Looking Back for Insights into a New Paradigm

It is becoming widely acknowledged that the leading ideas of some of the most prestigious late-20th-century economists (such as Alan Greenspan and Lawrence Summers in the American government) are outmoded and that a new paradigm of economics is needed.  Part I of this essay will focus on two issues which we think it has to address and will cite some passages in which great economists of the last 250 years have called attention to them: the inadequacy of the “economic man” concept in microeconomics and of “closed-system” models in macroeconomics (i.e. models taking account of social exchanges only, to the exclusion of material exchanges between humankind and the rest of nature).  Part II will begin with a brief consideration of (a) the traditional metaphor (in Western writings) of the benign “invisible hand” and (b) some related aspects of the work of the most renowned economist of the first half of the 20th century, John Maynard Keynes, and of a brilliant contemporary of his at the University of Chicago; then it will shift, via a critical assessment of a statement posted recently by Keynes’ most knowledgeable biographer, to a statement of what seems to us to be the main challenge facing 21st-century economics.  Part III will be about some past and present ideological excesses which 21st-century economists — and politicians — ought to avoid.


The most prestigious mid-19th-century British economist, John Stuart Mill, included a classical statement — the classical statement — of the economic-man concept in his On the Definition of Political Economy (1836):

[Political economy] does not treat the whole of man’s nature as modified by the social state, nor of the whole conduct of man in society.  It is concerned with him solely as a being who desires to possess wealth, and who is capable of judging the comparative efficacy of means for obtaining that end. . . .  [It presupposes] an arbitrary definition of man, as a being who inevitably does that by which he may obtain the greatest amount of necessaries, conveniences, and luxuries, with the smallest quantity of labor and physical self-denial with which they can be obtained.1

Mill clearly did not claim that humans are motivated solely by a desire to increase and secure their wealth.  Instead, his intention was to set the limits of a field of inquiry called “political economy,” which he thus defined as the study of the results of people’s desires to increase and secure their wealth.  This concept of his was a world apart from the following precept of Adam Smith (the greatest of the economists):

Political economy considered as a branch of the science of a statesman or legislator proposes two distinct objects: first, to provide plentiful revenue or subsistence for the people, or more properly to enable them to provide such a revenue or subsistence for themselves; and secondly, to supply the state or commonwealth with a revenue sufficient for the public services.2

But still the study of political economy was regarded in Mill’s day as part of “moral philosophy,” unlike physics (which was developed from “natural philosophy”).  It was later that the academic discipline of economics was detached from moral philosophy, for instance at Cambridge in 1903 by the leading turn-of-the-century British economist, Alfred Marshall.3  And meanwhile a claim was made (in Germany by Max Weber among others) that the social sciences can be value-free like physics.  This claim in regard to economic theory was abetted by its mathematization — in England, for instance, by William Stanley Jevons, who in the 1860s used calculus to describe his version of the concept of marginal utility,4 and by Francis Edgeworth in Mathematical Psychics: An Essay on the Application of Mathematics to the Moral Sciences (1881), according to which “the first principle of Economics is that every agent is actuated only by self-interest.”  These later developments took place in an intellectual climate of Social Darwinism touting dog-eat-dog competitiveness at a time when great inequalities of wealth were vital to the development of industrial capitalism and of its political benefits to the nations leading that development.  The economic-man concept was thus converted from (a) an arbitrary premise setting the limits of the topic of political economy within the field of moral philosophy, into (b) an allegedly scientific law of economics (analogous to a law of physics) propounded by its most eminent 20th-century professors.  Masquerading thus as a scientific law, it bestowed a special meaning on the word “rational” when used as a term in economic theory; and it was in the context of a doctrine implicit in that term — namely, that people are rational only when behaving like “economic men” in the market — that most 20th-century economists said or took for granted that all economic values have to be reduced to monetary units.  (We will mention below a counter-argument advanced in the first half of the century.)

The economic-man concept is attributed to Adam Smith by people who have not read his two books: The Wealth of Nations (the first edition of which was published in 1776, and his own last edition in 1789) and The Theory of Moral Sentiments (first edition, 1759; his own last edition, 1790).5  Passages such as the following are often cited out of context:

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.6

By preferring the support of domestic to that of foreign industry, [the entrepreneur] intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.  Nor is it always the worse for the society that it was not part of it.  By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.  I have never known much good done by those who affected to trade for the public good.  It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it.7

— by ignoring passages such as the following:

It is not the soft power of humanity, it is not that feeble spark of benevolence which Nature has lighted up in the human heart, that is thus capable of counteracting the strongest impulses of self-love.  It is a stronger power, a more forcible motive, which exerts itself upon such occasions.  It is reason, principle, conscience, the inhabitant of the breast, the man within, the great judge and arbiter of our conduct.  It is he who, whenever we are about to act so as to affect the happiness of others, calls to us, with a voice capable of astonishing the most presumptuous of our passions, that we are but one of the multitude, in no respect better than any other in it; and that when we prefer ourselves so shamefully and so blindly to others, we become the proper objects of resentment, abhorrence, and execration.  It is from him only that we learn the real littleness of ourselves, and of whatever relates to ourselves, and the natural misrepresentations of self-love can be corrected only by the eye of this impartial spectator.  It is he who shows us the propriety of generosity and the deformity of injustice; the propriety of resigning the greatest interests of our own, for the yet greater interests of others, and the deformity of doing the smallest injury to another, in order to obtain the greatest benefit to ourselves.  It is not the love of our neighbor, it is not the love of mankind, which upon many occasions prompts us to the practice of those divine virtues.  It is a stronger love, a more powerful affection, which generally takes place upon such occasions; the love of what is honorable and noble, of the grandeur, and dignity, and superiority of our own characters.8

By calling the “spark of benevolence” feeble, Smith meant that one may well feel a bit of compassion while being actually less likely to do anything about it than if one feels also that “the grandeur, and dignity, and superiority” of one’s character is at stake.  A brilliant Indian economist, Amartya Sen, read Adam Smith’s books9 and published in 1977 an article making use of a distinction, rather like the one made by Smith in this passage, between “sympathy” (the same as Smith’s “spark of benevolence”) and moral, religious etc. “commitment” (in some ways akin to, though not the same as, Smith’s “love of . . . the grandeur and dignity and superiority of our own characters”):

The contrast between sympathy and commitment may be illustrated with the story of two boys who find two apples, one large, one small.  Boy A tells boy B, “You choose.”  B immediately picks the larger apple.  A is upset and permits himself the remark that this was grossly unfair.  “Why?” asks B.  “Which one would you have chosen, if you were to choose rather than me?”  “The smaller one, of course,” A replies.  B is now triumphant: “Then what are you complaining about?  That’s the one you’ve got!”  B certainly wins this round of the argument, but in fact A would have lost nothing from B‘s choice had his own hypothetical choice of the smaller apple been based on sympathy as opposed to commitment.  A‘s anger indicates that this was probably not the case.10

For Smith, the overarching context for all the ideas in his books was that of creating a “science of human nature.”  One of his best friends, David Hume, had argued, in A Treatise of Human Nature (1739-40), that this science would cover such topics as the senses, impressions, ideas, imagination, passions, morality, justice and society.  Hume addressed those topics in his writings but did not develop the science in much depth; Smith undertook to do so, and to that end proposed to write a coherent set of treatises, on moral philosophy, national wealth, “theory and history of law and government,” and “all the different branches of literature.”11  He began but, to his dismay, did not complete the one on jurisprudence and did not get around to writing the rest.  According to the view of human nature presented in the books that he did complete, self-interest consists of having a “proper regard for self” (our italics) which elicits the approval of the imagined impartial spectator (referred to in the long paragraph cited above) because it does no harm to others.  This view harmonizes rather well with the following precept of Francis Hutcheson, Adam Smith’s beloved (“never to be forgotten”)12 mentor and predecessor at the University of Glasgow:

