458. Markets: What to make of them



In debates concerning markets, in the wake of the recent financial and economic crises, there is considerable confusion among policy makers and the general public, and even among economists, on what markets are, how they function, how they fail, what they contribute to society, and what the alternatives are. Related confusion arises in debates concerning deregulation and privatization of public or semi-public services, such as utilities (gas, water, electricity, telecommunication), transport (train, bus), infrastructure (road, rail, waterways), health services (care and cure), education and schooling, safety and security, prisons, etc. State bureaucracies are not attractive, but markets are taken to promise beneficial effects that are often not achieved or are overruled by negative effects.

Here I start a series of items to contribute to insight in markets that may help people to form an opinion. I derive it from a book on markets that was published by Edward Elgar in 2014.. The title is the same as of this item. This is complementary to a series on economics that also appeared in a bundle posted on my website bartnooteboom.nl. The present series is on markets more specifically.



In the widest sense, Markets are processes of supply and demand on the basis of private choice and initiative that yield selection of success by competition and institutions. Market places are places where supply and demand meet. A meeting of supply and demand is needed to enable division of labour, needed as a source of prosperity.



A narrow notion of markets is the economist’s traditional, idealized model of perfect competition, where a mere mechanism of prices, without any government intervention, in laissez faire, yields an optimal allocation of scarce resources. It was an intellectual challenge to prove that analytically Adam Smith’s idea of the invisible hand could work. However, it has little, if anything, to do with reality. It is a fairy tale. I call it the mythmarket.



When one criticizes market ideology, targeting the myth, the idealized fairy tale, the answer from economists is that in modern economics the market is seen more broadly, and with more nuance, in a wider notion of markets. In fact, surreptitiously they still pursue the fairy tale that has been lodged in their minds in economics classes. In other words, the narrow view is taken as a guide (theory in use) but the broad view is wielded as an excuse (espoused theory).



In valid criticism of market ideology, radical critics, on the other hand, make the mistake of also throwing away a wider notion of markets that I think we cannot do without. So I need a new terminology to denote a variety of wider notions of markets while making it clear that I reject the fairy tale.



Earlier, in item 86 of this blog, I already discussed several wider notions of markets, in which there is collaboration next to competition, and competition is imperfect, yielding room for ethical conduct, a certain amount of altruism next to egotism, and a wider ethics, going beyond the utilitarianism of traditional economic theory, in a virtue ethics that also accords intrinsic value to economic activities and virtues.



The already existing notion of regulated market indicates that markets require institutions and government intervention to work and to redress perverse effects. That applies to all the markets indicated above, except the mythmarket. Competition is imperfect in many ways and requires a variety of government intervention. Markets do not satisfy all social goals and seriously damage a number of them. Most economists recognize this. Behind supply and demand there are social and psychological processes of choice and processes of production and innovation. Much of that requires collaboration, next to competition, and they limit each other. Many economists recognize this (e.g. in transaction cost economics).



Still crucial, also in the wider notions of markets, is the idea of maximum freedom, and hence variety, of choice and initiative. That is what makes it different from central planning. That element of ideology remains.



In the present series I will first specify in more detail the mythmarket of perfect competition, and criticism of it. Next, I will go more deeply into the philosophical roots of markets and market ideology, and I will consider alternative roots for alternative views. I will also go a little more deeply in to the question how markets work and fail. I will show that in practice there are mixes of markets and government regulation, and I will give some examples. Finally, I will look at newer developments, and at possible alternatives to markets, in communities.  

457. Issues for change in economics



The criticism of dominant, orthodox economics, and demands for its change, have intensified since the financial crisis in 2008. Sources of those protests are heterodox economics, such as post-Keynesian economics, evolutionary economics, (new) institutional economics. and social economics, and the international movement of young economists with the name ‘Rethinking economics’.



Some of the criticism and proposals for change were given in previous items of this blog, collected in a bundle posted on economics on my website bartnooteboom.nl. They were also elaborated in a recent book[i]. Here I review the criticism and make additions. The order is arbitrary, does not signify priority.

