Inevitable Brexit Post

I am a citizen of Portugal. My mother is from Macau and was born there when it was still under Portuguese control. She went through the long and difficult process of claiming her Portuguese citizenship so that I could have it through legacy. This allows me to live and work in the UK without having to apply for visas every few years (my other passport is Australian).

The process of gaining Portuguese citizenship was long, arduous, and expensive. But the Portuguese government treated us ex-colonials with respect and dignity. It was worlds apart from the way I was treated by the UK Border Agency when I tried to apply for visas as an Australian.

The UKBA treats applicants like criminals. It makes it impossible to speak with anyone in the system. The forms warn that any attempts to contact the agency will not be successful but will result in delays to the processing of your application. The agency is fortified within a labyrinth of Kafkaesque runarounds. It charges outrageous fees. The process of bringing in dependents or applying for spousal visas requires submission to humiliating and invasive examinations.

The UKBA also rejects every application it possibly can by creative interpretation of the laws. A friend of mine had his application rejected because his pen mark went too far outside one of the boxes he ticked. One of mine was rejected because I included the wrong page on one of twenty bank statements I had to send with the application. When your application is rejected, you are told that you have 28 days to leave the country. You are not told that you are allowed to appeal the decision and provide the right documentation (or send another form with all the ticks exactly the correct size). I had to ring a lawyer to find this out. The UKBA also warns that the appeal process can take months. You are not informed that you cannot be deported while the appeal is pending – again, I needed a lawyer to tell me this.

When I had sent in the correct page on my bank statement, my application was eventually accepted after appeal. But from that point onwards, I could never cross the UK border without being made to wait while an agent investigated my sordid past of illegal immigration. I must say that every agent apologised to me after finding out the truth but told me that they are obliged to investigate any visa that has a ‘flag’ on it.

Strangely enough, I still have this problem when entering the UK on my Portuguese passport, since the UKBA has linked together my EU passport with my Australian one. I am told this is (was!) in direct contravention of its treaty obligations to the EU, but that is a different story.

My immigration story is incredibly benign compared with others I have heard. I have heard of people being detained, deported, and fined for the most absurd imaginable reasons. I have heard of children being separated from their families. I have heard worse than that.

Immigration was a core issue in the EU Referendum, possibly the deciding issue. Intelligent people have argued that one advantage of leaving the EU is that Britain will be able to pick and choose its immigrants rather than having them forced upon it. My friend Neil Wilson has made this argument eloquently.

Neil claims that “every other advanced civilised nation on earth, outside the EU” runs a points-based system of selective immigration. I respectfully disagree. Face down the Australian Department of Immigration or the US Department of Homeland Security and tell me if you see evidence of civilisation.

I see a process that is deliberately made as expensive and dehumanising as possible. At times I barely managed it, and I am well off and a native speaker of English, with friends in high places. I cannot imagine what it would be like for somebody less privileged.

Do I believe in open borders? No. I believe, as Michael Dummett argued (please read his book), that just as anyone prosecuted for a crime should be treated as innocent until proven guilty, anyone seeking to migrate to a nation should be treated as legitimate until proven otherwise. We should not be treated as criminals trying to prove our innocence.

Now let me explain one reason why I voted for Britain to remain in the EU. The inhumanity of the UKBA and its counterparts in other nations did not emerge out of nothing. Such procedures are brought in on a wave of popular support, among native populations that always will harbour resentment against immigrants – including the ‘good’ (high point-scoring) sort of immigrants: fancypantses like me with higher degrees, often mixed ethnicity, middle-class jobs, and the requisite impressive bank balance. This popular resentment will always be a rich seam from which votes can be mined. The television stations make documentaries about heavily armed border guards chasing foreigners around, and the native populations squeal with delight. When one nation does it to the immigrants of another nation, that nation retaliates in kind. An accelerating arms race of nastiness between the UKBA and the Australian Department of Immigration has got us to where we are today. Immigrants become cannon fodder in a battle of national egos.

There is one and only one way to escape this vicious cycle. It is for nations to give up their sovereignty over immigration and enter into mutually binding international agreements, overseen by transnational bodies not subject to the ugly identity politics from which no national government can escape on its own. Nations must compromise on core principles of immigration to which they can all agree. The EU’s Free Movement of People might not have been the right principle, and I personally disagreed with its approach to non-EU migrants. But that is a matter that should have been argued within the EU Parliament or, in the ideal case, a Parliament of all the stakeholder nations.

