Saturday, November 3, 2012

Lars Syll — Wicksell’s critique of harmony economics

With the advent of neoclassical economics at the end of the 19th century a large amount of energy was invested in trying to formalize the stringent conditions of obtaining equilibrium and showing in what way the prices and quantities of free competition constituted some kind of social optimum.
That the equilibrium reached in free competition is an optimum for each individual – give prevailing prices and income distribution – was not, however, seen by some economists as making a very strong case for a free market economy per se. It was not possible to prove that free trade and competition gave a maximum of social utility. The gains made in exchange are not a manifestation of a maximum social utility.
Lars P. Syll's Blog
Wicksell’s critique of harmony economics
Lars P. Syll | Professor, Malmo University

There are several problems with the assumption that "free markets" achieve distribution of scarce goods in terms of maximum individual utility consistent with resource use. The first is that individuals are competent to choose for themselves in terms of maximum utility and also that the aggregate of individual utility is all there is to social utility, that is, that the system itself adds nothing of significance. 

Neither is true. Why? Human limitation, cultural factors and institutional arrangements supervene over individual choose and either shape it or even in many cases determine it.

Basically, methodological individualism overlooks the complex web of relationships in social systems, especially modern developed societies, i.e., nation states embedded in a complex web of relationships with other nation states. This results in the interplay of social, political, and economic factors that generate frameworks within which human intelligence, behavior, and interaction takes place. These frameworks determine what transpires within them by the boundary conditions they erect.

In addition, biological systems are complex adaptive systems subject to all the uncertainty that complexity involves due to emergence, and human systems also add the complicating factor of reflexivity. Humans have also been discovered to be non-rational beings due to the way that human brains function as integrated cognitive-volitional-affective processors of information in which the cognitive and affective are often at odds with each other, tugging in opposite directions on the volitional function. Even the cognitive function is not completely "rational" (predictable) owing to sectoral operations.

Therefore, there is no reason to expect that the operation of an invisible hand will be operative in the life and social science in any way similar to the function of "laws" in physical systems, where invariance can be stated in mathematical equations as functions relating independent and dependent variables.

As a matter of fact, such equations have not been written successfully in econometrics, and there is no reason to suspect that this is just a limitation that will be overcome with more knowledge. Existing knowledge of complexity indicates otherwise. There are many possible outcomes, some of which humans would regard as having social utility and others social disutility, since natural forces are brutally efficient.

Proponents of economic liberalism seem willing to accept the brutal efficiency of nature in the belief that they and their offspring will be among the survivors in social Darwinism. Proponents of social utility, on the other hand, believe that through the application of intelligence, humanity can increase its adaptability rate and rate of return on coordination faster than the rate of complexification.

One reason that proponents of social utility over social Darwinism believe this is because markets do not distinguish between needs and wants in allocation resources by price. But, as Abraham Maslow has observed, humans have a hierarchy of needs but a constellation of wants. That is to say, needs are prioritized based on necessity for life and living well, whereas wants are not. Markets make no such distinction. 

Humanity faces a growing challenge of increasing global climate change, polluted air, polluted water that his short in supply, poisoned food, and maldistribution of food, just to name some of the bottom rungs on Maslow's hierarchy of needs. 

The question is how best to address these conditions. Inquiring minds would like to know, is it by bringing human intelligence to bear on social utility by seeking to increase the adaptive rate, or it is by freeing the market to decide supposedly optimal allocation of scarce resources? Or are there other options?

Finally, in considering Pareto optimality, Amartya Sen (as I recall) bids us remember that freeing the slaves after the US Civil War was not Pareto optimal from the slave-owners point of view. Neither is social utility from the point of view of the global ownership class and national elites. Perhaps that has something to do with their preference for "market solutions."


Ryan Harris said...

The invisible hand effect distribution of scarce goods might be overstated by orthodoxy but government deficit spending to manage AD should prevent some business and investment failures to marginally inefficient firms. It might also make people accept lower quality goods because they didn't have to work as hard to get them.

But doesn't MMT argue that eliminating the output gap more than compensates for the slight decrease in productivity?

In a decade or two from now comparing modern Europe where they have a system designed on almost pure invisible hand forces vs the United States, Japan or UK where we have MMT style systems should answer the question.

Tom Hickey said...

The "invisible hand" works for the beneficiaries of the system in institutionally based systems like modern developed states. So "What's good for America" is not necessarily good for Americans in general. That is to say, the invisible hand does not consider social utility or fairness in individual utility. As a result, economic liberalism is socially unstable and politically volatile unless maintained by force.

Matt Franko said...

"institutional arrangements supervene over individual choose and either shape it or even in many cases determine it."

Right how can a mainstream concept as basic as "supply and demand" even be considered operative if institutional arrangements of the monetary system prevent many market participants access to settlement balances required by law to facilitate "demand"....