(1776-1873)[28]
It is preoccupation with possessions, more than anything else, that prevents us from living freely and nobly.[29]
Bertrand Russell
Studying the progress of macroeconomics requires segregating economics into its micro and macro components. Briefly, microeconomics studies the behavior of economic participants as individuals and firms and the demand and supply they generate for goods and services, which determine market prices. By contrast, macroeconomics looks at the big picture of the economy as a whole, focusing on aggregate economic variables such as total demand and supply in an economy, employment, inflation, and growth. Early economists were infatuated with markets and their apparent efficiency. However, markets’ inability to resolve macroeconomic crises during the first half of the 19th century, prompted Karl Marx (1818-1883) to label those early theories classical, meaning obsolete.
This chapter examines the impact of the classical theory on macroeconomics, particularly its choice of economic driver, its economic decision-makers, and the conditions surrounding these; appreciation of these early concepts is vital to understanding current macroeconomic problems.
The pioneering economists contributed a wealth of economic ideas for almost a century between 1776 and 1873, while Europe was transitioning from feudalism to industrialization. Inevitably, the prevailing class structure colored their outlook. They laid the foundations of modern microeconomics, such as demand, supply, price, markets, the division of labor, and factor incomes: wages to labor, rent to land, and profit (interest) to capital. Theirs was individual effort; they did not think of themselves as belonging to a particular school of thought. In contrast to their considerable contribution to microeconomic theory, they had limited success with macroeconomics.
The four distinguished classical economists were:
Adam Smith (1723-1790) was Scottish. In 1776, he published his seminal work, The Wealth of Nations, making him the father of classical economics.[30]
David Ricardo (1772-1823) was a British political economist. He developed the concepts of the labor theory of value, comparative advantage, the law of diminishing returns, economic rent, and Ricardian equivalence. His theory of comparative advantage and specialization by nations supported free trade, and consequently he opposed the British Corn Laws. He made a fortune speculating on financial markets, which allowed him, in later life, to purchase a seat in the British Parliament.[31]
Jean-Baptiste Say (1767-1832) was a French businessman and economist. He was a strong advocate of free markets. Say’s Law states that supply creates its own demand.[32] As with several classical concepts, it is more valid at the micro level than at the macro level. For instance, the introduction of a new gadget, like a new mobile phone, creates its own demand. However, it would be a mistake to extend this analysis to the macro economy because the demand for the new gadget is likely a demand shift away from older gadgets (e.g., an earlier version of the mobile phone), with little impact on aggregate demand. However, on rare occasions Say’s Law could conceivably extend to the macro level if a series of innovations drive large investments at the same time, as suggested by Joseph Schumpeter (1883-1950) in his innovations cycle.[33]
John Stuart Mill (1806-1873) was a British economist, an influential social philosopher and the last and most moral of the pioneers. He was against slavery and supported free speech, individual freedoms, women’s suffrage, and proportional representation. In his later years, he advocated economic democracy, labor unions, and farm cooperatives, and opposed unrestrained capitalism.[34]
A fifth “economist,” Reverend Thomas Malthus (1766-1834), was an Anglican cleric whose admirers consider him a pillar of classical economics and habitually include him with the pioneers. His often cited contribution to economics was a mistaken impending crisis theory that presumed populations would grow exponentially while agricultural production would only grow linearly, resulting in mass starvation, unless population growth is checked. Malthus had not realized that agricultural production had kept pace with population growth by clearing marshes and forests and increasing agricultural yields through the use of metal-bladed ploughs, crop rotation, etc.[35] His worst transgression on economics was in advancing flawed economic arguments to benefit the British feudal aristocracy by lobbying for the British Corn Laws, which resulted in the deprivation and starvation of millions in Great Britain. Hence, he could hardly belong to the above-mentioned league of pioneers of classical economics.
The other mistake was to exclude the veritable macroeconomics pioneer, Jean Charles Léonard de Sismondi (1773-1842), from the list of pioneers. De Sismondi was a Swiss economist and the father of macroeconomics and business cycle theory. Among his other noteworthy contributions was to refute David Ricardo‘s general equilibrium theory and its focus on the long run. Instead, he understood markets’ inability to self-correct in a reasonable period and called for a larger government role in economic stabilization, which Keynes would later advocate as well.[36] By rejecting de Sismondi’s contributions, classical economics remained incomplete and without a viable solution to economic contractions; hence, economic crises continued unabated until the 1940s, providing a foothold for Marxism and all that flowed from it. Curiously, neoclassical economists’ rejection of Keynesian macroeconomics in the 1930s mirrored the classical rejection of de Sismondi’s theories a century earlier.