Neil argues that: “People want nations for the same reason they want family and not just friends. People like their friends but want to live with their family – behind their own front door. Demonising nations is like demonising family, and needs to stop.

I strongly repudiate the analogy. We all struggle to get on with our families at times, but if you’re lucky enough to have a good family you know they’ll always be there for you when you need them most. Nations are not like this. The ex-industrial regions of England needed the more affluent regions to support them during the 1980s. Instead they got Thatcher telling them they weren’t getting their grubby hands anywhere near the family jewels, to wild popular acclaim. The resentment builds to boiling point, and the only escape valve for it blows straight through the hearts of immigrants and their families. That is what we have just seen. I’m sorry for being unoriginal, but it is true.


Thoughts on Direct Democracy

I don’t like bureaucrats in Brussels making decisions that affect my life.

For that matter, I don’t like Westminster MPs making decisions that affect my life.

But you know who I really, REALLY don’t want making decisions that affect my life?

The general public of Britain and the Commonwealth nations.

Some explanation on my last post

I was extremely surprised and touched by the supportive responses I had on my previous post where I declared my intention not to blog about economics anymore.

I had no idea how many people took an interest in my blog. I was also flattered by having very intelligent people write to tell me that my contributions are valued. Some even asked me if I was doing ok. I am moved by all this show of support.

I suppose what has happened is that I feel that I’ve run up against a problem I don’t know how to solve.

When I met Warren Mosler, I noticed how often he uses the phrase “the public purpose”. I think it’s a very good phrase – John Kenneth Galbraith’s Economics and the Public Purpose is likewise a very good book. But to use it opens up some deep philosophical questions. I have every intention of continuing to think and write about these questions. But I no longer think (if I ever thought it) that economics is the right way to approach them.

The questions are: What is the public purpose? Who gets to decide what it is? And what institutions are required to serve it?

It is good to make logical arguments in favour of certain answers to these questions. But they’re for everyone to think about, not for me to pontificate upon. Speaking to people in Britain has revealed to me that I just don’t know what people want.

Almost everybody here in the UK complains about greedy, corrupt bankers. Mosler has a very simple policy outline: give banks a list of what they can do – what serves the public purpose – and ban them from doing anything else. Ban them from taking financial assets as collateral, from selling debt to third parties, and other things that are not in the public purpose. Yet this direct and simple solution has zero uptake in the UK. Nobody writes about it in the newspapers. I haven’t heard a single politician even mention it. And activist organisations specifically focussed on banking reform, such as Positive Money UK, are fixated on far more radical solutions that seem aimed at centralising and consolidating the power of banking interests rather than regulating it.

Again, almost everybody here says they want people off welfare and into work and that they want better public services. There is obviously a very simple way of solving both problems at once: offer public sector jobs to anyone currently on welfare who would rather work for a living wage. Again, zero uptake in the UK. Instead, a growing number of people support the idea of a universal basic income. So almost the whole population thinks that one problem for the UK is too many people on welfare and too few people in work, and then half of them think the solution is just to take away the welfare while the other half think it’s to give welfare to everybody. Almost nobody thinks the solution is to offer work to the people on welfare. I just don’t get it.

Neil Wilson suggested to me that maybe it’s politics rather than economics that I don’t understand. I think it’s deeper than that: I just don’t understand the British public. They say they want a banking system that doesn’t just serve the greed of the few. Ok, here’s how to make banking work in the interests of the many instead. No interest. They say they want people to have the chance to work rather than living on government handouts. Ok, here’s how to effect that change simply and straightforwardly. No interest.

I know what I think the public purpose should be. But I have no idea what people in general think it is. And clearly I can’t take what they say they think it is at face value, since they completely ignore the most obvious policies for bringing that about.

To explain my previous point about MMT: I don’t think the problem is that people don’t understand how government spending works. The two policies above don’t even seem like they’d be particularly costly – not in comparison with the status quo. So it’s not that people think they would like these things but believe them to be unaffordable (look at the number of people that support universal basic income). The problem is much deeper and weirder. Are the policies too good – too effective at serving what the public declares to be the public purpose? Are the British worried they might not have enough to complain about if such things are implemented? I just don’t know.