1.      The issue of uncertainty. Keynes was one the few economists to take it seriously and see its consequences. Under uncertainty one cannot calculate, and calculative rationality is a cornerstone of orthodox economics. The results are bandwagon effects and hypes, as Keynes recognized.

2.      The issue of maximizing a utility function. People are not only limitedly rational (see below), but things of value cannot all be subsumed under a single utility.  That applies to work, as a source of income and a source of satisfaction, in giving pleasure or a sense of accomplishment, and social recognition. It applies, in particular, to moral values that one does not always practise for their utility, but because they constitute what one feels one should practise, and that is who one wants to be.  That can apply also to trust, which can be useful, as a ‘lubricant for relations’ but also has intrinsic value. Another problem of utility is that it is purely conceptual, and cannot be observed directly. Utility maximization is unfalsifiable: one can always conceive of some utility function whose maximization reproduces observed behaviour. That unfalsifiability makes it scientifically dubious.

3.      The  ‘preferences’ that underlie choice are partly formed, or adjusted, in the process of choosing and acting upon them.

4.      Due to the role of subconscious processes of choice, as taught in social psychology, people are limitedly rational: do not always make rational choices. That can be very effective, in routine conduct, but it does not satisfy the assumption, in economics,  of rational choice.          

5.      Transaction costs, such as caused by imperfect information, cause ‘market failures’, of misjudging quality and reliability, the incompleteness and cost of collecting information, making contracts or other agreements and controlling their execution.

6.      The condition that relations require ‘specific investments’ that have value only, or mostly, in that relationship, which make one dependent, and create a need for the relationship to last some minimum time, to recoup that investment. This pleads for ‘optimal’, not maximum flexibility.

7.      The human need for local roots, which obstruct the economic credo of maximum mobility of resources, including labour, which in globalisation erode local communities and work relations, and sources of respect and reputation.

8.      The self is not autonomous, as assumed in economics. One does not only need the other for the advantage of division of labour, but one is constituted  in action in the world, in interaction with others. Opposition by others yields the highest form of freedom: freedom from prejudice.

9.      The need for trust, for agreeable relations and the economy. Some economists claim that trust cannot survive in markets, due to competition, but competition is not always so strong as to prevent some slack for sacrifices for trust, and, more fundamentally, in so far as survival requires innovation, that brings uncertainty, which requires the ‘leap of trust’, and therefore I turn it around: in markets one needs trust.

10.  In so far as economists take into account issues of information and knowledge, they take it for granted, tacitly most of the time, that in relations there should minimum of ‘cognitive distance’, difference in ideas. But such difference also has value, as source of innovation. Rather than minimum difference there should therefore be ‘optimal distance’, in a trade-off between distance as an obstacle for understanding and as a source of difference for innovation.

Most of these points entail a ‘paradigm shift’, and one can ask if this is still economics. That is probably why they tend to be ignored or neglected by economists.     

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[i] Bart Nooteboom, Uprooting economics; a manifesto for change, Edward Elgar, 2019.

456. The meaning of rationality



In item 394 of this blog I discussed rationality and non-rational decision heuristics. Here I return to the subject, from a different angle.



What does ‘rationality’ mean? It can mean the use of logic, facts and their combination in the ‘scientific method’ of hypothesis and empirical test. Logic then requires that scientists seek to falsify their theories ( Popper). In fact, scientists seek confirmation, to protect their reputation and gain attention and resources. Criticism and falsification are up to competition in the scientific community, not the individual. 



Sometimes, especially in economics, ‘rationality’ means doing what is ‘good’, in agreement with goals, maximizing utility. The question then is who determines that. It is known, in social psychology, that often choices, decisions, are not made ‘rationally’, with the use of reason, consciously and deliberately, but unconsciously and impulsively. That is not always bad, in situations that one has often experienced, as in walking and driving a car, things fir which you have developed a routine.



