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History
of Economic Doctrines Session 3 Alternative Theories of Human Behavior II (See the link Behavioral Economics for elaboration.) SOCIOLOGY Sociology is the study of how people interact in both formal and informal social institutions, and how these social structures develop. Sociologists emphasize that human behavior is adaptive and they focus on, among other things, pecking order: class, status, and power. Issue: Are humans primarily social animals? Are “socialization”
and “self-interest” motives compatible? Note: The importance of relative position is largely ignored by economists, who largely eschew, e.g: “interpersonal comparisons of utility functions.” Relative positioning makes analysis very messy and mathematical optimization almost intractable, so this is a place few economists dare to go. Example: Suppose you can choose: (a) an annual income of $80,000 while all of your neighbors and acquaintances average $90,000 annually, or (b) an annual income of $70,000 while your neighbors and acquaintances average $60,000 annually. The majority of people asked this question choose (b), which suggests that orthodox economists ignore some insights possessed by sociologists. Organizations and
Leadership
Weber viewed bureaucracy as
necessary for the efficient accomplishment of modern tasks, and contrary to
e.g., Franz Kafka and several Italian sociologists [below], was reasonably
optimistic that bureaucracy could be other than largely arbitrary and overwhelmingly
authoritarian. Social Homeostasis: Homeostatic systems (organisms, organizations, or entire societies) have developed mechanisms that tend to automatically adjust to shocks, thereby maintaining internal structures and functionality. For example, homeostasis in organisms facilitates adjustments to environmental shocks by stabilizing such metabolic functions as temperature and blood pressure. (Shivering in response to cold, for example, automatically generates heat through friction, and coughing clears the windpipe.) Talcott Parsons (1902-1979) was an American sociologist who believed that
social homeostasis ensures that; if
there is a disruption to social structures, then society adjusts to revert to
the familiar. In organizations, according to sociologist Parsons, laws and
customs abound and are adjusted to maintain class, status, and power
relationships; societies everywhere sanction individuals who threaten to
disrupt the status quo. In classical economic theory, Adam Smith’s
“invisible hand” of the marketplace operates as a homeostatic
mechanism, using the prices of goods and resources as signals to
automatically regulate economic activity. Elitism and Hierarchy: Top Down? In The Republic, the early Greek philosopher Plato (427-347 BCE) advocated rule by an elite of “the strong and the fierce” – a Philosopher King who should regulate all social and economic activity to maximize the well being of the citizenry.
Gaetano Mosca (1858-1941) In his The Ruling Class, the Italian sociologist Gaetano Mosca asserted that most people desperately want to conform to the mores and behavior of their peers, and prefer following to being leaders. Much in Mosca’s writings echoes and amplifies the earlier writings of Niccolo Machiavelli (The Prince), and some social philosophers view Mosca as a thinker who profoundly influenced the ideology of fascism. Roberto Michels (1876-1936), an Italian journalist and sociologist, developed his Iron Law of Oligarchy after studying labor unions in Italy. Michels contended that the leaders of all organizations – from a local PTA to Microsoft to the United Nations or the Chinese Communist Party – share similar characteristics; and tend to be authoritarian and very hierarchical, with “top down” management styles. Vilfredo Pareto(1848-1923)
While wearing his sociologist hat, Pareto expounded on his fears that decentralized democracy is inconsistent with the makeup of human beings and to the dynamics of human interaction. He lamented that all social systems seem inevitably to succumb to levels of authoritarianism that, contrary to e.g., Marxist theory, are not flaws unique to capitalism. As a sociologist, he may be best known for what is now called Pareto’s Law of Distribution or the Pareto principle. According to Pareto’s Law, roughly twenty percent of the individuals in a society will control roughly 80 percent of the society’s wealth. Individual drive and willpower determine income and the accumulation of wealth so that a government cannot successfully redistribute in the long run. Attempts to redistribute are an exercise in futility, because regardless of social organization (e.g.: feudalism, capitalism, or socialism), strategic adjustments by acquisitive individuals will restore the distribution of income or wealth to a state similar to that which existed prior to the redistribution.
Pareto’s observations about the 80% / 20% distribution of income or wealth have been extended to numerous areas, including such assertions as the following: 1.
80% of all productive work is accomplished
by 20% of all workers. 2.
80% of all problems in any activity are
generated by 20% of all participants. 3.
80% of any task is accomplished in the
first 20% of the time devoted to the task. 4.
80% of all crime is committed by the most
active 20% of all criminals. 5.
80% of national income must be allocated
privately; if government spends more than 20% of national income, political
unrest will cause a regime change. [This formulation was developed by Joseph
Schumpeter, and is known as Schumpeter’s
Law of Taxation.] 6.
And so on. Vilfredo
Pareto: The Economist Pareto was a highly skilled mathematician who, among other notable contributions to theory, formalized the concept of economic efficiency with an approach that still dominates economics. If a society is Pareto efficient it is impossible for anyone to gain unless someone else loses. In a fully Pareto-efficient equilibrium, further exchange is, at best, a zero-sum game. Pareto efficiency , also called Pareto optimality, requires (a) allocative efficiency, (b) productive efficiency, and (c) distributive efficiency. Allocative efficiency requires the global pattern
of output to mirror what people want and are willing and able to buy. This
concept is hinted at in the writings of the Greek philosopher Hesiod, but was
more systematically specified by Pareto. Productive efficiency (or technical efficiency) requires minimizing the opportunity costs for a given level of output. It follows logically that the maximum value of output must be derived for given amounts of costs or resources. Together, these characteristics are known as an “economic dual.” Distributive efficiency requires people who
value relatively the most (a ratio) each of the goods society produces to
consume them relatively more. For example, if you prefer apples to peanuts
while I like peanuts better than apples, your apple-to-peanut consumption
ratio must be greater than mine. Economic efficiency assumes
that society gains when anyone gains because all are members of society. Also, an item’s worth [its marginal social benefit] is
approximately equal to the price required to buy it. Moreover, in a competitive
economy, the price of a good reflects the cost to society of someone having a
unit of the good. [marginal social
benefit = P = MC = marginal social
cost. Paper by Byrns: “Semi-Positive Economics and Pareto Optimality” Economic Decisionmaking: Bottom Up? During the Age of Enlightenment, social
philosophers began looking for alternatives to feudal kings as economic
regulators and arbiters of the legal and social structure. The idea that
virtues of a capitalistic market system include its decentralized
decision-making and the potential of competition to challenge concentrated
power began to emerge in the seventeenth century as markets increasingly
replaced exchanges based on barter. By the middle of the nineteenth century,
the “classical liberals” strongly advocated
“bottom-up” decisionmaking through markets as an alternative to
governmental allocations of goods and resources. Capitalistic competition was
expected to diffuse the power of entrenched elite groups, and to flatten
hierarchical structures. |
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These web pages are significantly edited and elaborated versions
of student notes based on lectures by Ralph Byrns, 2002-2005.
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