trnstlntc issue001 100307 online

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Journal of Economics and Philosophy


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Copyright or articles belongs to the respective author. All

views expressed herein are those o the authors and do not ne-

cessarily reect the views o the editors or sponsors. All other

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Attribution-NonCommercial-ShareAlike . Unported Crea-

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condition o attribution. All correspondence or complaints

should be adressed to the editors:

Te ransatlantic Journal

LSE Philosophy Society

c/o LSE Students Union

East Building

Houghton Street

London WCA AE

United Kingdom

Printed by: Caric Press Ltd., UK LSE SU Philosophy SocietyColumbia Economics SocietyLSE Students Union

Tis journal is a publication by students rom several universities,

the Philosophy Society o the LSE Students Union, and the Colum-

bia Economics Society.


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the transatlanticteam

Peer-reviewers and prooreaders:

David Abramsky (Kings College London)

Jaiseung Bang (Columbia University)

Philip Crone (Columbia University)

Claire Field (Kings College London)

Felipe Goncalves (Columbia University)

Hans Martin Hermann (Shanghai International Studies University)

Yuh Yiing Loh (Oxord University)

Eleonora Paganini (University o Edinburgh)

Luca Uberti (Kings College London)

Justin Vlasits (Columbia University)

Nicholas Evans (Kings College London)

Zhi Hui Ho (Oxord University)

Hannah Wilkinson (Oxord University)

Editorial Board:

Leoni Linek (University o York, Columbia University), Editor

Jakob Schaeer (London School o Economics), Co-Editor

Felix Holler (Academy o Visual Arts Leipzig), Editorial Design, Cover

Alina Lipcan (Oxord University), Corporate Relations Liaison

Ronan Bligh Sato (Oxord University), Special Events Coordinator

Eva Leung (London School o Economics), Institutional Support Ocer UK

Alexander Frantzen (Columbia University), Marketing Director US

Josephine Fogden (Cambridge University), Marketing Director UK

Rayna Coulson (London School o Economics), Copy-Editor

Simon Fuchs (University o York, York University),

Web Marketing and Development

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When the recent nancial crisis shook the world

economy, students belies in economics in economic

theory and economics as a science were out o balan-

ce, too. Many o us elt that they could not just carry on

business as usual. Tere was a need to come together

and discuss. But how do you discuss with people all over

the world?

Students in London and New York connected, and

the idea o a transatlantic journal dealing with Philoso-

phy & Economics was born. Soon students at Cambridge,

Oxord and even Shanghai got involved, and Te rans-

atlantic began taking shape. Te aim was not to give

consistent solutions to current economic problems but

rather to oster debate about economics in a not merely

technical, but, instead, in a philosophical way. We did

and do not wish to approach economics rom the view-

point that is so well known to undergraduate students:

a perspective that mistakes economics or a mechanical

method. Although methods, particularly mathematical

methods, are undeniably part o the eld, economics is

so much more than that.

Whether mathematics is in act crucial to economics

and its scientic status is a question that ony Lawson,

mathematician by training and proessor o economics

at Cambridge University, investigates into (p.9). Sir Ro-

bert Skidelsky, best known or authoring a multi-volume

biography o the economist John Maynard Keynes, is a

prominent critic o the way economics is taught at uni-

versities and proposes a diferent approach to teaching

(p.31). Te ransatlantic is pleased to present their

guest articles in this issue.

Te topics o the student submissions range rom

game theoretical approaches towards economics (p.39),

discussions o rational agency (p.35), and questioning o

current models o eciency (p.21), to an inquiry into the

practices o peer-review in science (p.15) and the elabo-


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editorialration o an identity model, determining an individuals

economic path (p.25). Emanuel Derman, ormerly a Ma-

naging Director at Goldman Sachs, and now a proessor

o nancial engineering at Columbia University, met

with us in New York to talk about models, theories and

the relation between physics and nance (p.42).

Te next edition o Te ransatlantic will be on the

topic Growth. I you would like to write an article on

economic growth, accumulation o knowledge, demogra-

phic economics, the growth o the nancial sector, or any

other related issue, contact us at submi@heransa-

lanic.org. Undergraduates, postgraduates and acade-

mics are welcome to write.

Jakob Scher & Leoni Linek t


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con he ransalanic eam

ediorial

economics & science

is science oo auhoriarian?

ha moraliy overrides he pro moive

o improve eciency

he role o ideniy and social neworks or

economic oucomes in poor counries

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tent whas wrong wih economics?

redening raionaliy

a concepual srucure or oensive and

deensive sraegy

inerview wih emanuel derman

call or aricles


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economics &science

B Y O N Y L A W S O N


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Many economiss accep ha he modern dis-

cipline o economics is no in a healhy sae (see

Lawson, 2003, chaper 1). Indeed wih he onse o

he recen crisis perhaps mos now do (see Lawson

2009b). Many even connec he problems o mo-

dern economics o he quesion o science, he opic

o his shor noe. Amongs hose who do so, how-

ever, here are signican dierences. Indeed here

are essenially wo opposed groups o be disingu-

ished. Te rs comprises hose who hink ha he

problems wih he discipline arise jus because an

economic science is ineasible, ha aemps o ren-

der economics scienic are misguided; i is he con-

cern o be scienic ha leads economiss asray.

Te second group comprises hose who, in conras,

hink ha problems arise jus because economics

has ye o realize is ull scienic poenial.

I also believe he parlous sae o economics

is conneced o sances aken wih regard o he

quesion o wheher economics can be a science.

Bu my assessmen diverges sharply rom hose o

proponens o boh sides o his debae, given heerms in which he laer ends o be cas. For, un-

damenally, boh groups associae science wih he

use o mahemaical mehods. And heir conrasing

expecaions concerning he possibiliy o an econo-

mic science primarily reec dieren expecaions

concerning he possibiliy o gaining insigh using

mahemaical models. My conrary view is ha he

use o mahemaics is irrelevan o he quesion o

wheher a discipline qualies as science.

Furher, wih a revised concepion o science o

hand, I do argue ha a science o economics is eni-

rely easible, bu I also conend ha he curren em-

phasis on ormalism in modern economics mosly

obsrucs he poenial o economics or realizing is

poenial as a successul science.

I hus side wih he rs group in being opimi-

sic abou he possibiliies o a successul economic

science, bu hold a conrasing concepion o sci-

ence. I side wih he second group in hinking ha

he emphasis on ormalism is unhelpul in modern

economics, bu do no suppose ha giving up on or-

malism impedes he possibiliy o economics being

scienic in he sense o naural science. Le mebriey elaborae.

t

Most typically, in ModerneconoMics, it is held that thesuccessful prediction ofevents is central to science.

the use of MatheMaticsis irrelevant tothe question ofwhether a disciplinequalifies as science.

Tony Lawson is Professor of Economics at Cambridge University. He has contributed in various are-

as including Economic Methodology, Heterodox Economics, Evolutionary Economics and Feminist

Economics, yet his focus lies on Ontology, in particular on Social Ontology. Lawson is a mathema-

tician by training and a severe critic of the way mathematics is used in economics. He has publis-

hed in numerous journals and is author of the books Economics and Reality(1997) and Reorienting

Economics (2003). A recent overview of his contributions can be found In Edward Fullbrooks

recent edited collection Economics and Ontology: Tony Lawson and His Critics (2009). Lawson is

a founder of the Cambridge Realist Workshop and the Cambridge Social Ontology Group and sits

on various editorial boards including the Cambridge Journal of Economics.


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What is science?

O course, he pracices o successul science

(where he obvious exemplars o successul science

are cerain naural sciences) are muliaceed, and

i is problemaic o single ou any one (se) as he,

or even as a, dening eaure. Neverheless such

singling ou is requenly aemped. And mos

ypically, in modern economics, i is held ha hesuccessul predicion o evens is cenral o science.

Predicion o evens is an aciviy whose success

presupposes he exisence o even correlaions,

ha is, regulariies o he orm whenever even x

hen eveny. Noably, such regulariies, where hey

occur, do lend hemselves o mahemaical ormu-

laion. And indeed he widespread reliance upon

mehods o mahemaical deducivis modeling in

economics presupposes heir ubiquious occurrence

in he social realm.

Whaever science may be, I wan o sugges ha

his associaion o i wih successul predicion is

misplaced. I here is a dening momen or eaure

o science, I wan o sugges ha a more susainable

conender is causal explanaion. By his I mean he

move rom a concepion o some even or phenome-

non o ineres o he idenicaion and undersan-

ding o an underlying causal acor ha (in par a

leas) produced i. I is he move rom, say, symp-

oms o an illness (such as a high emperaure) o he

underlying cause making he dierence (say a virus).

I is he move rom, say, observing cows maniesing

he sympoms o mad cow disease in he UK in he

1980s, o ideniying he prion as he cause.

Noice, ha causal explanaion is a sep ha

ypically canno be reduced o mahemaical mani-

pulaion. For i ypically involves a concepual move

rom phenomena o one ype o a cause o a quie

dieren (and perhaps previously unknown) ype.

Causal versus predictionist accounts o science

Tough I canno elaborae very much in a shor

noe such as his, le me a leas indicae why I ake

he causal concepion o science o be a more reaso-

nable accoun o wha goes on in science han hemore amiliar predicionis concepion.

