Overcoming the Anthropocentric Epistemics of Economics

My colleague Christian Hederer and I are currently preparing our new book ‘A New Principles of Economics. The Science of Markets’ for production with Routledge. The book establishes economics ‘from scratch’, though relying on the accumulated research of economics in the past centuries. One fundamental difference to established approaches is starting out from Earth system evolution, putting humans in the context of general evolution, and treating markets as an emergent cultural form and as a core element of the technosphere. In fact, this is what Alfred Marshall already envisaged in his ‘Principles of Economics’ which we partly use as a model for our book. Marshall argued that economics is a branch of biology, an idea that got lost completely in the mainstream, even though evolutionary economists often cite this statement.

Why do we need a science of markets? The simple reason is that markets are complex phenomena of their own status that generate emergent phenomena and continuously create new social ontologies. The elementary artefact and social technology in markets is money. This is important to recognize: Money and finance are elements of the technosphere, and not just the abstract formal structures of mainstream economic theories. As economic sociologists have argued for long, therefore economics must recognize the materiality of markets. Remember the days when international trade theory was built on models with zero transport costs? This is one example for the continuing epistemic stance of economics that investigates markets ‘from the inside’, not as objects out there in the world. What does that mean?

Our book develops a simple epistemological triad, the ‘three views’: first person, second person and third person. The first person view corresponds to what economists refer to as ‘subjective value’. The second person view is established on the marketplace via interactions among economic agents, and the third person view is the view of an external observer. Let us consider the notion of ‘scarcity’, which is often seen as the core concern of economics. Mainstream economics has a complicated epistemological relationship with ‘scarcity’. As shown in the figure below, taken from our book (which leaves the first person view only implicit, which is the subjective value of a good). Economists do not think that their science offers a direct access to the notion of ‘scarcity’ ([3]): Scarcity is not a property that can be measured independently from the market. That means, first, they approach the market as an object (3) in the sense of reifying it as a kind of distributed computational system in which the interaction between buyers and sellers establishes a price. The price is a second-person view (2) since it is contingent on these interactions. Yet, economists assume that this price is the only measure of scarcity, which means that the price is ‘objectified’ (2*) by the interactions and treated as such by the economist (3*).

The problem with that view is that ‘scarcity’ is not an economic phenomenon in the internal sense but an ecological phenomenon. Scarcity is not an economic concept in the first place, but a biological one, since scarcity is one of the key conditions for natural selection: During a drought water is scarce for humans, but also for all other living beings, yet the price on the market only reflects human needs, treating the other needs only as derivatives, if at all (such as water needed for agriculture). Economics recognizes this difference in its notion of ‘externality’: Externalities are costs that are not internalized in prices. But there is a paradox here: How can we measure these costs if they are by definition excluded from the only measure of scarcity that economics recognizes, i.e., prices? In fact, the paradox results in complete neutralization of externalities if economics endogenizes the costs of internalization: This leads into the Panglossian trap that market failure in internalization is efficient since markets also measure the costs of internalization. This is the standard story about property rights evolution: Growing scarcity drives internalization via assignments of property rights, which are then re-allocated via the market to reach the most efficient state (Coase theorem). As long as this does not happen, apparently internalization is not efficient: We live in the best of all possible worlds.

If we start out from the Earth system view, we adopt the third person view right from the beginning. That means, the view on markets is decoupled from the first-person view in terms of theoretical foundations. A notion such as ‘scarcity’ is transformed into conditions for sustainability, resilience and evolvability of ecosystems. The direction of analysis is radically reversed: Take, for example, the planetary boundaries concept. This allows to identify a condition of ‘scarcity’, which is not treated as ‘externality’, but as a third-person view fact. We must then ask how far markets internally reflect this fact in terms of pricing. That means, markets are always and everywhere ‘failing’, because systematically they only give voice to humans in determining the outcomes of the price mechanism. This is the external view on markets and prices. Whereas economics assumes that markets generally measure scarcity ‘objectively’, but sometimes fail, as in the case of externalities, the third person view argues that there is always and everywhere a deep wedge between market pricing and ecological scarcity. This may be different if we consider objects that emerge from the creative ontology of markets, such as financial derivatives or intellectual property rights, which are pure human artefacts, or most sorts of collectors’ items. However, taking this kind of endogenously created scarcity as model for the generic concept would be seriously misleading.

In a nutshell, the economist should be an ecologist in the first place, eschewing anthropocentric epistemic foundations of the discipline. However, as markets are extremely complicated systems, the deserve the scrutiny of an own scientific discipline.

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