Critical Classical Assumptions
Assumptions about the real world are the foundations of economic theory. Their validity, realism, and completeness are prerequisites for a robust theory. Hence, careful examination of those assumptions is equivalent to inspecting the very foundations of a theory to reveal its strengths and weaknesses.
Classical theory adopted heroic, simplistic assumptions such as the idea that markets are perfectly competitive, efficient, and self-regulating. It also assumed that self-interest, sometimes referred to as Adam Smith’s hidden hand, is the sole driver of economic participants as consumers, savers, investors, and businesses. Regrettably, capitalist economic theories have adhered to this crucial assumption of a single economic driver.
Let us begin by clarifying the relationship between self-interest and capitalism. Some capitalist enthusiasts have mistakenly attributed self-interest to capitalism. No doubt, capitalism has achieved much, but it could not have implanted self-interest in the mind of the human species. Self-interest and the profit motive permeate the economy and the markets because they are part of our survival instinct. They are hard-wired into our psyche.[37] For countless millennia before capitalism, self-interest was one of our built-in autopilots, helping us survive and adapt. In Mesopotamia, it likely gave rise to the first barter trade—a free market without government interference—marking the birth of capitalism.
Free markets proved an economic wonder, most of the time. However, we should not become infatuated with them the way classical economists were and the neoclassical economists since. We should not lose sight of the fact that markets and capitalism are manmade and, therefore, bound to be imperfect and occasionally disastrous.
Classical economics also makes idealized assumptions about economic man (homo economicus), such as the following:[38]
1. He is perfectly rational.
2. He has perfect information, or at least the necessary information, for making rational and correct decisions.
3. His decision-making process rationally weighs and selects alternative outcomes.
4. Self-interest is the sole arbiter between alternative courses of action.
5. His actions, driven by self-interest, are not only beneficial to himself but also to society.
If economic behavior is at least sometimes inconsistent with these assumptions, then it is reasonable to conclude that such assumptions do not fully define economic behavior and it becomes paramount to identify what else drives it and under what conditions.
Self-Interest, Rationality, and Instinct
Classical theory tends to overemphasize logic and rationality in human behavior and to ignore the role of instinct. This is understandable; people hold logical deduction in high esteem because it has cleared the path to many scientific discoveries, while instinct has animal connotations, even irrationality. Yet, humans only began using formal logic recently—a mere few thousand years ago—while instinct has played a vital role in human survival since the beginning of our existence. Instinct is easily mistaken for irrationality because its logic is fuzzy, deep, and more complex than formal logic, arriving at conclusions that frequently challenge those based on formal logic. Carl Jung (1875-1961), the celebrated Swiss psychiatrist, psychotherapist and founder of analytical psychology, once remarked, “We should not pretend to understand the world only by the intellect. The judgement of the intellect is only part of the truth.”[39]Once again, since self-interest itself is a consequence of our survival instinct then, instinct necessarily plays a big role in our decision-making, including in economic matters.
Rationality, logic, and other deductive tools work best when we have comprehensive information about a problem and sufficient time to consider it carefully and unemotionally, as in designing a functional and cost-effective building. However, in real life such prerequisites are frequently missing when making important, but time-critical, decisions. Often, it is not just that we do not know everything about an issue, but also that we do not know how much we do not know about it. Scientific advancement is a good illustration, frequently compelling us to revise our scientific knowledge. Indeed, the deductive process can be overwhelmed by a diversity of opposing influences, requiring, among other things, the assignment of factor weights, a situation that a well-honed instinct, with its fuzzy processing of information, can better handle.
Doubtless, instinct, vague and complex though it may be, is most effective for processing large, incomplete, and uncertain information and making decisions at lightning speed. Without realizing it, we make such decisions numerous times every day, instinctively. For example, when something happens abruptly on the roadway, the driver has to respond immediately and instinctively. Even in the arts and sciences, an instinctive sixth sense unencumbered by rigid rationality has shepherded our most creative inspirations.
Instinct and logic are frequently so intertwined that it is difficult to draw the line between them. By way of illustration, imagine a herd of gazelles grazing serenely in the wild. A twig breaks. Some gazelles instinctively run; others stop grazing and look about to ascertain the source. Presumably, the latter group is rational because instead of running for no clear reason, they seek a rational explanation for the sound before deciding to run or stay. They could be rationally weighing the cost and benefit of running versus staying: the calories expended in running and the opportunity cost of calories lost by not grazing against the benefit of avoiding an uncertain risk.
