Naturalism in Economics: Part 1- The Naturalistic Fallacy

Political expression is an area where naturalistic philosophy is desperately needed. Nowhere within politics is this dearth more noticeable than in the realm of economic policy. People on the left and on the right of the spectrum of economic policies find ideological opponents on the other side, while not recognizing the false assumptions about the nature of reality that they are incorporating into their own worldview. The debates are often accentuated by confirmation bias. At a more basic level the two groups are often not talking about the same things, although the language may appear similar. It is my conviction that if a naturalistic perspective is applied in analyzing the field of economics, much of the ideological debate can be brushed aside to reveal the essence of the issue.

To understand what naturalism can offer in understanding economics, we must first understand the fact-value distinction. The essence of the fact-value distinction is that there is a difference between what is and what ought to be. This distinction is important in economics because it is the philosophical line that separates positive and normative economics.

Briefly put, positive economics is concerned with facts free of values- the economics of what is.

Example: The price of oil has gone up by 30 cents in the past 6 months.

Normative economics is the economics of what ought to be.

Example: The price of oil should increase to help lower the amount of carbon released into the atmosphere from burning fossil fuels.

The entire political debate in mainstream economics can be followed through the interplay between the two forms of economic ideas.

Much of the misunderstanding between the left and the right is because of basic philosophical flaws in the way people think of economic theory; flaws that derive from a form of the naturalistic fallacy. My main argument in this article is that, like in the case of the naturalistic fallacy, economists often make the error of assuming that their subjective values are not affecting their allegedly objective economic ideas. They often build their moral preferences into their theories and assume them to be principles that apply universally. In fact, they don't recognize the values as being values at all, but as being objective facts of the universe. The line between objective facts and subjective morals is blurred in much of popular economic theory. In this, the first part of a series of articles on Naturalism in Economics, I describe why the naturalistic fallacy is responsible for much of the misunderstanding between people when it comes to economic ideas.

The Naturalistic Fallacy in Economics:

The naturalistic fallacy implies that it is impossible to derive objective values from facts about the natural world. If you are unaware of the naturalistic fallacy, I have addressed it here and here. In short, the naturalistic fallacy is a common logical error that people make when they ignore the fact-value divide. This divide straddles the distinct concepts of objectivity and subjectivity. It is useful to begin here.

Objective facts are empirically verifiable facts about the world outside of our minds. The best tool to study these facts is science.

Our minds are capable of internal experiences. These experiences are subjective.

The internal experience is essentially the emotional and conscious feelings experienced by the individual. Our values are born in this internal area of subjective experience. Each human being has a unique internal architecture which interacts with sensory information, giving rise to the ephemeral quality called value. When one assimilates facts about the natural universe into one's brains, these facts interact with and influence the intuitive inner value-system. The facts only inform that very personal and subjective value system. This inner value system can be explained mechanistically, but the values themselves remain subjective. Each human being is capable of looking at the same objective facts about the universe and coming up with a unique set of subjective values. Thus, values are different from person to person. Each moral position is not a product of objective facts alone, but of the interaction of these facts with each individual's unique internal architecture. There is no such thing as objective morality, just collections of individual values that can form a working group-morality in a specific cultural context. No mathematical model or experiment can establish human morality as a property of the objective universe outside of human experience. Experiences are an inherently subjective aspect of the human condition.

From the subjective/objective divide above it is clear that only subjective values can be derived from facts about the natural world. When one derives values (subjective) from facts (objective events), and then presumes that those subjective values are universal (objective), one makes the naturalistic fallacy. At best we can agree on a group-subjective moral point of view.

Unfortunately, it is not very intuitive to us humans that others may look at the same objective facts and their brains may come up with different values. Our emotions have been harnessed by our brains to respond to moral questions under the illusion that there is such a thing as objective good and bad. Consequently, people falsely interpret objective facts as pointing to some objective moral solution. The naturalistic fallacy is a very common fallacy. The illusion that morals are objective and apply universally may be hard-wired. This means that this illusion can lead to mass delusion in society, by spreading through cultural belief systems and traditions. It is imperative that one understands the naturalistic fallacy before proceeding further. For the rest of the article I will assume that you understand the basic implications of the fallacy.