[Everyone] has a natural right to exert his powers, according to his own judgement and inclination . . . in all such industry, labor or amusements as are not hurtful to others in their persons or goods, while no more publick interest necessarily requires his labors or requires that his activities should be under the direction of others.  This right we call natural liberty.  Every man has a sense of this right.13

In 19th-century Germany, a perspicacious reader of Smith’s work was Karl Knies, whose most seminal book, Die politische Ökonomie vom Standpunkt der geschichtlichen Methode (“Political Economy from the Standpoint of the Historical Method,” 1853) was based on the premise that the economist’s understanding of the historical development of political economy should be such as to help him form theoretical propositions about economics.  The ensuing concept of the task of political economy would be, according to Knies, in contrast to “theoretical absolutism,” i.e. to “the claim of offering, in scientific elaborations of political economy, unqualified statements valid equally for all times and all countries.”14   (Ricardo, rather than Smith, was the main target of this admonition.)  In regard to human nature, Knies held that

Human self-love does not inherently entail any denial of love for one’s family, one’s neighbor, one’s fatherland.  Self-addiction does entail this denial; it has a ‘private’ and negative element that cannot be blended with the love of anything that does not fall within the individual’s ego.  Self-addiction is self-love combined with indifference to, disrespect for, and enmity toward every other individual and toward the community — and hence readiness to plunder them.  Human self-love is instinctive, normal, decent.  Self- addiction is an oddity of character, abnormal to human nature.  It is seen as indecent in all peoples and in all eras.15

(Knies was a leading member of an informal school of economists, the so-called Kathedersozialisten, who held professorships at German universities in the economic and social sciences in the latter part of the 19th century.  It was owing to their influence that Germany became to a large extent a welfare state in the 1880s.  Health insurance, with half the costs paid by the workers and half by the employers, was enacted in 1883; accident insurance in 1884; old-age pensions in 1889.)16

However, given the dogmatic persistence with which orthodox Western economists today uphold, in the name of value-free science, the doctrine of economic man, mere insightful statements to the contrary cannot dislodge it from its place as a keystone of their theories.

(Since 1969 the academic and popular status of their would-be-science has been promoted by the Swedish National Bank with its ersatz “Prize in Economic Sciences in Memory of Alfred Nobel.”  The real Nobel Prizes were endowed by a genuine scientist, Alfred Nobel; orthodox economic theory is just a would-be-science because its predictions are vastly less reliable than those of the science which it explicitly imitates, namely physics.17  It is in certain ways like astrology in its academic heyday in the 15th and 16th centuries when astrologists were among the highest-paid university professors.  They were not, by and large, charlatans.  In their search for useful truth they gathered vast amounts of data, but a basic premise of their paradigm [i.e. that the planets and sun and stars move around Earth] was incorrect.  Their theoretical apparatus and terminology were impressively complex but they often begged to differ as to the validity of each others’ work.  A highly successful practitioner of the discipline would be one known to have made, on one or more occasions, correct predictions — with anyway a 50% chance of being true — about something of great concern to a wealthy patron: that his wife’s next baby would be a boy.  Orthodox economists make analogous predictions as to whether certain investments or sets of investments will be profitable.)

No matter how profound various statements such as those which we have cited from Hutcheson (1755), Smith (1790), Knies (1853) and Sen (1977) may be, they cannot dislodge the equally intuitive economic-man premise of the dogmatists upholding orthodox Western economics today.  Because these dogmatists claim to be more scientific than the giants of the past, a demonstrably more scientific approach than theirs is needed to discriminate among all the intuitive concepts of human nature (i.e. concepts based on common sense rather than on scientifically experimental probing with statistically formulated results) — including Thomas Hobbes’s concept (1651) of a “war of every man against every man”:

[D]uring the time men live without a common power to keep them all in awe, they are in that condition which is called war; and such a war as is of every man against every man. . . .  It may seem strange to some man that has not well weighed these things that Nature should thus dissociate and render men apt to invade and destroy one another. . . .  Let him therefore consider with himself: when taking a journey, he arms himself and seeks to go well accompanied; when going to sleep, he locks his doors; when even in his house he locks his chests. . . .  Does he not there as much accuse mankind by his actions as I do by my words?18

— Karl Marx’s concept of the psychological alienation of workers under capitalism:

[T]he worker . . . feels at home when he is not working, and when he is working he does not feel at home. . . .  [A]s soon as no physical or other compulsion exists, labor is shunned like the plague. . . .  [T]he worker’s activity [is] not his spontaneous activity.  It belongs to another.19

— Sigmund Freud’s concept of the tripartite psyche (id/ego/super-ego):

. . . [T]he id is directed exclusively to obtaining pleasure . . . [but] the ego is governed by considerations of safety.  The ego has set [to] itself the task of self-preservation, which the id appears to neglect.20

— Keynes’s concept of “animal spirits”:

[A] large proportion of our positive activities depend on spontaneous optimism rather than mathematical expectations, whether moral or hedonistic or economic.  Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as the result of animal spirits — a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities.21

— and all the rest.  E.O. Wilson remarked (in 1998):

Most people believe they know how they themselves think, how others think too.  But they are wrong.  Their understanding is based on folk psychology . . . shot through with misconceptions.  Advanced social theorists, including those who spin out sophisticated mathematical models, are equally happy with folk psychology.22

We will describe briefly in an appendix some statistically validated research into psychological human nature which is currently being used by some unorthodox economists seeking a more scientific foundation than folk psychology can supply to the discipline.  But let us turn first to the other main issue that we have undertaken to focus on in this part of our essay: the issue of using open-system modeling in 21st-century economic studies.  Steps in that direction are evident in recent textbooks on ecological economics; our task here is merely to call attention to some statements by first-rate economists of the past, acknowledging that humankind is economically dependent on natural resources some of which can be (and in fact now are being) exhausted, damaged, or rendered poisonous by human exploitation.  The idea that macroeconomic theory should take account of material exchanges between humankind and the rest of nature is nonsensical — we admit it freely — to those who take the term “economics” to mean market economics only (since none of the exchanges in the market are between humans and the rest of nature); but if the term is taken, as many orthodox economists profess to do, to refer to the allocation of potentially or actually scarce resources, then it has to refer not only to the market, and not only also to the everyday allocations of resources which are made outside the market — during, for instance, most of the work done by most of the women in the world — but also to the host of often destructive allocations of various natural resources (including ecological “sinks” as well as “sources”) some of which are beginning nowadays to become dangerously scarce.  Moreover, we think “economics” should be taken to mean all the material aspects of human life — in which case its study should take account also of certain material conditions, in regard for instance to climate and hygiene, that are indispensable to the material well-being of humans.  We admit that this latter concept of economics is more akin to Adam Smith’s concept of political economy as described above (i.e., enabling people to provide themselves with plentiful subsistence, and supplying the state or commonwealth with a revenue sufficient for its public services) than to John Stuart Mill’s concept of being concerned with man solely as a being who desires to possess wealth (which orthodox economists today obviously take to mean rich people wanting more money than they have already).

Thomas Malthus, one of the great classical economists of the generation after Adam Smith, is well known for the following precept (1798):

The power of population[-expansion] is so superior to the power of the earth to produce subsistence for man, that premature death must in some shape or other visit the human race.23

That concern is obviously more germane today than in 1798 when world population was less than one sixth of what it has now become, whereas the Earth is still the same size.  The current amount of increase in every generation or so is as much as the total world population — one billion (a hundred crore) — was then.

