Economics for the Real World

The Annual Economics Lecture, 25th February 2016

Peter Bowman

Can we have an economics that deals with real people and how they act in the real world rather than one based on abstract theories and models?

Could  such a fresh approach to economics could offer the possibility of prosperity and well-being for all?

1. Modern critique of Conventional Economics

The perception that there is a need for deep-seated reform of economic thinking is now widespread. The phrase: “Real World Economics” is used by the World Economics Association, formed in 2011, for their review journal. They call themselves heterodox economists because they do not follow the orthodox view now taught in most universities. The inference in the title of the journal is that, in their view at least, the orthodox approach does not deal with the real world.

The Real World can be quite illusive. In the courses on practical philosophy offered by the School a simple exercise is provided. The purpose of the exercise is simply to connect with the senses. The exercise can bring great stillness but it can also be quite shocking because it can show the extent to which the mind is disconnected from the real world and in lives in its own world of thoughts and imaginings so perhaps it is not just economists who have this problem of disconnections.

To give a particular example of the heterodox stance we could take Professor Steve Keen, now Professor at Kingston University who gave a talk here at the School last year. He has formulated his thoughts in a book entitled Debunking Economics This contains a rather devastating critique of conventional economics revealing. After reading it one is left with the view that very little remains of the science as it is now conventionally presented that actually stands up to rigorous analysis.

This concern about the inadequacy of conventional economics is now shared by a growing student movement including for example the Rethinking Economics group that is working to transform economics education for the better.

Of course this critique is not new. Over a century ago the writer Henry George, well known to most of us and a strong influence on the Economics taught in the School very clearly enunciated the weaknesses of subject as it was then taught

2. Homo Economicus

The impetus behind this onslaught on conventional economic thinking is the perception that it has somehow lost connection with the real world and has become absorbed in ideas, theories, opinions and beliefs which no longer reflect the real world and real people that live in it. Given the propensity of the mind to play touch and go with the real world this is not surprising.

The paradox is that for economics what led it away was a genuine endeavor in the opposite direction. There was a desire to emulate physics and make economics a positive science. This was attempted by adopting the mathematical methods of analysis which had been so successful in that field. But the problem is that economics is a social science, it is about real people so to proceed as it wanted to economics needed to put in place a conception of humans that could be readily subject to mathematical analysis.

What emerged was a conception that became known as homo economicus. It consists of a being who is described as consistently rational in the sense that he/she/it is narrowly self-interested and only pursues subjectively defined ends in an optimal way. As a consumer he attempts to maximize utility and as a producer to maximise profit.

This notion is double damaging. Firstly it is such an inaccurate representation of what human begins are actually like that any theory built upon it is bound to be false and so inaccurate in predicting how the real world actually works.

Secondly, although it is a false idea if it is taught in such a way that only those who accept it are deemed of merit, so if a student wishes to pass their exams, obtain their degree and then go on to gain employment they need to subscribe to this idea. If then those who accept this conception take it as a basis of policies that are prescribed it can require people to act in a way that is both artificial and destructive.

3. Real People: Positive and negative behaviour

An economics for the real world needs to be based on real people and not artificial and abstract concepts. But one aspect of real people is how diverse we are, what a wide range of behavior and motivation there is. There is really no such thing as a typical person. However, what it is important to recognize is that amongst the range of possibilities there is that behavior that has a positive effect on society and so should be encouraged and that which has a negative impact and so should be discouraged.

Within the civil realm this encouragement/discouragement was originally established through traditional custom and then later codified through the legal system. If assaulting one’s fellow citizen is generally deemed unacceptable then a law can be passed rendering this an offence for which there is a punishment.

In the economic realm it is strange how the reverse can be the case. Selfish and greedy activity, which has a negative impact on society as a whole and on the natural environment , is justified and condoned whereas activity that would have a positive effect e.g. is rendered difficult. This is the effect of the very inaccurate and incomplete concept of what it is to be human that underlies conventional economic theory

4. Choice of person as illustration relative importance of economics & society

So what we need to begin an economics for the real word is a suitable conception of what it is to be human. To assist in this, rather than give a general or ideal list of qualities and activities that are beneficial to the community and therefore would be encouraged by a healthy economic system I propose to give a particular example.

I do not know the person I have in mind personally but when I heard his story it made a strong impression. He describes himself as Persian, and happens to work in the US at UCLA. He is part physician and part engineer and he works in hand reconstruction surgery.

