Philosophy of Economic Behavior E-Book

Nara Rela

• Herausgeber: Editora Dialética
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 427

Veröffentlichungsjahr: 2021

Beschreibung

Why do economic models often fail in their predictions? Why do economists and financial market professionals make foolish decisions even though they know they may be harmful in the future? Why do many competent people in their financial professional life make wrong decisions in their personal finances? Why does economics today seem to us to have the characteristics of an exact science? These are some of the questions that Philosophy of Economic Behavior aims to answer. This is a new field that encompasses both behavioral and psychological studies of economics in the light of philosophical thought. Economics is primarily a human and applied social science, and its study is based on human behavior within the economy. The main purpose of the book is to present its fundaments, focusing on the individual and not the market nor the government. The conclusions drawn here indicate the starting point as a basis for the outcome of many possible approaches: psychology of economics, behavioral economics, philosophy of emotions, philosophy of economics, nudges and other techniques that influence the decision making, ethics of economic behavior, ethics of decision making, ethics of the financial system (banks, startups, digital banks, investments, cryptocurrencies, etc.), education/health/socio-cultural condition/employment/ income vs. economic behavior, influence of algorithms in decision making, economic behavior and globalization, and many other relevant topics.

Leseprobe

To João Carlos, Maryana and Ped

Acknowledgements

One of the most interesting and rewarding aspects of research in academic life is the opportunity to be in contact with scholars committed to encouraging the quest for knowledge. I would like to thank the following people very much, both for sending me the texts and providing clarifications: Daniel Hausman, Uskali Mäki, Giovanni Cucci, Eric Schliesser, Karsten Stueber, Gerald Postema, Samuel Fleischacker and Don Ross. I am grateful to P. Louis Caruana, SJ for his support during my doctoral period.

A Light exists in Spring

Not present on the Year

At any other period –

When March is scarcely here

A Color stands abroad

On solitary Fields

That Science cannot overtake

But Human Nature feels.

Emily Dickinson

PREFACE

The history of humanity and economy is written with the same feather pen; speaking of the first implies on describing the second. The trajectory of the human being is narrated through pleasures, pain, desires, passions, games of power and domination, fights, addictions and virtues in its double relationship with itself and with the world. Economy, as an exchange activity, being so outdated, lost its origin, for it began when the first human being had the desire to own something possessed by someone else. Exchanging necessarily implies on a minimum relationship between two people who bring with themselves, the spirit filled with sentiments, desires and emotions which follow the action, whether it is a fair exchange or authoritative. For this very reason, economy has the sense of purpose of being the individual in a social-economic interaction in his activities as a member of a group. Where there is desire and necessity, there is economy. Therefore, this is the reason for its pertaining classification to a complex world of human sciences.

Talking about human progress also means talking about its economic development which has reached a high standard of sophistication in the current context. However, and not uncommon, the expected results are not achieved or partially met after the implantation of certain economic measures. Why do the economic models still fail despite the increasing sophistication of their methods?

Economy is a double-sided science. Amartya Sen named the section of economy related to mathematics and econometrics “engineering” as the basis of modeling of this science, precisely that area which should be considered its exact part, able to make predictions but none the less, not able to perfectly accomplish this last function. Therefore, it is clear that it is not in its eminently scientific part that the answers can be found. In this book we immerse into the more instable aspect, and for this very reason, the one with more possibility of pointing out the causes: in economy yet as a science, although, focused on that which is its ultimate purpose, the individual as a member of a group united by the same purpose, using the hypothesis of the fact that economy, being a science which has interactions as a basis within a social economic context, makes its human side interfere with its part that should be exact.

The starting point was defined exactly at the moment considered to be the birth of economy as a science, although this was discussed long before in a non-systematic way with respect to inherent specific topics. And this is how the choice of the proposed authors came about. Adam Smith, considered the father of modern economy, systemized political economy in The Wealth of Nations and John Stuart Mill, configured it as a science by defining its objectives, methodologies, scope and limits in his book On the Definition of Political Economy and the Method of Investigation Proper to It.

What drew attention in the study of both authors is that, despite the logic of their arguments and differences in approaches, there was a common point where the certainties of assumptions became more unstable, in other words, where operationalization of economy depended on the action of human beings or in current terms, where the success of the applications of the models depended on the fact that the diverse actors behaved within an expected and pre-established standard. Adam Smith, as a moral professor, had already demonstrated the power of sentiments in the process of social interaction in his book Theory of Moral Sentiments and Stuart Mill states that the logic of the models could be disturbed because of human nature. Based on the standing hypothesis, the overall objective was to determine how the human being in his economic activities could cause instability in the models, the so called “disturbing causes” by John Stuart Mill.

It was established, as the first specific objective, to understand how Mill characterized economy as a human science despite supporting mathematical models. Nevertheless, the abstract and arbitrary definition of the homo oeconomicus, that is, how a completely rational human being who deals with and handles economy on a daily basis with actions exclusively focused on maximizing his profit could cause instability to the models. The denomination “homo oeconomicus” was given by Vilfredo Pareto in order to designate the human facet aimed at the search for richness. Therefore, it is a concept which encompasses the “homo”, that is, an individual in all his psychological complexity, allegedly acting rationally in search of richness, that is, as an “oeconomicus”. As verified in the course of the book, what causes disturbance in this concept is that there is always a greater impact towards the “homo”.

