Economics: the study of scarce resources production, consumption, and distribution.
Philosophy: the study of the fundamental nature of knowledge, reality, and existence
It makes sense then to assume that the philosophy of economics is the study of the fundamental nature of economic knowledge.
Or the ontology of economics and how we can learn from the science.
In easier terms: How do we know economics is real, applicable, and how do we acquire knowledge from it?
Decision theory are things such as choice, risk analysis, the relationship between economic agents, and consumer/producer preference.
Game theory can be of exceptional help here. And that’s because it’s a shared tool – between both economics and philosophy.
Game theory, simply put, is the science of logical decision making.
How does one arrive to a conclusive (logical) reasoning, or decision?
So it works like this in economic terms:
Consumer A has a preference for product X over Y. But why does he/she have this preference? Because of Z.
“Because of Z” = is the logical decision making aspect.
But it’s not actually an economics aspect. It’s a philosophical question.
In presents to us notable prominent philosophical questions such as: “Can you truly decide anything objectively”?
It’s a truth claim.
Are we claiming that this theory relates to an objective reality? Or is it just an economists perception of it and the general overall trend of those being researched?
Common questions in relation to this include:
1. Can we lay an exact scientific claim to an economic theory?
Sure, for many things. A notable example being the Philips Curve.
Economists can predict with relative certainty. Or, they can find general trends and analyze the resulting data for insight.
2. What is ‘economic’ value?
Of course, in finance, it just means the dollar value surplus created by an action, such as an investment.
But how exactly are we supposed to truly, and masterfully, analyze this?
We can’t possibly take into account all of the cost vs. benefits of an action.
It’s simply impossible.
I touched briefly on this in my Rebuttal to The New American Economy Open Letter.
In the retort I stated:
So how do we define these costs?
Do we put a dollar figure on how much a human life costs in comparison to the supposed GDP growth?
Do we put a dollar figure on rape – and label the travesty that the woman has to deal with the rest of her life as the interest?
And it’s my exact point.
We can analyze the obvious costs and benefits of certain monetary things as economists.
We can’t analyze the cost of a murder, or a rape. Putting a dollar figure on a human life is immoral and impossible. What if that individual became a billionaire and invested thousands into charity? What if he became a criminal and took from society?
This idea that we can actually give a strict economic interpretation of things that we do not know – such as events that never had the chance to unfold – is hysterically inept.
So how exactly are we supposed to make conclusive statements?
The short answer: We, acting as just economists, can’t. Unless we use philosophy.
Philosophy of Economics
That’s where philosophy comes in. We can use it to more accurately analyze things such as the cost of a tragedy versus a supposed economic gain. See: broken window fallacy.
We need philosophy to consider the questions in relation to it:
Is it just? Is it moral?
And we have to use decision theory from an economist and philosophical perspective, to do it effectively.
We need to look at these questions through a “bigger picture” lens. While certain monetary gains seem obvious, the hidden costs are quite ambivalent.
Take for example a discussion on environmental protections.
EXAMPLE A) We place restrictions on the carbon footprint corporations can incur. Any over that, they pay a steep tax.
This has numerous obvious effects:
- The restriction reduces the harm to the environment
- It costs companies money if they exceed the limit, thus providing tax revenue to the government
- It likely reduces the profits of the company if they can no longer produce at the same output level
But it also has some other, hidden effects – not measurable by a cost vs benefit analysis. Such as:
- Companies may incentivize outsourcing because of the restriction. If they pack up and move overseas, it presents a lot more cost to us as a whole. How does the lost jobs, lost wages, lost income tax, lost resource, increased trade deficit, affect the country as a whole? How could we even begin to analyze all these effects?
- If we don’t restrict these companies – and they do impact the environment – how will it affect the living standards of those who have to deal with the mess? Can we put a dollar figure on the amount of harm that it may cause? What about mental or emotional issues? The shift in political voting because of these effects? Are those to be left out of the equation?
I could go on with these for a long time, but you get the picture.
There is a lot at work here to consider when seeking an answer to even the simplest of questions. That is the beauty of economics.
And there is a lot more in action that we can’t possibly (numerical) consider.
This is why within the breath of economists – there needs to be a philosopher.
Otherwise, it’s all about the money and overall welfare. With no consideration about the potential unspoken harmful effects.