Philosophy of Economics: A Contemporary Introduction
Reiss (Julian)
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BOOK ABSTRACT:

Back Cover Blurb

  1. Philosophy of Economics: A Contemporary Introduction is the first systematic textbook in the philosophy of economics. It introduces the epistemological, metaphysical and ethical problems that arise in economics, and presents detailed discussions of the solutions that have been offered.
  2. Throughout, philosophical issues are illustrated by and analysed in the context of concrete cases drawn from contemporary economics, the history of economic ideas, and actual economic events. This demonstrates the relevance of philosophy of economics both for the science of economics and for the economy.
  3. This text will provide an excellent introduction to the philosophy of economics for students and interested general readers alike.
  4. Julian Reiss is Professor of Philosophy at Durham University. He has a degree in Economics and Finance from the University of St Gallen and a Ph.D. in Philosophy from the London School of Economics. His main research interests are methodologies of the sciences, philosophy of economics, and science and values. He is the author of Error in Economics: Towards a More Evidence-Based Methodology (2008), and some 40 papers in leading philosophy and social science journals and edited collections.
  5. "Julian Reiss’s Philosophy of Economics: A Contemporary Introduction is far and away the best text on the subject. It is comprehensive, well-organized, sensible, and clearly written. It is the first text that I’ve ever been eager to use in teaching the subject. I expect that everyone interested in philosophy of economics, whether with a background in philosophy or with a background in economics, will learn a great deal from Reiss’s masterful treatment."
    → Daniel M. Hausman, University of Wisconsin-Madison
  6. "Economists can no longer avoid the agenda of problems in the philosophy of economics, if they ever could. Equally, political and moral philosophers ignore economics at their own intellectual peril. Julian Reiss takes us on an insider's tour of the most important issues in this domain, teaching economists and philosophers what they need to know about how each of their disciplines have an impact on the other. For completeness, currency and clarity. Philosophy of Economics: A Contemporary Introduction cannot be beat.”
    → Alex Rosenberg, Duke University
  7. "Economic science has changed enormously over the last two decades, seeking fruitful collaborations with scholars working in other disciplines. An important site of exchange lies at the border between philosophy and economics. Julian Reiss’ book provides a wonderful critical survey of the debates that have flourished around the turn of the millennium, and will become a standard reference point for teaching and research in the years to come.”
    → Francesco Guala, University of Milan

Contents
  1. Introduction
      List of Figures – xiv
      List of Tables – xv
      Acknowledgments – xvi
    1. The Why, What and How of Philosophy of Economics – 1
      • Overview – 1
      • Two Opposing Paradigms – 2
      • The Philosophy of Economics: Interpreting Theory, Methodology and Ethics – 6
      • The Aims of Economics and the Problem of Purpose – 8
      • Study Questions – 11
      • Suggested Readings – 11
  2. PART I: Interpreting Economic Theory – 13
    1. Explaining Economic Phenomena – 15
      • Overview – 15
      • Explanation as an Aim of Economics – 26
      • Phenomena – 17
      • Why-Questions, Explanandum and Explanans – 19
      • Scientific Laws – 21
      • The D-N Model and Its Discontents – 23
      • Conclusions – 25
      • Study Questions – 26
      • Suggested Readings – 26
  3. PART IA: Rationality – 27
    1. Rational-Choice Theory – 29
      • Overview – 29
      • Folk Psychology – 29
      • Ordinal-Choice Theory – 32
      • Cardinal-Choice Theory – 42
      • Stability, Invariance and Justifiers – 49
      • Conclusions – 53
      • Study Questions – 53
      • Suggested Readings – 53
    2. Game Theory – 54
      • Overview – 54
      • Whither the Euro? – 54
      • Some Games and Some Formalism – 57
      • Game Theory’s Payoffs – 61
      • Game Theory and Rationality – 63
      • Game Theory as Explanatory Theory – 74
      • Study Questions – 80
      • Suggested Readings – 81
  4. PART IB: Causality – 83
    1. Causation and Causal Tendencies – 85
      • Overview – 85
      • The Rise of Causal Talk in Economics – 86
