Article — From the May 2005 issue

Let There Be Markets

The evangelical roots of economics

Economics, as channeled by its popular avatars in media and politics, is the cosmology and the theodicy of our contemporary culture. More than religion itself, more than literature, more than cable television, it is economics that offers the dominant creation narrative of our society, depicting the relation of each of us to the universe we inhabit, the relation of human beings to God. And the story it tells is a marvelous one. In it an enormous multitude of strangers, all individuals, all striving alone, are nevertheless all bound together in a beautiful and natural pattern of existence: the market. This understanding of markets—not as artifacts of human civilization but as phenomena of nature—now serves as the unquestioned foundation of nearly all political and social debate. As mergers among media companies began to create monopolies on public information, ownership limits for these companies were not tightened but relaxed, because “the market” would provide its own natural limits to growth. When corporate accounting standards needed adjustment in the 1990s, such measures were cast aside because they would interfere with “market forces.” Social Security may soon fall to the same inexorable argument.

The problem is that the story told by economics simply does not conform to reality. This can be seen clearly enough in the recent, high-profile examples of the failure of free-market thinking—how media giants have continued to grow, or how loose accounting regulations have destroyed countless millions in personal wealth. But mainstream economics also fails at a more fundamental level, in the way that it models basic human behavior. The core assumption of standard economics is that humans are fundamentally individual rather than social animals. The theory holds that all economic choices are acts of authentic, unmediated selfhood, rational statements reflecting who we are and what we want in life. But in reality even our purely “economic” choices are not made on the basis of pure autonomous selfhood; all of our choices are born out of layers of experience in contact with other people. What is entirely missing from the economic view of modern life is an understanding of the social world.

This was precisely the diagnosis made five years ago by a group of French graduate students in economics, who published their dissent in an open letter that soon made minor headlines around the world. In the letter the students declared that the economic theory taught in their courses was hopelessly out of touch, absorbed in its own private model of reality. They wrote: 

We wish to escape from imaginary worlds! Most of us have chosen to study economics so as to acquire a deep understanding of the economic phenomena with which the citizens of today are confronted. But the teaching that is offered . . . does not generally answer this expectation. . . . [T]his gap in the teaching, this disregard for concrete realities, poses an enormous problem for those who would like to render themselves useful to economic and social actors.

The discipline of economics was ill, the letter claimed, pathologically distant from the problems of real markets and real people. 

The students who offered this diagnosis in 2000 were from the most prestigious rank of the French university system, the Grandes Ecoles, and for this reason their argument could not be easily dismissed. Critics who accuse economists of embracing useless theory usually find themselves accused of stupidity: of being unable to understand the elegant mathematics that proves the theory works. But the mathematical credentials of these students were impeccable. The best of a rising generation were revolting against their training, and because of this the press and public paid attention. Orthodox economists counterattacked, first in France and then internationally. Right-wing globalist Robert Solow wrote a savage editorial in Le Monde defending standard economic theory. The debate became so protracted that the French minister of education launched an inquiry. 

Economics departments around the world are overwhelmingly populated by economists of one particular stripe. Within the field they are called “neoclassical” economists, and their approach to the discipline was developed over the course of the nineteenth century. According to the neoclassical school, people make choices based on a rational calculation of what will serve them best. The term for this is “utility maximization.” The theory holds that every time a person buys something, sells something, quits a job, or invests, he is making a rational decision about what will be most useful to him, what will provide him “maximum utility.” “Utility” can be pleasure (as in, “Which of these Disney cruises will make me happiest?”) or security (as in, “Which 401(k) will let me retire before age eighty-five?”) or self-satisfaction (as in, “How much will I put in the offering plate at church?”). If you bought a Ginsu knife at 3:00 a.m., a neoclassical economist will tell you that, at that time, you calculated that this purchase would optimize your resources. Neoclassical economics tends to downplay the importance of human institutions, seeing instead a system of flows and exchanges that are governed by an inherent equilibrium. Predicated on the belief that markets operate in a scientifically knowable fashion, it sees them as self-regulating mathematical miracles, as delicate ecosystems best left alone.

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is a professor at Rhodes College in Memphis, Tennessee, and the author of Fiction, Famine, and the Rise of Economics in Victorian Britain and Ireland .

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