Rethinking Economics as Social Theory

By Richard Wagner, Emeritus Professor of Economics, George Mason University, US

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Richard Wagner discusses his innovative look at the origins of economics in his new book Rethinking Economics as Social Theory

What is the object at which economists direct their analytical energies, concepts, and imaginations? By far the most popular answer these days is that economics is a science that addresses efficiency in resource administration. This answer places economics as an administrative science whose primary analytical tools are mathematics, statistics, and accounting in conjunction with formal modeling. Rethinking Economics as Social Theory explains how this administrative vision renders economics deeply incoherent because it assigns to economics analytical tasks that the discipline cannot truly address.

Sure, there are many situations that call for an administrative style of thinking for which ordinary principles of economizing action are suitable. The entire world of commerce provides a limitless menu of cases for which the marginal calculus and optimization more generally represents the epitome of reasoned action. One of the most charming of all economists, Philip Wicksteed (1844-1927) in his 1910 Commonsense of Political Economy explained how a mother could use knowledge of marginal productivity theory to distribute a bowl of mashed potatoes among her children. Without doubt, economic principles can be helpful to someone seeking to maximize the difference between the value someone expects an action to yield and the cost of the inputs that must be assembled to conduct that action. All the same, it must be recognized that a formal model alone cannot answer substantive questions, for answers can’t be supplied  without importing other presuppositions into the model.

Economics goes astray when its formal framework is used to address substantive questions that have political character. There is all the difference in the world in this regard between an administrative science and a science of society. An administrative science pertains to organizations that are organized and operated through the offices of private law. They are organizations for which all participation is voluntary. Conflict there can be among organizations, as befits the idea of competition. But the internal operation of privately ordered organizations is consensual, which means in turn that for such organizations there is general agreement about the boundary between efficient and inefficient actions.

 It is a huge category mistake to apply principles and concepts of optimization to political organizations. For commercial organizations, the magic number is two. This means that even the most complex of commercial organizations and transactions can be meaningfully illustrated by simple models of exchange between buyers and sellers. In contrast, for democratic polities the magic number is three. Where Carl Schmitt (1932) asserted that political action turned on the friend-enemy distinction, William Riker (1962) asserted all democratic action has coalitional character. With either of these schemes of thought, democratic competition, in contrast to commercial competition, turns on forming and supporting winning coalitions, an accounting of which shows that those winnings are financed by imposing loses on the rest of society.

Prior to the emergence of neoclassical economics late in the 19th century, economics under the influence of Adam Smith and the theorists of the Scottish Enlightenment had as its analytical object society itself, and not the administrative problems of some members of society. Smith and his compatriots observed that societies worked in that people were able to feed, clothe, and house themselves even though there was no person or administrative office whose responsibility was to ensure those outcomes. Those outcomes just happened even though no one had the duty to ensure them.

Smith and the other Scottish theorists realized that societies resembled icebergs in that what you saw on the surface was but a small part of the entire object. A theorist whose vision was limited to connecting points of observation would misunderstand a good deal of the sources of social orderliness. Smith’s two most notable books, Theory of Moral Sentiments (1759) and Wealth of Nations (1776) form a complementary pair in the process of rendering a theory of society as based on recognition that people invariably seek to be successful in what they attempt. Each person in society has a domain over which he or she exercises administrative responsibility. Society, however, is not just another such domain, but is a container that holds the domains that constitutes a society.

While Adam Smith initiated the study of society centered on recognition that people were actuated by their desires to be effective in their chosen actions, that classical scheme of economics gave way a century later to the neoclassical focus on resource administration. Again, there is nothing illogical about constructing a science of administration. It’s just that such a science will necessarily be inadequate as a theory of society whose primary object are the properties of people living together in close geographical proximity, which in turn brings into the analytical foreground both the potential gains from cooperative action and the potential animosities that might be unleased through the never-ending search after position and status that are alive in societies.

Rethinking Economics as Social Theory seeks to carry forward the social-theoretic vision of the Scottish Enlightenment. It seeks to do this, however, not through some act of restoring the Scottish scheme of thought but by importing such modern modes of theorizing as systems theory, complexity theory, evolutionary theory, emergent phenomena, and agent-based computational modeling. It is surely plausible to assert that the Scottish thinkers attempted to address questions that are more complex than their methods and techniques allowed them to address, and to recognize that modern analytical developments supply instruments through which we can make progress on their concerns about the qualities of societies. As thinkers, we should always realize that our ability to develop our intuitions depends on the analytical techniques at our disposal. Recent development in computer and related technology over the past half-century has multiplied our ability to think about societies as ever evolving entities whose direction of evolution is no matter of policy choice but rather is an exceedingly complex matter about which there exists no obvious one best way but for which that evolution is of intense significance for our ways of life all the same.

Rethinking Economics as Social Theory, by Richard E. Wagner, George Mason University, US is out now.

Read the introduction and other free chapters on Elgaronline


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