Download Scarcity and the Moral Foundations of Economics

The Ethical and Political Foundations of Scarcity
Asad Zaman
September 2009
Abstract
Since Robbins (1932) influential essay on the methodology of economics,
scarcity has been taken as the fundamental economic problem. We will argue that this is
based on a tacit assumption of primacy of property rights. We illustrate how differing
ethical commitments on part of a society lead to differing formulations of the
fundamental economic problem.
1. Introduction:
Foucault’s research reveals that “modern human sciences (biological, psychological,
social) purport to offer universal scientific truths about human nature that are, in fact,
often mere expressions of ethical and political commitments of a particular society.”1
Lionel Robbins (1932) argued the economics was not about “material welfare”: the
provision of goods to further prosperity and development” but rather, it was about
“scarcity”: the provision of goods to fulfill all wants, whether conducive to welfare or
not. His arguments came to dominate the field, and drove earlier conceptions out of
sight; see Cooter and Rapapport (1984) for details. Nearly all modern conventional
textbooks use scarcity as the fundamental defining problem of economics. Here is a
sample of quotes:
1

Scarcity means that available resources are insufficient to satisfy all wants and needs. Absent
scarcity and alternative uses of available resources, there is no economic problem

Economics is the study of choices consumers, business managers, and government offical make to
attain their goals, given their scarce resources.

Economics is the study of how people make choices under conditions of scarcity and the results of
those choices for society.

Economics is the study of how society manages its scarce resources

Goods are limited while wants seem limitless. Even after two centuries of rapid economic growth,
production in the United States is simply not high enough to meet everyone’s desires. [Samuelson
and Nordhaus].
This is a paraphrase of the entry for Michel Foucault in Stanford Encyclopaedia of Philosophy (accessed
23 February 2008): http://plato.stanford.edu/entries/foucault/; it has since been revised, but because it so
aptly describes our main theme in this paper, we have retained the quote.
Our goal in this paper is to bring out the ethical and political commitments that underlie
the apparently objective and value-neutral idea of scarcity. These background
commitments have been hidden in the framework in which problems are formulated. For
example, Raiklin and Uyar (1996) write that ignoring the needs/wants distinction basic to
the material welfare view permits economists to keep moral and social implications out
of economic theory and analysis.
2. Modern Economics as “Knowledge”
Economic theory is presented as factual knowledge: objective, value-free, and based on
data and observations. Modern textbooks claim that economics ‘deals with factual
statements,’ echoing Friedman who said that economics is ‘an objective science, in
precisely the same sense as any of the physical sciences.’ Deeper examination leads to a
puzzle: the basic economic theory presented as “indisputable facts of experience2” turns
out to be false. Large numbers of experiments and observations of consumer behavior
show that this behavior is not compatible with elementary models of utility maximization
exposited in standard textbooks. Similar observations of firm behavior show that this is
not compatible with profit maximization. All the rest of a substantial and sophisticated
structure of theories rests on the foundations of these two assumptions, which can be
easily proven to be false by observing consumer and firm behavior in the real world.
Astronomy emerged as a result of observing the motion of the stars. Irregular motion of
planets led to the hypothesis of the seven spheres containing the stars, each of which
independently rotate around the earth. Observations conflicting with this picture led to
creation of more complex theories. The object of such theories was to create a better
match between observations and theoretical predictions. Similarly, in all of the physical
sciences, theories are generated to provide systematic explanations for a collection of
observations. Discordant observations lead to attempts to modify theories to create a
better match. On the basis of this, one might expect that the theory of firms and
consumers is based on some data regarding the behavior of consumers and firms.
Studying the history of the development of economic theories, we are surprised to learn
that these did not emerge as a result of attempting to match increasing collections of
observations about consumer and firm behavior. Indeed, the opposite is true. An earlier
methodology of economics, based on historical observations, was defeated in
Methodenstreit (“The battle of the methods,” see Chapter 7 of Manicas (1984)). The
alternative methodology characterized as abstract, deductivist and theoretical emerged
and continues to dominate the discipline. The key issue to note here is that the victory of
this new methodology was not because of its ability to provide a closer match to observed
behavior. Rather it was a claim that you can only get to universal laws by abstracting
away from particulars of historical experience. In How Economics Forgot History,
Hodgson (2002) has argued that economic theories must take historical context into
account, and cannot be presented in the form of universal truths, as they currently are.
2
This phrase is used by Robbins (1932), but similar assertions that economic theory is purely factual can be
found in most economics textbooks.
There exists a huge amount of empirical evidence and observations directly in conflict
with the fundamental assumptions of utility and profit maximization which are the basis
of neoclassical economics. For example, Ariely (2008) and Thaler (1994) document how
consumer behavior deviates systematically from utility maximization. Bergmann (2007)
documents how economic theorists writing about firm behavior have never actually
observed how businessmen running these firms think and behave. She writes that “A
knowledge of business behavior based on observation rather than mere conjecture could
revolutionize the formulation of public policy and the managing of the business cycle.”