      • Correlation Is Not Causation: So What Is Causation? – 89
      • Causal Tendencies – 92
      • Conclusions – 98
      • Study Questions – 100
      • Suggested Readings – 100
    2. Mechanisms – 101
      • Overview – 101
      • Hume on Money – 102
      • Four Notions of Causal Mechanism – 104
      • Mechanisms as Underlying Structures or Processes – 105
      • Mechanisms, Methodological Individualism and Micro-Foundations – 109
      • Mechanistic Explanation – 112
      • Conclusions – 115
      • Study Questions – 116
      • Suggested Readings – 116
  5. PART IC: Models – 117
    1. Models, Idealization, Explanation – 119
      • Overview – 119
      • Causal Explanation – 120
      • Economic Models – 121
      • Idealizations – 124
      • Explanation – 127
      • Conclusions – 141
      • Study Questions – 141
      • Suggested Readings – 141
  6. PART II: Methodology – 143
    1. Measurement – 145
      • Overview – 145
      • Observation – 146
      • Consumer Price Inflation – 150
      • Unemployment and GDP – 157
      • Conclusions – 158
      • Study Questions – 159
      • Suggested Readings – 159
    2. Econometrics – 161
      • Overview – 161
      • Induction, Deduction and All That – 162
      • Mostly Harmless Econometrics? – 166
      • Conclusions – 172
      • Study Questions – 173
      • Suggested Readings – 173
    3. Experiments – 174
      • Overview – 174
      • Speaking to Theorists – 175
      • Searching for Facts – 177
      • Whispering into the Ears of Princes – 180
      • Methodological Issues – 182
      • Conclusions – 193
      • Study Questions – 194
      • Suggested Readings – 194
    4. Evidence-Based Policy – 195
      • Overview – 195
      • What Is Evidence-Based Policy? – 197
      • What Is an RCT, and What Are Its Virtues? – 201
      • What, Then, Is Wrong with Evidence-Based Policy? – 202
      • Conclusions – 206
      • Study Questions – 207
      • Suggested Readings – 207
  7. PART III: Ethics – 209
    1. Welfare and Well-Being – 211
      • Overview – 211
      • Welfare Economics – 212
      • Well-Being – 213
      • The Evidential View of Preferences – 225
      • Conclusions – 227
      • Study Questions – 228
      • Suggested Readings – 229
    2. Markets and Morals – 230
      • Overview – 230
      • Market Failure – 231
      • Transaction Costs and the Coase Theorem – 236
      • Intellectual Property Rights – 240
      • Commodification: What Money Can’t Buy – 245
      • Study Questions – 252
      • Suggested Readings – 253
    3. Inequality and Distributive Justice – 254
      • Overview – 254
      • Inequality – 255
      • Principles of Distributive Justice – 256
      • Conclusions – 275
      • Study Questions – 276
      • Suggested Readings – 276
    4. Behavioral Economics and Nudge – 278
      • Overview – 278
      • Behavioral Economics – 279
      • Libertarian Paternalism – 286
      • Philosophical Issues in Libertarian Paternalism – 293
      • Conclusions – 301
      • Study Questions – 301
      • Suggested Readings – 302
  8. References – 303
    Index – 322

Chapter Summaries
  1. The Why, What and How of Philosophy of Economics
    • The philosophy of economics is at the same time an ancient and a very recent discipline. It is ancient in that the world's greatest economists beginning with Aristotle were also or mainly philosophers, and many of their contributions should be classified as contributions to the philosophy of economics rather than the science of economics, narrowly understood.
    • With the increasing specialization and professionalization of academic disciplines that occurred in the nineteenth century, economics was separated from philosophy and developed, especially after the Second World War, a mainstream paradigm that was hostile to philosophical reflection. At the same time, philosophers of science were mainly interested in natural science and thus tended to ignore economics and other social sciences.
    • It is only in the last 30 or so years that we can once more experience a mutual interest and exchange, and witness the development of academic institutions that focus on the intersection of economics and philosophy. In that sense, then, the discipline is a novel one.
    • This chapter will explore why philosophy of economics is a subject worth studying, explaining its various branches and the overall approach and narratives in evidence in this book.
  2. Explaining Economic Phenomena
    • This chapter asks what it means for a theory, an account or a model to “explain” a phenomenon of scientific interest.