Karl Marx said in 1867 that:

Capitalist production, by collecting the population in great centers, disturbs the circulation of matter [Stoffwechsel] between man and the soil, i.e. prevents the return to the soil of its constituent elements consumed by man in the form of food and clothing; hence it violates the conditions necessary to lasting fertility of the soil. . . .  [P]rogress in increasing the fertility of the soil for a given time is a progress toward ruining the lasting sources of that fertility.24

Marx and Karl Knies both recognized that, as Marx put it in 1868,

[Agricultural] cultivation, when it progresses spontaneously and is not consciously controlled . . . leaves deserts behind it, as happened long ago in Persia, Mesopotamia etc.25

Alfred Marshall’s chosen successor as professor of economics at Cambridge, A.C. Pigou, suggested in 1920 that what was true of farming was true also of fishing, and that, in all such cases, government has to protect the interests of future human generations:

Sometimes people use methods that, as against the future, cost much more than they themselves obtain.  Fishing operations so conducted as to disregard breeding seasons, thus threatening certain species of fish with extinction, and farming operations so conducted as to exhaust the fertility of the soil, are instances in point. . . .  It is the clear duty of Government, which is the trustee for unborn generations as well for its present citizens, to watch over, and, if need be, by legislative enactment to defend the exhaustible natural resources of the country from rash and reckless spoilation.26

Knies had displayed, back in 1853, a remarkably broad sense of relations between economies and their ever-changing ecological conditions which affect economies:

The changes due to long-term effects upon the territorial [i.e. geographical] basis of an economy are changes not just in the land, but also in the conditions dependent upon water.  Further changes in the natural basis of the political economy can be seen in historical developments when one considers the significance, particularly in the culturally higher stages of commerce, of the utilization of natural sources of chemical and mechanical energy.27

A famous, updated version of such insight was published by E.F. Schumacher in 1973:

The illusion of unlimited powers, nourished by astonishing scientific and technological achievements, has produced the concurrent illusion of having solved the problem of production.  The latter illusion is based on the failure to distinguish between income and capital where this distinction matters most, namely [with regard to] the irreplaceable capital which man has not made, but simply found, and without which he can do nothing.  Humankind has been living on the capital of living nature for some time, but at a fairly modest rate.  It is only since World War II that we have succeeded in increasing this rate to alarming proportions.28

Schumacher had read a book, The Economy of Permanence (1946), by an Indian economist, Joseph Kumarappa, who had written at Columbia University in the 1920s a graduate thesis under the direction of an American follower of the Kathedersozialisten.  Kumarappa is not well-known in the West but we may include a citation from him because he was the first economist to put ecological concerns, including pollution as well as depletion, at the center of his professional concerns; he said:29

Beyond the pale of human society are our mute brethren who minister to our needs — animals, birds etc.  They and the land we draw our sustenance from, the water, sunlight, air and the rest of the physical world, claim our attention and regard while we strive to satisfy our needs.  If we fail to consider these factors, Nature will retaliate.30

Our citations from Malthus, Knies, Marx, Pigou and Schumacher as well as Kumarappa reflect concerns that have never had much effect upon buyers’ preferences in markets.  Ecological concerns tend to be mainly in behalf of people who are mere children or infants or who have not yet been born and therefore have no impact in the market; and so the market, with its reduction of all values to monetary terms, cannot reflect the kind of rational sanity which would take such concerns into account.  This point is implicit in the citation from Pigou (with its reference to the duty of government as “the trustee for unborn generations”); it was developed explicitly in the first half of the 20th century by an innovative Viennese economist, Otto Neurath, and became a normal feature of ecological economics in the second half of the century.31  Pivotal to Neurath’s work on economic theory was (in the words of one of the editors of the standard English translation of his main writings on economics) the “deceptively simple thought . . . that economic decisions, like many others, are judgment calls comparing expected outcomes between sets of irreducibly incommensurable measures.”32


We would like at this point to comment briefly on two aspects of the work of the most celebrated and influential economist of the first half of the 20th century.  Keynes is renowned for his brilliantly simple demand-side approach to the pressing problem of mass unemployment in the UK in the 1920s and in the USA after the stock-market crash of October 1929.  The theoretical basis of that approach is set out in his General Theory of Employment, Interest and Money (1936); the underlying spirit is displayed succinctly in the following excerpts from a pamphlet which he wrote in March of 1929:

There is nothing to be afraid of. . . .  [T]he future holds in store for us far more wealth and economic freedom and possibilities of personal life than the past has ever offered.  There is no reason why we should not feel ourselves free to be bold, to be open, to experiment, to take action, to try the possibilities of things.33

The influence in the USA of this reasoning is clear in Franklin D. Roosevelt’s historic call in 1932 for “bold, persistent experimentation”34 and his insistence that “in the future we are going to think less about the producer and more about the consumer” and that “the only thing we have to fear is fear itself.”35

Those brave optimists did not foresee, however, the potential scope of 21st-century ecological degradation.  It now seems likely to include not just depletion (causing the prices of basic foods, for instance, to soar) but also more and more severe pollution of various kinds (harmful chemicals in our air, food, and water), more rapid transformation of arable soil into desert than ever before in recorded history, more climate change disrupting agriculture where the land remains arable, more and more intense storms and tsunamis, more super-bacteria and fast-evolving viruses, etc.36  Resilience and resourcefulness and courage are always better than cringing; but if you wonder about the odds that the Earth will really provide for “far more wealth” and health and peace to the nine or ten billion people of the late 21st century than it did to the two billion at the beginning of the 20th, you may see less wisdom in simple optimism than in certain aspects of the intricate reasoning in Keynes’s Treatise on Probability (1921) and in his criticism of 1937 (based on that reasoning) of the economic-man premise.37  Many of his insights in regard to probability and uncertainty were matched by Frank H. Knight in his Risk, Uncertainty and Profit (also 1921).  Knight was the first and the most profound of a series of notable 20th-century economists at the University of Chicago.

Keynes and Knight distinguished alike between (a) probabilities that can be reckoned mathematically (both men assigned the same term, “risk,” to such probabilities) and (b) “uncertainty,” which cannot be reckoned because too little relevant knowledge is available.  And, both of them saw clearly that statistics from the past can validly quantify probabilities only if the relevant circumstances in the future are expected, with good reason, to be just like (within reasonable limits) those in the past — which is certainly not the case in regard to humankind’s ecological and demographic conditions in the 21st century vis-à-vis those of earlier times.  Keynes saw that the issue of uncertainty was at the heart of the most famous philosophical precept of Adam Smith’s mentor and friend, David Hume:

Hume’s skeptical criticisms are usually associated with causality; but argument by induction inference from past particulars to future generalizations was the real object of his attack.38

Here are some of Knight’s remarks on the pivotal distinction:

The practical difference between the two categories, risk and uncertainty, is that in the former the distribution of the outcome[s] in a group of instances is known (either through calculation a priori or from statistics of past experience), while in the case of uncertainty this is not true, the reason being in general that it is impossible to form a group of instances, because the situation dealt with is in a high degree unique.39

Uncertainty as to 21st-century developments prompts us to reflect on the orthodox economic theorists’ metaphor of a supposedly benign “invisible hand,” an early occurrences of which is in Adam Smith’s paragraph, cited above, about entrepreneurs inadvertently promoting the wealth of the nation by investing in domestic more than in foreign industries (which is, as everyone in the USA knows, no longer in our century the case).  Marx and Engels did not regard it as dependably benign; they said in the mid-1840s that under capitalism,

[T]rade . . . rules the whole world through the relation of supply and demand — a relation which . . . hovers over the earth like the fate of the ancients, and with an invisible hand allots fortune and misfortune to humans.40

But several diligent economists from the 1870s onward have sought, with mathematical concepts of market equilibria, to provide a theoretically rigorous foundation to the notion of an invisible hand ensuring that A‘s greed always promotes B‘s welfare.  These efforts reached a climax in the wake of a decision by two prominent American professors collaborating in the 1950s, Kenneth Arrow and Gerard Debreu, to set aside completely and irrevocably, in their economic theorizing, the engineering approach whereby mathematics is used to model observed reality.41  Joseph Stiglitz (to whom the Swedish bank has awarded its prize for his analyses of markets with asymmetric information) remarked in 2010:

The theories that said that markets work perfectly were all based on very simplistic models of perfect competition and perfect information. . . .  I don’t think today anybody would claim that the pursuit of self-interest by bankers . . . has led to the well-being of all of society.  And yet this was [throughout the late 20th century] the central notion taught in almost every graduate school in the country [i.e. the USA].42

We think Smith’s use of the metaphor was worthy of Dr. Pangloss.43  Of course serendipity is a fact of life, but there are also occasions when the luck is different and the invisible hand seems malign.  In modern Western religious terms it is described as a supernatural Will, provident when benign, otherwise chastening.  Do you believe that, if mankind’s economic and military activities render the Earth uninhabitable, a supernatural hand will stay the extinction?


