Three Strikes against Individualism
Anthony Waterman wrote: "The background to my hasty intervention (which I am
already beginning to regret) is, of course, Margaret Thatcher's famous
aphorism: 'There's no such thing as society'; one of those self-evident
propositions like Milton Friedman's (was it he?) 'There's no free lunch'.
Further back in the intellectual tradition to which Lady Thatcher belongs,
is a passage with which historians of economic thought will be familiar:
'although we speak of communities as of sentient beings; although we ascribe
to them happiness and misery, desires, interests and passions; nothing
really exists or feels but individuals. The happiness of a people is made up
of the happiness of single persons. . .' (William Paley, Moral and Political
Philosophy (1785), chap XI.).
Individual football players 'really exist', and they have 'desires,
interests and passions' that may be gratified by the victory of their team
over another. The team does not 'really exist', which is why I called it an
abstraction. Useful, but dangerous when used anthropomorphically.
If, in order to make my (Paley's) point I have to concede 'rationality' to
dogs, so be it. What I do not want to do is to ascribe it to the pack."
==
This has nothing to do with whether Anthony or anybody else has written it.
I am going to scrutinize the message, not the messenger. After all, Anthony
could very well be the best representative of the mainstream economists of
today. It is the conventional wisdom.
Strike 1. May Rationality Go to Dogs: I applaud Anthony for giving
rationality to dogs; and I encourage him to leave it there. Rationality is
an analytical concept that resides in the head of the analyst, to allow him
to make sense of events that occur outside the skull. It is used to ascribe
meaning to observations, to connect one observation to another. It does not
exist as a physical observable entity. One cannot say that the mice or the
dogs are more or less rational than humans. I insist that the marginalist
revolution dropped the observable economy (as a realm where real goods are
produced, exchanged and consumed/invested) out of economic analysis to focus
on the abstract analytical principle of economizing. The biological
principle of conservation of energy (as the principle of economizing)
applies to all living beings including dogs and mice and humans. The idea of
rationality makes sense of why animals make choices. It says nothing
specifically about human beings, or about economic events at all.
Thus suppose that a hungry mouse has a choice of hunting for n different
kinds of insects for foods. If a biologist wants to model mouse behavior, he
will end up precisely with the Walrasian General Equilibrium Model of ONE
SINGLE MOUSE pursuing the production and consumption of n different goods,
with no reference to any other mouse or man. There is no market and no
society: it is strictly an individual. The model has nothing to say about
the market economy at all. While this can provide a good basis to study
biology, it provides nothing to study the MARKET economy, because the market
economy in every way supercedes and violates the NATURAL BIOLOGICAL
imperatives. Market events are essentially non-optimizing and
meta-individualistic.
Why so? Consider the most basic event of the market- the event of exchange.
It must occur between at least two HUMAN people, and never between non-human
animals. The buyer wants to buy something from a stranger instead of
producing the good himself, because it is less costly to buy than to produce
the good. I will soon show that we must have a certain indubitable theory of
free lunch to get to this (see strike 3 below).
The human element enters via human-to-human relations, by violating nature's
dictum of strict isolation. In nature, an animal produces what it consumes,
but in a market, a man produces what he does not consume (but what he sells
to other humans), consumes what he does not produce (but what he buys form
others). Buying and selling are non-optimizing things that rational choice
cannot understand. Anybody who wants to challenge me on this must produce a
demand curve without an underlying utility function (for the merchant who
buys what he does not consume), and produce a supply function without an
underlying production function (to show how a merchant sells what he does
not produce). To buy cheap and sell dear is not optimal: it is
entrepreneurial. One must go far beyond rationality to understand why one
sells x and another buys it (rather than all of them selling x, or all of
them buying y). If John and Paul are both rational (as they must be), then
how come John sells x while Paul buys it? One must have something in
addition to rationality to understand the difference in behavior with
respect to the same thing. What is that other thing? That other thing does
not detract them from being individuals, but protracts them into something
meta-individualistic.
Strike 2: Lady Thatcher's Thatched Palace: I wonder why some people never
leave kindergarten. The intellectual guidance of Lady Thatcher is certainly
a hasty one, or should we say, decent for a kindergarten cutie. The problem
is that society exists, but the Kindergarten Lady does not know how to
define it.