The way the naturalistic fallacy asserts itself in economics is through hidden subjective ideas that are often built into economic models, while objective claims are made about these models. Since positive economics is concerned with objective facts free of values, and normative economics incorporates subjective values, the common mistake many economists make is to believe that their policies are positive while in reality they are normative. This is the special form of the naturalistic fallacy as it applies in economics.

The most fundamental of arguments from free-market capitalists is that the unregulated free-market model of capitalism is the most efficient model to distribute resources. The efficiency argument is used very often to justify the model as being objectively good, or even true, thus implying that it is a theory of positive economics. Many libertarians, including some skeptics, fall in this camp. However, there is a subjective preference that is built into this argument.

Example: Let us suppose, for sake of argument, that "efficient distribution of resources" is the goal of economics. This sounds straightforward, but it is not. What constitutes 'efficient distribution of resources' can vary vastly depending on the values of the individuals concerned. Different people have different value judgments on the end result of the process of distributing resources. Consider two families, each with 5 children. One family values merit and the other values sharing. The first family divides up the Halloween candy based on how well the children perform in school. The other family divides up the candy equally among the children, disregarding their performance. What role did "efficient distribution of resources" play in these cases? Efficiency in distributing the candy comes into play only AFTER the moral/values decision on how presents SHOULD be divided is answered. The desired end must be stated BEFORE figuring out how to maximize efficiency in achieving that end. Each family looked at the same objective facts, but their subjective values were different, persuading them to adopt different approaches towards maximizing efficiency in achieving their different ends.

Contrary to the intuitions of economists such as Friedman and philosophers such as Ayn Rand, some people feel that resources should not be divided based on how much money someone already has, or how intelligent someone is. For these people, 'efficient distribution of resources' simply means efficiently distributing resources EQUALLY among all people. Others may be thinking about how to efficiently reduce suffering by avoiding unequal resource distribution. Still others may be thinking about how to efficiently protect the planet by restricting the exploitation of it's resources (in this case, the value is in protecting the environment during the distribution of it's resources). Many people may not give so much importance to efficiency at all (demonstrating that the desire for efficiency is itself a subjective value). Since all these groups have different subjective values there is a break in the dialogue, caused by the assumption of the free-market economists that their values are shared by all.

What is going on here is that free-market capitalist theory is actually a normative theory with subjective preferences built into it. If it was claimed as such, there would be room for a debate on values to take place, thus bringing the issue some much needed clarity. Instead, conservative economists fail to recognize the subjective nature of their assumptions, and society has reached a stalemate in the conversation on economic policy.

Political Influence on Culture and Morality (and vice-versa):

Morals evolve. They are affected by the greater environment that the culture is a part of. In modern societies, the systems of law, social media, mass media and government policy constitute important aspects of the environmental component that shapes the moral values of individuals. Thus, different cultures with differing environments for morals to evolve in will produce societies with different moral ideals, within a certain range of malleability. Therefore, the average Swede may have a different moral outlook on economic issues when compared to the average American.

This leads us to one insightful conclusion: Policy issues concerning a group (including government and law enforcement), and the evolving morality in the culture of that group are locked in a feedback loop. Values (morals) influence policy, and conversely, policy (as environment) influences culture and values.