Similarly, Sugden (2004) writes that “Over the last 20 years, there has been an
accumulation of evidence that the behavior of real human decision makers deviates
systematically from the predictions of conventional choice theory.”
The reaction of economists to these demonstrations of the conflict between
economic theories and observed behavior is even more surprising. There is no attempt to
gather empirical evidence in favor of economic theories. There are no attempts to
quantify the discrepancies, or to develop or modify theories in response to these
discrepancies. Textbooks ranging from elementary to advanced make no mention of the
existence of such (well documented) discrepancies between the theories discussed and
the observations on consumer and firm behavior. The refusal of economists to allow
observations of actual behavior into their theory led to the emergence of “behavioral
economics” as a separate field of study. Camerer (2003) writes that “The eventual goal is
for game theorists to accept behavioral game theory as useful and necessary.” As the
word “eventual” suggest, the gap between the theoretical methodology of economics and
direct observations of behavior is so large that Camerer does not see any hope of
reconciliation between the two in the near future. Furthermore, at the moment,
economists do not view observations of actual behavior of economic agents as either
useful or necessary.
If economic theory does not attempt to describe observed behavior, and does not
respond to reported conflicts between observed behavior and theory, then what is it?
Several researchers (including Foucault) analyzed similar questions which arise in many
areas of the social sciences. These researchers found that analyzing the history of ideas
led to deep insights about the nature of knowledge. The naïve idea that the body of
knowledge in social sciences is (or attempts to be) factual and objective leads one to deemphasize history. The only thing which matters is how accurate theories are in their
description of facts. Analysis of how these theories emerged within a historical context
shows clearly the dependence of these theories on political structures and the relative
power of different segments of society.
Such an analysis has been termed the “archeology of knowledge” by Foucault,
because it involves digging underneath surface appearances to get to the hidden
foundations upon which the structures of knowledge have been constructed. This method
is suited to our present investigation, which seeks to uncover the ethical and political
commitments underlying the apparently objective and factual economic theory. In the
next section we briefly consider aspects of European history which shaped modern
economic theory in crucial ways.
3. Archeology of Secular Social Sciences
Social science is a study of human experience. Such a study would naturally be
conditioned by history. Many authors have studied how the history of Europe has
impacted on the development of social sciences. Mitchell (2002, p. 7) writes that “The
possibility of social science is based upon taking certain historical experiences of the
West as the template for a universal knowledge.” Manicas (1989) has given a detailed
treatment of the development of social sciences, and how they have been affected by
historical developments in Europe. Karl Polanyi (1944) has given a brilliant analysis of
how specific events in England shaped the development of economic theory:
“in the case of the economists it was singularly unfortunate as their whole theoretical
system was erected during this spate of “abnormalcy,” when a tremendous rise in trade
and production happened to be accompanied by an enormous increase in human misery –
in effect, the apparent facts on which the principles of Malthus, Ricardo and James Mill
were grounded reflected merely paradoxical tendencies prevailing during a sharply
defined period of transition.”
Polanyi argues that specific historical events in England have affected and distorted the
development of economic theories in the west. From the vast literature on the history of
ideas, we provide a thumbnail sketch of a few issues which have direct bearing on the
emergence of scarcity as the fundamental defining problem of economics. It should be
obvious that we cannot do justice to the complexities involved in a few paragraphs.
3.1 Corruption of the Popes:
The roots of changes which eventually led to the development of modern
economic theory go back to the corruption of the popes in the sixteenth century. Even
though it is not well known, and often considered as unimportant, Barbara Tuchman has
correctly evaluated the event as being the most consequential in Western history:
"... succession of six popes (exemplified the secular spirit of the age by) an excess of
venality, amorality, avarice, and ... calamitous power politics. Theirs was a folly of
perversity, perhaps the most consequential in Western history ...". [italics mine]
Widespread discontent with the Catholic Church set the stage for the success of the revolt
led by Martin Luther. The shattering of the unity of the Church led to development of
many different sects and factions. The intolerance of these sects for each other, and
battles, carnage, oppression and injustice, all carried out in the name of Christianity,
convinced Europeans that religion could not serve as a basis for ordering a society. Even
religious leaders realized that social harmony required principles which could be agreed
to by all members of the society without invoking controversial and conflicting religious
principles. This was the main motive force for the development of secular thinking in
Europe.
