Econolibrium 2010 8

The Poverty of Economics

Coverage of a Talk on “The Normative Foundations Atiyab Sultan
of Scarcity” by Dr. Asad Zaman at LUMS

Dr Zaman began his talk by pointing out that modern general equilibrium theory, Frank
while the limitations of economics, especially Hahn, writes that “Although I never believed
the disjunction between economic theory and it when I was young and held scholars in
reality, is recognized by many, there is too great respect, it does seem to me to be the
much invested in it which prevents an easy case that ideology plays a large role in eco-
departure for Western academia. The present nomics.” Nobel laureate Ronald Coase is of
circumstances however present us in the East, the same view, saying “Existing economics is
where we have much less invested in conven- a theoretical system which floats in the air
tional economics, with a tre- and which bears little relation to what hap-
mendous challenge and oppor- tunity pens in the real world.”
to redo economics from scratch
and question some of its funda- “ Economics as
taught in
mental assumptions. He struc- America's graduate
The Rise and Fall of Positivism
Dr Zaman then described the phi-
losophy of positivism in greater detail to
tured his talk around the phi- schools... bears
understand its relevance to economics.
losophical underpinnings of testimony to a tri-
umph of ideol- He said that the binary drawn between
some basic economic assump-
ogy over sci- fact and value by positivists is artifi-
tions, contending that they were ence
not value-free and while not
advocating any particular alternative, stressed
” cial and that in reality, though facts
and values may be separated, they are not
separated along the lines the positivists have
the available opportunity to revisit some of
divided them. Positivism elevates fact over
the fundamental notions of economic theory,
value, science over religion, the objective
particularly the designation of scarcity as the
over the subjective, casting everything that is
foremost concern of economics.
‘non-scientific’ into the garbage can.
Dr Zaman described how modern economics
While describing the rise of positivism, Dr
emerged in the 1930s and is grounded in the
Zaman referred to the historical circum-
prevailing philosophy of the time- logical
stances. Positivism rose in an era enamored
positivism. He said that economic methodol-
of science and it became the magic formula
ogy, with its stress on mathematics and quan-
for the complete deification of science. Posi-
titative analysis, is a reflection of this as the
tivists reduced the category of knowledge to
elevation of scientific methods is a key tenet
facts and logic alone, dispensing with relig-
of the school. While quoting numerous lead-
ion, values, etc and treating them as worthy
ing economists, he mentioned Nobel prize
of contempt. The basic tenet was that only
winner Stiglitz stating that “[Economics as
those things count as knowledge which can
taught] in America's graduate schools... bears
confirmed by observation i.e. they are mani-
testimony to a triumph of ideology over sci-
fested in brute fact and sense-data. (This is in
ence.” Furthermore, one of the architects of
Econolibrium 2010
stark contrast to religion, for example, which
calls for belief in unseen elements.)
A particularly harmful consequence
of this was that values were also deemed as
nonsense. This was exemplified in the change
in the mission statements of universities
which, prior to the rise of positivism, aimed
at building the character of students. After the
1930s, the statements were gradually purged
of this notion with horrific consequences. e.g.
the architects of the gas chambers during
World War II were graduates from top uni-
versities and the Vietnam war was also
‘managed’ as a business by Ivy League
graduates. Dr Zaman pointed out that the
casting away of values resulted in the crea-
tion of one-eyed monsters who had no regard
for the sufferings of their fellow beings.
Positivism and its relation to economic the-
ory
Relating positivism to economic the-
ory, Dr Zaman explained that the key idea of
positivism is that observables exist and non-
observables do not and that only those state-
ments are meaningful which have observable
implications. He explained how Samuelson’s
theory of revealed preferences is based on
this idea. Since preferences are internal, they
are not used directly but choice is deemed to
be their manifestation. Dr Zaman stressed
that the replacement of utility by revealed
preferences in the form of choices is errone-
ous because for choices to be consistent, they
have to be backed by internal (i.e. unseen)
preferences, because otherwise an individual
may choose differently each time.
Dr Zaman then pointed out that the
fundamental problem of economics, scarcity,
rests on three normative assumptions:
• A political commitment to private
property
• A methodological commitment to
considering tastes as exogenous
• A commitment to the notion that wel-
fare equals the satisfaction of prefer-
ences.
Dr Zaman stressed that despite the
claims to being objective, factual and scien-
tific, these were all normative ideas which
9
underpin basic economic theory. Expounding
on this, he referred to the positivist notion
which stresses that the validity of a theory
rests in the accumulation of enough support-
ing facts. Actually, it can be proven that there
is a fundamental indeterminacy: large num-
bers of theories will fit all available facts and
it is the accidental ideological/political com-
mitments of scientists that determine which
theory will be picked. It is here that the his-
torical process assumes paramount impor-
tance.
Dr Zaman then discussed the three assump-