Until I work this out, I don’t know how to contribute anymore. Any help is greatly appreciated.

Apologising to Simon Wren-Lewis and Nick Rowe

This is probably going to be my last post on the philosophy of economics. Some recent events have led me to reassess my priorities.

I’m not abandoning politics or economics. I would just rather use this blog to write about the history of logic, and philosophy more generally. That fits my title better anyway. I’ve also come to the unwelcome conclusion that I’m quite bad at economics, whereas I have to hope that I’m not a terrible historian of philosophy.

What I’d like to do here is concede how much I now think I was wrong about and how much Simon Wren-Lewis was right about. A lot of this also applies to Nick Rowe, who has also been kind enough to engage with me over the last year or so.

First, I think that Wren-Lewis was probably largely right about MMT. His complaints were directed against the hard core of MMT supporters online, not the actual developers of the theory. He had two complaints:

  1. MMT seems obsessed with the accounting detail of government transactions
  2. This seemed to lead to ideas that I thought were standard bits of macroeconomics

Now I think both complaints are quite fair, again if applied to the MMT fan base online rather than to Mosler, Kelton, Wray, Mitchell, Tcherneva, and the rest of the proper MMT theorists. In the blogosphere, I would add that they don’t apply to people like Eric Tymoigne, Brian Romanchuk, and Neil Wilson.

Let me say something, however, about “standard bits of macroeconomics”. Wren-Lewis later pointed out that he is writing about “a world where monetary policy did successfully control demand and inflation”. That is the world of mainstream macro. And he is absolutely right that in that world – given that premise – all the accounting details in the world don’t show his story to be deficient in any way.

In that world, fiscal policy is neither needed nor effective as a macroeconomic stabilisation tool. It is not needed, since by definition demand is managed by monetary policy. And it is not effective, since monetary policy will just adjust to counteract any effects of fiscal policy on demand and inflation that diverge from its targets.

The logic here is faultless. But I, like many others, fell into the trap of trying to pick holes in it by way of facts about accounting. The truth is, if there is a problem with what Wren-Lewis says, it is not with the internal logic of his model; it is with its applicability to the real world.

What Wren-Lewis didn’t know about MMT, and couldn’t have known given the typical comments on his blog, is that it takes for granted a belief (implicitly founded I think on Post-Keynesian microeconomic theory) that interest rates just don’t work the way that they’re assumed to work in standard economics. This was then pointed out to him; he acknowledged it and then implied that it seems to be belied by the empirical evidence.

Again, the proper MMT reply here is subtle. The point is that even if monetary policy does work in the way presumed, it can have terrible unforeseen consequences. Another part of MMT that Wren-Lewis couldn’t possibly have seen (because nobody showed it to him) is its dependence on a Minksyan theory of financial instability: if loose monetary policy works to increase demand, for instance, it also increases instability in the financial markets, because those markets are inherently unstable. Randall Wray’s recent book on Minsky makes this case with admirable clarity.

The proper answer to Wren-Lewis, then, is that he should not be writing about a world in which monetary policy succeeds in controlling demand and inflation. Even if monetary policy is able to do that, the cost is too high: it sets up the conditions for financial collapse. But proving this requires an awful lot of Minskyan and Post-Keynesian theory, about how market signalling doesn’t work in the way assumed, about how people are not rational in the textbook sense, about how prices are largely set through convention rather than through competitive pressure, and so on. In other words, digging below the macro and into the micro is the only way to prove the case against mainstream macro.

What does not work is repeated assertions about the way that government spending works. Wren-Lewis gets this absolutely right. Such facts might be surprising to the general public and probably many micro- and applied economists. They undermine what he calls “mediamacro”. But they are not surprising to macroeconomists. MMTers are wasting an awful lot of time and energy on pointing out such facts when what they need is to promote the pricing theory, capital theory, and theory of financial instability that underpins their fundamental claims.

Again, let me be clear. The main MMT theorists have been making this case for a long time. And they are trying to get it out into the public; just look at Eric Tymoigne’s recent blog series on money and banking. But it hasn’t sunk in with the online MMT fanbase, who still think the problem is that macroeconomists don’t understand government accounting.

I know this because I made the same mistake myself for a long time. The trouble, I think, was that I wanted to have something to contribute to the conversation, and price theory, capital theory, and theories of asset pricing are really beyond my understanding. Accounting I do understand, and so I hoped that that might be enough to make the case for what I believe on instinct. I think a lot of others in the MMT fanbase fall into the same trap. But it is a trap.

