Critique of rational decision making

Conventional economic thought makes the case for its rationale by introducing a distinction between the “positive” and “normative” sciences. Whereas positive science looks at the things as they are, normative science proposes how the things should be based on some normative judgment. The positive view therefore discards “normative” views as wishful thinking, not in line with the ground reality. Let us begin with the positive scientific method. One of the limitations of the positive method is that it offers precision at the cost of holistic understanding of the world. It looks at social reality not as something interpersonal, but private, devoid of any social context and not built on social interaction. Disregarding this social dimension and inherent conflict in social transactions made in the marketplace results in alienation, displaced aggression, violence, and wars (McKenzie 1981). Positive rationality was also used to promote a utilitarian concept of nature which has led us to the brink of extinction due to climate change. The idea of “rational individual choice” has been smuggled into the realm of science due to its strong appeal as simple common sense. However, common sense has both its strengths and limitations. Common science premises were contested in a masterly way by Socrates who questioned ascribing universal applicability to phenomena that have limited validity. He challenged each common sense-based proposition by pointing out the exceptions to the rule and seeking explanation of the exception through his dialogical discourse (Plato and Greene 1927).

Common sense perceptions have been challenged in a profound way by two contemporary thinkers, Nassim Nicholas Taleb in the Black Swan and Daniel Kahneman in the book Thinking Slow, Thinking Fast. Kahneman pointed out that the human mind works on two tracks, fast and slow. The fast track looks at the similarities and ignores the differences between the phenomenon that it observes, and this furnishes the basis for stereotyping. Thinking fast can both illuminate and obscure the reality that we are trying to understand. According to Kahneman, the limitation of stereotypical thinking can be overcome by looking at the numbers instead of looking at the similarities and differences (Kahneman 2011). But numbers alone may not suffice. Numbers compel us to look at the facts. But as pointed out by Hegel, the fact is identity of something with our ideas whereas truth is the identity of something with itself (Hegel, Baillie and Lichtheim 1967). Taleb has vehemently attacked “professional” views on slavish conformity to stereotyping and lack of attention to unique and least visible possibilities - known as error term in statistics - and named “Black Swan” by him (Taleb 2010). It is important to mention here that the fundamental task of a scientist is to tear the veil of appearance and unveil the mystery of the world around us and continuously challenge our “scientific views” which have taken the forms of ideologies and beliefs.

Another limitation of positive economics is the tautology of reasoning. A case in point is the functioning of the so called invisible hand so persuasively argued by Adam Smith. The invisible hand leads to decision making through the price mechanism. Price is considered the best indicator because it reflects the scarcity of a good or service in the marketplace. So, scarcity determines the price of a good. How do we find the scarcity of a good? Price determines the scarcity. So, we are moving in a circle, but the force of habit provides a big service by making us feel comfortable about this paradox. The concept of scarcity plays a vital role in explaining individual choices made as consumers and producers. The solution to the economic problem, as defined by conventional economics, is making an optimal choice to satisfy unlimited wants through limited means. Price is considered the best guide in evaluating individual choices with reference to the utility yielded by different baskets of goods and services compared to a certain amount of money. However, this method sweeps under the carpet the distinction between the natural and social scarcity of a good or service (Linder and Sensat 1977). Free market fails in making this distinction. Consequently, the free market fails in guaranteeing full employment, fair wages, and mitigation of climate change. It is only through state intervention that these failures can be corrected. However, during past 40 years of neoliberal policies, state has also failed to play a meaningful role. This compels us to revisit the conventional wisdom and go beyond “Free Market” ideology.

