The Imagined Market

Donald MacKenzie

  • Machine Dreams: Economics Becomes a Cyborg Science by Philip Mirowski
    Cambridge, 670 pp, £24.95, February 2002, ISBN 0 521 77526 4

I’ve started giving my students money. Not to bribe my way to favourable teaching reviews, but to provoke reflection about the relations between economic and sociological views of human beings. The money is used to play the ‘ultimatum game’. A large class divides itself into pairs, who must not be friends or acquaintances. Each pair collects ten 5p coins. One of the pair proposes a division of the coins, and the other either accepts or rejects the proposal. The game is then over: no negotiation is allowed. If the offer is accepted, the students keep the coins, splitting them as agreed. If it is rejected, the coins are returned to me.

If everyone is a rational egoist – a homo economicus, the dominant construction of the individual in economics – proposers should offer their partners 5p, aiming to keep 45p for themselves. They can be sure respondents will accept, for rejecting the offer means leaving with nothing. In practice, however, proposers mostly offer 25p, with a minority offering 20p. If 5p offers are made (to get a decent number of them I have to infiltrate confederates into the class), the majority are rejected. There’s nothing idiosyncratic about these results: they are typical outcomes of the ultimatum game. Admittedly, 5p or perhaps even 50p is a trivial sum. When the ultimatum game has been played with much larger stakes, however – students in Indonesia have played it for amounts up to three months’ typical expenditure – the results do not differ fundamentally. Even substantial rewards do not provoke rational egoism.

Of course, nuances of interpretation are possible. A homo economicus who knows that his partner might not be a rational egoist can be expected to offer more than 5p: the optimum offer will depend on what he believes the distribution of probabilities of rejection to be (and, when larger sums are involved, the extent of his risk aversion). The microdynamics of the social interaction may be significant: even when playing with strangers, the figure one cuts in their eyes may matter. Nevertheless, a simple conclusion is that players of the ultimatum game are oriented to a norm that enjoins ‘fairness’, and perceived violations of the norm are punished, even at personal cost, by rejection of unfair offers.

If people are not homines economici, should economic theory be rejected as a fantasy based on unsound foundations? The classic riposte came from Milton Friedman, who argued that the test of a theory should not be the realism of its assumptions but the precision and success of its predictions. To assume that people are egoists who each maximise what economists call their ‘utility’ (roughly speaking, their individual satisfaction or pleasure), and that firms are rational entities that seek to maximise profit, allows a sophisticated mathematical apparatus to be brought to bear and testable predictions to be generated. While there is much room for debate about the success of those predictions, other social-science disciplines are certainly in no position to sneer.

A different, more troubling argument for taking economics seriously comes from the French sociologist of science Michel Callon, in The Laws of the Market (1998). Callon argues that economics does not describe an already existing ‘economy’, but helps bring that economy into being. Economics is not a descriptive but a performative endeavour. (Performative utterances – ‘you are now husband and wife’; ‘I name this ship Queen Elizabeth’ – make themselves true by being uttered.) In part, Callon has in mind loosely ‘economic’ practices such as marketing and accountancy, and the Enron scandal has certainly focused attention on how key data such as firms’ earnings are constructed through the practice of accountancy. However, Callon also claims a strong performative role for academic economics.

Friedman, for example, has not simply analysed markets but helped create them, starting in 1972 with the world’s first currency futures exchange, the International Monetary Market. Those influenced by Friedman – most famously the ‘Chicago boys’ in Pinochet’s Chile, but also US, Japanese and British economic policy-makers in the 1980s – reshaped entire national economic systems. And the influence of economics didn’t cease with the arrival of Clinton and Blair, though it changed form. Gordon Brown has been a particularly important channel. His decision to delegate to the Bank of England the power to set interest rates – arguably the single most crucial and most successful decision Labour has made – was underpinned by academic work applying game theory to expectations of inflation (game theory is the mathematical analysis of strategic, rational interactions in which the pay-off to a participant depends both on what he or she does and on what others do).

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[*] LRB, 13 April 2000.