Collective and Individual Rationality
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Collective and Individual Rationality: Some Episodes in the History of Economic Thought Andrew Martin Paul DENIS Thesis submitted in fulfilment of the requirements for PhD in Economics City University, London Department of Economics School of Social and Human Sciences December 2001 This thesis is dedicated to the memory of my father, Paul Justin Denis (1924-1982). 2 Contents Lists of tables and figures 5 Acknowledgements 6 Declaration on consultation and copying 7 Abstract 8 Key to symbols and abbreviations used in the thesis 9 1 Introduction 10 1.1 Preamble 10 1.2 Reductionism and holism: a response to Mario Bunge 12 1.3 Policy prescription and social philosophy: reducibility and the invisible hand 19 1.4 The structure of the thesis 28 2 34 2.1 Barry and Hardin: rationality at two different levels? 34 2.2 36 2.3 Iterated and n-player games 40 2.4 43 2.5 Collective and individual rationality 46 2.6 Hobbes and Rousseau 48 2.7 Conclusion 50 3 52 3.1 Introduction 52 3.2 The conditions 53 Condition O 54 Condition U 54 Condition P 54 Condition D 54 Condition I 55 3.3 Proof of the theorem 55 3.4 Scope for relaxing the assumptions 57 3.5 The libertarian response 61 3.6 Little: the argument against the existence of an SWF 64 3.7 Searle and Little 68 3.8 70 3.9 Conclusion 74 4 The Invisible Hand of God in Adam Smith 76 4.1 Introduction 76 4.2 Bibliographical note 78 4.3 81 4.4 Weltanschauung 86 3 4.4.1 All is for the best in this world and we should accept our lot with joy 86 4.4.2 Why, then, bother with considerations of morality? 89 4.4.3 Every cloud has a silver lining 92 4.4.4 Review 101 4.4.5 The invisible hand 102 4.5 114 4.5.1 th Century Philosophes 114 4.5.2 Nature and the natural in Smith 118 4.5.3 124 4.6 Conclusion 128 5 Friedrich Hayek: a Panglossian evolutionary theorist 131 5.1 Introduction 131 5.2 Hayek and Smith 133 5.3 Holism and reductionism in Hayek 136 5.3.1 Shenfield on collectivism and holism in Hayek 136 5.3.2 Hayek and holism 145 5.4 Hayek and evolution 147 5.4.1 Darwinian evolution 147 5.4.2 Hayekian evolution 158 5.4.3 The assumed optimality of evolved institutions 160 5.4.4 Group selection 167 5.4.5 Have Sober and Wilson rescued group selection? 179 5.5 -individualism 181 5.5 Conclusion 187 Appendix: Bibliographical note 188 6 191 6.1 Introduction 191 6.2 192 6.3 Keynes and holism 200 6.4 205 6.5 Did Keynes reject laissez-faire? 212 Appendix: Bibliographical note 215 7 Conclusion 218 7.1 Retrospective: Keynes and providentialism 218 7.2 Results and prospects 222 Glossary 224 References and bibliography 234 4 Lists of tables and figures Tables 1 Payoff matrix for a one- 36 2 Payoff matrix for a one-shot coordination game with ordinal payoffs 40 3 Preferences of the three sets of agents, V1, V2 and V3 56 Figures 1 V1, V2 and V3 59 5 Acknowledgements I should like to thank my advisor, Geoffrey Kay, and my wife, Mary Denis, for their unfailing support and encouragement during the production of this thesis. The inspiration for the thesis originated in work completed in the late 1980s as a student on the excellent MA course in Political Economy at the then Middlesex Polytechnic; I should like to record my debt to the teaching staff on that course, in particular the late Geoffrey Pilling. I should like to thank the following for their encouragement and/or for insightful criticism of various points in the thesis: Erik Angner, William Barber, Stephan Böhm, John Broome, Mario Bunge, Pete Clarke, Paul Coleshill, John Cowley, William Dixon, Sheila Dow, Denis Glycopantis, Denis Gray, Alfons Grieder, the late Peter Holl, Allan Isaac, Steve Miller, Simon Price, Joan Safran, Joe Sen, Adrian Seville, Ron Smith, Ian Steedman, Richard Sturn, Julian Ullman, Jack Vromen, and Rachael Walker. Papers based on various parts of the thesis have been presented at the Economics Department and Interdisciplinary seminars in the School of Social and Human Sciences at City University, and conferences of the European Society for the History of Economic Thought (ESHET), the European Economics Association, the Association for Heterodox Economics (AHE), and the Leeds Postgraduate Economics Annual Conference. I should like to thank the many scholars, too numerous to list, who have participated in these discussions. As is detailed at the appropriate points in the thesis, papers based on the material embodied in it have been submitted to various journals and I should particularly like to thank the editors, and several anonymous referees, for the Journal of Socio-Economics, Constitutional Political Economy, and History of the Human Sciences, for their helpful comments. A debt of gratitude is owed to my students on the final year undergraduate option in History of Economic Thought at City University, London. Their responses to the material of this thesis, as it developed, have been extremely helpful: I should like to thank them for their enthusiasm, commitment and challenging criticism. Finally, I should like to thank John Cowley and Jessica Holding for the invaluable gift of books which had belonged to the late Arthur Clegg and John Cameron, respectively. The views expressed and errors committed here, are, of course, entirely my own and not to be associated with any of the above. 