What is the critique of economism and why does it matter?

The Booth School of Business, University of Chicago

On Economism Author(s): G. Warren Nutter Source: The Journal of Law & Economics, Vol. 22, No. 2 (Oct., 1979), pp. 263-268 Published by: The University of Chicago Press for The Booth School of Business, University of Chicago and The University of Chicago Law School Stable URL: https://www.jstor.org/stable/725119 Accessed: 16-01-2019 14:29 UTC

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ON ECONOMISM*

G. WARREN NUTTER**

The University of Virginia

Finally, some mention must be made of the limitations of the whole economistic view of life and conduct-the view, that is, in terms of the use of means to achieve ends.

Frank H. Knight'

THE boundaries of a scholarly discipline, Ronald Coase reminds us,2 are set by competition with contiguous disciplines. The wanderings of econo- mists into previously alien territory, which seem to be expanding steadily,3 are therefore to be welcomed not only because they shed new light on old problems but also because they stimulate competition in the search for truth. But one must not make too much of a good thing, and there is a danger that some economists may become dizzy with success and claim too much for their discipline and too little for other social sciences.

As a possible case in point, we find Gary Becker saying that he has "come to the position that the economic approach is a comprehensive one that is applicable to all human behavior, be it behavior involving money prices or imputed shadow prices, repeated or infrequent decisions, large or minor decisions, emotional or mechanical ends, rich or poor persons, men or wom-

* It is an occasion of great sadness to publish the last article which Warren Nutter was to write before his untimely death. The heart sinks at the realization that nevermore will we read another of his contributions. But we can rejoice in the knowledge that someone of Warren Nutter's ability, integrity, and selflessness devoted himself to economics and to the cause of liberty. We may still study and learn from the many important contributions which he made to our subject. Those of us who knew Warren Nutter personally could not but admire him immensely. "He nothing common did or mean." What mattered to him, above all, was the truth. During his last painful illness with cancer, his spirit never faltered. He showed extraordi- nary courage as he continued with his work. He told me, in submitting this article for publica- tion, that he no longer had sufficient energy to write a long article. But such energy as he had was devoted to his studies. His dedication to scholarship was complete. It was a privilege to have known such a great human being.-R.H.C.

** I am indebted to William L. Breit, Roland N. McKean, John H. Moore, John K. Whitaker, Leland B. Yeager, and John H. Young for their comments, though I have not abided by all their objections. This essay has resulted from research supported by a grant from the National Endowment for the Humanities, which I gratefully acknowledge.

1 Frank H. Knight, On the History and Method of Economics 295 (1956). 2 See Ronald H. Coase, Economics and Contiguous Disciplines, in the Organization and

Retrieval of Economic Knowledge 481-91, esp. 482-83 (Mark Perlman ed. 1977). 3 For a list of work done by economists in other disciplines, see id. at 483. See also Gary S.

Becker, The Economic Approach to Human Behavior 9 (1976).

263

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264 THE JOURNAL OF LAW AND ECONOMICS

en, adults or children, brilliant or stupid persons, patients or therapists, businessmen or politicians, teachers or students."4 This is a rather sweeping claim, one bound to raise questions and doubts. At least it has done so in my mind, and the purpose of this essay is to expose some of my doubts about the feasibility of economism, or the universal application of economic method and theory to analysis of human behavior and social activity.

In addressing this issue, one immediately faces the problem of defining "economics" and runs the risk of getting bogged down in fruitless meth- odological disputation. I propose to avoid this problem by accepting Beck- er's concept of the "economic approach" as a point of departure, since there is no need for the purpose at hand to get more deeply involved in definitions. As Becker puts it, "the combined assumptions of maximizing behavior, market equilibrium, and stable preferences, used relentlessly and unflinch- ingly, form the heart of the economic approach as I see it."'

Let us focus on "maximizing behavior" and ask what it means in sub- stance as well as form. In a purely formal sense, to say in economic parlance that a person is engaged in maximizing behavior is to say nothing more than that he chooses among alternative courses of action in such a way as to maximize utility within resource constraints confronting him. Content is given to this otherwise empty formal statement by the accepted economic paradigm of the utility function and of the operative resource constraints, which paradigm sets forth the framework of general functional relations within which the maximizing process is to take place. That paradigm con- sists in the conventional concepts of indifference curves and budget lines, specified in terms of their basic functional characteristics.

