Getting the Hard-Core Concepts of Economics Right

IN HIS 2001 Nobel lecture, Joseph Stiglitz attacks the paradigm on which mainstream economics is constructed along several fronts, including the separation of issues of efficiency and equity, the impossibility of involuntary unemployment, the representation of supply and demand as the whole of economic analysis, and the description and predictability of economic affairs with certainty. ¹ George Akerlof, in his Nobel lecture in 2001, criticizes economics for many of the same reasons and concludes with the indictment that neoclassical economics excludes "reciprocity, fairness, identity, money illusion, loss aversion, herding, and procrastination." ² The problem, according to Stiglitz, is that conventional economics construes the individual too narrowly; the solution lies in rethinking the first premises of conventional economics. ³

When the issue is restated in the form of the question "Does human sociality play a role in economic behavior or is it strictly human individuality that is the proper domain of economic science?" it appears that Adam Smith nearly succeeded in discerning the answer. In The Wealth of Nations, Smith embraces human individuality; in The Theory of Moral Sentiments he opts for human sociality. Smith was not able to reconcile the two because he lived in a world where individualism held sway. As with classical economics in the 1800s, contemporary economics holds fast to the one and discards the other. Just as it did in Smith's time, individualism rules the day in economics.

In this article I will argue that the answer lies in replacing the individual with the person, the outdated individualism that lies at the core of the conventional thinking about economic affairs with the personalism that emerged in the electronic age.

Core Concepts

Waters identifies the following four premises (or what he prefers to call the "hard-core concepts") of conventional economics: (1) the individual is the basic unit of the economy; (2) an individual acts freely, self-interestedly, and calculatedly in a self-regulating economy; (3) an individual's economic behavior is grounded in reason and, though it changes as economic conditions change, is predictable and knowable with mathematical certainty and empirical precision; and (4) an individual's ultimate worth is determined instrumentally. ⁴

Thus, the underlying philosophy of mainstream economics is a somewhat awkward blending of individualism and utilitarianism. Individualism presents human beings in economic affairs as individuals who are free to choose; utilitarianism presents them as machines. The difference is much more than just a matter of semantics. Competition is the corollary to these hard-core concepts that originated in the seventeenth and eighteenth-century Enlightenment, making mainstream economists today children of the Enlightenment. ⁵ These premises have a direct bearing on how mainstream economists understand and describe economic affairs and present policy recommendations.

Waters also articulates the four premises of what is becoming known today as "personalist" economics. To paraphrase him again, the four hard-core premises of personalist economics are (1) the person is the basic unit of the economy; (2) a person acts freely but within certain limits, self-interestedly but often with regard for others, and calculatedly but at times impulsively, whimsically, or altruistically, in a self-regulating economy, which from time to time, must be constrained deliberately in order to serve the common good and to protect the weak and the needy; (3) a person's economic behavior is grounded in reason and faith, changing as economic conditions change but at times reflecting moral rules and principles, predictable and unforeseeable, and knowable with mathematical certainty and empirical precision but sometimes mysterious and beyond human understanding; and (4) a person's worth at times may be construed instrumentally, but it is not reducible to economic calculus because it rests squarely on the conviction that humans have a worth and dignity beyond measure. Thus, the central differences between mainstream economics and personalist economics all originate in and are reducible to the differences between...