On Ethical and Intellectual Failures in Contemporary Economics

Abstract

Contemporary Anglo-American economics, which I admire, faces two major obstacles. First, in its drive at least since Milton Freedman to be a positive science free of normative issues, it ignores its own current intellectual foundations buried at the heart of its analysis of the “advantages of trade”: Fairness. Second, the major driver of economic growth in the past 50,000 years has been the explosion of goods and production capacities from perhaps 1,000 to 10,000 long ago, to perhaps 10 billion goods and production capacities today. Economics, lacking a theory for this explosion, deals with this explosion by ignoring it and treating it as “exogenous” to its theory.

The “Edgeworth Box” carries the heart of advantages of trade, demonstrating for properly curved isoutility curves a region where you and I are better-off trading some of my apples for some of your pears. The ratio of these in trade constitutes price. But spanning the region of advantages of trade is the famous CONTRACT CURVE, where we have exhausted all the advantages of trade. Different points on the curve correspond to different prices. But the Contract Curve is Pareto Optimal, motion on the curve can only make one of us better-off at the expense of the other. Critically, economics has NO THEORY for where we end up on the Contract Curve. Nor, since different points on the curve correspond to different prices, can PRICE settle the issue.

Using the Ultimatum Game I will show that FAIRNESS typically drives where we settle on the Contract Curve, as long as we do not have to trade with one another. Thus ethics enters economics at its foundation, yet cannot be mathematized, so is ignored in Freedman’s name of a positive science.

Perhaps more important, unlike physics, no laws entail the evolution of either the biosphere or the “econosphere.” There are no laws of motion whose integration would entail that evolution. Lacking an entailing theory of the growth of the economy in diversity, often of new goods and production capacities, economists ignore the most important feature of economic growth, wrongly treating it as “exogenous.”

The failures above are likely to play major roles in the lapse to mere greed in our major financial institutions, and in our inadequate capacities to help drive growth in much of the poverty-struck world.

Citation

Kauffman, S. (2014), "On Ethical and Intellectual Failures in Contemporary Economics", Entangled Political Economy (Advances in Austrian Economics, Vol. 18), Emerald Group Publishing Limited, Leeds, pp. 259-282. https://doi.org/10.1108/S1529-213420140000018012