Mark Howard
Department of Politics, University of California, Santa Cruz
The term economic reason will be understood and defined differently depending upon the object to which it is applied. This keyword entry examines three: 1) the rationality of actors within an economy or economic system; 2) the rationality of economic analysts; and 3) the rationality of economic systems.
Raymond Williams (2014, 252-256) notes that the term ‘reason’ has an immensely complex history that from its earliest use connoted two distinct meanings: one specific (a statement, account, or understanding e.g. a reason for believing something); and one generic (a faculty of connected thought and understanding). The latter, which we shall distinguish with the capitalized form (i.e. ‘Reason’), has a history in both theological and philosophical tracts as being related to first principles: the opposite of empirically based practices of logical rationalization and calculation. To claim one has reason on their side has therefore led to bitter debates in intellectual history, with various factions claiming exclusive ownership. It is in connection with this understanding that rational and reasonable denote a being endowed with reason, and as such able to give reasons for exercising particular beliefs, actions, or behaviors.
When connected with the word ‘economic’ we are presented with a term that implies either a statement, account, or understanding relating to the production, distribution and consumption of goods and services, or a faculty for understanding the same. It is worth noting that this definition does not necessarily imply an empirically informed position, and may include behaviors and interactions that are based on logical reasoning divorced from practical experience.
The rationality of economic actors (including individuals, institutions, corporations) within an economy or economic system are most commonly understood in economic discourse through the rational-choice paradigm, a principle that assumes individuals will always make logically reasoned economic choices (based on available information) according to the principle of individual preference. In the classical political economy of Adam Smith, this pursuit of individual preferences, when aggregated, produces a socially-beneficial outcome contributing to ‘The Wealth of Nations’, thus giving the title to his famous book on the subject, and bestowing us with the term ‘invisible hand’ (Smith 1776, 572). He notes that it is not out of the goodness of his heart that a butcher provides customers with meat, but as a manifestation of his rational self-interest to receive compensation. The butcher’s self-interest in turn services the rational self-interest of the hungry customer in need of satiation (Smith 1776, 23-24). The neoclassical school of economics took this idea further and, extending the principle of socially-beneficial outcomes arising from self-interest, developed the idea of laissez-faire economics, which concludes that the outcome of aggregate individual preference will be self-equilibrating markets—that is, markets that balance supply and demand (and consequently price) without the need to make individual sacrifices for the greater good (Chang 2014, 87-92). Essentially, the greater good will unfold if we simply leave people undisturbed to “truck, barter, and exchange” on the market (Smith 1776, 22). Thus the principle of modern economic individualism is born.
Of course, economic actors are not all equal in the information they possess when making a so-called rational-choice. The Austrian School of economics (e.g. Friedrich von Hayek) believed that custom and tradition stand in the way of rational choice, and that it is impossible for anyone to have all information and to reason from a fully informed position. They do however still argue that the free market is the best system, because leaving rational actors alone produces a ‘spontaneous order’ in which diverse preferences and actions of economic actors can be reconciled with each other (Chang 2014, 100-102). However, asymmetric information problematizes the notion of equilibrating markets, such that there are cases where some actors know more than others and are therefore able to exploit market situations from a position of information superiority. This means that different types of self-interested economic actors may reason towards different preferences based on what information they have or do not have. Furthermore, economic actors do not develop interests in a vacuum that is insensitive to broader objective factors of the market; geography, technology, and political systems all play an influential role.
This is where the rationality of economic analysts come in. Economic analysts may be professional economists in the public or private sector, politicians, academics, or simply critics writing from activist or journalistic perspectives. Professional economists may generally accept the rational-choice model of economics, but will vary in opinion about how the rational choices of individuals will play out depending on various economic factors operating beyond individual preference. For instance, classical political economists such as Smith subscribed to Say’s Law, which proposed that economic supply creates its own demand, thus implying that the market preferences of economic actors will be affected by the behavior (i.e. rational preferences) of producers. The theory was that the interests of consumers and producers would balance each other out to produce overall social benefit (Foley 1999, 8). However, modern experience (particularly since the Great Depression and 2008 Global Financial Crisis) and analysis (such as that of John Maynard Keynes) has shown that market intervention by way of stimulus packages is occasionally necessary to stimulate demand in a deflated market (Harvey 2017, 17). Thus, we have a situation in which the economic reason of professional economists helps to manipulate the rational choice (i.e. economic reason) of consumers and producers. Similarly, interest rates and exchange rates may influence the rational action of economic actors in ways that economic analysts feel confident enough to predict with significant degrees of certainty. For example: low interest rates will discourage economic actors from saving and stimulate market demand, thus stimulating supply; high interest rates will encourage saving and bring foreign investment into a national economy from international economic actors applying their economic reason to self-interest and profit (Frieden 1991, 431).
Economists also use reason to come up with principles that can guide their action in making economic decisions that will affect the rational-choice behavior of economic actors on the market. Mundell-Fleming conditions, for example, specify how rational-choice will be impacted by capital mobility, exchange rates, and monetary expansion policies, but cautions that there are limitations to the manipulation of these factors, such that they may cancel each other out if not organized in a rational way. Therefore, a state can only move towards two of the following at any one time: fixed exchange rate, monetary policy autonomy, or capital mobility. (Frieden 1991, 431) The impacts of mixing and matching these policies will have significant effects on the rational-choices of economic actors and the economy as a whole, but must be managed well and in accordance with market conditions in order to provide overall economic benefit. Similarly, professional economists reason about the response of the market and economic actors within it in relation to financial instruments pertaining to debt and credit. Cohen notes that for a state economy running in trade deficit with other states, there are two rational-choices: financing or adjustment (i.e., a change of economic parameters, such as foreign exchange rates) (2017, 4). Financing is a mechanism used to stay adjustment, and implies a growing debt burden. This debt burden, however, can be managed by the application of economic reason to apply policy instruments such as currency depreciation (lowering the exchange rate), deflation (austerity, reducing spending and imports), or direct controls (limiting imports or exports).
