Does Humanomics Need a Moral Anchor?

 

This is a guest essay by Dr Edward W. Younkins, Professor of Accountancy and Business at Wheeling University, and Executive Director of its Institute for the Study of Capitalism and Morality. Ed is author of a trilogy of important books on freedom and flourishing: “Capitalism and Commerce”, “Champions of a Free Society”, and “Flourishing and Happiness in a Free Society”. He also has numerous other publications, including several published on this site. (Please see them listed after the end of this essay.)  

 Modern economics, particularly in its dominant neoclassical form, is often characterized by models that treat human beings as Homo economicus—rational utility maximizers responding predictably to incentives and constraints. This idealized abstraction enables precise mathematical modeling but, as critics argue, collapses the rich complexities of human behavior into a narrow calculus of preferences and payoffs. Homo economicus assumes coherent pref­erences, consistent rationality, and a reduction of social life to instrumental choices. But this framework struggles to account for trust, social norms, feelings of fairness, moral judgment, learning, culture, and meaning—features of economic life that we observe every day. 

 

 Enter Humanomics, a burgeoning intellectual movement that seeks to re-ground economic inquiry in the realities of human experience. At its core, Humanomics aims to integrate moral and social dimensions into the scientific study of economic behavior, recapturing insights from Adam Smith that have been marginalized in mainstream economic theory. Rather than reducing humans to narrow maximizers of utility, Humanomics treats them as sentient, social, purposeful, learning agents whose actions are shaped by sentiments, norms, ethical commitments, and reflective judgment.

 

The longest part of this essay reviews the work on this growing movement conducted by Nobel laureate Vernon L. Smith and experimental economist Bart J. Wilson. That portion of the essay is followed by a discussion of distinguished interdisciplinary economic historian Deidre Nansen McCloskey’s alternative, bur compatible, vision of Humanomics. This is followed by a discussion of neo-Aristotelian philosopher Douglas B. Rasmussen’s proposal that the traditional concept of homo economicus be replaced by dual concepts pf homo agens (acting man) and homo moralis (moral man).  An argument is then made that the neo-Aristotelian framework developed by Rasmussen and Douglas J. Den Uyl called Individualistic Perfectionism may provide a philosophical grounding for Humanomics.

 

 Adam Smith’s Philosophical Vision

 

To understand Humanomics, we must revisit Adam Smith (1723–1790) not merely as the author of The Wealth of Nations (WN)—often oversimplified as the father of free market economics—but also (and arguably even more importantly) as the author of The Theory of Moral Sentiments (TMS). Smith’s intellectual project embraced both economic systems and moral psychology. For Smith, markets emerge not in a vacuum but within networks of interpersonal relations guided by sympathy, propriety, and shared language. The often-quoted “invisible hand” metaphor in WN can only be read in full context when seen alongside his moral philosophy; humans are not egoistic automatons but social beings whose moral sentiments play a foundational role in shaping institutions and behavior.

 

Humanomics begins with this fuller Smithian anthropology: humans act purposefully, learn from experience, and are motivated by both self-interest and social sentiments like gratitude, resentment, trust, and fairness. Experimental evidence in economics, particularly from the works of Vernon L. Smith, shows that in simple game environments humans often behave cooperatively and reciprocally, even when self-interest alone would predict otherwise. These findings are hard to square with narrow neoclassical models but fit comfortably with a Smithian understanding of human nature as complex and multifaceted. 

 

Like Aristotle, Adam Smith focused on the cultivation of virtues and character building. Smith extended Aristotle’s ideas into modern commercial society. In turn, Humanomics builds on the connection between Aristotle’s eudaimonia and Smithian flourishing.

 

Humanomics as a Synthesis of Sentiments and Markets

 

In contemporary economic language, the dominant paradigm is sometimes referred to as Max-U: maximizing utility subject to constraints. Humanomics challenges this by asking a deeper question: What should the subject of economic theory be? If economics is a science of human wellbeing and prosperity, then it cannot abstract away the human condition; it must account for how people actually think, feel, communicate, and form norms.

 

In their 2019 book Humanomics: MoralSentiments and the Wealth of Nations for the Twenty-First Century, Smith and Wilson articulate a framework grounded in Adam Smith’s combined insights from TMS and WN. They argue that conventional economics has “lost sight of the full range of human feeling, thinking, and knowing in everyday life,” and that re-centering economics on sociality and sentiments enriches its explanatory power. Humanomics thus defines economics as a “science of human beings,” not simply a calculus of utility functions.

 

The core thesis of Humanomics is that economics must be re‑founded on a “model of sociality” that captures the full range of human feeling, thinking, and knowing. Smith and Wilson argue that the prevailing “maximize utility” (Max‑U) paradigm is inadequate because it reduces all action to outcome‑based preferences, ignoring the origins of action in moral sentiments and the context‑dependent rules that guide human conduct. In contrast, Smith’s model explains why people often act in ways that cannot be reduced to narrow self‑interest—for example, why subjects in anonymous laboratory games display high levels of trust and cooperation.