This is not the occasion to give a rigorous account of the foundations of utility theory, nor am I qualified to do so. Instead, I want to concentrate on key principles inherent in the economic paradigm of utility, the first being the universal substitutability of goods for each other at the margin. Simply put, this principle asserts that a consumer can be compensated for the loss of a quantity of any one good from the bundle he is consuming by the addition of a quantity of some-any--other good.6 A diminishing marginal rate of substitution being assumed as well, the principle of universal substitutability of goods, is, I believe, inherent in the maximizing process that Becker treats

I Id. at 8.

In his important path-breaking article on the relation of economics and sociobiology, Eco- nomics from a Biological Viewpoint, 20 J. Law & Econ.1 (1977), Jack Hirshleifer claims somewhat less for economics, viewing it as perhaps the dominant social science but not as the universal one. See, for example, id. at 3 & 51-52.

5 Gary S. Becker, supra note 3, at 5. 6 In this formulation, a pure complement is not considered to be a separate good but rather a

part of the good that it complements.

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ON ECONOMISM 265

as part of the economic approach. Indeed, the conception that there is some single psychological expression of value called utility that can be maximized through consumption implies that all economic goods are substitutable for each other.

But is that true of all goods that motivate rational human behavior? Are all goods-the myriad of things of value--substitutable for each other in the mind of man? That is to say, are they all translatable into some common measurable quality called utility? Is there a single calculus of goodness that encompasses all valuations of things made by a representative person? If so, how do we explain the conduct of the Malthusian consumer, the martyr, the patriot, the ideologue, the addict, the fanatic, and so on?

The Malthusian case is such an integral part of the lore of economics that there is hardly a need to discuss it, but it will be useful to do so anyhow in order to prepare the line of reasoning to be followed in other cases. Suppose, therefore, that there is some minimum daily consumption of food required to

keep a person alive,7 and let that quantity be represented by OA in Figure I,

y

A

0 A x FIGURE I

where x represents the consumption of food and y the consumption of all other economic goods. The curve AA' depicts the fact that the marginal rate of substitution of other goods for OA of food is infinite. There is no quantity of other goods that will compensate the Malthusian consumer for a reduction in food. The curve AA '-which should be conceived as extending indefinitely upward-cannot properly be called an indifference curve because succes- sively higher points on it represent successively greater utility in the tradi-

7 There is a hair-splitting problem in specifying what it means to "keep a person alive," but I assume that it may be ignored without harming the general line of argument here.

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266 THE JOURNAL OF LAW AND ECONOMICS

tional sense. To use a term coined some years ago by Ian Little,8 it can be called simply a "behavior line." If constrained to OA of food, the Malthusian consumer would prefer to be as high on AA' as possible, but any point on AA' is preferred absolutely to any point to the left of it. The consumer prefers any life-sustaining condition to death. To the right of OA, the utility function would be represented by the kind of indifference map normally assumed in economics. To the left of OA, the utility function simply vanishes.

The case of addiction is similar. For the purposes at hand, it seems appro- priate to define a good as being addictive if the very consumption of it, other relevant things the same, alters the utility function so that there is an in- crease in the marginal rates of substitution of other goods for the addictive one. Complete addiction occurs when the utility function relating consump- tion of the addictive good (x) to consumption of other goods (y) degenerates to a single behavior line, such as AA'. In other words, once complete addic- tion occurs, the utility function vanishes to both the left and right of AA'.9

The situation is in a sense reversed for the martyr, who will sacrifice his life if necessary rather than recant or renounce a belief. It is not clear how one might depict the relations among values involved in such a case. If the belief in question can be conceived as having a quantitative dimension rep- resented by x in Figure I, then OA is the minimal configuration of belief that the potential martyr holds as an absolute value: no consumption of economic goods y can induce him to diminish his professed belief from OA. So far so good, but what about the trade-off with life itself? How can y be conceived in a quantitative sense as comprehending life itself as well as economic goods? The fact is that situations confronting potential martyrs and requir- ing choices of them typically are not quantitative in nature. Sir Thomas More was given the choice of either signing the Act of Succession and living, or not signing it and dying. It is not uncommon in many other social contexts for choices to be posed in analogous either-or fashion. In any event, a moti- vational pattern similar to that of the martyr applies to the terrorist, the fanatic, the dedicated partisan, and the simple patriot, each of whom is ready to die for a cause.

