\t\t\t\tI have been reading a lot of psychology research in recent months which is a very broadening experience. Mainstream economists rarely include research from the wider social sciences. However, I have always been interested in finding out what other social scientists are up to and how their work bears on the human society that I have spent a career studying. At present, the neo-liberals are on the rise again and are driving governments to introduce harsh fiscal withdrawals using the supposition that this is fiscally responsible behaviour. Their position is unsupported by credible logic or empirical research. In fact, the overwhelming body of evidence rejects the theoretical models they parade to defend their positions. One of the under currents of their proposals is that by cutting public welfare payments and support governments can not only “save” money (and reduce their deficits) but also free the welfare space for private charity. They eulogise the benefits and virtue of private charity but demonise public support for disadvantage. So today I read an interesting article from some psychologists who have examined whether those with economic resources are generous or not. The results of their work are that the poor are more generous and compassionate than the rich. Another evidential flaw in the neo-liberal mantra that should worry all of us.
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As an aside, studies of disciplinary cross-citations in social sciences, show that economists rarely cite research from the other social sciences. That probably also means that they do not read the literature either.<\/p>\n
The abstract of a relatively recent (2002) study Pieters and Baumgartner (“Who Talks to Whom? Intra- and Interdisciplinary Communication of Economics Journals.” Journal of Economic Literature 40(2): 483-509) says in part:<\/p>\n
\nEconomics emerges as a significant source of interdisciplinary knowledge for the other social sciences and business. However, no area of economics appears to build substantially on insights from its sister disciplines.\n<\/p><\/blockquote>\n
I cannot link to the article (you need a library subscription) but Pieters and Baumgartner (2002) analysed citation patterns within economics and between economics and other social science disciplines. The found that 90 per cent of citations in economics is intradisciplinary and the top five-ranked economics journals (on citations) that they considered made no citations to other social sciences.<\/p>\n
There are several other studies you can find that support this conclusion. What it means is that economics is a very insular social science. It doesn’t even consider that psychology has anything to offer because, after all, humans are simply assumed to be rational, maximising decision-making units operating independently of others in pursuie of their self-interest. All mainstream analysis is ultimately derived from that conception of human psychology and motivation.<\/p>\n
The recent surge in what is known a behavioural economics which incorporates findings from psychology and other social science disciplines (anthropology, sociology, etc) has shown that individuals – in real life – do not follow the normative patterns assumed by mainstream economics.<\/p>\n
Human behaviour is decidedly irrational and driven by emotion and experience and is highly interdependent (we continually reference the behaviour of others).<\/p>\n
The choice-theoretic models that mainstream economists rely on for their conclusions all emphasise the importance of free choice. You can see this prejudice in the current claims that the recession is persisting because private investors and consumers are scared to act because they are being restricted in their choices by uncertainty over government policy.<\/p>\n
However, behavioural economics has shown that choice is often a hindrance to people in their decision-making. These insights and many more make the mainstream presumptions about human behaviour largely irrelevant to any serious discussion. You might like to read this Behavioural Economics FactSheet<\/a> or this blog<\/a> for more information.<\/p>\n
In the blog – The old line back to free market ideology still intact<\/a> – I covered the recent appearance on MSNBC’s Meet the Press<\/a> by Alan Greenspan.<\/p>\n
Greenspan was asked whether the US economy was going to get worse before it got better and he replied:<\/p>\n
\nMaybe, but not necessarily. I think we’re in a pause in a recovery, a modest recovery. But a pause in the modest recovery feels like quasi recession. Our problem, basically, is that we have a very distorted economy in the sense that there has been a significant recovery in a limited area of the economy amongst high-income individuals who have just had $800 billion added to their 401(k)s and are spending it and are carrying what consumption there is. Large banks, who are doing much better, and large corporations, whom you point out and the–and everyone’s pointing out, are in excellent shape. The rest of the economy, small business, small banks, and a very significant amount of the labor force, which is in tragic unemployment, long-term unemployment, that is pulling the economy apart. The average of those two is what we are looking at, but they are fundamentally two separate types of economy.\n<\/p><\/blockquote>\n
I don’t disagree with the assessment of who has gained from the fiscal stimulus packages. When you have as much unemployment as the US currently and rising long-term unemployment, you can be sure that the most disadvantaged workers and their families are not gaining from government intervention.<\/p>\n
But then should we care about that? One of the basic principles espoused by proponents of Modern Monetary Theory (MMT) is that the sovereign government should use its policy capacity to advance public purpose which embraces the concept of true full employment. Please read my blog – Modern Monetary Theory – a personal note<\/a> – for more discussion on this point.<\/p>\n
Some people will interpret the use of the intent “should” to mean this is a normative statement and doesn’t reflect any theoretical position. In one way that reflection has merit. MMT outlines a set of stock-flow consistent principles about the way modern monetary systems function and the choices and consequences that exist for government within such a monetary system.<\/p>\n
You do not have to accept any notion of public purpose (and full employment) to accept the superior insights that MMT provides us in relation to the operations of the monetary system.<\/p>\n
So you could advocate fiscal austerity now in the knowledge that the policy will probably cause unemployment and budget deficits – an outcome that you prefer (for some strange reason). But you would then have to sell that outcome and you would not be able to hide behind the cant that austerity will produce good short- to medium-term outcomes.<\/p>\n
