An Idea of Progress

Implicit in the preceding discussion is a more serious indictment of economic and political analysis, a question about the largely absurd but always popular notion of economic progress and human welfare. Freud once said that our notion of progress was like the man who enjoys putting his bare foot outside the bed covers on a cold winter night because he finds that it feels so good when brought back in under the warm blankets. (Freud, 1930) Although the illustration may seem extreme, it is surely true that we persistently offer ourselves congratulations on fulfilling wants that were non-existent until we invented them. What kind of progress is this?

Consider the generally accepted economic postulates that an individual's wants are given (fixed) and that these wants are independent of both production (output) and also independent of the wants of others. These postulates deny the most obvious facts of free enterprise, specifically, that the economy creates most of the wants it seeks to satisfy and that my welfare depends significantly on how well off I am as compared with my neighbors. Who among us does not want to keep up with the fabled Joneses? (Frank, 1985)

Taken together, the links between production and consumption, on the one hand, and the links among consumers, on the other, constitute a vicious spectacle: new wants are created as fast or faster than old ones are satisfied and any gains by one consumer are often nullified by invidious comparisons with equal or larger gains made by his successful neighbors. The economy is, then, a treadmill with little or no possibility of coming to rest. These deductions preclude the classical idea of economic progress as the progressive fulfillment of human wants.

Dear to the hearts and minds of economists is the concept of equilibrium, attributed to Pareto, an equilibrium towards which the competitive economy is always tending. The bliss of equilibrium promises maximum welfare (utility, well-being) of consumers and maximum profits of entrepreneurs. This equilibrium is, indeed, one of the prime justifications for the competitive enterprise system. But even without examining all of the assumptions on which this proposition rests, we see that the preceding observations call the proposition into question. And we have additional authority for its repudiation. Von Neumann and Morganstern offer the comment that "This kind of problem [of maximizing] is nowhere dealt with in classical mathematics. A guiding principle cannot be formulated by the requirement of maximizing two (or more) functions at once." (Von Neumann and Morganstern, 1944) The Utilitarians have suffered from this problem of the double maximum since uttering the slogan that policy should aim for "the greatest good of the greatest number." It is analogous to the problem of giving a student a test and telling him to get the highest grade he can in the shortest time possible. Both aims cannot be realized at the same time.

Another assumption of the general equilibrium model is that the distribution of income is given. This is a severe restriction and in the current spectrum of opinions from Newt Gingrich to Jesse Jackson, everyone wants to change the distribution. People differ only as to whom they favor in the press for subsidies, tax breaks, and other benefices of redistribution.

Any discussion of economic progress in the sense of improvement in the well-being (welfare) of a people must take account of the economic presuppositions of the sub-field of economics called welfare economics (Sen, 1970, 1987).  One key proposition from this sub-field is that for the individual and society, increases in income are positively correlated with welfare. (Pigou, 1924) Now, as both the political left and right agree, the wonderfully productive accomplishments since the Industrial Revolution over two hundred years ago have raised measured incomes to undreamed of heights. Who would dispute this? So, then, why are we not in a state of delirious well-being? The answer is plain to see: inter-temporal (as well as interpersonal) comparisons of well-being are virtually without scientific foundation. Ask a seventy-year old person whose wealth and income have increased magnificently since he was twenty whether he is better off now than at that earlier time.

In any event, it is evident that our measures of income are terribly flawed. Though it is mostly faulty economic presuppositions with which I have been here concerned, it is useful to notice a few of the defects in the measurement of gross domestic product (Cobb, Halstead, and Rowe, 1955; Berle, 1968) One flaw is the omission of such non-market values as household services and volunteer work; another is the inclusion at market value of defensive expenditures to prevent crime or recover from it; another is the exclusion of resource depletion, environmental degradation, government investment, and a valuation of leisure time.

Two decades of stagnant real wages for the average American should suggest additional questions about the adequacy of our economic analysis. So also should the growing inequality in the distribution of income. Among the eleven most industrially advanced nations, the U.S. occupies the lowest rank. It is as if we are demonstrating the Matthew principle: "Unto everyone who hath shall be given, and he shall have abundance: But from him that hath not shall be taken away even that which he hath." (St. Matthew, 25:29)

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*"After illegal workers were found [among 20 companies in Atlanta] ...some 2,400 legal workers were hired...." From "New Tactic Is Tested on Illegal Immigrants: The U.S. tries to put residents in jobs held by illegal aliens." (Smothers, 1995)  As of September 30, 1995, the loss of over 42,000 jobs in the U.S. has been reported by the Department of Labor (Sterngold, 1995).

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References

Berle, A.A., "What the GNP Doesn't Tell Us," Saturday Review, Aug. 31, 1968.
Cobb, Clifford, Halstead, Ted, and Rowe, Jonathan, "If the GDP Is Up, Why Is America Down?" Atlantic Monthly, Oct., 1995.
Frank, Robert H., Choosing the Right Pond, N.Y., 1985.
Freud, Sigmund, Civilization and Its Discontents, N.Y., 1930.
Goldberg, Carey, "Choosing the Joys of a Simplified Life," New York Times, Sept. 21, 1995.
Gurley, John G., "The State of Economics," American Economic Review, May, 1971.
Lind, Michael, "To Have and Have Not," Harper's Magazine, June, 1995.
Maher, John, What Is Economics?, N.Y., 1969.
North, Douglass C., "Economic Performance Through Time," American Economic Review, June, 1994.
Pigou, A.C., The Economics of Welfare, 2nd ed., London, 1924.
Sen, Amartya K., Collective Choice and Social Welfare, North Holland, 1970.
Smothers, Ronald, "New Tactic Is Tested On Illegal Immigrants:  The U.S. tries to put residents in jobs held by illegal aliens."  New York Times, Sept. 26, 1995.
Sterngold, James, "NAFTA Trade-Off: Some Jobs Lost, Others Gained", New York Times, Oct. 9, 1995.
Von Neumann, John and Morganstern, Oskar, The Theory of Games and Economic Behavior, Princeton, 1944.