The Normative Use of Neoclassical Economic Idealisations

Part of our problem arises because it is too easy to slip unconsciously between very different understandings of the word ‘ideal’ and to end up believing that—with Hirshleifer, Becker, Posner and Thatcher— the true nature of human beings is being described by Homo economicus. Similarly, it is too easy to make a similar slip in respect of the idealisation of the situation. What was justified initially as being a helpful analytical tool to get around some of the complexities of human behaviour has ended up being used as a normative ideal. Without a doubt, the most important policy sleight of hand in the neoclassical story—its reversal of the onus of proof—is a consequence of these idealisations. In neoclassical economics therefore we have an idealisation of ‘THE MARKET’—another of Plato’s forms and the god of economic fundamentalists. It is then easy to further assume that the market system is the ideal form of economic organisation and, for the true believers, the ideal form of social organisation. What Weber justified as idealisations to illustrate only one aspect of social phenomena and to enable empirical investigations have been turned into a normative ideal contrary to his intention and to good sense. This slide has been assisted by the fact—as we saw in the previous chapter—that it is simply not possible to separate the positive from the normative. All the talk about positive economics serves only as a smoke screen to hide the fact that economics is legislating one form of social organisation. One particular result is that most government action is now categorised by economists as intervention in market processes, which has to be justified in terms of the neoclassical idealisations and the associated theology, rather than as collective action furthering collective goals.

Market failure

Of course, economists usually admit that the transactional situations we all face in daily life could be different from those assumed in their idealisation, but they leave it to us to demonstrate that those differences matter in the context of their particular flawed conceptual framework; that they result in ‘market failures’ and that government correction is less costly than maintaining the status quo. In the absence of any convincing empirical confirmation of the validity of this form of modelling, this reversal of the onus of proof—this demand that policy activists demonstrate that real markets are not perfect before they can act—is inconsistent with any reasonable interpretation of good scientific practice. This tactic also places the policy activist in an impossible position because, in the absence of action, it is impossible to demonstrate the benefits of any particular action or even the costs. It is also impossible to know what the economy—or particular sectors of the economy—will look like if there were complete and perfectly competitive efficient markets and free trade.

One further important effect of this search for market failures is that it endorses tacitly the above flawed conceptual framework. The result is a theoretical discussion couched in neoclassical terms even where the activists reject that neoclassical framework. It is like trying to persuade the Pope that birth control or abortion may be permissible in certain cases when one rejects the theological and authority claims of the Catholic Church. These concerns are amplified when economists and libertarians apply these flawed simplistic concepts to political systems and voting patterns as if they were economic phenomena and start talking about the dangers of ‘government failure’. This is just pseudo-scientific nonsense—a very limited rediscovery of the concept of original sin. We all know that human beings are fallible, have questionable motives and make mistakes—but to refuse to do anything on the ground that we could be wrong is not prudence; it is simple cowardice.