tions mentioned above in greater detail:
• Locke’s theory of property
The philosophical works of John Locke put
property rights outside the reach of powers of
monarchs (and politically legitimate govern-
ments). Particular historical circumstances in
England led to the acceptance of this theory.
The restoration of King Stuart, following
Cromwell’s Rebellion, required support of an
element of the aristocracy. Following the suc-
cessful restoration, these elements proceed to
carry out the biggest land grab in history,
seizing all public lands, rivers, forests, and
legitimizing this by a Lockean notion of pri-
vate property. The massive numbers of peo-
ple dispossessed of their livelihoods created
the stock of labor necessary for the industrial
revolution. This historical episode also led to
the creation of the modern idea of private
property as sacred, (to the detriment of all
social values, as described in great detail in
The Great Transformation by Polanyi) main-
stay. This notion of private property is also a
background assumption of economic theory.
Dr Zaman described alternatives to private
property e.g. the practice of native Indians
who considered land as belonging to all,
communist society in which people are moti-
vated by social mechanisms rather than
money, etc. Islamic theories of property are
substantially different from dominant West-
ern theories; see for example Sait & Lim.
While not advocating any particular theory of
property, he simply argued that instead of
being accepted as a background fact not sub-
ject to debate, the notion of private property
Econolibrium 2010
should be recognized as a political deci-
sion and openly discussed.
• Taste formation
Samuelson, Stigler and other leading
economists have argued that “economists
should not analyze tastes” and treat these as
exogenous to economic theory. The role of
scarcity in economics changes substantially if
we violate this methodological commitment
born out of positivist views (of not analyzing
internal mental states). A number of analysts
have suggested that tastes are formed through
comparative assessments and attempts to
keep up with the Joneses. Beyond subsistence
level, taste formation was a matter of looking
at what others have, leading to a rat-race and
competition in the acquisition of commodi-
ties. In this case, production of goods would
not eliminate scarcity, as the desired level o
consumption would keep rising.. Dr Zaman
referred to Galbraith’s work which shows
how industries produce masses of junk prod-
ucts, creating a need where there is none.
Thus the real problem was not scarcity, but
over-production. Others have argued that so-
cieties choose how to train children and this
determines preferences. Again, Dr Zaman did
not advocate any particular theory of taste
formation and noted that different people
have said different things and which of these
theories is correct has a tremendous effect on
correct economic policy. Therefore it is cru-
cial for economists to study this issue – they
cannot afford to take tastes as exogenous and
be agnostic about how tastes are formed.
• Measuring Welfare
Dr Zaman used a modification of the
Pareto principle to illustrate how our notions
of welfare can be revised. The “Pareto-style
longevity principle,” would state that a redis-
tribution of income increases the welfare of a
society if it increases the lifespan of some
10
members without adversely affecting lifespan
of anyone. He pointed out that the original
Pareto principle therefore reflects a commit-
ment to private property, which leads to the
conclusion that in this framework, upholding
private property is scientific but upholding
basic needs is not. By thus showing that the
seeming neutrality of welfare principles is
actually grounded in normative notions, Dr
Zaman then referred to alternative ways of
looking at welfare. He referred to the material
welfare approach, human capabilities ap-
proach, etc which stress that the problem is
not scarcity but distribution. Sen’s work on
famines illustrates this by showing that fam-
ines are not a result of food shortage but of
social commitments to certain notions of the
rights and entitlements of the poor. Similarly,
communitarian notions of welfare which ele-
vate communal welfare over individual wel-
fare can lead to a reduction in efficiency
losses, through the creation of communal
safety nets against unforeseen adversities.
Again, while not advocating any notion of
welfare, he argued that economists must
study this issue, complex and thorny as it is.
Any ruling on economics is based on an im-
plicit view of welfare, and therefore it is bet-
ter to make it explicit.
Summarizing, Dr Zaman said that the
positivist bifurcation between fact and value
does not hold up to scrutiny and in reality,
facts and values are entangled. It is values
that determine which facts (and therefore
which theories) are relevant and significant.
He pointed out that positivist notions have
been definitively rejected by philosophers.
Even in mathematics, the heartland of logic,
Godel’s undecidability theorem showed that
even mathematical propositions must be cho-
sen on grounds of aesthetic values, instead of
being proven true or false. Intuition and aes-
thetics, as well as other values, determine
‘truth’ instead. He reiterated the opportunity
to revisit economic theory by a recasting of
the fundamental assumptions discussed
which did not hold up to the claims of objec-
tivity and instead were manifestations of a
particular philosophical school of thought. To
be optimistic without being positivist may be
Econolibrium 2010 11

a tough ask for many of us, but Dr Zaman

certainly left hopeful question marks hanging
in the air.

Economics through Pictures