Te mos obvious observaion o make here is

ha ouside asronomy mos o he even regulari-

ies regarded as o ineres o naural science (and so

aciliaing o signican successes a even predic-

ion) are resriced o condiions o well-conrolled

experimen. Te poin here is ha i is more or less

only in he laer experimenal scenario ha he pre-

dicionis world view even appears o hold up. Ye

successul naural science is hardly resriced o siu-aions o experimenal conrol.

Even so, he predicionis migh conend ha

he conrolled experimen is he mos undamenal

eaure o successul (naural) science and so he ac

ha he preerred concepion o science (based on

successul predicion) s here is sucien o regard

i as dening o science. Tere are various problems

wih such reasoning, bu or now le me poin ou

ha even he siuaion o he well-conrolled expe-

rimen, properly undersood, provides relaive sup-por o he causalis accoun o science. Ta is, even

he scenario ha prima acie mos lends suppor o

he predicionis accoun, ulimaely acually sup-

pors he causalis inerpreaion.

We can see ha his is so as soon as we quesion

why i is ha even regulariies are mosly resric-

ed o siuaions o experimenal conrol. Te only

enable explanaion o his phenomenon o which

I am aware is ha in well conrolled experimens,

sable underlying causal mechanisms are insulaed

rom counervailing causes, so ha heir unimpeded

eecs can be sraighorwardly idenied. Tus ob-

jecs all wih a consan rae o acceleraion in an

experimenal vacuum, because aerodynamic and

oher causal orces are prevened rom aecing he

oucome. So experimens, oo, are primarily con-

cerned wih underlying causal acors. Te poin o

he experimen is precisely o insulae and hereby

empirically ideniy sable causal mechanisms. Te

even regulariy ha is successully produced (when

i is) correlaes he riggering o a causal mechanism

wih is unimpeded eecs.

Bu hese causal orces ypically coninually ope-

rae even when counervailing endencies are in

play, as is he case ouside he experimen. Graviy

is operaing on he objecs now on my desk as much

as i would be i he objecs were dropped in an ex-

perimenal vacuum. In oher words, he undersan-

ding o causal mechanisms (ha can be backed up by

experimenal invesigaion), allows us o manipulae

or anyway rigger hose mechanisms ouside he ex-

perimen, where even regulariies ypically do nohold. A medicine may work o aid my recovery even

instead of existing inisolation alMost all

social phenoMena arein fact constituted in

relation to each other.


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Te Social Realm

Wha bearing does any o his have or discip-

lines such as economics concerned wih he sudy

o social phenomena (where by social phenomena I

mean hose whose exisence necessarily depends a

leas in par on us)? I wan rs briey o indicae

ha on he causalis concepion o science, he sudy

o social phenomena can aer all be scienic in hesense o naural science.

I have already indicaed ha he applicaion o

mahemaical ormalism has no essenial bearing on

he issue. I seems, raher, ha a condiion o any

discipline ha is o qualiy as a science, according o

he causalis concepion, is ha he objecs o sudy

be srucured. By his I mean ha he relevan do-

main o realiy is no wholly given in appearances. I

is srucured in he sense ha here are underlying

causal mechanisms working o bring abou he phe-

nomena o experience.

Graviy, or example, does no reduce o, and can-

no be direcly read o rom, he pah o he auumn

lea, even hough i inuences he laer. Similarly, i

seems clear enough ha social phenomena are no

reducible o he acualiies o experience. In paricu-

lar, social srucures do no reduce o he pracices

hey aciliae. Consider social rules. Cerainly hey

bear on human pracices. Bu in many counries,

mooriss on moorways, or example, mosly drive

aser han he local legal speed limis, a leas unil

a police car arrives on he scene or speed cameras are

spoed. Workers in he UK carry rule books and h-

reaen o work o rule when hey are unhappy wih

prevailing condiions.

Such consideraions reveal an onological gap

beween social srucures (in his case social rules)

and he pracices ha hey aciliae. I is possible

or he social scienis o ideniy rules, cusoms or

norms, ec., by observing pracices, especially on

criical occasions. However, he pracices canno be

reduced o hese norms and so orh; social realiy

is srucured. O course, underlying social srucureincludes no only rules, bu also social relaions, po-

siions, insiuions and so on (see Lawson, 1997,

2003). Te poin hen is ha in principle a successul

science o social phenomena, i.e., one concerned o

ideniy and undersand he causes o acual praci-

ces and oucomes o ineres, is enirely easible.

Modeling social phenomena

Te successul predicion and/or mahemaicalmodelling o social phenomena, however, seems less

easible. In he well-conrolled experimen, even re-

gulariies are produced by way o isolaing a sable

causal mechanism rom counervailing causes. Tese

wo condiions isolaion and sabiliy seem o be

required i even regulariies are o be sysemaically

guaraneed. Ye such condiions are likely o be rare

indeed in he social realm.

O course whereas experimenal naural scien-

iss work laboriously o achieve he isolaion o arelevan inrinsically consan mechanism, econo-

mic modelers eecively, i somewha opimisically,

assume ha such isolaions o inrinsically consan

causal acors occur quie sponaneously in he soci-

al realm, and indeed are even ubiquious. Bu here

is lile grounding o his opimism.

Consider rs he condiion o isolaion. Insead

o exising in isolaion almos all social phenomena

are in ac consiued in relaion o each oher. I is

easy enough in modern capialism o see he inernal

relaionaliy o markes, and money, and rms and

governmens and households, ec; all depend on and

presuppose each oher. Bu human individuals as so-

cial beings are likewise ormed in relaion o ohers.

All slo ino posiions, where all posiions are consi-

ued in relaion o oher posiions. Tus employer

and employee presuppose each oher, as do eacher

and suden, landlord/lady and enan, paren and

child, gendered man and woman, and so on. We all

slo ino, and are molded hrough he occupancy o,

a muliude o such posiions, deriving real ineress

rom hem, and drawing upon whaever powers or

righs and obligaions are associaed wih hose po-

siions. So social realiy is an inerdependen, ne-

work, i is an inernally relaed oaliy, no a se o

phenomena each exising in relaive isolaion.

Consider oo he requiremen o sabiliy. Once

more social phenomena seem no o conorm. For

everyhing social is consanly being ransormed

hrough pracice. Tink o a language such as Eng-

lish. A any poin in ime i exiss as a (largely un-

acknowledged) resource o be drawn upon in our

speech acs and so orh. Bu hrough he sum oalo all people simulaneously drawing on i in heir

social reality is aninterdependent network,it is an internally related

totality, not a set ofphenoMena each existing

in relative isolation.


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speech acs, he language is (largely uninenionally)

reproduced and in par ransormed. I hus exiss as

a process, as somehing ha is consanly being re-

produced and ransormed hrough pracice. Tis is

is mode o being; i is inrinsically dynamic and sub-

jec o ransormaion. Bu a momens reecion re-

veals ha all social phenomena share his mode o

being: universiies, owns, polluion, sociey a lar-

ge, each and every organizaion, our posiions andheir associaed powers, our embodied personaliies

and everyhing else. So sabiliy o social phenome-

na (which along wih heir isolaion seems required

o guaranee an even regulariy) seems unlikely and

cerainly is somehing no o be aken or graned.

We are now in a posiion, in ac, o undersand

jus how economics has come o be in such a parlous

sae. Economiss hope o be scienic in he sense

o naural science. However hey are inuenced in

his by a misconcepion o science. I science is hemove rom phenomena o ineres o underlying

causes hen his move is a easible in economics as

in naural science. However, in some special cases

naural scieniss can successully carry ou con-

rolled experimenaion. In such condiions, even

regulariies may be produced in he course o heir

evaluaing a heory abou an underlying causal me-

chanism.

Economiss, hough, have ypically no only re-

sriced heir ocus o his special case, bu also uni-

versalized he wrong aspec o i. Insead o seeing

he cenral momen as urhering our undersan-

ding o some underlying causal mechanism, econo-

miss have ocused on he experimenal producion

o even regulariies. And hey have generalized his

inessenial eaure o science o a conex, namely

he social realm, where ypically he condiions are

such ha even regulariies do no occur.

Tus alhough a science o social phenomena re-

mains enirely easible he reliance on mehods o

mahemaical modelling in economics, presuppo-

sing as i does a ubiquiy o even regulariies, mainly

serves as an obsacle o he disciplines realizing is

scienic poenial (or a more posiive elaboraion

o how an explanaorily successul economics can be

realized see Lawson, 2009a, 2009b).

Final Comments

I here is a laudable jusicaion or emphasis o

mainsream economiss on using mahemaical or-malism, i is he desire o be scienic in he sense o

naural scieniss. Te laer, aer all, do regularly

achieve success in advancing human undersanding.

A less laudable jusicaion is o pose as scieniss

merely in he hope o acquiring a cerain saus in

sociey. Whichever o hese or relaed moives is

mos pervasive in modern economics, he concepi-

on o science as necessiaing he use o mahema-

ical mehods is misaken. I have suggesed insead

ha a causal concepion o science is ar more enab-le. I he laer is acceped hen economics can inde-

ed ake is place as a science in he sense o naural

science, hough, given he naure o social maerial,

he curren emphasis on ormalism obsrucs his

oucome, and will have o be abandoned i a science

o, or indeed any explanaorily useul, economics is

o emerge.

