Approaching New Economic Worlds

Is it time we question the very foundations of economics? In light of the recent financial disturbances, some people think so. A blog post from New York Times Economix by economist Nancy Folbre cites one such progressive group trying to re-write some of the rules of economics called the World Social Forum. While additional ideas and research are always welcome and potentially valuable, there are limits to what sorts of foundational ideas can be legitimately questioned.

After a couple of paragraphs berating the tea partiers, Folbre gets down to explaining some of what the Social Forums believe:

Textbook economics treats individuals as selfish optimizers, unconcerned about the welfare of others. Only recently have economists begun to explore the importance of fairness, reciprocity and altruism, and to consider the possibility that incentives to behave selfishly can undermine both moral norms and altruistic preferences.

Textbook economics also largely ignores worker-owned businesses and consumer cooperatives, although these are geographically widespread in the United States. Recent research suggests that many workers would like to play a larger role in the management of their companies and that "shared capitalism" works remarkably well.

"Building Social Businesses," a new book by Muhammad Yunus, famous for development of the Grameen Bank, emphasizes the potential for social business models to reduce poverty in developing countries.

Let's start with that first point. Is it false that individuals are selfish optimizers? Of course it is, but only as false as it is that gravity accounts for how quickly objects fall. Virtually by definition, most people (excluding a handful of odd psychological outliers) a person is only going to act in such a way is utility maximizing. Sure, that utility can have many factors. The pleasure obtained from a benevolent act is often relevant, for example. But it's important in the same way that air friction is important in understanding how quickly an object is falling: just because you take an additional variable into account doesn't mean that your understanding of gravity is ultimately flawed.

Of course, if you expand this point to businesses, the point becomes even more obvious. While for-profit firms might have priorities other than earnings, including charitable endeavors, ultimately they must chase profit to survive. There's no getting around the central fact that a business that must compete with other companies for a limited demand from people or other businesses for whatever it produces.

Now where Folbre and, potentiall,y Social Forums are correct in questioning the generally accepted rules of economics comes more into play with new economic novelties that we're seeing more recently. In the third paragraph quoted above, the prominence of non-profit firms is alluded to. This is, indeed, a new question in economics that needs significant exploration, and in a sense does create another sort of world for economics to grapple with. Non-profit firms and foundations are facing questions like whether to invest donated money or use it immediately to help their cause. It's not necessarily about profit-maximization in their world.

The key to questioning foundational thought is not to get too carried away in the world we know. Many key theories have proven to hold up quite well throughout history. Just because new business innovations and attitudes might be more common today than they were, say, 50 years ago, doesn't mean some of economics strongest base assumptions are wrong in a more general context. They may, however, force economists to sometimes qualify their equations with additional variables to better understand the changing world.