Policies enforced using normative assertions falsely labeled as positive theories can have a self-fulfilling effect. Here is why:

In a truly moral society, the economic policies of the society should represent the moral beliefs of its citizens. But when the moral beliefs of a select few who are in power are buried deep into the models that are presented, and the debate on the moral questions never takes place, the hidden (buried) morals are surreptitiously being forced upon the citizenry. Then, when the system becomes adapted to the economic model that is based on that hidden morality, the hidden morals themselves become accepted as a universal good by an unenlightened public. This is how it came to be that most Americans today believe that a competition and consumerism based society is the natural way. Their cultural environment has made it impossible for most people to even imagine that perhaps someday we can be free of such restrictions in human society; that a compassionate, affluent and egalitarian society would ever be possible someday. If we live in a society where the economic policy is based solely on the idea that self-interest pays off, self-interest WILL pay off! All the policy incentives in such a system will be geared towards making it so. Thus, the cyclical nature of the feedback loop ensures that the dominant politically enforced economic system will alter the morals of the individuals it affects. We humans tend to adapt to new environments by adopting change as a fact of the natural environment. We modify our value system to be more in line with the new conditions we live in. This leads to more people adopting the moral positions that are hidden in the false-positive economic policies, creating the conditions in the universe where the proposed model will hold true, thus completing the loop. It is therefore a self-fulfilling model. The naturalistic fallacy committed by those who pass off normative theories as positive ones leads to social-conditioning through brainwashing.

"Why, for example, should the international socioeconomic system, or for that matter our own society, be in the hands of unaccountable private tyrannies? That's a decision, it's not a law of nature."

-Noam Chomsky.

You will have gathered by now the great big lie that covers up the flaws in logic that our most popular economic models promote. There are hidden values being pushed by those proponents of economic policies who promote these models as though they are laws of nature; as though they are positive and not normative. These hidden values in the models need to be addressed if the models are to reflect the varied subjective values held by all people, and not just reflect the values of the ruling class.

Cart before Horse:

It has become a commonly held idea in economic circles that the way in which to approach economic policy is by applying positive economics first, to figure out the objectively ‘efficient’ model, and normative economics next, to see how we can apply the model to our value preferences. The ideological neo-con disciples of Rand, Strauss and Friedman have argued since the middle of the last century that values (part of normative economics) must only be used as a guide after positive economic models are used to determine what makes the best economic system. Thus, they believed that positive economics must be kept free of influence from normative economics. The most politically successful of these economists (and perhaps the one academic most responsible for the current economic collapse), Milton Friedman, had for decades successfully pushed the idea that a value-free system can best inform us about which economic policies can be successful. This belief has become dogma with the neo-conservatives. It is the fundamental philosophy behind modern conservative politics, expressing itself as the libertarian ideology known as ‘free-market economics’.

Let us unpack the idea.

Positive economics in so far as it makes no is-ought fallacies, is useful in informing us of facts, to be judged by our values. It deals with numbers and forms the mathematical backbone of economic policy, dealing with the concept of causality of events. However, practically applicable models that are developed using positive economics cannot make sense without subjective value judgments. Without values, these models are like the two families that know they must efficiently distribute the candy among their children, but don't have any idea what the specifics of the desired outcome are. They cannot say anything significant about the actual implementation of economic policy. Any economic model that is to be applied through policy must follow from the human value parameters involved. This is especially important for economic policies. All practically applicable economic models are both normative as well as positive.

So how did the neo-cons manage to propose positive economic models that had practical real-world functionality to them? The simple answer is that they cheated. Most of those in the last century who advocated for the idea that values must be kept out of economics, those like Milton Friedman and Ayn Rand, never actually followed their own advice. Indeed, it would not have been possible for them to, simply because without value judgments there would not have been any applicable policy to speak of. Instead, they lied. They built normative models and passed them off as positive models. Thus, the subjective values of these economists were surreptitiously passed on to the public as though they were objective facts. During all of this these economists were hypocritically calling for the removal of values from economic policy! After their models are then established as policy there is no room for the subjective values of others to be inserted, because these models only work under the set of hidden subjective values that the neo-cons used to build them. When people with different values present their objections, they are dismissed simply because these values are not 'efficient' under the model determined by the hidden values of the neo-cons. These economic ideas have dominated neo-conservative economics for decades. Milton Friedman popularized the idea in a famous 1953 essay that has been held up over the past half-century as the cornerstone of neo-con economic theory. Economists like Gunnar Myrdal have criticized the idea that values can be removed from applied economic theory, but the neo-con propaganda machine has nevertheless managed to successfully enforce the deceptive economic policies of Friedman and others through the political process.