    • As we will see, the notion of (scientific) explanation has traditionally been closely related to that of a scientific law: according to this view, which has been endorsed by both philosophers and economists, to explain an economic phenomenon means to subsume it under a law.
    • The chapter examines this so-called “deductive-nomological model of explanation.” The account is widely regarded as mistaken nowadays, but a discussion of its deficiencies nevertheless serves as a good starting point because it is just these deficiencies that have made philosophers and social scientists look for more satisfactory alternatives, and much of the remainder of Part 1 discusses issues related to these alternatives.
  3. Rational-Choice Theory
    • According to one widely held view, human behavior is caused by intentions and motivations and therefore resists subsumption under natural laws. Rather, explanations of human behavior should describe the reasons for actions.
    • The two chapters of this part deal with rationality at the individual level (Chapter 3) and at the level of interactions between individuals (Chapter 4). Both levels share the folk-psychological model according to which behavior is caused by the interaction of beliefs, opportunities and desires. They also share the idea that to explain an outcome means to rationalize it.
    • According to this view, an account that portrays humans as erratic and unpredictable would not be explanatory as it would fail to elucidate the rational grounds for action.
  4. Game Theory
    • In this chapter I will look at some pressing philosophical issues concerning game theory in both its descriptive as well as its prescriptive modes.
    • After some motivation and preliminaries, I will introduce the game-theoretic formalism along with famous games that have proved to be of philosophical interest.
    • I will then look at some arguments in the debate whether game theory is an empirically more or less empty formalism or a substantive theory and finally whether it is a normative theory of rational choice.
  5. Causation and Causal Tendencies
    • Reasons are kinds of causes. But not everyone insists that causal explanations always have to cite reasons.
    • The present chapter responds to the second deficiency of the deductive-nomological model of explanation, namely, that social phenomena, even in areas where human motivations are not directly concerned, seldom fall under a scientific law, conceived of as a strict regularity.
    • Strict regularities are few and far between in the economic world. This is due to the circumstance that it is always possible, and often actually the case, that the operation of the law is disturbed by countervailing factors. A strict regularity therefore only holds when certain, often unrealistic conditions are in place.
    • There are two major variants of such a “law with qualifications” view.
      1. The first asserts that laws express regularities subject to a ceteris paribus condition. The ceteris paribus condition makes the circumstances under which the regularity ensues manifest.
      2. The second understands laws as expressions of tendencies. According to this view, for example, the iron law of wages, say, doesn’t state that wages always approach subsistence levels but rather that wages tend towards subsistence levels, which might mean that they in fact always exceed them.
  6. Mechanisms
    • Another problem with the view of laws as strict regularities is that regularities, even where they exist, are hardly explanatory by themselves. Suppose we observe a case of wages approaching subsistence levels. If an economist, when asked why this happened, replied, “Because wages always approach subsistence levels,” she would hardly win a prize for most insightful economic commentary. Establishing a regularity is at best part of the job. The regularity is itself explanation-seeking: we want to know why it holds, what is responsible for it to hold.
    • One response to this issue has been to demand that explanations must describe mechanisms that are causally responsible for a phenomenon of interest. Mechanism is a concept that is familiar to economists, compare "transmission mechanism,” "price mechanism" or “mechanism design. "
    • Unfortunately, there is little agreement among either philosophers or social scientists about what mechanisms are and how precisely the description of a mechanism relates to explanation. These questions are taken up in the present chapter.
  7. Models, Idealization, Explanation
    • The theories of explanation discussed in Parts IA and IB are all different versions of causal explanation. Causal explanations have a peculiarity: they are not successful unless the account given is true of the phenomenon in question. The bursting of the asset price bubble in the American subprime market in 2007 does not explain the recession that followed it unless there was a bubble, the bubble burst and the bursting of the bubble caused the recession. Neither inexistent causal factor nor mere potential causal links explain.
    • This fact about causal explanations doesn’t sit easily with another couple of facts about economics, namely, that economics is heavily model-based (more specifically, that economic explanations are often based on models), and that all models are false in a variety of ways. Models always give simplified and often idealized accounts of the phenomena they are models of. But if models are false, explanations use models essentially and causal explanations have to be true, can economic explanations be causal?