As a disturbing cause in the economic models, Stuart Mill argued that human nature can act as a contradictory force in search of wealth when expressed in a manner of desires for expensive goods and aversion to work. Consequently, the whole book was aimed toward the binomial science and the economic man, aiming to understand how someone else’s behavior could interfere with his modeling. As a science, despite all “mathematisation” (or engineering), economy has shown to be inexact for defining a tendency in its models instead of defining a precise direction. On the other hand, it is not a science that treats the human being as an isolated individual but as an individual living in a social interaction.

Thus, a second specific purpose was established, to wit, to understand how an individual comes to interact with others and how this reflects on his social economic behavior. Hence, the importance of Adam Smith as a philosopher and economic systematizer, to illuminate the alleged rational actions of the oeconomicus based on the concept of “sympathy” shown in the analyses described in his books. As far as I know, the “disturbing causes” by Stuart Mill had not yet been studied under the light of thought by Adam Smith as expressed in his Theory of Moral Sentiments.

The homo oeconomicus had been studied within the scope of economy and psychology, but not within a philosophical perspective. I can point out this aspect as the second point of originality of the book. Therefore, there was the necessity of the historic research of the origin and the course of construction of the basic concepts which resulted in the thought of the two philosophers previously mentioned specifically within the limits established by the problem and hypothesis. I am referring to the concepts of sympathy, self-interested actions, passions, desires, vanity, pride, human nature, causes and effects, theorization of economy, society, wealth and psychological law. The results served as a basis for the argument that the economic man defined by Mill did not only have logical aspects but assumed nuances of behavior also motivated by sentiments, or quasi rational, as Richard Thaler, the Nobel Prize in economics would say.

For Stuart Mill and Adam Smith, society is understood as the sum of each member separately considered and not as part of a total unified entity, which means that each one could be the ignition which would start the process of the coordinated action which would lead to a change in social behavior. In the economic field, the various homo oeconomicus driven by the desire of wealth and acting within their personal interest would take the richness from their social group or from the nation as claimed by Adam Smith. Stuart Mill stated that actions from the economic man are under the impulse of the psychological law which states that “a greater gain is better than a smaller”, but he did not specify how he reached this law. Not having found psychological and economic literature that could explain how the philosopher established the principles of the referred law, I sought to determine its origins and reasons. It was in the book Analysis of Human Mind written by James Mill and edited by and with notes from his son John Stuart Mill, where the explanation was found, that is, in the sense of pride when realizing that the possessed wealth is greater than that of others but even more, the satisfaction when realizing that the possessed wealth of someone else is smaller. Such sentiment, the pride of comparison, makes the individual constantly search for a greater gain. The development of the argument can be pointed out as the third point of contribution of the book.

For Adam Smith, the essence of the economic man is in the activity of exchanges in all its meanings, which made the research investigate whether the philosopher had also pointed out any psychological law that would guide its action. Starting from Smith’s statement in which humanity is more determined to sympathize with the sense of joy than with the sense of sorrow and being so, we look for pleasure and avoid pain, the text entered into the universe of interpersonal relationships already described in the aforementioned work in order to not only determine the psychological law described by Smith but also to list the involved basic emotions. The philosopher in his work, in a non-systematic way, left clues on how to characterize the economic man, that is, the one who performed mercenary activities propelled by the law of “pursuing wealth and avoiding poverty”, having the emotion of vanity as a basis. These issues had not yet been discussed in the academy.

From the joining of Mil’s and Smith’s psychological laws, from the study of the involved emotions (mainly pride and vanity), the text took a defined course from the importance of sympathy as a mechanism of social interaction, resulting in the updated conclusions in the contemporary context of mindreading, vicarious theories, emotions, inaccuracy of the economic theories, commonsensible, I and We-intentions and conspicuous consumption. The performed studies demonstrate that by the act of sympathy allied to the imagination, the individual projects himself in someone else’s position, however, using his own psychological standard for the interpretation of the observed situation. Likewise, also by force of the sympathy mechanism, a prior standard of behavior from the group can be altered. The change of a consumption behavior not foreseen in the models applied, for example, leads to disturbing occurrences in the expected results.

As mentioned previously, until then, the behavior of the individual had been studied in psychology and in economy respectively in the areas of economic psychology and behavioral economy whose obtained results earned two Nobel Prizes in economy. The objective of both studies was to understand how people reach decisions and make their choices having as a focus, to guide the actions of the market and of the government in management and implementation of public politics. But as for the homo oeconomicus, here understood as one being of flesh and blood, who pays his bills, takes loans, saves money, provides services, researcher, scientist, financier, worker, investor, banker, ultimately any member of a group who deals with financial economic affairs on a daily routine, little clarification is provided in the study so that he may understand what prompt him to make decisions (why and not how), many times in a way different from the one imposed by reason. Hence, the proposal of adding philosophy of studies and conclusions of psychology and economy associated to the behavior of the individual as a member of a group emerged. Something which had not yet been done.

