I4. Neo-Classicism and Economic Science


Stephen Hilbert is one of these rich men that Smith talks about. In 1993 his income would have provided a (government mandated) minimum wage of more than four and one half times Smith’s multiplier of one thousand. His attitude regarding his wealth reflects a belief that anyone (any American, at least) in his position would act in the same fashion without a moment’s thought. It is clear that economic inequality in America is justified by an argument akin to Smith’s: the wealthy person is doing the "right" thing in becoming rich because it will, inevitably, be of great advantage to the society at large. Hilbert’s own words reveal that such an action is the "way" of America; it is, in fact, a specific ethos handed down to us from this classical liberal position, and it has most recently expressed itself in its reinstatement as the neo-classical economic argument, or the case for "human capital."


A major proponent of the neo-classical economic explanation is Solomon Polachek, who takes up this challenge in his book (co-authored with W.S. Siebert) The Economics of Earnings (1993). The underlying rationale behind the human capital investment schema is basically functionalist; there is a reason for the existence of wage differentials, and that reason can be discovered by looking at the structure of the economy with respect to earnings. The idea of human capital, of the concept that people can accumulate experience that can in turn be invested at a future point in time, "is ancient, and has been eloquently stated by Adam Smith" (Mincer, in foreword to Polachek, 1993). Going further, Polachek states that "human capital investment decisions, based on life-cycle decision-making, can be used to explain labour market differences" (1993:4).


Economic inequity, then, can be seen as the result of rational decisions made by people based on their relative levels of human capital. Indeed, neo-classical economism strongly "emphasiz[es] the rationality of human beings" and defines such rationality as "the human capital approach" (Polachek, 1993: xv). This emphasis on rationality is again supported by Polachek when he states that "the problem [must] be studied within the framework of rational choice. People are now assumed to have the information and ability to optimise over a long-term planning horizon - this is the human capital revolution" (1993: 20). It seems logical to conclude that a person’s ability and willingness to be rational is a necessary assumption of the human capital model. In fact, a person must not only be rational, but must also be capable of understanding how the rational decisions they make will affect them over their entire life-course. As Polachek states, "the life-cycle model concerns individual investment decisions. It forms the core of human capital theory…[This] approach deals with resource allocation over an individual’s life, rather than solely with decisions of the moment. We have to take explicit account of the fact that the young expect to become old, and the old to retire, when making their decisions" (1993: 16, 1-2).


A third condition is further imposed by the human capital approach in that in order to fulfill the requirement of life-course decision-making, persons must have full and accurate information regarding the options between which they are to rationally decide. "An important assumption underlying the competitive market model is that of ‘full information’…" (Polachek, 1993: 210).


The neo-classical economic model recognizes the idea that there exist certain junctures in our lives at which we make fundamental decisions that shape our individual futures. However, in fashioning this recognition, it assumes that we have the ability to perceive rationally these junctures and act as though we have the full information regarding what impact such actions have on future events. As such, the model exists in a world of very limited motives, not an open universe of nearly infinite futures. Although modern economic science prides itself upon the idea that it has a growing capability for conquering the chaos that is often characteristic of human interaction in society (i.e., discovering universal human motives), such claims have been skillfully questioned. Hannah Arendt offers this insight into the genesis of this scientific character of economics:


Economics - until the modern age a not too important part of ethics and politics and based on the assumption that men act with respect to their economic activities as they act in every other respect - could achieve a scientific character only when men had become social beings and unanimously followed certain patterns of behavior, so that those who did not keep the rules could be considered asocial or abnormal. [In footnote to preceding:] ‘The conception of political economy as primarily a ‘science’ dates only from Adam Smith’ and was unknown not only to antiquity and the Middle Ages, but also to canonist doctrine, the first ‘complete and economic doctrine’ which ‘differed from modern economics in being an ' art' rather than a ' science' ’ (1958:42).


Wallerstein also describes this transformation of economics into a "science":


We…know that a good deal of discussion occurred about the fundamental methodology of intellectual work, which centered around the so-called idiographic-nomothetic distinction. Basically, almost all economists…came down strongly on the nomothetic side of this debate, asserting the scientificity of their activity, which was defined by the search for universal laws (1988:528).


This "rational", "nomothetic" character of "the search for universal laws" (i.e., this scientific character) that the field of economics engenders continues to be the cornerstone of the basic philosophy regarding how we deal with each other in the social arena of the marketplace today. It is the fundamental way in which we define the meaning of our exchanges and this neo-classical view supports an expulsion of value-laden "social responsibilities" from such exchanges. Milton Friedman, writing on Capitalism and Freedom (1962), notes that


the view has been gaining widespread acceptance that corporate officials and labor leaders have a ‘social responsibility’ that goes beyond serving the interest of their stockholders or their members [note: here he sets up a straw man, for this view had not gained widespread acceptance then, or even now]. This view shows a fundamental misconception of the character and nature of a free economy. In such an economy, there is one and only one social responsibility of business - to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in free and open competition, without deception or fraud…Few trends could so thoroughly undermine the very foundations of our free society as the acceptance by corporate officials of a social responsibility other than to make as much money for their stockholders as possible. This is a fundamentally subversive doctrine (in McKie, 1974: 19).


The idea that social responsibility (or a manifest recognition of the public good) in business is not only non-productive but "subversive", counter-productive and damaging to free trade continues to linger on into our own time; this can be seen in the strange fascination that is taken by the media with companies like Ben & Jerry’s (cf. bibliography), who very outwardly promote such a "subversive doctrine". The classical economic view that 1) economic behavior is separate from other types of behavior, 2) the primary criteria of performance is growth in production, and 3) the primary goal of a business is profit, has basically survived unscathed from Smith’s time. It empowers our ideas of progress and has been seen as the fundamental basis for the development of modern societies. And despite the recent questioning by many philosophers and sociologists of its propriety, this "rational" character of business is most certainly alive and well.


Next Section - The Irrationality of Rationality

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