Three Methodologies

This is a summary of the introduction/motivation part of Lecture 15 on Advanced Microeconomics II, delivered at PIDE in Spring Semester 2017.  The lecture is about 19th Century European History, and how it is deeply entangled with Modern Economic Theory. We cannot understand one without the other.

19th Century European Economic Ideas In Historical Context.

“… the race is not always to the swift, nor the battle to the strong …” Ecclesiastes 9:11

In the late 19^th century, a battle of methodologies (“Methodenstreit”) took place, which shaped the future of economics. The German Historical School lost out to the newly emergent, quantitative, mathematical and scientific approach. This led to a re-conceptualization of economics as a science similar to physics, which studies the economic laws of motion of societies. For a detailed account of this battle, and its effects, see “How Economics Forgot History,” by Geoffrey Hodgson.

1. Contemporary Methodology:[humans are predictable robots] The idea that economic theory is a science like physics has extremely unpleasant and counterintuitive consequences. We look for universal laws of economics, which apply equally well to Pakistan, France, Brazil, Russia and Nigeria. Furthermore, they apply equally well in the seventeenth, nineteenth, and twenty-first century. The trade theory of economists must apply equally to trade between Ghana and England, India and Pakistan, and the Huron and Iroquois tribes. Since the ability of human beings to shape their destiny in accordance with visions cannot be fit into a scientific framework, human behavior is reduced to that of a robotic pleasure machine, which follows precise mathematical laws.

2. Marxist Methodology:[social and political structures are determined by economic structures] A key element of Marxist methodology is that economic relations of production are fundamental. These determine the political and social superstructures. Marxist methodology is far richer than current methodology, which removes history, and human beings, from economics. Nonetheless, Marxist methodology gives primacy to materialistic conditions of productions, and considers society and politics as important secondary consequences.

3. (Polanyi’s Methodology):[material circumstance shape human societies, but also human vision and ideas shape material circumstances] Whereas conventional methodology restricts attention to the material circumstance, and Marx considers material circumstances as primary, Polanyi uses a bi-directional causality. Human ideas and visions can shape history, and conversely, the economic relation of production shape human ideas and visions. For more discussion of the radical implications of this entanglement of ideas and materials, see my earlier post on “Meta-Theory and Pluralism in Polanyi’s Methodology“.

These are three distinctly different methodological principles.  In the rest of this lecture, we will look at nineteenth century European history through these three different colored glasses and see how they help us understand the economic, social and political changes which occurred during this period. Our goal will be to establish that “entanglement” occurs – that human ideas are both shaped by, and shape, history. In particular, economic theories are used by humans to understand historical experience, and also to guide social responses to this experience, and attempt to mold history in favorable directions. An extremely important consequence of this entanglements is that economic theories cannot be understood when detached from the historical context in which they were born. As Polanyi explains clearly, modern economic theories were produced in nineteenth century England, and to understand these theories, it is necessary to understand European history of that era.

Before proceeding to the complexities of European history, we will do a dry-run of the conceptual framework we are using within the simpler context of hunter-gatherer as well as feudal societies.

Digital banks and fintechs

Bank transactions by internet and mobile banking have sharply increased since the 2008 global financial crisis. In this digital environment, new technologies – such as advanced analytics and big data, in addition to the use of robotics, artificial intelligence, besides new forms of encryption and biometrics – have been enabling changes in the provision of financial products and services. The current wave of financial innovations is being increasingly oriented to more friendly digital channels through apps in the context of mobile banking strategies that privilege the development of open bank softwares and the interaction with social media.

Indeed, the increasing digitalization of financial transactions is also related to changes in the banks’ competitive environment, where the intense growth of the startups called fintechs, especially since 2010, has revealed a new articulation between finance and technology. Such fintechs are companies organized as digital platforms with business models focused on costumer relationship in the areas of payment systems, insurance, financial consultancy and management, besides virtual coins. The advantages of their business models are low operating expenses, greater operational agility and the ability to generate data for the design of customized financial products and services. As a result of the advance of these new non-bank competitors, big banks have begun to establish collaborative partnerships with selected fintechs in order to produce new technological solutions and to promote the development of a culture of technological entrepreneurship among bank workers.