The political, social and economic environment created by decades of subterfuge by the neo -ons has led to changes in the moral structure of American culture. Many people today accept a system that is antagonistic to their sense of value, under the impression that the social, political and economic environment that surrounds them is a fact of nature, and that the current economic system is an extension of natural law. It is this pressured acceptance of a system antagonistic to our moral outlook that creates a large apathetic class of working class citizens. This class of workers develops a sense of powerlessness that allows the neo-cons to continue enforcement of their economic policies and morals on the rest of society.

Consider this example:

Say you want to go shopping with a friend who wants to buy ingredients to make a chocolate cake. You have just had a baby and need to buy baby accessories. You realize that you have only one supermarket card between the two of you and that you will have to come up with a mutually acceptable strategy to do the shopping together, so that you can together hit all the stores that you must go to. Let's just say that the card is your friend's. Suppose your friend then proposes a strategy, saying that this strategy is the most efficient model to get the shopping done. He then proceeds to go only to the stores that sell ingredients for the chocolate cake, all the time claiming that this is the most efficient strategy. You realize that you cannot buy all the baby products that you want to. So, you adapt and make the best by buying what little baby stuff you can buy from the stores that your friend visits. Eventually you say to yourself that you might as well make lemonade when life gives you lemons.

It is obvious here what the problem is. Instead of both parties sharing their individual needs (the subjective values of all concerned) and THEN building a model that addresses those needs, one party is passing off his own needs as the common needs of both parties. In a mutually useful model, both parties must first share their different shopping objectives (the values) - in this case, exchange information on the ingredients of the cake and on the different baby things that are needed- and only then can they decide on how to approach the shopping together.

In the analogy, shopping together is equivalent to building a common economic policy. The required initial sharing of values does not happen when the neo-cons present their false positive models.

By building their own subjective values into their models and falsely claiming them to be positive theories, the neo-cons actually skirted the debate on the normative questions altogether. They just act as though their own normative theories are only concerned with facts of the universe. Having built their own values into their models, they dismiss the values of others as not fitting with facts about reality (as determined by their 'objective' models). By claiming that normative economics must follow positive economics, and then actually presenting normative theories as positive, they are deceptively pushing their values on everyone else who has been forced to check their own values at the door.

Hidden values ==> False positive model ==> Brainwashing that the model is objectively true ==> Public acceptance of hidden values.

In essence, we are all shopping for ingredients to make a chocolate cake, believing that the point of shopping is to make a chocolate cake. We've been convinced by the neo-cons that making a chocolate cake is the objective reality we live in, and that their model of how to buy the ingredients is the best thing for all. The truth is that IF we all wanted a chocolate cake, their model would probably be the most efficient of all. But what if we are really in need of the baby diapers and not the chocolate cake? That is a debate that needs to be had BEFORE we decide which model of shopping to follow. By convincing us surreptitiously that we all need the chocolate cake, the neo-cons are forcing us all to shop for those ingredients and to ignore the diapers.

Evolutionary Economics and the Fallacy:

In his book The Mind of the Market, skeptic, philosopher and economist Michael Shermer presents an analogy between the process of natural selection and the process of the "free-market". The claim is that, just as in the case of evolutionary processes, complexity and efficiency can arise in a market-based economic system through just individualistic action and self-serving co-operation. He claims that people must understand how economics 'works' in a similar way. This, he declares, is why skeptics and free-thinkers should subscribe to free-market economics.

Firstly, this is a terrible analogy, as many have pointed out, but that is topic for a different article. What's relevant here is that this is a classic case of making the naturalistic fallacy. Shermer presents the free-market model as a law of the natural universe, while in truth all it constitutes is a form of normative economic policy. The 'freedom' and 'liberty' that libertarians reach for in any debate are distractions. Any point of view can be justified by invoking these words. They are only meaningful in specific contexts where additional and varied moral principles apply. There is no particular reason why a subjective understanding of efficiency obtained from the principles of evolution SHOULD be the motivation behind economic policy. This is a moral decision and Shermer arrogantly makes it for the rest of us.

