Tuesday, January 17, 2017

A theory of social economy I: what is theory?

Many approach macroeconomics as a combination of the study of the sum of all economic activity and of trade between persons from different and across large regions. If microeconomics is, as it is so often formulated, the study of economic decision making and economic activity at the levels of the firm and industry, then it is understandable that you may think of macroeconomics as economics of the big. Topics that often come up in a macroeconomics class include composition and significance of total income measures such as gross domestic product (GDP) and gross national product (GNP), international trade, and money, banking, and monetary policy.  We will cover many issues related to these, but we will also spend time thinking about the composition of these measures and the role of a theory of economic evolution in understanding the development of modern markets. In this course, we will divide analysis between a theory of action and agent understanding and emergence with the market system. To the extent that we study macroeconomics, we will include money, banking, and the emergence of extended orders promoted by specialization and market exchange.

The role of theory

Before we begin, we must ask, why do we need economic theory in the first place? To arrive at an answer to this question, let's engage in a thought experiment. Imagine the morning that preceded you coming to this class. Perhaps you woke up early and scanned through the first assigned reading in preparation for the class. Or perhaps, more likely, you woke up with just enough time to make yourself presentable and travel to class. How would you explain the process of waking to someone without using words? Of driving? Of sitting down and preparing your mind to receive a lecture? Now that you have imagined how to do this, imagine how you would explain this to a 3 year old who has no concept of education or learning. How do you explain this to a 3 year old who may not even understand that driving requires the following of the rules of the road? How do you explain the material that you read to this 3 year old? The answer is, simply, that doing any of this would require a significant amount of creativity to use language that the 3 year old can understand and use to build some conception of the events that comprise your morning.

Now imagine that this 3 year old speaks Spanish and only Spanish. Most of you would have to find another way to communicate with this child. Maybe you draw pictures of yourself, but without a spoken language to help the child build his or her own understanding of the events of your morning, the child may remain confused. Maybe it seems to the child that the picture of you sitting next to hundreds of other students is actually you sitting in the audience of a game show. The challenge of communication is to convey new concepts to one another using terms and scenarios that the receiver can use to relate what they already know to the new concepts without attributing in whole the attributes of these concepts. For the child, going to a lecture hall is kind of like sitting in the audience of a game show, except that instead of going to be entertained, the primary goal of the student is to learn (and if they are lucky they will find the lectures entertaining).

We learn by metaphor. Some metaphors are better than others. In science, we create metaphors with the goal of making the attributes of the metaphor and relations between those attributes precise. We abstract away from details that do not directly bear upon the details in which we are interested. By abstracting in this manner, we model the world around us. The power of our models are indicated by their ability to 1) coherently explain the events in which we are interested and 2) to predict likely outcomes of the category of events that we study.

Science expresses abstraction par excellence. Let’s think of the abstraction that is used in everyday social knowledge. In particular, imagine the knowledge that you have of your mother or of your brother or sister, or of your best friend. How do you frame your interactions with them? Are there certain words, actions, or events that you know will make your mother feel content. Are there others that will make your best friend laugh? Your ability to imagine this indicates that you have a theory of the people in your life who are significant to you. Is your theory of your mother the same as your theory of your father or of your friend or sibling? Most likely it is not. There may exist some common features, but the characters that make up the musical that is your life have many unique facets that are not shared between them.

We can take this exercise further. How do you imagine that you interact with persons that you do not know? Take, for instance, a cashier. What is your model of a cashier? What is your model of an elderly person? Of a man or woman? Do you have a model of a third category for gender? I can ask you, “How do you interact with a cashier that is an elderly woman?”, and you will probably be able to provide a well reasoned response.

Simply by thinking, you have shown yourself that you model the social world around you. The models you use are quite elaborate. They can be combined and adjusted to create new models in the course of new scenarios that we encounter. You can use these models to have discussions about these scenarios. And the beauty is that nearly everyone is capable of performing these operations. People are far more intelligent than we give them credit for.

Is every model just as good as every other model? We can inform this question with a more particular question. If I want to learn to be a successful car salesman, should I attempt to learn from my father who has practically zero experience selling anything or should I find a car salesman who appears to be successful and is willing to allow me to shadow him on occasion? I want to emulate the model that the successful car salesman follows. Likewise, if I want to become more personable, I should spend time with a person who is naturally social and who is a pleasure to be around. We learn by attempting to copy the model, in part or in whole, of people whose actions and lives we would like to emulate.

What is social economy?

A theory of social economy represents an attempt to create a theory of society comprised of actors that is of the highest level of abstraction. It is a theory that can define, at the most general level, the features that comprise our social world. We deal with a theory of social economy, not just a theory of economy. We will cover pure economic theory in this class, but it would be inappropriate to only cover economic theory as economic action always occurs in light of a particular understanding of an agent. Just as you have a theory of your family members and may even have theories about their theories of the world, all acting agents have theories about the world around them.

At the most fundamental level, when we act we ask ourselves, “Will this action make me better off?” Or more sophisticated actor asks, "Will this action create a state of affairs that I prefer over what would exist otherwise? If the answer is yes for a particular act, we follow through with it. When a person acts to make themselves better off, we say that the person acts to gain utility. Utility is a purely subjective phenomenon. It cannot be measured directly, though as we will later see it, money prices help us to estimate the value imbued to a particular act or resource in light of the income of the demanders and the supply of the good or action in light of the cost of inputs. From the fundamental principle of action, we are able to explain general features that arise during the course of action in society. We will learn, as is the case in other domains of study, the whole of society is greater than the sum of its parts.

Underlying many topics that we investigate are institutions. Institutions arise during the course of interaction between agents. Institutions are coordination devices that include shared or interlocking rules that guide interaction. Agent understanding is shaped by these institutions. They allow us to form expectations concerning the results of our actions, which includes the response of others. They provide concepts for agents to anchor their thinking. In forming a theory of social economy, we will develop a deeper understanding of these general features with which we interact daily.

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