 Humanomics thus proposes a paradigm shift: from utility maximization to a “science of human beings” that integrates insights from TMS and WN into contemporary empirical analysis. This shift is not merely theoretical; it is driven by decades of experimental economics. Vernon Smith’s own Nobel‑winning work revealed that in market‑like settings, individuals often behave as narrowly self‑interested agents, while in personal social‑exchange games they exhibit strong other‑regarding tendencies. The Humanomics model reconciles these seemingly contradictory findings by appealing to Smith’s distinction between impersonal exchange (where anonymous rules of justice suffice) and personal social interaction (where fellow‑feeling and moral sentiments are paramount).

 Key to the Humanomics approach is its focus on rule‑following adaptation. Smith and Wilson emphasize that human beings are not merely preference‑satisfiers; they are rule‑followers who learn from social experience. We develop “rules of conduct” through observation, imitation, and the feedback of gratitude and resentment. These rules allow us to navigate both social and economic domains.

 

Extending Adam Smith’s Vision: Vernon  Smith and  Bart Wilson’s Contributions

 

Smith and Wilson extend several core ideas from TMS into contemporary economic analysis:

•  Fellow feeling (the capacity to enter into the emotions of others): Smith’s notion that we naturally project ourselves into the situations of others, sympathizing with their joys and sorrows, becomes a foundation for understanding cooperation and norm compliance in experiments;
•  Beneficence and justice: Smith calls beneficence (voluntarily doing good)  the “ornament” of society and justice its “main pillar”; Humanomics uses this to distinguish nonobligatory kindness from the strict norms whose violation calls for demands for redress; and
•  Impartial spectator (an imagined neutral observer): People internalize a standpoint from which they judge their own conduct. Humanomics treats this internalized judge as an explanatory mechanism for behavior that adheres to norms even when no external enforcement exists.

 

These themes allow Humanomics to construct non‑utilitarian models of choice in which rules, sentiments, and perceived propriety are primary, and utility is not reduced to felt pleasure or material payoff.

 Humanomics does not discard markets or rational choice altogether; it reinterprets them within a broader framework where market interactions are embedded in social relations. Markets are not mechanical devices for exchange but arenas where trust, reputation, norms, and sentiments actively shape outcomes. A simple market price is not just a number; it is a signal embedded in social practices and meanings. Similarly, cooperation in a trust game, or generosity in a dictator game, cannot be fully explained by narrow self-interest but makes sense when one accounts for gratitude, fairness, loyalty, and moral sentiment

 Smith and Wilson develop Adam Smith’s ideas in several crucial directions. First, they operationalize Smith’s moral psychology for experimental economics. They design games that test predictions derived from TMS, such as the role of gratitude and resentment in triggering reward and punishment. This provides empirical grounding for Smith’s often‑overlooked psychological insights.

 They develop a positive alternative to Max‑U. Instead of assuming that actions are driven solely by preferences for outcomes, Humanomics models action as rule‑governed and rooted in human relationships that involve what Smith called fellow‑feeling. This alternative framework not only explains anomalous experimental results but also offers predictive power about how people will behave in various social‑economic contexts.

 

In addition,  they re‑center economics on human flourishing. In their 2024 interview, Smith and Wilson connect Humanomics to the broader goal of human flourishing, which they describe as “discovery as a process that is adaptive and that anticipates new forms of knowing”. By restoring the moral‑social dimension to economic analysis, Humanomics seeks to inform policies and institutions that promote genuine human well‑being, not merely material efficiency.

 

A central insight of Humanomics is its emphasis on learning as a fundamental process. Unlike the static optimization models of neoclassical economics, Humanomics views human behavior as evolving through trial, error, reflection, and adaptation. Individuals do not come equipped with fully formed preference ordering; they learn who they are, what they value, and how their actions affect others. Experimental economics plays a crucial role here, providing empirical evidence about how people behave in controlled settings that approximate various institutional arrangements.

 

The result is a form of economics that is not just about equilibrium states but about processes of discovery. It recovers Smith’s method—humans are curious, puzzled by anomalies, and constantly refining their understanding. When models fail to predict observed behavior, Humanomics asks whether the underlying assumptions about human nature are the problem, not just whether the parameters are mis-estimated. 

 

Because Humanomics insists on incorporating social norms, sentiments, culture, and context, it naturally becomes interdisciplinary. It invites insights from psychology, anthropology, sociology, philosophy, and history into economic inquiry. This stands in contrast with an overly reductionist economics that isolates variables analytically while ignoring how human context shapes meaning and action. In real policy contexts—such as education, public health, public choice, or charity—Humanomic insights can lead to different conclusions than narrow cost-benefit analyses. Analysts must ask not merely whether a policy is efficient but whether it respects real human motivations, social norms, and institutional contexts. 

 Bart Wilson’s contributions to Humanomics focus on the moral ecology within which economic behavior takes place. Drawing on Smith, Wilson argues that human beings inhabit a world structured by rules — not only formal laws but informal norms of propriety, fairness, and respect. These rules are not arbitrary; they emerge from social interaction and are sustained by shared moral sentiments.

 Wilson’s concept of “moral ecology” refers to the environment of norms and expectations that make cooperative behavior possible. Just as biological organisms depend on ecological systems, human beings depend on moral systems that support trust and reciprocity. Markets, in this view, are not self‑sustaining mechanisms but institutions embedded in a moral ecology.