    • Part IC takes up this issue in a single chapter: Can false models explain? If so, how? Can the ideal of causal explanation be reconciled with the fact that all models are false?
  8. Measurement
    • Part I of this book dealt with economic theory. Economists theorize for a variety of purposes, a prominent one being the scientific explanation of economic phenomena. But no matter what the pursued purpose is, theory is very unlikely to serve its purpose well unless it is supported by evidence.
    • Part II therefore looks at the topic of evidence, the generation of empirical support or methodology.
    • There are two main types of method for generating empirical support in economics: observational and experimental methods.
      1. Observational methods, as the term suggests, aim to draw conclusions about economic theories without the benefit of interventions designed by the economist. In practice, economists rely on the work of statistical offices and other data-supplying bodies, and analyze the data given to them by means of statistical and econometric models. Econometrics is the topic of Chapter 9.
      2. Experimental methods require a more active role in the data-generating process on the part of the economist. The economist designs and executes an intervention, observes and records the result and only then analyzes the data, often also using statistical techniques that are as elaborate as those of observational methods. Economic experiments will be considered in Chapters 10 and 11.
    • The present chapter looks at the hard work done by statistical offices such as the Bureau of Labor Statistics in the USA, the UK Office for National Statistics, the Statistische Bundesamt in Germany, the Centraal Bureau voor de Statistiek in the Netherlands, the World Health Organization and the United Nations, and many non-governmental data providers such as Transparency International (an NGO that publishes the Corruption Perception Index, CPI) or the private US National Bureau of Economic Research (NBER) to inform policy-makers, scientific researchers and the population at large about the state of the economy by constructing economic indicators.
    • Economic indicators are index numbers such as the Consumer Price Index (also abbreviated CPI) and industrial production that aim to represent some fact about the economy — in these cases the current inflation rate and changes in output for the industrial sector of the economy.
    • Most economists are aware of the fact that huge measurement issues lurk behind innocuous-sounding statements like “Consumer price inflation in the Netherlands has been +2.6 percent in the year to April 2011” or “45 percent of Spanish people below 35 are currently unemployed." But they rarely engage actively in the process of designing a measurement procedure, leaving that task to the “professionals” — the statistical officers.
    • Later I will give some reasons to regard this as a regrettable state of affairs. It is important to understand the measurement issues associated with each economic indicator.
    • This chapter looks at one indicator, consumer price inflation, at some length, and at gross domestic product and unemployment more briefly. All three are of enormous theoretical and practical importance. All three are highly problematic.
    • First, however, I will make a number of general remarks concerning “observation."
  9. Econometrics
    • Econometrics is the study of the economy using the methods of statistics. Its aim is to estimate economic relationships, to test theories and to evaluate policies. In other words, it provides economic theories with empirical content.
    • Ragnar Frisch (1895-1973), a Norwegian economist and co-recipient with Jan Tinbergen of the first Nobel prize in economics in 1969, is sometimes credited with coining the term. In his editor’s note to the first issue of the journal of the Econometric Society, Econometrica he explains:
        There are several aspects of the quantitative approach to economics, and no single one of these aspects, taken by itself, should be confounded with econometrics. Thus, econometrics is by no means the same as economic statistics. Nor is it identical with what we call general economic theory, although a considerable portion of this theory has a definitely quantitative character. Nor should econometrics be taken as synonymous with the application of mathematics to economics. Experience has shown that each of these three view-points, that of statistics, economic theory, and mathematics, is a necessary, but not by itself a sufficient, condition for a real understanding of the quantitative relations in modern economic life. It is the unification of all three that is powerful. And it is this unification that constitutes econometrics.
    • Econometrics does not only apply statistical methods to pre-existing economic theories. Rather, it transforms theoretical claims into testable empirical propositions that can be expressed in a precise mathematical form and statistically estimates their parameters.
    • From the philosopher’s point of view, there are two related fundamental issues that make econometrics important and intriguing.
      1. The first is the testing or confirmation of scientific theories. In many ways this has been the issue in the philosophy of science in the twentieth century and beyond. It was certainly the most important issue for logical positivists, and a dividing issue between them and Karl Popper and his followers.