Keynes’s most thorough biographer, Robert Skidelsky,44 has recently suggested that economic man may become, in a socialist future, a forgotten ghost of the past (and perhaps with no 1789- or 1848- or 1917-type revolution):

In 1995, I published a book called The World After Communism.  Today, I wonder whether there will be a world after capitalism.  That question . . . comes from the feeling that Western civilization is increasingly unsatisfying, saddled with a system of incentives that are essential for accumulating wealth, but that undermine our capacity to enjoy it.  Capitalism may be close to exhausting its potential to create a better life — at least in the world’s rich countries.

This is not to denigrate capitalism.  It . . . has lifted a large part of the world out of poverty. . . .

[H]uman nature is a bundle of conflicting passions and possibilities.  It has always been the function of culture (including religion) to encourage some and limit the expression of others. . . .  It was only in the 18th century that greed became morally respectable.  It was now considered healthily Promethean to turn wealth into money and put it to work to make more money, because by doing this one was benefitting humanity.  This inspired the American way of life, where money always talks.  The end of capitalism means simply the end of the urge to listen to it.  People would start to enjoy what they have, instead of always wanting more. . . .

The dishonoring of greed is likely only in those countries whose citizens already have more than they need.  And even there, many people still have less than they need.  The evidence suggests that economies would be more stable and citizens happier if wealth and income were more evenly distributed.  The economic justification for large income inequalities — the need to stimulate people to be more productive — collapses when growth ceases to be so important.

Perhaps socialism was not an alternative to capitalism, but its heir.  It will inherit the earth not by dispossessing the rich of their property, but by providing motives and incentives for behavior that are unconnected with the further accumulation of wealth.45

However, people who don’t have enough — and there are more such people now than ever before46 — will of course want more; and, many people who have plenty are persuaded by advertising that they have to get more.  This latter fact is one of the reasons why we should in the 21st century heed Adam Smith’s warning (in quite a different context, of course) about the influence of merchants:

The interest of the dealers . . . is always in some respects different from, and even opposite to, that of the public. . . .  The proposal of any new law or regulation of commerce which comes from this order, ought always to be listened to with great precaution, and ought never to be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention.  It comes from an order of men . . . who have generally an interest to deceive and even to oppress the public, and who accordingly have, upon many occasions, both deceived and oppressed it.47

The capitalist seeks, as such, to increase his own wealth infinitely.  As long as his own market grows, he doesn’t even mind if the population grows faster than the total amount of wealth, causing a per capita decline.  (Not all people who are capitalists are only that, however; those who are in reasonably good mental health develop other concerns as well.)  If reasonable experts manage to replace, in their thinking about economics, the mystical concept of “the invisible hand” and the simple-minded concept of “economic man” (upon which the vocation of capitalist is based) with more complex concepts of individual and social psychology based on scientific investigation, then there might be a hope of envisaging an economy suited to all three of the following concerns:48


Some 20th-century economists addressed two of these concerns.  (Amartya Sen, for instance, was concerned with total wealth and fair distribution.)  The need to address all three at once is likely to become urgent in our century.  But this cannot be done properly by people with ideological bees in the bonnet driving them too far away from the center of the triangle.


Ideological excess — leaning too much on some precept — flourishes at the intersection of economics and politics, and the more fervent the ideologist, the worse the mistakes.  The great economists transcended their ideological biases in certain ways.  Adam Smith, for example, while championing the division of labor (which he regarded as being historically a “gradual consequence of a certain propensity in human nature . . . to truck, barter, and exchange one thing for another”50), also made the following remarks:

In the progress of the division of labor, the employment of the far greater part of those who live by labor, that is, the great body of the people, comes to be confined to a few very simple operations, frequently to one or two.  But the understandings of the greater part of men are necessarily formed by their ordinary employments.  The man whose whole life is spent in performing a few simple operations, of which the effects too are, perhaps, always the same, or very nearly the same, has no occasion to exert his understanding, or to exercise his invention in finding out expedients for removing difficulties which never occur.  He naturally loses, therefore, the habit of such exertion, and generally becomes as stupid and ignorant as it is possible for a human creature to become. . . .  His dexterity at his own particular trade seems to be acquired at the expense of his intellectual, social, and martial virtues.  But in every improved and civilised society this is the state into which the laboring poor, that is, the great body of the people, must necessarily fall, unless government takes some pains to prevent it.51

He proposed that these deleterious effects of the division of labor be relieved by having the state provide education to the workers.

Marx is the most famous Western ideologist.  Two of his main precepts were class conflict and a forthcoming proletarian revolution, violent like the French Revolution of 1789.  Neither Marx nor Engels supported rigidly the second of these precepts: Marx said in 1872 that workers in England and America might attain their goals by peaceful means;52 in 1880 he quipped “Je ne suis pas marxiste” (“I am not a Marxist”)53 because he considered some of his French followers to be ideologically extreme as they took a cynical view of engaging the workers in a struggle for reforms in the Third Republic; and Engels in the 1890s was sanguine about the prospects for reforms in the Kaiserreich.54  Nevertheless, the fact that the USSR and Mao’s China had totalitarian governments can readily be linked historically to the applications and misapplications of an ideological distinction between “opportunistic” reform and genuine revolution entailing the liquidation of the bourgeoisie55 and of other “counter-revolutionary elements.”  This latter concept was salient in Stalin’s and Mao’s uses of ostensibly ideological precepts ad hoc to consolidate their personal power.  Their governments provided to the people far more in the way of formal education than previous governments had done, but their ideologically garnished cruelties were abominable; and meanwhile the ideology of Man heroically dominating the Earth caused, under Communism even more than elsewhere, ecological devastation at a rate unprecedented in the history of humankind.56

The most influential ideologists in the USA in the latter part of the 20th century were ardent opponents of everything that seemed to them socialist.  Two of them were (1) an erudite emigré from Vienna, Friedrich August von Hayek,57 and (2) an emigrée from the USSR, Alisa Zinov’yevna Rosenbaum, who in the 1920s had changed her name to Ayn Rand.

Hayek attributed collective and uniquely impeccable wisdom — albeit not in harmony with kindly human instincts — to the market:

All economic activity is . . . planning [of some kind or other]; and in any society in which many people collaborate, this planning, whoever does it, will in some measure have to be based on knowledge which, in the first instance, is not given to the planner but to somebody else, which somehow will have to be conveyed to the planner.  The various ways in which the knowledge on which people base their plans is communicated to them is the crucial problem for any theory explaining the economic process. . . .  We cannot expect that this problem will be solved by first communicating all this knowledge to a central board which, after integrating all knowledge, issues its orders.  We must solve it by some form of decentralization.  But this answers only part of our problem . . . [since] the “man on the spot” cannot decide solely on the basis of his limited but intimate knowledge of the facts of his immediate surroundings.  There still remains the problem of communicating to him such further information as he needs to fit his decisions into the whole pattern of changes of the larger economic system.  How much knowledge does he need to do so successfully? . . .  [T]his problem . . . can be solved, and in fact is being solved, by the price system.58

He said that prices yield misleading information whenever government interferes with the market,59 but he made no allowance for the fact that in the modern world the immediate surroundings of vast numbers of “men on the spot” includes persuasive misinformation due to vast expenditures for deceptive advertising, and he implicitly denied the possibility of such informative phenomena as Wikipedia, MIT OpenCourseWare, Google Earth and iGoogle, pubmed.gov and healthfinder.gov, etc.:

