16 October, 2014

The Laws of Economics


One response to my Distributism Basics article on the Science of Economics was the assertion that economics can be studied apart from ethics. According to critics of the article, I was incorrectly attempting to join two topics that don't necessarily go together. These critics at least seemed to agree that ethics did apply to economic activity, but denied that economic studies, specifically the laws of economics, are subject to ethics.

The factors that govern the relationship between labor, capital and resources are referred to as "economic laws." Labor, capital and resources tend to be tend to be treated separate from exchange. They comprise the various costs and profits related to the labor market, acquiring and using capital, and economic rents on resources. These are all said to be "value-free," as though their very nature excludes any ethical implication. This is presented to us as an established fact; it is regarded as being beyond questioning. To doubt this runs the risk of being accused of denying these laws, or even that economic is a science.

Suppose we have a society where everyone is completely self-sufficient; each person produces all that is necessary for the needs and wants of the household and does so with his own capital and resources. A society where any exchange of goods or services is only incidental and insignificant, done out of neighborly spirit rather than as a regular activity for the purpose of acquiring what is needed or wanted. In such a society, labor, profits, and economic rent still apply, but I must admit that they would not have any, or at most an insignificant ethical implication. Economics means household management, so the people in such a society would still be practicing economics. Labor, profits, and economic rents would still apply in this Utopia, but because they do not involve any necessary interaction with others (exchange), it could be argued there is no ethical implication to them. Therefore, I must admit that there is a certain sense in which the economic laws of labor, profits and economic rents could be examined apart from ethics.

However, these economic laws can only be examined apart from ethics in the case of such a society, and that society simply does not exist. Economics is not studied for the purpose of a hermit living on his own outside of society, nor is it studied for the utopian society I described above. The science of economics is studied as a means of understanding and succeeding in economic activity in the real world, a world where exchange will take place as an integral part of nearly all economic activity. In the reality of economic society, exchange is not usually separate from labor, profits and economic rents.

Hired labor is the exchange of human effort for pay. We musk keep in mind, however, that pay can take many forms, so this exchange includes cases of having family members working in a family business. In this case, the added benefit of extra profit or other non-monetary benefits to the family are factors in those labor decisions. In the case of hired labor, exchange is a factor in acquiring labor and in profit. The fact that a portion of economic return from human effort needs to be given to hired labor impacts the profit on capital and the ability to accumulate capital for future economic activity. When the resources on which human effort will be exercised are owned by someone other than the provider of labor or capital, then exchange becomes involved in economic rent.

Economic exchange is a transactional relationship between people. There are always ethical implications to these transactions. Even when transactions are managed by computers, those computers are managing the property of people and effectively acting as their agents in the transactions. Those creating and running the programs cannot disregard the people on both sides of the transactions being managed. The study of economics necessarily includes exchange. In economics classes, they don't just study the theory of labor of the individual who lives in the fictional world I described, they include hired labor. They don't just study the idea of people working with their own capital, but providing capital with which others will work. They don't just study the case where the person doing the work owns the resources that are being changed, they study cases where someone else owns those resources and the impact of economic rent on the profits of the owner of capital. In studying supply and demand, not only is exchange a necessary aspect of demand, but it is often a factor in supply.

The transactional relationships of exchange are an integral part of economic activity and are essential for any study of economics to be complete. The study of economic laws can only be considered value-free if exchange is not a consideration in those studies. This might give us some necessary insights into the nature of those laws, but such a study would be woefully inadequate if it did not teach how those laws apply in the economic practices of the real world, the world in which students of economics intend to apply what they learn in their economics classes. This is why the science of economics is subordinate to the science of ethics. This is why I say that studying the laws of economics as purely value-free ideas, without including the ethical implications when exchange is considered in how those laws are applied, is incomplete.

5 comments:

  1. While well stated, a bit of clarification seems in order. The laws of economics are just as real as the laws of physics though sometimes the reaction is a bit slower to the action than found in physics. The most prominent things that are responsible for th confusion regarding the operation of these laws are lack of transparency (absense of full disclosure of informatiion) and dishonesty (lying and theft). True, we don't live in a world where we can shed ourselves of these distortions but if they are better understood they can be better managed.

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  2. I've never said that the laws of economics are not as real as the laws of physics. I'm merely trying to point out that they are of a fundamentally different type than the laws of physics. In addition, the formulation and explanation of those laws tend to present them as though they are inevitable because they those presentations tend to assume that the human factor is either irrelevant or predictably mechanical.

    However, not only does your comment show that this is not the case, but there are other human factors outside of withholding information, fraud, lying and theft that affect economic decisions. The success of the advertising industry proves that there are certain general assumptions we can make at least as far as a response to marketing, but marketing is only a portion of economic activity - and even marketing gets it wrong (people don't act as predicted) some times.

    The Science of Economics

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  3. This is an almost word for word copy of a section in 'Economics for Helen' by Belloc. Oughtn't you acknowledge your sources?

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  4. Really? Word for word? I'll have to check Economics for Helen to see. I don't remember the fictitious society where everyone is completely self-sufficient. All I can say is that, while I have certainly read Economics for Helen, I assure you that I did not do any intentional copying from that or any other work unless I put it in quotes and referenced it.

    That being said, I readily acknowledge that I stand on the shoulders of giants. I have tried to learn from the best, and that includes Belloc, Chesterton, and many others. If anything I write comes too close to a quote without acknowledgement, it is unintentional and I will very gratefully give credit where credit is due.

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  5. Well actually to say word for word is rather a tad exaggerated, but it was the totally self-sufficient society comment that twigged in my mind that I'd heard much of this essay before. I'm sure it's purely an honest mistake, like a songwriter who is inspired to write a completely new song only to realise after the fact that it was a tune he heard long ago. I think it's near the start where he talks about the modern tendency to divorce economics and ethics (how people either deny the laws of economics because they don't like the ethical implications or believe that economic law decides the ethics) or it might be the bit where he discusses how trade can increase wealth without needing to produce anything new. Of course I could easily be making a fool of myself and making the same error as the songwriter, thinking I heard it in Belloc but actually reading it here first.

    Either way it would be difficult to write about Distributism without references to their work!

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