Monday, April 20, 2009

The Economy, or is that Moses's Shoe?

Hundreds of thousands of economists around the world pour over their subject. A good number attempt to reduce the economy to scientific laws, which can be expressed as mathematical theorems. Laws are passed and people are taxed, subsidized or even punished in order to promote the economy.

Just what is this economy? Before dismissing this question as naïve or impertinent, consider an almost unintelligible sentence from John Selden (1584-1654), a polymath, whom the poet, Milton, described as "the chief of learned men reputed in this land." Selden wrote: "We commonly are at What's the Reason of it? before we are sure of the Thing." The two short sentences that follow makes Selden's meaning clear: "sure of the Thing. Twas an excellent question of my Lady Connon, when Sir Robert Coggon was magnifying of a shoe, which was Moses's or Noah's, and wondering at the strange shape and fashion of it: But, Mr Cotton, says she, are you shure it is a shoe?"

Just what is this economic shoe? What we call the economy is just an abstraction. We just rope off part of our lives and call it an economy.

Imagine encountering a person totally unfamiliar with our way of life who is hungrily inquiring about his surroundings. Having heard a great deal about our society, our visitor asks to be directed to see the economy. We should we point him?

Is a nursing mother lavishing love on an infant part of the economy? Her child may well turn out to be a scientist whose work will increase the Gross Domestic Product by billions of dollars. But then, we know that adversity helps some people develop. Is someone tormenting a child part of the economy?

Artists squatting in a blighted part of town may be planting the seeds of the next trendy neighborhood, making some property owners fabulously wealthy, while displacing others who cannot afford the gentrified rents. Are these artists part of the economy?

Also, when disaster strikes, people put aside their thought of the economy.

As you might expect, normally inexpensive goods might cost a great deal in the wake of a disaster. For example, after Hurricane Hugo hit South Carolina in 1989, portable generators that normally cost a few hundred dollars sold for thousands. However, most people find the behavior of such profiteers repellant. For example, a Newsweek article of October 30, 1989 described the doubling of bottled water prices after the 1989 San Francisco earthquake as "mind-bending audacity" (p. 10; cited in Samuels and Puro 1991, p. 62).

What was mind-bending? Isn't that what business is supposed to do? Sometimes firms do hold prices steady in the wake of disasters, despite the profits that they could earn by charging what the market might bear (Samuels and Puro 1991, p. 62). For example, Safeway refrained from raising prices immediately after the Alaskan earthquake of 1964 and continued to do so through the month of April. It raised prices in May, only after management decided that the emergency period had passed (Dacy and Kunreuther 1969, p. 116). Truck rates were lowered, but only for those commodities that could not be conveniently shipped by boat -- the competitive mode of transport (Hirshleifer 1987, p. 141).

Wal-Mart burnished its image by delivering supplies in the wake of Hurricane Katrina, but why would the public applaud such actions that violate the logic of the economy? Maybe economists' attention is misdirected and it is not Moses' shoe after all.

Apologies in advance. This is a very hasty and preliminary stab. Comments will be appreciated.


Robert D Feinman said...

This is just another variation of the question as to whether the GDP is a useful measure.

The classic example of how it distorts reality is the treatment of stay-at-home moms.

If the woman goes out to work and then hires a baby sitter both salaries add to the GDP. If she stays home and cares for her own kids then there is no measurable economic activity. It one assumes that the baby sitter also has kids and the newly working woman minds them so that they have merely exchanged duties, one can see how stupid the measure is.

The "economy" is defined as those areas of concern to those who deal in money, namely the wealthy and their minions. That's why we are starting to see discussions about other criteria, such as happiness indexes and the like.

Since I'm hung up on creating a steady-state economic system, I'd like to see a sustainability index created.

A society which can live within its means would score high, one, like the US, that has to rape the rest of the world for raw materials would score low.

Michael Perelman said...

Robert, I was trying to do something else than just critique the measurement of GDP. Or better yet, the critique of GDP would only be a part of my intention here.

Rather, I wanted to suggest that the whole idea of an economy is an abstraction. Seeing the economy as re-embedded in a broader scheme of life is a the economy (as Polanyi would say) might give us a more solid grounding.

Robert D Feinman said...

Well, maybe it's an issue of semantics. I equate economy with finance and money.

What you are aiming at is embedding "economy" in society, which is the larger abstraction.

That's why I write about creating a steady-state society, not a steady-state economy.

It's not just the idea of unlimited growth which is the basis of capitalism which needs rethinking, but the goals that society sets for itself. Acquisitiveness for its own sake or as a status symbol needs to be replaced.

Perhaps something along the lines of American Indian culture where people see themselves as part of a long process which extends out to the past and future.

Alex R said...

Very nice start to... something. I think that the question of "what is the economy" is an important one. If one wishes to generalize beyond "that human activity which involves the exchange of money" it's not always clear which way to go. The trend I see reading around in the popular treatments of economics ("Freakonomics" etc.) is that *any* human activity which admits of some kind of quantification will sometimes be considered economic.

I'd like the discussion of post-disaster behavior to be fleshed out -- I'm not clear how this couples to the bigger question, except simply to point out that people don't always attempt to maximize their monetary gain (or minimize their loss) on every single transaction.

Finally, a niggle: please, "pore over" rather than "pour over", unless liquids are involved... :-)

john c. halasz said...

Rather than seeking for a distinct "entity" or domain, perhaps one could seek a definition as a kind of activity that fastens on certain aspects of social life, with its own kind of differentiated "rationality", that exists side-by-side and overlaps with other activities and their characteristic "rationalities". So distinctively economic activity would concern itself with the seeking out or generating, realization and distribution of more-or-less material surpluses. That would occur in all societies and across a spectrum of activities,- production, exchange, invention, lending, etc. And, since just about everything would have a budget-constraint attached to it, just about all social activities would have an economic aspect, though not all their ends are economic in nature or orientation. By contrast, politics, for example, could be defined as social activity oriented toward the resolution of conflicts and the securement of authoritatively binding agreements. It's obvious that economic and political activities overlap and can not be cleanly separated into entirely different domains, but what gets abstracted out and theorized are different aspects of the "same" social reality. It's a matter of not reifying the theories, as if they referred to separate realities. Though that's, of course, the sort of ideological operation that much economic theory seeks to effect.

Michael Perelman said...

All good points. Alex is correct. Economists have tried to use their models to explain just about everything & have used rat experiments to "confirm" economic theory.

John describes overlapping spheres of influence, but economics have been infringing on all of them -- for example by training judges to decide cases on the basis of economic theory.

In any case, I will "pour" over your comments some more. Thanks.