Taking into account the global changes in the provision of financial products and services, Central Banks have closely followed the recent expansion of fintechs. Indeed, the transformations provoked by these startups in the financial markets have raised a relevant discussion about the impacts of recent technological innovations on the financial regulation agenda- mainly focused on the Basel Accords. The intense advance of fintechs is settling new questions for regulators: How to deal with loan activities that are being performed by means of electronic platforms? How to regulate the fintechs’ activities of consultancy and financial management that are characterized by the collection, treatment and custody of information from users? Which is the scope of the Central Bank and of other financial regulators when considering the surveillance over the fintechs? Moreover, there are legal concerns related to information security practices, legal validity of electronic documents, digital signatures and data storage in the cloud.

As a result of the new competitive digitalized and deregulated environment, the current wave of technological innovations will decisively affect the future of bank workers. Currently, one of the main cost-reducing bank strategies is centered on administrative expenses mainly labour costs that remain tightly controlled by banks in order to improve operational efficiency. In this scenario, technological strategies aimed to increase profitability will foster further organizational innovations and changes in labor relations. Thus, the future impacts on jobs in the financial sector will deepen the power of financial holdings, that is to say, of centralized blocks of financial capital that base their global expansion on the digitalization of products, services and delivey channels .

 

Women at work: global highlights

The roots of gender and poverty studies began with Pearce (1978) who coined the expression ‘feminization of poverty’. Pearce considered female-headed families, excluding poor women who live in male- headed families, based on the argument that the proportion of families headed by women among the poor has been  increasing since the 1950s. In her opinion, women have become poorer because of their gender.

The recent dynamics of the global labour market has reinforced the precariousness of women’s employment and working conditions. Among other issues, the recent global highlights about the participation of women in the labour markets are listed below:

Unemployment: Women are more likely to be unemployed than men, with global unemployment rates of 5.5 per cent for men and 6.2 per cent for women

Informal Work:      In 2015, a total of 586 million women were own-account or contributing family workers. Many working women remain in occupations that are more likely to consist of informal work arrangements

Wage and salaried jobs: Moreover, 52.1 per cent of women and 51.2 per cent of men in the labour market are wage and salaried workers.

Jobs and occupations by economic sectors:  Globally, the services sector has overtaken agriculture as the sector that employs the highest number of women and men. In the period between 1995 and 2015, women are employed in the services sector: since 1995, women’s employment in services has increased from 41.1 per cent to 61.5 per cent.

High-skilled occupations: High-skilled occupations expanded faster for women than for men in emerging economies where there is a gender gap in high-skilled employment in women’s favour.

Part-time jobs: Globally, women represent less than 40 per cent of total  employment, but make up 57 per cent of those working on a part-time basis.

Hours of work: Across the global labour scenario, one fourth of women in employment (25.7 per cent) work more than 48 hours a week, mainly in Eastern , Western and Central Asia, where almost half of  women employed work more than 48 hours a week.

Gender wage gap: Globally, women earn 77 per cent of what men earn.

 

Indeed, although women have been increasing their participation rate in the labor market in the last decades, they worked in more precarious occupations. This situation characterized by precarious jobs, mainly based on short-term contracts, enhances the vulnerability of workers, mainly women, as the financialization of management strategies turns out to be subordinated to economic efficiency targets, that shape employment relations, overwhelmed by longer working hours, job destruction, turnover and outsourcing. Workforce displacement and loss of rights could also be part of the spectrum of management alternatives aimed at cost reduction. In addition to the wage gap, women’s participation is stronger in the services sector where working hours are longer and wages lower.