      2. The second is the issue of identifying causal relationships from data: causal inference.
    • In what follows I will first introduce the topic of theory testing or confirmation in purely philosophical terms. I will then move on to econometrics, show that the major approaches to theory testing have econometric counterparts and discuss these econometric approaches. Issues of identifying causal relationships will be treated along the way
  10. Experiments
    • Simplifying somewhat, we can say that there are four kinds of experiments in economics.
      1. There are, first, thought experiments in both macroeconomics (see Chapter 6 on Hume’s monetary thought experiment) and microeconomics (see Chapter 7 on Galilean thought experiments and models). Thought experiments abstract a situation from the real world, simplify it to a greater or lesser degree, manipulate a variable and contemplate what would happen in the idealized situation.
      2. There are, second, natural experiments. In a natural experiment there is no manipulation by the experimenter. Rather, the experimenter finds a natural situation that resembles an experiment and uses statistical methods to analyze it. In the previous chapter we have seen that the econometricians’ instrumental-variables technique is often employed to that effect.
      3. There are, third, randomized field evaluations that have become popular in development economics in very recent years. In a randomized field evaluation experimental subjects are divided into two groups, an experimental treatment is applied to one and a control treatment to the other. The treatment is judged to be effective if there is a difference in outcome between the two groups. These experiments we will examine in the following chapter.
      4. The final category is that of the laboratory experiment. When there is talk of experiments in economics or experimental economics, it is usually laboratory experiments that arc referred to. These started in about the 1950s, and thus are a relatively recent phenomenon. Only randomized field evaluations are younger.
      That this book treats the different types of experiments in their historical order of appearance is pure chance.
    • Laboratory experiments in economics test hypotheses drawn from economic theory in the “lab,” which usually means a specially prepared classroom or other university environment. That is, real people (unlike the idealized agents of economic models and thought experiments) are brought into an artificial environment (unlike in randomized field evaluations, where agents are observed in their natural habitat) and subjected to interventions controlled by the experimenter (unlike in natural experiments, where variation is not under experimental control). When I say “experiment'' or “economic experiment” in this chapter, I mean this kind of experiment: a controlled, laboratory experiment.
    • I said that experiments test hypotheses from economic theory. This is too narrow a focus. According to one practitioner, economists pursue at least three purposes with experiments, which he describes metaphorically as follows (Roth 1986):
      1. Speaking to theorists (“testing and modifying formal economic theories”);
      2. Searching for facts (“collect data on interesting phenomena and important institutions”); and
      3. Whispering into the ears of princes (“providing input into the policy-making process”).
    • In what follows I will give one or a few examples of each category and describe some of the things economists have learned from performing this type of experiment. I will then take a step back and examine some of the methodological issues involved in economic experimentation in general.
  11. Evidence-Based Policy
    • Evidence-based policy is currently a highly influential movement. Though it originated in the field of medicine, in the UK, the USA and other (mostly Anglo-Saxon) countries, there is an increasing drive to use evidence to inform, develop and refine policy and practice. This push to improve how research and analysis informs policy and practice is increasingly being felt in a wide range of areas: in addition to evidence-based health and social care, we now hear of evidence-based housing policy, transport policy, education and criminal justice.
    • An example of an evidence-based approach to policy-making is the UK Sure Start program. Initiated in 2001, the aim of the program is to break the cycle of poverty by providing children and families with childcare, health and educational support. The Sure Start program has been evidence-based from the start, using extensive reviews of research findings on what approaches and early interventions are most likely to work; its execution and continuing evaluation and refinement have also been evidence-based.
    • Another notable example in the UK is the National Institute for Health and Clinical Excellence (NICE), which provides regulatory guidelines for the National Health Service (NHS) on particular treatments. These guidelines are based on reviews on the effectiveness and cost-effectiveness of various treatments.
    • In the USA, the Department of Education (USDE) is actively committed to furthering evidence-based approaches to education policy and practice. The Department’s Institute of Education Sciences established the “What Works Clearinghouse” in 2002 “to provide educators, policy makers, researchers, and the public with a central and trusted source of scientific evidence of what works in education” (Department of Education 2005). Furthermore, the Department in 2005 implemented a recommendation by the Coalition for Evidence-Based Policy (CEBP) that projects that include a randomized evaluation should have priority in its grant process.