 Wilson also emphasizes the importance of language and grammar in shaping social rules. He argues that moral rules function like grammatical rules: they guide behavior without requiring explicit calculation. This analogy echoes Adam Smith’s observation that moral norms arise spontaneously from social interaction, much like language. Humanomics thus extends Smith’s insights into the contemporary study of rule‑governed behavior.

 

 Experimental Evidence and Field Applications

 

Humanomics has a strong empirical foundation in experimental economics. Laboratory games have repeatedly shown that people often act cooperatively and reciprocally in ways that standard Max-U models do not predict. In market experiments, trading behavior often approximates neoclassical predictions, but in social exchanges and repeated interactions, people reveal trust, fairness, and punishment behaviors inconsistent with narrow rational self-interest. Humanomics treats this not as noise to be explained away but as central phenomena that any reliable theory must account for.

 

Field applications extend this logic: for example, blood donation behavior and charitable giving often occur without direct material incentives but are driven by moral sentiments, social identity, and reciprocal expectations—patterns Humanomics explains in a unified framework rather than as anomalies. 

 

Vernon Smith’s experimental work especially provides empirical grounding for Humanomics. His experiments consistently show that individuals behave in ways that reflect moral sentiments rather than pure self‑interest. For example, in trust games, participants often send money to strangers even when there is no guarantee of return. In ultimatum games, individuals frequently reject unfair offers even at personal cost. These behaviors contradict the predictions of standard economic models but align closely with Adam Smith’s account of moral judgment.

 Vernon Smith interprets these findings through the lens of TMS, arguing that individuals care about fairness, propriety, and the approval of the impartial spectator. Humanomics thus bridges the gap between experimental results and classical moral philosophy. It shows that Adam Smith’s insights remain relevant for understanding real human behavior.

McCloskey’s Vision of Humanomics

 In Bettering Humanomics: A New, and Old, Approach to Economic Science (2021), Deirdre Nansen McCloskey offers a spirited critique of the dominant currents in contemporary economics and proposes an alternative vision she also calls Humanomics.  McCloskey, a distinguished economic historian trained across economics, history, rhetoric, and the humanities, argues that modern economics has become overly narrow in its methods and impoverished in its understanding of human agency. Her work is rooted in the conviction that economics should advance as a science of human betterment that integrates quantitative analysis with a deep appreciation of human motives, language, ethics, history, and culture. 

 McCloskey’s project is both a critique of modern economics and a revival of an older, richer tradition that traces back to Adam Smith. Her Humanomics emphasizes humans as purposeful agents embedded in moral worlds of meaning, speech, and persuasion rather than merely isolated utility maximizers reacting to incentives. This perspective challenges what she sees as the prevailing behaviorist and neo-institutionalist frameworks that dominate economics. 

 In addition to drawing on Adam Smith, McCloskey acknowledges debt to work by experimental economists Smith and Wilson. However, while their approaches overlap in their broad aim to re-humanize economics, they differ in focus and methodological commitments.

 At the core of McCloskey’s Humanomics is the claim that economics should be a discipline that genuinely takes human action seriously. For McCloskey, this means moving beyond the narrow positivism and behaviorism that treat human beings as reactive entities whose behavior is only meaningful insofar as it can be observed and statistically quantified. Rather, she calls for a science that recognizes humans as speaking, thinking, persuading, valuing, and moral beings. Human action, in this view, cannot be fully understood without acknowledging the roles of language, narratives, ethics, and culture. 

 Her critique is directed both at neo-institutional economics (which stresses the role of rules and institutions but tends to treat individuals as passive units responding to institutional constraints) and behavioral economics (which often focuses on systematic deviations from rational choice without adequately theorizing autonomy, meaning, and moral agency). McCloskey contends that these frameworks, in privileging observation over interpretation, fail to capture the why behind human actions and preferences. 

 A central move in McCloskey’s project is to reclaim the tradition of Adam Smith  as a thinker deeply attuned to moral sentiments, rhetoric, and the narrative dimensions of human life. McCloskey argues that classical political economy—and especially Smith’s work—treated human beings as ethical and rhetorical creatures. In her view, this older tradition offers a template for a more holistic economics that respects human complexity. 

 McCloskey also situates her Humanomics within a broader narrative: the Great Enrichment of the last few centuries, during which material living standards rose dramatically across much of the world. For her, understanding this transformation requires a focus on ideas, language, and values—the very realm that conventional models tend to marginalize. Material incentives alone are insufficient explanatory tools; instead, human rhetoric, ethics, and innovation are central drivers of economic progress. 

 McCloskey’s Humanomics calls for an interdisciplinary methodology. She argues that economics should retain the tools of mathematical modeling and empirical analysis, but also incorporate insights from history, philosophy, literature, and rhetoric.

 At a broad level, McCloskey and Smith and Wilson share a commitment to re-humanizing economics by restoring attention to moral, social, and rhetorical dimensions of human life. All three thinkers draw inspiration from Adam Smith’s holistic perspective and reject the narrow positivist view of human action. They agree that humans cannot be understood merely as reactors to incentives or as mathematical objects in maximization problems. 

 Both approaches emphasize interdisciplinarity and contextual richness rather than strict behaviorist reductionism. McCloskey’s Humanomics is particularly expansive in its inclusion of the humanities—language, history, rhetoric, and ethics—alongside economics. Smith and Wilson Humanomics, while acknowledging moral sentiments and context, tends to stay closer to an economic framework that can be operationalized in experimental and theoretical work. 

