Professor Choi's response - response to Steven Pressman in this issue, p. 51

American Journal of Economics and Sociology, The,  Jan, 1997  by Young Back Choi

• E-mail
• Print
• Link

I

Introduction to the Response

I find the following characterization of the book as indicative of the Prof. Pressman's attitude toward it: "Worshipping the entrepreneur, and believing that any restrictions placed on the entrepreneurial spirit . . . have undesirable consequences, Choi remains blind to alternative explanations of entrepreneurship, and stretches his arguments to satisfy this preconceived conclusion." Before I respond to specific criticisms many of which concern, among other things, my treatment of entrepreneurship and envy, I will try to provide an overview of the book, to aid the reader of this exchange who may not have read the book. Along the way, I will try to address the criticisms.

II

What is the Book About?

It is an attempt to develop a theory to deal with a range of frequently observed economic phenomena, X-inefficiency, invidious comparisons, and entrepreneurship, that are important yet are ignored, or not adequately treated, in the dominant tradition in economics.

As they are much neglected in economics, however, one risks losing other economists' respect even for mentioning them. But each of these are perceived to be significant by some prominent economists. X-inefficiency is estimated by Harvey Leibenstein to be more than 25% of GNP, compared to no more than 0.1% of GNP for allocative inefficiency. Invidious comparisons have important impact on savings and consumption behavior (Veblen and Duesenberry), on the flexibility of wages (Keynes), and on competition in the market place (Veblen and Knight). And, of course, entrepreneurship is conceived as the engine of economic development (Schumpeter). I am not in shabby company. I am glad that Prof. Pressman at least agrees with me that the object of exercise is worthy: "a rational reconstruction of the function of the entrepreneur is long overdue and much needed."

III

Why Do I Aim to Develop a New Theory?

The reason why the phenomena are neglected in economics is because the core theory of the dominant tradition in economics - Maximization and Equilibrium - leaves no room for many phenomena of great interest. The concept of production function does not admit the possibility of X-inefficiency. The concept of competitive equilibrium leaves no room for entrepreneurship, and invidious comparisons threaten the optimality of competitive equilibrium. The core of economic theory, maximization, idealizes the market tendency. With all the necessary conditions, competition among wealth maximizing agents will leave no opportunity for gain unexploited, with the Pareto optimal result.

Recent attempts to discuss invidious comparisons using traditional economic theory (S. Jones and R. Frank) are not satisfactory because they are ad hoc, only restating what we already know in language officially sanctioned by the economics profession, by introducing arguments for status into the utility function, for example. The critics of orthodox economics have tried in a number of different ways, but have not succeeded in developing a theory that can account for a broad range of phenomena.

IV

How Do I Aim to Develop It?

What we really need is an understanding of the process through which various socio-economic phenomena emerge. For this, I take individual decision making as the starting point. I start with the observation that individual decision making involves two distinct elements: an understanding of a given situation and the logic of choice.

According to a common (but mistaken) interpretation in Neoclassical economics, maximization is the mechanism of rational individual decision making: the agent chooses a course of action from which he expects the greatest gain given his objectives and resources. If it sounds somehow reasonable, and many find it reasonable, it is because we routinely take so many things for granted in our daily lives that it appears that the central task of decision-making is how to pick the best course of action given all that we take for granted. But this is an illusion. Our lives are plagued by uncertainty.

Instead, I suggest that to better appreciate the nature of decision making, we consider a pathological case: We are placed in an unfamiliar surrounding. In this case, we cannot take many things for granted and must assess the situation we are faced with before we attempt to decide what the best course of action might be. Furthermore, I argue that the assessment of the situation, or an understanding of it, must be such that a course of action can be decided based on it. From this, I observe that the crucial step in decision making is arriving at an understanding, and not the logic of choice, as in Neoclassical economics.

But what can we say, in general, about the process of arriving at an understanding of a situation, about the process of making up our minds with the intention of taking an action? Not much, except to say that we have to have it in order to act rationally and, when we do not have it, as when we are faced with an unfamiliar situation, we desperately search for it. The reason is that the process of arriving at an understanding of a situation is inferential, (or conjectual), and we know from Hume: No inference, or conjecture, follows logically from experiences. Ignoring this problem, many have gone astray in attempting to offer a general model of decision making. (If someone succeeded, all human inquiry including science would become routine!) Obviously, I do not intend to follow a futile path. But without offering a specific model of decision making, where do I go from here? I have a useful strategy. But before I go any further let me introduce a concept, Paradigm.