The Philosophy of Classical Economics

It is a common claim among economists that economics is morally neutral. Economics studies choice and efficiency. It is usually assumed there is a trade-off between efficiency and equity, but economics does not attempt to make this choice, but rather to illustrate the size of the trade-off   Economics, however, has several philosophical underpinnings and makes a large number of assumptions that deserve more scrutiny and consideration than they are sometimes given.

Classical economics starts with the work of Adam Smith, a Scottish Philosopher, who published The Wealth of Nations in 1776. Like most of the philosophers of his time, Smith had a classical view of human beings. Human beings are considered to be individual, rational, and autonomous. Human well-being consists of humans increasing their ability to satisfy their desires.

Economists essentially agree with John Stuart Mill’s argument that the only proof we have that something is valuable is that people do value it. Economists refer to this as revealed preference. Hence, whatever people value (their preferences) must actually be valuable.  Since it’s difficult to adjudicate among those preferences, it is therefore best to set up an economic system that allows as many people as possible to satisfy as many preferences as possible.

This makes classical economics a utilitarian philosophy. Economists are relatively explicit about this and attempt to maximize the appropriately named utility functions. Utility functions are a mathematization of individual preferences. My utility function can include your utility, if I care about you. There is, however, no suggestion that it would be either better or worse for me to care about other individuals; it is entirely determined by my individual preference.

On the distribution side, the primary problem for classical economics is one of scarcity. In a world of limited resources, how can goods and services be distributed in order to maximize the preference satisfaction of as many individuals as possible? Distribution is determined by the revealed preferences of individuals, i.e. how much they are willing to pay. The problem, of course, is that willingness to pay reflects not only the value the individual places on the object, but also their ability to pay.

This brings us to production. The incentive of each individual to produce is a meritocratic reward system. Each individual is rewarded (paid) based on the willingness of others to pay for the goods and/or services that the individual produces. Wealth is created by mixing individual labor with natural resources. The value of the product is determined by how much other individuals are willing to trade for it.

The primary problem the economics seeks to overcome is that of scarcity; not distribution. It is assumed that more is always better (though the 5th unit of something is not as good as the 2nd it still has a positive utility associated with it, an idea known as diminishing marginal utility).

On the whole, the system is based around individuals maximizing their utility within a meritocratic system that is set up to rely on individual self-interest. There are severe philosophical problems with most of these assumptions, and they become increasingly severe as economics attempts to impose its particular paradigm on an increasingly wide array of issues. However, that more detailed critique will be left for another post. (If you are interested, I have begun a critique of basing economics on individual preferences here).

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One thought on “The Philosophy of Classical Economics

  1. Pingback: Markets and Moral Breakdown | Faith and Public Policy

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