Therefore, the main purpose was to establish the fundaments of Philosophy of Economic Behavior, a union of research in psychology, economy and philosophy, focusing on the individual and not the market nor the government. Economics is primarily a human and applied social science, and its study is based on human behavior within the economy. For this reason, its main objective is to give information to the individual so that he/she understands how he/she makes decisions, and acts or behaves in the economic context as a whole. This, however, does not prevent its research from serving as a reference for companies and governmental policies. It encompasses the human being not only in his cognitive-rational side, but mainly in the emotional and ethical side, as well as the interpersonal and social relationships, and the sociocultural, historical, and scientific contexts he/she is immersed in. The conclusions drawn here simply indicate the starting point as a basis for the outcome of many possible approaches: psychology of economics, behavioral economics, philosophy of emotions, philosophy of economics, nudges and other techniques that influence the decision making, ethics of economic behavior, ethics of decision making, ethics of the financial system (banks, startups, digital banks, investments, cryptocurrencies, etc.), education/health/socio-cultural condition/employment/ income vs. economic behavior, influence of algorithms in decision making, economic behavior and globalization, and many other relevant topics.

Pareto reminded us that the individual is many in one, homo economicus, homo eticus, homo religiosus, etc., which means they all act as composed causes for the manifestation of the person as a being who lives in a social state, a state which presently exceeds the limits of the language, culture and religion. Nowadays, someone’s action has a much greater scope to the extent of altering the action of many others, which means that the concept of the rational act is incomplete if it is not allied to the concept of the conscious act.

The society of market is above all, as known by Adam Smith, a moral mechanism. It works by distributing responsibilities and partnerships, a process which demands maturity and liberty of action. How can we be independent in the action in a society of market under the action of the psychological laws of human nature emphasized by Adam Smith and Stuart Mill? In other words, how can we pursue richness while always preferring a greater gain without falling into pride and vanity and without entangling in the nets of corruption and lack of ethics when taking action? David Hume argued that reason is slave of passion. To think of the homo oeconomicus behavior so that, despite emotions, he can be capable of making choices, which will lead to wealth of Nations within a society that is economically fairer in a global context. This is what philosophy of economic behavior reflects upon, in the economy based on the individual’s ethos as a subject who is in the world, despite the world.

CONTENTS

Capa

Folha de Rosto

Créditos

INTRODUCTION

ECONOMICS, A HUMAN SCIENCE

CHAPTER 1 - ON DEFINITION OF POLITICAL ECONOMY

Political economy as a science and not an art

The concept of society in Mill’s Political Economy

The concept of wealth in Mill’s Political Economy

CHAPTER II - POLITICAL ECONOMY AS AN INEXACT SCIENCE

The method proper to Political Economy

Political Economy: an abstract science

A science of tendencies and of inexactness

CHAPTER III - MILL’S DISTURBING CAUSES IN POLITICAL ECONOMY

Causes and effects

The law of causations’ mode

The causes of disturbance in economic models

CHAPTER IV - ON THE DEFINITION OF ECONOMICS

Economics and its definition

Nirvana is merely the complete satisfaction of all requirements

Economics as positive science

Quarreling about economics and the real world

HUMAN BEHAVIOR IN ECONOMICS

CHAPTER V. STUART MILL AND THE HOMO OECONOMICUS

John Stuart Mill’s description of homo oeconomicus

Aspects of homo oeconomicus

Human nature as described by Mill

Mill’s homo oeconomicus

CHAPTER 6: ADAM SMITH AND THE HOMO OECONOMICUS

The social dimension of the homo oeconomicus

The psychological law of Smith’s homo oeconomicus

CHAPTER 7: REMODELING ECONOMY AS SOCIAL SCIENCE

Sympathy, Imagination, Joy and Sorrow

Vanity: The «Megaphone» Emotion

The Means to Cause Disturbance in Models

Emotional rather than rational homo oeconomicus

AFTERWARDS

Landmarks

cover

titlepage

copyright-page

Table of Contents

bibliography

INTRODUCTION

The philosophy of economics was born of the necessity to reflect upon the main questions of economics as science, which today has more to do with exact sciences than the realm to which it belongs, namely that of human sciences. According to Hausman, the inquiries related to the philosophy of economics are1: (a) rational choice, (b) the appraisal of economic outcomes, institutions, and processes; and (c) the ontology of economic phenomena and the possibility of acquiring knowledge about them. He further divides these inquiries into three subject areas: action theory, ethics (or both normative social and political philosophies), and the philosophy of science. Hence, its deliberations are on the nature of rationality in the choice process; personal interest and preference; welfare, justice, equality, and liberty; and scientific methodology. Reflections on action theory and ethics are often informed by relevant philosophical literature and psychology, as well as social and political philosophy. On the other hand, economics “is of particular interest to those interested in the epistemology and philosophy of science both because of its detailed peculiarities and because it possesses many of the overt features of the natural sciences, while its object consists of social phenomena.”2

