Dominant Economic Views in Western Society, Part I

This week, Chris poses this question:

Is there a dominant economic worldview in the Western society? If so, what is it? If not, what worldviews are the most popular/employed?

With the Democrat and Republican conventions upon us, no doubt we will be hearing more than we want about a “time for change.” Although the words may be different, the essence will be a replay of past conventions of both parties. The call for change has come from all major parties and throughout many decades.

Franklin Delano Roosevelt, using much of the thinking of John Maynard Keynes, moved the country to adopt a greater role for government in its economic decisions.

Ronald Reagan, espousing the ideas of Nobel Prize recipient Milton Friedman, became the effective spokesman for the “me” generation.

Both Democrat and Republican conventions will ceaselessly invoke the religious symbolisms which translate into votes.

All will have an impact on the United States and on the world.

The political conventions, however, should focus amateur (and professional) economists on the intellectual discussions that have been raging in the economic community as to whether men and women are essentially “Homo economicus” or something else. Moreover, the debate needs to point out the inherent contradictions between the principle of “Homo economicus” and the espoused religious beliefs.

Economics as a specific study has been nascent for roughly two centuries, since philosophers and early economists like Adam Smith, David Ricardo, and John Stuart Mill, among others, tried to define and quantify how best mankind could achieve the maximum result from any economic activity. They painted a rational, self-centered, perfectly informed individual who wants wealth and avoids unnecessary labor.

That picture is still held up as the ideal economist, designed to maximize his or her physical well-being.

Incredibly, this model more than contradicts the religious beliefs of the time as well as today.

Certainly a majority of people in the western world, influenced by European thought, subscribe to this view. Unfortunately, mankind is hardly rational nor perfectly informed, yet nearly ninety-five percent of mankind admits to a belief in a deity. Many billions are adherents of the Judeo-Christian-Muslim beliefs system. In not one is the definition of “Homo economicus” held out as an admirable trait.

Why, then, should economics as we know it stress the concept of maximization?

That question has resulted in continuing battles among economists, including Nobel Prize winners Franco Modigliani and Herbert Simon. It is more than a fine distinction between maximum gains derived from economic activities and simple satisfaction. Simon suggests, for example, that most people are not focused on maximizing gains but rather simply on meeting their particular level of satisfaction.

Achieving satisfaction appears more reflective of and beneficial to mankind, especially in the non-western world. Satisfaction, rather than maximization, should be much more emphasized to students of economics.

Does this mean a reevaluation of our concepts of mankind?

Of course!

At a time when the world as a whole is imperiled by the by-products of maximization – pollution, deforestation, continued poverty and starvation – it is perhaps the economist, working hand-in-hand with political and religious leaders on a world-wide basis, to avert continuing problems.

It may also require a much wide acceptance of non-traditional recipients of the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel.

Stephan is a former department chair for economics and taught at various colleges and universities at both graduate and undergraduate levels. If you would like Stephan to answer your economics-related questions, read his post “Got an Economics Question?” and submit your questions in the comments area there.

2 comments to Dominant Economic Views in Western Society, Part I

  • “Satisfaction, rather than maximization, should be much more emphasized to students of economics.”

    But isn’t satisfaction the maximization of one’s utility function? People don’t want “everything” … they want the amount of stuff (physical or otherwise) that gives them maximum satisfaction. But all this can still be expressed within the concept of Homo economicus.

  • CO – Certainly maximization of one’s utility function is true according to standard economic theory. What Simon and others are saying, as am I, is that “maximization” of a theoretical utility function is as unrealstic, as it is unwise in actuality.

    The push for “maximized” profit is at least partially responsible for many of the current economic ills, not the least of which is the incrdibly sloppy underwriting of Fannie Mae/Freddie Mac loans to people who would, under more careful, less “maximized” standards, never have passed loan criteria.

    Starting with the “maximization” of personal wants, to unscrupulous realtors, less than diligent bankers, to the quasi-federal underwriters at Fannie/Freddie, it is the “maximation” of greed and profit which seems to dominate.

    A settling for “satisfaction” would, of course, have resulted in lower expectations in the short run, less profit, and somewhat more realistic expectations.

    Unfortunately, neither economists nor politicians seem unwilling to point out realistic goals, preferring “maximized” goals which may be totally unrealistic in the real world, and lead to disasters such as we are currently experiencing in the real estate sector, the sudden realization of the shortage of oil, the problems in the ecosector, etc.

    It is fine to show in a model what may be possible to achieve, as long as the model also shows what is possible under real circumstances. Ceteris paribus cannot be overstated!

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