3.2 Search for Secular Basis for Society
One of the central problems faced by secular thinkers was to find a suitable nonreligious basis for morals. It was clear to all that unconstrained pursuit of self-interest,
allowing humans to do whatever they pleased, would destroy society. As Hobbes put it,
“Life would be nasty, brutish and short.” Many of the great minds of Europe engaged
with this problem, as it was a pressing need. For example, “The Theory of Moral
Sentiments,” by Adam Smith, and “A Treatise of Human Nature,” by David Hume (and
many other works not cited) seek to provide secular foundations for a theory of morals.
Hobbes was of the view that in absence of religion, constraints to minimize harm to
society from the selfish actions of men were necessary. Furthermore, these constraints
could only be enforced by a gigantic and enormously powerful state, which he termed the
“Leviathan.” Other thinkers found this solution un-appetizing, and ranged themselves
along different positions on the spectrum from complete anarchy (Rousseau),
intermediate positions (Locke), to the complete control of Hobbes. The key issue was
how to organize society in absence of universally agreed upon social rules and moral
principles provided by a common religion. Tawney (1930) has described the emergence
of modern political theory in Europe as follows:
… the secularization of political theory (was) the most momentous of the
intellectual changes which ushered in the modern world. It was not the less revolutionary
because it was only gradually that its full consequences became apparent, so that seeds
which were sown before the Reformation yielded their fruit in England only after the
Civil War. The political aspects of the transformation are familiar. The theological mould
which shaped political theory from the Middle Ages to the seventeenth century is broken;
politics becomes a science, ultimately a group of sciences, and theology at best one
science among others. Reason takes the place of revelation, and the criterion of political
institutions is expediency, not religious authority. Religion, ceasing to be the masterinterest of mankind, dwindles into a department of life with boundaries which it is
extravagant to overstep.
Since economic issues inevitably involve moral judgments, early discussions were
“saturated with doctrines from ethics and religions.” Tawney (1934) writes that “in the
England of the early seventeenth century, to discuss questions of economic organization
purely in terms of pecuniary profit and loss still wears an air of not quite reputable
cynicism.” Over the next two centuries, transition to secular thinking led to treating
“economic phenomena, not as a casuist, concerned to distinguish right from wrong, but as
a scientist, applying a new calculus to impersonal economic forces.”
Along the same lines, transition from religious to a secular basis for society requires
theories which govern social relations. Many philosophers invented the idea of a “social
contract” as an explicit or implicit agreement among all members of a society to live by
certain rules. Individuals sacrifice a certain amount of freedom (personal liberty to do as
they please) in order receive benefits of social order through the rule of law. Social
contract theory formed a central pillar in the historically important notion that legitimate
state authority must be derived from the consent of the governed. The emergence of these
secular theories of society and state form the background framework upon which
economic theory was built.
3.3 The “Deification” of Science
The European rejection of religion as a basis for organizing society had profound
ramifications over all domains of thought. Since widespread consensus was obviously not
a guarantee of truth, leading intellectuals thought about how to get to trustworthy sources
of knowledge. Scientific knowledge was to take the place of sacred knowledge, and an
intensive effort on many fronts was made to establish the superiority, objectivity, and
certainty of scientific knowledge, and to distinguish it from other forms of knowledge;
Olson (1990) has called this the “deification of Science.” The commonsense idea that
economic theory must be built on the particulars of human experience was vigorously
denied, in favour of the search for universal laws, similar to those of science:
The vulgar notion that the safe methods on political subjects are those of Baconian
induction—that the true guide is not general reasoning but specific experience—will one
day be quoted as among the most unequivocal marks of a low state of the speculative
faculties of any age in which it is accredited. . . . Whoever makes use of an argument of
this kind . . . should be sent back to learn the elements of some one of the more easy
physical sciences. Such reasoners ignore the fact of Plurality of Causes in the very case
which affords the most signal example of it" (John Stuart Mill, Logic, chapter 8.,
paragraph 8).
Mirowski (1991) has documented how the prestige of Physics led economists to
self-consciously imitate the methodology of Physics:
… the progenitors of neoclassical economic theory boldly copied reigning physical
theories in the 1870’s. The further one digs, the greater the realization that those
neoclassicals did not imitate physics in a desultory or superficial manner; no, they copied
their models mostly term for term and symbol for symbol, and said so. (…) I was
staggered by the enormity of it. What did it mean to say that the economic theory … was
essential a simulacrum of the physics of the mid-nineteenth century?
For our present purposes, the point to note is that the development of current
methodology of economics was driven by the desire to emulate physics, rather than a
desire to model the complexities of human behavior in the economic realm. McCloskey
(1984) has discussed how Samuelson has used mathematics to impress and appear
authoritative, and not because it adds any depth to the economic argument. Nobel
Laureate Paul Krugman (2009) writes that “As I see it, the economics profession went
astray because economists, as a group, mistook beauty, clad in impressive-looking
mathematics, for truth.”