Despite the fact that philosophical reflections on economy have their roots in Aristotle’s Nicomachean Ethics, continuing into the Middle Ages and Modernity, it was only with Adam Smith (1723-1790) in his book Inquiry into the Nature and Cause of the Wealth of Nations that political economy came to be systematized. However, it was John Stuart Mill (1806-1873) who made all the efforts to place it in the realm of sciences, defining its method, principles, and laws. Mark Blaug explains that “[t]his is not to say that Adam Smith, David Ricardo and Thomas Malthus lacked methodological principles, but merely that they saw no need to state them explicitly, regarding them perhaps as too obvious to require defense.” However, “Adam Smith is a particularly striking case because he in fact employed radically different modes of reasoning in different parts of his works.” According to him, in the books I and II of The Wealth of Nations, Smith had employed the method of comparative statistics, while in books III-V, and in Theory of Moral Sentiments he used Scottish historical methods, which appear to consist in “[…] a firm belief in stages theory of history, resting on the interaction between definite ‘modes’ or types of economic production and certain eternal principles of human nature […].”3

It is noteworthy that Mill was the first philosopher to be concerned with establishing of political economy definition, which went on to become classic and foundational for neoclassic economic theory. According to him, political economy “considers mankind as occupied solely in acquiring and consuming wealth; and aims at showing what is the course of action into which mankind, living in a state of society, would be impelled, if that motive […] were absolute ruler of all their actions.”4 In addition, it considers man as a being driven by the psychological law of preferring a greater portion of wealth to a smaller one in all cases. Rooted in this statement are the models used by economists to predict how agents tend to behave in the absence of various complications, or disturbing causes, which constitute the only uncertainty in not just political economy but moral sciences in general.5 As argued by Blaug, economic theories are not simply instruments for making perfect predictions about economic events, but genuine attempts to discover causal forces acting within the economic system.

The influence of Stuart Mill was so important that, in the decades that followed, economists devoted themselves to developing the methods of this science newly divorced from the social ones. However, in the effort to confer accuracy to economics they imagined themselves capable of keeping the disturbing causes under control in modeling, conferring on what might be the most disturbing of all, characteristics of rationality in economic behavior. They took the Mill’s abstract description of the person who deals with economic affairs, gave her a name of homo oeconomicus, and thought that it was enough to “humanize” the models and keep them close to reality.

Some economic crashes later, and after a collection of prediction failures haunting the economic science curriculum, have prompted some scholars to pose the question: What is wrong? It should not be within the engineering side, but in that side of lesser control, that is, the disturbing causes and, within it, the cause of greater “volatility”: the homo oeconomicus. Economists came to the rescue and said that the problem is that human beings are doomed to make choices in economics but held that they do it rationally. Finally, Nobel laureates Daniel Kahneman and Richard Thaler set wood on fire and demonstrated that human agencies are in fact not very rational, and psychology was needed to explain and help economics to deals with this situation. Was born, then, the Behavioral Economics; and the only uncertainty in models pointed out by Stuart Mill, that is, the disturbances caused by human nature, more than one century later, is receiving attention by scholars.

The economist’s models assume that human beings behave logically [homo oeconomicus] when dealing with economic affairs, which does not correspond to reality and brings uncertainty to their predictions. Consequently, we are constantly being informed of failures in the predictions of economic planning, in ironic contrast to the rapid developments being made in the engineering side of the science. For Mäki, the idea that the premises of economic theory were true because they capture the key causal factors that are in operation in producing economic phenomena, in spite of “were confirmed by ordinary experience, the predictions of economic theory are not typically well confirmed by evidence,” because it is incomplete, “it captures only a limited portion of the multiplicity of the causes that jointly influence the actual economic outcomes. The accuracy of predictions is thus not a reliable indicator of its truth.”6 Moreover, I hold that this discrepancy occurs because of a desire to apply exactness to a science which, being a human science, is fundamentally inexact; that is, it deals with real persons who experience passions and desires in their social interactions in pursuit of wealth.

This is a book on Philosophy of Economic Behavior, aiming to think philosophically the behavior of the homo oeconomicus of flesh and blood, based on the assumption that he is the disturbing cause in economic models. My proposal is to take the matter and put philosophy in this cauldron of ideas and, for that, I walk along the methodological, psychological, and social behavior paths under philosophical reflections in economics, while always bearing in mind that it is of human science that we are talking about. The Philosophy of Economic Behavior as I address here is a matter that has not already been discussed, mainly because it was necessary at first to have the basis provided by the study of the several scholars who dedicated their efforts to investigate the economic phenomena. Hence, my decision to return to the moment that economy was recognized as science due to the intellectual labor of those that systematized and defined its scope, principles, and laws: Adam Smith, considered the father of modern economy, and Stuart Mill. Moreover, the choosing of both authors was taken into consideration due to the fact that they have never neglected that political economy is also devoted to the behavior of individuals under social interaction in economic affairs, that is, it is above all a human science.

Despite their differences in economic reflection, at one point Adam Smith and Stuart Mill agree: human nature could influence the results of the application of economics in real life. The thinking of both philosophers is complementary when it comes to human nature and its ability to cause disturbance in economic models.

Economics, in today’s terms, is a science that deals with models and numbers, but what about be a human science? It deals also with people and their agencies to satisfy their needs and desires under situation of scarcity, which means that its roots are firmly staked in human nature influenced by economic social interaction. We cannot deny that although the improvement on the methods utilized by economics, the forecasting cannot achieve accuracy when the homo oeconomicus takes part of the equation.

