Social Economics & Its Relationship to Other Heterodox Schools of Economic Thought

Steven Pressman
pressman@colostate.edu

Introduction

Social economics has a rather long and distinguished history. Mark Lutz (1999) argues that its origins extend back to the ancient Greek and Roman philosophers, who were concerned about the common good and how to improve the well-being of average citizens. However, for Lutz, the father of social economics was the Swiss historian and economist Simonde de Sismondi. After completing a sixteen-volume history of Italy, he turned his attention to economics. He was particularly dissatisfied with the theoretical and abstract nature of economic analysis and was unhappy that economics ignored important issues of the day, such as the social and economic impact of industrialization and unemployment. Moreover, the early 19th century British political economists opposed giving aid to the poor. Following Malthus, they held that aid would increase the number of poor workers, lowering their incomes to subsistence while harming the overall economy (due to diminishing returns in agriculture). Sismondi, in contrast, thought that helping people in need was desirable for both economic and moral reasons.

Lutz (1999, p. 27) takes Sismondi’s [1815] article in Brewster’s Edinburgh Encyclopedia as the beginning of social economics. In that work Sismondi identified the shortcomings of British political economy and set forth a positive agenda for doing economics, one where people mattered. He argued that economics should focus on the problems of macroeconomic instability, on poverty and inequality, and that it should devise policy solutions to deal with real-world economic problems.

Since Sismondi, social economics has grown and developed its own unique outlook or approach. The Association for Social Economics (ASE) was founded in 1941 to promote research in social economics. It arose at a time when economics was becoming more mathematical– in microeconomics due to the marginal revolution and in macroeconomics due to Keynesian-type modeling. It is not the math that social economists object to as much as the unrealistic abstract assumptions employed in order to make the math easier to do. The most objectionable assumption for social economists is that people are rational. Instead, social economics sees people as behaving according to different sets of rules—they act, in part, based on habits, on what they see others doing (since this is how humans learn), and on cultural norms.

The next section lays out the main precepts of social economics. The final section of this paper explains how social economics is related to other heterodox schools of economic thought.

Social Economics in Practice

The three inter-related areas of research make up the core of social economics– the social determinants of choice and behavior, non-market economic relationships in a predominantly market economy, and a concern with ethical issues. Before we get to this, a few words about the standard economic view.

The neoclassical paradigm is well-known. It rests on a few simple assumptions about people and how people behave. People are assumed to be rational optimizers. They are also assumed to know the utility they will get as a result of every possible decision they might make; and they know this before they actually make a choice. Furthermore, individual preferences are assumed to be transitive, complete and stable. One consequence of these assumptions is that standard economic theory examines the individual in isolation from other people; other humans don’t really matter or, to the extent that they do, it is only because individual self-interest (by some invisible hand) leads to the best possible outcome for everyone.

From this it follows that there is little conflict between people and few ethical issues that arise. The individual is effectively Robinson Crusoe alone on an island. He thinks only about his own tastes and utility, which according to standard economic wisdom is known by the individual and is not subject to dispute (Becker & Stigler 1977). Nor is it influenced by others or by the process of choosing. Ethical issues arise mainly in the context of the social; there are few ethical issues for Robinson Crusoe alone on an island.[1] The only potential problems in this world are externalities, cases where the market does not work to maximize utility because non-market participants are impacted by market activities; the economic problem then becomes how to internalize these externalities.

Having said this, there has been a growing recognition among mainstream economists that social factors influence individual behavior (Becker & Murphy 2000). It is not entirely clear how and why this change came about. One possibility is that graduate students and young assistant professors had reached a satiation point with the neoclassical model. It was becoming nearly impossible to come up with dissertation topics and papers that built on the standard economic model; incorporating the social into economic analysis was one way to overcome this. A more technical reason for growing interest in the social was the rise of game theory, where the behavior of one individual depends on what other people do. However, social norms are the consequence of utility maximization on the mainstream approach. Individual actors behave according to the dictates of rational economic man, with other individuals embedded in their utility functions. In contrast to this perspective, social economics can be described as the study of how individual preferences and behavior are affected by group-level factors rather than other individuals who are engaged in rational, optimizing behavior.

