By Stephan Zimmermann, on September 18th, 2008
Cristian Mitreanu submits this question via email:
I would like to hear your thoughts on the subject of “economic thought vs. business thought.” Is there such thing? If yes, should this distinction be made?
He raises the question in concert with an initiative he is proposing, intended to start a discussion about the current state of business, called, “A Wake-Up Call for the Business Nation.” It ties in very nicely with the focus of economics.
What, if any, is the interrelation between economic and business thought?
In its most basic form, economics can generally be reduced to the study of choices among the uses of limited or scarce resources with unlimited demands.
On the other hand, there is a plethora of definitions for “business.” Broadly, business is generally discussed as people joining together to achieve greater productivity focused on one or more goals, either on a profit or non-profit basis from the American standpoint.
Simply doing something, such as photography or writing, that does not result in a sale is considered as a hobby by the IRS and, thus, does not constitute a “business.”
Dr. Peter Drucker suggests that a business has as its “purpose to create a customer (so that) any business enterprise has two – and only two – basic functions: marketing and innovation.”
Less academic but well-known and regrettably too often misquoted is President Calvin Coolidge’s comment that “the business of America is business.” What the president actually said in 1925 is, “After all, the chief business of the American people is business. …Of course, the accumulation of wealth cannot be justified as the chief end of existence.”
Just as western economics still largely acts on the assumption of the concept of Homo economicus, so does business seem defined and propelled around the economic principle of “maximization.” In most western – and, increasingly, Asian – businesses, that translates to maximization of profits, whether denominated in dollars, yen, rupees, rial, renminbi, or countless others.
“Business” may be thus be considered as carrying out some of the major functions of economics. However, the shortcomings of one translate to the shortcomings of the other.
Is religion or the pure pursuit of science, for example, part of economics? Certainly, since both need to make decisions regarding the use of scarce resources.
Of course, both have been turned into “businesses.” Witness the growth of the Catholic Church and its fueling of empire-building and wealth control over the centuries, or the churches in the United States that can command billions of dollars on television advertising or political campaigns.
Too often, science has been turned from a mere exploration of mankind’s cerebral potential to a dollars-and-cents business. Witness international drug companies, to mention but one example.
The financial fallout from the Wall Street panic of September 15 will, no doubt, have massive worldwide repercussions far from the financial sector. Blame is already cast by politicians and pundits alike.
Unfortunately, few seem to address that the basic fault lies not within specific individuals or institutions or political parties.
The basic fault lies in the fact that neither the teaching of economics nor of business places much emphasis on the nature of man. It focuses entirely too much on the generation and maximizing of profits and how to achieve them rather than on the human application of the benefits or disadvantages that can be achieved through business.
Both the private or governmental sector need to address those very basic questions that are currently largely ignored in favor of ultimate “maximization.”
What do we really need and how do we best achieve and distribute a “satisfycing” amount of the essentials that all human beings require?
The time is ripe for a new theory that effectively integrates natural and human values with mankind’s behavior without the myopic pursuit and maximization of profit.
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.
By Stephan Zimmermann, on September 4th, 2008
It would be (or maybe is?) an interesting and informative exercise to poll existing undergraduate economic students whether they consider themselves “Homo economicus.”
A second part of the study could be completed with graduate students, about to embark with a plethora of knowledge of economics, ready to face the “real world” of jobs in the workplace.
What better place than to conduct such a study than in the pages of Amateur Economists where we could entertain a question and answer debate?
As part of the exercise the students would, of course, have to discern for themselves the various definitions of the Latin phrase, consider the implications of answering in the negative or affirmative, and provide an honest self-inventory of their personal preferences and self-perceptions.
Do today’s economics students consider themselves “rational, self-centered, perfectly informed individuals who want wealth and avoid unnecessary labor?” as Adam Smith, John Stuart Mill, Vilfredo Pareto, and others discussed the model?
How do people, especially economists, see themselves?
How do they perceive their religious beliefs in light of the “Homo economics” model?
How does conventional European economics differ from its counterparts that espouse different philosophies, yet seek to answer the same questions of finite resources facing an infinite demand?
A discussion, if it occurs, would likely raise the very question of “maximization” as it is generally taught in economics classes and texts.
Moreover, it may be interesting and enlightening to read in a nutshell a synopsis of Islamic economic fundamentals as a start.
In a recent paper two Islamic scholars, Toseek Azid and Mehmet Asutay (Bahauddin Zakariya Universiy, Pakstan, and Durham University, U.K., respectively) point out that Maqasid al-Sharia (Koranic law, including economics and banking), or the objectives of the Shari’ah, aim to fulfill the objectives of human well-being. As a basic premise the authors suggest that “It, therefore, rejects the neo-classical postulate that human beings are in their intrinsic nature self-interest maximizers.”
This, of course, is diametrically opposed to current predominant economic thought. It is perhaps most closely approached by the late Nobel Prize winner, Herbert A. Simon.
Maximization of utility is also rejected by Sharia thought. The authors thus ask quite plausibly “if we suppose that all persons are egoists – they act for personal ends – what sense does it make to speak of ethics?”
While Islamic economics shares the belief that “the agents of the different sets of the economy are inherently selfish” the authors believe that “the attitude is changing towards the social and economic benefits through participation and cooperation.”
“A continuous process of … training of the society is required, which is only possible if we have an ideological system … that should not be biased towards any segment or set of the society and economy.” (Azid, Toseek, and Asutay, Mehmet, “Does ethico-moral coalition complement to economic coalition?” HUMANOMICS 23.3 (2007): 153-173)
Over the last quarter century, much of economics has been influenced by Herbert Simon’s ideas. He questioned the idea of economic behavior that intended to seek only the optimum result for each economic agent. Further, he suggested that individuals or even organizations could not obtain or process the massive information available to reach ultimate rational decisions. Instead, he suggested that decisions only need to be “good enough” to assure reasonable or acceptable results.
The question of “satisfycing,” rather than maximizing, has been a steadily growing trend, not only for philosophers, but for political adherents, as well. This has been especially true of Islamic adherents in Europe.
On September 22, 2007, the first Islamic political party in Europe was formed in Finland, the Finnish Islamic Party (FIP). Municipal elections will occur next month. The new party hopes to qualify to participate in national parliamentary elections in 2011. It currently has valid signatures for roughly a thousand of five thousand signatures required. The party was established by native Finns.
With the growing trend in Islamic populations throughout Europe, it is not inconceivable that Islamic economics and finance, as well as Herbert Simon’s ideas, may find greater acceptance. On the other hand, Islamic concepts may well be more and more co-opted into traditional European and American models.
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.
By Stephan Zimmermann, on September 3rd, 2008
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.
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