The broad mission of economics mustn’t get lost in daily routines

Adam Smith placed the key to human progress not in the hands of kings, queens and aristocrats, but ordinary folk. Photo: iStock
Adam Smith placed the key to human progress not in the hands of kings, queens and aristocrats, but ordinary folk. Photo: iStock

Summary

Here’s a reading list to illuminate the discipline’s ethical concerns that go well beyond the routine economic issues we focus on.

Two of the most celebrated sentences in economics are these: “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity, but to their self-love, and never talk to them of our own necessities, but of their advantages." Economists have had intense debates about what Adam Smith meant when he wrote this in The Wealth of Nations, a book published way back in 1776. The first interpretation is that Smith believed that the pursuit of raw greed would enrich society. The second interpretation, more in tune with his earlier book on moral sentiments, is that market exchange can only happen if we understand what others in society need; it is built on mutual trust.

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These famous sentences appeal to me for a third reason. Smith was writing in the era of royal autocracies. Yet, he placed the key to human progress not in the hands of kings, queens and aristocrats, but ordinary folk such as the butcher, the brewer and the baker. Smith eviscerated the governments of his time for imposing tariffs on free trade, creating monopolies and encouraging misrule in colonies such as India. This is also the same Smith who stressed the common humanity of each member of society: “The difference between the most dissimilar characters, between a philosopher and a common street porter, seems to arise not so much from nature, as from habit, custom, and education."

The end of the year is usually a time when this column meanders away from its usual territory of current economic issues, with occasional forays into economic history, to examine offbeat themes. This instalment seeks to look at economics beyond the usual paraphernalia of constrained optimization, statistical models and forecasting an uncertain future. What is its broader mission?

Nearly a hundred years after Smith, the English economist Alfred Marshall famously described economics as “a study of mankind in the ordinary business of life". And he went on to remind economists of those left behind: “Overworked and under-taught, weary and careworn, without quiet and without leisure, they have no chance of making the best of their mental faculties." His student, and one of the pioneers of modern welfare economics, Arthur Clarke Pigou, wrote in 1920: “It is not wonder, but rather the social enthusiasm which revolts from the sordidness of mean streets and the joylessness of withered lives, that is the beginning of economic science."

These are lofty sentiments, but what can all this mean in practice? There are three books that have appealed to me for the way they re-imagine how an economy can function. The three economists who wrote these books are a varied bunch. One was widely considered to be a founding father of neoliberalism. The second was one of the most innovative thinkers during the social democratic high noon of the 1950s and 1960s. The third is a Marxist. Each of these books examines the possibility of an economy that promotes human freedom, empathy and autonomy.

The first book is titled A Humane Economy: A Social Framework of the Free Market. Wilhelm Ropke was one of the intellectual forefathers of the German social market economy. He rejected both naive libertarianism as well as doctrinaire socialism. An economy rooted in human values would necessarily have to be a market economy, but Ropke argued that both state action to curb monopolies as well as ethical values that prevent the soullessness of mass society are also needed in a humane economy. He visualized a system with wide ownership of property, decentralized decision making through market exchange and the preservation of local institutions. As Ropke once wrote: “Economically ignorant moralism is as objectionable as morally callous economism."

The second book is titled The Joyless Economy: An Inquiry into Human Satisfaction and Consumer Dissatisfaction. Tibor Scitovsky was a Hungarian-born welfare economist whose 1976 book challenged not just the foundations of consumerist economies, but also the mainstream theory of rational consumer choice. Scitovsky made an important distinction between pleasures and comforts. The former are the simple joys of life such as an evening with friends, while the latter are more practical things such as the latest electronic gizmo. You tire of comforts, but never of pleasures. A joyful economy would value pleasures more than comforts. (Ralph Hawtrey had also earlier made the distinction between defensive products that reduce suffering and creative products that increase happiness.)

The third book is The Moral Economy: Why Good Incentives are No Substitute for Good Citizens. Samuel Bowles is one of the most innovative economists of our times. His main point, built on many case studies, is that putting a price on everything through economic incentives undermines activities we should be doing as good citizens. In fact, incentives to promote moral behaviour paradoxically promote amoral behaviour—something that those designing public policies often do not anticipate. Human beings do not just pursue their material interests, but also “to constitute themselves as dignified, autonomous, and moral individuals". Good public policy should build on the complementarity between economic incentives and moral behaviour.

The ethical concerns of economics are often lost amid either the technical wizardry of mathematical models or the pressure to focus on the immediate economic situation. These three books can help you take a step back to examine the broader mission of economics.

Niranjan Rajadhyaksha is CEO and senior fellow at Artha India Research Advisors, and a member of the academic advisory board of the Meghnad Desai Academy of Economics.

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