krebscycle

To start:

If you open up any good book on welfare economics or general equilibrium which has appeared since Debreu’s Theory of Value… economic agents care about… their own consumption of goods and services. Does any agent in any such model care at all about what any other agent gets to consume? No; it is a matter of purest indifference to them whether their fellows experience feast or famine; even whether they live or die. If one such agent has an unsatiated demand for potato chips, and the cost of one more chip will be to devastate innumerable millions, they simply are not equipped to care. (And the principle of Pareto optimality shrugs, saying “who are we to judge?”)…. Well, you might say, welfare economics and general equilibrium concern themselves with what happens once peaceful market systems have been established. Of course they don’t need to put a “pillaging, not really my thing” term in the utility functions, since it would never come up. Surely things are better in game theory, which has long been seen to be the real microfoundations for economics?

In a word, no. If you ask why a von Neumann-Morgenstern agent refrains from pillaging, you get the answers that (1) the game is postulated not to have pillaging as an option, or (2) he is restrained by fear of some power stronger than himself, whether that power be an individual or an assembly. (Thus von Neumann: “It is just as foolish to complain that people are selfish and treacherous as it is to complain that the magnetic field does not increase unless the electric field has a curl.”) Option (1) being obviously irrelevant to explaining why people obey the law, etc., we are left with option (2), which is the essence of all the leading attempts, within economics, to give microfoundations to such phenomena. This is very much in line with the thought of an eminent British moral philosopher — one can read the Folk Theorem as saying that Leviathan could be a distributed system — but that philosopher is not Dr. Smith….

And then someone tries to argue by repeating an axiom,  and is then set straight

“In other words, they both have to agree that ‘this trade is good for us’, or the trade won’t happen.”

Again, this only works because of taking fork (1) of my post. Without it, the prototypical mutually beneficial exchange, under the assumptions of standard micro, goes much more like this:

MAN ON HORSEBACK: I have just killed the previous man-on-horseback of this village. Give me half of whatever you grow, or I will kill you, too.

PEASANT (wearily): Your worship is the soul of honor.

Standard economics postulates that everyone operates purely in terms of self-interest somehow magically within the boundaries of peaceful commerce – except for the people we all agree to pretend don’t exist. That’s why we can speak of the efficiencies of British cotton mills in the Industrial Revolution without speaking of the Combination Acts and the brutal looting of India, let alone the effects of the opium wars on British foreign trade. Or how one can write about oil pricing as if the US government was not sustaining a medieval theocracy in Saudi Arabia at a spectacular cost in lives and treasure.

So we have an entire field in which most practitioners spend their working lives explaining the properties of a function Economics(P, G, t) where P is the initial  configuration of private markets and G is the operation of Government as if G was simply regulating the money supply and perhaps injecting a certain amount of fiscal stimulus and P was not dependent on t and G. Fortunately for them, at a small enough scale, one might call it the limit of pretending, the curved space of this function appears flat- if you squint.