Economic theory Value

Aristotle contra the math stick: Magic numbers redux

In the last post I explored how magic numbers, such as a 90% debt-to-GDP ratio or a 2% inflation target, at once over-simplify and stifle economic policy debate. The role of magic numbers raises more general questions about “the rule of number” in economics. The math stick used to browbeat those who enter economic policy debates can be so effective in part because quantity has primacy over quality and means have primacy over ends in economic debate. Bear with me here, but to see this more clearly we should go all the way back to Aristotle. Things might get a bit abstract, but I’ll try my best to reign them in.

Aristotle asked what seem to be fairly naïve questions. For example, he ruminated on why it is that a particular number X pairs of shoes trades for one house. How is that two very different things – one for walking in and one for living in – are brought into a very specific quantitative relationship through human trade? Sometime towards the end of the 19th century, economics stopped asking such questions, precisely deeming them naïve and nonsensical in the process. A house “costs” five pairs of shoes because someone is willing to offer five pairs of shoes for another’s house. The first will get as much out of the house as the second from the shoes and exchange, usually via money, in a particular ratio allows them to come to this conclusion – simple and pat. End of story.

Not quite, says Scott Meikle, author of Aristotle’s Economic Thought. Ending the story here actually leaves ends completely out of the picture:

The consequence [of this commensurability is] that the question of ends cannot be formulated within economics. It is perhaps the most important question that can be asked in respect of economic matters, and whatever answer may be favoured, it does not reflect well on a theory if that theory is incapable of even formulating the question.

Aristotle’s question about houses and shoes seems so naïve to us precisely because it focuses on the qualitative difference between things that seems so incidental today. Sure, shoes and houses serve different purposes, or ends, but I can buy a new one of each if I get tired of the one I have, each has a price tag in the same dollars, each increases GDP by that price tag, and so on. Each is a smaller or larger pile of money that offers infinite possibility.

If there is a magic number in economics, it is infinity. If I sell my shoes, I can buy 100 gumballs, 1/100th of a car or any of an infinite number of things in between. I can invest the money and it can quite literally grow towards infinity. Houses and shoes in themselves have defined, limited ends. It is only when they come to be represented by money and when they are produced to be exchanged for money that this definite, separate purpose becomes secondary. More houses don’t necessarily mean more housing – but the aim in producing them is certainly more money. The vacant, foreclosed-upon homes that litter the streets of Detroit or Las Vegas and empty mansions that line London’s haughtiest avenues are equally evidence for this fact.

Here is a clue to another reason why Aristotle’s question may seem bizarre today: the point is not just that we trade things using money but that more money is reason things are made. A house is built to be sold – that it is lived in is a clear bonus, but one that does not register in GDP statistics. While national accounts currently fixate on a GDP number, alternatives have been proposed that look also to qualitative change and achievement of ends like health, wealth distribution, ecological sustainability and many more. Interestingly, even these are often then presented as a single number whose growth denotes better. Even alternatives mirror the very thing they challenge to have a chance in the game.

Perhaps because trade for money played a small role in the economic life of his time, Aristotle was able to recognize that there is a clean break between using things and using things to make money. For the same reason, however, Aristotle didn’t see how the leap from quality to quantity necessitates a leap in social organization. A couple of millennia later, Karl Marx, an economist somewhat back in vogue today, had something to say about this. He laid it out in a little book called Capital. There, Marx in part applied Aristotle’s naïveté to the world of work and found the entire web of social relations is also fundamentally changed when some are exploited workers and some are those who pay workers for their labour in production for profit.

Today, Aristotle’s questions are not so much naïve as almost incomprehensible. Perhaps this is why cheerleader for the 1% and influential economist Greg Mankiw can gush,

The value of making the right decisions is tremendous. Just consider the role of Steve Jobs in the rise of Apple and its path-breaking products.

A similar case is the finance industry, where many hefty compensation packages can be found. There is no doubt that this sector plays a crucial economic role. Those who work in banking, venture capital and other financial firms are in charge of allocating the economy’s investment resources. They decide, in a decentralized and competitive way, which companies and industries will shrink and which will grow. It makes sense that a nation would allocate many of its most talented and thus highly compensated individuals to the task.

Here Mankiw is explaining away mind-boggling inequality and the economic primacy of finance. Mankiw’s celebrated financiers are the quantitative wizard barons of today’s economy. The economic allocation problem is one of producing the most, period. Whether the end result is an increase in carpets or carpet bombers, more is better. How much, rather than why is the economic question.

Numbers are in a sense the tools that have taken over the magician’s workshop. The math stick can be used so effectively in economic debate because the fundamental facts about our economy are quantitative facts – facts about means, not facts about ends. To be sure a complex economy like ours requires a lot of mathematical, quantitative knowledge; to say this is, however, not to surrender to the argument that can remake almost any criticism into a mathematical misunderstanding. Aristotle may have asked a lot of seemingly-naïve questions, but he was also no mathematical slouch in his day!

One way to neutralize the power of the math stick is to find ways of talking about the economy that incorporate and even privilege the qualitative side of things. An empty house is different from a house that shelters people, a public after-school sports program is different than a private lesson paid for by a tax break – even though the money cost can be the same. While the pairs of shoes that can be used at any point in time is limited by the need for things to walk in, the pairs of shoes that can be objects for sale at any point in time is potentially unlimited.

This is the magic of infinity: things are no longer bounded, either by the number of feet that walk, the number of bodies that require shelter from the elements and so on. Aristotle saw the pursuit of quantity in the fable of King Midas:

But how can that be wealth of which a man may have a great abundance and yet perish with hunger, like Midas in the fable, whose insatiable prayer turned everything that was set before him into gold?

Hence men seek after a better notion of riches and of the art of getting wealth than the mere acquisition of coin, and they are right.

Ignoring feet and shelter as well as health, love and joy – allowing quantitative growth to implicitly take care of all this for us – risks a society that, like King Midas, is mired in hunger while coated in gold.

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