In the past, the free market could not correct its own errors to promote sustained and equitable economic growth. The breakdown of the free market resulted in the Great Depression in 1929. Under the New Deal, state expenditure was accepted as a new norm to stabilize economies around full employment. Subsequently, the market’s inability to reduce global inequality was recognized and development assistance was introduced as an effort to create a global welfare system under the auspices of the United Nations and Bretton Woods institutions. Two World Wars demonstrated that political decisions of democratic societies are not led by rationality, but that rationality is led by the desire to accumulate; and scientific truth based on reason is led by personal truth based on emotions. This conflict between desire and rationality furnishes the fundamental source of instability from the micro to macro level in the contemporary global community. Half a century after the New Deal, predatory capital staged a comeback in the form of supply side economics. This recipe could not prevent the recession of 2008 and later on led to promises by populist politicians to withdraw from open trade in the global market. Ironically, while the scientific thought deliberated on what determines the value of a good in the society, it did not come up with a conclusive response to the source of this value; there was no conclusive response to what constituted the source of value? Is it nature, labour, or capital? The answer perhaps lies in intellectual humility.

Prices also send another confusing signal to the consumer. Every sale price at a purchase location includes sale tax, indicating the amount that the consumer is paying to the government and is seen by the Libertarians as an infringement on the benefit received by the consumer. But ironically the price does not show the subsidy received by a business due to use of patents created as part of military research or public sector funding of scientific research or subsidies received by a corporation due to government bailout. Tax deduction at the sale point sends a message hundreds of millions of times to all the consumers that they are subsidizing the workers on welfare or claiming health insurance but says nothing about the percentage going to weapon production, war, military research, and corporate support. That is why, as proposed by Kahneman, we need to look at the numbers not images if we want to go beneath the appearance.

“Free Market” ideology also justifies market price as a “natural price” because it is determined on the basis of supply and demand - expressing the free and voluntary choices of consumers and producers in the market. In the first place this natural price reflecting actual scarcities does not exist (Linder and Sensat 1977). Secondly, the assumption that natural price, also known as equilibrium price, clears the market making both the consumers and producers happy by providing them maximum benefit from a transaction does not hold. As shown by Ha Joon Chang (2012), some prices do not settle at equilibrium level even over the course of a century. So, this equilibrium might exist in the imagination of economists or gullible citizens but not in reality. Then same happens in the case of wages.

The myth that the free functioning of the market leads to full employment and fair wages, and the greatest happiness for greatest number came under question in the second quarter of the twentieth century (Bauzon 2016). Stagnation kept haunting the global capitalist economy until the Great Depression of 1929 ushered in the Keynesian solution of public sector spending under a mixed economy labelled as the New Deal (Hanauer 2019). Joseph Schumpeter (2008) pointed out that one way of dealing with stagnation in the market economy was creative destruction. In the post WWII period, American Empire found that war was one way of handling stagnation and cyclical developments. War is a profitable endeavour if conflict and war could be sold to the public mind in the image of peace. Playing on the subconscious uncertainty and fear of citizens in the capitalist world, war was promoted as harbinger of peace. Mass media was handy in cultivating this fear and sustaining arms production and the war machine (Moyn and Wertheim 2019).

As aptly pointed out by Skidelsky (2019), economics can only solve the problems that it imagined having existed a long time ago. It disregards any changes in the social reality. Conventional economics believed that high wages and smooth growth could be ensured if government only kept inflation in check by controlling the money supply. However, printing money does not cause inflation and high levels of employment do not increase wages in contemporary economies. Yet the language of public debate and the wisdom conveyed in economic textbooks remain almost entirely unchanged. The basic psychological assumptions of mainstream (neoclassical) economics including the proposition that flexible wages would ensure full employment has been proved wrong by psychologists and the major economic events of our time. However, the false assumptions of economics have colonized the rest of the academy and have had a profound impact on popular understandings of the world (Skidelsky 2019). As noted by Graeber (2019), economic theory cannot explain the key economic changes in the contemporary global economy and resembles a shed full of broken tools. The problem of how to determine the optimal distribution of work and resources to create high levels of economic growth is simply not the same problem we are now facing, i.e., how to deal with increasing technological productivity, decreasing real demand for labour, and the effective management of work, without also destroying the earth. This demands a different science.

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