The book is divided into two parts. In the first I discuss what makes economy an economic science. Departing from Stuart Mill studies about the definition, causes, laws, ends and methodology that confer the status of science to political economy, I follow discussing the inexactness of this science in order to address the occurrences of disturbing causes. Finally, I discuss the contemporary science now named economics.

Despite Mill’s efforts to give political economy the status of science, he was aware that its models could not achieve the accuracy of exact science, as political economy is an inexact and human science in which mathematical models can be disturbed by causes related to the behavior of the economic man. The solution Mill presented to solve the issue of inexactness is threefold: first, disregard the complete economic scenario and consider only those points closely connected to the hypothesis, ceteris paribus; second, confer on homo oeconomicus a rational character; and third, assume that the laws of political economy are not exact as in physics, but are laws of tendencies based on previous data.

According to Mill, political economy is concerned with wealth and only this aspect should be taken into consideration in modeling. Consequently, he shaped the characteristics of persons dealing with this science, such as the characteristic of acting rationally towards wealth by means of the psychological law «greater gain is preferred than a smaller». However, Mill’s issue was not whether it corresponded to the real behavior of a real person, but rather to the ideal behavior of an ideal person, so as to fulfill the goals of an abstract human science.

On the other hand, Mill did not neglect the fact that he was dealing with a human science; on this point, he tackled the occurrence of disturbing causes. In fact, he noted that human nature could lead to disturbances through antagonistic causes that frequently act conjointly in the pursuit of wealth, such as aversion to labor and the desire for immediate enjoyment of luxuries. In other words, passions and desires can influence behavior to the point of disturbing the models, which means that the real homo oeconomicus subdued the ideal economic man.

Economics is a science whose definition changes in accordance with the scope adopted. For this reason, a definitive description has still not been achieved and I think that this will always remain the case. As a human science, its paramount principle is rooted in human beings, which, besides being its end, is also its operator; an operator able to cause disturbance in models, which thus never reached stability. Consequently, it is a definition incapable of being definitive.

Adam Smith’s definition in based on wealth, and the psychological law is «pursuit of wealth». John Stuart Mill also established his definition based on wealth, having as psychological law that «greater gain is preferred to smaller». For Alfred Marshall, the definition of economics should be based on welfare; consequently, the psychological law is «pursuit of material welfare». On the other hand, Carl Menger defines economics based on his concept of economizing, where the psychological law is «obtain the greatest possible result with the smallest possible quantity». Leonel Robbins’ economics definition is based on the concept of scarcity, which involves the psychological law of to «make choices».

Despite the definitions of economics being based on different subjects, the psychological laws that drive the individual who deals with economic affairs essentially remain the same as those established by Mill and Smith because they have the same «end,» the pursuit of wealth, and the same «mean» to achieve this end: a greater gain is preferable to a smaller gain. In fact, Menger’s definition, based on economizing, is concerned with seeking to obtain the greatest profit with the smallest expense, because acting in this way leads to increasing wealth. Marshall’s psychological law supports the pursuit of material welfare and, in order to achieve that, money is needed, as he concluded. Consequently, to increase material welfare, the individual has to increase his profit, where a great gain is preferred to a smaller gain. In other words, he has to pursue wealth. Finally, in Lionel Robbins’ definition, based on scarcity, the individual has to make a choice from among a multiplicity of ends and means in order to obtain the greatest quantity/profit of ends using the smallest quantity/expenditure of means.

Neoclassical economics is approached as the science of man; but, nonetheless, the behavior of homo oeconomicus is arbitrarily considered in models as perfectly rational in relation to the choices he makes. If this corresponds effectively to reality, it does not matter; after all, economics is a science of tendencies, but with a definite rational purpose: the pursuit of wealth. Besides that, all the economists mentioned so for assumed the existence of disturbing causes in economic hypotheses and argued that it is possible to isolate the assumed premises from their influence in favor of validation. They defended economics as being based on tendencies because it is in the realm of human science and does not rule out the consideration of psychological factors.

Economics experienced a great evolution in past decades, using means that increased its degree of precision. However, it is impossible to deny the legacy of Adam Smith and John Stuart Mill in contemporary economics. Smith systemized political economy based on the real principles of human nature in dealing with it, while Mill launched the logical basic principles to configure it as an abstract science. How to reconcile Smithian reality with Millian abstractness is the issue that contemporary economics cannot avoid to deal with anymore.

Smith never explicitly defined homo oeconomicus but referred to him in his works as the one who interact with others in economic affairs; therefore, a person of flesh and blood. Mill never utilized the expression homo oeconomicus but depicted him as someone who carries out his own affairs logically in order to obtain a greater gain as possible. Mill gave abstractness to Smith’s definition. However, in both the homo oeconomicus were driven by the same psychological impulse to pursue wealth and, in turn, political economy becomes economics, whose scope is to achieve efficiency in order to face scarcity. But, what about the issue of its relationship with reality?