Developments in measurement have been so crucial to the advance of physical
sciences that Lord Kelvin was led to proclaim that when you cannot measure, you do not
really know what you are talking about, and when you can, you do. A history of this idea,
labeled the “quantitative imperative,” has been ably traced by Michell (2003). Attempts
to incorporate this methodological imperative into the framework of economic theory
have been extremely harmful, as we shall demonstrate later. Many of the concepts of
central importance to framing and evaluation of economic policies are qualitative and not
quantitative. An imitative methodology which focuses on the measurable and ignores
what cannot be measured throws out the baby with the bathwater, as many recent lines of
research have revealed.
3.4 Logical Positivism and the Elimination of Values
The emergence of scientific knowledge in conflict with, and as a rival to,
religious knowledge, led to a study of the “demarcation problem” – how to differentiate
(and prove the superiority of) scientific knowledge from other types of knowledge. This
program reached a highly successful culmination with the emergence of the philosophy
of logical positivism in the early twentieth century. Here “successful” means that the
philosophy was overwhelmingly accepted by western intellectuals for a large part of the
twentieth century, not that it was correct. Indeed, subsequent investigations revealed so
many difficulties that even its main proponents were forced admit3 that it was nearly “all
wrong”. For example, Van Fraassen (1980, p. 2) writes: “Logical positivism, … even if
one is quite charitable … had a rather spectacular crash.”
According to the positivist philosophy, scientific statements were based on
observations and logical deductions from them. Statements which could not be verified or
disconfirmed by observations were meaningless. In particular, values, ethics and moral
judgements were not scientific, and in effect meaningless, except as an expression of an
emotional attachment. This effectively relegated a huge portion of existing knowledge,
which included religious knowledge, to the dustbin. Julie Reuben (1996) writes that:
In the late nineteenth century, intellectuals assumed that truth had spiritual, moral and
cognitive dimensions. By 1930, however, intellectuals had abandoned this broad
conception of truth. They embraced, instead, a view of knowledge that drew a sharp
distinction between “facts” and “values”. They associated cognitive truth with
empirically verified knowledge and maintained that by this standard, moral values could
not be validated as “true.” In the nomenclature of the twentieth century, only “science”
constituted true knowledge. Moral or spiritual values could be “true” in an emotional or
nonliteral sense, but not in terms of cognitively verifiable knowledge. The term “truth”
no longer comfortably encompassed factual knowledge and moral values.
Economists who accepted this idea, and this was (and continues to be) the vast
majority, were forced to conclude that value judgements could not be part of the science
of economics. This means that we cannot say, in our capacity as professional economists,
that “we should help the poor.” As scientists, our job is to show that objective effects of
policies, and leave judgements as to whether these effects are good or bad to policy
makers. Even though positivism has had a “spectacular crash,” and Putnam (2002) has
discussed the collapse of the Fact/Value distinction, economists continue to be faithful to
this dead religion. While a few (for example, Weston 1994, Wilbur 2003) have argued
that economics cannot be value-free, these papers are not published, cited, or referenced
in the mainstream economics journals. So the attempt to keep economics “scientific” and
Ayer himself in later life is supposed to have remarked about Language, Truth, and Logic that it was “all
wrong” – http://www.newworldencyclopedia.org/entry/A.J._Ayer Accessed 25 Sep 2009.
3
“value free” has merely meant that values have been buried out of sight in the
methodology. We will try to dig these values out from underneath the foundations of
scarcity.
4.The Three Pillars of Scarcity
We will show that the elevation of scarcity to a fundamental principle of economics rests
on three pillars which have been buried under the surface. The first of these is
commitment to private property; note that this is a political decision of a society, and not
a fact of nature. The second is the idea of consumer sovereignty, which is a
methodological decision not to investigate the formation of tastes. This defines the task of
the economist to be the fulfillment of wants/desires of a society, without asking questions
about where these wants/desires originate. This is a normative decision: we are defining
what a economist should do, and textbooks argue that this is the proper role of an
economist. It is clear that many people with different values could disagree with this
norm and argue that they do not wish to fulfill idle whims/desires of the society. The
third pillar is a decision not to compare utilities across individuals. Ruling out
interpersonal comparisons of utilities makes it impossible to argue that providing bread to
the hungry has higher priority than providing a yacht to the millionaire. The rather
obvious value judgment involved is presented as a scientific necessity.
4.1 Locke’s Theories of Property
Philosopher John Locke was among the leading architects of modern thought. Locke’s
theories of property are his most important contribution to political thought. Variants of
these theories continue to provide the philosophical basis for capitalist economies to this
day. One of the key ideas is that private property exists as a natural right of human beings
prior to the formation of governments. Furthermore, legitimate governments are created
by mutual consent of citizens so as to protect the natural rights of the citizens.


