DRI-179 for week of 5-3-15: Why Economics is Inseparable From Individual Responsibility

An Access Advertising EconBrief:

 Why Economics is Inseparable From Individual Responsibility

Many people know that the father of modern economics, Adam Smith, wrote An Inquiry Into the Nature and Causes of the Wealth of Nations in 1776. Few today realize that his most famous prior work was The Theory of Moral Sentiments in 1754. In Smith’s day, the conjunction of economics and moral philosophy was accepted, even taken for granted. Now economists are viewed as social scientists rather than philosophers, let alone moralists. Yet some of the most penetrating recent books and policy debates have revealed the economic underpinnings of genuine morality, rooted in the concept of individual responsibility.

Of all moral principles, individual responsibility may have been taken the worst beating at the hands of the 20th century. The chief abuser was Sigmund Freud, founder of the modern school of psychology and the profession of psychiatry. The book Admirable Evasions: How Psychology Undermines Morality is primarily an expose of the harm wrought by Freud and his descendants. The author, Theodore Dalrymple, is a psychiatrist who has viewed the profession from the inside as a former prison doctor and psychiatrist in private practice. (“Dalrymple” is the pen name for Englishman Anthony Daniels, but to avoid confusion we follow the author’s convention in this article.) He wonders whether “Mankind…would…be the loser or the gainer… if all the anti-depressants and anxiolytics… were thrown into the sea… all textbooks of psychology were withdrawn and pulped” and “all psychologists ceased to practice.” He is in doubt despite the “modest contributions to the alleviation of suffering” by some areas of clinical psychological practice. This implies that the harm done by psychology must be both significant and ongoing.

The maxim “It takes one to know one” was never better illustrated than by Dalrymple. His only drawback is occupational tunnel vision; he gives short shrift to economic logic as the motive force behind the failure of psychology.

Freudian Fraud

Sigmund Freud, born in 1883 in Vienna, Austria, underwent conventional medical education and training in neurology. Based on his interviews of patients, he founded the study of psychoanalysis. The fundamental principle of psychoanalysis is that the analyst possesses certain a priori truths about the patient’s mental makeup that establish a hierarchical relationship between the two. The analyst should enjoy a position of dominance, which the patient will inevitably resist. Only submission will enable the analyst to unlock the complexes and neuroses that plague the patient. These afflictions are the result of result of sexual pressures emerging in early childhood, including the male Oedipus complex and female penis envy. Patients are powerless to perceive and grapple with these primal forces; only psychoanalysis can bring them to the surface and resolve their conflicts.

Does it occur to you to wonder how the psychoanalyst himself became immune to these primal forces, hence worthy of the dominant analyst’s role? Well, the analyst himself supposedly had his own analyst, but the infinite regression involved in this issue was one of many logical problems never resolved in Freudian theory.

The term “psychology” derives from the ancient word “psyche,” used to denote human consciousness. Freud divided the human psyche into three parts: the ego, or conscious mind that allows us to interact with reality; the id, or unconscious; and the superego, the way station between id and ego and repository of societal and parental norms that control our behavior.

The first half of the 20th century elevated Freud to the status of cultural hero and icon. In the second half, rigorous study of his career, methods and techniques left Freudian theory in tatters. Freud based his theories on a combination of empirical generalization from his case histories and speculative conjecture. Many a successful scientific theory has been built on less, but in Freud’s case the result was a mess. Freud’s case histories were published using pseudonyms, a commendable attempt to protect the personal privacy of his subjects. This delayed their investigation and study. Eventually, it became clear that they had little or no scientific validity because their results were not measurable, they could not be replicated and they did not seem to be robust. Freud’s famous concepts – id, ego, superego, Oedipus complex and penis envy – have all been dropped from the lexicon of modern psychiatry.

Indeed, psychiatric practice today owes almost nothing to Freudian method. It is divided between the biological practitioners and the behaviorists. The biologicals treat “mental illness” completely differently than Freud did. Instead of viewing it as a unique phenomenon of the psyche, they see it as simply another branch of modern medicine. Conditions like schizophrenia and manic depression (now called bipolar condition) are recognized as physical illnesses caused by chemical imbalances within the brain; they are treated with prescription medicines. This reinforces the logic of training psychiatrists as medical doctors rather than wizards of the psyche. Behaviorists talk with patients about their problems and help them cope with those problems – in this they bear a superficial resemblance to psychoanalysts. But there is no hierarchical relationship and no a priori theory about the origin of those problems. Moreover, behaviorists must be on the lookout for psychological problems with a biological source.

