing altruism as slavery to the desires of others, but in essence she is spouting Bentham.

Regarding the decision making process I have written about this on my Buddhist blog in a post called Facts and Feelings. Decisions always involve emotions, since we experience the value of information as an emotional response to it. This is always true even in apparently rational people. Certain types of brain damage impair this ability and render the victim incapable of weighing up options (this is one of the subjects of Antonio Damasio's book Descartes' Error).

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Keep is seemly & on-topic. Thanks.