I still believe the same things about policy – again, largely on instinct. And I do think that philosophy is useful in terms of clarifying concepts and arranging our moral and social priorities. I also still think that there is an interesting political philosophy contained in MMT that deserves more discussion. But frankly I lack the expertise to make the case I wanted to make. Luckily there are others to do so, but no intellectual shortcuts please. All excellent things are as difficult as they are rare.

Follow-up Post: Some Philosophy Lessons for Economists…

Long ago I took a course called “Economic Analysis for Political Philosophers” with Jo Wolff and Shepley Orr at University College, London.

think I remember Wolff saying something to the effect that he often felt a suspicion that economists don’t know the difference between necessary and sufficient conditions, but charity bid him put the thought out of his mind. If that is what he said, I’m beginning to know how he feels.

All that neochartalists claim – all that we need to claim to support our further claims – is that the imposition of tax in a currency is a sufficient condition for the currency being accepted in payment for goods and services.

Suppose the state wants to buy labour from us using its currency. If we have no inherent desire for the currency, then the state can create one for us, by imposing a tax payable only in the currency and threatening imprisonment for non-payment. Now we need to sell labour for the currency in order to pay the tax and stay out of prison. This is the standard neochartalist story. Taxation is a sufficient condition for the acceptance of the currency in exchange for goods and services. (Is it a sufficient condition for the general acceptance of the currency? Maybe not, but what business is that of the state? If we want our own medium of exchange to use for private purposes, we can create it.)

Now is taxation a necessary condition of currency acceptance? It need not be. We might have our own reasons for wanting the currency, in which case we would sell our labour for it regardless of the tax.

Has any neochartalist ever suggested that taxation is a necessary condition for acceptance of the currency? On the contrary, we actively deny it. If it were a necessary condition then balanced budgets would be incompatible with unemployment in the state currency at a given wage.

After all, if we had a total tax liability of £X/year, and the state spent a total of £X/year buying our labour, and nobody wanted pounds for any other reason than paying tax, then there would be no unsatisfied demand for the currency and nobody would be seeking more paid work in the currency. If the state either increased its spending or reduced the tax burden, then the excess supply of currency would drive down its purchasing power with regard to labour, and there would be inflation.

The reason why balanced budgets can and usually do lead to unemployment is precisely that taxation, within a given period, is not a necessary condition of demand for the currency within a given period. Suppose the state spends £X/year and people hold onto some portion of it for their own purposes. If the state also taxes £X/year then there will be some people needing pounds to pay taxes who aren’t able to get them. They will be willing to sell goods and services in exchange for pounds, but they won’t be able to get them if the state won’t increase its spending and others holding onto pounds aren’t willing to part with them.

Some people reply that this can’t be the right explanation in real life, since people who are unemployed aren’t the ones with tax liabilities. I’m not sure if this is deliberate obtuseness, but I can only reply: Don’t be silly!

Think of the following case. A has a tax liability that she can’t service out of current income. She borrows enough to pay her tax from B, who has a collected surplus of currency. Now C comes along needing food. A sells it to her on credit. C is now unemployed – she needs to earn currency to repay her debt to A – even though A was the one with the tax liability.

The real situation is much more complex, but the structure is fundamentally like that. And so neochartalists say that unemployment is caused by the state running deficits that are too small for people’s combined tax liabilities and savings desires.

Are they right to say that? Of course the situation could be resolved without the state increasing its deficit. B could, for instance, simply donate the currency to A; and A could donate the food to C. So the state’s small deficit is not a necessary condition of the unemployment. Nor, for the same reason, can it be said to be a sufficient condition.

So why do neochartalists call it a cause? I don’t want to give a lecture on the philosophy of science, but the notion that causes are equivalent to necessary and sufficient conditions faces grave and, in most contexts, thoroughly unnecessary difficulties.

R.G. Collingwood once gave the example of the AA man telling you that the cause of your engine overheating as you drove up a steep hill was a loose high-tension lead. To this, Collingwood notes, one could reply that the loose lead was not a sufficient condition of the engine’s overheating, on the grounds that you could have flattened the hill by stamping on it and then driven up comfortably on three cylinders. Nor was the loose lead a necessary condition of overheating, since even with the lead properly connected you could overheat the engine, say by setting fire to it.

