This is the introductory post in a series on the Methods of Political Economy.
In their Law & Economics textbook, Robert Cooter and Thomas Ulen ask: “Why has the economic analysis of law succeeded?” Their answer: “Economics provide[s] a scientific theory to predict the effects of legal sanctions on behavior….This theory surpasses intuition, just as science surpasses common sense.” Moreover, “economics provides a useful normative standard for evaluating law and policy….Efficiency [that standard] is always relevant to policymaking, because it is always better to achieve any given policy at lower cost than at higher cost.”
What distinguishes neoclassical economics is not that it is uniquely “scientific” (whatever that means) or that it has discovered a “neutral” set of moral considerations. It is, rather, its tendency to compare the real world to a utopia in which (to speak loosely) everybody is constantly maximizing their own idiosyncratic-and-not-at-all-socially-influenced notion of “welfare” based on all information that could possibly be relevant to every decision, such that every transaction that could possibly make its participants better off instantly takes place. It can be mathematically demonstrated that such a world is one in which everybody gets as much of what they want as possible given scarce resources. Resources would thus be used perfectly “efficiently”.
Sometimes the neoclassical utopia is treated as an ideal to which the real world should strive. Sometimes it serves as a “parsimonious” model of how the real world actually works (the alleged parsimony is ipse dixit), subject to certain deviations (“transaction costs”, “externalities”, etc.). Usually it is some loosely defined combination of the two, often with the notion that the purpose of policy is to uncover (or is it to construct?) the “pure” market that all social reality tends towards when not “artificially” prevented from doing so by regulatory “distortions.”
Far from being uniquely “scientific”, the neoclassical model has run into repeated difficulties attempting to describe nearly every aspect of reality. Its models of individual decision-making, of corporations, of production functions, of the dynamics of competition, of the effect of price controls, and of many other parts of political economy have been repeatedly undermined by empirical evidence. It lacks any account of how money works beyond being some neutral exchange rate between preference functions, which has posed serious problems not only for its models of “macro” phenomena (including, notoriously, its failure to predict anything like the financial and economic collapse of 2007) but also its models of international trade and of firms’ pricing practices. Meanwhile other social sciences and heterodox economists have developed alternative accounts of these phenomena through inductive model building.
Nor is neoclassical welfare analysis “neutral” or “always relevant.” Instead, the focus on efficiency tilts the scales in favor of wealth consolidation. It reduces all social values to individual “preferences”, thus effacing the value of individual autonomy and fairness and community and responsibility and democracy and many other moral concerns. Meanwhile, other moral philosophers and social theorists have developed alternative ways to think about how to evaluate laws and policies that pertain to political economy.
Yet even those of us who are familiar with these criticisms and who seek to practice a form of political economy that does not reify the value of capitalism or of markets often find it hard to avoid employing some form of neoclassical thinking, particularly when we try to imagine how a “market” works. (Don’t we?) We still talk about “rent seeking”, thereby reinforcing the baseline of “perfect competition” that has nothing to do with reality. We still talk about “transaction costs” and “externalities”, thereby reinforcing the idea that the problem with everything is that commodification hasn’t yet penetrated our society deeply enough. We still talk about how individuals are not fully “rational”, thereby reinforcing the idea that human reason should be evaluated as against socially disembedded welfare maximization machines.
When we do so, we may contribute to undermining one way of thinking about how political economy works, but we do not contribute to building alternatives. We have a sense of the conceptual tools we don’t want to use, but our own toolshed remains sparse. If we are serious about building a better world, we will need to better equip ourselves.
Over the next couple of weeks, this blog will host a symposium on heterodox approaches to political economy, with contributions from multiple disciplines: sociology, anthropology, history, critical theory, heterodox economics, and, of course, legal theory. The idea is to start—or to reinvigorate—an explicitly methodological conversation that does more than poke holes in neoclassical law and economics. Contributors will discuss how they analyze financial relationships, corporate entities, markets, labor, and other aspects of the social provisioning process without relying on conceptual crutches that neither describe the world we live in nor point the way toward the one we seek to build.
Our hope is that this symposium will not be self-contained. Readers with something to contribute to this conversation should join in. Pitch us!
Luke Herrine is a Ph.D. Student in Law at Yale and a Fellow with the Law and Political Economy Project.