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Homo Economicus vs. Aam Aadmi: Crisis of Democracy

 

During the twentieth century, there were two major shifts in mainstream economic thinking.  These two major changes were the Keynesian revolution of the 1930s and the return of orthodoxy on the back of the Rational Expectation and Monetarist school in the late 1960s and early 1970s.  Each of the shifts was preceded by a major global event of consequence.  The first one was of course spurred by the Great Depression; the second one by stagflation.  Each had its victims as well.   The Great Depression and the ensuing crisis ended Britain’s position as the first among the capitalist countries.  The Bretton Woods system fell in the wake of the second crisis.  The same crisis also drew curtains on the post-war policy of welfare states.

The theoretical shifts were accompanied by tectonic shifts of geopolitical nature as well. The era of Keynesianism curbed what Joan Robinson described as “the humbug of finance.”  The major capitalist countries started spending huge sums on social programs, which would have been unthinkable before the First World War.  The rationale was to push up effective demand, but it also helped to keep the domestic working class contended, which served the interests of capitalism during the Cold War.

The Keynesian honeymoon came to an end with the rise of stagflation.  Some commentators have argued that this change was inevitable, as the previous social arrangement, in which the working class was receiving a historically high share of the output, was unsustainable in a capitalist system.  The diminution of the “reserve army of labor” led to workers’ militancy in a Marxist view.  According to mainstream economic understanding, high inflation, a result of high oil prices pushing up the aggregate supply curve, and consequent unemployment discredited Keynesian policies.  Whatever the reason, the end result was an attack on Keynesian economics at the theoretical level: it is said that Keynesian economics paid no attention to the microbehaviors of economic agents (the attack that, some argued, was fueled by a misplaced criticism based on misrepresentation of Keynes, courtesy of “the neoclassical synthesis”).  In the world of Rational Expectation, economic agents’ microbehaviors are accorded due attention, to be sure, but these agents and their behaviors are as one-dimensional as they could be.  Homo economicus, as he is called, has the sole motive of maximizing individual utility, defined in the narrowest sense.  In this make-believe world, everyone is omniscient and lives to the fullest.   Thus the old Smithian fable of the “invisible” hand was reinvigorated.  Meddling in the market by even a well-meaning state would be harmful, because the state does not have all the information.  In the free market, agents can take prices as good enough signals.  There may be problems of externality which may create trouble for the well-known welfare theorems, but, as long as the transaction costs were low (another questionable assumption), all that the state needs to do is to create clearly defined private property rights and get out of the market.

Financial orthodoxy made a return, and politics changed accordingly.  We had famous regimes of Reaganomics and Thatcherism, followed by Bush and Blair.  To make things worse, the Soviet Union and the Eastern European bloc imploded.  China became colorblind: the color of the cat no longer mattered as long as it caught mice.   The upshot was a sharp rise in the share of profits in the total production.

Unnoticed, the third theoretical shift, however, was brewing at the same time as Rational Expectation was sacking Keynesianism.  The third shift had many dimensions, but its unifying theme was that homo economicus was as real as Santa Claus.  Economic agents seldom behave in the way they have been assumed to (behavioral economists have contributed in this field through laboratory experiments).  Even when they do so, they may obtain a sub-optimal outcome in many situations (students of game theory are presented such examples in their very first course).  Since people are far from omniscient, perfect competition is as common as dodos, and prices are therefore bad signals, one needs to focus on what role information asymmetries may play in economic decisions and outcomes.  These developments in behavioral economics, game theory, and economics of information have succeeded in destroying many myths about the virtues of free market and free trade during the last two and half decades.  That the Nobel committee has been compelled to recognize Sen, Akerlof, Stiglitz, and Kahneman is a testimony to the changing times.

What is curious is that, though Walrasian economics (microeconomics in the rational expectation framework) is breathing its last at a theoretical level, in the real world we continue to witness the same policies of free market being glorified by the media, smuggled in surreptitiously by elected governments, and put into practice to disastrous effects . . . over and over again.  It is not due to lack of empirical evidence that policy circles are stuck in the days of Reaganomics.  Inequality is visibly rising throughout the world.  The rate of decline of poverty in India has fallen in the last decade since it jumped on the free market bandwagon.  Common people, whenever given a chance, have thrown out governments which swore by money and market.  The leftward shift of Latin America and the 2004 elections in India are but two examples of the electoral trend.  The question therefore arises: how come the policies for which the previous government was shown the door continue to be followed?  Here we come to the question of democracy.

It seems that the market, with its own codes of law, is slowly assuming the role of the state.  But the market does not go by numerical majority — it obeys money.  Bourgeois democracy and its safeguards never came cheap.  One can have as many democratic rights as she likes only if she can pay for them.  In an era when the state is conceding more and more to the market, the price of democracy is ever increasing.  The result is a rift between the popular mandate and the policies of the government elected by the populace.  And this implies loss of faith in representative democracy.  Throughout the world, the percentage of people who vote is falling.   Ironically, it is the poor part of the world who still queue up at the polling stations.  In the poorer countries, voter participation is higher than in the richer countries.  (Don’t the rich nations believe in democracy?  Being more educated, surely they know the value of a ballot paper better than the poor?  Perhaps, they don’t bother to vote because they know that their elites are going to manipulate the elections in the name of war on terror or some such falsehood and that, when manipulation is not enough, the elites can buy the democratic mandate anyway.)  Voting is the only peaceful weapon the poor have — the weapon by which they hope to change their lives.

So the poor vote.  The Congress Party comes to power in India vowing the cause of aam aadmi (common man), Lula da Silva triumphs in Brazil riding on the wave of workers’ rage against the multinationals, the African National Congress remains in power in the name of black farmers (in contrast to the victories of Blair, who survives because of his opponents’ ineptitude, and of Bush, who struts on thanks to amazingly gullible voters).  Once in power, however, the promises are soon forgotten.  The following examples from India illustrate this fact.  The state government of Andhra Pradesh went back on free power to farmers.  (That about 11,000 farmers have committed suicide, according to conservative estimates, has evidently failed to move the government.).  The state government of Maharashtra forgot about the regularization of urban slums in Mumbai and razed them instead.  The democratic norms and institutions are given a short shrift.  Team Manmohan boasts of technocrats who have no popular mandate.  Let alone the aam aadmi, even the allies of the central government do not know what the “historic” nuclear deal with the USA entails.  The prime minister and the Kashmiri leaders contradict each other on whether or not they have met, until the spin doctors come to the rescue.   The judiciary crosses the line and intrudes into the affairs of the legislature, as the media nod approvingly.

Indeed, the pliant media, fattening on advertisement revenues, go on singing paeans in honor of the efficient, free market.  The science of economics has knocked homo economicus off the pedestal, and the rhetoric of politics has rediscovered the aam aadmi.  Nevertheless, the same show goes on until next election comes and the silent majority — when not fooled, forced, or disillusioned — makes yet another attempt to rule itself.

References:

Akerlof, G.  2002. “Behavioral Macroeconomics and Macroeconomic Behavior.” American Economic Review, vol. 92, No. 3, June, pp. 411-433.

Bhaduri, A. 1986. Macroeconomics: the Dynamics of Commodity Production. New Delhi: Macmillan.

Bowles, S.  2003. Microeconomics: Behavior, Institutions, and Evolution. Princeton University Press.

Suri, K. C.  2004. “Democracy, Economic Reforms and Election Results in India.” Economic Political Weekly, Dec. 18, pp. 5404-5411.

Debarshi Das


Debarshi Das is a post-doctoral fellow at the Indian School of Business, Gachibowli, Hyderabad.


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