"Life, liberty, and property do not exist because men have made laws. On the contrary, it was the
fact that life, liberty, and property existed beforehand that caused men to make laws in the first
place." (Frédéric Bastiat, The Law)
"The reason why men enter into society is the preservation of their property." (John Locke, Second
Treatise on Civil Government)
One of the main goals of secular thought is to allow different people with different
religions to coexist peacefully under a common rule of law. An essential ingredient in
achieving this goal is the idea of individual freedom. To make room for diverse religious
rules, we allow for maximum possible freedom compatible with a social order. Thus the
social contract in general is not subject to a priori constraints. Any set of rules that all
people agree to will serve. So this move of providing privilege to property so that it is not
subject to the social contract is a bit odd. When we negotiate among ourselves to create
common rules to live by, we may not discuss the idea of private property. Locke writes
that those entering into a social contract cannot intend to “ give any one or more an
absolute arbitrary power over their persons and estates, and put a force into the
magistrate's hand to execute his unlimited will arbitrarily upon them.” Locke requires
both "persons and estates" to be protected from the arbitrary power of any magistrate,
inclusive of the "power and will of a legislator." Depredations against an estate are just as
plausible a justification for resistance and revolution as are those against persons.
Why did Locke’s theory of property emerge as the dominant one in England, eventually
removing all alternatives from view? History provides important clues. Battles among
monarchs were common, and taking property from the losers and awarding them to
supporters was extremely common. Cromwell’s rebellion was a watershed event in
British history. Even though monarchy was eventually restored, the power of the landed
aristocracy against the monarchs was firmly established and continued to increase after
this time. Secure property rights for the aristocrats, not subject to the arbitrary will of
monarchs, supported this power configuration and therefore emerged as the dominant
theory. This political commitment to private property is an essential ingredient in the
emergence of scarcity as a central economic problem of a society.
4.2 Consumer Sovereignty.
It is a methodological decision on part of economists not to analyze tastes. For example, a
leading textbook states that economists
must reckon with consumer wants and needs whether they are genuine or contrived.
Shakespeare’s King Lear said, “Reason not the need” – and economists do not; rather
they analyze how limited goods get rationed among whatever wants a society generates
(Samuelson and Nordhaus, 1989, p. 26).
Similarly, Lerner (1971) writes that:
In a rich society like ours, only a very tiny part of what people want is determined by
their physical and chemical makeup. Almost all needs and desires are built on
observation and imitation. As a social critic, I may try to change some desires to others of
which I approve more, but as an economist I must be concerned with the mechanisms for
getting people what they want, no matter how these wants were acquired.
Similarly, Stigler and Becker (1977) write:
The venerable admonition not to quarrel over tastes is commonly interpreted as advice to
terminate a dispute when it has been resolved into a difference of tastes, presumably
because there is no further room for rational persuasion. Tastes are the unchallengeable
axioms of a man's behavior: he may properly (usefully) be criticized for inefficiency in
satisfying his desires, but the desires themselves are data. Deplorable tastes —say, for
arson—may be countered by coercive and punitive action, but these deplorable tastes, at
least when held by an adult, are not capable of being changed by persuasion.
The determination of how tastes and wants are determined is considered to be
outside the discipline boundaries of economics. Stigler and Becker (1977) write that “On
the traditional view an explanation of economic phenomena that reaches a difference in tastes between
people or times is the terminus of the argument: the problem is abandoned (at this point to whoever studies
and explains tastes {psychologists? anthropologists? phrenologists? sociobiologists?).”
Note the clearly normative tenor of the second statement: economists must
concern themselves with satisfying wants, and must not get involved with trying to
change desires. The first statement is equally normative, but the norm has been hidden
behind a definition: this is what economist do and this is what they do not do.
There are several reasons, to be discussed in detail later, why it is of crucial
importance to consider how tastes are formed. One of these is that we need to be able to
distinguish between needs and wants. While it is reasonable to be concerned about
fulfilling needs of all people, why should we be concerned with, or regard it as our duty
to fulfill idle desires of all the populace? This does not seem like a value judgement that
all will subscribe to.
How did this methodology get adopted into the framework of economics? The
attempt to quantify economic concepts, to bring the discipline under the umbrella of the
sciences, led economists to feel embarrassed about “cardinal utility,” which was a direct
attempt to measure how consumption impacts on human welfare. No satisfactory
measures for this could be devised, leading to uneasiness about the non-scientific
foundations of economic theory. Therefore the Hicks-Allen reformulation of utility
theory, which showed how all relevant economic concepts could be formulated using
ordinal utility was hailed as a “revolution.” The fact that something very important was
lost in the process of this revolution, has been pointed out by Cooter and Rapaport(1984):
The intuitive idea of scientific progress is that new theories are discovered that
explain more than old theories. We shall contend that the ordinalist revolution was not
scientific progress in this sense. For example, the older school was concerned with
economic policies to bring about income redistribution and alleviate poverty, and the
ordinalists did not offer a more general theory for solving these problems. Instead, the
trick that carried the day for the ordinalists was to argue that the questions asked by the
older school, and the answers which they gave, were meaningless.