Bibliography

Lawson, ony (2003),Reorienting Economics, Lon-

don and New York: Rouledge

Lawson, ony (2009), Applied Economics, Contrast

Explanation and Asymmetric Inormation, Cambridge

Journal o Economics, (Special Issue in honour o

Brian Reddaway), 33:3, May pp. 405-20

Lawson, ony (2009), Te Current Economic Crisis:

its Nature and the Course o Academic economics, Cam-

bridge Journal o Economics, 33:4, July, pp. 759-788.

econoMists havegeneraliZed thisinessential feature ofscience to a context,naMely the socialrealM, where typicallythe conditionsare such thatevent regularitiesdo not occur.

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is science too

authoritarian?an economics ofscienceperspective

B Y C H R I S O P H S I E M R O H


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Introduction

In wha ollows I shall invesigae a poenial

shorcoming in he curren sysem o science, na-

mely ha a srong reliance on scieniss wih repu-

aion crowds ou young scieniss work. I presen

empirical evidence which esablishes ha (1) young

scieniss are more producive and ha (2) well

known scieniss ge a disproporionae amoun o

credi and aenion. Hence, he saus quo is an in-

ecien allocaion o aenion and resources ha

may inhibi progress.In order o correc he bias in avor o repua-

ion raher han meri, I hen consider a sysem o

science ha does no rely on auhoriies a all. Tis

logical alernaive, however, is reued on grounds

o high inormaion coss. Tereore, in order o mi-

igae he problem, we have o improve he curren

insiuions raher han overurn hem.

Science oday: Authorities by Reputation and the

Peer-Review Process

Tere are a ew acclaimed scieniss who have a

huge inuence in heir peer group and even on he

public. I hey publish an aricle, people read i no

because o he conen, bu because o he auhors

name. Te public ollows hem no because o he

meris o heir argumens (oen ew can compre-

hend hem), bu because hey are perceived as au-

horiies. I is usually hese scieniss who inuence

public opinion or deermine he uure course o a

scienic discipline. Hence, i seems auhoriies are

sill a par o science oday, or example as spokes-

men o a school o hough or as a bridge beweenscience and he public.

Anoher eaure o odays science srucure ishe peer-review process. Te idea is ha expers

(auhoriies) assess he work o heir peers and i

deemed sucienly innovaive, correc and presen-

able accep i or publicaion in heir journal. In

eec, peer-reviewed journals monopolize1 access o

scienic discourse, or everyone expecs signican

conribuions o be published here.

Potential Problem #1: Te Input o Young Scien-

tists is Undervalued

Young scieniss are more producive han older

ones, or, phrased dierenly, scienic produciviy

ades wih age2. Levin and Sephan, or example,

invesigaed publishing aciviy o scieniss over

heir lie-cycle and concluded ha produciviy di-

minished wih age in 5 ou o 6 disciplines, even a-

er conrolling or acors like abiliy or moivaion

(Levin and Sephan 1991). Furher evidence is given

among ohers by Diamond and Kanazawa. Te

laer examined a random sample o scieniss rom

he 16h cenury o he presen (consising mosly

o male scieniss), which also included he year o

heir mos signican conribuion o science, i.e.

he peak o heir career (Kanazawa 2003). He ound

ha, in general, produciviy undergoes a sharp rise

a he very beginning o scieniss careers, peaks

around he age o 30 and hen declines coninuously.

Mos scieniss (65%) have made heir mos impor-

an conribuions beore heir mid-hiries and 80%

have done so beore heir early ories (Ibid., pp. 258-

60)3. See also gure 1.

I recogniion is only given o scieniss wih re-

puaions (i.e. older ones) or i aracing research

unds is dependen on repuaion (while unds are

oen a prerequisie or research in order o build

a repuaion), hen we have a problem. For in his

case, he high produciviy and creaiviy o young

scieniss would be inhibied and heir ideas sup-

pressed or delayed. In economic erms, he alloca-

ion o unds and credi (which is one o he major

incenives or scieniss) would be inecien. Con-

sequenly, he inpu o young scieniss may be un-

dervalued when publicaions are no exclusively ra-ed on grounds o meri, bu perhaps by he auhors

While acclaimed scientists receive most of the attention, evidence suggests that it is their younger

and still unknown colleagues who make the most significant contributions to science, thus challeng-

ing the quest for truth. Anarchy in science a suitable response?

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it is usually acclaiMed

scientists whoinfluence publicopinion or deterMinethe future course ofa scientific discipline.


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16

name. In he ollowing secion i is argued ha re-

puaion is indeed given a lo o weigh in allocaing

aenion or aracing research unds, hus making

he aoremenioned concerns plausible.

Potential Problem #2: Te Matthew Eect

Meron learned rom inerviews wih Nobel lau-

reaes ha here appears o be a misallocaion o

credi in science; hose who are already well-known

are given more credi han would be adequae pure-

ly judged on meris (Meron 1968). He coined he

Mahew Eec, which describes he phenomenon

ha he rich ge richer, or in his conex, he reco-

gnized ge more recogniion. When, or example, a

Nobel laureae co-auhors a paper wih unknown

scieniss, hen i seems ha readers do no jus as-

sociae he paper wih his name, bu seem o hink

he ohers were mere bysanders and he laureae

conribued mos o he conen, even i his was no

he case. Tis leads o cumulaive advanage4 and he

already amous ge even more recogniion due o

heir populariy. Te eec is urher srenghened

by he ac ha research unds are mosly allocaed

according o repuaion in he peer group. Hence,

he already acclaimed ge more unding, which pro-

vides hem wih more research opporuniies, which

in urn add o heir repuaion. Moreover, given

ime consrains and he increasing number o pu-

blicaions, he readers selecion o aricles is, o a

signican par, based on auhor ideniy. Tis is one

o several reasons why here is a good chance ha

even good work rom unknown scieniss goes unre-cognized (Ibid., p.59).

Unorunaely, he inheren mechanism o he

aenion-award sysem may be awed. Scieniss

wih pas success ge aenion, because heir peers

seem o iner ha his warrans uure success. Ye,

he previous secion presens evidence o he con-

rary, namely, ha (on average) signican conribu-

ions o science are less likely wih older age. I we

acor in he Mahew Eec in he age-produciviy

prole rom above, hen young scieniss should beeven more producive (relaively), given ha hey

have less unding and opporuniies a heir dispo-

sal. In ligh o his, an excessive ocus on acclaimed

scieniss may no necessarily be a good hing, or i

crowds ou oher scieniss work even i i has equal

meris. Te consequence is a disorion o incenives

and scienic discourse, which in urn migh delay

progress.

Whats the Alternative?

Bu wha are we o make o his? Le us hink

drasically or a momen and consider he alerna-

ive in a binary choice beween a sysem o science

wih auhoriies (saus quo) and wihou auho-

riies. Choosing he laer wihou he apparen

cause o he ineciency (auhoriies) , we could hy-

poheically esablish a web-based plaorm, where

anyone would (need o) publish his heories, ideas

or daa and anyone could criicize available publica-

ions. In order o exinguish biases caused by repu-

aion or coercion, everyhing would be published

anonymously, only wih a number or reerencing.

One migh call i anarchy in science, or repua-

ions would be erased and previous auhoriies made

equals among equals. In heory, he non-coercive

orce o he beer argumen would prevail in his

unbiased environmen o criical scruiny. Te pro-

blems rom secion 4 and 5 are evaded, bu would imake science on he whole more producive?

in order to extinguishbiases caused

by reputation orcoercion, everything

would be publishedanonyMously, onlywith a nuMber for

referencing. one

Might call it anarchyin science.

Figure 1:

age (x)

productivity

(y) profileamong 280

scientists,

source:

Kanazawa

(2003)

Mean = 35.4 Median = 34.0 IRQ = 12.0


17/52

17

Economic Justifcation o Status Quo Institutions

I wouldn. Tis is because i creaes new prob-

lems such as lack o incenives and prohibiively high

inormaion coss. Wha ollows is an argumen in

an inuiive orm.

Te anonymiy o he web-based sysem would

preven he associaion o an auhors ideniy wihhis work. Hence, wha may be somewha ineci-

en in realiy would be enirely impossible in he

hypoheical sysem: he allocaion o credi. Wih

he prospec o earning glory and recogniion aken

away, science would lose one o is major incenives.

Needless o say, i would be even harder o esablish

a meriocraic allocaion o research unds and aca-

demic posiions i scieniss could no be linked o

heir work. In his respec, he curren pracice even

wih repuaion bias is he lesser o wo evils.

Te more severe consequence, however, is ha

every scienis would have o read everyhing ha is

published in his eld himsel. Aer all, here would

neiher be peer-reviewed journals nor auhoriies

ha pre-selec aricles on behal o he reader. Sci-

eniss would no be able o acually do research,

because keeping up wih publicaions and el-

ling ruiul rom plain wrong would consume all

available ime. Giving up he inpu o ohers is no a

saisying alernaive eiher, since science is ar oo

specialized or ha.