Shortly thereafter, a leopard springs and captures one of the “rational” gazelles. Those that stayed behind took a risk to obtain better information, so as to rationally decide whether to stay or run. When they got the information, it was too late for one of them. Thus, the rational gazelles learned the hard way that in the absence of perfect information, pursuing rationality at the expense of instinct proved irrational for one of their lot.
Let us explore the complexity of this situation further. What else might have motivated the gazelles to run or stay? Was it differences in their individual circumstances? Perhaps the gazelles that ran had fuller stomachs, which afforded them the loss of actual and potential calories, while those that stayed behind were hungry (the equivalent of rich versus poor). Alternatively, were the gazelles that ran closer to the source of the sound, permitting them to assess the risk better by virtue of superior information? Perhaps they had survived previous predatory attacks, giving them more experience in assessing risk. Maybe some behaved as a herd, surrendering their will to those closest to them in running or staying, as panicked humans do. This example illustrates how the same stimulus can produce different responses due to differences in circumstance (e.g., biological needs, availability of information, experience, and herd behavior).
A variation on the previous example is a stock market crash that affects a large percentage of the investing public. Again, the same type of stimulus could propel different reactions due to the rational, instinctive, or emotional processing of the stimulus, as well as differences in individual circumstances such as wealth, indebtedness (full vs. hungry gazelles), information, experience, education, psychology, and self-discipline. Moreover, incomplete information can yield bizarre outcomes where, in retrospect, rational behavior could turn out to be irrational and instinctive behavior, rational.
However, even this degree of uncertainty about motives understates the real complexity of the situation. Fear can overwhelm the senses, while a false sense of security and inertia can dull the instinct, with implications for financial and other markets. Another level of complexity applies to the human species because it comprises of both prey and predators. In other words, there are human equivalents to both leopard and gazelles, with diametrically opposite motives.
Clearly, rational self-interest is an inadequate explanation of the broad spectrum of human behavior.
Insufficient Information, Emotion, and Irrationality
Investment is central to economic activity. It entails expending time, effort, and capital resources in the near term in anticipation of a larger, though uncertain and more distant, return. Profits compensate investors for their effort, the risk of loss, the delay in recovering their principal, and the inconvenience of illiquidity. These basic concepts apply whether the investment is a corner grocery store or a multi-billion-dollar petrochemical complex.
People tend to invest when they are optimistic about the future and overinvest when they are overly optimistic. Similarly, they tend to stop investing when they are pessimistic and to liquidate their investments when they are very pessimistic. Moreover, the emotions of optimism and pessimism are often contagious, producing bouts of overinvesting followed by shutting off the investment spigot or even the mass liquidation of investments. Man fears what he does not know and a sudden awareness of the inadequacy of information can trigger a panic.
The foregoing simplified investment and economic cycle mirrors an emotional cycle that does not conform to the classical model of rational self-interest. Indeed, too often, the investing public acts irrationally, without sufficient information and without the foresight to spot market turning points, contrary to the expectations of the classical model. At the same time, the rational self-interest model has some validity. For example, the most successful investors, like Warren Buffett, control their emotions, collect the necessary information, and undertake the required analysis to make rational decisions that yield outstanding returns on their investments—but they are the exception, not the rule.[40]
Positively Sloping Marginal Utility Curves
For the thirsty, the first mouthful of water provides the greatest satisfaction or utility. Successive mouthfuls provide decreasing utility until the thirst is quenched and drinking stops. This illustrates the economic law of diminishing marginal utility of consumption. It is portrayed graphically as a negatively sloping curve, with utility on the vertical axis and quantity consumed on the horizontal. This is the normal and rational consumption pattern.
However, there are also irrational, compulsive, consumption patterns, such as overeating, smoking, gambling, alcoholism, and drug addiction. Such harmful consumptions violate the classical principles of self-interest and rationality.
Indeed, some behaviors appear driven by self-interest and rationality, but are in fact compulsive. The preeminent example is compulsive wealth gathering; religions wanted to spare humanity the burden of avarice and its unrestrained adoration of gold, wasting lives in pursuit of an irrational and compulsive urge. Worse still, when money gathering occurs by depriving the disadvantaged, it becomes sadistic; wealth without charity suffocates the humanity of the wealthy, reducing them to gold zombies. Unlike communism, religions did not contemplate wealth confiscation, but rather a path to emancipation from gold bondage through contentment.