[E]ncyclopedias, dictionaries, textbooks and other works of reference could not be produced if, once they existed, they could freely be reproduced.60

He would cite Lord Acton’s famous precept (“All power tends to corrupt. . .”) in regard to government employees but never in regard to corporation executives, banksters or other millionaires or billionaires.  He labeled “anti-social” all government efforts to reduce differences of income,61 and thus opposed, for instance, the use of progressive income-tax rates62 (i.e. with the rich paying a larger percent of their income than the poor63).  He said (in 1988) that the phrase “social justice” poisons language,64 and that

The dispute between the market order and socialism is no less than a matter of survival.  To follow socialist morality would destroy much of present humankind and impoverish much of the rest.65

In 1933 he had regarded the Nazis as “a genuine socialist movement,”66 and in his most widely read and most influential publication he told the American people in 1945 that

[T]he rise of facism . . . was not a reaction against the socialist trends of the preceding period but a necessary outcome of those tendencies.67

He opposed brutal dictatorships in principle but said that they must be instigated and supported for years on end in order to destroy governmental interference with the wisdom of the market.  In an interview given in Chile during the eighth year of her military dictatorship he said that although he was “totally” against dictatorships “as long-term institutions,”

[D]ictatorship may be a necessary system for a transitional period.  At times it is necessary for a country to have, for a time, some form or other of dictatorial power.  As you [in Chile] will understand, it is possible for a dictator to govern in a liberal way.68

In the same interview he said this idea was valid for all of South America, and he meanwhile commended to Margaret Thatcher, for imitating, in Great Britain, the example of good government set by the Pinochet regime.69

His faith in the impeccable wisdom of the market rendered him indifferent to environmental pollution, and his doctrine in regard to macro-ecological depletion was that

[T]here is no danger whatever that, in any foreseeable future with which we can be concerned, the population of the world as a whole will outgrow its raw material resources.70

A thorough account of his writings about economics, politics, and history, and of his activism apart from his writings, would reveal a tendency to fluctuate between ideologically passionate and academically careful stances; so it is difficult to sum him up.  One way of doing it, however, is by pointing out that since the information supplied to the community by the market’s price system is useful mainly as a guide to producers,71 and since he made a point of showing little concern about obscenely gross inequalities of monetary power, and none whatever about ecological degradation, it is clear that in terms of the triangular diagram in our main text, his drift as an economist was too far toward the top of the triangle.

Ayn Rand (1905-1982) was far less erudite than Hayek, but remains today equally influential in the USA.72  She grew up in St. Petersburg, where her father owned and operated a pharmacy which was confiscated in the wake of the 1917 revolution.  As a youngster she found delight in reading Romantic novels (by writers like Victor Hugo and Walter Scott).  As a teenager she became an atheist, studied history and related topics (including some philosophy) at the University of Petrograd, and read Schiller, Rostand, Dostoyevsky, and Nietzsche, whose concept (set out in Thus Spake Zarathustra) of an ideal individual “superman” she deeply admired.  Upon graduating from the university in 1924 she studied screen-writing for a year at the State Institute for Cinema Arts, and then, after helping to make a film of propaganda-soaked Bolshevik fiction, emigrated in 1926 to the USA, and became an American citizen in 1931.  After toiling for years on the fringes of the film industry in Hollywood, she achieved fame as a novelist with the publication in 1943 of The Fountainhead, a tale of a superbly virile and brilliant architect whose magnum opus, a housing complex, he blows up with dynamite because his artistic integrity has been compromised by design changes due to a mediocre architect whose former wife he, the genius, has won over to himself.  (The two most famous scenes in the book are the depiction of their violent first coupling — later described by Rand as “rape by engraved invitation” — and the long, culminating trial-scene in which the genius is, of course, acquitted of having committed a crime.)

Rand moved to New York in 1950 and in the next few years wrote her other big novel, Atlas Shrugged — about a supremely brilliant and virile capitalist — and built up a small coterie of devoted and unquestioning disciples.  She regarded herself as the creator of a rational philosophy, “Objectivism,” which was, she explained in 1963, intended to support the same vision of an ideal man that her fiction projected.  She held that every individual man is an end in himself, and not the means to the ends of others; he must exist for his own sake, neither sacrificing himself to others nor sacrificing others to himself; the pursuit of his own rational self-interest and of his own happiness is the highest possible moral purpose of his life; and therefore the ideal political-economic system is laissez-faire capitalism, whereby men deal with one another as traders by free, voluntary exchange to mutual benefit; no one initiates the use of physical force against anyone else; the government acts only as a policeman protecting men’s rights, using physical force only in retaliation and against those (such as criminals or foreign invaders) who have initiated its use; and there is a complete separation between government and economics.  She fiercely opposed the concept of the welfare state as well as all forms of socialism and all kinds of altruism that involve sacrifice.  She held that the most coherent defense of capitalism required subscribing to an egoist ethic with a firm rejection of altruism as destructive and anti-human.  She criticized free-market economists (including Hayek and his Viennese mentor, Ludwig von Mises) with whose views she was otherwise sympathetic, because those economists rooted their defenses of capitalism in a utilitarian ethic: they assessed the desirability of social institutions and of public policies in terms of which institutions and policies they thought would tend to augment most the sum of human benefit as measured in terms of happiness or pleasure or the satisfaction of human desires.  She contended that such thinking is profoundly mistaken because it is more naturally suited to provide a moral basis for socialism than for capitalism; she held that it could be used to defend capitalism only by means of special pleading and distorted reasoning.

Rand’s personal acolytes in New York included a 28-year-old (in 1954) dropout from Columbia University’s graduate-studies program in economics.  She provided the ideological basis for his ancillary but nonetheless seminal role, as executive head of the central banking system in the USA from 1987 to 2006, in pumping up the bubble of reckless financial speculation (dealing in vast bundles of deliberately incurred bad debts) that burst catastrophically in 2007.  His name is Alan Greenspan.

Appendix: Three recent lines of research

1. Ecological footprint is a kind of index in ecological economics analogous to “gross national product” and per-capita “cost of living” in market economics.  The ecological footprint of a given population is defined as the total area of ecologically productive land and water (cropland, pasture, forest, marsh, river, sea, etc.) that would with prevailing technologies be required in order to provide on a continuous basis the energy and materials consumed by that population, and to absorb its wastes.  It is a reckoning in terms of area (different kinds of area on the surface of the Earth) and not of money.  It summarizes several aspects of ecological economics in a way analogous to the ways in which “cost of living” and other such indices summarize certain aspects of market economics.  A clever aspect of the ecological-footprint index is that for each nation it can be estimated from data that have already been gathered for market economics.  For instance, the pasture component of a given nation’s ecological footprint can be reckoned from the totals of how much money is being spent annually in that country for dairy products and from estimating, for that complex of dairy products, how much pasture (not necessarily in the same country) is needed to produce those goods.

It is also possible to reckon how much ecologically productive surface (of various types) is available within each nation.  The term for this in relation to national ecological footprint is “national available bio-capacity.”  The “ecological footprint” minus the “available bio-capacity” is the “ecological surplus or deficit.”  And, by dividing each of these three numbers by the number of people living in the nation, one gets corresponding per-capita estimates.  Here are some of them in hectares as of the mid-1990s:72

Ecological Footprint

Because the reckoning is in terms of two-dimensional surface area, it is inapplicable to aspects of depletion (for instance, of fossil fuels) or pollution (for instance, of air) which call for reckoning in terms of three-dimensional volume.  But in spite of that lack of comprehensiveness and in spite of the rough nature of the estimates (though no more rough than some of those, such as for cost of living, that are commonly used in market economics), ecological footprint is a way of summarizing a lot of useful information in ecological economics.  It shows that the average person living the USA was, in the 1990s, contributing more than ten times as much as the average person in, for instance, India was at that time to a related worldwide “ecological deficit” which is in turn a partial indication of the extent to which humankind was using up, for current consumption, the finite “natural capital” offered by the Earth.