Even ordinal utility is based on unobserved internal states of satisfaction, and
Samuelson’s ‘revealed preference’ theory attempted to replace these by the observable
choices made by consumers. Wong (2005) has shown that this program is a failure. The
only thing which guarantees the stability of these observed choices is the existence of the
underlying preferences.
4.3 No Interpersonal Utility Comparisons
As Putnam (2002) puts it, ‘it was during the depths of the Depression that Lionel
Robbins, certainly one of the most influential economists in the world, persuaded the
entire economics profession that interpersonal comparisons of utility are “meaningless.”
Since this crucial moral judgment which underlies the scarcity criterion, was also
formulated and popularized by Robbins, we quote Robbins on the issue below:
To state that A's preference stands above B's in order of importance is entirely difíerent
from stating that A prefers n to m and B prefers n and m in a difíerent order. It involves
an element of conventional valuation. Hence it is essentially normative. It has no place in
pure science.
As the above passage makes clear, the prohibition of interpersonal utility comparisons
was based on the facts/values distinction, and the idea that values were not scientific.
Cooter and Rapaport (1984) write how the proclaimed progress of economics towards
science put out of bounds questions which were considered crucial before:
The following is a partial list of questions that material welfare economists claimed to
answer and ordinalists claimed were unanswerable by economics: Is a dollar more
valuable to the average poor person than to the average rich person? Should economists
give different weight to additional income for the rich and poor when doing cost-benefit
analy- sis? Does a hungry person need food more than a bored person needs theater
tickets? If income is re-distributed to the poor, with no change in total income, does
national welfare go up or down? Is there an economic justification for progressive
income tax schemes?
Instead of providing better solutions, the “trick” which carried the day was to put some
crucial questions out of bounds of economic theory. In fact there are several objective
ways to make interpersonal comparison on the “material welfare” grounds which were
abandoned as unscientific. For example, we could consider an interpersonal transfer of
goods to improve social welfare if there would be no adverse impact on health and
longevity of anyone, while improving life expectancies for some. Under this objective
and measurable criterion, one could advocate transfers to eliminate starvation and
malnutrition without being accused of making “unscientific” and purely normative
statements. More detailed and analytical analysis of scientific bases for making (a limited
number of) interpersonal comparisons, and how this possibility radically alters welfare
theory results, is discussed by Sen (1999).
5. The Ethical and Political Commitments of Scarcity
Having exposed three background assumptions of conventional economic theory,
we are now in a position to discuss the values embodied in taking scarcity as the
fundamental defining problem of economic theory.
5.1 The commitment to private property
The institution of private property is taken as an institutional background feature,
and does not receive any discussion in economics textbooks. Neoclassical models
describe an abstract economy where all agents possess certain endowments. How they
came into possession of these endowments, and whether the society can pool resources to
solve economic problems does not receive any discussion. This can be taken as a political
commitment to capitalist institutions as well as a background assumption about the
necessity of private property for capitalism. In any case, it is clear that this is not a fact of
nature, but a collective decision on part of a society. There are many reasons to believe
that this commitment is responsible for the emergence of scarcity as a fundamental
economic problem. We can clarify this by considering alternative approaches to property.
A vivid example is furnished by communism, which assumes collective
ownership of all productive assents. While there is substantial literature about the
inefficiencies and disincentives in production created by collective property, it is also true
that there was no starvation in Communist Russia. Farkas (2001) documents how the IMF
encouraged transition to capitalism via “shock treatment” led to a fall of about 50% in
production and the large scale creation of poverty, hunger and starvation, together with
vastly enriched individuals within the Russian population.
As a thought experiment based on the communist model, consider a society which
makes a commitment to approximate equality of possessions, or property. Suppose this
commitment is strong enough that it is not subject to consideration or debate. It is very
likely that the problem of scarcity would not be a serious one in such a society. On the
one hand, it is well understood that enough production surplus exists that basic needs for
all are easily satisfied. Anthropologists have remarked that there is no hunger in
subsistence economies. On the other hand, numerous sources testify to the idea that wants
are socially generated by the pressure to keep up with the Joneses. Roughly equal
division of property should eliminate this second source of scarcity as well. The Russian
experience shows that collective property created serious problems in terms of providing
incentives for work. It is easily conceivable that economists in such a society would
formulate the central problem of economics as one of provision of suitable incentives to
workers. The efficiency wage literature has produced a lot of research on non-monetary
incentives for work (like gift exchange), and these could well be a central focus in such
an economy.