Wealth accumulation, as a store of value to provide for future consumption, is very rational. For normal people, the demand for wealth is a derived demand for future consumption; therefore, its underlying utility curve is normal and negatively sloping. Excessive wealth is unnecessary because humans have limited life spans and limited present and future consumption needs, whether it be food, drink, clothing, shelter, security, entertainment, or extravagance. Hence, the need for wealth gathering is finite.
When the urge for more riches is overpowering and exceeds any rational present and future consumption needs, it crosses over from normality to compulsive behavior and irrationality. Future consumption needs are not an adequate explanation for those with an insatiable appetite for wealth because their marginal utility curve for wealth is positively sloping.[41]
The song “Don’t Cry for Me Argentina” portrays wealth accumulation as an illusion, not a solution. Abundant wealth makes further accumulation self-defeating and irrational because the ultimate scarce resource is time. The pursuit of a larger treasure wastes the limited time available for enjoying wealth’s consumption possibilities; wealth gathering becomes an addiction that makes the addict oblivious to the fact that he or she only has a transit visa on earth and time is ticking. Sadly, the realization that materialism is not a path to contentment, much less happiness, comes late in the game to many wealth-gathering addicts, if it comes at all.
Even the desire of parents to leave an inheritance becomes irrational when the inheritance is excessive. A materialistic upbringing implies that the larger the inheritance, the happier the offspring; thus, loss of one’s parents is transformed into a happy occasion that the beneficiaries covertly look forward to, to say nothing of the occasional motive for crime. Hence, for a multitude of reasons, boundless wealth accumulation is counterproductive and irrational. It is a Shakespearean tragedy of the first order: insatiable thirst for wealth is the curse of the chronically thirsty, making them lose sight of the original purpose of the endeavor.
Several hypotheses surround the compulsion for wealth accumulation. Misers evidently have positively sloping marginal utility curves for wealth. They also display traits characterized as obsessive-compulsive personality disorder.
Adam Smith argued that the enjoyment of wealth lay not in its consumption, but in its exhibition. In other words, avarice is an exercise in exhibitionist frivolity. It raises questions about the insecurity of the exhibitionists, compelling them to take from the meager resources of their fellow humans to satisfy a craving for attention. Such subliminal insecurity turns psychopathic when it is associated with criminal acts.
William Shakespeare (1564-1616), the eminent observer of human failings, illustrated this phenomenon in his celebrated play The Merchant of Venice. It delivers a vivid picture of Shylock, a pitiless moneylender driven by psychopathic cold-heartedness, demanding a pound of flesh for a pound of gold should the borrower default. Shakespeare’s Shylock conveys the moral repugnance of predatory finance.
John Maynard Keynes harbored strong reservations about unlimited wealth accumulation. He asserted, “… The love of money as a possession—as distinguished from the love of money as a means to the enjoyments and realities of life—will be recognized for what it is, a somewhat disgusting morbidity, one of those semi-criminal, semi-pathological propensities which one hands over with a shudder to the specialists in mental disease… But beware!… For at least another hundred years we must pretend to ourselves and to everyone that fair is foul and foul is fair; for foul is useful and fair is not. Avarice and usury and precaution must be our gods for a little longer still.”[42]
Bertrand Russell, in his incisive work Power, explored the problems of government and the thirst for power in its various forms: religious, military, political, and economic.[43] He considered those varied forms of power, like different forms of energy, interchangeable. For example, just as heat energy is convertible into electrical or mechanical energy, similarly, economic power can provide political or military power. Hence, the underlying impulse for excessive wealth may be an urge for greater political power.
Conceivably, in the deepest recesses of the minds of compulsive wealth accumulators, the power of wealth offers better chances of survival and a heightened sense of security. An insatiable hunger for power and survival is compulsive too because with aging there should be a declining marginal utility curve, even for survival itself. In any case, excessive wealth is excessive power and even in the hands of the psychologically sane, it is a threat to the proper functioning of a democratic system and a backdoor to plutocracy, albeit with democratic trappings.
Parasitic Economics and Parasitic Capitalism
In the interest of clarity, it is important to establish the relationship between two related but distinct concepts: parasitic economics and parasitic capitalism. Parasitic economics is the provision of the contrived theoretical economic basis that supports and justifies Parasitic capitalism. This can arise by way of an unintentional analytical error but more often as a means of supporting a plutocratic economic agenda that advances the interest of a small minority to the detriment of the rest of society. As a result, it proposes unsound economics that results in economic inefficiency, inferior performance and seeds economic crises and depressions. The flaws in its economic arguments are not always obvious, but flawed nonetheless. The arguments in support of parasitic economics have been put forth by classical economics initially and later expanded on by neoclassical economics.