Hence, a repuaion sysem would reesablish

isel because i is less cosly. I I know someone o

be compeen which requires an evaluaion o his

work or compeences hen I can be reasonably sure

ha his recommendaions (explicily or implicily

via ciaions) o aricles are somewha reliable. I se-

veral o my rused colleagues advance he same re-

commendaion, hen his migh even be beer han

my own judgmen, because I migh miss somehing

hey don. Now i does no require much anasy o

see he similariy o his raionale o he concep o

he peer-review process. I is in ac is insiuiona-

lizaion; scieniss ha we consider o be expers re-

view submissions and give us recommendaions by

lering ou he wase o ime aricles. Cerainly,

some o hese sill ge in and worhy ohers may be

denied access, bu his is ar superior o an anarchy

where everyone is on his own and excellen work is

drowned in a mass o mediocriy. Reurning o he

binary choice rom above, we are led back o a sys-

em o science wih auhoriies.

Conclusion

Firsly, i seems ha scieniss a he beginning

o heir careers in general he mos producive ye-

ars do no receive as much aenion as is warran-

ed, because aenion is allocaed according o re-

puaion, no meri, and repuaion is an expression

o pas success, no uure achievemen. Key acors

supporing his conclusion are (1) he robus empi-rical nding ha produciviy ades wih age and (2)

he Mahew Eec.

Secondly, his diagnosis does no mean ha

we should overhrow he principles o he curren

pracice o science alogeher. As he hough expe-

rimen illusraed, we need auhoriies and i is che-

aper in erms o inormaion coss o rely on hem.

Insead, he ocus should be on he specics o a

sysem o repuaion and peer-review, answering

quesions like: How do we urher reduce bias? Or,

how many reviewers are opimal, given he radeobeween accuracy o evaluaion and delay o publica-

ion?

Endnotes

1 In he conex o science, a monopoly does no

jus resul in higher prices. Insead, reerees migh

misjudge he meris o submissions or even ineni-

onally serve heir own agenda and urn down papers

which break wih heir own heories. In oher words,

papers wih meris migh be suppressed by denying

hem access o scienic discourse. In he cases whe-

re he review process is no double blind, i provides

room or avoriism. And even when peer-reviewing

is done double blind, manuscrips are oen publis-

hed as discussion papers or presened a coneren-

ces earlier, in which case i is easy o nd ou he

auhors ideniies. Moreover, expers in a eld are

oen able o recognize someones work rom inclu-

ded ciaions, syle ec. Subsaniaing his, Yankau-

er (1991) ound ha 39% o he auhors in a double

blind review-process were idenied correcly by

he reerees in his sample. Tereore, even i double

blindness is implemened, peer-review is no com-

pleely eecive in prevening biases or disorions

o scienic discourse.2 Due o ormal connemens I canno invesi-

gae why his is so. Possible reasons include, among

oher hings, ha older scieniss are more dogma-

ic, less creaive or have more adminisraive res-

ponsibiliies han heir younger colleagues. Also see

nex oonoe.

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18

3 I should be noed ha Kanazawa (2003,

pp.265.) provides an evoluionary psychology he-

ory, which can explain he daa. More imporanly, i

explains why emale scieniss seem o have a more

even age-produciviy prole han men (economic

human capial models, on he oher hand, do no di-

singuish beween he sexes). Since his daa almos

exclusively consiss o male scieniss, he overall

prole looks like he male scieniss age-produci-viy prole. However, his migh change because he

proporion o emale scieniss is on he rise. Tus,

considering all scieniss, he eec o produciviy

ading wih age migh weaken in uure.4 Allison and Sewar (1974) provide empirical

evidence or accumulaive advanage based on quan-

iaive analysis o cross-secional daa, in addiion

o he qualiaive daa rom inerviews used by Mer-

on (1968).

Bibliography

Allison, P. D. & Sewar, J. A. 1974. Productivity

Diferences Among Scientists: Evidence or Accumulati-

ve Advantage. American Sociological Review 39. 596-

606

Diamond Jr., A. M. 1986. Te Lie-Cycle Research

Productivity o Mathematicians and Scientists. Journal

o Geronology 41. 520-525

Kanazawa, S. 2003. Why Productivity Fades With

Age: Te Crime-Genius Connection. Journal o Re-

search in Personaliy 37. 257-272

Levin, S. G. & Sephan, P. E. 1991. Research Pro-

ductivity Over the Lie Cycle: Evidence or Academic Sci-

entists.American Economic Review 81. 114-132

Meron, R. K. 1968. Te Matthew Efect in Science.

Science 159. 56-63

Yankauer, A. 1991. How Blind Is Blind Review?

American Journal o Public Healh 81. 843-845

Christoph Siemroth is reading Philosophy & Econo-

mics at the University o Bayreuth, Germany. He has

previously studied at the University o Helsinki, Finland.

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19

This is you.


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20

In his essay, I will quesion he eciency o

modern economics, paricularly ha o he preva-

len neoliberal economics, ocusing specically on

he eciency o compeiion, he pro moive, and

privae propery. Subsequenly I will criique ha

view by adding a moral consrain o show ha e-

ciency solely in erms o markes and nancial pro

alone does no bene sociey generally, bu raher

promoes an increased wealh or a minoriy, oen

a he expense o he majoriy.

Te Right to Lie

Much o he ollowing argumen is based on an

imporan assumpion, ha he righ o propery is

secondary o he righ o lie. Lie precedes propery,

or no-one can own propery wihou rs owning

heir lie. Tough propery righs are oen con-

sidered o have developed ou o he need o hold

personal possessions, o consume ha necessary o

susain lie, he permanen righ o an exac posses-

sion in modern law has evolved, oen superseding

he righ o lie, as laer shown.

Wha ollows rom his is a new deniion o

pro. Troughou I will conras he moneary

deniion o pro wih a long-erm social pro

based around economics working or people raher

han people working or economics. Tis new ormo pro is based on he above assumpion and sug-

that moralityoverrides the profit

motive to improveefficiency

gess ha eciency isn jus o moneary value, bu

mus accoun or he inalienable righ o lie o each

person. Tis dierence is pivoal in undersanding

he ineciency o he pro moive, compeiion

and privae propery, as alhough i may be possible

o bring abou greaer nominal wealh, i is ine-

cien, according o measures o inalienable righs, o

concenrae wealh in he hands o a minoriy: his

social deniion o pro, hen, is he pracical appli-

caion o he righ o lie superseding propery.

Proft and the Proft Motive

Perhaps he mos popularized argumen or he

ree-marke is ha while he capialis intends only

his own gain... he is... led by an invisible hand to pro-

mote an end which was no part o his intention(Smih

1976, p.477). I is, however, also imporan o noe

Smihs concern or he capialiss greed, as All or

ourselves, and nothing or other people, seems, in ev-

ery age o the world, to have been the vile maxim o the

masters o mankind.(Ibid., p.437) Tough considered

he ounder o modern economics, Smih noed he

hrea o an unchecked and individualisic pro

moive, arguing ha markes do no always correc

hemselves; some conrol is necessary o proec he

marke rom monopolies and oher vesed ineress.

Many liberals consider sel-ineres as raionalor par o human naure. Since, in he ormulaic

So-called neoliberal economic assumptions of private property, competition and the profit motive

are established to increase utility and efficiency. However they are morally bankrupt and only benefita small elite, leaving most people in poverty. An impeachment. B Y R O Y M O O R E

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21

saisical approach o micro and macro economics,

uiliy is oen considered no more han sel-iner-

esed nancial gain, promoing moneary ineress

over ohers. Wih such assumpions o human na-

ure, he ineviabiliy o compeiion in producing

boh winners and losers leads hose winners o logi-

cally srenghen heir own posiion, creaing a kind

o supersrucure perpeuaing lile bu heir own

success. We mus, hereore, quesion he purposeo such assumpions, and i is here ha John Ruskin

noes he eecs o such economic principles, wri-

ing ha pro in economics is a zero sum game: or

every buyer, here is a seller; one receives only wha

anoher gives.

I he ar o making money is o ake all you can

rom he buyer perhaps You sold your bread well to-

day: [but] was it to a dying man who gave his last coin

or it and will never need bread more...?(Ruskin 2007,

p.44) Tus, a brie hisory o how such developed

counries nanced heir indusrializaion usually re-

veals some orm o slavery, colonialism or coercion.

Tus, while his means pro becomes he general

maxim o Buy in the cheapest market and sell in the

dearest, i seems ha such nancial pro usually

comes a a social cos no acored ino radiional

economic accouning: Charcoal may be cheap among

your roo timbers ater a re, and bricks may be cheap

in your streets ater an earthquake; but re and earth-

quake may not thereore be national benets. (Ibid.,

p.44)

I is no dicul o see, hen, how he ar o

pro is oen he ar o exploiing ohers, and eco-

nomics wihou such moral consrain leads o such

violaions o humaniy, o he poin a which: ...the

pluses, make a very positive and venerable appearance

in the world, so that everyone is eager to learn the sci-

ence which produces results so magnicent; whereas the

minuses have, on the other hand, a tendency to retire

into back streets, and other places o shade, or evento get themselves wholly and nally put out o sight in

graves: which renders the algebra o this science pecu-

liar, and diculty legible; a large number o its negative

signs being written by the account-keeper in a kind o

red ink, which starvation thins, and makes strangely

pale, or even quite invisible ink, or the present.(Ibid.,

p.79)

Wih such sel-ineres he capialis may sill,

as Smih noes, bene sociey. He argues ha he

armer, bucher and baker all ac in heir own sel-ineres bu sill provide a service o sociey, a beer

organizaion hrough he division o labor. Tough

such exernaliies do bene sociey, Ruskin noes

hose negaive exernaliies which are oen orgo-

en, producs and occupaions which damage soci-

ey, and he majoriy who suer due o he disribu-

ion o such goods. Ruskins hypohesis, hen, seems

ever more correc he wealhier sociey becomes;

despie increasing wealh, povery and inequaliy

coninue o grow: in 183, the ratio in average per

capita income was three to one, in 196 sixty to one, andin 1997 seventy-our to one.(Risse 2005, p.349).

