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How economics can be seen as religion Samuel Brittan: Financial Times 15/08/02 The decline of belief in material progress leaves a gap for those trying to grasp social trends, or advise on policy. Is economics a form of religion? Alas, it depends on what you mean by religion. According to the 1990 edition of The Dictionary of Christianity in America: "If belief in a god is necessary to define a religion, secular humanism does not qualify. If on the other hand religion, or a god, is defined as one's ultimate value, then secular humanism is a religion." The US Supreme Court has tended to follow the second definition. Mainstream economics is undoubtedly a form of secular humanism. I should prefer to call it an ideology. But it is foolish to argue over definitions and the best recent study of the subject by Professor Robert H. Nelson is entitled Economics as Religion: From Samuelson to Chicago and Beyond (Pennsylvania State University Press, $35). I was myself brought to see that economic teaching involves an over arching stance, more than it does hard scientific results, when some years ago I conducted a questionnaire study based on multiple choice questions given to students. Nearly all the correct answers involved a policy stance and very few a simple prediction akin to that in elementary physics. Nelson came to this realisation when he worked as an economist for the US Department of the Interior and he found much of his time taken up by a "theological" battle between economists and environmentalists. The economists were certainly prepared to give some weight to environmental effects, but nevertheless espoused economic growth. The ultra-environmentalists, such as Bruce Babbit, Secretary of the Interior under Clinton, saw the world as an ecosystem in which every single species had to be preserved, as an instance of God's creation. When I mentioned this subject to some of my colleagues, they had no doubt that economics was a form of theology. By this, they had in mind the heresy hunting, fierce insistence on doctrinal purity and anathematising of dissenters so characteristic of religious argument. Prof. Nelson, however, takes theology seriously and does not use it as a term of abuse. His main point is that the overriding beliefs that have guided economic thinking in the second half of the 20th century are losing their potency. But a new foundation has still to be found. He starts off with a paradox. Economists of varying stripes assume that individuals will pursue their self-interest in the market and that this can be made to work to the general good. But there is a problem. "The pursuit of self-interest should not extend to the various forms of opportunism, such as cheating, lying and other types of deception, misrepresentation and corruption within the market place." Nor should it extend to political opportunism, that is attempts to use government to extract benefits from others, to protect a particular firm or groups of workers. Moreover property rights, contracts and other legal arrangements need to be fairly and consistently enforced. We hardly need reminding of these caveats after recent corporate scandals, let alone the disappointing attempts to introduce a market economy into the former Soviet Union. But how can we produce a faith which will approve of self-interest, yet observe all the surrounding conditions and qualifications? Nelson takes the surprisingly fruitful approach of looking at the doctrines of the leading American textbook that appeared after World War II, namely Paul Samuelson's, Economic Analysis. Nelson has no difficulty in showing that Samuelson's text was founded in the US progressive tradition. He believed that the market, subject to suitable correctives, could be used as an instrument for social progress. Unfortunately, it was difficult to persuade non-economists, even of the same political persuasion, to see it that way; and there was some resistance among some economists themselves, more in Europe than in the US. Samuelson, especially in his early editions, was not free from political bias. He was eloquent on the evils of private enterprise monopoly, but low key on the effect of unions and minimum wages. For such reasons my own Cambridge tutor was not keen on the book. But, like so many other students, I was attracted to it because -- unlike texts with titles such as The Theory of Price -- it gave prominence to the policy problems which made the headlines. It was like starting physics with atomic theory rather than with Newton's laws of motion. Even though the majority of students probably regarded the book as a pleasant, if long-winded, way of preparing for examinations, nevertheless the message seeped through. It had probably a greater effect on mind sets among American than European readers. Although few business or professional people harangued their friends with the doctrines of Samuelson, they probably had a more lasting influence on the sort of people who become Federal Reserve or IMF economists, or who advise presidents. Their belated culmination was probably the Washington Consensus of the early 1990s, in which economists who had spent decades fighting "free market fundamentalism", nevertheless proclaimed to emerging countries the need for liberalised trade and capital movements, private