Parasitic capitalism, on the other hand, refers to the immoral and, occasionally, criminal, pursuit of unrestrained parasitic profits in a coercive parasite-host relationship enforced by a plutocratic state apparatus. Such patristic profits have been extorted in a variety of means, including feudalism, serfdom, genocidal imperialism, looting of nations, trafficking in human cargo, racism, torture, political murder, imprisonment, banishment, suppression of political rights, destitution, famines, and more recently, debt-bondage without regard to its consequences, including loss of shelter, break-up of families, and suicides.[44]
Parasitic Capitalism, Plutocracy, and Psychopathy
As previously mentioned, classical economists have built their economic theories around the assumptions of self-interest, rationality, and sanity. Their model has some applicability, but not universality. Its validity weakens further as we move to the extremes of the personality spectrum: those with the highest and lowest moral fibers. People driven by honorable, gallant, and virtuous morality are at one end of the scale. They come from all backgrounds and provide society, and their loved ones, with moral leadership by their acts of selflessness, humanity, charity, bravery, and sacrifice. At the other end of the spectrum are psychopathic individuals whose irrationality propels them to undertake barbaric acts to satisfy their compulsion for wealth gathering by practicing parasitic capitalism.
Unchecked parasitic capitalism is economic fascism or worse. To protect its drug-trafficking profits, parasitic capitalism has waged the opium wars in the name of the Motherland, using citizens for cannon fodder.[45] Imperialist parasitic capitalism expropriated the surplus out of their colonies, thereby stifling economic development there to spur the development of the imperial powers and forcibly widening the economic gap between the exploiters and their victims. The resultant malnutrition among natives cut their life expectancy by half.[46] Imperialism and Parasitic capitalism are vulgar criminalities and not economic endeavors; they have reduced scientific advances, architectural marvels, breathtaking paintings, enchanting music, and captivating literature to the mere paraphernalia of civilization, an outer shell of barbaric regimes. The establishments and aristocracies that sanctioned those crimes, regardless of their fine table manners and pomp and circumstance, are essentially exclusive clubs of criminals that make the Mafia a gathering of angels. Stripped of morality, society has no soul and its claim to civilization is hollow.
The perpetrators of such crimes do so with impunity, fearing no punishment because they are certain of their political cover. The democratic charade does not change the reality that parasitic capitalism is institutionalized sadism practiced by a wealthy plutocracy. The question is do plutocrats derive pleasure as well as material gain from committing atrocities? After all, such criminalities require not just moral bankruptcy but also deranged minds. No sane person could commit such crimes. The shocking truth is that psychopaths are among us and they are often the most powerful economic actors, although economics textbooks pretend they do not exist. Clearly, deviant political systems require deviant macroeconomics to support them. Perhaps students of political science can shed more light on the role of plutocratic motives in historical political developments.
The words of Jesus Christ on wealth accumulation are most illuminating: “For what shall it profit a man, if he gain the whole world, and suffer the loss of his soul?”[47] Human history is an inglorious record of parasitic exploitation within and beyond national borders, with the majority of people defenseless against the tons of sin committed against them.
Plutocracies have survived despite the misery they spread because they are manned by talented and formidable individuals, capable of projecting alternate realities like the idea that the poor are to blame for their poverty. The Reverend Thomas Malthus, a Fellow of the Royal Society and intellectually close to David Ricardo, is a case in point. Although an Anglican clergyman, he was against Christ’s teachings by rejecting empathy and charity to the poor. Paradoxically, the Anglican Church did not find his anti-Christian values and proposals grounds for expelling him from the Church.
His economic writings reflected a right-wing conservative disposition that supported the plutocratic status quo. It is no coincidence that he was a professor of political economy at a college belonging to the notorious East India Company in Hertfordshire, England. Its shareholders were relatively few and wealthy; their company had obtained license from the imperial British government to do as it pleased with the natives of the British colonies.
The East India Company practiced the nastiest forms of parasitic capitalism; it swelled its parasitic profits to become Europe’s foremost imperialist franchise through gruesome atrocities. Its most profitable line of business was the slave trade and, following the First Opium War of 1839-1842, a monopoly on drug trafficking into China from Afghanistan and its opium plantations in India. To right-wing conservative economists of the day, the East India Company was a model of economic efficiency and rationality by privatizing and outsourcing imperialism and downsizing the government. The economic logic of these arguments has chilling parallels today in the calls for privatizing public monopolies.