 

Rasmussen’s neo-Aristotelian Contributions

 

While Vernon Smith and Bart Wilson ground Humanomics primarily in a reinterpretation of Adam Smith and empirical findings, Douglas B. Rasmussen brings a philosophical depth that complements and extends the project.

 

In his recent work (2024), Rasmussen proposes replacing the abstraction of Homo economicus with the paired concepts of Homo agens (acting man), and Homo moralis (moral man). In this view, human beings are purposeful actors (Homo agens) who choose means to achieve ends, and they are also moral agents (Homo moralis) who evaluate not only the effectiveness of their actions but whether the ends themselves and the means to attain them are good for a human life. Unlike Homo economicus, which reduces behavior to utility calculations, this dual conception captures the ethical and purposive dimensions of human action. 

 

Rasmussen’s homo agens comes from Austrian economics and Ludwig von Mises’s “action  axiom” especially as interpreted by Murray Rothbard which holds that human action is purposeful behavior involving the use of scarce means to attain ends. Homo moralis adds the further question of whether the ends chosen and means employed are genuinely good for a particular human being (i.e., tying economic agency to the ethics of individual human flourishing).

 

Rasmussen maintained that neo-classical economists’ grounding of economics in universal self-interest and revealed preference is arbitrary and tautological (i.e., any consistent pattern of behavior can be interpreted as ‘utility maximization”), Rothbard’s homo agens avoids this by characterizing human beings as agents who pursue ends through chosen means, the content of which can be altruistic, egoistic, and so on. This supports a version of Humanomics that does not need homo economicus as a foundational assumption yet preserves economic theorems such as diminishing marginal utility as implications of purposeful action rather than hedonistic psychology.

 

Rasmussen’s framing resonates with Humanomics by emphasizing the agent’s reflective choice, not just behavioral regularities. It anchors Humanomics in a philosophical anthropology that recognizes human beings as rational, moral, and teleological—that is, oriented toward ends that are remembered, evaluated, and integrated within a larger conception of the good life. This aligns with classical and neo-Aristotelian notions of human flourishing, where economics cannot be fully separated from ethics and politics. 

 

Rasmussen’s broader philosophical work on human flourishing situates economics within a normative framework: economics is not just a positive science predicting behavior but a moral inquiry into conditions that enable humans to live well. Drawing on Aristotelian and natural law traditions, Rasmussen argues that flourishing involves exercise of reason, moral judgment, and substantive choice—aspects that narrow economic models often neglect. These philosophical foundations enrich Humanomics by giving it a normative anchor: preferences and choices are not just given but evaluated in terms of their contribution to a fulfilling human life. 

 

Rasmussen’s contribution to Humanomics is best understood through his broader neo-Aristotelian framework of individualistic perfectionism and his sustained work on human flourishing, moral agency, and political philosophy. Rasmussen does not approach Humanomics primarily as an economist, but as a philosopher concerned with the nature of human action, practical reason, and the ethical conditions necessary for individuals to flourish. His work provides Humanomics with a deeper normative and anthropological grounding that complements the empirical and Smithian recovery undertaken by Vernon Smith and Bart Wilson.

 

Rasmussen’s individualistic perfectionism holds that there is an objective standard of human flourishing grounded in human nature, but that flourishing must be achieved through the self-directed activity of individuals rather than imposed collective ends (Den Uyl and Rasmussen [2016]). This view aligns closely with Humanomics’ insistence that economic behavior cannot be reduced to mechanical optimization. Preferences are not merely given; they are formed, revised, and evaluated through practical reasoning over time. Economic choice, on this account, is inseparable from ethical self-authorship.

Under this view, policies or institutions that optimize efficiency but undermine agency, community, or moral sentiments may be judged inadequate. Humanomics, when infused with Rasmussen’s perspective, becomes not just a descriptive science of human behavior but a critically engaged social science that judges economic arrangements in terms of how they contribute to individual flourishing.

 

 Conclusion

 

Humanomics represents a significant intellectual shift toward a human-centered economics rooted in the full breadth of Adam Smith’s thought and enriched by contemporary philosophy. By privileging social relations, moral sentiments, and purposeful action, Humanomics provides a more holistic framework for understanding economic life. The contributions of scholars like Vernon Smith and Bart Wilson reorient economics toward a science of human beings, while philosophical thinkers like Douglas B. Rasmussen deepen its conceptual foundations by restoring moral agency and flourishing to the center of inquiry.

 

In an age where economic science faces criticism for its abstraction and detachment from lived experience, Humanomics offers a compelling alternative: one that holds onto the analytical rigor of economics while honoring the complexity of what it means to be human. In reviving Adam Smith’s unified vision of moral sentiments and economic life, Humanomics challenges the reductionism of modern economics and opens new pathways for interdisciplinary research. It invites economists, philosophers, and social scientists to reconsider the moral foundations of markets and the narrative structures that shape human action. In doing so, it honors Adam Smith’s legacy while extending his insights into the twenty‑first century.

 

Recommended reading

 

Bates, Winton. (2021) “Why Should Economists Practice Humanomics?” Freedom and Flourishing. October 4, 2021.

