Albert Einstein never won the Nobel Prize for physics on account of relativity, even though it became a well accepted part of our understanding of nature and acquired empirical support well within his lifetime. It was considered too different, too weird for so august a prize although oddly quantum mechanics, more peculiar still, did attract multiple Nobel’s as has quantum field theory.
When one looks back at the history of the physics Nobel relativity has attracted few, if any, prizes. This year was, of course, a welcome change. But this post was written not in response to the physics prize but rather the Nobel for economics. Consider the previous award of the Nobel to Eugene Fama, one of the originators of the efficient market hypothesis, which has financial markets as rational and efficient allocators of finance capital. That award, made after the onset of the global financial crisis can best be described as a kick in the teeth to its, many, victims. The Nobel Committee for physics has been reluctant to award prizes for work in relativity, too speculative perhaps, too mathematically oriented without firm experimental support perhaps (although there had been interesting experiments confirming general relativity to very high precision well before gravitational waves), however the Committee for the economics prize can offer an award for a theory amid its most spectacular empirical disconfirmation.
That tells us something about economics, but more to the point something about the Nobel Prize for Economics. The very being of the economics prize is a scandal.
I should say, however, that this year’s winner, Richard Thaler, one of the founders of behavioural economics, was a good choice. Thinking about the award and behavioural economics had me thinking about the very concept of a social construction. Let me explain.
Behavioural economics is quite psychological, and is founded on a conception of human nature developed through empirical observations in the psychological sciences which suggest that we humans are not as rational as we like to think we are. This insight is applied to economic behaviour in quite fascinating and revealing ways, and lends much support to the “animal spirits” of John Maynard Keynes perhaps the key insight within his General Theory. A big upshot of behavioural economics is that markets, including financial markets, are not rational. Standard neoclassical economics, as we know, posits that humans are rational, that humans rationally think at the margin, and that markets, including financial markets, are rational. This naturally leads to the view that a rational society should be based on the free and unfettered operation of intrinsically efficient markets. Finance capital, for instance, is best allocated by deregulated financial markets and so a rational society would do things that way.
There’s always been this view that economics, or better still the market, is the domain of the rational yet politics is the domain of the irrational. Quite how the same rational species should be so schizophrenic is left unexplained. Perhaps David Hume’s dichotomy between reason and the passions may be invoked, with economics the abode of reason and politics that of the passions. That leads to an unfortunate conclusion for, according to Hume at any rate, it is the passions that drive us not reason in which case we have; behavioural economics.
Just a quick side point. Arrow’s Impossibility Theorem could easily be interpreted as providing justification for an apolitical society dominated by atomised individuals pursuing their preferences in market interactions. If democracy cannot ensure the efficient allocation of preferences then we are left with the market which, according to free market theory, very much can. Despite the usage of “liberal” in the title neoliberals are not democrats, and for Hayek and Friedman forcefully subverting democracy, say in Chicago Boys Chile, is by no means a contradiction. If conservativism can be defined as opposition to democracy and enlightenment then neoliberalism becomes more a conservative, than a liberal, doctrine. The moniker “neoconservatism” is more apt than “neoliberalism.”
To return to the main game. Neoclassical economics and behavioural economics differ on the question of rationality, a key fundamental philosophical or intellectual differentiation, however they do agree on one important philosophical matter and that is naturalism. Both are naturalistic. That is, both build an account of economics from a conception of human nature and so the market, rational or to a certain degree irrational, becomes a natural kind understanding of which can be construed as a science. We even now have neuroeconomics.
That shared naturalism stands in contrast to heterodox economics which, generally, treats markets and economies not as natural kinds but as social constructions. To understand markets, to understand economies, is to understand socially contingent institutions, structures, and norms. That is, to get a true handle on economics it must be studied in a sociological fashion. That insight is associated with the sociological method of Marx, but the sociological method is not inherent to Marxian economics. There are other, non Marxist, strands that adopt a sociological approach and that treat economies as social constructions. Some examples of this are institutional economics, structural Keynesianism and so on. Marxists want you to believe that Marxian economics is the only heterodox sociological school in town. It isn’t.
Behavioural economics, then, becomes quite limited because its naturalism fails to appreciate fully the degree to which economic behaviour is fashioned and constrained by the socially contingent rather than the psychological.
One will observe that few, if any, heterodox economists have won the Nobel Prize for Economics. These prizes are awarded to economists whose work rests on naturalistic theoretical foundations. The ethos of naturalism, and science, looms large here. This is odd, however. It is possible in one year for an exponent of the efficient markets hypothesis to win the Prize and yet in another year for an exponent of behavioural economics. Imagine, where nature really does act as a task master, one year a relativist winning the physics Nobel and thereupon an exponent of Modified Newtonian Dynamics. That is inconceivable, yet despite the naturalistic pretensions the same proceeds in the economics Nobel and all without contradiction.
But to return to the concept social construction. Earlier in the year Chomsky and Berwick published a book with the title, Why Only Us? That is, why is that only Homo sapiens have, and had, a faculty of language? When we observe the social species we tend to see that, except for Homo sapiens, very few have social constructions. Societies in the organic world tend to be rigidly determined, and that no doubt is based on a genetic endowment. Even the more complex primate societies are the same. To study the troop of a certain species of primates is to understand the social interactions and structures of all instances of that species. That suggests that those interactions and structures are not socially constructed. They are natural kinds, hence sociobiology.
Humans are different, both across space and time. Humans, and only humans, have social constructions. So, why only us? I suspect that social constructions suggest to us that Homo sapiens possess an innate faculty of social cognition which limits the scope of possible human social forms and structure, however within that limit this faculty can be creatively employed to create novel social form and structure hence social constructions. A scientific, or naturalistic, social theory would be concerned with developing an empirically well supported account of this faculty of social cognition. In that sense, social theory becomes a type of cognitive science. The study of capitalism, say, or the state, say, would be the study of a socially contingent social form and cannot be construed as a social theory. It is not possible, then, to have a naturalistic or scientific theory of social constructions. We surely can understand them, but to do this we require a sociological approach, and that understanding should not be construed as scientific. Notice that in standard political theory the state is also naturalised rather than seen as a socially constructed social relationship that was made and can be unmade.
I say all this as a robust card carrying naturalist. Those who subscribe to the view that markets are natural kinds are not naturalists, in my view. We ascribe to them the label of naturalism because since the enlightenment naturalism we have come to recognise that a naturalist metaphysics is the only sensible one. The Nobel Prize in Economics plays a very important role in dressing economics in naturalist garb, when, on naturalistic grounds, it is not warranted. The Nobel is awarded because of a certain consensus that exists in the economics community regarding whose work is valuable which bring us back to; the social construction.
It is possible to be a naturalist, and hold to the picture of social theory I have outlined, whilst recognising that heterodox economics provides us with the best means of understanding economics, and that through the justified rejection of naturalism where it doesn’t belong namely the study of social constructions which, like economies, are not natural kinds.