    • Its most prominent implementation was in connection with the US No Child Left Behind policy. The CEBP describes it as follows:
        The recent enactment of No Child Left Behind, and its central principle that federal funds should support educational activities backed by “scientifically-based research,” offers an opportunity to bring rapid, evidence-driven progress — for the first time — to U.S. elementary and secondary education. Education is a field in which a vast number of interventions, such as ability grouping and grade retention, have gone in or out of fashion over time with little regard to rigorous evidence. As a result, over the past 30 years the United States has made almost no progress in raising the achievement of elementary and secondary school students, according to the National Assessment of Educational Progress, despite a 90 percent increase in real public spending per student. Our nation’s extraordinary inability to raise educational achievement stands in stark contrast to our remarkable progress in improving human health over the same time period — progress which, as discussed in this report, is largely the result of evidence-based government policies in the field of medicine. (CEBP 2002: iii)
    • Social policy is not the only area in which a move towards more “scientifically based research” has taken place in recent years. The other main field is development economics. In this field proponents of evidence-based approaches promise a “radical rethinking of the way to fight global poverty” (the subtitle of Banerjee and Duflo’s 2011 book Poor Economics) and a cutting- edge approach to “Making Aid Work” (the title of Banerjee’s 2007 book).
    • There is no doubt that a new thinking concerning social and development aid policy is needed. Our knowledge of “what works” in both areas is lamentable. With respect to development, Angus Deaton expresses the situation as follows (Deaton 2010a: 425): “I shall have very little to say about what actually works and what docs not — but [since?] it is clear from the literature that we do not know.’
    • Moreover, it never seems a bad idea to urge that our policies should be "evidence-based.” Imagine someone tells you that there is a new movement in social science whose proponents call for a more “faith-based approach" to social policy or a more “story-telling-based foreign aid policy.’ Advocates of evidence-based policy have the rhetorical advantage on their side.
    • Looking behind the rhetoric of new beginnings and revolutions in the making, we see that these movements do not merely demand that policies be based on evidence, but rather on a very specific kind of evidence: randomized controlled trials (RCTs). The debate whether randomization is necessary, or, more generally speaking, useful, is in fact quite old, going back to at least the 1980s (e.g., Urbach 1985). Then as now proponents and opponents of RCTs have fought about the virtues and vices of randomization.
    • In this chapter I will first introduce the evidence-based policy movement and show how it arose out of medicine, then describe what an RCT is and why we might think that it is a highly reliable tool of causal inference and finally list the drawbacks critics have pointed out. I will finish with a dilemma regarding the role of theory in establishing policy claims.
  12. Welfare and Well-Being
    • This chapter will introduce welfare economics, look at its normative foundation and discuss alternative proposals for one of its core ideas: its conception of well-being. (This is a philosophers’ term. Economists usually refer to the same thing as “welfare.” “Welfare,” however, also means “social support,” so I will use the philosophers’ term in what follows.)
    • Theories of well-being are highly controversial. That this should be so is not hard to see. Well-being measures, roughly speaking, how well a life is going for the person leading it. That different people, coming from different social and cultural backgrounds, should have different ideas of what that means is not surprising. Nor is it surprising that philosophers, who value abstract and universal theories, do not easily find a fully adequate theory.
    • And yet, we cannot avoid theorizing about well-being. Normative economics cannot do without the concept, nor can moral and political philosophy. Below I will sketch an understanding of the various theories of well-being on offer that minimizes the substantial commitments the normative economist has to make. But minimal is not none, and to get there we have to get an idea of what is at stake in the debate about well-being.
  13. Markets and Morals
    • Economists often justify their advocacy of free markers by the invisible-hand hypothesis. Recall from Chapter 12 that the hypothesis holds that if people pursue their self-interest, then free markets will lead to a socially desirable outcome. It implies that organizing goods exchanges by free markets is (not necessarily the only but) one effective strategy to reach a socially desirable outcome.
    • Bur what are “free markets"? Pre-analytically, one might understand the term as referring to markets involving no or a minimum of government intervention.
    • Whatever the virtues of that understanding, it is not what is required for the invisible-hand hypothesis. The first fundamental theorem of welfare economics (the analytical part of the hypothesis) assumes, among other things, that producers and consumers behave competitively and are perfectly informed, and that markets are complete.