Now you may be thinking that given that this is a talk about economics, indeed real world economics that this is a strange example to give and that a better example of the sort of person that the economic system should encourage would be someone in the productive economy, an entrepreneur, a leader of industry or a financier perhaps. But there is a point of crucial importance here, a question of crucial importance for our time: namely that of the relationship between the economy and society as a whole. Is it the purpose of the economy to serve society or is it the purpose of society to serve the economy? Surely it is the former, the economy does not contain the ultimate end of society, its place is simply to provide society with the goods and services it needs, both public and private and to ensure that there is a just distribution of these.

Not recognizing this fundamental relation between the economy and society as a whole opens the gates to the danger of economically based considerations encroaching further and further into and ultimately taking over aspects of life they do not really belong. We see this happening in the academic realm where the application of the rational choice utilitarian way of thinking has spread now well beyond economics to more and more distantly related social fields, such as crime, law, the family, and, politics. This phenomenon is described in academia as economic imperialism and there is concern as it spreads from the academic realm into the real world of public policy.

Ideas are powerful and as these ideas spread and encroach into policy so more and more aspects – health, education at all levels from nursery to university, the legal system – become subsumed by this artificial way of thinking. Services become commoditized and the language and concepts of the market take over, students and patients become customers, consumers of service.

So these are the reason why the person I have chosen as an illustration of real person someone in society for whom the economy should be there to serve, in the hope that this will help re-orient our thinking and re-establish that the ultimate end of society is to be found beyond the economic sphere.

5. Kodi Azari – his story

So let me introduce Kodi Azari, hand surgeon at UCLA in California; he specializes in hand restoration, particularly for former American serviceman and he has been a pioneer of hand transplant surgery.

Kodi describes himself as a Persian immigrant. In his childhood his early ambition was to be a fighter pilot but he soon realized that although he savoured the combination of responsibility and the power over technology that such a role would give he soon realized he would probably never have it in him to pull the trigger or drop the bomb.

Encouraged by his family to become either a doctor or an engineer he gravitated towards medicine and was particularly fascinated by the possibilities of transplant. At that time heart transplants had been achieved and developments in the transplantation of other organs such as the liver were taking place.

Kodi described a transformational moment in his life which took place during a gross anatomy class when he was carrying out a dissection. He was struck deeply by the perfection of the human hand. He does not describe himself as religious but he said he could not help but recognize that divine intervention must have taken place to create this amazing organ. It combines so many possibilities there is no greater source of diversity in functional anatomy. The hand is an organ of grasp, it has great strength but also amazing dexterity – consider a concert pianist or violinist. It is an organ of the greatest sensitivity almost like an extra eye but at the same time an organ of expression.

Kodi describes that is was shortly after this time that the possibility of undertaking hand transplantation struck him. He proceeded with his medical training at Pittsburgh in the north east of the US with this goal now in his mind. It was an arduous and at times grueling apprenticeship over 18 years and frequently working more that a hundred hours a week. There was training in general surgery, plastic surgery, fellowships in tissue engineering and microsurgery. He then helped to set up and participated in a seven year programme to develop hand transplant surgery.

However, just as the programme was coming to fulfillment his wife let him know that, well the way he put it was that she was not prepared to spend another cold winter in Pittsburgh so he acquiesced and they moved to the west coast, to California. Nevertheless Kodi maintained his connection with the project.

He then describes receiving the phone call that everything was set for the first operation. The patient was a former US marine who had lost his dominant hand several years previously in a munitions accident. A match had been found and that was not an easy thing to achieve, it had to match not only is size and blood group but also in skin tone and hair pattern.

Not wanting to be left out Kodi was soon on his way. He completed his own surgery for the day then jumped on the first plane back east. He describes his apprehension sitting on the plane, by the start of the operation he would have already been awake for the previous 24 hours and the procedure was going to take around 15 hours. He describes feeling pent up like a caged animal or a boxer about to begin a bout.

His description of the operation was what sportsmen call being in the zone, a sense that time stands still and motion is effortless. The procedure is quite a feat. First the bones have to be shaped and put in place then 23 tendon ends have to be found in the scar tissue and connected. The hand operates on the basis of balance so to maintain equilibrium between opposing pairs of tendons on the palm and back of the hand they have to be connected with just the right tension. Then there are all the nerves to be connected, they are a bit like electrical coaxial cables but unlike manmade wires they do not contain colour coding to tell you which parts to connect to which. Finally there are the blood vessels, veins and arteries some less than a millimeter thick. They are connected using micro-sutures with diameters less than a quarter of that of a human hair. It requires a microscope to see them and manipulate them.