So is the AA man wrong? Well, he is speaking in a context where it is obvious which things you are and are not likely to wish or be able to control. You can (I hope) control your impulse to set fire to your engine, and you can’t easily control the gradient of the hill. If you’ll permit me some jargon, causal statements are in many contexts interest-relative. Right now you’re interested in mechanical adjustments to your engine, not in the possibility of flattening hills or lighting fires.

The neochartalists find the operation of a currency to be one of these contexts in which causation is interest-relative. There might be various ways in which full employment in the state currency, along with price stability, can be achieved. But the most easy and reliable one is to scale the deficit to the right size. We’re interested in what can be easily and reliably done. And so we say that the cause of unemployment is the state – the currency-issuer – failing to spend enough to cover tax liabilities and savings desires.

I won’t say it’s as simple as that. What I will say is that it’s as simple as you want it to be. And for my part I have bad digestion when it comes to overcomplicated recipes.

Chartalism and Stock-Flow Consistency: A Reply to Nick Rowe

poster_stock_flow-resize-710x399I promised a reply to Nick Rowe’s post in which he proposed that the neochartalist (NC) view of currency suffers from a stock-flow inconsistency.

I’m moving house, going to farewell events, enjoying a visit from my parents, and marking exams at the moment. So this isn’t going to be a very detailed reply. Anyway, I’ve been told to go in a less technical and more humane direction with my blogs, which suits me. But I did promise a reply. And I have a gap in my marking schedule. So here we go.

Rowe takes issue with the NC claim that the state, by imposing a tax payable only in a given currency, gives value to that currency. “Value” is a nightmare word from a philosophical point of view. Let me restate the claim thus. The answer to the question: “Why is there demand for currency?” is: “Because it is needed to pay taxes.”

Rowe comments as follows:

There’s a problem with that answer. Taxes are a flow; they have the units $/time. Taxes create a flow demand for intrinsically worthless bits of paper. But there is a stock of intrinsically worthless bits of paper; and that stock has the units $. And if that stock of paper is strictly positive and increasing over time, as it usually does, that means the flow supply of new paper created must exceed the flow demand for paper to pay taxes. So if flow supply exceeds flow demand, why doesn’t the market price of those intrinsically worthless bits of paper fall to zero?

I agree with that. If the government spends $2 for every $1 it taxes back, then a stock of dollars is building up somewhere. If people didn’t want to be building up that stock, then they would be spending the dollars, and the dollars would find their way back to the government as tax payments. Since that isn’t happening, clearly people want to build up their stock of dollars. There is a stock demand as well as a flow demand.

But I’m not sure I understand Rowe’s complaint about this. I think his point is that taxes can explain the flow demand but not the stock demand, so that the NC theory can’t be the whole truth. The fact that people need X dollars/year to pay tax explains why people are willing to give up goods and services for dollars. If people on the whole end up accumulating dollars in excess of X/year, there must be some other reason for wanting dollars. There is, but only in this sense: people are always unsure about precisely how many dollars they need each year, and they overshoot to be on the safe side.

In a world of perfect certainty, there would be no need to accumulate dollars: people would spend all their dollars (or whatever currency) buying what they need today on the spot market and everything they need tomorrow on the forward market. Cue the requisite Keynes quotations about money as the barometer of uncertainty.

Rowe then asks what it means for velocity if the state runs continued deficits and the price of currency is not falling.

Here we can think of velocity as the flow of currency out of the economy (tax payments) divided by the total stock of currency. As Rowe points out, the dimension of the velocity variable is 1/time. The variable for the flow of currency out of the economy has the dimension $/time, and that for the stock of currency has the dimension $. So construing velocity as the first divided by the second gets us to the right dimension.

Rowe rightly points out that if the state runs continued deficits, and the new dollars are added to the stock of currency rather than being spent, then velocity must be decreasing. But what, he asks, explains this continued decrease in velocity?

I think this is the same complaint in a second incarnation. A slowdown in velocity is, effectively, the building up of a stock. So again Rowe is suggesting that NC theory has no explanation for the building up of the stock. This time, he proposes an alternative theory:

The simple textbook’s ISLM model has a clear and simple answer …. It says that velocity is a positive function of the opportunity cost of holding money, so if money always pays 0% interest, a rise in the rate of interest on other assets will cause velocity to increase. You might not agree with that answer, but it is an answer.