    • Producers and consumers behave competitively when they are price takers; they are perfectly informed when they possess all information relevant to their transactions; and markets are complete when everything people value has a price at which it can be exchanged without transaction costs.
    • In many existing markets producers or consumers have considerable market power, information is not perfect and markets for many goods are non-existent.
    • A better term for what is required for the invisible-hand hypothesis would be an “ideal market system." An ideal market system is, quite obviously, not the same as “free markets,” pre-analytically understood.
    • This chapter looks at some of the ethical implications of mixing up free markets and the ideal market system. It will ask two main questions.
      1. First, are the moral implications of the invisible-hand hypothesis still valid when markets operate “freely” — that is, with no intervention by the government or other regulatory agency — but the assumptions of the ideal market system are false?
      2. Second, are certain interventions that make actual markets more like an ideal market system morally justified?
    • The two questions are closely related. If a market imperfection that leads to a morally undesirable outcome occurs, then interventions that eliminate the market imperfection seem justified (at least as long as the regulated market does not produce a morally inferior outcome). But as we will see, it is guaranteed neither that the moral implications of market failure are easily evaluated nor that interventions with a view to making actual markets more ideal are always desirable. Markets, then, are moral minefields.
  14. Inequality and Distributive Justice
    • The second fundamental theorem of welfare economics (Chapter 12) is sometimes held to show that questions of distribution can be separated from those of allocation. As any Pareto-efficient outcome can be reached as a competitive equilibrium, the proper role for the government is merely to redistribute wealth; other than that it should just “let the market work" (Mas-Colell et al. 1995: 308).
    • The previous chapter showed that in actual markets allocation may raise fairness issues. So, unless the market system is “ideal,” questions of allocation cannot be fully separated from questions of distribution. Either way, we want more than brute intuition to guide our thinking about fairness and distribution.
    • This chapter discusses a number of principles that help us evaluate economic outcomes, policies and institutions with respect to distributive fairness or justice.
      1. Is inequality necessarily unfair?
      2. Should we buy additional economic efficiency at the cost of allowing some people to be treated unfairly?
      3. To what extent can government efforts to “correct” market outcomes by redistribution be justified?
    • I begin by reviewing some facts and figures giving evidence that actual markets often produce a high degree of inequality.
  15. Behavioral Economics and Nudge
    • The book Nudge: Improving Decisions about Health, Wealth, and Happiness by Richard Thaler and Cass Sunstein (Thaler and Sunstein 2008; henceforth T&S) has received much critical and wider attention. According to Google Scholar, it has been cited 1,760 times (June 2012); even Freakonomics (Levitt and Dubner 2005) achieves only 943 citations, despite being a couple of years longer on the market. It has been reviewed countless times, including in daily newspapers such as the New York Times, the Guardian and the German Handelsblatt, as well as magazines such as the New Yorker and Newsweek. The Economist named it a “Best Book of the Year” in 2008.
    • Richard Thaler, the Ralph and Dorothy Keller Distinguished Service Professor of Behavioral Science and Economics at the University of Chicago Booth School of Business, is the founder of an asset management firm, Fuller & Thaler Asset Management, that enables investors to exploit numerous cognitive biases.
    • Cass Sunstein, a legal scholar who taught for 27 years at the University of Chicago Law School, is now Administrator of the White House Office of Information and Regulatory Affairs and has exerted a notable influence in the Obama administration. The latter has brought him a recognition of being "seventh-ranked Global Thinker" in Foreign Policy magazine. If you want to do philosophy of economics in a practically relevant and influential way, write a book like Nudge.
    • The reason for ending this book with a discussion of Nudge is not so much to add to its praise (though I do quite like it, unlike many of my philosophy of economics colleagues) but to discuss a policy proposal that nicely brings together many of the themes that have been touched upon in this book: rationality, experimental economics, evidence, theories of well-being and justice and market failure.
    • In my view it is hard to fully appreciate T&S’s policy proposal “libertarian paternalism” without a good understanding of all these areas within the philosophy of economics. And so it’s most appropriate to end this book with a discussion of Nudge.

BOOK COMMENT:

Routledge; 1st edition (24 April 2013)




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