Finally after 15 hours the process was complete. Kodi describes an abiding memory of aching cold hands since the whole thing had to be done at the temperature of ice. When it was all over the patient was taken out to the recovery unit. Kodi describes the magic moment when the patient had come round and was asked to move his thumb, then each finger in turn and they all responded. There was not a dry eye in the room.

Kodi recounts meeting up with the patient a year later and describes shaking his hand and connecting with the warmth and slight dampness of the living hand. He was then photographed arm-wrestling the former marine.

Kodi now works at UCLA as the Reconstructive Transplant Chief in the Department of Surgery and the Medical Director of Operation Mend, a programme to provide complex reconstructive surgery for wounded servicemen, a task which he describes as “giving back.”

So that was Kodi Azari’s story as I heard him tell it. I hope you do not mind me going into the detail but it seemed a very useful real world example to give of what human beings are actually like and what we are actually capable of if we are in the position to fulfill our potential. It is possible for a human to give another human a replacement hand. For me the contrast between this true story and the description of homo economicus could not be greater.

6. Lessons from Kodi’s story

Service

There are a number of aspects of the story that are relevant to this talk. The first point is the extent to which this man’s life has been driven by a sense of service in a way that appears wholly natural and intrinsic. For him it appears utterly natural that one’s life should be devoted to the benefit of others. This is not unique or uncommon. Consider for how many professionals in healthcare, education, the charity sector even in business this is the case. Accompanying this is an incredible dedication and motivation. There is also great ambition, but not for personal gain.

Team work

The second point that the story implies is the extent to which Kodi’s work was as part of a team, although it was told from one individual’s point of view. Transplanting a human hand is not something that one individual can do on their own. On a similar operation to the one described the team consisted of nine surgeons, three anesthetists and four nurses. In addition there is the obvious fact that these operations are the accumulation of a huge amount of work and expertise built up by many, many people over a number of years with much interconnectedness and interdisciplinarity. It is very much a co-operative effort.

Family

Two additional points to come out of the story were firstly the mode of Kodi’s initial inspiration. Although he himself says he is not religious there was a sense that there was a connection with the divine, a greater power beyond the mundane and listening to his story a sense that this stayed with him as a motivating power. Lastly there was the importance of family in his life, providing nurture and guidance in early years and remaining a strong influence that needed to be given due consideration in later life.

 So here is our person, a real person in the real world, someone who, to be sure had the opportunity and good fortune to make the most of the opportunities that have been made available to fulfill his potential and show what human beings are capable of. Here is an example I suggest that of the sort of behavior that a society supported by a sound economic system should encourage. Not that all people act in the same way, we have to recognize that others have very different motivations but the idea is to what economic arrangements support the positive aspects of human behavior and conversely to discourage the negative aspects (just like in a sound legal system).

7. Nature of human society

So there is our person, what now about the real world in which he lives, and in particular the human society in which we live, what is it really like.

Recently my work has required to do some travelling overseas mainly to large cities, Shanghai, Beijing, Chengdu, Istanbul, Quito and what is striking about these places is that basically they work, by which I mean that by and large in these massive communities people get on together living in a reasonable degree of peace, prosperity and co-operation. They are not perfect, and not all cities all like this, it is not that there is no corruption and no poverty but by and large they work. The metropolis of Shanghai now has a population of over 30 million packed together much more densely than here in London but the place works and works well. The trains run, the traffic just about gets through, everyone has electricity, you turn on the tap and clean water flows, the shops are full of goods the innumerable restaurants are continually provisioned with fresh food and so on. One is left wondering how it all works. We may or may not feel the same about London. It is easier to see in somewhere you are not so familiar with. At home your attention is easily taken by the little things that go wrong like when the trains don’t run for a day rather than seeing the big picture. How does it all work? Is it all down to the Mayor, Boris Johnson and the good people in City Hall. 

8. Hobbes and the Leviathan

Our modern ideas about society have been strongly influenced by Enlightenment thinking and in particular the notion of the social contract. This view of society is based on a belief that human beings are essentially separate individuals with selfish tendencies and it is assumed our natural condition is one of distrust and conflict. The idea is that in order to survive we have sacrificed some of our individual liberty and agreed to put ourselves under authority, the authority of the state. For those of up who have any, this also provides us with a means of protecting our private property particularly from those who don’t have any.

One of the main proponents of this view was the philosopher Thomas Hobbes who wrote at the time of the English Civil War. He presented his thoughts in a well-known book called The Leviathan. The original had a very striking engraving as the cover illustration. There is a crowned figure emerging from the landscape. His torso and arms are composed of some three hundred figures of individuals, all facing inwards and so making up the form of the giant.