During the first half of the 19th century, workers in the “democratic” British Isles were often on the brink of starvation, hardly better off than were the natives in the colonies. By perverse economic logic, Reverend Malthus proposed abolishing the meager assistance that the extremely poor people received under the English Poor Laws, this in a sadistic attempt to prevent them from marrying and multiplying.[48] He maintained this stance for the rest of his life, arguing that shrinking the labor supply was good for labor because it would raise their wages and living standards. However, Malthus failed to mention how many must perish to implement his plan. Like all immoral economic policies, it was shortsighted. He did not foresee that once the standard of living of the poor improved, they would again marry and multiply, driving down their future wages and returning them to poverty. By Malthus’s sick logic, the poor people’s rebound would have necessitated their periodic culling. His plan bore an uncanny resemblance to Nazi death camps, which used death by starvation almost a century later. The criminality of his plans as well as his flawed logic requires dismissing Malthus as an economist altogether, never mind including him among the pioneers.
The British plutocracy, fearing Malthus’s proposals would spark a revolt, decided not to implement the ghoulish scheme. However, he had previously lobbied for another scheme to increase the profits of the wealthy and the hardship of the downtrodden, which the British government adopted and the British Parliament passed. More specifically, in 1815, Reverend Malthus lobbied for putting a tariff on grain imports (the British Corn Laws), which not only impoverished the British working class for decades but also starved about a million of them to death, all to increase the wealth of the British land-owning aristocracy.[49] Any political system that shuns the interests of the vast majority of the people—the poor and underprivileged—is vile and undeserving of the label “democracy.” True democracies do not tolerate the dictatorship of money.
Plutocratic atrocities rarely shocked 19th-century economists, making them intellectual servants of morally bankrupt ruling classes. To maintain a modicum of respectability, at some point economists invented “value judgments” to justify violations of the moral code. The gold worshipers used social Darwinism to explain that their wealth and privilege were proof that they were the fittest, entitling them to an alternate morality that permits gold gatherers to starve the underclass at home and massacre the natives abroad. However, like Malthus, their logic was flawed. Authentic social Darwinism, as John Kenneth Galbraith incisively noted, required confiscating the inheritance of the rich to ensure that the next generation was as fit as their parents presumably were.[50] Hypocritical double standards and inconsistency in applying social Darwinism hardly bothered its economic adherents in the 19th century. Hypocrisy masquerading as macroeconomics is still with us.
Plutocratic domination extended to the church; it obliged by appeasing the impoverished with promises of a better afterlife, provided they endured the status quo. Like the economists, many theologians’ response to those crimes ranged between support and silence, thereby sacrificing Christian values.[51] The imperialist plutocracy also engaged local plutocracies in the colonies and the periphery as a low cost solution for maintaining control.
The Ramifications of Missing Drivers
A structural flaw of the classical model was its amorality. Its rational self-interest did not seem to conflict with the institutionalized economic criminality at the time. The economic actor it envisioned was a moneymaking machine without moral depth or humanity. It overlooked the full spectrum of human tendencies: egotistic self-interest to the point of psychopathic criminality, nobility of spirit to the point of sainthood, and everything in between. Hence, it cannot properly explain why soldiers volunteer at wartime to defend their country, why mothers spend sleepless nights looking after their sick children, or why parents willingly make great sacrifices to see their children through universities, without any expectation of financial reward. It does not explain our instinct for charity.
More generally, it does not explain our instinct for morality, which drives societal-interest. Morality and societal-interest have subtle links to our survival instinct, not at the individual level but at the level of collective survival as families, groups, tribes, societies, nations, and species. Perhaps our instinct for morality resides in the deepest recesses of the unconscious, which Carl Jung referred to as the “collective unconscious.”[52]
Classical economics’ assumption that self-interest is the sole driver of economic behavior is a caricature of economic reality and a disservice to macroeconomics because it projects a plutocratic perspective: a world where humaneness is an inconvenience. Indoctrinating the minds of students of economics and the public at large that self-interest is the sole rational economic driver is to suggest that egotism, greed, and materialism are normal attributes of economic behavior, implying that nobler attributes are irrational and aberrant. This callous indoctrination relegated economic morality, improving income distribution, and welfare programs to mere social and political agendas, treating such moral considerations as outside of the realm of economics because they collide with plutocratic selfishness. Disregard of the majority is one explanation for dire macroeconomic policies. Unfortunately, economic thinking has inherited this error from the classical economists, producing a corrupted, deviant, and grotesque macroeconomics that propelled the rise of Marxism.