Competition

Te incenive and pracicaliies o making money

can only exis in some sor o compeiive rame-

work. I is imporan o noe, hen, ha hose who

nish rs in any compeiion do so only in relaion

o hose who nish second and hird respecively.

As resuls are ound and winners receive heir prize,

heir posiion is srenghened and hus heir abiliy

o reinves wih greaer capial, gain greaer mar-

instead of an invisiblehand gently pushingtowards the benefit of

everyone, coMpetitionleads to an inequalitywhich is Much Moreof a vivid slap in theface for that Majorityborn into poverty.

John Ruskin


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ke share, or exrac more marginal produc rom

employees. In his ramework, Ricardo denes he

naural rae o wages as ha which mainains he

laborer, bu Ruskins appeal o moraliy shows ha

pro or he capialis does no mean gain or all.

Insead o an invisible hand genly pushing owards

he bene o everyone, such compeiion leads o

an inequaliy which is much more o a vivid slap in

he ace or ha majoriy born ino povery.Ruskin hus changes he prioriies o economics,

noing ha wenty people can gain money or one who

can use it; and the vital question, or individual and or

nation, is, never how much do they make? but to what

purpose do they spend?(Ruskin 2007, p.85) Where

Ricardo denes he naural rae o wages, Ruskin

quesions he very purpose o naural; wha is nau-

ral or Ricardo, according o such economic heory,

is ha which serves his ineress. I seeing laborers

as mere ools in heir acory and keeping a muli-

ude in povery or cheap labor is benecial, hen iis naural according o such a view.

I makes economic sense, hereore, or even

hose working in healhcare o es banned drugs on

children1 wih alsied documens o suppor ehi-

cal consen, and o make heir own produc appear

more eecive by lowering he recommended dose o

he conrol drug o paiens, even i his leads o he

disablemen and deah o children (Ahmad 2001).

Te enire relaionship beween capial and labor,

hen, beween hose who won he compeiion and

hose who have nohing, is based on a power srug-

gle o exploiaion. Wihou balance, one dominaes

he oher, heir ineress eecively deermining he

lie o he oher. Unil each person has an inviolable

righ o lie, such exploiaion can only coninue.

Where such exploiaion exiss, no inviolable righ

o lie does so.

Private Property

Wha ollows compeiive markes is inequal-

iy, bu wha permis he legaliy o he exreme in-

equaliy oday is he insiuion o privae propery.

Permanen propery righs allow one person he le-

gal righ o choose o wihhold even he means o

lie. Once we ake our rs assumpion, however, he

righ o lie is above propery righs requiring a morejus disribuion. Even Nozicks Enilemen Teory,

ulimaely driven by propery righs, acknowledges

his prioriy; a poin which when properly expound-

ed erodes properys permanence o agree wih our

assumpion:

an owners property right in the only island in an

area does not allow him to order a castaway rom a ship-

wreck of his island as a trespasser... the theory does

not say that owners do not have these rights, but that

the rights are overridden to avoid some catastrophe.

(Nozick 1974, p.180)Consequenly, in moderae scarciy should one

person no have jusly acquired enough propery or

heir own consumpion while anoher has jusly ac-

quired more han hey can consume, some disribu-

ion seems o be required o avoid such caasrophe:

he owners righ o deny a person hose means o

lie is overridden because o a greaer need. I is his

acknowledgemen, ha need is greaer han prop-

ery, which demands redisribuion or he sake o

social jusice, paricularly or hose who have been

born ino povery cycles and who had no choice in

heir acquisiions. In his sense, he eciency o

economics is judged by is abiliy o ulll hose ob-

ligaions o social jusice, raher han being a sum-

mary o collecive wealh by GDP, PPP or some oher

average saisical measure.

here is the conflict: whereonce, as ruskin argued,

profit had a purpose,Money was a Means to an

end, now it is the end. 22


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Endnotes

1 Children are dened as hose aged below ve years old, hushe saisics are greaer i children aged beween ve and sixeenare included. (You e al 2009)

Bibliography

Ahmad, K. 2001. Drug company sued over research trial in Nige-ria. Te Lance, Volume 358, Issue 9284. 815

Food and Agriculure Organizaion (FAO), InernaionalFund or Agriculural Developmen & World Food Program2002. Reducing Poverty and Hunger: the Critical Role o Financingor Food, Agriculture, and Rural Development. hp://www.ao.org/docrep/003/Y6265e/y6265e00.hm, accessed on 03/02/2010 a20:04.

Holloway, J. 1992. Crisis, Fetishism and Class Composition.Open Marxism: Volume II, Teory and Practice. London: Pluo.

Marx, K. 1970. Critique o the Gotha Programme. New Ed.Moscow: Progress.

Nozick, R. 1974.Anarchy, State, and Utopia. New York: Basic.Proudhon, P.J. 1904. What Is Property? New York: Cosimo.Risse, M. 2005. How Does the Global Order Harm the Poor? Phi-

losophy and Public Aairs 33. 349-76Ruskin, J. 2007. Unto Tis Last. Minneapolis: Filiquarian.Smih, A. 1976. An Inquiry into the Nature and Causes o Te

Wealth o Nations. Chicago: Universiy o Chicago.World Hunger Educaion Service 2009. World Hunger Facts

29. hp://www.worldhunger.org/aricles/Learn/world%20hunger%20acs%202002.hm, accessed 07/02/2010 a 20:31.

You, D., Wardlow, ., Salama, P. & Jones, G. 2009. Levels andtrends in under 5-mortality, 199-28. Te Lance, Volume 375, Is-sue 9709. 100-103

When lie precedes propery, i becomes logical

o conclude ha disribuion ollows need. I is no

a ar srech rom here o he amiliar slogan From

each according to his ability, to each according to his

need(Marx 1970): only hose who have can provide

he resources, only hose wih need will receive; any-

hing else is unjus, an inecien caasrophe. In

his vein Proudhon declares Property is robbery!

(Proudhon 1904, p.3) as i denies wha is he righo hose who need i. Te problem is no scarciy, as

here is enough ood despie a 70% global populaion

increase, as calories per person has increased 17%

(FAO 2002). Ta he required redisribuion canno

legally occur wihou he consen o he owner is

due o he insiuion o privae propery.

Economics as Morality

Eecively, he debae is reducible o one hing:

purpose; or wha purpose are modern economic as-sumpions esablished as law? Te answer is airly

clear given he hisorical basis o he evoluion o

power, ha even voing righs, or example, were

subjec o condiions o propery ownership. Com-

peiion, privae propery and he pro moive

all serve he ineress o a minoriy who won he

compeiion and hus consolidae heir wealh and

power. Almos all o hese are rom hose developed

counries, creaing a sysem o conrol, whereby en-

ire naions o people are classed as rs, second, or

hird world, according o heir respecive wealh,

where wo people rom dieren economic siua-

ions are considered alien o each oher based solely

on saisics.

Such deniions show he bankrup moraliy o

such principles. Perhaps his sems rom he evolu-

ion o economics as a separae subjec. Te eymol-

ogy o economics derives rom house, meaning

there was no clear distinction made between household

management and the economy, or between politics and

economics, or between economic theory and moral phi-

losophy. (Holloway 1992, p.160) When separaed

rom he poliical realm, as Holloway argues oc-

curred in he ransiion rom he Feudal o he Capi-

alis sysem, he end goal o economics becomes

moneary gain. Insead o ha ransiion leading o

greaer reedom, only greaer povery and inequal-

iy have been achieved; as capial and labor became

ree, masers could search he globe or cheap labor,

raher han being ied o any paricular ser.

Wihin such exreme inequaliy, jusice, airness

and even he righ o lie have been los. Bu i we re-

move he parialiy o hose who esablish pro mo-

ives or heir own ends we are le wih he conclu-sion ha all people are equal, ha lie is worh more

han propery, and we gain a purpose or wealh

beyond he rivolous and useless consumpion o

scarce resources (Smih 1976, p.437). Wih growing

povery and inequaliy i is surely becoming more

and more necessary o challenge hese assumpions

o neoliberal economics o sop, perhaps, he grea-

es injusice in he hisory o mankind.

I he purpose o economics is in he accumula-

ion o money we have our mehods. I, however,we nally see he moral imperaives in repariaing

economics wih oher disciplines we nd a new ra-

ionaliy and eciency. Where we nally accep he

inalienable righs o each person we allow ourselves

he chance o recreae our world and ashion sociey

in a manner air or all. Te nex sep in economic

evoluion is wih us: eiher we coninue o reap he

benes o he suering o so many, or we nd hose

moral imperaives and creae our own purpose, o

change he course o economics and he lives o mil-

lions o people worldwide.

Roy Moore is a third year Politics, Philosophy andEconomics (PPE) student at the University o York.

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24

the roleof identityand social

networks foreconomic outcomesin poorcountries - anapplication to

aspirationsB Y Z S O K A K O C Z A N


25/52

25

Recently there has been an increasing tendency to incorporate in economic theory, as Keynes once

did, the great variety of norms that determine human behavior, expanding the homo economicus

assumptions. Identity and the role of social networks have hence increasingly featured in economic

discussions.

