Chapter 4. A Brief Account of the Historical Origins of Economic Fundamentalism

Table of Contents

Introduction
A Brief History
Summary

How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness to him, though he derives nothing from it except the pleasure of seeing it.

— Adam Smith[1]

Introduction

At the conclusion of Chapter 3, it was argued that the proposition that self-interest was the fundamental ordering principle operating in society could not be sustained. This conclusion is inconsistent with the beliefs of many economists, who claim that the existence of social groups and of social order can be explained by voluntary contracts between individuals who have made the rational calculation that cooperation is in their long-term self-interest. This view begs the question of whether real individuals are capable of determining what is in their long-term self-interest—a question that, in practice, has often been settled in the negative. In contrast, I argue that civilisation requires the suppression of self-interest through social norms and that, in practice, our decisions are deeply affected by socially inculcated values and by our emotions. Consequently, the complex of relationships and institutions that make the division of labour possible cannot be reduced to voluntary transactions between individuals.

I also argued in Chapter 3 that our moral codes and our legal system provide the infrastructure and the institutional basis essential for the social system in general and the economic system in particular. While it has long been recognised that infrastructure is essential to the functioning of the economic system, economists generally have taken that social infrastructure for granted, limiting their consideration to physical things. This limitation involves even a very narrow understanding of the economic concept of ‘capital’—a limited understanding that is breaking down. This has led to recognition among some economists of the importance of ‘human capital’ to the functioning of the economic system. That concept is, however, confined too frequently to embodied marketable knowledge and skills. This is far too narrow a view of the abilities and attributes required for successful human interaction—economic and social. The development of that human capital involves the process of socialisation and moral education, but the content of that socialisation has been invented in the process of social evolution and involves some vision—or visions—of the ‘good society’.

It is clear that religious and intellectual speculation has played an important part in the development of such visions. This intellectual speculation involves the attempt to see beyond the historical to what—in the rationalist, classical scientific tradition—are conceived of as more radically fundamental, underlying forces, which are seen as fixed natural laws. As such, it incorporates a conception of natural laws as mathematical, eternal and absolute—a reflection of some perfect mathematical form—derived from ancient Greek philosophers Pythagoras (569–500 BC) and Plato, and reinvigorated by the Enlightenment. Such a vision—and its associated speculative reasoning—attempts also to lay down the form that moral justification should take. I will critique this tradition in more detail in the next chapter.

As indicated in Chapter 2, these are not new questions. Rather, they are as old as philosophy and its fascination with deductive political and moral stories. Even the idea of the ‘invisible hand’—beloved of economists—was old in 1759 when Smith first used the phrase.[2] Just how old could come as something of a surprise, even though Smith tells us. In his Theory of Moral Sentiments, Smith says:

[T]hat the ancient Stoics were of [the] opinion, that as the world was governed by the all-ruling providence of a wise, powerful, and good God, every single event ought to be regarded, as making a necessary part of the plan of the universe, and as tending to promote the general order and happiness of the whole: that the vices and follies of mankind, therefore, made as necessary a part of this plan as their wisdom or their virtue; and by that eternal art which educes good from ill, were made to tend equally to the prosperity and perfection of the great system of nature.[3]

The idea could have originated with Hesiod, one of the earliest Greek epic poets, in the seventh century BC—though he might have just been reporting an idea with wide currency within his culture.[4]

In Chapters 2 and 3, I provided an evolutionary account of the emergence of social order along with a brief summary of the various ahistorical theories that have been used to account for social order. These ahistorical approaches have not led to—nor are they likely to lead to—any consensus. Rather, the history of the social sciences has been dominated by three competing opinions:

  • society is merely a collection of individuals

  • society is an integrated whole; the term ‘society’ stands for a reality

  • society is neither a fiction nor a fact; it is an entity ever in the making, a process.[5]

The first view is based on a mechanical, atomistic metaphor. In this view, atoms are conceived of as the solid fundamental particles in nature interacting in a mechanical fashion like billiard balls. Consequently, this view leads to the use of mechanical analogies and to social theories in which supra-individual forces must be explained in terms of individual behaviour. It also sees the social system as an equilibrium system modelled on the equilibrium system of classical mechanics and of Newtonian cosmology. As we will see in the next chapter, this is the fundamental idea—the paradigm, the cosmology—that underpins the Enlightenment. It is this view that underpins neoclassical economics, which models human beings and their interactions as if they were mechanical, equilibrium systems. This perspective, however, in denying the existence of a super-individual entity, still has to account for our understanding of the existence of such entities. To suggest simply that such understandings are mistaken—as Margaret Thatcher did—is inconsistent with that perspective’s own methodological individualism. This is because it denies the primacy of the meanings and intentions of individuals when they use the word ‘society’ to describe a collective entity with a pervasive influence on our lives.[6] The second view, which is based on an organic metaphor, is the way ancient Greek and medieval philosophers viewed society—the view that was overthrown by the Enlightenment. In this view, society is conceived of as an organism similar to the human body—a view lending itself to biological analogies. Important historically is the view of God as the head and society as the body.

Both of these views exclude essential elements of the social order and cannot, therefore, provide an adequate account. There is a tension between these views and an associated tension between the public and private spheres. These tensions—which remain unresolved to this day—have been central to Western political speculation. The boundaries to be placed between the public and private spheres and the limits on individual liberties are the stuff of day-to-day politics and the defining themes to which I drew attention in the opening paragraphs of Chapter 1. The third view of nature as process—or as evolution—arises primarily out of the relatively recent experience of change in social and economic life within the lifetime of reflective commentators. As a result, change came to be seen as a fundamental factor that had to be explained. This process view better accounts for the integration of the social order and the independence of the individuals that comprise it.[7]

What is clear, however, is that we are heirs to a dominant tradition of moral and social argument, arising out of the Enlightenment and based on atomism and a mechanical, Newtonian metaphor that continues to influence our policy development processes. The broad philosophical and scientific foundations of this tradition in the Enlightenment will be discussed in Chapter 5. For the moment, we will focus on a more detailed account of the origins of the various social doctrines that flow from this tradition—doctrines that influence contemporary economic and policy thought, including social contract theory.