Ideology And Economic Development

Neoclassical economics begins with the premises of private property and self-interest. Whatever the structure and distribution of property rights, it assumes the right of owners--whether as owners of land, means of production or the capacity to perform labor--to follow their self-interest. In short, neither the interests of the community as such nor the development of human potential are the subject matter of neoclassical economics; its focus, rather, is upon the effects of decisions made by individuals with respect to their property.

Logically, then, the basic unit of analysis for this theory is the individual. This individual (whether a consumer, employer or worker) is assumed to be a rational computer, an automaton mechanically maximizing its benefit on the basis of given data. Change the data and this "lightning calculator of pleasures and pains" (in the words of the American economist Thorstein Veblen) quickly selects a new optimum position.1

Raise the price of a commodity, and the computer as consumer chooses less of it. Raise the wage, and the computer as capitalist chooses to substitute machinery for workers. Raise unemployment or welfare benefits, and the computer as worker chooses to stop working or to remain unemployed longer. Increase taxes on profits, and the computer as capitalist chooses to invest elsewhere. In every case, the question asked is, how will that individual, the rational calculator of pleasure and pain, react to a change in the data? And, the answer is always self-evident--avoid pain, seek pleasure. Also self-evident are the inferences to be drawn from this simple theory--if you want to have less unemployment, you should lower wages, reduce unemployment and welfare benefits, and cut taxes on capital.

But, how does this theory move from its basic unit of the isolated, atomistic computer to draw inferences for society as a whole? The essential proposition of the theory is that the whole is the sum of the individual isolated parts. So, if we know how individuals respond to various stimuli, we know how the society composed of those individuals will respond. (In the words of Margaret Thatcher, there is no such thing as society--just individuals.) What is true for the individual is true for the economy as a whole. Further, since each economy can be considered as an individual--one who can compete and prosper internationally by driving down wages, intensifying work, removing social benefits that reduce the intensity of job searches, lowering the costs of government, and cutting taxes--it therefore follows that all economies can, too.

To move from the individual to the whole in this manner, though, involves a basic assumption. After all, those individual atomistic computers may work at cross-purposes; the result of individual rationality may be collective irrationality. Why isn't that the conclusion of neoclassical economics? Because faith bars that path--the belief that when those automatons are moved in one direction or another by the change in given data, they necessarily find the most efficient solution for all. In its early versions the religious aspect was quite explicit-- that instantaneous calculator of individual pleasure and pain was understood to be "led by an invisible hand to promote an end which was no part of his intention."2 For Adam Smith it was clear whose hand that was--Nature, Providence, God--just as his physiocratic contemporary, Francois Quesnay, knew that "the Supreme Being" was the source of this "principle of economic harmony," this "magic" being such that "each man works for others, while believing that he is working for himself."3

But the Supreme Being is no longer acknowledged as the author of this magic. In his place stands the Market, whose commandments all must follow or face its wrath. The unfettered market, we are told, ensures that everyone benefits from a free exchange (or it would not occur)