Den Uyl, Douglas J., and Douglas B. Rasmussen. (2016) The Perfectionist Turn: From Metanorms to Metaethics. Edinburgh University Press.

McCloskey, Deidre Nansen McCloskey. (2023) Bettering Humanomics; A New, and Old, Approach to Economic Science. University of Chicago Press

Rasmussen, Douglas B (2024), Homo Agens and Homo Moralis in Humanomics. The Independent Review.

Smith, Adam. (1759) 1982The Theory of Moral Sentiments.  Indianapolis: Liberty Fund.

Smith, Adam. (1776) 1981. An Inquiry into the Nature and Causes of the Wealth of Nations. Indianapolis: Liberty Fund.

Smith, Vernon L., and Bart J. Wilson. (2019) Humanomics: Moral Sentiments and the Wealth of Nations for the Twenty-First Century. Cambridge University Press, 2019.

Smith, Vernon L. and Bart J. Wilson. (2024) “Humanomics: An Interview with Vernon Smith and Bart Wilson.” 2024. Profectus Magazine. October 14, 2024.

 

Some other essays by Ed Younkins

Younkins, Edward W (2025) “What Contribution did David L. Norton Make to our Understanding of Ethical Individualism?” Freedom and Flourishing. January 18, 2025.

Younkins, Edward W. (2025) “How can dialectics help us to defend liberty?” Freedom and Flourishing. July 8, 2025.

Younkins, Edward W. (2025) “How can Austrian Economics be reconciled with the Neo-Aristotelian philosophy of Freedom and Flourishing?” Freedom and Flourishing. October 24, 2025.

Younkins, Edward W. (2025) “Can Polarized Moral Politics be Bridged by a Neo-Aristotelian Philosophy of Freedom and Flourishing?” Freedom and Flourishing. December 13, 2025.

How does Entangled Political Economy help us to understand political entrepreneurship?

 

After I finished reading Richard E. Wagner’s book, Politics as a Peculiar Business, the thought crossed my mind that I should encourage people to read what I was about to write about it before reading the other essays I have recently written about political entrepreneurship. The titles of the other essays are:

Can the concept of political entrepreneurship help us to understand authoritarianism?

What role does political entrepreneurship play in institutional change?

Should we expect our political leaders to be great and good?

I have been writing essays about political entrepreneurship to improve my understanding of the topic. In the process I have felt like that a blind man trying to build up a picture of an elephant in his mind by approaching it from different angles. After I finish writing this essay, I might be able to turn my mind to considering how best to present my understanding of the concept and its relevance to liberty and human flourishing.

Entangled Political Economy

The full title of Richard E. Wagner’s book is Politics as a Peculiar Business: Insights from a Theory of Entangled Political Economy (Edward Elgar, 2016).  

Wagner refers to the ancient Indian parable of the blind men and the elephant in suggesting that political economy is best approached from the standpoint of plausible reasoning rather than demonstrative reasoning.

Plausible reasoning starts from the standpoint that the object of inquiry cannot be known in full detail to the inquirer.

By contrast, demonstrative reasoning begins with a set of assumptions about human behavior, and then analyses the implications of those assumptions. The conventional welfare economics approach to the role of government - with its assumption that government acts like an omniscient and benevolent dictator attempting to maximize the well-being of citizens by correcting externalities and providing public goods – provides a relevant example of demonstrative reasoning.

The analytical framework of Entangled Political Economy recognises that both “polity and economy are areas of practical action that operate in similar but not identical fashion.”

The author suggests that human nature has “a bi-polarity about it that generates both polity and economy.” The political side of human nature entails recognition that we are social creatures who live in close proximity and engage in cooperation and conflict. The economic side entails recognition that we need “to make a livelihood” and desire “to be self-directed as against being conscripts in someone’s army”.

I am not persuaded that “bi-polarity” is the best way to capture the idea that humans are “political animals” whose interactions with other members of the species are not always motivated by personal benefit. It seems to me that human nature inclines individuals to seek to flourish by making wise and well-informed choices about all aspects of their lives that they are able to influence, including their interactions with others. 

However, as public choice theorists have noted, most people lack sufficient motivation to allocate the time and effort required to make well-informed choices in relation to national politics because their individual choices are unlikely to have much impact on national outcomes. Wagner’s view of entangled political economy draws on that public choice literature.

I certainly agree that political economy should focus on the full range of interactions among persons and entities within society. As Wagner notes, that perspective has important implications for social change:

“The framework of entangled political economy accommodates recognition that societies change only through individual action inside those societies, and with those actions spreading within the society according to the receptivity of other members of that society to those changes.”

Although Entangled Political Economy is based on a description of different kinds of interactions among individuals in the real world, it represents a departure from the way many economists have previously thought about the interaction between politics and economics. Wagner reminds readers that it has been customary to “envision a polity as a kind of lord of the manor who overseas what is denoted as economy.” He points out that discussion is usually in terms of “additive political economy” in which polity and economy are denoted as independent entities and polity intervenes in economy to correct “market failure”. He argues:

“The Progressivist vision of political presence and dominance throughout society is abetted by the vision of additive political economy because that vision provides rationalization for unlimited political action.”

Political entrepreneurship

 Wagner argues that it makes sense to view politics as a peculiar form of business because it has many characteristics in common with business. Both are sources of livelihood for people, entail competition, and are supported by administrative educational organisations. Both must attract investors to provide capital. Both involve entrepreneurship.