(The ecological deficits for India and China are certainly higher today than they were then.)

The ecological-footprint concept suits the traditional economic theorist’s taste for reducing complex realities to a single scale of values.  However, ecological economics in our century will have to be of such a transdisciplinary nature, incorporating information from the natural sciences (as 20th-century medical science has done) as well as from other social sciences, that it will no more seek to describe an economy with a single number (such as ecological footprint or the current orthodox economist’s GDP) than medical doctors seek to describe a patient’s health with a single number.

2. Experimental economics is based on game-theory, which in turn was welcomed into the academic discipline of economics by the Swedish Bank’s committee in 1997 because it uses mathematics and seemed likely at that time to support orthodox economic theory.  But it is not turning out that way; instead, it is beginning to demonstrate statistically that the economic-man doctrine is of limited validity.

This is shown succinctly in Moral Sentiments and Interests: The Foundations of Cooperation in Economic Life (MIT, 2005), by Ernst Fehr (a seasoned expert in experimental economics), Herbert Gintis (the author of Game Theory Evolving: A Problem-Centered Introduction to Modeling Strategic Interaction, Princeton, 2000; 530 pp.), Samuel Bowles (whose father, Chester Bowles, was the first US ambassador to India) and Robert Boyd.  This book presents quantified experimental evidence as to the extent to which (a) the economic-man premise is invalid and (b) a complementary premise — of “strong reciprocity” — is valid.  Two characteristics (described below) are bundled together under the heading of strong reciprocity; the book includes statistical evidence as to the extent to which people who display one of them display the other one as well.

A starting point in the presentation of the evidence is an account of an experimental game called “Ultimatum,” which has been played many times and in several different cultures.  In its simplest version, there are only two players, A and B, who are unknown personally to each other and who play only one round of the game.  The rules of the game are that 10 units of cash are put at the disposal of A, who offers n units to B, who either accepts the offer, in which case A gets (in reality) 10 – n units, or rejects it, in which case neither player gets anything.  In this simple version of the game, the average offer is ca.4 units and the average cash-amount of the offers rejected by B is ca.3 units (whereas if A and B were, most often, “economic men,” then A would tend to offer only 1 unit and B, being “realistic,” would tend to accept it; instead, not only does A tend to share rather generously with B, but also B tends to sacrifice cash in order to punish A if A seems, to him or her, to be too selfish).  In other versions of the game, more than one round of the game is played between A and B (each round with its own cash-pot), or there are two or more successive potential recipients to A‘s offer(s), or A is replaced by a mere computer (as distinct from a person), etc.  If a certain game or a certain version of a game yields interesting evidence the significance of which is equivocal, then Gintis is clever at devising another one which, when it has been played many times with many people, can yield statistical evidence to clear up equivocal points.

One chapter of this book shows how, in any given society, the level of strong reciprocity (which is evidently based in part on a disposition to trust) can sometimes be weakened by inept strong-government action.  For instance, if a high percent of citizens are paying their income taxes, then salient government warnings against tax-cheating are likely to result in a lower rate of tax-paying (this happened in the USA), evidently because some people’s willingness to pay is based on a belief that everyone else is paying, and so the bad effect of destroying that aura of trust — that social capital — by calling attention to cheating outweighs the good fiscal effect of some of the previous shirkers deciding, out of fear, to mend their ways and pay up.  The book also discusses how such social capital can be built up even though shirkers (people who don’t contribute to it) benefit from it.

3. Happiness theory was developed initially by an economics professor at the University of Southern California, Richard Easterlin, who around 1970 began to entertain doubts that more money always brings more happiness.  Having become aware of some surveys asking people how happy they were, he gathered data from various countries, and found that in each one, the rich people reported more happiness than the poor but that the happiness-levels for poor countries were often nearly as high as for richer ones.  (The United States was tops in happiness; Cuba was a close second.)  Data available from 1947 to 1970 led him to the so-called the “Easterlin paradox”: Even though the average family money-wise in the USA became more than 60% richer between 1947 and 1970, this did not make Americans significantly happier.  In 1947, about 42% of them surveyed by one pollster said that they were “very happy,” whereas a similar poll found that 43% did so in 1970.  (There were some ups and downs in between.)  His explanation for the paradox is that (a) the more a nation has, the more its people think they are entitled to, and (b) the fact that others whom they know or know about are just as well-off materially as they are detracts from their happiness.

By the turn of the century, happiness economics was flourishing as an academic discipline, and even more so in Western Europe than in the USA.73  The most eminent British researcher in this field has been Prof. Richard Layard of the London School of Economics, who says that it is possible to get a fairly accurate statistical measure of happiness/unhappiness from ratings supplied (a) by individuals about themselves, (b) by their friends and (c) by researchers who have interviewed the individuals.  The results of all three methods are about the same, and fit in well with what is known neurologically about happiness; so, the information is more scientific than is traditional philosophical or religious wisdom in regard to this topic.  From statistical correlations between happiness/unhappiness and other basic conditions of people’s lives, it can be inferred that people are made happy by security (including the feeling that they can trust other people), by friendship, by marriage, and by familiar circumstances (rather than difficult new circumstances).  Some conditions making people unhappy are unemployment, distrust, and loss of status.  Activity-wise, people are, on average, happier when engaged in sex, socializing, relaxing, or eating (in that order) than when engaged in housework, working at a job, or commuting (in that order).  Two findings of interest to Layard as an economist are that the Easterlin Paradox is more true in regard to the USA, England, and Japan today vis à vis 50 years ago than in regard to continental Western Europe today vis à vis 50 years ago, and that competition causes more unhappiness than happiness, because the unhappiness which people feel when they notice that someone else is doing better is greater than the happiness which they feel when they notice someone else doing less well than they are.



1  John Stuart Mill, “On the Definition of Political Economy, and on the Method of Investigation Proper to It,” London and Westminster Review, October 1836; republished in his Essays on Some Unsettled Questions of Political Economy (2nd ed., London 1874), Paras. 38 and 46.

2  Adam Smith, Wealth of Nations, Bk. IV, Introduction, Para. 1.

3  Even though Alfred Marshall formally detached the study of economics from moral philosophy, he held that “Every change in social conditions is likely to require a new development of economic doctrines” (Principles of Economics, London 1890; Ch. 3, conclusion).

4  William Stanley Jevons, The Theory of Political Economy (London 1871).  A notable previous use of calculus is in A. Augustin Cournot’s Recherches sur les principles mathématiques de la théorie des richesses (1838).

5  Smith oversaw carefully those last editions of his books during his lifetime. In regard to the one on moral sentiments he told a friend in 1788 that “the most important additions will be to the third part . . . concerning the sense of duty and to the last part concerning the history of moral philosophy. . . .”  (See Nicholas Phillipson, Adam Smith. An Enlightened Life, Yale, 2010, p. 269.)

6  Smith, Wealth of Nations, Bk. I, Ch. 2, Para. 2.  The context of this famous sentence was an argument (by Smith himself) that people tend to cooperate: “Give me that which I want, and you shall have this which you want. . . .  It is in this manner that we obtain from one another the greater part of the good offices which we stand in need of” (loc. cit.).  Smith regarded the “characteristical faculty” of language as having enabled humans to develop commerce, law etc. as well as the literary arts.

7  Op. cit., Bk. IV, Ch. 2, Para. 9.

8  Smith, The Theory of Moral Sentiments, Part III, Ch. 3.

9  For a profound essay by Sen on Smith, see www.newstatesman.com/ideas/2010/04/smith-market-essay-sentiments.

10  Amartya Sen, “Rational Fools: A Critique of the Behavioral Foundations of Economic Theory,” in the journal Philosophy and Public Affairs, Vol. 6 (1976-77); this passage on pp. 328-329.