On the one hand, Uskali Mäki argues that economics is dealt with by human beings in terms of «commonsensibles,» that is, a kind of folk economics that all of them know, which makes possible everyday agencies in their economic affairs. On the other hand, he explains that this science considers in its models a thin slice of reality within pre-established parameters. In common with physics, economics has its unobservables,namely, emotions, preferences and beliefs, which introduce realisticness to its models. The economic agencies of each member [I-intention], when taken conjointly, promote the wealth of society, the so-called invisible hand consequences.

In my understanding, economics is a conjunction of human + science. In the latter, homo oeconomicus is an abstract figure utilized in modelling. In the former, he is a flesh-and-blood human being [ordinary person, economist, businessperson, scientist etc.] under influence of vanity, pride, envy, humiliation and desire, and seeking social approbation. Wealth carries within itself the symbolic content of success, personal merit, cleverness and power, among many others, in turn providing a way in which to be approved of and admired by other members of society. Smithian and Millian psychological law is still alive and continues to drive the actions of many economic agents in contemporary world. Alone, an I-intention is not relevant, but the actions of many I-intentions together, when dealing with their economic affairs under the influence of emotion and by force of sympathy, are able to cause disturbance in models.

In the second part, after having discussed economics as human science, I address the behavior of human beings in their daily economic affairs, that is, the behavior of homo oeconomicus, here considered as flesh and blood individual.

Stuart Mill granted that human nature within the realm of homo oeconomicus is governed by the desire for wealth, which can be counteracted by the antagonizing motives [aversion to labor and/or desire of costly indulgences], and, additionally, that human feelings [desires and aversions] are excited by outward circumstances that can cause disturbance in the models of political economy, is it correct to neglect human conduct in pursuing wealth to the point of considering it not general enough to be taken into account?

Mill considers that almost all human actions revolve around the motivation to pursue wealth, and consequently, human emotions are also driven by that impulse. The reason why the desire for wealth is so great a force is the strength of its symbolic content. In fact, as Smith has explained, human nature is induced to confound wealth with virtue, because the greatness of both are objects of approval and praise. Therefore, all of human life is a journey in quest of approval, although it is not an easy task, but rather a Herculean one. The greater difficulty is to get rid of all of wealth’s symbolic content: joy, luxuries, success, pleasures, desires fulfilled, and tranquility, but also, to be noticed, attended, admired, and respected; in short, to be approved of by other members of society.

Political economy or economics at present, as a science of the realm of humanities, cannot be refractory to the influences of the human nature of homo oeconomicus, which is those who engage in economic affairs. Before being oeconomicus, the economic agent is homo, which means that the latter is sovereign. Besides that, the social corpus is a whole where all its parts are in consensus, and where each one influences others. Therefore, the quest of wealth permeates all social life, because humankind is more disposed to sympathize with joy than with sorrow. For this reason, the human conduct in pursuing wealth is do general enough to be taken into account and should not be neglected.

The Millian homo oeconomicus is capable of judging the comparative efficacy of means for obtaining wealth, but has also the desire for costly indulgences. He is proud and impelled to improve his gains in order to certify by comparison that his wealth is greater than that of others. Therefore, the psychological law driving him in his affairs is that «a greater gain is preferred to a smaller ».

Adam Smith depicts homo oeconomicus and highlights man’s social nature as an economic agent. The psychological law at work here is the one that dictates man to «pursue wealth and avoid poverty», considering that wealth is a source of pleasure and attraction. By force of sympathy, the pleasurable sensation envelops spectators, who are attracted to the joy of the rich person. Conversely, sorrow is a source of pain and aversion.

The Smithian and Millian psychological laws are complementary, that is, because «a greater gain is preferred to a smaller we pursue wealth and avoid poverty». The homo oeconomicus is vain and proud, as well as are those who surround him. He is proud because he wants to be admired, and vain because he wants to be noticed, praised, and paid attention to, using spectators as mirrors to appraise his value and reinforce his self-regard, through the wealth he displays. On the other hand, those who surround him are proud to attend to and notice a person who is a source of pleasure. They are vain because by sympathetic relation they imaginatively put themselves in the place of the rich person they observe and admire the outer symbols of wealth of the homo oeconomicus. They are enveloped by pleasure and transmit it to him.

If the pursue of wealth is a considerable force that drives human action, vanity and pride permeate human nature, as well as desires for wealth and costly indulgences; thus, homo and oeconomicus are portions driven by the same forces. The basic and radical composite of «wealth - vanity - pride - desire» united and diffused by sympathy cannot be neglected as forces powerful enough to disturb the economic models.

Recent studies in psychology of economics defend that emotion can interfere in decision making. However, they consider those emotions that indirectly exert influences on behavior, like mood, emotions felt in the moment a choice must be made, weather influence on feelings, etc. It refers to when, for instance, an individual feels angry at home and should decide about investment, and that emotion indirectly affects his investment choice. They do not consider emotions directly related to the choice. Individuals may not accept the automatic discount of retirement savings in their salaries to engage in immediate conspicuous consumerism to construct a desired identity to face social comparison, aiming to satisfy their sentiment of inequality. Special offers for vacation during lower season in a place currently visited by affluent persons in high season can be ineffective because some people desire to be seen amidst others who are rich, even if it means to pay full prices of high season and make many sacrifices to pay the bill. People are impelled to make the same risky investments that other affluent people are making, despite not feeling comfortable, in order to be seen as part of the affluent group. Or even to buy a house in a higher-class neighborhood, even if it means jeopardizing their savings for the time of old age.

