Idealisation in Neoclassical Economics

This contemporary search for epistēmē in neoclassical economics involves a series of ‘idealisations’ of the economic agent and the setting in which ‘he’ operates. As we saw above, the particular idealisations were driven by a desire to describe human beings and their interactions as if they were a deterministic, mechanical system characterised by equilibrium—by the Newtonian metaphor. Smith was a great admirer of Newton and his moral analysis is thoroughly Newtonian and carries over into his understanding of self-interest as it appears in his economic analysis. Therefore, Smith, in the Wealth of Nations, speaks of the price of commodities ‘gravitating towards the natural price’.[23] More broadly, those Newtonian tendencies dominated physics, which came increasingly to provide the model for science in general. The marginalist movement pioneered by Walras, Jevons and Menger in the nineteenth century strengthened these tendencies in economics, which were strengthened still further by the post-World War II fascination with formalism. All three claimed specifically that economics—as an exact universal natural science—resembled classical mechanics, involving a calculus of the natural ‘forces’ of pleasure and pain.[24] This reflected the utilitarian inheritance of neoclassical economics as well as the desire of economists to emulate the mathematical formalism of physics, which they saw as the archetypical science, whose prestige they wished to share. Although Phillip Mirowski distinguishes the physics that Walras relied on from that of Newton, he nevertheless objects strongly to the resulting mechanical nature of neoclassical economic reasoning.[25] He traces at some length the powerful influence of physics on Walras and his colleagues, criticising them for their misunderstanding of that physics and their misapplication of the associated equations to economics. Despite Mirowski’s minor reservations, there can be little doubt that general equilibrium theory is fundamentally Newtonian in concept. For example, Jevons claimed in 1871 that ‘the theory of Economy…presents a close analogy to the science of Statical Mechanics, and the laws of Exchange are found to resemble the laws of Equilibrium of the lever as determined by the principle of virtual velocities’.[26]

This adoption of the equations of physics and the renaming of the relevant variables to give them an economic meaning was criticised by Mirowski in the following terms:

The most curious aspect of this program to make economics more rigorous and more scientific is that not one neoclassical economist in over one hundred years has seen fit to discuss the appropriateness or inappropriateness of the adoption of the mathematical metaphor of energy in a pre-relativistic gravitational field in order to discuss the preferences and price formation of transactors in the marketplace.[27]

As Clark points out—following Guy Routh—these developments are intended also to support their political views. Asserting—on the basis of scientific credentials—that the economy is an equilibrium system regulated by nature in the same way as the solar system lends weight to the claim that such an economy exists in harmony and is best left to itself without government intervention. There were, however, non-mainstream economists who objected strongly to this identification.[28] Knight argued as long ago as 1935 that any reconstruction of economics had to reject this mechanical analogy.[29]

Within this mechanical framework, Homo economicus—economic man—created originally by classical economics, is a reductionist attempt to obtain an idealised creature defined by economic motives only—a machine for making decisions, an atomistic economic billiard ball on which economic ‘forces’ act, which at the same time remains perfectly ‘rational’. This contradiction in terms is made only remotely credible by the instrumental mechanical understanding of rationality employed. This understanding is itself an unjustified and misleading idealisation to which we will return shortly. Ceteris paribus—the assumption of other things being equal—is then invoked on the unsafe reductionist assumption that this isolates successfully the influence of other phenomena. In the case of interdependent complex phenomena, it is now clear that this is far from true.

Importantly, Weber also believed that no conceptual system could do full justice to the complexity of social phenomena. Nevertheless, he believed that his methodology would enable claims made about the social world to be subjected to rigorous empirical verification, provided this tool was applied only to rational and goal-oriented behaviour. These idealisations were thought, falsely, to provide economics with an analytical situation analogous to those involved in the control of excluded variables in experimental situations in the natural sciences. Among the heroic simplifying assumptions used in neoclassical economics are assumptions derived from classical economics—those of rational behaviour and consistent preferences. The claim that economic behaviour is so governed has allowed economists—drawing on Pareto—to claim that economics is the science of logical actions and of rational choice. Unfortunately, for mainstream economics, the empirical evidence shows that the preferences of real people are not consistent—that is, they are not transitive—and this undermines the claim.[30]

There is a deeper, more hidden motive for this idealisation. Acknowledging any diversity among economic agents further undermines the mathematical tractability of the analysis and has to be avoided at all costs.[31] This ‘ideal’ type is obtained by stripping out most of the ethical, religious, altruistic and other motives of real human beings.[32] The other idealisations are those involved in the setting, in particular, of the postulation of perfect competition, perfect information, complete markets and resource mobility. The particular idealisations have been subject to enormous criticism and it is a moot point whether the regularities detected by this procedure are artefacts of real economic affairs or of the analytical system. I hold the latter interpretation.