Is it an answer? It seems to me to have no operational content. The rate of interest on an asset is a function of forward price / spot price: how much people will pay for the asset in the future relative to how much they pay for it today. So to say that velocity will increase if the rate of interest on other assets rises is just to say that if people will spend more on assets tomorrow then they will spend more on assets today. Increase in velocity today is explained by increase in velocity tomorrow. Tomorrow’s increase now stands in need of explanation, and if it is explained in the same way as today’s increase then we are embarked upon a regress in danger of collision with the heat death of the universe.

Cue quotations from Joan Robinson about how economic propositions dissolve into meaningless noises or circular arguments. I’ll stick with the NC theory until a contentful alternative comes along.

The primary cause of poverty, as a wise president once said, is lack of money. People need currency to buy what they need. Those who have what they need will only give it up for currency. Why? Because they want currency to supply their needs, and those who have what they need will only give it up for currency, for just the same reason. There is a chain of dependence, but it is well-founded. At the end you get to those who want currency because they need it to pay taxes or are uncertain about their future expenses and build up a buffer to be on the safe side.lewis_carroll_-_henry_holiday_-_hunting_of_the_snark_-_plate_6

Poverty exists, in other words, because the flow-supply from the currency issuer is inadequate to the flow-demand created by taxation plus the stock-demand created by uncertainty. Increase the flow-supply, or reduce the flow-demand, and the problem goes away.

Another option is to try to reduce the stock-demand by reducing uncertainty. Most central banking operations boil down in the end to such an attempt. But it is a most impalpable Snark-hunt, and while the central banks are busy trying to charm Uncertainty with smiles and soap, or threatening its life with a railway-share, the government could just be increasing spending or cutting taxes.

Individuals don’t have preferences

guest-preference-2This is just a vague stab at a germ of an idea. It’s what I hope to work on in the future by looking at the history and philosophy of political economy. It’s not properly formed at all; I’m just getting the idea out there to be discussed by all the smart people who read my blog and have offered so much helpful advice in the past.

The basic claim I want to make is that the theory of individual preferences that lies at the basis of economic analysis, public choice theory, and other related social sciences, is wrong. Individuals don’t have preferences.

Start with consumer choice theory. Here is how Samuelson and Nordhaus (Economics, 2009, 84) define utility in that context:

In a word, utility denotes satisfaction. More precisely, it refers to how consumers rank different goods and services. If basket A has higher utility than basket B for Smith, this ranking indicates that Smith prefers A over B. Often, it is convenient to think of utility as the subjective pleasure or usefulness that a person derives from consuming a good or service. But you should definitely resist the idea that utility is a psychological function or feeling that can be observed or measured.

Here it is clear that “satisfaction” is no less a technical term than “utility”. To say that an individual is more satisfied by A than by B is not to say that A provides a greater feeling of satisfaction than B. So what does it mean?

In fact we can take the following sentence from the above passage as a definition: “If basket A has higher utility than basket B for Smith, this ranking indicates that Smith prefers A over B.” For A to have “higher utility” (or greater satisfaction) than B just is for A to be preferred over B. “Utility” basically just means “degree of preferredness”.

Well, what is preference? Hard-headed economists sometimes pretend to the view that preferences on their theory are nothing more than behavioural tendencies. But they can’t really mean it. In the first place, for all their protestations of value-neutrality, they can never forebear to attach positive value to the condition of people satisfying their preferences. But there is no reason to value the continuation of a mere behavioural tendency.

Secondly, they take behavioural tendencies to reveal preferences only under some descriptions. Suppose a consumer chooses a basket containing strawberries over one containing blueberries. Suppose he also, in the same choice, chooses a basket containing a prime number of fruits over one containing a composite number of fruits. One description is likely to be accepted as the description of a preference; the other is not. But both work equally well as descriptions of a behavioural tendency.

I think a preference can only be a rule. A person who prefers A over B is best described as following a rule specifying that A is to be chosen over B (with whatever relevant escape clauses must be added for realism). The rule must contain the relevant descriptions of “A” and “B”. But here the trouble begins.