6 Declaration on consultation and copying The following statement is included in accordance with the Regulations governing the Research Studies Handbook, 2000: Appendix ii, (xxx), paragraph 5(e)): I grant powers of discretion to the University Librarian to allow this thesis to be copied in whole or in part without further reference to me. This permission covers only single copies made for study purposes, subject to normal conditions of acknowledgement. Andy Denis 7 Abstract This thesis argues for the fundamental importance of the opposition between holistic and reductionistic world-views in economics. Both reductionism and holism may nevertheless underpin laissez-faire policy prescriptions. Scrutiny of the nature of the articulation between micro and macro levels in the writings of economists suggests that invisible hand theories play a key role in reconciling reductionist policy prescriptions with a holistic world. theorem in soci collective irrationality coordination problems lead to. The source of the dilemma is identified as the combination of interdependence in content and independence in form of the decision making process. Arrovian impossibility has been perceived as challenging traditional views of the relationship between micro and macro levels in economics. Conservative arguments against the possibility in principle of a social welfare function are criticised here as depending on an illicit dualism. The thesis then reviews the standpoints of Smith, Hayek and Keynes. For Smith, the social desirability of individual self- god who has moulded us so to behave, that the quantity of happiness in the world is always maximised. Hayek seeks to re-establish the invisible hand in a secular age, replacing the agency of a being based on the exploded notion of group selection, cannot underpin the desirability of spontaneous outcomes. I conclude by arguing that Keynes shares the holistic approach of Smith and Hayek, but without their reliance on invisible hand mechanisms. If spontaneous processes cannot be relied upon to generate desirable social outcomes then we have to take responsibility for achieving this ourselves by establishing the appropriate institutional framework to 8 Key to symbols and abbreviations used in the thesis Symbols The delta symbol ( ): X means the change in X, where X = C or M. The prime symbol ('): X' means X plus X, where X means C or M. AD aggregate demand MEC marginal efficiency of capital C commodity MPC marginal propensity to i the rate of interest consume M money Abbreviations of source titles1 Astronomy LLL Hayek (1982) Mandeville Hayek (1967b) -129 NSP Hayek (1978a) COL Hayek (1960) RTS Hayek (1944) EPS Smith (1980) SIP Hayek (1967a) CRS Hayek (1979) Sup Keynes (1979) CWXIII Keynes (1973b) TBT Hayek (1978b) CWXX Keynes (1981) Times CWXXI Keynes (1982) Keynes (Keynes, 1937a, b, CWXXVII Keynes (1980) reprinted in Hutchison, 1977) EP Keynes (1972a) TM Keynes (1971) GT Keynes (1973a) TMS Smith (1976/1759) IEO Hayek (1948) TSO Hayek (1952) KES Hayek (1983) WN Smith (1976/1776) Other abbreviations AI artificial intelligence GE general equilibrium ESS evolutionarily stable PC predicate calculus strategy SWF social welfare function 1 For details of works by Keynes, Hayek and Adam Smith, please refer to the bibliographical notes attached to the relevant chapters: Section 4.2 for Adam Smith, and the appendices to Chapters 5 and 6 for Hayek and Keynes respectively. 9 Chapter 1 Introduction: Holism versus reductionism in economic thought2 1.1 Preamble question perhaps the fundamental question for economics. How do (micro level) agent interests and behaviours interact to generate (macro level) social outcomes? Are those outcomes desirable, or should society as a whole, in the form of the state, intervene to modify them? This thesis will investigate these questions and explore the answers that have been given by some characteristic economic thinkers. The thesis thus forms part of an investigation into the views of various writers on the articulation between micro and macro levels in economics, between individual actions and social outcomes, between individual and collective rationality. The thesis begins, in this chapter, with an introduction to some of the fundamental methodological issues underlying the remainder of the work.