Like a kindergarten child playing with three individual letters A, C, and T,
this nice lady seems to think that the order of the letters arranged in a
certain way makes no difference. Thus the arrangement ACT versus CAT spell
out very different things, but the child may not have the intellectual
growth to recognize this. Therefore, the child never sees that a WORD exists
only by virtue of letters being arranged in a certain order, or put in a
certain relation. The child sees only the individual letters and never
manages to find the feline with the tail in the order CAT or the excitement
that comes with the actions in the order ACT. (TAC is a slang better not
known to children: it refers to marijuana)
A society is not an individual or the sum of its individual members, and it
is not a living organism, the same way the WORD is not a LETTER or pile of
letters. It is the name given to a set of rules of the game, each set
acting as an institution. A society is formed by a group of people who
adhere to a definite set of rules of conduct. If this is a new definition,
it is much better than the thatched palace that collapsed: it is stronger.
Society is not made by individuals: it is made by rules that connect
individuals.
The key ingredient in defining a society as a set of rules is to contemplate
a number of institutions, each with a definite rule. These rules of conduct
go beyond the individual, and define the nature of the relation between
different individuals. Allow me to clarify it for one institution of
society called the market. (I will leave the institutions of the state and
of culture untouched.) If one can reach the level where the order AC before
T (as in ACT) is different from the order CA before T (as in CAT), one may
embark on this post-kindergarten stuff.
In a market, real goods (or claims on real goods) are exchanged. The
exchange relation is subordinate to certain clearly specifiable rules. The
three rules I find enough to deal with EVERY issue in economics proper can
be stated thus. First is the rule of equivalence. The two goods (or claims
on goods) that are exchanged must be of equal value. State sponsored legal
institutions and customary social norms mean that the individuals who
participate in a market must agree that the seller has a right to be paid
with a payment of exactly equal value of what he sold. The legal
institutions must enforce the buyer's obligation to deliver an equivalent
payment to the seller.
Analytically, when the equivalence rule is formalized, it immediately fuses
micro and macroeconomics together and implements methodological
individualism. Many different individuals are linked via this relation of
equivalence between the goods. As soon as one writes down the equation of
equivalence, one goes far past the shallow base of Say's Law and soars far
beyond the depthless world of Walrasian General Equilibrium. It goes to
where rationality has no access.
The second rule of exchange is about kinds of payment. It is the most
intriguing. The seller does not accept any random kind of payment of the
correct value, but only that kind which gives him the highest utility.
Suppose that the seller has one dollar bill (which in turn is a claim on
unspecified kinds of real goods of a wide assortment) to sell, and the buyer
offers a large variety of real goods in his "everything for a dollar"
store. Though every different kind of good of one dollar's worth can be
received in payment, the seller of the dollar bill picks the good that gives
him the highest utility from among all goods of exactly equal value (one
dollar). This is the key to monetary theory, but I will leave it for now.
The third rule of conduct in the market is about intermediation. It simply
states that a market participant is free to buy what he may sell again. It
means that the buyer is not obliged to consume what he buys, but is free to
sell it. It means that the seller need not have produced what he is selling.
The ability to act as an intermediary is the essence of the market.
Conceptually, even in barter between original producers and consumers, there
must be intermediation: one of the two people in barter must perform the
acts of the intermediary, on his own behalf in this special case.
Now, the point here is that none of the three rules I mentioned have
anything to do with optimization or rationality. These rules do not
contradict rational choice, but go far beyond that. Imagine that these
rules are the cement that holds the individual bricks together to make a
palace. Lady Thatcher has no palace, because the individual straws in her
thatched cottage are essentially isolated and cannot be worked together to
hold. To say that society does not exist is to say that in a palace, the
individual bricks alone exist, and the cements that bind them together do
not. It as harder to see the invisible cement in a WORD that hides in the
order of the letters. What is the cement in the word CAT as opposed to the
word ACT?
One cannot get a palace by merely adding a pile of bricks: one must bring
the cement in a certain order of cohesion. The rules of conduct are the
cement that binds the different individuals together to form events that
occur beyond the individual level. The actions of one individual affect
other people via the relations. Lady Thatcher needs to enroll in school to
learn about cement, and about rules of conduct. In arithmetic, those will be
RELATIONS, oftentimes as EQUATIONS.
Strike 3: The Theory of Free Lunch: The idea that there is no free lunch is
the same thing as the idea that there is no such thing as a market or no
such event as development. Here is why. We will begin at the kindergarten
and grow up in steps.