In practice, which of these policies are pursued does not merely influence the rational-choice of economic actors, but is also influenced by the rational-choice of economic actors, particularly those with disproportionately large influence over the formation of politics and policies impacting the economy. We saw earlier that economic actors may not simply be individual consumers or producers on a market, but also be institutions (e.g. Central Banks, the IMF, Bond Rating Agencies etc.) or corporations. It stands to (economic) reason that institutions that already have a seat at the table with political actors and governments, and corporations with vast sums of money available for lobbying activities, will have a greater influence on the policies pursued by state actors (Frieden 1991, 450). Therefore, powerful industries with nation-state specific interests may lobby for decreased international integration of economic and financial resources so as to further their own interests (Frieden 1991, 443), which may in turn have little benefit for many individual economic actors operating in the economy. It may, in fact, reduce the menu of options available to them, thereby stunting their ability to exercise economic reason in making a rational-choice. Power and politics consequently become significant factors influencing economic reason. Indeed, such powerful corporations and institutions often operate for their own self-interest. For instance, during the subprime mortgage bubble preceding the Global Financial Crisis, corporations and institutions (e.g., banks), knowing full well that their interests would not necessarily align with the self-interest of individual economic actors, could reason that, on the one hand, the bubble would not go on forever, and on the other, that they would be bailed out by the state should a crisis be realized (while individuals would be compelled to honor their subprime debt obligations) (Dupuy 2014, 68).
All that said, the above analysis has one assumption in common, which is that the economy is (and should be) organized according to the principles of capitalism. This therefore constitutes the economic reason of that particular system. An economic system, much like the economic actors so far described, demonstrates a propensity for self-interest and has at the center of its economic rationality a will to self-preservation. The 2008 US government bailout of Wall Street was enacted in part because powerful actors on Wall Street threatened to essentially blow up the economic system if the US government did not provide the liquidity (through US Bond Markets) to protect them (Lawrence 2008). There was a conscious effort by the puppet masters of capitalism to protect and sustain the system. What is more interesting, however, is that capitalists pursuing their own interests in the market under conditions of perfect competition are driven towards the pursuit of profit at the expense of surplus-value creation through labor, which in turn threatens the reproduction of the very capitalist class that benefits from the system. Why? Because although this is not necessarily a freely rational act, it is one that is impelled by the very market forces they are engaged in. Thus, the system itself influences capitalist economic reason and in turn generates the potential for crises (Harvey 2017, 34). None of this can be achieved without exploitation, which is precisely what power enables institutions and corporations to do in their self-interest profit rationality.
Alternative economic systems may assume alternative rationalities, but to do so must look beyond, or deeper into the ways in which economic reason is constituted and justified. Marx, in his critique of capital, repeatedly draws our attention to appearances in commodity production and exchange, suggesting that something more is going on, and that our rational understanding of the economic reality is skewed in numerous ways (Marx 1906, 125). Capitalism is systematically generating wants needs and desires in conjunction with the self-interested preferences of a particular class (i.e. capitalists), and therefore commandeering economic reason for its own self-interest at the expense of another class’s (i.e. wage laborers) self interest. What the Frankfurt School would call ‘real interests’ are being obscured behind manufactured interests that serve only a portion of society. This is what we commonly understand as ideology, which for Marx and Engels is an abstraction from the real processes of history, the ideal expression of the dominant material relationships grasped as ideas (Williams 2014, 155). Ultimately, we are a long way from Smith’s conception of a socially-beneficial outcome derived from the economic reason of self-interested individuals.
(See Neoliberalism, Variegated Neoliberalism)
Bibliography
Chang, Ha-Joon. Economics: The User’s Guide, Vol. 1. Bloomsbury Publishing USA, 2014.
Cohen, Benjamin. “The IPE of Money Revisited.” Review of International Political Economy 24, no. 4 (2017): 657-680.
Dupuy, Jean-Pierre. Economy and the Future: A Crisis of Faith. MSU Press, 2014.
Foley, Duncan K. “Notes on the Theoretical Foundations of Political Economy.” 1999.
Frieden, Jeffry A. “Invested Interests: The Politics of National Economic Policies in a World of Global Finance.” International Organization 45, no. 4 (1991): 425-451.
Harvey, David. Marx, Capital, and the Madness of Economic Reason. Oxford University Press, 2017.
Lawrence, Patrick. “Scholar Robert Meister on a New Model: Using the Financial Markets to Fuel Historical Justice.” Salon.com, July 8, 2018. http://patricklawrence.us/scholar-robert-meister-on-a-new-model-using-the-financial-markets-to-fuel-historical-justice/.
Marx, Karl. Capital. Modern Library. New York, NY, 1906.
Smith, Adam. The Wealth of Nations. 2003 ed. New York: Bantam Dell, 1776.
Williams, Raymond. Keywords: A Vocabulary of Culture and Society. Oxford University Press, 2014.