This approach to economics did not originate with Weber or Pareto. For example, John R. McCulloch (1789–1864), the leader of the Ricardian school after Ricardo, in his Principles of Political Economy published in 1825, gave an early defence of this practice.[33] Interestingly, McCulloch was trying to deal with objections to what he claimed to have been political economy’s ‘best established conclusions’.[34] Nevertheless, he thought that the conclusions of political economy applied only in the majority of cases, because special circumstances could differentiate particular cases. Even so, McCulloch believed that those conclusions were an appropriate basis for government policy decisions. In practice therefore, McCulloch avoided dealing with those objections. Mill, in turn, did the same, while drawing attention to the practical men who objected to what they believed to be the inappropriate conclusions that economists drew from invented assumptions. Mill rejected those objections on the basis that while Euclid’s ‘laws’ were also true only in the abstract, they were, nonetheless, useful. He claimed that all ‘phenomena of society are phenomena of human nature, generated by the action of outward circumstances upon masses of human beings; and if, therefore, the phenomena of human thought, feeling, and action are subject to fixed laws, the phenomena of society cannot but conform to fixed laws’.[35]

While aspiring to exactness, Mill nevertheless drew a distinction between exact sciences such as astronomy and inexact sciences such as the moral sciences, which he saw as lacking the necessary information. While Mill claimed to have a richer conception of human beings than Bentham, it nevertheless involved a deterministic view little different from Bentham’s.[36] Any placidity in human nature operated in the longer term. Mill also drew a distinction between general and specific causes and—going further than McCulloch—believed that the causes operating in political economy were laws of human nature, something he believed the individual could check for themselves by introspection. Consequently, he argued that political economy was an abstract and aprioristic science such as geometry. For him, economic conclusions—which are derived from assumptions that resemble real circumstances—are true in the abstract and express tendencies present in human behaviour. These ‘truths’ are applicable in practice when the influences of the neglected effects are added. Of course, these universal truths were said to be manifest most completely in Britain—the most advanced industrial country in the world. Importantly, however, Mill did not extend these claims to the distribution of production—this, in his view, being subject to the laws and customs of mankind.

Marx went further again, postulating a hierarchy of factors, believing that his law of value represented the deepest essence of society. These increasing levels of abstraction have an important consequence. Whereas for McCulloch the conclusions of political economy were generally valid, for Mill they were laws of human nature, while with Marx we finally arrived at something even more abstract: a Platonic form. Of course, neither Mill’s abstract truth nor Marx’s deepest essence was open to empirical falsification. Ironically, for those on the Right, it is this Platonic form— articulated most strongly by Marx—that unconsciously underpins economic fundamentalism and much neoclassical economic theorising.

The positivist movement associated with the Vienna Circle in the 1920s and 1930s strengthened these positivist tendencies in economics. For his part, Pareto sought also to develop a scientific economics based on what he thought were natural phenomena based on natural laws independent of social institutions and using an analogy with mechanics and the concept of general equilibrium. Nevertheless, Pareto was conscious of the limits of pure economics and saw a need to add back into the analysis the factors left out by these idealisations before one could make predictions about real phenomena, and before these analyses could be applied in the world. He also thought that the applied scientist should turn to other disciplines for those other analyses.[37] That was the reason why he turned to the study of sociology. Pareto tells us, for example, ‘In order to judge whether customs protection is harmful to people, we need help not only from political economy but also from all those sciences which in their totality constitute that branch of human knowledge called social science.’[38]

The contemporary economist feels no such need before offering policy advice. Indeed, there is no greater insult for mainstream economists than to describe someone as a sociologist.[39] There is little doubt, therefore, that Pareto would have rejected the particular positivist use that economists now make of Pareto-optimality and the economic imperialism of many economists.

If we are going to use economic analysis as a framework to erect hurdles to policy initiatives, we have to have a great deal of confidence in that analysis. The confidence that is currently placed in the mainstream framework is, however, mistaken. That framework should be replaced by a framework demonstrating relevance to the continuing transformation of the economy and to the achievement of real improvements in social welfare—particularly among the disadvantaged. In this regard, it seems bizarre to look for regularities in human conduct by grossly exaggerating one aspect of the apparent reality, and then to claim that this exaggeration represents a simplification rather than a distortion. I doubt this is a fair description of what the natural sciences seek to do. In a scientific experiment, one can hold all other things as being equal through careful experimental design. In the social disciplines, in a non-experimental environment, it seems a wild leap of faith to assume that an idealisation enables one to ignore possible interactions with other influences. This reductionism is a fundamental mistake, as it is highly likely that when we are dealing with human beings we are dealing with non-linear dynamic systems; and if we are, such influences cannot simply be added together. It is an approach that also legislates higher-level systems out of existence. In any event, the uncorrupted layperson’s complaints that the neoclassical assumptions and the conclusions drawn from them are unrealistic are simply dismissed—usually with a sneer.