Besides, unpaid work could also be considered an extra onus on women. In addition to women´s challenges in the labour market, the increasing weight of unpaid work is more likely when women become unemployed and return to their homes and take more responsibility for housework than men, or because the loss of family income makes it impossible to support the remuneration of domestic workers. Gender-differentiated time use patterns are affected by many factors, including:  household composition (age and gender composition of household members); seasonal considerations; regional and geographic factors; availability of infrastructure and social services. But social and cultural norms also play an important role both in defining, and sustaining rigidity in, the gender division of labour.

Building on the United Nations goals, gender equality is required for the erradication of the many dimensions of poverty and to promote sustainable human development. Taking into account a macroeconomic approach to the labour markets, the “vicious circle” of impoverishment could be surmounted if policy makers rethink employment an income policies under a gender approach to the labour markets.

References

Ilo (2016) http://www.ilo.org/wcmsp5/groups/public/—dgreports/—dcomm/—publ/documents/publication/wcms_457086.pdf

Pearce, Diana (1978). “The feminization of poverty: women, work, and welfare”. Urban and Social Change Review, Special Issue: Women and Work, Vol. 11, No. 1-2, pp. 28–36.

Adam Smith & the Invisible Hand

In response to a comment by David Chester regarding Adam Smith and the Invisible Hand, I am reproducing the section in the paper which deals with this issue. This answers his question about how what is attributed to Adam Smith differs from what he actually said.
[Excerpt from the paper: Failures of the Invisible Hand]

Section 6: Recent Vintage of the Invisible Hand

The main goal of this section is to show that the modern interpretation of the IH is relatively recent. The idea that Mankiw (together with other modern economists) attributes to Smith is not actually present in Smith’s writings. In fact, modern writers borrow the authority of Adam Smith to provide weight to a very dubious idea of recent coinage.

We first note that modern interpretation of the “IH” is radically different from any interpretation of this concept that existed before the second half of the twentieth century. There is a growing body of literature (e.g., Grampp, 2000; Minowitz, 2004) which insists that the metaphor used by Smith was never meant to be anything more than a metaphor, and that the meanings inferred from Smith’s idea of IH by the modern economists support only their own interpretation of economic policies. Kennedy (2009) shows that three leading modern economists laud the IH as the “profoundest” and “most influential” contribution of Adam Smith. Nonetheless, their interpretation of the term and its significance is not supported either by Adam Smith or by readers of Adam Smith until the late nineteenth century.

In a corpus of over a million words, the terms IH appears only twice in the economic writings of Adam Smith. It is used only once in the Wealth of Nations in very limited and narrow context. Rothschild (1994) analyses the controversy surrounding the meaning of IH and concludes that what Smith meant by this metaphor was only a “mildly ironic joke.” Blaug (2007) also shows that Adam Smith cannot be blamed for these ideas. He cites other references which state that:

Some economists regarded the Arrow-Debreu results [on the existence of general equilibrium] and the fundamental theorems of welfare economics as the modern expression of Smith’s invisible hand . . . . But Smith would be surprised at what is attributed to him today . . . . On careful reading Smith does not say that selfish behavior is praiseworthy, is bound to pay, or necessarily promotes the best interests of society . . . . The passage containing the invisible hand metaphor is not about general equilibrium theory: its purpose is to explain why merchants would continue to buy British products even if tariffs were removed.

Ashraf, Camerer, and Loewenstein (2005) make a detailed analysis of Smith’s pioneering work The Theory of Moral Sentiments to conclude that “For Adam Smith, a mixture of concern about fairness . . . and altruism played an essential role in market interactions, allowing trust, repeated transactions and material gains to occur.” In sharp contrast to the modern economists’ unwarranted understanding of the IH metaphor as a sanction for selfish behavior, Smith explains that justice is in fact only a rational behavior. Fear of retribution is likely to deter the people from committing injustice. He says: “Nature has implanted in the human breast, that consciousness of ill-desert, those terrors of merited
punishment which attend upon its violation, as the great safe-guards of the association of mankind, to protect the weak, to curb the violent, and to chastise the guilty.” See Smith (1759, p. ii, iii, 125). Realizing the crucial role of justice, especially in ensuring just behavior, he believes that justice is the “main pillar that upholds the whole edifice. If it is removed, the great, the immense fabric of human society . . . must in a moment crumble to atoms.” Fairness and justice have only recently attracted the attention of economists as providing justifications for many observed human behaviors in conflict with standard utility maximization theories, see Karacuka and Zaman (2012) for a brief survey.