The main difference between political entrepreneurship and market entrepreneurship arises because of the difference between dyadic and triadic relationships. Dyadic relationships involve two people; triadic relationships involve three. Wagner observes that market relationships can be reduced mostly to a set of dyadic relationships where both parties benefit. Political relationships typically require a set of triadic relationships where two people exchange mutual support and a third is forced to provide financial support.

Wagner explains:

“Within the triadic relationships associated with electoral competition … a political entrepreneur can construct a supporting coalition by crafting a transactional structure that entails gainers and losers, while at the same time generating a supporting ideological cover that softens and conceals the redistributive character of the transaction.”

The difference between market and political competition has implications for the qualities required for successful entrepreneurship in different contexts. Wagner suggests that while puffery is an understandable part of market competition, “electoral competition is mostly about puffery”. Systemic lying is a feature of political competition. Sentiment tends to play a larger role, relative to reason, in political competition because of the absence of a direct connection between the individual elector’s choice and the outcome obtained. Voting is like ordering a meal at a restaurant and being served the same meal as everyone else, irrespective of what you ordered. Wagner notes Vilfredo Pareto’s view that ideological articulation can induce people to support measures that they might have opposed in a market setting. Voters generally embrace policies that enable them to feel good about themselves.

Wagner argues that little substantive work is accomplished through elections and political campaigns. The substantive work of policy choice takes place “outside electoral politics and entails the interactive elements necessary for constructing and maintaining deals.” He suggests a parliamentary assembly can be viewed as an “investment bank” because it is “a hub for making deals” involving selection and funding of projects. In that context:

“Entrepreneurs are thus competing among themselves to seize the future. Successful entrepreneurship offers both fame and fortune.”

In reading Wagner’s account of political entrepreneurship, it occurred to me that the significance of electoral competition in the United States is greater than he portrays it to be. That perception is based partly on my (somewhat cursory) observation of the presidential election in 2024 and the performance of the Trump administration in its first 100 days in office.

The 2024 U.S. election and its aftermath may be atypical, but similar political entrepreneurship has been on display in some European elections.  As discussed in a previous essay, political entrepreneurs tend to focus on niches in the marketplace of ideas. They seek to attract support from people who are discontented with current economic and social outcomes by emphasizing alleged problem-solving capacities of their ideas. Their success in attracting a loyal support base of customers who are willing to help them to sell their narrative depends to a large extent on the strength of competition from politicians selling different narratives, and on the extent of resistance by journalists and members of the public who consider their narratives to be incorrect, or that their policy proposals are unworkable, unconstitutional, unethical, or otherwise unhelpful.

I also observed that the discussion of entangled political economy in Politics as a Peculiar Business seemed more relevant to countries with parliamentary systems of government than to those with presidential systems, where much business seems to be done via “executive orders”. However, that is not intended as criticism. It may reflect the greater role of “executive orders” in the U.S. in the years since the book was published.

How can entanglement be contained?

One of Wagner’s aims in writing the book was “to explain how an entangled political economy can generate its own momentum to transform a constitution of liberty into a constitution of control”. He refers to the credit market as providing an example of how this occurs. Private ordering of credit markets is vulnerable to entanglement for two reasons. On the demand side are market participants who are dissatisfied with how they fare in privately ordered credit markets. On the supply side are “political figures who want to catapult themselves from background to foreground in the cosmic drama that is human society”.

Another example relates to the Fifth Amendment of the U.S. Constitution which provides for just compensation when the government takes private property for public use. However, Wagner observes that “history over the past century or so has increasingly run in the direction of governments taking property for what are private uses and paying only partial or token compensation”. A clear constitutional provision is not necessarily “sufficiently strong to deter rapacious interest groups from using government as an instrument of predation”.

Wagner refers to Vincent Ostrom’s observation that government involves a Faustian bargain: “instruments of evil – power over other people – are to be employed because of the good they might do, recognizing that evil might also result.” 

How can we minimize the potential for evil to result? Wagner suggests that the alternatives are “parchment” and “guns”.

“Parchment” refers to constitutional rules. Constitutional rules may remain effective if supported by public morality – sufficient numbers of people being willing to refrain from use of the powers of the state to enrich themselves at the expense of others. This approach relies on education and related processes to cultivate virtue and wisdom.

“Guns” refers to an approach that looks primarily to “a kind of opposition of interests to limit government predation”. Wagner suggests that “guns” may complement “parchment”. He writes:

“The basic principle behind this approach is for governmental action to require some concurrence among different participants with opposed interests.”

Wagner suggests that when it becomes habitual for people to use politics in a predatory manner that may “promote alternative beliefs as to what comprises just conduct”. He concludes that “parchment and guns … would seem to be nonseparable ingredients of constitutional order in the final analysis.”

Wagner tells us that his reference to guns is metaphorical, so what he has in mind may not necessarily be violent. For example, those who believe themselves to be victims of predation have an incentive to form associations to protect their interests in the courts and may be able to exert countervailing power the political arena.

While I believe that entangled political economy offers important insights about interactions between participants in politics and markets, I would have liked the author to explore more fully the macroeconomic consequences of increasing entanglement. Perhaps that would have led to a more optimistic conclusion.

