‘Good working rules’? Huh?

I find I’m having something of a love-hate relationship with the new institutional economics of Douglass North and Elinor Ostrom (the reading material which makes up the bulk of our ‘Political Economy of Property Rights’ class). On the one hand, this is a branch of economics which treats institutions, rules and social behaviour as important – and we always need more serious economic work that does that. On the other hand, these economists (and particularly Douglass North) seem to be slowly following that route to conclusions that have been long apparent to various schools of social scientists and philosophers in the tradition of Hegel; that there is a dialectical relationship between ideology, thought structures, social structures and basic economic behaviour. However, new institutional economics has historically tied itself to the working assumptions of neoclassical economics regarding human nature, and now has to actively struggle to break out of those brazen chains for good.

I have previously argued that human nature is a convenient fiction – our commonalities take the form of common limitations and social conventions. Beyond that, there is a paradox underlying human nature that is profoundly explored in the pages of Genesis. The standard Christian theology behind the Genesis story is that God gave human beings a choice and free will, and that as a result of human beings making the wrong choice, evil entered the picture. But I argue that there is a deeper irony that such a reading does not take into account - before Adam and Eve ate of the tree of Knowledge of Good and Evil, they knew what was good (to eat the fruit of any tree in the garden save one, to be fruitful and multiply and so forth) and they knew what was bad (to eat of the tree of Knowledge of Good and Evil). The irony of the story is that after they ate of this tree, that knowledge was lost to them. There is a basic confusion about what is good, what is useful, even what makes us happy which underscores the entire human experience.

We can thus describe neoclassical economics in terms of heresy: the undergirding assumption of neoliberalism, and accordingly of early new institutional economics, is that people always know what is good (a heresy compounded by the ridiculous, if convenient, notion that what is good is to be defined as what produces the maximum utility or maximum profit for the individual, either in the moment or over an extended period of time), and will always behave accordingly, at which point an optimal outcome will be achieved. Indeed, the most damning contradiction in neoliberal ideology is precisely this: ‘the people’ (as producers and consumers) can always be trusted to make ‘good’ (egoistic) decisions in the presence of market rules, but they cannot (as moral agents) be trusted to actually have a say in making those rules – which is why the acolytes of Friedman and Hayek seem to have a compulsive need for trigger-happy dictators like Pinochet, Fujimori, Ríos Montt and Yeltsin to implement their policies throughout the world. It is a strange and distressing tendency that when market fundamentalism is allowed to theoretically flatten human incentives to mere utility- or profit-maximisation, it somehow ends up deploying starvation and tank treads to actually flatten real humans: hardly an optimal outcome by any standard.

Of course, the logic of the new institutional economics can be levelled against both neoliberalism and neoclassical economics. Firstly, Douglass North seems to have rediscovered the basic principles of John Ruskin’s Christian socialism with his newfound insight that preferences and behaviours simply cannot be modelled merely on utility or profit; one must take account also of concepts such as duty and honour. Secondly, one can examine the incentive structures of neoliberal capitalism as it currently occurs and find conflicting incentives at work – ironically, vindicating Marx in some of his critiques of capital and credit. As the economic collapse proved, the incentives of investment banks to a.) safeguard their investors’ wealth by managing risks and b.) maximise their own profits by taking drastic risks, contained a catastrophic contradiction, one which Keynesian intervention might only temporarily submerge and ameliorate. The sad truth of the matter is that privatisation and market fundamentalism simply do not produce ‘good’ working rules for the majority of people – as such, regulation from relevant authorities, held accountable by a democratic political structure and practice, is required.

Best to all; sorry for the long absence. I shall return soon!