While societies with mostly communal property have existed in the past, a more
realistic modern day example is that of a society with an ethical commitment to provide
for health, education and housing for all of its citizens. If this right is seen as taking
priority over private property, priorities of different types of economic problems would
change, and scarcity would not be the central problem for such economies. Canada, UK,
and Europe have substantially greater commitment to provision of basic needs, and
accordingly provide health, education, housing and minimal income outside the ambit of
the market – eliminating scarcity in certain crucial dimensions. A substantially stronger
commitment to private property in the USA led to a situation where over 10% of the
population, more than 25 million people, experienced hunger (“food insecurity”) in 2007.
This cannot be attributed to “scarcity” or lack of resources, but rather to differing ethical
commitments of the society.
5.2 The Moral Imperative to be Scientific.
A “scientific” commitment to ordinal utility prevents economists from looking at
the intensities of preference, and from distinguishing between needs and wants. There is a
paradox here: the vigorously argued norm or moral commandment that “thou must be
scientific” is itself not scientific. Viewed through the distorting lens of the (then)
dominant positivist philosophy, this does not appear paradoxical. Being scientific is
merely being concerned with facts (instead of opinions) and is more a matter of definition
than of a normative decision. Deeper analysis of these decisions to define certain types of
problems out of existence leads to the ‘collapse of the fact/value distinction’ as discussed
by Putnam (2002). Taking needs and wants into accounts leads to a substantially
different view of the problem of scarcity. Before we turn to this, we consider two
different critiques of the transition from cardinal to ordinal utility, which obliterated the
needs/wants distinction in economic theory.
Cooter and Rapaport (1984) argue that the transition to ordinal utility does not
represent scientific progress since important questions were defined to be meaningless
and removed from the scope of economic theory in the process. There are in fact
observable differences between needs and wants, as the earlier school of thought based
on “material welfare” maintained. While intensity of preference may not be measurable,
there are many measurable indicators for needs. Recently developed literature on basic
needs uses many observable and objective criteria based on nutrition, longevity, as well
as access to basic health and education, as defining variables for basic needs. The idea
that one cannot “scientifically” distinguish between needs and wants is not sustainable.
A deeper objection can be formulated as follows. Some more recently developed
criteria for economic progress rely on qualitative and unmeasurable variables such as
trust, freedom, opportunities, social capital, capabilities, etc. Does a commitment to be
scientific mean that we must ignore all such variables in economic theory? In fact this
was the major error which eventually led to the downfall of logical positivism. The
positivists maintained that all unobservables could be redefined in terms of observables –
if not, then they must be meaningless. Extensive research and attempts to accomplish this
goal of replacing all references to unobservables by observables in scientific theories led
to failure, and the realization that this could not be done. While many other social
sciences have adjusted their methodologies in the light of this understanding, economists
have yet to come to terms with the failure of logical positivism as a philosophy of
science.
5.3 Distinguishing Needs and Wants
There is substantial empirical evidence that both globally, and also at national
levels, scarcity does not exist with reference to basic needs. That is, there are enough
resources to feed, clothe, house, educate and provide basic health care for all. The
problem lies in what Amartya Sen has called “entitlements”. The society does not
consider the poor to be entitled to food unless they can sell their labor in return for it. An
ethical commitment that everyone in the society is entitled to basic needs, and that this
entitlement takes precedence over the right to private property, would eliminate scarcity
at the level of basic needs as an economic problem. This again illustrates the main theme
of our paper: unstated ethical commitments lead to the emergence of an apparently
objective and value free criterion like scarcity as the fundamental defining problem of
economics.
Next consider “wants”. Again there is consensus that these are unlimited. As you
satisfy them, more and more crop up for a number of different reasons. One simple
reason is that “keeping up with the Joneses” is a powerful social urge. In any society with
income inequalities, the poorer will forever be striving to keep up. The conspicuous
consumption analyzed by Veblen adds fuel to this engine for generating scarcity. Gintis
(1972) describes Galbraith’s views on how powerful corporations manipulate and
generate consumer preferences to sell their products:
Similarly, citizen sovereignty fails to hold, because of the inordinate political power of
these corporate technostructures in directing public policy toward their own ends. In
addition, technostructures employ persuasive advertising and other forms of psychic
manipulation to mold preferences in furthering their internal goals. Thus consumer and
citizen sovereignty fail as desirable welfare criteria, in that individuals are impelled to
choose what is not in their own interest.
If tastes are formed as per Galbraith, then a decision not to analyze them would serve
corporate needs, and not the society as a whole. Alternatively, if wants are primarily
driven by externalities, the need to keep up with the rest, this has radical implications for
welfare theory. Imposing certain types of bans on production of goods could easily
improve welfare of the society by preventing it from a futile rat race where everybody
spends a lot of effort trying to increase his private income, and ends up at the same utility
level because the average income for the whole society increases. The effectiveness of
economic policy as means to fulfill wants depends crucially on how these tastes are
formed. Given that, as Samuelson and Nordhaus remark, two centuries of rapid growth
have failed to satisfy all wants, perhaps we should look elsewhere to the solution of the
problem of scarcity relative to wants.