Sometimes, however, they go against ‘optimality’. Use is made of non-rational decision heuristics, as discussed in item 394. That has led to ‘nudging’, where impulsive or routine behaviour is used to steer decisions in the direction of optimality. An example is the ‘opt-out’ in insurance, or the donation of organs, where you indicate if you don’t want it, instead of the earlier ‘opt-in’, where you indicate it if you want it. That employs the inertia or unwillingness to choose, whereby people remain underinsured or donate organs too little. The ethics of nudging is that it may only be done in the interest of the people involved. One can see that as benevolent guidance, but also as manipulation. That is not new: it has been happening for long in advertising, but not always in the interest of the consumer. It happens in the use of ‘algorithms’, on the basis of data of conduct as collected via Facebook, Google of Amazon. Those ‘know you better than yourself’ in your subconscious conduct. Is that rational?  No, because it does not make conduct more ‘optimal’, but is to the benefit of those who do the manipulation. Yes, maybe, if it is used for nudging.  



In Object oriented philosophy (OOO) Harman claimed that  an object cannot be fully known, in all its features, but is partially ‘withdrawn’, with features that are inaccessible, because hidden or caught in an incomprehensible code or structure, or are not(yet) there. Bhaskar and DeLanda proposed that objects have potential to produce features, depending on circumstances. Then they are not yet present and hence unknowable.



Rationality, the use of reason, is a virtue, but has its limits. We do some things without rational deliberation, in routines, as mentioned above, and some things can only bed grasped by hunch. Also, emotions set the agenda for rational thought.



And then there is morality: rules for conduct that are not rationally deliberated, subjected to calculation, but adopted and followed unconditionally, having intrinsic value of a different order than interests.    

455. Beyond utility



In his recent book ‘Is there a future for heterodox economics?’, Geoffrey Hodgson, a well known heterodox economist, characterized orthodox economics as maintaining the approach of ‘utility maximization’ or ‘Max U’. He criticized that, as I did in previous items in this blog.



One of the reasons that a one-dimensional measure of utility is assumed, is that it enables simple mathematics, and math rules as the paragon of ‘scientificness’.    



When people say that human conduct entails more than self-interest, such as the interests of others, or other moral values, one can simply add corresponding variables. Hence, the principle of Max U is unfalsifiable. Here, I reiterate the problems I noted in previous items in this blog,  and add an insight from Hodgson. The problems with  Max U are as follows:



First, as mentioned, utility is not observable, and the principle of Max U is unfalsifiable, while that is one of the criteria of a theory being unscientific.



Second, there are different dimensions of utility that are not ‘commensurable’, cannot be subsumed in one variable of utility.  



In particular, moral values are of a different order from economic ones. Buying a house one cannot afford is not of the same category as not killing someone. It is unconditional, imperative, and not a matter of self-interest.  Likewise, the being of another, in his/her dignity is not an economic value to be bargained with. Not everything can be subsumed in self-interest. Kant already argued this. You Follow moral rules not for pleasure or other utility, but because following the rule constitutes who you want to be.



Jobs, and perhaps relations have extrinsic, instrumental value, for achieving some purpose, but can also have intrinsic value, value by themselves, and moral principles certainly do.



In other words, the other person and moral values cannot be subsumed under ‘utility’.



In a recent book, entitled ‘Uprooting economics’, I pleaded to replace ‘utility ethics’ with the ‘virtue ethics’ of Aristotle. The first looks only at outcomes, for example in the form of utility, and ignores intentions and morals. The second includes consequences but also looks at intentions, morality. The classical virtues are: reason, courage, moderation and justice.  

They are connected. For example: one needs moderation for justice. Also courage to make sacrifices for the sake of another, or resist temptations to violate a moral stricture. In this way, morality may not only be incommensurable, of a different order from economic value, but may go against it, in moderation and justice.



Third, the future can be uncertain, incalculable, in distinction with calculable risk. This disables Max U. To deal with uncertainty, one needs trust, and courage to make a leap of faith, be vulnerable.



Liberalism excluded morality, discussions and expressions of faith from public debate, and relegated it to religion, behind doors of the private sphere. But that was in the effort to avoid religious wars, which were rampant in the past. Now, with the need for environmental protection, and excesses of inequality of income and wealth, there is a need for public debate on it, on morality.

Social psychology teaches us that much of our decision making, choice, is made subconsciously, impulsively, not subject to deliberation, let alone Max U. This was adopted in economics, as ‘behavioural economics’, but a psychologist trying to collaborate with economists on this reported that those keep on trying to fit this in max U, and this is reported also by Hodgson. But how can you talk of maximization when it is not deliberate?