If such cases seem rare and extreme, we may turn to situations in which life itself is not at stake but the values motivating behavior are virtually

8 I.M.D. Little, A Critique of Welfare Economics 24 (2d ed. 1960). 9 In their recent essay on the stability of tastes, see De Gustibus Non Est Disputandum, 67

Am. Econ. Rev. 76 (1977), Stigler and Becker use a rather different definition of addiction than the one used here, but this matter need not be examined further as far as the issues at hand are concerned. It is, however, worth noting that, in the Becker-Stigler analytical framework, x and y would be inputs of goods used in the household to produce an addictive "commodity"-say, euphoria. Complete addiction as defined in the present article would then imply that the production function relating inputs x and y to outputs of euphoria would degenerate to the single vertical isoquant AA'.

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ON ECONOMISM 267

unsubstitutable for economic goods. An example is provided by the recent controversy over legalizing abortion. "Unalterable opposition" characterizes many antiabortionists, who constitute a large segment of the American pub- lic, and such a persistent and unyielding attitude implies nonsubstitutability of economic goods for the value attached to prohibition of abortion. It should be readily recognized that the examples given here involve what

has come to be known as lexicographical ordering of goods. 10 I would offer the following general proposition. First, a representative person has several to many separate realms of value, each containing its own set of goods that are subjectively comparable with and substitutable for each other. Second, the bundles of goods in each separate realm are subjectively related to each other in accord with the economic paradigm; that is, they are weakly ordered in terms of a single-dimensioned preference scale, each indifference relation being reflexive, symmetric, and transitive. Third, bundles of goods from different realms of value are lexicographically (and hence strongly) ordered; that is, there is a dominance ordering for the different preference scales corresponding to realms of value. Fourth, goods in one realm of value may be objectively substitutable for those in another, but they are not subjec- tively substitutable. Let me illustrate the various parts of this proposition by some rather practical examples. Imagine a representative "consumer" with different realms of value called

morals, tastes, and wants which yield serenity, felicity, and utility, respec- tively. Suppose one realm dominates the next in the stated order, the domi- nance ordering being transitive. Subject to constraints in the form of objec- tive substitutability of goods, the consumer then proceeds to optimize the mix of morals, moving next to tastes and finally to wants. Suppose there is an objective trade-off between income and honesty, and

that crime pays: for some amounts of lying, stealing, and cheating, our consumer can expect to increase his income. If honesty is in the realm of morals and income in the realm of wants, our consumer will show the same honesty in his dealings no matter how well crime pays. Only if both are in the realm of wants will he be more or less honest depending on how well crime pays. Since there are people who will lie, cheat, steal, and even kill for a price, there are ample examples of the second sort. But so are there of the first sort. If a universal social science based on the economic approach is to evolve, it will have to be possible to generalize on the assortment and content of realms of value in at least a given community of people, or to superimpose a single realm that integrates all others. I doubt that future efforts to con-

10 For a lucid explanation of lexicographical ordering and some of its more important impli- cations see D. Banerjee, Choice and Order: Or First Things First, 31 Economica 158 (n.s. 1964). For a comprehensive survey of the literature, see Peter C. Fishburn, Lexicographic Orders, Utilities, and Decision Rules: A Survey, 20 Management Sci. 1442 (1974).

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268 THE JOURNAL OF LAW AND ECONOMICS

struct such a universal science will be any more successful than past ones, such as Benthamite utilitarianism. It would seem to be indisputable that precise duplication of realms of value among a group of people will be approached in only the most homogeneous of societies, if indeed homoge- neity means anything more than such duplication.

There are other persuasive reasons why the search for a universal social science is likely to be unsuccessful, not the least being the substantial role played in social affairs by nonpurposive, nonrational behavior, a point re- peatedly stressed by the late Frank Knight and reflected in the quotation from his work given at the beginning of this article. There is also the impor- tant role played by coercion. The economic approach is of virtually no use in analyzing behavior brought about through the use of force or the threat of its use, because the economic paradigm applies to voluntary choice, difficult as it may be to define accurately.

None of these criticisms are intended to belittle the importance and sig- nificance of economics as a social science, both of which are demonstrated by the pervasiveness of markets in societies that permit them to flourish. The existence of a market implies the applicability of the economic paradigm, though the converse obviously does not hold. And therein arises the reason to search for areas of social activity and human behavior not characterized by markets but appropriately analyzed by the economic approach. How the discipline of economics fares in revealing previously unrecognized social rela- tions depends on the competition of disciplines in terms of both subject matter and techniques, as Coase has noted. I expect economics to fare well in this competition, but in the end to reveal, describe, and explain no more than an island of man's behavior.

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