But Shermer is aware that economics contains moral principles as its foundation. Being of the Randian school of thought, Shermer is knowledgeable enough to try and place his libertarian ideas in a moral context. The nature of the dogma that he believes in, however, compels him to make the fallacy. Despite the pretense of an appeal to moral norms, Shermer's real motive is to demonstrate to readers that the 'Invisible Hand' of the market works in a similar way to evolutionary processes, and then use this analogy to justify free-market economics. Shermer audience, primarily consisting of skeptics and rationalists, are easier to convince that free-market economics is a positive (objective) theory when the analogy is with evolutionary processes which most freethinkers justly identify as being the most robust objective theory for explaining life.

To make his case for why we should subscribe to 'free-market' economics, Shermer resorts to extrapolating from ideas in evolutionary psychology. For instance, he argues that behaviors that evolved in hunter-gatherer societies cause us to panic when we find ourselves in the sort of economic conditions of modern times where high degrees of wealth-disparity exist. But, he claims, we must not panic since the "free-market" is an efficient and moral system. This sort of extrapolation from evolutionary psychology is absurd. If it can be argued that the behavioral tendencies that cause us to protest injustice in wealth accumulation evolved in primitive conditions and must be addressed, the same can be said of those behavioral tendencies in people that are tapped by those economic policies that result in that very wealth disparity. I've written about such tendencies here. Shermer simply disavows those behaviors that challenge his worldview while not acknowledging the moral choices he's making.

Shermer's argument can be broken down to:

Primitive (small group) behavioral tendencies + Modern (large group) societies = Resentment of extremely wealthy people and distrust of free-market economics

What is also true is that:

Primitive (small group) behavioral tendencies + Modern (large group) societies = Establishment of power-based economic systems (such as the 'free-market') and exploitation of an economic underclass.

The essential thing here is that both these are moral issues that must be discussed on a level platform. Shermer does not get to conceal his moral preference for an exploitative economic system by explaining away the opposition's moral preference for a hearty dislike of such a system as primitive behavior. The fact that liberals perceive the system as unfair can surely be explained mechanistically. However, this explanation does not indicate what SHOULD be done about it. Similarly, the establishment of unfairness in the system can also be explained mechanistically. This, however, does not invalidate the desire for some people in such a system. Both these are moral issues that need to be discussed openly. Shermer needs to be a bit more objective in his understanding of the subjective nature of these desires.

Shermer's arguments in support of the ideology of libertarianism are fodder for another article. In this article I simply wish to establish that Shermer commits the naturalistic fallacy, if only to demonstrate how even popular thinkers and skeptics like him are prone to making this fundamental error in thinking about economic policy.

Disclaimer:

There are those on the political left who make the naturalistic fallacy as well. Usually these folk define 'good' in a liberal sense, often having something to do with the health and wellness of all. Others define 'good' as the survival and continuation of the human species. Many such definitions of 'good' exist. I am not specifically calling out the liberals who make the naturalistic fallacy, because my position is that much of liberalism (and some aspects of conservatism) can be well-defended on a common moral platform. This will be the topic of the next article in the series.

Conclusion:

The fact that both the right and the left of the economic policy spectrum have falsely promoted their positions as objective positive economic philosophy explains much of the misunderstanding between the two groups. In essence, both groups are not speaking the same language. This confusion arises because people value different things and insert these different values into their visions of reality. How do we talk about a common economic policy if the values on which economic policies are based are different for different people? This is the dilemma that we find ourselves in.

The first step is to stop talking about economic policies as though they are independent of values. The value discussions must be had BEFORE it can be decided using mathematical models what the most efficient economic system is that can achieve mutually agreed-upon goals.