REFERENCES:

Ashraf, N., Camerer, C. F., & Loewenstein, G. (2005). Adam Smith, behavioral economist.
Journal of Economic Perspectives, 19, 131–145

Blaug, M. (2007). The fundamental theorems of modern welfare economics, historically
contemplated. History of Political Economy, 39, 185–207

Grampp, W. D. (2000). What did Smith mean by the invisible hand? Journal of Political
Economy, 108, 441–465

Kennedy, G. (2009). Adam Smith and the invisible hand: From metaphor to myth. Econ Journal Watch, 6, 239–263

Minowitz, P. (2004). Adam smith’s invisible hands. Econ Journal Watch, 1, 381–412

Rothschild, E. (1994). Adam Smith and the invisible hand. The American Economic Review, 84, 319–322

Failures of the Invisible Hand

Rafi Amir-ud-Din and Asad Zaman “Failures of the ‘Invisible Hand’”
Forum for Social Economics Vol. 45, Iss. 1, 2016 pp 41-60.

Textbooks, like Mankiw, state that the four claims listed below are at the center of modern economics. Our goal in this paper is to show that all four of these claims are wrong.

1.      Participants in market economies are motivated by self-interest. (SI) – In fact, cooperation, service, recognition and status in community, and reciprocity are very strong motivators of human behavior.

2.      Decentralized market economies work very well, and maximize the welfare of society as a whole. (FM:  free markets). As illustrated by the Global Financial Crisis, unregulated markets lead with regularity to disasters and crises.

3.      The reason for excellent functioning of decentralized market economies is that all participants are motivated by self-interest. This self-interest works better than love and kindness in terms of promoting social welfare.  (GG:  greed is good). This is absolutely false, and the opposite of the truth – love and kindness work much better at promoting social welfare.

4.      The principles listed above were summarized in the concept of the “Invisible Hand” by Adam Smith. (AS). Adam Smith can be blamed for many wrong ideas, but this is not one of them. In fact, free market economists attribute this theory to Adam Smith to create legitimacy for their ideas. 

Detailed presentation of the paper is available in the following 1 hr. video.

Engaging students in the Law & Economics WEA Conference

The WEA Online Conferences format, designed by Edward Fullbrook and Grazia Ietto-Gillies, makes full use of the digital technologies in the pursuit of the commitments included in the World Economics Association Manifesto: plurality, competence, reality and relevance, diversity, openness, outreach, ethical conduct, and global democracy. The WEA On-line Conferences seek to also engage graduate and undergraduate students considering: (a) the variety of theoretical perspectives; (b) the range of human activities and issues which fall within the broad domain of economics; and (c) the study of the world’s diverse economies.

The current WEA Conference Public Law and Economics: Economic Regulation and Competition Policies  aims to:

(i) discuss how sector regulators and competition authorities are interacting post-crises and how the economic analysis of law can help countries reach better regulation and competition policies;

(ii) contribute with practical and theoretical references on the limits of economic power and forms of state intervention;

(iii) deal with the uncertainties and challenges of the digital economy;

(iv) gather relevant case studies and

(v) identify new trends in Law and Economics that have arisen post-crises.