Behavioural economics was already considered by Herbert Simon 60 years ago. He proposed that people ‘satisfice’: stop doing Max U from a certain point. That can easily be incorporated in Max U by assuming that there is a psychic cost of rational calculation. Thus it is much less fundamental than choice  being subconscious.  



An alternative to Max U is adaptation, as in Evolutionary Evonomics, as discussed in item 396 in this blog. Much has already been written about evolution in this blog (items 27-30, 46, 82, 161, 195, 205, 279, 376. These 11 items were collected in a bundle, presented on my website bartnooteboom.nl). It is similar to the satisficing advocated by Herbert Simon, in that one can stop when survival is assured.

454. A third form of freedom.



As discussed previously in this blog, Isaiah Berlin proposed two kinds of freedom:

‘Negative’ freedom as absence of external constraint, having room for action, and ‘positive’ freedom, access to the resources needed for action. I think there is a need for a third kind.



I proposed that happiness, the good life, entails purpose and pleasure. Purpose requires commitment to a goal larger than oneself, transcendence that can be vertical, to God, or horizontal, in dedication to society, mankind, nature, or specific others. This dedication requires discipline, freedom in resisting the urge towards pleasure, distraction, the pull of hedonism. One does not learn to play the violin, say, without it. That, I propose, is a form of freedom. Paradoxically, perhaps, this freedom entails constraint, constraint of hedonism. It is similar to Kant’s freedom of accepting constraints to satisfy the law.



Where does that leave liberalism? Liberalism is not, and has never been, the utmost of individual freedom, lack of external constraint, in negative freedom only.  That is libertarianism, perhaps neo-liberalism. From the beginning, in the works of Locke and Adam Smith, there was a plea for restraint of market power, for the common good, including positive freedom in education and social policies, and institutions for the regulation of markets. Also, it has never been against nations, communities and the local roots of culture.



Institutions are ‘enabling constraints’, restricting but also enabling action. Dick Nelson once said that it is odd to see a path through a morass as purely a constraint. Markets do not operate in an vacuum, but need laws concerning property rights, advertising, and restraints on concentration and market power. 



Now, in present times, capitalism has gone haywire, in uprooting local communities in maximum flexibility of labour and other resources, in unrestrained market ideology, along with globalization and privatisation. That is not the inevitable outcome of liberalism.



In its attempt to prevent religious violence, liberalism did relegate faith, and ethics,  to the private sphere, allowing for diversity of religion, safeguarding the separation of church and state. Now, with rampant inequality of income and economic power, public debate of morality is needed, including a re-appraisal of local roots of culture and community.



Inequality of income and power, the dislocation and neglect of culture, and loss of social concern, are sources of populism, which now threatens to derail in renewed nationalism, authoritarianism and exclusion, going against what is good in liberalism.



It is true that liberalism is an offshoot of the Enlightenment, with its overestimation of rationality and individualism. More room is to be reserved for emotions and impulse, limits to egotism, a revival of civil society and debates on morality. Attention to resonance is required, with renewed appreciation of the intrinsic value of labour and relations, and escapes from the frenzy of acquiring resources, as Hartmut Rosa advocated.

453.  Action, resonance, and existence



With this piece I want to connect the following streams of thought: philosophical pragmatism (mostly John Dewey), the notions of assimilation and accommodation (Jean Piaget), Symbolic Interactionism (George Herbert Mead, GHM), resonance (Hartmut Rosa), existentialism (Kierkegaard and Heidegger), and Object Oriented Ontology (OOO, Tristan Garcia).



Let me start with perhaps the most fundamental point: in OOO, Garcia characterized objects as having things going in and things coming out, and the object being ‘its difference’. The things going in come from other objects and build potential (Manuel Landa), ability to create phenomena, have effects on other objects. Thus, objects interact.



