Freedom in our contemporary global economy

What is freedom? It seems that this question has become very important in the age of neoliberal decline of civic society. Recently, in an interview with the Guardian newspaper, the marxist philosopher Slavoj Zizek discussed freedom in our age of the Arab Spring and the Occupy movement. Zizek is as usual rather fuzzy about what exactly freedom is, but he points out a very valid point, namely that the ultimate form of freedom is to question the institutions that determine our society and economy.

I want to elaborate a bit on this by enhancing the discussion and linking this form of institutional freedom with the type of freedom that so dominates our economic and neoliberal perspective on our economy, namely individual freedom. In fact, I distinguish three related notions of freedom:

Individual freedom

The most basic form of freedom is the one that prevails in our thinking since enlightenment and the industrial revolution: The ability to be allowed to freely choose between multiple alternatives. This individual form of freedom is seen rather primitively and linked strongly with the acts of consumption or production. But it is never truly satisfactorily considered in the discussion in economics beyond these rather straightforward considerations.

Indeed, what exactly does this individual freedom mean? If it is simply the act of selecting freely from a set of alternatives, then it can be rather meaningless. What if the set of alternatives is very small? This important aspect of individual freedom is usually avoided.

A simple thought experiment clarifies here: Consider an individual completely by herself in a desert. She can do anything she wants and as such is completely individually free. But this setting renders this freedom meaningless, since it is not in context of interaction with other humans. Thus, freedom only has meaning in a social context. So, individual freedom should only be considered in the context of a society. In fact, the size of the set of alternatives that one can choose from is usually determined socially; it are institutional settings and actions of others that determine what one can actually choose from.
So, the discussion of individual freedom is really one that goes far beyond the individual and considers the social and institutional environment of the individual rather than just the individual herself.

Social freedom

This brings us to think about a second form of freedom, namely one that goes beyond individualism: A form of freedom considering an individual in her social environment. Social freedom refers to the freedom to engage with other individuals and freely build one’s social networks. Thus, this form of freedom is really about influencing others’ choice sets and to give up some of one’s individual freedom by restricting one’s choice sets to create new choice or choice sets.

Engaging with another human being usually means that one restricts choice, simply by spending time and effort to engage, excluding other uses of that time and effort. However, other choices might emerge from this engagement, which were not possible before that engagement. For example, engaging with a potential business partner or collaborator reduces one’s productive time, but creates new opportunities to build a business venture or to develop a common project. Social freedom in all respects is the antithesis to individual freedom.

Institutional freedom

The highest form of freedom stands above the two forms of freedom that I discussed thus far. Institutional freedom directly addresses and confronts the institutional environment in which one exercises these individual and social freedoms. It is this form of freedom that Zizek debates in the Guardian interview.

Institutions determine individuals’ ability to exercise their individual and social freedoms and provide a framework that constrains as well as liberates people. What form of these institutions should we strive for and implement in our society? How far can we go in restricting individuals’ exercise of their individual and social freedoms? How far can one go in modifying the institutions that form the basis of society?

It is these important questions that are asked in the exercise of one’s institutional freedom. The ability to question and debate is exactly what institutional freedom facilitates. And is exactly this form of freedom that has always been important during enlightenment and more recently in our contemporary global economy. It is the erosion of this highest form of freedom in our western societies with the rise of the security state that should worry us.

Limitations of behavioral economics

Over the past months during the current economic recession and financial crisis, there has developed a published opinion as if so-called behavioral economics could explain the crisis. Behavioral economics emanates from observations in economic and game theoretic experiments that human subjects do not behave rationally, but are clearly bounded in their reasoning about decisions. Subjects are now routinely put under MRI scans to see which parts of the brain are used in which decision situations.

The main problem with behavioral economics is that it is staunchly methodological individualistic; the center of decision-making remains the singular individual. I think that consequently it cannot satisfactorily explain the economic world and certainly not the current financial crisis. This crisis has its origin in a failure of trust between contracting parties in the financial sector of the main economies; as argued before, it can be called a true trust crisis. Trust is fundamentally an interpersonal phenomenon and should be explained through sufficiently developed social theories. These theories cannot longer be founded on methodological individualistic arguments, but should rather be based on more interactive and social considerations.

Methodological individualism has as its singular strength that it is particularly open to successful mathematical and statistical modeling. As such economics is the outcome of a long history of methodological individualistic modeling. Its world-view is essentially alien to regular human interaction and more suited to model behavior of decision makers with autistic tendencies as recently pointed out by Tyler Cowen in his discussion of academics. In his Behavioral Economics Cowen takes that a step further and promotes the idea that we essentially should become more autistic, thereby essentially arguing that the world should actually adapt to economic theory rather than the reverse. It fits with a long history of economists trying to fit the world to their limited understanding and promoting individualism as a “good” behavioral mode, thus denying the fundamental sociality of the human condition.

I think that economics should rather adapt to understand the world better and at least soften-up on the issue of methodological individualism. Recently, Paul Romer presented an innovative way to look at history from such a more social perspective. However, to be successful at looking at the economy from such a social perspective, economists need to abandon their trusted methodologies. They should recognize the utter complexity of the economy and allow the use of a wide range of techniques to be used to understand it. This not only implies the use of mathematical analytical modeling, large-scale measurement of economic activities, and simple experimentation in the laboratory, but also the use of simulation models and statistical approximations as used in theoretical physics. As it stands now, economics remains rather irrelevant and marginal a science.