1 Hausman, D., «Philosophy of Economics», The Stanford Encyclopedia of philosophy, http://plato.stanford.edu/archives/win2013/entries/economics acc. 14 December 2013.

2 Ibid.

3 Blaug, M., The Methodology of Economics, 52. For all quotes. Italics added.

4 Mill, J., On the Definition of Political Economy, 322.

5 Mill, J., On the Definition of Political Economy, 330.

6 Mäki, U., «Economics», 543.

ECONOMICS, A HUMAN SCIENCE

CHAPTER 1 - ON DEFINITION OF POLITICAL ECONOMY

In a letter from 1831 to the Scottish author John Sterling (1806-1844), John Stuart Mill told him that he was “working out” in political economy, aiming to clear up some points that he thought were dubious and correcting others he considered wrong, “to shew what the science is & how it should be studied.”7 Mill was concerned with principles. “I am here much more in my element: the only thing that I believe I am really fit for, is the investigation of abstract truth, and the more abstract the better. If there is any science which I am capable of promoting, I think it is the science of science itself, the science of investigation – of method.8 For him, there were many differences between the methods that were used at the time, and it was necessary to shed light on this issue in order to find a method that expressed political economy as a science. “For Mill, a scientific approach meant the simplicity he found in Newtonian science, that is, the explanation of a mass of facts and details by organizing principle.”9 The motivation for what Mill stood for resulted in his essay On the Definition of Political Economy, which had the goal of defining scope, laws, and methods in order to place political economy in the realm of science.

To understand the reasons why economics, as we know today, has lost its characteristic of human science, it will be necessary to return to the moment when the exact place of political economy among the sciences was defined, that is, when Stuart Mill published his essay, whose theory of method is the one to which most economists since then have actually subscribed.10 Facing that enormous and important task regarding the individuation of political economy, Mill started by laying down its definition, considering that “the definition of a science has almost invariably not preceded, but followed, the creation of the science itself.”11 For Mill, like other sciences, political economy remained destitute of an outline framed by strictly logical principles, which should be exactly coextensive with the thing defined,12 and he employed every effort to achieve a precise definition of this human science.

Considering that the definition of a science is inseparably connected to its philosophical method, i.e., the nature of the process by which its investigations should be carried out in order to obtain its truths, Mill’s next move, therefore, was to determine a method of investigation. This method was established by him as a priori, because, in his opinion, that is the only method by which truth can be attained in any department of the social sciences, where experiments cannot be made as in physics. In our reading, his main goal is to set forth political economy within the realm of social science. Nonetheless, he conceives it as a separate science.

However, the use of this method depends on the acuity of political economists in the process of observation. They should take precautions in order to avoid partiality or neglect of important effects related to any given phenomenon. “No one can be sure that there is nothing existing that had not previously been seen; nor assume that they were able to admit the reality or relevancy of any facts which [he had] not previously either taken into, or [even had] left a place open for in, [his] systems.13 The occurrence of disturbing causes is the only uncertainty that permeates the models.

This chapter presents John Stuart Mill’s study that was developed to establish a complete definition of political economy “framed on strictly logical principles […] exactly co-extensive with the thing defined”14, as presented in the fifth part of Essays on some Unsettled Questions of Political Economy, named On the Definition of Political Economy; and on the Method of Investigation Proper to It (1836). In order to accomplish the important task of establishing political economy as a science, Mill had to determine its ends, scope, principles and method, but also had to describe its points of weakness. Besides of being science, political economy belongs to the realm of those social, which adds a kind of uncertainty in its models by occurrence of disturbing causes.

The present chapter is developed based on the steps Mill took to attain the definition he defended for political economy. It should be noted that the present study has been conducted strictly adhering to the path that Mill followed to achieve his goals, which encompass the social, cultural, and scientific contexts he lived in. Therefore, sometimes I must be interpretative and exegetical; at other times, I need to compile, aiming to discuss the evolution of his thinking and how he shaped political economy as science. I am not concerned with discussing, confronting, opposing, or comparing economic theories; rather, my purpose here is to investigate the occurrence of disturbing causes as a factor of inexactness in economic models, relying on previous studies by scholars who have fully investigated these matters.

Some works marked a certain effort toward systematization in the late seventeenth and early eighteenth centuries, such as William Petty’s Political Arithmetic (1682), which evidenced the statistical analysis of economic problems. Richard Cantillon (1680-1734), in his Essai sur la Nature du Commerce en Général (1734),15 foreshadowed the scientific phase of the economy, presenting elements about the functions of production and the risks assumed by entrepreneurs (later developed by Say), as well as explaining the economic circuit. A few years later, François Quesnay (1694-1774) developed the study of the economic circuit, after which economic activity began to be treated scientifically. Stuart Mill was the first philosopher dedicated to the inquiry of what that science is in itself; or, in other words, to determine the properties common to all truths comprising it and what distinguishes it from the others.16

Political economy as a science and not an art

In order to understand how Mill reached his definition of political economy, the approach of the subject is made from the opposite direction; meaning that it will start from his definition and then proceed by analyzing each part of it. For him, political economy may be defined as follows:

The science which traces the laws of such of the phenomena of society as arise from the combined operations of mankind for the productions of wealth, in so far as those phenomena are not modified by the pursuit of any other object.17

The title and topics of Adam Smith’s The Wealth of Nations, in accordance with Stuart Mill’s view, led to the vulgar notion that political economy “is a science which teaches, or professes to teach, in what manner a nation may be made rich.”18 His objection relates to the fact that it confounds the essentially distinct, albeit closely connected, ideas of science and art: science is a collection of truths and art is a body of rules.