The idea of the social contract has become well-established but is it actually true? Is this actually how society works? Hobbes wrote at a time of conflict and social upheaval when the idea of the Divine Rights of Kings was losing its hold and a new justification for authority was required so may not have been without ulterior motives. Are we naturally selfish and in need of an external authority to form into a society? Certainly my experience of massive communities that form cities is that people are actually naturally gregarious, we are social creatures, the way the scientists put it is that we self-assemble into communities, we do not require an authority to coerce us into doing this, although of course once formed every society needs leadership and regulation (and the more complex the society the greater the regulation). 

9. The Greater Leviathan

Not infrequently it appears as if life in society goes on despite our rulers rather than because of them. Let us follow henry George and use the term “Leviathan” to denote the man-made construction, the world of politicians with their experts and advisers and their propaganda, a world ruled largely of ideas, opinions theories and beliefs. Then let us distinguish form this from what George called the Greater Leviathan which I take to be the real world, the everyday world of people going about their business and getting on with life which is actually quite good at looking after itself. I think this is a useful distinction. Obviously the two are not completely separate and do interact

10. Analogy of person and body

To give an analogy, take consider what there is standing in front of you speaking. There is the person, essentially a collection of acquired and inherited behaviours which you may or may not be familiar with and which you may also have various ideas, opinions and beliefs about.

Underneath that is something rather remarkable, a living being whereby through a marvelous alchemy a combination of processes such as breathing, circulation and nourishment all taking place. These processes have a remarkable self-regulatory intelligence to them and, fortunately, are perfectly able to carry on without the direct intervention of the person. Of course the two do interact and the person can nourish and care for the body in such a way that keeps it strong and healthy or it can abuse it to the point of destruction.

The aim of this talk is to try to connect with the real world of people who naturally form communities in which mutual aid and cooperation are present and which I refer to as the Greater Leviatha. Not there are not tendencies towards selfishness greed and other vices but a natural aspect of societies and a binding force are their traditions and culture which provide a collective memory of what is right and wrong, good and bad to hold the negative tendencies at bay.

11. Production of a surplus

An important economic aspect of the Greater Leviathan, the community of people working co-operatively through specialization and trade, is that the capacity to produce wealth greatly exceeds the situation where each simply fends for themselves. In short there is a natural tendency to produce a surplus an abundance even.

When an economy becomes well-established and there has been considerable build up of capital this surplus becomes a significant proportion of the wealth produced. The distribution of the surplus will have a geographical element to it being most intense in those locations where the combination of natural and man-made features come together to make wealth production particularly efficient. The great cites of the world provide examples of this.

Given that this surplus arises out of the co-operative efforts of the society as a whole enhanced by natural locational features there is no natural or just basis for it to be claimed to belong to any particular individual. It is naturally public property, and so is the natural basis of the provision for the public sector of the economy.

Historically this surplus has been used for many different purposes. All too often is has been requisitioned by those in authority and used for military expenditure, to fight wars. But it can also be used for the uplift of society. In Periclean Athens it was used for the provision of magnificent public works of art. In Medieval times much of it was used for the construction of great cathedrals, glorious monuments to the ultimate provider.

So to return to our real person, Kodi Azari and consideration of what economic arrangements would support activity such as his, work that is for the common good, then we see that in the Greater Leviathan there does arise naturally a surplus of wealth which could be used to support such activity.

12 The Leviathan and taxation

However, in the man-made superimposition of the Leviathan the primary focus tends to be on the individual and their rights. There is an awareness of public needs but it tends to be secondary. There are arrangements to collect and distribute the surplus although it may not be perceivd as such, but they have become complex, onerous and inefficient. The situation has become particularly confused by a tenacious adherence to the concept of taxation, the imposition of arbitrary levies on various aspects of economic activity. Not surprisingly these levies are accepted only with the greatest reluctance because the way they are imposed is typically that a proportion of what is rightly private wealth is expropriated.

The governments never manage to extract enough and so have to resort to borrowing. Over time the debts grow and the situation is exasperated as a growing portion of public funds goes not to public services but to paying debt interest.

The outcome is that although an efficient economy is producing a massive surplus amidst the plenty there is a sense of there not being enough to go round to provide the decent public services that a civilized society is due and a need for austerity amidst an obvious abundance.

This does raise the question of where the rest of the surplus goes.

To understand this requires us to acknowledge some very simple and fundamental facts about the real world in which the economy subsists.

13. The Real World – requirements of space and time

Trade through a market system appears a natural phenomenon in the Greater Leviathan. We all have needs and desires of various types and this draws from us the effort needed to fulfill them. The market system means we do not have to meet all these needs directly we can each specialize, contribute what we are particularly good at and then receive what we need in exchange. Money provides a very effective medium of exchange to facilitate this and also supplies a universal scale to compare values.

