I stumbled upon this paper by Edward Lazear on economic imperialism [pdf] from the FTC yesterday, which is actually a remarkably interesting specimen. The term 'economic imperialism' is traditionally used as a term of abuse, most frequently by Ben Fine, against Gary Becker, James Coleman and others in the Chicago neo-classical tradition. After all, who would proudly declare themselves to be an 'imperialist'? Well Edward Lazear clearly. It's rare to find anyone, outside of the televangelism business, to be so brazen about such an unbending set of abstractions.
The paper sets out to confirm, celebrate and explain how economics came to be so 'successful' in colonising other areas of social science. That old friend of the neo-classicist, simplicity, is held up as the main weapon of empire-building. And within that, Lazear pinpoints the source of this simplicity:
Economists, almost without exception, make constrained maximization the basic building block of any theory. Many of our empirical analyses seek to test models that are based on maximizing behavior. When we obtain results that seem to deviate from what would appear to be individually rational, we re-examine the evidence or revise the theory. But the theoretical revisions almost never drop the assumption that individuals are maximizing something, even if the something is unorthodox.
What struck me was how - to my knowledge - this is a feature of neo-classical economics that has received least critical revision from rival social sciences. We all know that neo-classical economics assumes a model of homo economicus, a fictional calculator who acts rationally and selfishly to maximise his own utility (even when 'he' appears to be doing something else altogether).
Psychologists have largely focused on the errors of assumed rationality, a critique that has now bled back into economics via Kahneman and behavioural economics. Sociologists have largely focused on the errors of assumed selfishness, by showing that individuals are delimited by customs, norms and institutions. But there has been scant attention paid to the potentially pathological aspect of this model, namely the assumed maximisation.
Think about this for a minute. Maximisation. Who really maximises anything in practice? How would one even set about doing it? Even in warfare, limits are set and recognised to the pursuit of personal gain. Does even an addict maximise their consumption? Did Tiger Woods maximise his sexual conquests? Even when we do encounter pathologically egoistic behaviour, it is more easily explained in terms of comparison than maximisation. Dubai property developers never set out to build the tallest building possible, but only the tallest building in the world. Ashley Cole doesn't want enough money to buy as many gold-studded leather swimming trunks as possible, he just wants to own more than John Terry.
"Now", the economist says, "we do not mean that people continue on and on in pursuit of their object. We show that marginal utility falls, as people consume more, such that their desires gradually wane and are diverted elsewhere. There is nothing inherently pathological about being a font of desire, only of fixating that desire upon one object in a fetishistic way."
"So this maximisation is more of a regulative idea?" we ask
"If you like, yes. But it is the main source of the clarity and rigour that you sociologists so lack", the economist replies.
This is confirmed by the fact that various economists have actually been happier to dispense with rationality and selfishness than they have with maximisation. Happiness economics and behavioural economics both challenge the assumption of rationality and egoism, but without directly questioning the issue of maximisation, for fear that things might become untidy.
Meanwhile, 'on the other side of town', a number of economic sociologists such as Michel Callon and Franck Cochoy are now, ironically enough, trying to understand markets on the basis that they are partly constituted by rational self interest! It is, at the very least, possible to point to empirical practices and behaviours and say "that is an example of rational self-interest", even while accepting that it isn't typical (if there is any overlap between behavioural economics and constructivist sociology, it lies in the shared recognition that we often need and use various forms of assistance to act in a rational fashion). By contrast, I'm not so sure that, outside of the wildest fantasties of Nietzsche or Bataille, we can ever imagine a person acting to truly maximise anything. Rationality and self-interest at least exist in certain places at certain times, but maximisation is never anywhere in particular.
There is, I suspect, a very significant semantic slippage going on. If I say "I want the most food", this can mean two things. It can mean I want as much food as possible; or it can mean I want more food than everyone else. The former is a psychological abstraction, which cannot ever correspond to anything in lived experience. The latter is a socio-political project, that is eminently plausible, as my examples of Dubai and Ashley Cole testify. As an idea the former is beautifully simple, but unreal; it then permeates society via the latter, which is hideously political but real.
One concrete area where this critique has bite is with regard to shareholder value ideology. Firms, as I amongst others have argued, can be understood as profit profit-making without being profit-maximising (see also Michael Skapinker today). After all, if they were really profit-maximising they would liquidate themselves immediately and transfer all assets to shareholders. (If you really have to know what the single purpose or objective of a firm is, it is difficult, in practice, to argue with Neil Fligstein who views them as primarily concerned with survival.) But once again, a central claim made for shareholder value as the goal of management was that it is elegantly simple, even if (or, perhaps, especially if) it was never reflected in any actual decision-making. Pollute the clarity of profit-maximisation with other objectives, it was argued, and you become confused at best and tyrannical at worst.
It's here that the semantic slippage occurs. Maximising shareholder value can mean two things. It can mean maximisation as an economic abstraction, as in delivering the largest profits possible. Or it can mean maximisation as a socio-political project, as in delivering more surpluses to shareholders than anyone else. The first is a disciplinary idea that stems from neo-classical economics, and is by itself relatively harmless; the second is a political settlement that stems from neo-liberal ideology, and is little short of a class-based asset grab.
(I have a horrible feeling that this tortuous blog post may have simply identified the core division between economics and economic sociology as explained in 'Economic sociology 101' in any half-decent American sociology department: "it's not about rationality at all!". In which case, apologies for arriving late.)
A friend of mine recently referred to the fact that the CEO of Pepsico had conceded "shareholder value" was dead as a focus and there needed to be more of a shareholder approach. I joked that I was now going to sell my shares in Pepsico before they tanked...
It is an interesting point you make about liquidizing the firm as a way of maximising shareholder value. This was something that the 'corporate raiders' did, and it was interesting - and is interesting - how this activity is viewed as being rather ungentlemanly. The first recognisable wave of corporate raiders rather startled those family firms which were incorporated as PLCs, as Adam Curtis' documentary on the subject showed.
It strikes me that time is a crucial factor in maximisation. Watching news reports of the Toyota scandal last night, I was struck by how much the reason d'etre of the corporation was divorced from its avowed morality. Just as pharmaceutical companies stop safety-testing once a product has launched, the approach of the automotive industry has been similarly lax.
But in the long term, such damaging revalations as dodgy medicine and cars that don't stop can wipe out the good standing of a company in the eyes of consumers. What appears to be efficient in the short term is deadly, not only for consumers, in the long term.
Which gives us the second factor, competition. The perception is, if we go further than the competition - on safety, etc. - then the company will be less competitive and less likely to survive.
Posted by: Oranjd | February 24, 2010 at 04:21 PM
You didn't cover the 'constrained' part of maximising. Assuming, for a moment, that we believe utility is a useful idea (and I kinda do, despite it having very little correlate in our mental worlds), you have a utility function that you maximise subject to a budget constraint. Economists like that for the same reason they like most things: they've got a math tool for doing it, namely lagrangian multipliers.
It's not such a bad idea: a set budget, a choice between x things I want, how do I get the most goodyniceness from my spending? As opposed to what I think you were saying, which was, maximise until my diminishing marginal utility is all outa puff and I need a little lie-down.
Good luck with the 'after markets' event; I thought about trying to sign up, but I think it's a little too sociological for me. If you're interested, here's some utterly speculative, non-academic waffle of mine on non-market regulation of food production in 3 cases. Oh, and more waffle on where the incentives should be in drug production.
Oops, didn't come here intending to be such a blogwhore. I feel bad. Not bad enough not to do it, it would seem.
Posted by: Dan Olner | March 13, 2010 at 06:54 PM