A Post-Classical Model of Economic Behavior
The classical model of economic behavior resembles the early, primitive, version of the personal computer Disk Operating System (DOS). DOS permitted running only one computer program at a time. About two decades later, Windows replaced DOS, permitting multitasking in real time. Like the unidimensional DOS, classical economics based economic decisions on a narrow hypothesis: only self-interest for an economic driver, only rational actors, only perfect information, and only perfect markets. Unlike DOS, this highly unrealistic and restrictive theoretical environment has been with us for two centuries. It is high time for the economics profession to throw off this mistaken economic model.
Observation suggests there is not one but at least six economic drivers, two rational and four irrational. These drivers are present in everyone in varying degrees; their relative dominance depends on the personality of the actors concerned, circumstances, perceived information, and the decision-making process.
Besides certain established facts such as the dawning of the sun in the east, critical information for decision-making is rarely certain; normally, only partial information is available, bundled with wrong and uncertain facts and it gets progressively less reliable the farther we gaze into the future. A realistic decision-making process is a blend of rationality and instinct with instinct taking a larger role when information is noticeably inadequate and decision-making is time-critical. Instinct also takes on a bigger role in essentially moral issues like charity and love of family, and country. Disregarding morality has given rise to imperfect markets, an imperfect political system, and inefficient tax and public expenditure policies. In addition, emotion can overwhelm the entire decision-making process in moments of extreme excitement or fright. The model proposed here is a better approximation of reality than the classical model, though by no means perfect. It assumes that all people are subject to multiple drivers, and that the relative dominance of certain drivers at different times is what colors behavior.
I. Economic Drivers
A. Instinctually Rational Economic Drivers
Although these drivers, societal-interest and self-interest, have been labelled rational to distinguish them from the irrational drivers to follow, they are in fact a blend of logic and instinct. Most significantly, societal-interest and self-interest can be complementary, provided they are fairly balanced under an environment of high moral standards such as a genuine representative democracy.
1. Self-Interest: This economic driver is hard-wired into the human psyche, a byproduct of the survival instinct of the individual. It is explicit within a market system, driving most people to earn a living, consume, save, and invest. Borrowing loosely from something Abraham Lincoln said, self-interest drives all the people some of the time, and some of the people all the time, but not all the people all the time.[53] Normally, self-interest is conducive to societal-interest but it requires restraint when it becomes excessive, immoral, irrational, and, consequently, detrimental to societal-interest.
2. Societal-Interest: This driver expresses itself through such moral behaviors as win-win strategies; charity; fairness; standing by the weak against the heartless; love and sacrifice for family, country and principles. Like self-interest, it is also hard-wired into the human psyche, a byproduct of the instinct for collective survival of families, tribes, and nations, and as such, even more rational than self-interest. It is implicit in a market framework. It also functions as a check against the destructive power of unrestrained self-interest, and therefore, as an antidote to economic barbarism.
Societal-interest drives the need for public goods: justice, police protection, public health, the welfare state, improving the lot of the downtrodden, environmental protection, and national defense. It is intrinsically linked to the preservation of society, morality, humaneness, religious instincts, and public concerns. Hence, economic morality implies societal-interest and is inseparable from economic efficiency. Naturally, societal-interest is meaningless if it is not a two-way obligation between society and the individual. Hence, societies are obligated to take on the role of tribes in centuries past, by looking after their members. Economics without concern for societal-interest is not just the economics of vampires but also irrational and inefficient. Most seriously, a society that has fading societal-interest is itself fading. Typically, plutocracies favor their group or individual interest over societal-interest, which requires lowering moral standards.
The chapters and economic arguments to follow will use the current model—particularly the balancing of self-interest and societal interest—for evaluating the economic efficiency of public policy. This balance is only approximately achievable under a centrist political agenda, which is also the most democratic because it is consistent with the desires of the majority of the people by definition. The political agenda of the Left is economically inefficient because it tends to sacrifice self-interest, whereas the political agenda of the Right is economically inefficient because it tends to sacrifice societal-interest.
B. Irrational Economic Drivers
These drivers are essentially irrational and, typically, contrary to the self-interest and societal-interest drivers cited above.
1. Emotional Behavior: This driver sometimes manifests itself as crowd behavior. It is observable as avarice, reckless courage, exuberance, and infinite optimism when markets are rising spectacularly and as panic and widespread pessimism when markets are crashing. It typically peaks around the turning points of speculative markets, becoming self-destructive and overwhelming rational decision-making and instinct. It produces irrational decisions as well as decision-paralysis. Other than in the marketplace, infatuation, hate, famine, revolution, war, among other stimuli can trigger emotional behavior.