ownership and the removal of controls and restrictions. Samuelson makes clear his allegiances in his "valediction" to the 1998 50th anniversary edition of his textbook. He there quotes from a famous paper of Lord Keynes (which I discussed in my column Economic Possibilities for our Grandchildren on January 2), where he looks forward to a society where people concentrate on the true values of life and place the accumulation of wealth in its appropriate subordinate place. The paradox is that to get to this nirvana, the forces of self interest and even greed have still to be used. And even if they are no longer indispensable in a wealthy country like the US, they still have an essential role to play for two thirds of the world's population still mired in poverty. By the mid-1970s, the Samuelson approach was under challenge from the Chicago School. One problem about assessing Chicago is that it never produced a single text equivalent to Samuelson's. The advocacy of its best known member, Milton Friedman, of certain monetary polices, gave a misleading impression. The main effort of Chicago academics, on whom Friedman drew in his popular writings, was devoted to analysing sector by sector the effects of government attempts to improve matters. They always managed to convince themselves that such efforts made matters worse. Regulators are all too easily captured by the industries they are supposed to regulate; and in any case in a slow and subtle way the market often develops its own correctives. They were helped by the dogma that their subject had nothing to say about value judgments: if private negotiations to compensate those who had been injured by some polluting development led to an efficient solution, then economics had nothing to say about the resulting effects on the distribution of income. A further strand to the Chicago analysis arose from the theoretical analysis of the effects of politicians who were guided by their own self interest, and who were more likely to provide support for particular interest groups than to promote the general welfare. Perhaps over-fancifully, Nelson sees the economic mainstream as a Roman type of religion; and the Chicago school as a form of Calvinist dissent. Nevertheless the two sides had in common the use of the market in pursuit of efficiency. In the last decade or two, both the Social Democrat and the libertarian versions of market economics have been challenged -- not just by traditional socialists or conservatives who dislike change -- but by a school of "new institutionalists", of whom the most prominent member is the Nobel prize winner Douglass North. They pay a lot of attention to history and institutions: to questions such as why China has been more successful in moving towards a market economy than Russia, despite greater Russian willingness to remove controls. The new institutionalists remind us that there is no shortage of markets or self seeking behaviour in areas which have failed to achieve an economic takeoff, whether in West Africa or in southern Italy. What they lack in such places is the basis of trust and institutions which would enable them to make long-term contracts and refrain from Mafia-type raiding on each other. This new institutionalism covers a great variety of approaches and has yet to coalesce into a school. It ranges all the way from inserting some extra variables into mainstream economic equations to calls for a return to the traditional study of political and cultural history. [But what has yet to be established is how people can come to see the value of self interest in its limited market role while developing the institutions and constraints, which make it a force for good.] Nelson does not claim to have found a new faith which will resolve the paradox of self-interest. He pins his hopes on some mixture of environmentalism and libertarianism freed from the Chicago technical apparatus. Nelson's own avowed inspiration comes from Frank Knight, an inter war economist little known in Europe apart from one technical book from early in his career, but who was the true founder of the Chicago School and to whom its members still pay lip service. Unlike his postwar successors he was highly sceptical of the effects of economic growth in improving the human condition and also of the use of scientific method in any of the so-called social sciences. His core belief was in human freedom. A student once succeeded in getting his money back because he had devoted a large part of his classes to an anti-Catholic harangue instead of his official subject. At this point one needs to go slowly. Nelson summarises the prevailing economic religion of the second half of the 20th century as the pursuit of economic efficiency. By this he seems to mean two rather different things. First, he means rationality in the sense of choosing the least costly way of achieving any human objective, whether pursuing a jihad or building a mosque or cathedral. The second of his meanings is the pursuit of economic growth, where his may indeed apply. It is vital to hang on to rationality - and I would add, to respect for evidence - if we are not to retreat to the Dark Ages. But economic growth could well, in the more affluent countries, recede as an objective in the way envisaged by Keynes and Samuelson.
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