In kindergarten, suppose that two kids John and Paul can both make two
different goods x and y of certain quantities, given their resources and
skills. Now suppose that John makes a certain quantity of x, and he values
it as being equal in utility (not market value) to 10 bananas. He however
values y as equal to 15 bananas in utility. On the other hand, Paul regards
the y he has made to be as useful as 8 bananas, while he regards x to be as
useful as 12 bananas.
Let us leave kindergarten, and go to elementary school. If John and Paul
could agree to exchange x for y, John stands to make a net gain of 5 bananas
in utility, while Paul stands to gain 4 bananas in utility. The John-banana
is different from the Paul-banana, and none of them actually consumes the
banana: they merely compare the utility of x and y with that of the utility
of banana. The big job for the school kid is to understand the idea of
AGREEMENT. It is far beyond rationality, as the word CAT is far beyond the
letters A or C or T. Agreement does not contradict rationality just as the
word CAT does not destroy the letters C or A or T: it simply adds something
beyond the letters. Rationality plus something goes into making agreement.
What is that something?
Next, let us go to high school. Though no banana is actually seen, the
exchange has produced a free lunch of 5 bananas for John and 4 bananas for
Paul, a total of 9 incomparable bananas. If we could go to college, we
would see that the use of a social device called money in place of the
conceptual banana to measure nominal value will help us grasp a kind of
measurement of the size of the free lunch. Because interpersonal comparison
of utility is not possible, we cannot give an absolute measure of the size
of the free lunch, but we can still put a definite number on it: the number
of bananas or the number of dollars. Yes, we can measure GDP.
Why is a theory of free lunch essential to economic science? It is so
because the market economy is essentially about the creation of free lunch.
Exchange is a manner of eating the bananas that do not exist. If John and
Paul keep x and y to themselves, they do not get the increase in utility. It
needs college education to see that the market enables people to produce x
in order to consume y rather than produce y and consume it outside the
market. The gains in utility can be readily converted into gains in physical
output if we begin to measure the gains in terms of resource costs. If and
only if certain predictable rules of exchange-related conduct exist does it
make sense for John to produce x in order to consume y, and thereby get more
y than he would get if he produced y rather than x.
The libertarian defense of individualism is the fairy tale world of manna
from heaven. The liberty to pursue profit cannot exist unless institutions
protect them. One must offend the individual and bind him under profit
relations to liberate him and to develop him. The libertarian does not know
why the letter C will never be a feline and grow a tail to get the liberty
of being a cat, unless it is hinged to A and T. There is no need to defend
individualism: simply let him/her go to the wilderness in complete isolation
and enjoy the most perfect freedoms. But to liberate a human is to bring him
under the spell of the rules of conduct that enrich him, those that make it
possible for him to be more than what he is. It is to supply Mozart with his
audience, and impose the freedom to accepting their ovation.
Economic development is possible because exchange allows one to put
resources to more valuable use compared to autarky. If a kindergartener
does not understand that the arrangement of the letters in the two words ACT
and CAT make a difference, our Lady Thatcher may never understand the
meaning of things like economy of scale, economy of scope and economy of
nearness. That is, a particular kind of exchange arrangement and a
concentration of production in a particular configuration of geography may
dramatically increase the size of the total observed output, without any
change in the preference functions, production functions and endowments.
The child need not change the letter C or A at all to make them part of
different words ACT and CAT, but the difference in arrangement changes the
meaning of the words. Likewise, the difference in market relations changes
the VALUE (meaning) of the OUTPUT (word) with the same RESOURCES (letters).
Those who do not believe in free lunch may never understand why the exact
same musical instruments (resources) struck in different orders create
different music. To them Mozart is as uncreative as any other deaf person
with no ability to discern music.
Now, let me reproduce the sentence (To them music) , with a randomization of
exactly the same letters, to show that to some people who see only
individual letters, there is no such thing as a word, far less a sentence:
Ot hemt Tormaz si sa untreavice as nya herto fade nerpos ithw no alityib ot
sidnerc miscu.
I hope the Kindergarten Lady will some day grow up. Yes dear, the letters
are individuals, and you are right in defense of TEE and OH and EM and ZED
and so on. But they also stand in relations, like the individual Meg is wife
to individual Ted, mother to individual Nick and she is Vice-Principal of
Atwood School; and when many individuals come together such as for a
REUNION, there is FEAST and FESTIVAL and plenty of FREE LUNCH. Go discover
the relations and the festivals, and hear some music there. Such is the
grammar of science that one rises from letters to words and from words to
sentences.
Mohammad Gani
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