As noted above, one standard economic assumption is that preferences are what they are, and it is not the job of economists to question them. People should be “free to choose” what they want (Friedman & Friedman 1979). For social economists, such an approach fails to dig deeply enough into the question of where preferences come from and whether they can be manipulated for either economic or political gain.

Research in the field of evolutionary biology demonstrates that many of our preferences are the result of hundreds of thousands of years of evolution. Our ancient ancestors, living on the African savannah, needed such preferences in order to survive. One trait likely to lead to survival by our ancient ancestors was the willingness and ability to consume large quantities of food whenever an abundant supply of food was available. It was never clear when there would be another kill and plentiful food, and any available food that was not consumed would spoil quickly in the hot weather of Africa. Those with “tastes” to consume mass quantities survived, and they passed these traits to their offspring. Over many generations, humans developed a propensity to eat whenever food was available. While this served us well (pardon the pun) in the ancient past, and even the more recent past, it does not serve us well in a world in which food is plentiful. In fact, it leads to problems of obesity and health problems that stem directly from obesity.

There is also the question of whether preferences can and should be manipulated. Following Becker, Friedman and others, conservative economists have objected to attempts at changing or manipulate sub-optimal preferences or choices (such as over-eating or not saving enough for retirement) through using nudges (Thaler & Sunstein 2008) that merely change the order in which choices are presented (in the case of food) or change default options (in the case of saving for retirement).

On the other hand, we know that advertising manipulates tastes, contradicting the neoclassical assumption of stable preferences. In the 1890s, Ivan Pavlov was able to get dogs to salivate by ringing a bell before feeding them. Salvation creates hunger, which then creates a demand for food. This work implies that outsiders can influence tastes and spending. Following the work of Pavlov, manufacturers have reengineered food so that people will consume more of it (Kessler 2009). Fructose, for example, has been added to a large number of food goods. Part of the reason for this is that fructose is cheaper than sugar; but there is a more important reason. Food sweetened with high fructose corn syrup inhibits our feelings of being full (Teff et al. 2004). Rats have been found to work harder (pressing a lever) to get fructose-sweetened goods even if they are not hungry (Brennan et al. 2001).

A second area studied extensively by social economics are those parts of the economy that do not involve market transactions. This includes family relationships, worker and consumer cooperatives, non-profit organizations, and the mixed-market economy in general. Non-market organizations play a large role in all economies. Probably the most important such organization is the family. Families are co-operative institutions. They reach decisions for all family members, in the interests of and for well-being of the family, and this contributes to the social goal of reproducing the human species. Neoclassical economics has great difficulty explaining the rise of the family or how the family satisfies the assumptions of its model. Gary Becker (1993) sought to do this by arguing that the head of the family was self-interestedly altruistic and would take into account the utility function of spouses and children. Left unanswered is why it would be rational for the male family head to act this way.

In addition, much economic activity is socially rather than individually driven. Gift giving is one good example of this. Richard Titmuss (1971) wrote a brilliant book on this subject, attempting to answer questions about the benefits of cooperation versus a competitive market. He examined blood donations in the US and the UK. In the US many people get paid to donate blood; in the UK all blood donations are voluntary. Titmuss found that more blood was donated per capita in the UK than in the US, and the blood donated was of better quality than in the US. He argued that because donating blood was a social act in the UK, people were more willing to donate their blood, and the blood donated was less likely to be tainted. In the US blood-payment model, people who desperately needed money (to support drug and alcohol habits) were more likely to donate blood and their blood was less likely to be useable.