In Freedom, Progress, and Human Flourishing I suggested that although most liberal democracies are heading for major economic crises in the years ahead there are reasons to be optimistic “that governments will eventually introduce institutional reforms to enable the drivers of progress to restore growth of opportunities.” (See Chapter 6, particularly p. 120)

My optimism presupposes the emergence of political entrepreneurs who understand the nature of the problems that need to be addressed and can marshal the political support required to carry out appropriate institutional reforms to correct those problems.

Conclusions

The discussion of entangled political economy in Richard Wagner’s book, Politics as a Peculiar Business, is helpful to an understanding of the context in which political entrepreneurship occurs in the liberal democracies.

Entangled political economy focuses on the full range of interactions among persons and entities within society. It emphasizes that societal change occurs only through individual actions. Entangled political economy represents a departure from the view of those economists (and governments) who have envisioned a polity as a kind of lord of the manor who overseas an economy.  

Wagner argues that politics has many characteristics in common with private business, but it is characterized by triadic relationships rather than dyadic relationships. Market relationships can be reduced mainly to sets of relationships between two people, both of whom benefit. Politics typically requires sets of relationships where two people exchange mutual support and a third is forced to provide financial support.

The author suggests that the main work of political entrepreneurs – interactions to construct deals - takes place outside electoral politics. He suggests that parliaments can be viewed as kinds of investment banks because they are hubs for making deals involving selection and funding of projects.

In my view the significance of electoral politics and deal-making by executive arms of governments is greater than Wagner portrays it to be. However, my view has been strongly influenced by events since 2016, when his book was published.

Wagner argues that entangled political economy generates its own momentum to transform a constitution of liberty into a constitution of control. He is pessimistic about the prospect for entanglement to be contained via constitutional rules and moral conduct. He suggests that habitual use of politics in a predatory manner promotes an alternative view of what constitutes just conduct.

In my view, Wagner might have come to a more optimistic conclusion if he had more fully explored the macro-economic consequences of increasing use of the powers of the state for predatory purposes. Economic crises may eventually bring about appropriate institutional reforms if political entrepreneurs emerge who can marshal the political support required to implement them.  

Addendum

Readers may also be interested in a later series of essays on political entrepreneurship.

Would a good society seek to maximize a social welfare function?

 This article is about my personal experience in attempting to understand social welfare, the concept of a good society, and my role as an economist involved in the processes of social choice. I decided to write about this topic after writing an article for Savvy Street on the related topic, “Can social planning enhance individual flourishing?”

When economists talk about maximizing social welfare, they are referring to a concept that appears to have something to do with the well-being of people. However, the concept is best viewed as a signaling device to suggest that the social planner claims to have obtained insights about society from studying an abstract mathematical model. Such signaling is not helpful to consideration of the merits of policy proposals.

Maximizing social welfare can encompass policies that would enlarge the economic pie (national product) so that there is potential for everyone to be given a larger slice. In that case, it might be reasonable to argue that the policy would receive widespread support among citizens. A good society - one that is good for the people who live in it – could be expected to adopt such policies. However, claims about pursuing social welfare objectives make such policies no more attractive than if they are advocated to simply expand opportunities for individual flourishing.

Maximizing social welfare can also encompass policies to redistribute the economic pie in a manner that advocates believe will somehow enhance the collective well-being of citizens.  When maximizing social welfare is said to require redistribution of the cake, some citizens will be advantaged at the expense of others. It is possible for some policies of this nature to receive widespread support (e.g. provision of a basic social safety net) but that is less likely when extensive redistribution is proposed to equalize the utility that different individuals obtain at the margin from additional income.

Whose welfare function should we maximize?

The idea of social welfare maximization implies the existence of a social welfare function reflecting insights about determinants of collective well-being and expressing the “general will’ of the people. It was over 50 years ago that I began to realize that this idea is highly problematic. My libertarian friends might find this hard to believe, but it happened while I was studying welfare economics.

An article by Francis M Bator influenced me greatly, although perhaps not in the way the author intended. As I was reading Bator’s article - ‘The Simple Analytics of Welfare Maximization, The American Economic Review, 17(1) March 1957 - I remember feeling that this was an object of great beauty. I suppose the article seemed beautiful for the same reasons that abstract art can seem beautiful. Bator provides a geometric presentation of the derivation of a production possibilities curve, then proceeds to derivation of the utility possibility frontier, which he then crowns with a social welfare function, as shown in the diagram above.

Bator’s description of that diagram left a lasting impression on me. He tells us that BB represents the grand utility possibilities frontier, showing at each point the maximum utility for person X given any feasible level of utility for person Y, and vice versa. He then proceeds to explain the “bliss point”, Ω, in the following words:

“To designate a single best configuration we must be given a Bergson-Samuelson social welfare function that denotes the ethic that is to “count” or whose implications we wish to study. Such a function – it could be yours, or mine, or Mossadegh’s, though his is likely to be non-transitive – is intrinsically ascientific.”

What Bator meant by ascientific is that the function involves ethical valuations. However, the point that has stuck in my mind is that despite the heroic assumptions Bator was making in constructing his beautiful geometric edifice, he did not try to pretend that it could be crowned with a social welfare function aggregating the preferences of all citizens. The function depicted “could be yours, or mine, of Mossadegh’s”. (Mohammad Mosaddegh was an Iranian prime minister who held office from 1951 until 1953, when his government was overthrown - apparently in a coup orchestrated by M16 and the CIA.)

