Several authors want to make an honest woman of dismal science. Among them are Nobel Prize winner George Akerlof and Rachel Kranton who wrote Identity Economics, and Sam Bowles who penned The Moral Economy. Project Syndicate posted a quick review by Ricardo Hausmann who wrote,
“Two recent books indicate that a quiet revolution is challenging the foundations of the dismal science, promising radical changes in how we view many aspects of organizations, public policy, and even social life. As with the rise of behavioral economics, this revolution emanates from psychology.”
Cognitive psychology spawned behavioral economics and its proponents have grabbed six Nobel prizes for telling us that humans are not always rational. Behavioral economists tried to corral the older Efficient Market Hypothesis (EMF), which actually said that in the long run professionals make the market behave rationally. EMFers always knew that in the short run people could act irrationally and often did. Behavioral and EMF economists talked past each other for the most part because the first dealt with the short run and the latter with the long run.
The new economics proposed by Akerlof and company want to improve behavioral perspectives by adding morality to the dismal science, which hasn’t been a part of mainstream economics since Adam Smith. Behavioral economics led to calls for the state to nudge people in the direction economists thought best for them,
"Such as forcing them to opt out of rather than into better choices. [. . .] The new revolution assumes that when we make choices, we do not merely consider which of the available options we like the most. We are also asking ourselves what we ought to do. [. . .]
Akerlof and Kranton propose a simple addition to the conventional economic model of human behavior. Besides the standard selfish elements that define our preferences, they argue that people see themselves as members of “social categories” with which they identify. Each of these social categories – for example, being a Christian, a father, a mason, a neighbor, or a sportsman – has an associated norm or ideal. And, because people derive satisfaction from behaving in accordance with the ideal, they behave not just to acquire, but also to become....In the process, we may understand that we vote because that is what citizens ought to do, and we excel at our jobs because we strive for respect and self-realization, not just a raise."
If the revolution succeeds it will make mainstream economics better, but it will lag behind Austrian economics by about 150 years and the economics of the University of Salamanca, Spain, by about four centuries. Hayek was convinced that Austrian economics descended in a straight line from Salamanca.
Hausmann wrote that mainstream economics lost its moral foundations when economists forced it into a shotgun marriage with math:
“For a long time, economic theory aspired to the elegance of Euclidean geometry, where all true statements can be derived from five apparently incontrovertible axioms, such as the notion that there is only one line that connects two points in space.”
Actually, 19th century economists envied mechanics more than geometry. They lusted after a system of simultaneous equations that would make predictions as accurate as those in physics. Leon Walras gave it to them. The great economist Axel Leijonhufvud quipped in his humorous essay “Life among the Econ,”
"The Math-Econ make exquisite models finely carved from bones of Walras. Specimens made by their best masters are judged unequalled in both workmanship and raw material by a unanimous Econographic opinion. If some of these are ‘useful’ – and even Econ testimony is divided on this point – it is clear that this is purely coincidental in the motivation for their manufacture.”
And Mises wrote in Human Action,
"The mathematical economist, blinded by the prepossession that economics must be constructed according to the pattern of Newtonian mechanics and is open to treatment by mathematical methods, misconstrues entirely the subject matter of his investigations.... He no longer deals with human action but with a soulless mechanism mysteriously actuated by forces not open to further analysis.
Economics deals with the real actions of real men. Its theorems refer neither to ideal nor to perfect men, neither to the phantom of a fabulous economic man (homo oeconomicus) nor to the statistical notion of an average man (homme moyen). Man with all his weaknesses and limitations, every man as he lives and acts, is the subject matter of catallactics. Every human action is a theme of praxeology."
However, Mises stressed that economics can never tell us what is moral. Economics can only tell mankind the most efficient way to achieve its goals; it cannot tell humans what goals they should aim for. That is a role for religion and philosophy, and religion is not irrational as atheists claim. Mises wrote in The Ultimate Foundation of Economic Science that morality came from a loving God as a manual for successful living:
"The utilitarian philosophy does not look upon the rules of morality as upon arbitrary laws imposed upon man by a tyrannical Deity with which man has to comply without asking any further questions. To behave in compliance with the rules that are required for the preservation of social cooperation is for man the only means to attain safely all those ends that he wants to attain.
According to the fundamental doctrine of Christian theology and philosophy, God has created the human mind in endowing man with his faculty of thinking. As both revelation and human reason are manifestations of the Lord's might, there cannot be ultimately any disagreement between them. God does not contradict himself. It is the object of philosophy and theology to demonstrate the concord between revelation and reason. Such was the problem the solution of which patristic and scholastic philosophy tried to achieve. Most of these thinkers doubted whether the human mind, unaided by revelation, would have been able to become aware of what the dogmas, especially those of the Incarnation and of the Trinity, taught. But they did not express serious doubts concerning the faculty of human reason in all other regards."
Economists trying to sew morality to economics will at some point have to face the question, “Whose morality?” After all, Nietzsche taught us that without God morality can’t exist. He didn’t mean that people can’t fabricate some type of ersatz morality. He meant that without God people can't use reason to arrive at a universal morality. Morality becomes a matter of opinion.The West has proven it can invent anything. The problem is that we have seen a lot of different moral systems over the past three centuries. Today, moral philosophers merely opt for consensus as the best we can do. But consensus has changed dramatically over the centuries. Ethnic cleansing of tribes east of the Mississippi and slavery were once the consensus in the US.
Would it be too much to ask that economics return to the morality that made the West great in the first place, that of the Bible distilled by the theologians of the University of Salamanca? It could make America great again.