We illustrate how alternative ethical commitments lead to an entirely different
perspective on the economic problem by describing Islamic views on this issue. The
unlimited nature of wants is acknowledged in the following narration from the
universally accepted Islamic source text Al-Bukhari: Volume 8, Book 76, Number 447:
Narrated Anas bin Malik: Allah's Apostle said, "If Adam's son had a valley full of gold, he would like
to have two valleys, for nothing fills his mouth except dust (of the grave). …"
However, Islam seeks a solution to this in limiting wants, instead of expanding
production. Ethical principles to limit wants are formulated along several dimensions.
Firstly Islam distinguishes clearly between needs and idle desires, and encourages
fulfillment of needs while discouraging fulfillment of desires. Needs are broadly defined
to include beautiful clothes, but there is admonition to not exceed limits in the following
verse from the Quran:
Q7:31 O Children of Adam! wear your beautiful apparel at every time and place of prayer:
eat and drink: But waste not by excess, for Allah loveth not the wasters.
Those who refrain from the fulfillment of idle desires are promised Paradise in return:
Q79:40 But unto him who shall have stood in fear of his Sustainer's Presence, and held back
his inner self from idle desires, Paradise will truly be the goal!
There is also a complementary set of principles for the poor to avoid envying the rich,
and for the rich to act in such ways as to not incite envy of the poor. In particular
conspicuous consumption, undertaken specifically for making others envious, is
prohibited by Islamic law.
As Samuleson and Nordhaus formulate the problem, wants are unlimited while
goods are limited. When this problem is formulated as one of scarcity, on focuses on
increasing the production of goods as a means of solving the problem. However an
alternative ethical perspective suggests that the problem can be solved by limiting wants.
The economists decision not to analyze wants leads him to ignore this possibility. This
reflects an ethical commitment of a secular society, which seeks to allow maximum
possible freedom to all members to pursue whatever goals they wish. Alternative ethical
commitments lead to different views about the nature of the economic problem.
6. Conclusions
The logical positivists conceived of science as a purely fact-based and value free activity.
The work of Kuhn (1960) was very influential in showing that science did not conform to
this image. Along different lines, Quine (1951) showed that some of the fundamental
distinctions upon which positivism was based were wrong. While not all agree with
Popper in his claim to have “killed” logical positivism, philosophers do agree that it is
dead. Logical positivism offered a sharp and clear solution to the ‘demarcation problem’
of distinguishing between scientific knowledge and other types. With its demise, current
consensus is that there is no sharp distinction, and all types of knowledge are essentially
similar. Facts, values, and conventions (framing definitions) interpenetrate, and cannot be
separated from each other in scientific theories as well as in conventional discourse.
In the meanwhile, the methodology of economics was strongly influenced by positivist
misconceptions about science, which were dominant in the first half of the twentieth
century. Desirous of acquiring the status of science, economists formulated their theories
to appear as value-free. Weston (1993) has argued that is impossible for economics to be
value free, and provided several reasons for this. The attempt to be value-free leads to the
hiding of values in unstated assumptions, background institutional structures, and framing
of the problem. This leads to a highly unsatisfactory state of affairs where both teachers
and students of economics propagate a set of implicit values while claiming to be
objective, factual and value-neutral. Because many well known economists in books and
articles have taken sophisticated philosophical positions fully cognizant of most recent
developments, some have been deceived into believing that economists have adjusted
their methodology to take into account objections of the type raised in this article. The
correct position is accurately summarized by Vivian Walsh (2003):
Some philosophically trained economists, of whom I am happy to say there are
increasingly many, may be initially surprised that their field should still be accused of
logical positivism. But the claim is not that philosophers of economics are positivists—
they would not have been caught dead with it for years (apart from one or two diehards).
Nor is the claim even that working economists still accept all of the positivist theses. The
claim is that a fact/value dichotomy (of which logical positivism was the early 20th
century version) still underlies the beliefs and intended practice of economists today.
They probably do not see this as positivism, but rather as a matter of scientifically
informed common sense, and would perhaps be surprised to discover some of its more
ancient philosophical roots. As Putnam remarks ‘[t]he idea that “value judgments are
subjective” is a piece of philosophy that has gradually come to be accepted by many
people as if it were common sense’ (Putnam, 2002, p. 1).
The only solution to this is to bring these values out in the open. Weston (1993) writes
that just as economists acquire the mathematics required for their models, they need to
acquire proficiency in ethical arguments that lie behind much of economic theory. This is
also my position.
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