2. Compulsive Consumption: This driver is irrational because it has a tendency for self-destruction; it manifests as addictions to food, cigarettes, alcohol, drugs, and gambling.
3. Compulsive Wealth Gathering: This driver is irrational because it entails an abnormal, positively sloping, marginal utility curve for wealth accumulation, which is typical of misers and others who stop short of criminality.
4. Compulsive, Psychopathic Wealth Gathering: This driver is irrational because it entails an abnormal, positively sloping, marginal utility curve for wealth accumulation; however, it also entails psychopathic behavior, characterized by amorality, absence of empathy for others, and a willingness to commit crimes in pursuit of wealth gathering. Hence, those suffering from this condition behave as human predators, taking other humans for prey. The causes of their psychological ailment may be hereditary, environmental, or both. Many powerful politicians, wealthy individuals, and criminals belong to this group, but not all. Historically, plutocracies have often manifested this disorder as a group as well as individually.
II. Decision-Making
The relative weight of the above drivers provides the impulse that colors a variety of economic behaviors. In addition, the decision-making process uses perceived information, however imperfect, to arrive at decisions. The type of decision-making process is itself a function of the availability of information and the time constraint. In theory, under conditions of relatively complete information and enough time to consider that information, rational decision-making is appropriate. However, under conditions of uncertainty, limited information, and time constraints, instinctual decision-making is usually best. Moreover, under extreme emotional conditions, the entire decision-making process breaks down and a form of herd behavior takes over.
A complicating factor regarding the assumption of the classical theory of perfect information is that there are diseconomies associated with the today’s abundant information, producing an information overload that can clog our minds causing a state of decision paralysis. Hence, for information to remain manageable and useful it needs filtering in some fashion to retain the essential and discard the non-essential elements. In that case, the quality of the filtering process may well be a more critical factor for arriving at suitable decisions than the availability of voluminous data. Indeed, how to limit information is nowadays an important decision-making tool.
Another complicating factor is that it is frequently difficult to foresee the remote and unintended consequences of decisions, which may be larger and opposite to their immediate effects. Moreover, occasionally a “butterfly effect” can enormously magnify the distant and unexpected consequences, especially as regards moral and immoral acts. The unified theory of macroeconomic failure examines these complicating factors.[54]
In conclusion, qualitative and mathematical modeling of realistic economic behavior is more demanding than the present oversimplified version of reality, but it is potentially more rewarding in terms of its explanatory and predictive powers. Economics could also do with statistical methods that are more tolerant of diverse probability distributions.[55]
Behavioral economics can be a great help too, if only it can stop using self-indulgent assumptions such as knowing the probabilities of future outcomes, which requires not just perfect information but also perfect foresight.
Critique of Classical Economics
Classical economics contributed numerous valuable and essential microeconomic concepts. However, its erroneous macroeconomic formulations have held back the progress of that branch of economics.
The previously discussed inadequate assumptions of classical economics need no repeating here, but other shortcomings deserve passing mention.
Classical theory’s lack of appreciation of externalities, a central theme of this book, was a major oversight with sweeping negative repercussions. In part, that error is understandable because economic knowledge at the time had not advanced sufficiently. Briefly, an externality refers to a market failure where market forces, on their own, cannot internalize all the costs or benefits of a good or service, resulting in a suboptimal market price that is too low or too high, and therefore economically inefficient. This lack of familiarity with externalities led to a grossly inadequate classical macroeconomic model, which could not recognize the causes of market failures and the need for state intervention in the form of public expenditure, tax, monetary and antimonopoly policies, and other measures.
Lack of appreciation of externalities led to another grievous error of the classical theory: overlooking the pivotal role of morality in formulating efficient and rational economic policies. Morality is a difficult concept to grasp as an economic variable, not the least because it is not a tradeable good. The absence of an economics of morality made it easier for classical economists to tolerate and support imperialism and parasitic capitalism. Similarly, the lack of an economics of morality facilitated overlooking the downside of unchecked self-interest on markets, permitting psychopathic profit maximizers to gouge consumers and starve workers, producing chronic underconsumption and slow economic growth. Thus, without moral restraints, capitalism is relegated to a destructive beast that subverts societal-interest.
John Maynard Keynes described the absurdity of unrestrained capitalism succinctly: “Capitalism is the astounding belief that the wickedest of men will do the wickedest of things for the greatest good of everyone.”[56] The oversights of classical economics, intentional and otherwise, made it possible for parasitic economics to slip between the cracks and we continue to suffer the consequences.