Many other “gift relationships” take place regularly between humans—we invite people into our homes, we take them out for meals and treat them to concerts, or a day at a museum. We give people birthday gifts, graduation gifts and Christmas presents. These actions all generate a good deal of economic activity. From a strictly economic point of view, they are deadweight losses—not only could I have done better than someone else at buying me something, but I now have an obligation to reciprocate (Waldfogel 1993). Social economists view these exchanges not as losses but as part of the cement that ties families, friends and communities together.

Finally, social economics is concerned with values and ethics. This too is part of the cement that keeps societies functioning well because economics cannot be separated from social values. Furthermore, as philosopher Hilary Putnam (2002) pointed out, there is no sharp distinction between values and facts; the two are intertwined in many cases, as are the ethical and the economic.

For this reason, social economics is concerned with issues of poverty and inequality (Barrett 2005). Poverty represents a moral lapse at the social level– we allow people to have incomes that are less than the minimum that is necessary for them to survive. Moral concerns are also why social economists focus on ecological issues (Booth 1998); these concern whether the human species will survive and what will happen if climate change continues and the planet continues to warm. This has not only economic consequences, but social consequences as well since parts of the planet will become uninhabitable, people will have to drastically change their behaviors and the poor will tend to be hurt more than the rich—both because they tend to live in areas subject to flooding and they have fewer assets and fewer options when the land on which they survive will not be able to support them anymore. Finally, there is a concern with health care– its provision and its cost. For many people, access to decent and affordable health care is literally a matter of life and death (Davis & McMaster 2017), while the lack of adequate care creates the stress that then leads to health problems.

Inequality is a concern because it is inherently a social relationship, one that humans care about deeply. Social economics recognizes that people care about their relative position in society. This is supported by a good deal of empirical evidence. DeCelles & Norton (2006) studied air rage based on a simple natural experiment that arises because some planes board from the middle and others from the very front. They found that air rage was more likely to occur in the latter case, when coach passengers are forced to pass through first class on the way to their seats.

There is even some evidence that this may be part of our genetic inheritance. One interesting experiment demonstrates this very well. Brosnan & De Waal (2003) rewarded monkeys with a piece of cucumber when they successfully completed a task such as returning a stone that was given to them. Once the monkeys understood the routine and the reward pattern, some were rewarded with a grape rather than a piece of cucumber. It turns out that monkeys like grapes a whole lot more than cucumbers. Those monkeys who continued getting cucumbers were no worse off in absolute terms; but were clearly upset. They refused to return stone; and they threw things. This result doesn’t support the standard economic view of rational economic man. To the contrary, it demonstrates the importance of social factors in primate behavior.

Social Economics and Other Heterodox Schools of Economic Thought

Given this brief description of the key principles of social economics, it is easy to lay out some of the connections between social economics and other heterodox schools of economics.

First, social economics shares a concern with feminist economics about the family and the caring part of the economy. This includes caring for children, partners, relatives and the destitute.  Caring activities benefit many people and enable society to reproduce itself; these activities typically get ignored in standard economic analysis.

Second, like Veblen and the old institutionalists, social economists are concerned with understanding cultural institutions and traditions, as well as their impact on individual preferences and behavior. Like Veblen, social economists look to biology, or human evolution to explain this facet of human behavior. Veblen’s (1889) theory of conspicuous consumption also has a social aspect– people consume not to provide themselves with utility directly but to reduce the utility of others by making them feel jealous or inferior.

Third, following Marx, radical political economists see class rather than utility maximization as the main factor driving human behavior. People look to others like themselves to see how to act, and people act based on their class interests rather than their own individual interests.

Fourth, like Post Keynesian followers of Keynes (1936, pp. 95, 374), social economists focus on the determinants of income distribution and the economic impact of income inequality. In addition, and again following Keynes (1936, p. 148), uncertainty permeates decision making for Post Keynesians. Herd behavior (one response to uncertainty) becomes important for understanding human behavior and financial markets. Famously, Keynes (1936, p. 156) likened financial markets to a beauty contest in which one seeks to identify the 6 prettiest faces from 100, with a prize going to the person “whose choice most nearly corresponds to the average preferences”. This requires that people think about how others think, knowing all the while that others are also thinking this way; the individual and the social thus become intertwined.