 Interaction between people connects with the symbolic interactionism of GHM, the ‘resonance’ of Hartmut Rosa, and my discussion of the relation between self and other, and the contrast between Nietzsche and Levinas ( item 63 in this blog, see also 58 and 60), in the need to resist the ‘will to power’. with the need for openness, opposition of the other to gain the highest form of freedom, in criticism of one’s preconceptions. Interaction entails having effects on others and undergoing effects from them. Lack of those entails ‘alienation’, says Rosa. Things then are felt to be ‘mute’ and ‘flat’, in being 'reified', with a lack of resonance. 



As the philosopher Kant already said, and in contrast with orthodox economics, morality, such as empathy and consideration for others, is a value apart from self-interest or pleasure,  has intrinsic value and cannot be subsumed in ‘utility’.



According to Kierkegaard ‘the self’ is not a thing but an individual  process of ‘being in the

world’ (Heidegger took this over from Kierkegaard, it seems), taking actions and

responsibility for them, in a leap into the uncertain future, which requires trust, which requires

belief in God.

The subject is not given and present in opposition to the world, but develops in action in it. This connects with pragmatism, which also takes action as generative of ideas, and also the hallmark of truth. In this action one allows the world, including other people,  ‘to shout “no”’ (Gaston Bachelard) , correcting or falsifying one’s ideas.  That is how one learns.

This connects with Jean Piaget’s notions of ‘assimilation’, where one tries to fit in experience,

perception, into existing forms of thought, which, if it does not fit, can yield

‘accommodation’, transformation, of those forms of thought (see items 18, 31 and 35 of this

blog). That is connected with the fact that resonance can be oppositional, critical, even

inimical, in correcting errors and breaking prejudice. As Hegel claimed, one gets to know

things in their failure. Resonance is having effect and undergoing it, in mutual effect of

subject and object.    

  

452. From God to the other.



After Nietzsche declared the death of God, does God still have meaning in the modern world, other than as the ‘prime mover’, the cause of the world?  Why do we need God?



According to Kierkegaard there are three stadia in life: aestheticism, ethics and religion. Here, aestheticism is hedonism, pleasure, feeling and diversion. That is what causes acceleration, from filling finite life as much as possible with things and events as discussed in item 449 in this blog. Ethics is about the good life. There are two forms: public and private. Public ethic consists of shared morality: rules and customs of conduct, part of culture, mostly specific to a community. The private form concerns the conduct of individual life, making one’s own choices, taking responsibility, in developing oneself, possibly against the public, shared rules.



Also, Kierkegaard noted that in the face of God, in our categories of thought we are imperfect, never completely right, in our knowledge and judgement. As I said before, we cannot look in all directions at the same time. And how we look is likely to be biased (the Kant problem). Then God is attractive as the absolute, the knowing all, and judgement untainted by self-interest, ulterior motives, which the human being cannot attain. This yields Buber’s notion of God as the ‘eternal You’[i], I would say ‘Ideal Other’.



Levinas and Derrida also replaced God with the other human being, who is also unique and inscrutable, exerts an absolute, unconditional, and hence divine appeal on you.[ii] This rhymes with a root meaning of religion, in religare , making connection with something outside and bigger than yourself, in transcendence that can be vertical (God) or horizontal ( the other human being), or life. It applies to all, without discrimination, and is like the old, Christian notion of agape.     



That also rhymes with the notion of ‘resonance’, openness to another, mutual influence, discussed before in this blog, in item 449, as introduced by Hartmut Rosa. As noted several times, in this blog, to correct our prejudice and blindness, the other is the best we can get, as a source of opposition, I cannot accept the absoluteness of dedication, complete surrender to the other. If it goes together with care for the self, as the advocates claim, it is no longer absolute. As Buber indicated, He is the ideal, not the real other. The other as absolute also yields the problem, acknowledged by Levinas himself, and Derrida, hat absolute dedication to one other can harm a third other, and more others, while the principle of dedication applies to all. It may even harm the other, in taking away his/her responsibility.



 So,  dedication to God in my view is to be replaced by dedication to the ideal of life, including animals and inanimate nature, and it is to be subject to Aristotelian phronesis, taking into account conditions and intentions, and the imperfections of Man, including one’s responsibility for oneself..

     

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[i] Buber, Martin, I and Thou, Scribner, 1970.

[ii] Jan Keij, Kierkegaard, seen differently, (In Dutch), Klement, 2015.