However, the pursuit of public purpose is closely parallel to the findings drawn from behavioural economics that people do care about each other and see their outcomes (and happiness) as being interdependent on those of others. So if the government pursues public purpose it will be a consistent policy stance with other aims that we have of creating environments where people are able to reach their potential.<\/p>\n
In that sense we create efficient resource deployments and move beyond the massive waste that is embodied in maintaining persistently high rates of unemployment.<\/p>\n
One of the major agendas of the neo-liberal era has been to disabuse us of this care for others.<\/p>\n
Mainstream economists always try to claim the higher intellectual authority by saying they practise positive (objective) science which then allows normative (value-laden) positions to be overlaid and the consequences become transparent.<\/p>\n
The positive-normative distinction was never valid. All statements are value-laden. But the mainstream profession has provided all sorts of so-called positive models that purport to show that we get poor outcomes if we allow governments to intervene and provide support via fiscal policy to those in need.<\/p>\n
And so we get the austerity proponents designing policies that are hacking into welfare and pension entitlements and destroying millions of jobs. The claim is that the private sector will fill the spending gap left by the withdrawal of the public spending and create better outcomes overall.<\/p>\n
There are a range of so-called objective theoretical devices that are wheeled out to justify these claims. They have all been shown to be completely incapable of explaining or being consistent with empirical developments on several occasions in the past. Please read my blog – The old line back to free market ideology still intact<\/a> – for more discussion on this point.<\/p>\n
In effect, the austerity push is based on ideology – on the view that private markets will self-correct and if charity is required it will come from private citizens. The anathema to the austerians is public welfare and fiscal support for the disadvantaged.<\/p>\n
Proponents of austerity want private charity to replace welfare. There are several free market think tanks that have been pumping out this line for years. A representative example is this Cato Policy Report<\/a> from November\/December 1996.<\/p>\n
There is a long lineage to these ideas. Greenspan’s blind faith in the market was inspired by his mentor Ayn Rand. Would Greenspan care about the unemployment now? I doubt it.<\/p>\n
His intellectual mentor Ayn Rand delivered her famous speech – Faith and Force: The Destroyers of the Modern World<\/a> – on February 17, 1960 at Yale University, which has laid out the principles of those who want a withdrawal of government intervention in the economy.<\/p>\n
She set the tone by arguing that:<\/p>\n
\nAs to altruism — it has never been alive. It is the poison of death in the blood of Western civilization, and men survived it only to the extent to which they neither believed nor practiced it. But it has caught up with them — and that is the killer which they now have to face and to defeat. That is the basic choice they have to make. If any civilization is to survive, it is the morality of altruism that men have to reject …<\/p>\n
Make no mistake about it — and tell it to your Republican friends: capitalism and altruism cannot coexist in the same man or in the same society.<\/p>\n
Tell it to anyone who attempts to justify capitalism on the ground of the “public good” or the “general welfare” or “service to society” or the benefit it brings to the poor. All these things are true, but they are the by-products, the secondary consequences of capitalism — not its goal, purpose or moral justification. The moral justification of capitalism is man’s right to exist for his own sake, neither sacrificing himself to others nor sacrificing others to himself; it is the recognition that man — every man — is an end in himself, not a means to the ends of others, not a sacrificial animal serving anyone’s need.\n<\/p><\/blockquote>\n
You can read a Time Magazine account<\/a> of the speech which was published February 29, 1960.<\/p>\n
This argument essentially relies on the assumption that individuals can be strictly independent – that is, one of the basic assumptions adopted by mainstream economists. In the real world, we are all interdependent and it is hard to separate our actions from the impacts they have on others.<\/p>\n
My understanding is that the unemployed are being sacrificed at present by governments. Sovereign governments could immediately offer a minimum wage job to anyone who wanted it if they chose to. It is within their financial capacity as issuers of the currency to do so.<\/p>\n
The whole austerity argument is (erroneously) prefaced on the view that if governments were to provide this increased fiscal support “to help” the unemployed find jobs this would impact (via higher taxes) on others. The reasoning is of-course based on the flawed understanding that governments “have” to pay back deficits.<\/p>\n
So the lower expected future tax burdens are being “paid for” by the unemployed. Even if that conception was a reasonable one (which it isn’t) the costs being borne by each individual unemployed worker far outweigh the any “extra” tax burden on the working individual that these arguments ever conceive.<\/p>\n
Anyway, as I understand Rand’s position she is not against a private citizen casting a cent to an unemployed beggar in the street. She doesn’t want this institutionalised nor does she think we should feel differently about ourselves if we walk by the beggars and ignore them. The idea is that the state should not be doing anything to undermine our pursuit of self-interest.<\/p>\n
This view prevails in many influential quarters despite the behavioural economics studies undermining the concept of “self interest” as conceived by the mainstream economists.<\/p>\n
But I have been thinking about this in the context of the victims of the fiscal austerity initiatives that are now gathering pace around the world.<\/p>\n
MMT demonstrates that mass unemployment is the result of a systemic constraint (deficient aggregate demand) and the unemployed individual is largely powerless to improve their job prospects under such conditions. Please read my blog – What causes mass unemployment?<\/a> – for more discussion on this point.<\/p>\n
The question the austerity proponents have to answer (among many they have so far failed to answer) is whether they think private charity will step in and be able to stop people from falling into poverty as a result of the policies they are pursuing. The neo-liberals have long held out that the private generosity of those with resources is a far superior “welfare” safety net than a state run welfare system (much less public job creation).<\/p>\n