Fifth, as noted above, climate change both threatens the human race and also has the potential to sharply reduce the well-being of most people living on the planet, an issue of great concern and focus of both ecological and social economists.

Finally, social economics shares with behavioral economics a belief that humans are not very good at obeying economic laws, especially laws holding that that people always behave rationally. People frequently people make mistakes of judgment and do not behave rationally. Some of the more famous errors, as pointed out by Nobel Prize winner Daniel Kahneman, are endowment and framing effects. The ultimatum game, developed by Kahneman (et al. 1986), supports some of the empirical work mentioned above– people care about income distribution and are willing to give up money, sometimes a lot of money, to reject a distributional outcome they regard as unfair.

References

Barrett, C. (ed.) (2005) The Social Economics of Poverty (London: Routledge).

Becker, G. (1993) A Treatise on the Family (Cambridge, MA: Harvard University Press).

Becker, G. & Murphy, K. (2000) Social Economics: Market Behavior in a Social Environment (Cambridge, MA: Harvard University Press).

Becker, G. &  Stigler, G. (1977) De Gusibus Non Est Disputandum, American Economic Review 67, pp. 76-90.

Booth, D. (1998) The Environmental Consequences of Growth (London: Routledge).

Brennan, K., Roberts, D.C., Anisman, H. & Merali, Z. (2001) Individual Differences in Sucrose Consumption in the Rat: Motivational and Neurochemical Correlates of Hedonia, Psychopharmacology 157, pp. 269-276.

Brosnan, S. & De Waal, F. (2003) Monkeys Reject Unequal Pay, Nature 425, pp. 297-9.

Davis, J. & McMaster, R. (2017) Health Care Economics (London: Routledge).

DeCelles, K. & Norton, M. (2006) Physical and Situational Inequality on Airplanes Predicts Air Rage, Proceedings of the National Academy of Sciences 113, pp. 5588-91.

Friedman, M. & Friedman, R. (1979) Free to Choose (New York: Harcourt Brace).

Kahneman, D, Knetch, T. & Thaler, R. (1986) Fairness and the Assumptions of Economics, Journal of Business 59, pp. S285-S300.

Kessler, D. (2009) The End of Overeating (New York: Rodale Books).

Keynes, J.M. (1936) The General Theory of Employment, Interest and Money (London: Macmillan).

Lutz, M. (1999) Economics for the Common Good: Two Centuries of Social Economic Thought in the Humanist Tradition (London & New York: Routledge).

Putnam, H. (2002) The Collapse of the Fact/Value Dichotomy and Other Essays (Cambridge, MA: Harvard University Press).

Singer, P. (1975) Animal Liberation (New York: Random House).

Sismondi, C.L.S. de [1815] Political Economy (New York: Augustus Kelly, 1966).

Teff, K., Elliott, S. Tschöp, M. Kieffer, T., Rader, D. Heiman, M., Townsend, R., Keim, N., D’Alessio, D. & Havel P. (2004) Dietary Fructose Reduces Circulating Insulin and Leptin, Attenuates Postprandial Suppression of Gherlin, and Increases Triglycerides in Women, Journal of Clinical Endocrinology and Metabolism 89, pp. 2963-2972.

Thaler, R. & Sunstein, C. (2008) Nudge: Improving Decisions about Health, Wealth and Happiness (New Haven: Yale University Press)

Titmuss, R. (1971) The Gift Relationship (New York: Random House).

Veblen, T. (1899) The Theory of the Leisure Class (London: Macmillan).

Waldfogel, J. (1993) The Deadweight Loss of Christmas, American Economic Review 83, pp. 1328-36.

Endnotes

[1] This does not mean that there are no ethical issues for a single person on an island. One prominent issue concerns the rights of other animals (see Singer 1975); another concerns the Kantian notion of having a duty to oneself.