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The New Scientist on Economics

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Economy Ahoy (Photo by Kerstin)

Last year a strange bit of ‘neoliberal’ propaganda surfaced in the New Scientist of all places. In what purported to be a report of recent research, Washington University psychologist Pascal Boyer has written of how the ‘human mind is designed to misunderstand the mass-market economies we have created’.

He says ‘evidence from psychology and anthropology…reveals that people have an intuitive mental template for how exchange…should occur’, and that these are evolutionary in origin. This template has arisen because, Boyer argues,

humans evolved to be highly co-operative…[a]nd our ancestors shared resources, especially when it came to goods with highly variable availability… Trade mostly took place between people who knew each other, or between groups that shared repeated exchanges. Technology was simple enough that they could track how much effort was involved in making most things, and verbal communication…was used to select the most co-operative partners with whom to do business. As a consequence, ‘we have a strong sense of fairness, and intuitively expect and prefer that the proceeds of a joint effort be shared in proportion to each participant’s contribution’. Moreover ‘we intuitively consider it beneficial to extend small favours to trading partners rather than exploiting their weak positions, because of expectations of long-term interactions.

Boyer claims that as trade became more developed ‘[o]ur evolved exchange psychology made mass-market economies possible while simultaneously making it very difficult for us to understand them’. In particular, because we fail to see aggregate effects we have negative attitudes to large retailers because of their big profits, despite that fact that they sell goods cheaper than smaller stores. The ‘aggregate consumer benefit can be hundreds or thousands of times larger than their profits…We tend to believe that ‘corporate giants… ‘control’ the market and fix prices, whilst Boyer claims that ‘no matter how big a company [it] depends on the aggregate of millions of individuals choosing to buy its products, or not’. Market dominance, when it exists, is therefore transient.

Boyer goes on to condemn price and rent regulation, buying cheap and selling dear being labelled ‘greedy exploitation’ and ‘emporiphobia’, a coinage that apparently means ‘a fear of markets and suspicion that free competition will have negative social effects’.

Oddly for a scientist, his approach in this article relies heavily on the basic neoclassical economic model of perfect markets, static analysis and comparative advantage, whilst ignoring the simplistic nature and empirical unreality of much of this thinking.

‘Our intuition’ he says, ‘tells us that market regulation will work because it seems to redress the balance of power between that producer and the consumer’. This is wrong, Boyer claims, because ‘[a] landlord, for example, cannot usually dictate prices because renters generally have a choice of where to rent’. Yet while price and rent controls are always second-best solutions in neoclassical models, he is contradictory in his characterisation of the problem. The power of monopolies or cartels, whether formal or informal, manifests itself by suppressing competitors in markets for necessities such as shelter or extremely desirable goods, such as mobile phones. We certainly gain from acquiring these goods, rather than not acquiring them – that is indisputable – but do we gain our fair share, as opposed to the profit share of the producer? The identity of the company that exerts this advantage is irrelevant – the groups which gain and lose from monopolies remain pretty much the same.

In particular, while we may gain from the lower prices of massive retailers and service providers, we are often losing out in terms of employment conditions, environmental impacts and the social cohesion of our local communities, and we have little control over these trade-offs. Anonymous markets are not an unalloyed good, because price is not a comprehensive measure of the cost of a good – it tells us nothing of social and environmental costs.

In discussing international trade Boyer falls back on the theory of comparative advantage – which for all its traditional reputation for being counter-intuitive is no more than the idea that ‘specialisation’ has advantages in terms of efficiency and scale, not just at the individual level, but also at the national level. While this is self-evidently important, it ignores all the social impacts of manipulating the individual make-up of economies, and more importantly is an entirely static theory – no allowance is made for the possibility or desirability of developing new industries and patterns of production. In reality, the theory of comparative advantage has practically no significance for modern trade policy.

The treatment of wealth as static and without social significance is also responsible for Boyer’s dismissal of arguments against inequality. At any moment in time, ‘wealth is a pie of fixed size’ and its current allocation has a big influence on its future allocation – in particular because wealth gives not just economic power, but social and political power too – all of which are reinforcing.

While Boyer is right that ‘successful politicians intuitively grasp that they gain influence by speaking in ways that chime with these [economic] intuitions’ and that better understanding of economics will help us see beyond them, his defence of neoclassical economics and the policy that follows is no solution. After all much of the arguments of neoclassical economics have been misapplied for political gain too.

The solution, in fact, lies largely in the reality that our intuitions are largely correct, whatever the technological details of our exchange arrangements. Less anonymous transactions allowing us to obtain more information about how our goods are produced and marketed, closer involvement with these producers, and generosity and equality in exchange and the distribution of wealth leads to more comfort and security for all.

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