11  See Phillipson, op. cit., p. 3.  The best shorter biography of Smith is James Buchan’s The Authentic Adam Smith. His Life and Ideas (Norton, 2006).

12  Phillipson, op. cit., p. 42. Phillipson points out (pp. 42-43) that “Hutcheson’s philosophical reputation,” even before his appointment to Glasgow University’s professorship of moral philosophy, “had rested on his insights into the principles of human nature, the nature of virtue and the meaning of sociability.”

13  Francis Hutcheson, A System of Moral Philosophy (Glasgow 1755), vol. I, p. 294.

14  Karl Knies, Die politische Ökonomie vom Standpunkt der geschichtlichen Methode (Braunschweig 1853), pp.18-19.

15  Op. cit., pp.160-161.

16  See Karl Erich Born, “Von der Reichsgründung bis zum ersten Weltkrieg,” Part III/iii of Von der französischen Revolution bis zum ersten Weltkrieg, in Bruno Gebhardt, Handbuch der deutschen Geschichte, ed. Herbert Grundmann (Stuttgart 1970 and later editions), pp. 303-306.

17  Ample evidence could be given that orthodox economists suffer from “physics envy”; see apropos Philip Mirowski, More Heat Than Light : Economics as Social Physics, Physics as Nature’s Economics (Cambridge University Press, 1989).  Let us make do here with the following snippets from Paul Samuelson’s Nobel Memorial Lecture (1970): “[We praise] the followers of Galileo and Newton for taking the mathematical approach. . . .  Often the physicist gets a better, a more economical, description of nature if he is able to formulate the observed laws by a maximum principle.  Often the economist is able to get a better, a more economical, description of economic behavior from the same de- vice.  ¶Let me illustrate this by some very simple examples.  Newton’s falling apple. . . .  Let me illustrate the same thing in economics as a simplest imaginable case. . . .  One of the pleasing things about science is that we do all climb towards the heavens on the shoulders of our predecessors.  Economics, like physics has its heroes. . . .  [L]et me recall the work I have done in formulating clearly and generalizing what is known in physics as LeChatelier’s Principle. . . .  There is really nothing more pathetic than to have an economist or a retired engineer try to force analogies between the concepts of physics and the concepts of economics.  How many dreary papers have I had to referee in which the author is looking for something that corresponds to entropy or to one or another form of energy. . . .  However, if you look upon the monopolistic firm hiring ninety-nine inputs as an example of a maximum system, you can connect up its structural relations with those that prevail for an entropy-maximizing thermodynamic system.  Pressure and volume, and for that matter absolute temperature and entropy, have to each other the same conjugate or dualistic relation that the wage rate has to labor or the land rent has to acres of land.”

18  Thomas Hobbes, Leviathan or The Matter, Forme and Power of a Common Wealth Ecclesiasticall and Civil (London 1651), Ch. 13.  Do you think (a) everyone would rob you if you left your residence unlocked, or (b) that only some people would do it?

19  Karl Marx, economic and philosophical manuscripts of 1844; see www.marxists.org/archive/marx/works/1844/

20  Sigmund Freud, Abriß der Psychoanalyse (1940), revised translation, An Outline of Psychoanalysis (New York 1949), pp.110-111.

21  John Maynard Keynes, The General Theory of Employment, Interest and Money (London 1936, pp. 161-162).

22  E.O. Wilson, Consilience: The Unity of Knowledge (New York 1998), Ch. 9, Para. 11.

23  Thomas Malthus, An Essay on the Principle of Population, As It Affects the Future Improvement of Society (London 1798), Ch. 7.

24  Karl Marx, Das Kapital. Kritik der politischen Œconomie, Vol. I (Hamburg 1867), Ch. 15, Section 10, last paragraph.

25  Marx, letter to Engels, 25 March 1868.  Marx was, in this part of the letter, praising a book by K.N. Fraas, Klima und Pflanzenwelt in der Zeit, eine Geschichte beider (“Climate and the World of Plants in Time, a History of Both,” 1847).  Modern orthodox economists normally don’t read scientific books.

26  A.C. Pigou, The Economics of Welfare (London 1920), Part I, Ch. 2, Para. 5.

27  Knies, op. cit. (in Note 13), pp. 76-77.

28  E.F. Schumacher, Small Is Beautiful.  Economics As If People Mattered (London 1973), Ch. 1.

29  See Mark Lindley, Joseph Kumarappa. Mahatma Gandhi’s Economist (Popular Prakashan, Mumbai 2007), Ch. 1.

30  Joseph Kumarappa, Gandhian Economic Thought (Bombay 1951), last page.

31  See gesd.free.fr/oneill.pdf (John O’Neill, “Socialist Calculation and Environ- mental Valuation: Money, Markets and Ecology,” in Science & Society, Vol. 66, No. 1, Spring 2002, pp.137-151), and Hermann Daly and Joshua Farley, Ecological Economics. Principles and Applications (Island Press, 2nd edition 2010), Ch. 24, “Efficient Allocation.”

32  Thomas E. Uebel, “Introduction: Neurath’s Economics in Critical Context,” in Uebel and Robert S. Cohen, ed., Otto Neurath, Economic Writings. Selections 1904-1945 (2004), p. 2

33  John Maynard Keynes, “Can Lloyd George Do It?” (pamphlet; London, 10 March 1929).

34  Franklin Delano Roosevelt, speech at Oglethorpe University, 22 May 1932; see newdeal.feri.org/speeches/1932d.htm.  According to the memoir of a firsthand witness (Samuel Rosenmann, Working with Roosevelt, New York 1952, pp. 65-66), this text became “a kind of watchword for the New Deal program” and forecast a “basic part of the Roosevelt program for recovery and economic stability: emphasis on purchasing power for consumers rather than accumulation of capital for the producer.”

35  Roosevelt, presidential inaugural speech, 4 March 1933; see www.guardian.co.uk/theguardian/2007/apr/25/greatspeeches.

36  For some historical accounts of earlier such tragedies, see Jared Diamond, Collapse: How Societies Choose to Fail or Succeed (Viking Press, 2005) and Alf Hornberg, J.R. McNeill and Joan Martinez-Alier, ed., Rethinking Environmental History: World-System History and Global Environmental Change (Altamira Press, 2007).

37  See qje.oxfordjournals.org/content/51/2/209.full.pdf, pp.212-216.

38  Keynes, Treatise on Probability (London 1921), p. 302.

39  Frank H. Knight, Risk, Uncertainty and Profit (Boston 1921) p. 233.

40  Karl Marx and Friedrich Engels, Die Deutsche Ideologie.  The passage in context can be found by searching in www.marxists.org/archive/marx/works/1845/german-ideology/ch01a.htm).

41  The essay published in 1954 by Kenneth Arrow and Gerard Debreu is entitled “Existence of an Equilibrium for a Competitive Economy.”  Its historical significance is outlined in Yanis Varoufakis’s essay, “They Don’t Make Them Like They Used To! Why Even the Best Post-war Economist Ended Up a Tragic Figure”; see “They Don’t Make Them Like They Used To! Why Even the Best Post-war Economist Ended Up a Tragic Figure”.

42  Joseph Stiglitz, talk at the Commonwealth Club (2010); see www.zerohedge.com/article/joe-stiglitz-slaps-invisible-hand.

43  Dr. Pangloss is a fictional character in Voltaire’s novel, Candide, ou l’optimisme (Paris 1759), who is remembered for his teaching that we have been divinely provided with noses to put our glasses on.  Voltaire was inspired to write the novel by an earthquake (and resulting tsunami and fires) which destroyed Lisbon in 1755.