As a basis for discussion, let me then formulate a schema comparing the purposes of science and art in accordance with Mill’s understanding19:

SCIENCE

ART

Deals in facts

Deals in precepts0

Classified by causes

Classified by effects

Is a collection of truths

Is a body of rules or directions for conduct

Its language is one of “this is” or “this is not”; “this does” or “this does not happen”

Its language is one of: “do this, avoid that”

Takes cognizance of a phenomenon and endeavors to discover its laws

Proposes itself as an end, and searches for the means to achieve this end

Ex.: mechanics as science lays down the laws of motion, and the properties of the mechanical power

Ex.: mechanics as art teaches us how we may avail ourselves of those laws and properties, in order to increase our command over external nature

Fig. 1 – Comparison of the purposes of science and art.

Mill states that the principle of classification utilized by science follows the classification of causes, while art is classified by the effects, the production of which is art’s appropriate end. An effect depends on a concurrence of causes, several of which belong to different sciences. “From this it follows that although the necessary foundation of all art is science, that is, the knowledge of properties or laws of the objects upon which, and with which, the art does its work; it is not equally true that every art corresponds to one particular science. Each art presupposes, not one science, but science in general; or, at least, many distinct sciences.”20 He argues that political economy as a science cannot be a collection of practical rules, and — due to the reason that the former is not a useless one — the latter must be founded upon it. “An art would not be an art, unless it were founded upon a scientific knowledge of the properties of the subject-matter: without this, it would not be philosophy, but empiricism; [Greek: εμπειρία,] not [Greek: τεχνή] in Plato’s sense.”21 In the footnote, owe are advised to consider the Gorgias of Plato, section [463b], quoted below:

[463b] This practice, as I view it, has many branches, and one of them is cookery; which appears indeed to be an art but, by my account of it, is not an art but a habitude or knack. I call rhetoric another branch of it, as also personal adornment and sophistry — four branches of it for four kinds of affairs. So if Polus would inquire, let him inquire: he has not yet been informed to what sort of branch of flattery.22

A conceptually more relevant opposition established by Plato in the early dialogues was exactly that regarding technai and empeiria. Giuseppe Cambiano explains, “[a]ccording to Plato, occupations such as cookery and rhetoric are not definable as techniques, but empeiria. This conclusion was obtained based on a series of attributions to empeiria in order to differ it clearly from technical procedures”.23 In fact, Plato points out that empeiria24:

a) Limits itself to preserving the memory of what usually happens. As explained by Aristotle in his Metaphysics, Book 1, 980b: “The animals other than man live by appearances and memories, and have but little of connected experience; but the human race lives also by art and reasoning. Now from memory experience is produced in men; for the several memories of the same thing produce finally the capacity for a single experience.”25

b) Possesses no logos, i.e., it has no capacity to reason about the nature of an object and its procedures; in other words, to indicate its causes, “[…] it has no account to give of the real nature of the things it applies, and so cannot tell the cause of any of them.”26In Metaphysics, 981 b, Aristotle argues that “experience seems very similar to science and art, but actually it is through experience that men acquire science and art.”27We can see the same conception operating in Mill on preliminary remarks in his book Principles of Political Economy, “Inevery department of humanaffairs, Practicelong precedesScience: systematic enquiry into the modes of action of the powers of nature, is the tardy product of a long course of efforts to use those powers for practical ends.”28

c) Uses the memory constantly in order to procure pleasure, without worrying about what is best. In fact, in Gorgias we can read:

[465a] and I say that this sort of thing is a disgrace, Polus — for here I address you — because it aims at the pleasant and ignores the best; and I say it is not an art, but a habitude, since it has no account to give of the real nature of the things it applies, and so cannot tell the cause of any of them.29

[501b] Now consider first whether you think that this account is satisfactory, and that there are certain other such occupations likewise, having to do with the soul; some artistic, with forethought for what is to the soul’s best advantage, and others making light of this, but again, as in the former case, considering merely the soul’s pleasure and how it may be contrived for her, neither inquiring which of the pleasures is a better or a worse one, nor caring for aught but mere gratification.30

Plato’s considerations occur on two different levels. On the first level, empeiria is criticized as regards its limitation in being based in repetition without making allowances for general rules. On the second, Plato lays stress on the fact that, in addition to frequent observation of an event, one needs to have logos in order to be capable of acquiring knowledge about it, i.e., from logos comes the cause. To this end, it is necessary to carry out an examination of the nature of the object and of the technique’s instruments, which does not occur for empeiria