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Neo-Classical economics attempts to add a layer of scientific rigor to a subset of the social science that has had a long history of utilizing verbal reasoning and observation as focal points of its methodology. While the modern-day intellectual progeny of  Alfred Marshall may enthusiastically advocate for the treatment of economics as a near-hard science, that does not mean there aren’t any detractors. The Austrian School of economics has been resolute in their longstanding criticism of Neo-classical methodology. It stands to reason that controlled models cannot perfectly mimic the dynamic conditions of economic exchange. Alone by holding the assumption of ceteris paribus economic models fails to accurately reflect realistic conditions. The cadence of bustling bazaar in Casablanca represents the ever-changing ebbs-and-flows of a complex system. A collective ecosystem of trade was a few variables that remain constant. Except for the informal norms of commerce and the locally enforced laws. Anything else cannot be predicted with absolute certainty and is subject to approximate in the face of uncertainty. Even an oversimplification in the form of an economic model cannot lead us toward any definite predictions. Rather provide us with a two-dimensional silver of the truth.

In chapter three of economist Robert Higgs’s seminal book Crisis and Leviathan delivers quite the blow to Neo-Classical methodology in the analysis of political ideology. In this chapter, Dr. Higgs strives to provide a framework for interpreting ideology and how it relates to the growth of government. Higgs particularly scrutinizes Mancur Olson (while a New Institutional Economist, he was very influential in the development of Public Choice Theory). Olson touches upon the free-rider issue of collective political action. The efforts put forth by one individual actor are relatively inconsequential when compared to the actions of the group. Higgs provides the example of an organized band of political activists writing to a congress about a specific issue. Odds are the elected official will respond similarly regardless of receiving one or hundreds of letters from these mobilized citizens.  A similar analogy can be made towards voting. The vote cast by an individual voter is merely a drop in the bucket (p.39).

From the standpoint of rudimentary economic calculations and reason, it would be rational to question if it is worthwhile to contribute to this political cause in any capacity. Any “collective-goods” spawned from political activism can be enjoyed with relatively little cost to most constituents (p.40). Making it irrational to be anything but a free-rider (p.40). Leading us to Olson’s Iron Law of Collective inaction. Per Higgs, there were only two exceptions to Olson’s law. These exceptions include the provision of an excludable incentive for participation and are coerced into directing efforts towards the collective good (p.40). Per Olson’s analysis anything outside of these two contingencies would not entice actors to avoid the spoils of being a passive advocate.

Olson commits some of the perennial sins that mar Neo-Classical analysis. The span of variables that can be plotted on a utility function provides us with a provincial view of all that can encompass an individual’s perception of well-being (p.41). Reducing all of the human desires into an oversimplification. Embodied in homo economicus the theoretical economic agent in all models. Who is oblivious to social graces and the finer nuances of the human condition (p.41). In terms of the political-economic analysis of the growth of government if the unquantifiable element of ideology would need to be linked to the utility function (p.41). There are purely qualitative motivations that guide our behavior that is not necessarily “rational” in the economic sense. We seek a group association. We tend to enjoy the epicurean delights a sitting outside with a glass of wine and watching the sunset over Cascade Lakes in the light breeze of the summer evening. Indulging our tastes for aesthetics and luxury. From the lofty vantage point of linear production models or the assumption of rational consumption cannot provide a complete explanation.

Ideology provides such a degree of satisfaction that cannot be forced into the mold of cardinal units for quantifiable analysis. Higgs mentions the characteristics of “solidarity” and “identity” being satisfied by ideological association (p.42). Referencing Russell Hardin’s example of young men during World War II joining the military. They made this tradeoff in a manner that would be concluded as irrational from the reasoning of Neo-Classical economics. Due to all of their cohorts joining the armed services and being deployed for combat in foreign theaters, making military service “.. the most important experience of their generation..” (p.42). Immortalizing the stoic image of the “silent generation’s” unwavering commitment to the war effort. Elements of group identity and social pressure which are conspicuous realities of political group membership are glossed over by dispensing of qualitative analysis.

Robert Higgs dives even further into the depths of group identity and ideology. Political party members and activists from communities of “like-minded” individuals. Through adhering to group norms and values they obtain “invisible membership cards” (p.42). For instance, even though gun owners are mostly like a subgroup of either Conservative or Libertarians, they tend to have their microcosm in the political sphere. Some individuals are one-issue voters, meaning they may not necessarily conform to either assumed right-wing ideology. However, the one issue voting gun enthusiast will be happy bedfellows with other pro-gun lateral Second-Amendment friendly camps. There are certain indicators of the group identity of gun advocates. They may be wearing an NRA t-shirt. Sporting tattoos depicting the phrase Molon Labe.  Even having witty bumper stickers denouncing gun control on the back of their cars and trucks. Typically, members of this political identity are well versed in the inner-mechanics of fire-arms. Also, surprisingly knowledgeable regarding local and federal gun laws. There are qualitative characteristics that define ideological groups and subgroups. These commonalities at times can present pressures towards conformity. On the flip side, they also foster a sense of community, bond, and camaraderie.  All are variable generally absent from the analysis of a  hard-nosed economist hell-bent on reducing all phenomena to quantifiable graphs and regressions. Endearing terms used to refer to in-group members such as Christians calling each other “brother” and Communists shaking hands with their “comrades” is lost in the mix (p.43).   

3 thoughts on “Another Blind Spot of Neo-Classical Economics

    1. I would certainly agree that economics alone cannot answer all of the questions, but yet it is a very powerful analytical discipline. Hence, why economics has evolved to incorporate elements of other disciplines

      I personally interpreted this portion of the chapter as direct criticism of econometrics more so than of the incomplete nature of economic methodology. Then again, I could be incorrect.

      Liked by 1 person

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