Economic rationality proceeds from the principle that human beings are “acquisitive, you like to acquire more wealth, you like more income,” as Kaushik Basu told us last Tuesday. It is an assumption, Dr. Basu would point out, that is supported by the experiments of today’s trend-setting behavioral economists. Saint Paul, however, believed that the desire-for-more-and-more (pleonexia in Greek) is the root of all evil. Why this disagreement?
Classical empiricists like Thucydides also documented the negative impact of the Athenian desire for greater wealth and greater power in "The Peloponnesian Wars." Modern critics of neo-classical economics have pointed out, for example, that for economics to function in keeping with the theory, economists have to assume that participants in a transaction are equally free. But that freedom is very often an illusion, especially at the international level.
The United States is now in the process of advancing a new free trade agreement. In fact, these agreements are not the frameworks for free exchanges, they are, in fact, only rulebooks for differently managed trade. They are usually managed to the advantage of big interests. Workers are not represented; the environmental costs of trade are not included; the needs of poorer groups and regions are not included.
The 1999 World Trade Organization meeting in Seattle is famous for the demonstrations which closed the meeting down for a couple of days. But the meeting failed not because of the demonstrations in the streets, but because of the ham-fisted management of the Clinton administration, the meeting’s host. Committee meetings were never held or the organizer only convened rump sessions of leading industrial and agricultural nations. Other medium-income and developing country representatives were excluded.
Economic rationality (as a supposedly universal human instinct) can do its work only when the playing field has agreed markings and all actors play by the same rules. Markets function rationally only when limits are set by “social norms, law and [effective] governance.” Law and governance can’t work without a moral culture in which men and women hold themselves accountable to common standards. So, the more nebulous, less measurable component of a society’s ethos is also of critical importance. The institutions of law and government and the ethos are mutually enforcing. Without an ethos as its life-blood, institutional arrangements will not save the economy from blind self-interest.
The Great Recession of 2007 to 2012 was the result of financial institutions, financiers, and money-managers seeking their advantage in a deregulated and under-supervised environment. The collapse followed an unwarranted belief on the part of financial managers and politicians in the beneficial outcomes of an untrammeled market.
Yale political philosopher Thomas Pogge has argued that the elimination of aggravated inequality depends on fair participation in global institutions. Without progress toward wider and more effective participation in national, regional, and international bodies, the rules of the market will continue to be skewed—and, by universal standards, irrational.