According to theory the market system, not interfered with, should result in an optimal allocation of resources. However when dealing with theory it is easy to lose sight of the real world. The real world in which we live is bound by constraints. The most fundamental constraints of the physical world are simply those of space and time. These are the preconditions of all actions including all economic activity and cannot be circumscribed. The way the world exists in space and time imposes on us what we might call certain natural obligations. Any economic activity requires a space for it to take place, which on planet earth implies an area of the surface of the planet and requires a certain amount of time, simply because all activity takes time to be carried out.

14. In society Primary obligations become social obligation.

These are primary obligations. In a developed economy other obligations of secondary character may come into play. To stay alive we are obliged to consume food and energy, if we live a different location from where we work we are obliged to travel and so on.

In human society our obligation to nature to occupy a certain location in order to live and work becomes an obligation to the rest of society for granting us the privilege of occupying a particular place to the exclusion of everyone else and having that privilege acknowledged and protected. In a monetized economy the most obvious, but not necessarily the only way of fulfilling this obligation is through a rental or leasing arrangement and if the rent or lease reflects the economic advantage of occupying the location it provides a simple and efficient method of transferring back to the community that portion of wealth produced that corresponds to the public surplus.

It has to be said that this is not common practice but there have been examples, such as Hong Kong, Singapore, Taiwan, Tsing Tao, when under German occupation and Botswana where there has been practical application of the principle and the effects on prosperity have been evident.

15. Convention of private ownership of land

The tradition here in the UK and in many of the territories that have been under its influence is rather different. Here the convention has been established of treating land as private property. The effect of this is that the natural obligation to occupy a location to live and or work then becomes an obligation of one citizen as tenant to another as landlord to hand over a portion of the wealth produced not to the community as a whole but to another citizen. A mechanism then comes into place whereby wealth can be acquired not by useful production or service rendered and exchange, but simply through obligation arising from the custom of ownership.

The immediate effect of these arrangements is that the surplus, i.e. that part of the wealth produced that would naturally provide for Kodi and others like him accrues to private hands. There is now no surplus available for public expenditure so those in power resort to taxation. They require those who produce wealth to hand over a portion of what they have produced and is rightfully theirs. Besides the inherent injustice of this arrangement the additional burden placed on production reduces economic efficiency and hence also competitiveness. Enterprises, particularly labour intensive ones, which would otherwise be viable are rendered what is called “uneconomic” by the burden of taxation.

The second effect is that mere ownership of land instils great economic power as it effectively gives command over the wealth produced at each location.

16. The corruption of the banking system

 A recent and very noticeable effect of these arrangements in the UK has been a very full distortion and corruption of our banking system which lead to its collapse in 2008 from which it is yet to recover.

Credit

Looking at banks and what is behind them brings in the second fundamental natural obligation, that to time. In the real world it does take time for any productive activity and worthwhile activity may take a considerable time. This gives rise to an inherent difficulty for anyone producing for the market. They need to invest in both raw materials and in time for the productive process but they will not receive a reward until their work is complete and has been sold in the market.

The natural way to deal with this state of affairs is through the provision of credit, which relies essentially on trust, on recognising the role that time plays and for suppliers to have sufficient trust in the producer to wait until he has sold his product before expecting payment. The essential function of the banking system in relation to meeting the needs of the economy is as an institution that is able to provide the credit that is needed to enable productive process to take place.

However in a society where land has become private property a much safer option becomes available to the banking system which is to provide credit against land based assets as collateral. The second step is then for credit to be created not for productive purposes but to finance the transfer of ownership of land based assets.

With these arrangements a significant part of the public portion of the wealth created, that naturally could provide a source of public revenue, through for example land rent payments is diverted to financial institutions in the form of interest payments on the newly created credit .

The net effect of the accumulation of these arrangements on the economy as a whole is to introduce great instability in the financial institutions that eventually impacts on the real economy. It leads to a great distortion in the distribution of wealth away form those who actually produce it and to those who own the assets.

It also diverts the credit creating process away from its natural function that is to facilitate genuine wealth production.

Meanwhile Kofi Azari and others like him teachers, doctors, nurses, carers, policemen, the armed forces and the servants of the legal system are continually short of funds, not only for wages but also of the capital investment needed to supply good quality services.

The qualities of public service are devalued whilst greed selfishness, avarice are fueled.

17.  Conclusion

Summary :

The need to frame economics in terms of

• real people
• society as it is – a collective entity
• the basic parameters of the “real world” – space and time