 

We invite you all  to read the following conference papers at http://lawandeconomics2017.weaconferences.net/papers/ and send your comments

• Predatory Innovation: The Definite Need for Legal Recognition
• Deepening versus Widening the EU: Where to go?
• Should competition authorities care about conglomerate mergers?
• The Efficiency-Growth Dilemma: An Analysis of Regulation’s Impact on Short and Long-Term Development
• Competition Assessment in developing countries: Policy challenges after the global crisis
• Opportunism by Competition Authorities in Ireland, Portugal and Greece in the Wake of Economic Crisis›
• The Internationalization of Merger Review: Extraterritoriality, Conflicts and Convergence
• Structural Change and Protection: Non-Tariff Measures in ASEAN

 

 

The Mathesis Universalis and Neoclassical Economics

As Edward Fullbrook highlights in his recent book Narrative Fixation in Economics, the Cartesian view of human reality has deeply shaped the way Neoclassical Economics theorizes about the economic and social existence (2016, p. 45). Indeed, while emphasizing the relevance of the pure thought of a disembedded human subject,  Neoclassical Economics has reinforced the relevance of the Cartesian method of inquiry  that moved the so called scientific (true) knowledge  out of the general flux of experience.

In the second part of the Discourse of Method, Descartes presented some principles that should be followed in order to acquire knowledge: 1) human beings cannot  admit any ideas that are not absolutely clear; 2) human beings must divide each problem in so many parts as appropriate for its best resolution; 3) human beings should apply deductive reasoning to organize their  thoughts from the simplest to the most complex ones 4) the analytical-synthetic process of reasoning leads to true knowledge.

According to Descartes, the first principle of his method focuses the importance of “never accepting something as true that I clearly don’t know as such” (Discourse of Method, Part II). Indeed, Descartes inspired himself in Geometry as a model of Science. As a result, he considered the postulates of Geometry not only as universal and necessary but also as clear and distinctive ideas related to intellectual intuition. Only these clear and distinctive ideas  are considered to be the pillars of true knowledge.

Based on the second principle, Descartes builds his research method of analysis that isolates the clear and distinctive ideas from the most complex ones. His emphasis on the order of thoughts strengthens the role of Mathematics in the Cartesian method of pure inquiry. Moreover, the third principle of his method leads to a special kind of organization of thoughts. In his own words, the organization of thought should start “with the simplest and easier to gradually rise, as if by means of steps, to the knowledge of the more composed, and assuming an order between the ones that don’t precede naturally each other” (Discourse of Method, Part II).

Departing from the mathematical method of reasoning, Descartes arrives at the notion of order in scientific thought, that is to say, once the human subject knows the simple elements of a problem, he can assume all the consequences that derive from those first ideas considered as absolutely certain. Those first ideas have the characteristics of clarity and distinction. Besides, they are known intuitively and constitute the pillars on which relies true knowledge.

Finally, Descartes reinforced the analytical-synthetic process of reasoning. Following the deductive method of pure inquiry, human knowledge grows throughout a rigorous chain of ideas. As a consequence, new thoughts arise while the human subject applies deductive reasoning so as to create a chain of ideas that links the most simple to the most complex ones. In this attempt, true knowledge can be obtained.

As a matter of fact, the Cartesian method presents the intellectual intuition and the deductive reasoning as crucial elements of the discovery and construction of true knowledge. Moreover, clarity, distinction and order overwhelmed the mathesis universalis that turned out to be considered as the pinnacle of the epistemo-ontological construction of Cartesian thinking.  The mathesis universalis is, according to the Cartesian epistemology, a general method of pure inquiry able to explain everything, regardless of the nature of the objects to be studied.

As E. Gilson (1945) highlighted, the Cartesian method represents an attempt to extend the mathematical method of inquiry to all of human knowledge in the form of the mathesis universalis.  Indeed, this extension is at the center of the a priori foundations of scientific knowledge in Neoclassical Economics.

 

 

 

References

DESCARTES, René.  Discurso do Método. São Paulo: Abril Cultural, 1973.

FULLBROOK, E. Narrative Fixation in Economics, WEA Books, 2016.

WILLIAMS, Bernard. Descartes: The Project Of Pure Enquiry. UK: Penguin, 1978