Introduction1

In a world o social diference, one o the most im-

portant economic decisions that an individual makes

may be the type o person to be. Limits on this choice

would also be critical determinants o economic behav-

ior, opportunity, and well-being.

(Akerlo and Kranon 2000, p.748)

Sociologiss, psychologiss and anhropologiss

have repeaedly emphasized he imporance o

relaive comparisons, role models or peer pressure

(perhaps mos vividly in Franks Choosing he Righ

Pond 1985). Economiss have ended o be skepical

owards such culural explanaions. However, em-

pirical sudies have brough up puzzles ha canno

be accouned or enirely by he usual maximizing

ramework. Numerous papers have ound unex-

plained neighborhood eecs hining a some re-

gionally and/or socially conned missing acor (e.g.

Borjas 1995; Jalan and Ravallion 2002; Becker and

Murphy 2000). Evidence also increasingly seems

o sugges ha human capial invesmen canno

be ully accouned or hrough rae-o-reurn

credi consrain analysis (e.g. Carneiro and Heck-

man 2002; Cameron and aber 2000; Marjoribanks

1999). Rooed in such empirical puzzles, his paper

aemps o hese acors ino a mainsream eco-

nomics ramework by linking human capial inves-

men o aspiraions and opimizaion under second-

bes consrains.

Te microoundations o aspirations

Mainsream economics has been based on meh-

odological individualism, he concepion o he indi-

vidual as a very privae person, unconcerned abou

he res o he world. However, as Dasgupa noed,

Robinson Crusoe aside, economic agens do no live

in isolaion (Dasgupa 2009). Tey do no exis in a

social vacuum as consumer preerences are oen as-

sumed o do. However, i a persons behavior is con-diioned by he experiences o oher individuals, his

becomes cenral o driving group dynamics, possibly

in a way quie dieren rom wha he simple aggre-

gaion o individual preerences would sugges.

Te microoundaions o he model discussed in

he ollowing secion can hus be se ou by linking

aspiraions backwards o an aspiraion window, in

urn deermined by he choice o a reerence group

inuenced by social neworks2.

Te noion o an aspiraion window is closelylinked o he discussion by Ray (2004) who argued

ha individuals have some cogniive sphere o

which hey compare hemselves, hus deermining

heir aspiraions. Tis can be ormulaed in more

saisical erms, as looking a he experiences o in-

dividuals close o an agen (spaially, economically,

socially) is like running an experimen wih beer

conrols. Te selecion o a reerence group can hus

be seen as a raional response o an inormaion

problem - he lack o perec oresigh.

Reerence may here be made o he recen work

o Akerlo and Kranon on ideniy (2000, 2002,

2005, 2007). Tey developed a ramework based on

he assumpions ha people have a view o who

hey are (a social caegory), and corresponding o

who hey are (his ideniy) hey have an ideal or

behavior, and lose uiliy insoar as hey do no live

up o ha ideal. While Akerlo and Kranons argu-

mens are based on he idea o merely exending

uiliy uncions, I rely on he noion o ideniy (in

he sense o behavior being deermined by an ideal)

as applied o aspiraions, closing he model by rac-

ing he deerminans o aspiraions back o social

neworks. Te essence o his argumen is ha he

individuals cogniive neighborhood, he group o

people he compares himsel o, is deermined by heneworks he is a member o3.

t

robinson crusoe aside,econoMic agents donot live in isolation.


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26

Te model

Te model is based on he graphical analysis o

wo curves in income aspiraions (human capialinvesmen) space. Is main predicions are (i) ha

including aspiraions may aec he locaion o he

povery rap hreshold and (ii) ha aspiraions can

consiue he binding consrain and may accoun

or raional ineria. Focus here is on human capial

invesmen since aspiraions could be more criical

or his orm o invesmen as (i) here may be less

uncerainy abou reurns o physical capial and (ii)

hese may lie in he nearer uure han reurns o e.g.

educaion. Tis disincion is however no essenial

o he argumens in he ollowing.

Te aspirations curve & the ability to invest curve

Te aspiraions side o he model is rooed in

he argumens brough orward by Ray discussed

earlier (Ray 2004), and is exended by inroducing

cosly invesmen in human capial. Te individuals

problem is hus o choose an invesmen eor ha

maximizes he dierence beween benes (higher

uure living sandards) and coss (curren sacrices

in erms o consumpion or leisure) - an iner-em-

poral choice in which social neworks deermining

he selecion o a reerence group become imporan

as he individual aemps o overcome he inorma-

ion consrain o a lack o perec oresigh.

Te aspiraions curve can hus be seen as a

uncion o he peer group seleced by he individ-

ual (S ) as well as personal characerisics (P ). Te

ormer in urn depends on acors such as income

(aecing socio-economic saus), bu also on per-

cepions o more macroeconomic variables such as

mobiliy:

urning o a qualiaive descripion o he curve

(which will be he driving orce behind he resuls

discussed in secionEquilibrium properties & transi-

tional dynamics) i can be assumed o ake he shape

o a logisic uncion: a a a low level or low lev-

els o income (as he individual is likely o selec a

peer group wih similarly low levels o income, lile

inormaion and low mobiliy), hen rising and a-

ening o a a higher level.Te second curve o he model depics abiliy o

inves as a uncion o income. Following ample em-

pirical evidence rom LDCs, he presence o an ini-

ial credi consrain is incorporaed in his curve.

Invesmen (as a proporion o income) is hen as-

sumed o rise (more han) proporionaely wih in-

come4:

Equilibrium properties & transitional dynamics

Examining he graphs o he above oulined

curves, analysis may be broken down ino hree cas-

es depending on wheher he wo curves cross wih

one, wo or hree equilibria, or dieren relaive

slopes o he wo schedules.

Te rs case is ha o a single, unsable equi-

librium accouning or he povery rap. Below his

poin aspiraions exceed abiliy o inves in human

capial, he credi/subsisence consrain is binding

(as could be expeced). Abiliy o inves is low, hus

so is invesmen, resuling in low uure income and

a povery hreshold ha is dicul o cross in he

absence o some large exogenous shock. I is, how-

ever, worh poining ou ha he povery hreshold

lies above he poin where he credi consrain is

relaxed, leaving a role or ineria in he adjusmeno expecaions. Pas he hreshold he individuals

Figure 1:The social

determi-

nants of

aspirations

aspirations = (S(Y, mobility ...),P)

ability = 0 or Y < Y and g(Y)otherwise5

the notion of anaspiration window is

closely linked to thediscussion by ray whoargued that individuals

have soMe cognitivesphere to which theycoMpare theMselves,

thus deterMiningtheir aspirations.


27/52

27

ha along he ransiion pah o his nex equilibri-

um, human capial invesmen may acually be below

he individuals abiliy o inves. Aspiraions may lag

behind, holding back invesmen and growh. Tis

may be due o ineria or conex-specic acors a-

ecing expecaions. Such causes could be eiher a

he macro level (such as hyperinaion or wars) or

could be limied o changes in belies a he micro

level o social neworks e.g. in a village. Above he sable equilibrium, aspiraions have

caugh up (expecaions may have improved), and

credi may again be he binding consrain. Tis

could be due o overshooing in aspiraions, exceed-

ing he increase in abiliy o inves. Tis is reeced

in he iniially seeper slope o he aspiraions curve

and may incorporae he inheren uncerainy sur-

rounding belies (perhaps a rial-and-error adjus-

men o expecaions o equilibrium). While ineria

has requenly been impued o radiional culure

and habis or, in erms o he idea o ideniy, o hepsychological cos he poor/marginalized would pay

i hey were o adop he paern o behavior o he

rich/dominan group (Akerlo and Kranon 2000),

here raional ineria may be explained by he ac

ha i akes ime or he experience sock o he re-

erence group o grow, or heir expecaions o ad-

jus and or his o be considered by he individual.

Conclusions

I the individual cannot orm belies on a set o ully

specied contingencies, including her own uture tastes

given the big choice, how is she to decide?

(Heiez and Minelli. 2006, p. 3)

Tis paper has oulined a model buil rom mi-

crooundaions o how aspiraions may aec he

povery rap and accoun or raional ineria. Tus,

i may go some way owards elucidaing empirical

puzzles concerning unexplained neighborhood e-

ecs or he dominan role o social background char-acerisics or human capial invesmen.

abiliy o inves exceeds his willingness. Tough

invesmen will increase, i is held back by his rela-

ively lower willingness o inves as human capial

invesmen ou o equilibrium is always deermined

by he lower curve. Once he individual has escaped

he povery rap, emphasis shis rom credi con-

srains o aspiraions. Belies and percepions be-

come imporan, highlighing he role o inorma-

ion availabiliy and social neworks in aecingaspiraions, human capial invesmen and hence

urher growh.

Figure 2: First case with one equilibrium

Te second case is similar o he rs scenario:

alhough here are now wo equilibria, he dynamics

and predicions o he model are essenially as or

he rs case. Tere is a second equilibrium as he

wo curves are jus angen o each oher, however

his is sill unsable; abiliy o inves exceeds aspira-

ions boh below and above his poin; he aspira-

ions curve is binding on boh sides.