If preferences are rules, and preferences govern behaviour, then Wittgenstein’s rule-following arguments suggest to me that it is impossible for a subject by herself to be consciously directed by her preferences. We have to ask: how is knowledge of a preference made available to the subject? Remember that the rule must contain the relevant descriptions of the things to which it relates. Suppose the subject is following the rule: “Always choose green Smarties over blue ones.” Then she says to herself: “Well, of course on Tuesdays blue Smarties count as green Smarties. That’s what the rule meant all along.”

Is it what the rule meant all along? If she is on her own there is nobody to challenge her judgement. As Wittgenstein puts it: “to think one is obeying a rule is not to obey a rule.” (Philosophical Investigations, 201) The most she can know through conscious introspection is that she thinks she is obeying the rule – following the preference.

But acting on a preference is obeying a rule, not simply thinking that you are obeying it. After all, if my preference for A over B leaves it completely open whether in any given circumstance I choose A or B (e.g. because I can always reinterpret what “A” and “B” mean), then it can’t be said that my preference is determining my behaviour. The preference becomes operationally insignificant. To adapt Wittgenstein, no course of action could be determined by a preference in this case, because every course of action can be made out to accord with the preference.

To continue with the example: maybe our subject has the rule written down somewhere and notices that it contains no special Tuesday provision. Is this enough for her to be able to be determined by the rule? No, because the rule she gave herself was what she intended to write down, not what she actually wrote down. If she made a spelling mistake in writing down the rule, she hasn’t thereby compelled herself, per impossibile, to choose ‘gren’ Smarties over blue. Anyway, there is always room for interpretation of what she wrote. If she wrote: “Always choose green Smarties over blue”, does the “always” mean that she should do nothing besides choose Smarties? Or was she compelling herself to live forever? In other words, there must be rules governing how to read the recorded statement of the rule, and if these rules also are recorded then we run to regress.

Our subject can, we might think, consult her memory to see if the intention behind the rule, when she first gave it, contained the special Tuesday privilege. But again we can say that to think that one remembers is not to remember. Checking what you think the rule is now against what you think you remember the rule being in the past is like, in Wittgenstein’s memorable image, buying a second copy of the newspaper to check that the first is accurate.

The upshot is that for an individual to act on a preference requires an external standard to confirm the rule defining the preference. This external standard can only be found in social interactions. The question is: what sort of social interactions?

Spinoza’s theory, especially prominent in Part Three of the Ethics, is that preferences work through mimesis (not his word). Naturally most of us don’t go around asking each other whether we are acting on our preferences. But what we do is look to others whom we believe to be similar to ourselves – to share our preferences. We make up our minds about what rules we are following by observing what rules they appear to be following. Now we have an external standard for what counts as following the rules – being guided by preferences.

Admittedly, it is not a very reliable standard, since the people we observe can always be breaking the rules. But the rules defining preferences are determined in an ongoing communal practice. The best analogy is with the meanings of terms in a language. Any individual can be simply wrong about the meaning of a word. But that doesn’t mean that meanings are objective in the sense of being independent of everyone’s beliefs about them. For a word to mean what it does, thinking makes it so – that is why meanings change over time. But it is the thinking of the linguistic community as a whole that makes it so, not the thinking of any particular member of the community.

Yes, ‘as a whole’ is tricky here. It isn’t a case of unanimity. And it doesn’t look like a case of majority rule either; it seems perfectly possible that most people should be wrong about what a certain word means. I can’t explain the analogy any better than it explains itself. In some sense the meanings of words are decided communally, and I am saying that preferences are communally decided in just the same way. And as we come to attach meanings to words by observing how others use them (even though any other person might be using any word incorrectly), so we come to determine what counts as acting on our preferences by observing the behaviour of those supposed to have the same preferences (even though any other person might be wrong about what counts as acting on any preference).

Put briefly: You can only prefer A to B by finding and interacting with somebody else presumed to prefer A to B, and that other person is in the same situation.

Veblen, Galbraith, Duesenberry, Fullbrook, Hodgson, and many others tried to incorporate interdependent preferences into the theory of economics. Gary Becker tried to develop a theory of what he called “social interactions”, and even Pigou wrote a couple of articles on interdependent preferences. That notion on its own plays havoc with the familiar idea of equilibrium. But this theory goes much further. Preference, on this theory, is inherently social. More bluntly: individuals don’t have preferences; only communities do.

If this is right, I believe that economics and public choice theory need to start afresh from a new foundation.