Is it possible to make sense of the diagram? 

As I look at the diagram now, the idea of choosing between the utility levels of different people seems problematic. It would also be problematic to some modern utilitarians whose social welfare function is defined simply in terms of maximizing average life satisfaction (making the implicit ethical judgement that everyone deserves to have the same life satisfaction). In that case, if the axes measure the life satisfaction of X and Y, the bliss point would be defined by the intersection of the possibility frontier and a 45⁰ line drawn from the origin. The 45⁰ line would represent all points where X and Y have equal life satisfaction – X and Y would each have maximum life satisfaction at the bliss point.

However, I reject that modern utilitarian view. It seems to me to reflect an inadequate understanding of the determinants of individual flourishing. As argued in Freedom, Progress, and Human Flourishing, even though average life satisfaction may be a reasonable indicator of the average psychological well-being of large groups of people, psychological well-being is just one of the basic goods of a flourishing human. In my experience, when people are encouraged to offer more than perfunctory responses to questions about how they are faring, they tend to talk about a combination of different things such as their aspirations and the choices they have made, their health, and their personal relationships. Satisfaction is relevant, but does not encompass all relevant aspects of human flourishing.

To make sense of the choices represented in the social welfare function depicted, I would need to replace “utility” with “opportunity to flourish”. Even then, I would need good reasons to make an ethical judgement about whether X and Y deserve to have their opportunity to flourish enhanced or restricted.

What are the implications for social choice?

While Bator’s description of the social welfare function let the cat out of the bag for me, I remember reading about Kenneth Arrow’s impossibility theorem at about the same time. I think the main lesson I took away was that the processes of government must inevitably be somewhat dictatorial. That makes it important to have constitutions that protect liberty and electoral processes that are capable of kicking tyrants out of office.

While studying welfare economics, I also took a course in public choice in which I had my first exposure to The Calculus of Consent, by James M Buchanan and Gordon Tulloch. That book and other writings by Buchanan have had a profound impact on my views about the good society and the role of economists.

Buchanan and Tulloch noted that when individuals are considering constitutional rules that they expect to be in place for a long time, they are uncertain as to what their own interests will be in any of the whole chain of later collective choices made according to those rules. Such uncertainty may enable people to set aside their current economic interests in making constitutional choices. One implication is that individuals will tend to choose somewhat more restrictive rules for social choice-making for areas of potential political activity that could involve violation of liberty.

Buchanan and Tulloch link liberty directly to the concept of a good society:

“The acceptance of the right of the individual to do as he desires so long as his action does not infringe on the freedom of other individuals to do likewise must be a characteristic trait in any “good” society. The precept “Love thy neighbor, but also let him alone when he desires to be let alone” may, in one sense, be said to be the overriding ethical principle for Western liberal society.” (p 217).

 Buchanan later warned that the norms that underlie democratic institutions are under threat when politics is allowed to become little more than a ‘commons’ through which competing coalitions seek mutual exploitation.  (For further discussion of this please see Chapter 6 of Freedom, Progress, and HumanFlourishing).

What should economists do?

Economists who advise on public policy often view themselves as social planners who are advising benevolent despots. They are frequently disappointed to find that those whom they advise give higher priority to political and personal goals than to publicly stated economic objectives, or lack the political power to implement recommendations.  

James Buchanan suggested that economists should adopt a contractarian approach, with a focus on the consequences of rules and, in particular, on the question of what rules of the game individuals might accept voluntarily as participants in an authentic constitutional convention. In providing an example of this approach, Buchanan suggested that such a convention would be unlikely to endorse rules of the game which allow majorities in a single generation to impose public debt burdens on subsequent generations of taxpayers. (Nobel prize lecture).

My career

The focus of my career in public policy advice was partly contractarian. For most of my public service career I had the good fortune to work in agencies of the Australian government (predecessors of the Productivity Commission) which undertook research and published reports on the economic implications of changing the rules of the game for economic development. The focus of much of this work was assessing effects of barriers to international trade and other forms of industry assistance.

I note that my career was only partially contractarian because the agencies were required to make recommendations to the government according to specific terms of reference for individual inquiries and more general guidelines. The specific terms of reference were sometimes designed to ensure that governments received politically palatable recommendations, but the research and policy analysis published in inquiry reports, and in annual reports, informed policy-making processes in ways that led eventually to adoption of rules of the game more favourable to free trade.

The advisory agencies were given general guidelines including having “to have regard to the desire of the Australian Government …  to improve and promote the well-being of the people” and to “improve the efficiency with which the community’s productive resources are used”. I do not believe that the collectivism reflected in the reference to people and privately owned capital as “the community’s productive resources” had one iota of influence on the research and policy analyses conducted by the agencies.

I have endeavored to maintain a focus on the implications of different “rules of the game” in the public policy aspects of my subsequent consulting career and my writing on freedom and flourishing on this blog and in my books. There have been some lapses, but I hereby forgive myself 😄 . It has not always been easy to avoid falling into the trap of viewing oneself as a social planner advising a benevolent despot.