44  Robert Skidelsky, John Maynard Keynes: A Biography (3 vols., London 1983-2000).

45  Skidelsky, “Life after Capitalism.”  For the entire essay, see (www.newtimes.co.rw/

46  In “emerging India,” for instance, 35 million more people now than in 1981 are surviving on money equivalent to US$1.25 a day or less.  See www.hindustantimes.com/special-news-report/trackinghunger.aspx.  See also Ozay Mehmet, Westernizing the Third World: the Eurocentricity of Economics (Routledge, 2nd edition 2002) for a sharp account of the succession of nostrums — “big push,” “balanced growth,” “technological dualism,” “import-substitution industrialization,” etc. — devised by orthodox economists since World War II for rendering prosperous the nations that had been reduced by 19th- and 20th-century imperialism to deep poverty.

47  Smith, Wealth of Nations, Bk. 1, conclusion

48  This triangular diagram is adapted from a similar one by Jan Otto Andersson; see www.lucsus.lu.se/Jan_Otto_Andersson_Paper.pdf, p.1.

49  The cause-and-effect relation between inequality and violent mass rebellion depends (obviously) on historical context and cultural circumstances.  Our diagram could have included some mention of a purely moral concern in regard to extreme inequality (e.g. some people wallowing in decadent luxuries while their neighbors die wretchedly of starvation or ecological poisoning), but we haven’t included that point in the diagram because we want it to make sense even to readers devoid of such concern.

50  Smith, Wealth of Nations, Bk. I, Ch. 2.

51  Op. cit., Bk. V, Art. 2.

52  See www.marxists.org/archive/marx/works/

53  See www.marxists.org/archive/marx/works/1882/
and www.marxists.org/archive/marx/works/1890/

54  See www.marxists.org/archive/marx/works/1895/
, www.marxists.org/archive/marx/
and www.marxists.org/archive/marx/works/1895/03/06.htm.

55  Rosa Luxemburg had sustained in Germany this aspect of Marxist revolutionary ideology.  (See www.marxists.org/archive/luxemburg/1900/reform-revolution/index.htm.)  The first eminent Russian Marxist, Georgi V. Plekhanov, believed that Russia must undergo capitalist economic development before socialism could become possible there.  (See www.marxists.org/archive/plekhanov/1885/ourdiff/-index.html.  Marx’s views about this are described in Teodor Shanin, Late Marx and the Russian Road: Marx and the “Peripheries of Capitalism”: A Case, Routledge, 1983.)

56  In regard to China see Judith Shapiro, Mao’s War Against Nature: Politics and the Environment in Revolutionary China (Cambridge University Press, 2001) and R. Edward Grumbine, Where the Dragon Meets the Angry River: Nature and Power in the People’s Republic of China (Island Press, 2011).

57  In 1919 Hayek was legally obliged by the Socialist government of Austria to omit the word “von” (indicating aristocracy) from his name.

58  Hayek, “The Use of Knowledge in Society,” American Economic Review 35, pp. 519-30; reprinted in his Individualism and Economic Order (Chicago 1948) pp. 77-91.

59  See for instance www.youtube.com/
(at 5:12 – 6:09).  This video provides intangible but valuable information as to Hayek’s personality and the adulation which most of his ideological followers have accorded to him.

60  Hayek, The Fatal Conceit. The Errors of Socialism (London 1988), pp. 36-37.

61  Hayek, op. cit., pp. 117-118.  It is noteworthy, however, that he proposed in theory (though never actively in practice) that “in free societies” the government should provide certain kinds of safety-net, e.g. an assured minimum income to people who would other- wise be destitute.  (See The Road to Serfdom, 2007-2008 editions, p. 148; Law, Legislation and Liberty. Volume 2. The Mirage of Social Justice, 1976 and later editions, pp. 87-88; and Hayek on Hayek, 1994 and later editions, pp. 148-149.)  It is equally notable that none of his ideological followers advocate such measures.

62  Paul Samuelson recalled, in “A few remembrances of Friedrich von Hayek (1899-1992),” Journal of Economic Behavior & Organization, lix (2009), pp. 1-4 (see tinyurl.com/ycuu5uk): “The Hayek I met on various occasions . . . bemoaned progressive income taxation, state-provided medical care and retirement pensions, [and] fiat currencies remote from gold and subject to discretionary policy decisions by central bank and treasury agents.”  It is noteworthy, however, that he proposed in theory (though never actively in practice) that “in free societies” the government should provide certain kinds of safety net, e.g. an assured minimum income to people who would otherwise be destitute.  (See The Road to Serfdom, 2007-2008 editions, p. 148; Law, Legislation and Liberty. Volume 2. The Mirage of Social Justice, 1976 and later editions, pp. 87-88; and Hayek on Hayek, 1994 and later editions, pp. 148-149.)  It is equally notable that none of his ideological followers advocate such measures.

63  In the USA, the effect nowadays of progressive income taxes is offset to a considerable extent by loopholes and by other, regressive taxes.  According to the following graphic data in regard to the USA in 2010 (from krugman.blogs.nytimes.com/2011/04/22/zombie-tax-lies/) the poorest 20% of the people had about 31⁄2% of the income and paid about 2% of the taxes, while the richest 1% had slightly more than 20% of the income and paid less than 22% of the taxes.  If the net effect of the taxation had not been “progressive,” the poorest 20% would have paid about 60% more than they did, while the richest 1% would have paid about 5% less than they did:

By Paul Krugman

64  Hayek, Fatal Conceit, pp. 7-8.

65  Hayek, “Nazi-Socialism,” memorandum first published in the Appendix to The Collected Works of F. A. Hayek. Volume II. The Road to Serfdom. Text and Documents. The Definitive Edition; see p. 245.

66  Hayek, Reader’s Digest Version of The Road to Serfdom (New York, 1945), pp. 31-32.

67  See, at www.fahayek.org/
, the reply to the question, “What opinion, in your view, should we have of dictatorships?”.  (Hayek’s mentor in the 1920s, Ludwig von Mises, had declared in 1927 that although Fascism was an emergency makeshift, its merit would endure forever in history because it was saving European civilization.  See the tenth paragraph at mises.org/liberal/ch1sec10.asp.)

68  Greg Grandin, Empire’s Workshop. Latin America, the United States, and the New Imperialism (New York 2006), p. 172; see tinyurl.com/3hcmx8k.  “[A]t the nadir of Chile’s 1982 financial collapse, [Thatcher] agreed that Chile represented a ‘remarkable success’ but believed that Britain’s ‘democratic institutions and the need for a high degree of consent’ made ‘some of the measures’ taken by Pinochet ‘quite unacceptable.'”

69  Hayek, op. cit., p. 125.  An up-to-date account of this matter is available at www.unep.org/resourcepanel/decoupling/files/pdf/

70  Some of Hayek’s American followers believe that the market can supply other valuable kinds of information as well.  See en.wikipedia.org/wiki/Prediction_market and www.commondreams.org/headlines03/0729-03.htm.  One consequence of this aspect of post-Hayekian ideology and activity could be the promotion of sensational crimes (such as assassinations) by enabling the criminals to profit from betting correctly as to, for instance, the dates of their planned undertakings.

71  This discussion of Rand is excerpted from the English translation, “Six Prominent American Freethinkers” (see mrzine.monthlyreview.org/2008/fl161208.html) of an essay by us in Aufklärung und Kritik, xxxii/2 (2009), pp.46-65.

72  See Mathis Wackernagel et al., “National Natural Capital Accounting with the Ecological Footprint Concept,” in Ecological Economics XXIX (1999), pp.375-390.

73  A good retrospective anthology, edited by Easterlin, of fifteen articles (by various authors) published originally between 1974 and 2001 is Happiness in Economics (Edward Elgar, 2002).

James Farmelant (B.S., Physics, University of Massachusetts) is a software engineer by profession.   His main interests are natural and social sciences, technology, philosophy, and political science.  Click here to read his article “‘Neuer Atheismus’ (und ‘Neuer Humanismus’) in den USA.”   Mark Lindley is a noted musicologist and an historian of modern India.  Among his most recent publications is J. C. Kumarappa: Mahatma Gandhi’s Economist.  Click here to read his article on Kumarappa: “Kumarappa: A Giant or a Midget?”

| Print