Figure 3: Second case with two equilibria

Te hird case is a scenario wih hree equilibria

(one sable and wo unsable). As in he above wo

cases, he low unsable equilibrium may accoun or

a povery rap. Once pas his poin, he individual

could slowly move up o he nex sable equilibrium.Aspiraions are, however, imporan as hey mean

Figure 4:

Third case

with three

equilibria


28/52


29/52

29

How might

his aspira-

tions form his

future?

Zsoka Koczan received a BA First Class Honors De-

gree in Economics rom Kings College at Cambridge

University in 29 and continues at Cambridge as an

MPhil student in Economics. She has received the Gerald

Shove Prizes or distinguished perormance in Econom-

ics and was Scholar o Kings College in all three years o

her undergraduate studies.


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30

whats wrong witheconomicsB Y S I R R O B E R S K I D E L S K Y

Lord Skidelsky is Professor Emeritus of Political Economy at the University of Warwick. He is best

known as the author of a multi-volume biography of John Maynard Keynes. Skidelsky is a member

of the cross benches and frequently writes columns for newspapers and magazines such as the Fi-

nancial Times, the Economist or the New York Times. In response to the financial crisis he published

the book Keynes: The Return of the Masterin September 2009.

?


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31

Te recen economic collapse has produced wide-

spread dissaisacion wih he sae o economics

and calls or changes in he way economics is augh

a universiies and business schools. wo proes-

sional sraws in he wind are worh noicing:

In November 2008, he Queen Elizabeh II o Bri-

ain asked a he London School o Economics why

so ew economiss had oreseen he credi crunch.In Augus 2009, Proessor Georey Hodgson, edior

o he Journal o Insiuional Economics, draed

a leer, signed by en leading Briish economiss,

which ried o answer he Queens quesion.

Te main poins he signaories made were ha

economics had become a branch o applied mah-

emaics, wih lile conac wih he real world; ha

mainsream economics enerained a highly ques-

ionable belie in universal raionaliy and ecien

markes; and ha i was he narrow raining o econ-omiss which concenraes on inappropriae mah-

emaical echniques and he building o empirically

unconrolled ormal models which helped explain

he ailure o economiss o give adequae warnings

o he economic crises in 2007 and 2008. Te leer

concluded ha economiss needed a broader rain-

ing, involving allied disciplines such as psychology

and economic hisory.

Bu predicion, wroe Paul Krugman in he NY

on 2 Sepember 2009, was he leas o he elds

problems. More imporan was he proessions

blindness o he very possibiliy o caasrophic ail-

ures in a marke economy ... he economics proes-

sion wen asray because economiss, as a group,

misook beauy, clad in impressive-looking mahe-

maics, or ruh ... economiss ell back in love wih

he old, idealized vision o an economy in which

raional individuals inerac in perec markes,

his ime gussied up wih ancy equaions ... Unor-

unaely, his romanicized and saniized vision o

he economy led mos economiss o ignore all he

hings ha can go wrong. Tey urned a blind eye

o he limiaions o human raionaliy ha oen

lead o bubbles and buss; o he problems o insi-

uions ha run amok; o he imperecions o mar-

kes especially nancial markes ha can cause

he economys operaing sysem o undergo sudden,

unpredicable crashes; and o he dangers creaed

when regulaors don believe in regulaion. ... When

i comes o he all-oo-human problem o recessions

and depressions, economiss need o abandon he

nea bu wrong soluion o assuming ha everyone

is raional and markes work perecly.

An imporan criic rom ouside he proession

was he nancier George Soros who had long argued

ha nancial markes were prone o huge errors be-

cause o he exisence o reexiviy. On December

19, 2008 he wroe in he New York Review o Books:

Te salien eaure o he curren nancial crisis is

ha i was no caused by some exernal shock Te

crisis was generaed by he nancial sysem isel.

Tis ac ha he deec was inheren in he sysem conradics he prevailing heory, which holds ha

nancial markes end oward equilibrium.

Tere have been sporadic proess by sudens

agains he economics hey are augh. For example,

a suden movemen or he reorm o economics

eaching sared in France in May 2000 and spread

o Spain, he Unied Kingdom and he Unied Saes.

Te issues raised by he sudens ocused mainly on

he irrelevance o undergraduae and graduae eco-

nomics eaching or undersanding real economic

problems. Tey were agains imaginary economics

worlds being imposed on sudens. Tis hey called

auism, and called hemselves he pos-auisic

movemen. Bu economics sudens come and go

(mainly ino banking, accounancy, and nancial

services) and economics, i seems. goes on oblivi-

ous o heir presence.

I is dicul a his sage o say wha a pos-au-

isic economics would look like. Economiss hem-

selves are a war. Consider he ollowing clashing

schools.

1. Chicago economics (or shor). Agens have

raional expecaions. Ta is, hey ecienly uilize

all available relevan knowledge. Tere is perec in-

ormaion, perec compeiion, and complee mar-

kes. I hese condiions hold, shares are always cor-

recly priced, markes coninuously clear, money has

no uiliy.

2. Te New Keynesians. Agens have raional

expecaions bu imperec inormaion. Markescan hereore ail, and here is scope or governmen

t

econoMics students coMeand go (Mainly into banking,accountancy, and financialservices) and econoMics, itseeMs, goes on obliviousof their presence.


32/52

32

inervenion o correc hese ailures, and rescue

economies rom savage downurns.

3. Keyness economics. Keynes himsel believed

ha humans behave raionally (or reasonably) bu

ha he uure is no jus risky, bu uncerain. Tis

makes invesmen very volaile. Because o uncer-

ainy money has uiliy as a sore o value. When

condence alls here is a igh rom invesmenino cash. Tis means ha economies can run down

as people curail heir spending. Once economies

have conraced, hey can say depressed a long

ime unless governmen increases is own spending

o ose he all in privae spending. Tis jusies

simulus policies.

4. Behavioral economics. Tis ses ou o heorize

on he basis o how human beings acually behave.

I uses cogniive psychology o reach a momenous

conclusion: humans are programmed o behave irra-ionally. Tey behave in ways which may have surviv-

al or social value bu do no conorm o raionaliy as

radiionally undersood by economiss. Some New

Keynesians have aken up behavioral economics in

heoreical despair wih convenional models.

Obviously, policy and regulaion will be di-

eren depending on which sory one buys. In he

las hiry years governmens and regulaors have

bough he rs sory, wih he resuls we now see.

So we need o change he sory. Ta means

changing he way sudens are augh economics.

A presen economics courses are highly mah-

emaical. In he rs wo years, ypical econom-

ics sudens in a Briish universiy would do hree

economics courses, hree mahemaical courses and

wo opional courses. In he hird year hey can se-

lec our courses rom a lis which includes modules

in urher mahemaical mehods, managerial ac-

couning, commercial law, and so on. Sudens who

are planning o go on o do posgraduae degrees

or research are encouraged o selec mahemaical

courses as heir opions as his would make i eas-ier or hem o ge ino op universiies o do heir

PhDs. So a disproporionae amoun o eaching is

allocaed o mahemaical echniques. Tis means

ha a suden can achieve a rs-class honors degree

on he basis o mahemaics alone. Indeed, provided

a suden can do he mahs, he or she can achieve

virually 100% on he mahs papers. A suden in

an Anglo-American op economics deparmen may

graduae wih he highes grades wihou having o

read a single word o Adam Smih or Marx or Mill orKeynes or Schumpeer or Hayek.

Mahemaics is no a problem in isel he con-

ribuion o mahemaics and saisics as an aid

o rigorous hinking and use o correc quania-

ive mehods in appropriae conexs is a skill ha

sudens should be augh. However, he exising

economics curriculum encourages overuse o inap-

propriae mahemaical echniques wihou under-

sanding o heir concepual underpinnings and

limiaions.

Sudens sudy micro and macro compleely

separaely. Tere is no course in he nal year ha

would bring he wo ogeher ino one coheren pic-

ure. Tey also have no way o relaing micro and

macro echniques o he wider conex o economic

hisory, poliical economy and so on.

Given he war among economiss, here is lile

chance, as ye, o a unied eld o economic heory.

Wha can be done is o ensure ha sudens can-

no obain a degree in economics on he basis o

economics and mahs alone. Some or all o economic

hisory, poliical economy, he hisory o economic

hough, psychology, poliics, sociology and (I would

argue) philosophy should no be opional exras bu

an inegral par o he raining o an economis, es-

pecially a rs degree level, and weighed according-

ly. Tis would give he budding economis an insigh

ino he way oher disciplines have sough o under-

sand human behavior. Specializaion can wai unil

laer, and only on he back o a broad rs degree.

Tis reorm would ensure a modes de-proes-

sionalizaion o he discipline. Given is lack o real

scienic sanding, his would be a good hing. No

only is economics cu o rom ordinary discourse,

bu i rarely engages in ruiul dialogue wih adja-

cen disciplines. An economics deparmen in which

broader rs-degree courses were augh would nec-

essarily have a more heerodox body o proessors,

and sudens would be exposed o clashing views

and mehodologies.

not only is econoMics cutoff froM ordinary discourse,

but it rarely engages infruitful dialogue with

adjacent disciplines.


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33

Even modes reorms o his sor will be im-

mensely dicul o achieve. Te whole sysem o

exbooks, learned journals, enure, job opporu-

niies is buil on an increasingly narrow echnical

concep o wha i is o be an economis. Tis will

need o be blown up. Perhaps he presen crisis will

conribue o ha. Bu I suspec we will need o have

more crashes in he real world beore he presen

srucure o economics comes crashing down.

Te models economiss use inuence he acions

o regulaors and governmens. So he sae o eco-

nomics is a maer o vial concern o us. One migh

almos say economics is oo imporan o be le o

economiss.

Students

studio

1915

t


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34

Te widely acceped neoclassical deniion o ra-

ionaliy has remained he cornersone o econom-

ics or decades. Te assumpion ha economic acors

are uiliy maximizing beings wih consisenly clear

preerences and access o perec inormaion, has o

a large exen enabled he mehodologies o econom-

ic sudies o resemble hose o he naural sciences.

While even Rober Lucas himsel has readily sub-

mied and acknowledged he severe shorcomings

o he raional acor assumpions, is applicaion o

he non-academic world did no noiceably hi a wall

unil he recen global economic crisis. An oshoo

o he raional expecaions heory is he ecien

marke hypohesis (EMH), which saes ha prices

reec all available inormaion. Te EMH spawned a

whole slew o nancial models, including he CapialAsse Pricing Model and he Black-Meron-Scholes

opion-pricing model. Sysemic acors in he global

nancial marke grew o accep and implemen such

models, which were based on ausere and unrealis-

ic assumpions o how reurns and variaion could

replicae Gaussian, lognormal and oher heoreical

disribuions.

Simon analogically ariculaes he core o he

maer. He uses he example o a moionless, ir-

regularly shaped bowl lled wih molasses (Simon

1959). When in a seady sae, or equilibrium, he

molasses will display characerisics akin o ha o

any oher liquid in a similar bowl. Under he earhs

graviaional pull, or example, a pliable subsance

o almos any kind will ac o minimize he heigh

o is cener o graviy. Te behavior o he molas-

ses in equilibrium is dependen only on is goal and

is environmen (Ibid., p.255). In his case, he goal

is he pursui o he cener o graviy and will be

oherwise compleely independen o he inernal

properies o he organism (Ibid.). I on he oher

hand, he said bowl were se in moion, he molasses

would sill evenually nd is cener o graviy as hebowl reached equilibrium. In order o ascerain is

redefiningrationality

B Y R A N I A R A G U N A H A N

The neoclassical definition of ra-

tionality, though continuously and

consistently debated, has remai-

ned the cornerstone of economics

for decades. How do current de-

velopments in areas ranging from

finance to the natural sciences,

necessitate and facilitate a depar-

ture from this paradigm?

t

antnio r. daMsio []observed patients who

had lost their abilityto experience eMotiondue to brain surgery.he observed that one

such patient, known

as elliot, also losthis ability to Make

rational decisions.


35/52

35

behavior beore he bowl reaches his poin however,

he physical properies o he molasses, such as is

volume and viscosiy, would have o be known. Te

assumpion o raionaliy employed in neoclassical

economics, has eecively assumed away he physi-

cal properies o economic acors.

Ludwig von Mises, an inuenial Ausrian School

economis, once dened science as he endeavor

o aain a menal grasp o he phenomena o he

universe by a sysemaic arrangemen o he whole

body o available knowledge (von Mises 1963, p.21).

Proponens o he Ausrian School were, in general,

averse o he mahemaical mehods employed by

wha we have come o know as mainsream eco-

nomics. Von Mises ulimaely dismisses he neoclas-

sical deniion o raionaliy as nohing more han

a value judgmen, saing ha his was akin o de-

claring wha one person would preer based on wha

anoher would consider desirable. He assered ha

evenually, he observaion o all phenomena willreach a poin where i can no longer be analyzed and

measured by presen knowledge; he human psyche

beyond he ausere deniion o raionaliy being

one o hem. Von Mises argued ha irraional be-

havior wasn irraional per se, bu raher a reacive

response o simuli on he par o he bodily organs

and insincs which canno be conrolled by voliion

o he person concerned (Ibid., p.20). Wheher he

was aware o i or no a he ime, his saemen de-

scribed he basic ramework o a branch in he eld

which we would evenually come o know, as behav-

ioral economics.

Behavioral economics seeks o explain economic

aciviy in erms o marke players behavior and

has aken noe o various human endencies such

as herding, overreacion and loss aversion. Shiller

oulines he endency or invesors o be spurred

on by eedback, making invesmens based on he

observed successes o heir peers (Shiller 2003). He

goes on o ariculae how inerruped eedback dy-

namics simulaes herding behavior and has heendency o generae speculaive bubbles. DeBond


36/52

36

and Taler ound ha invesors ended o overreac

o new inormaion and hereore caused marke

movemens more exreme han would be expeced

o raional agens (DeBond & Taler 1985). Teir

sudy o U.S. sock reurns concluded ha overre-

acion caused socks ha had previously suered aloss o become underpriced, and previously winning

socks o become overpriced. Prospec heory, devel-

oped by Kahneman and versky, is based on he idea

ha economic agens ended o evaluae invesmen

risks relaive o heir curren levels o wealh (Kah-

neman & versky 1979). Tis is inconsisen wih

he raional expeced uiliy heory, which assesses

possibiliies in erms o absolue nal wealh. Wih-

in his ramework, i was also ound ha invesors

placed greaer weigh on he value o poenial losses

han on ha o poenial gains.

Te human endency o submi o supposedly ir-

raional behavior is a quesion ha he developing

eld o neuroeconomics seeks o answer. By sudy-

ing he link beween reacions in he human brain

and economic behavior, neuroeconomics looks ino

he origins o he decision-making biases idenied

by behavioriss. Based on he brie overview o he

ndings o behavioral economics earlier in his ari-

cle, he propensiy or human beings o produce ir-raional reacions seems o be relaed o emoions.

Fear and greed, he mos common emoional reac-

ions in invesors, appear o orm he basis or mos

o he irraional behavior observed by behavioral

economiss. A sudy by Annio R. Damsio, a be-

havioral neurologis, observed paiens who had los

heir abiliy o experience emoion due o brain sur-

gery (Damsio 1995). He observed ha one such pa-

ien, known as Ellio, also los his abiliy o make

raional decisions. Te main implicaion o he sudy

was ha emoions and raionaliy are inexricablylinked. Zajonc ariculaes how aecive reacions

precede cogniive reacions in he decision-making

process (Zajonc 1980). He concludes ha aec and

cogniion are under he conrol o separae and par-

ially independen sysems ha can inuence each

oher in a variey o ways, and ha boh consiue

independen sources o eecs in inormaion pro-

cessing (Ibid., p.151). However, is i possible ha

his seemingly inricaely and incredibly inerwoven

web o reacions have is roos in he human evolu-

ionary consruc?

loss aversion and herding

can be seen as basic priMalinstincts; losses are Morelikely to deplete a species

than the lack of gains,and power in nuMbersis essential to greater

collective preservation.

Perfect

information

or animal

spirits? The

NY Stock

Exchange.


37/52

37

Consider, or example, he human reacion o

jumping a he sound o a loud noise. I is only ol-

lowing his aecive reacion ha he human brain

seeks o esablish he source o he disurbance,

which is arguably, he raional hing o do. Tis

propensiy o jump, in preparaion o ake igh,

can be seen as par o our evoluionary consruc,

mean o aid he propagaion and preservaion o

he human race. Variaions in reacions can arisebased on inensiy o he sound, surrounding envi-

ronmen, and pas experiences o he individual in

quesion. Tis suggess ha human beings learn and

adap o whaever circumsances hey nd hem-

selves presenly in. By exrapolaing his noion o

invesor behavior in nancial markes, i can be in-

erred ha many o he observaions made by be-

havioral economiss are, a leas parially, aribu-

able o evoluionary human qualiies. Overreacion

in paricular, can be seen as analogous o human

responses o loud noises. Loss aversion and herding

can be seen as basic primal insincs; losses are more

likely o deplee a species han he lack o gains, and

power in numbers is essenial o greaer collecive

preservaion. Chen, Lakshminarayanan, and Sanos

conduced an experimen using primaes, in order

o uncover he evoluionary properies behind eco-

nomic decisions (Chen, Lakshminarayanan & San-

os 2006). Primaes were seleced or his purpose

due o heir neurological consruc being similar o

ha o human beings. Te experimen ound ha

he es subjecs displayed behavior consisen wih

Kahneman and verskys deniion o loss aversion

(Kahneman & versky 1979).

Tese ndings have remendous implicaions or

he microoundaions o economics. For he longes

ime, human idiosyncrasies were rendered negligible

in economic analysis; he argumen being ha on a

macro level, variaions would cancel each oher ou

o bring abou one very raional super-being ha is

he economy. However, his is proving o be less and

less he case in pracice. By no aking ino accoun

he eecs o herding or insance, we ailed o real-

ize how deviaions rom so-called raional behavior

wouldn necessarily cancel each oher ou. Finan-cial models mean o hedge and measure risk did

no work when all players were being on he same

sraegies. I has become eviden beyond a shadow

o a doub ha he eld o economics has o incor-

porae componens o he naural sciences ha ac-

coun or human behavior, as opposed o he ormer

convenion o solely employing generic mahema-

ics, rie wih unrealisic assumpions. However he

bigges challenge lying ahead or observaions o be-

havioral, evoluiona

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