Where does psychoanalysis fit into this modern paradigm? It doesn’t. Maybe we should call psychoanalysts as an endangered species – but there isn’t much impetus to preserve the species. Psychology is a profit-motivated profession. If psychoanalysis were capable of curing patients by resolving their problems rather than merely relieving them of an overburdened wallet, it would be thriving today. Instead, psychoanalysis is facing extinction.

If the commission of pseudoscience were Freud’s only sin, he would have slipped quietly into obscurity by now. Alas, this is the least of Freud’s mistakes. Sigmund Freud’s legacy lives on in ways that Freud himself hardly intended and would not have approved.

The Unintended Consequences of Freudian Psychology

Among Freud’s contentions were that sexually restrictive social mores created neuroses and inhibitions that repressed natural human behavior. In his day, this made Freud a name as a libertine. This label was false, for Freud was sexually quite strait-laced and conventional. As Theodore Dalrymple acutely observes, the “profoundly subversive” element of Freudian theory was “that desire, if not fulfilled, will lead to pathology… [This] makes self-indulgence man’s highest goal. It is a kind of treason to the self, and possibly to others, to deny oneself anything” [emphasis added]. Dalrymple supplies a chilling example of this philosophy in action: “[Dalrymple] quotes one of his patients, a murderer: ‘I had to kill her, doctor, or I don’t know what I would have done.'”

The idea that customs, traditions and morality evolve because they have value – survival value and competitive value in fulfilling human desires – may not have occurred to Freud. It definitely did not occur to his many successors, who were determined to engineer human evolution according to a central plan. The effects have been the reverse of those intended. Throughout the 20th century, Freudian psychology has walked side by side with Marxian philosophy and economics. Yet by encouraging people to shrug off the so-called “repression” of self that motivates respect for the rights and sensitivities of others, Freudianism has been the enabler of the self-absorption so often decried by critics of capitalist materialism.


The heir to Freudian psychology is the behaviorism of B.F. Skinner and his disciples. Here, Dalrymple deplores the behaviorist tendency to categorize every complaint as a “disorder,” subject to psychiatric eradication by behavior modification. “No statement that a psychiatric disturbance has such-and-such a prevalence in such-and-such a population should be taken at face value, especially when it is a plea, as it so often is, explicit or implicit as the case may be, for more resources to treat it, the supposed prevalence having risen shockingly in the last few years.”

Dalrymple is not merely questioning the statistical validity of this technique – although that is sufficient justification for the warning, since the bogus use of statistics has been biggest scandal of the last two decades in both the social sciences and the natural sciences. He is also further extending the Heisenberg principle that by investigating a phenomenon the scientist is also altering its course. “It is not merely that epidemiological searchers in this field can find what they are looking for; it is that they can provoke what they are looking for.” This principle cannot be stressed too strongly.

The social-welfare establishment has identified dozens of conditions requiring treatment. This treatment requires money and the existence of a bureaucratic establishment to provide, fund and supervise it. That establishment provides a living for many people. The “victims” of the conditions get real income in various forms: money, medical treatment and certified “victim” status as addicts or whatever the jargon term is for their condition.

And the victims also get a certified excuse for their misbehavior.

This is a form of real income that cannot be underestimated. Whereas in pre-psychology days, the victims were ostracized or otherwise discouraged from engaging in the behavior, now they are encouraged in it by the various subsidies provided. While proponents of the “therapeutic state” may indignantly object that nobody wants to be sick, objective research strongly confirms the role of incentives in enabling bad behavior.

This whole system has become self-promoting and self-aggrandizing. “The expansion of psychiatric diagnoses leads paradoxically and simultaneously to overtreatment and undertreatment. The genuinely disturbed get short shrift; Those with chronic schizophrenia, which seems most likely to be a genuine pathological malfunction of the brain [e.g., not “mental illness” at all but physical illness of the brain], are left to molder in doorways, streets and stations of large cities, while untold millions have their fluctuating preoccupations attended to with the kind of attention that an overconcerned mother gives her spoiled child with more or less the same results.”

The genuinely ill get less treatment because, being less able to earn income, they get less attention. The pseudo-ill are more able to command attention and show better “results” with less effort; therefore, they are easier and more satisfactory to “treat.”

Psychology is able to create the demand for its services by creating pseudo-illness. It does so, argues Mona Charen in her book review of Dalrymple in National Review, by “creating one excuse after another for bad behavior – our terrible childhoods, our genes, our neurotransmitters, our addictions. In each case, and often with extremely unscientific reasoning, we are offered absolution. None of us is really responsible for our behavior. The whole psychological enterprise, Dalrymple argues, has had the effect of excusing poor choices and bad character. ‘Virtue is not manifested in one’s behavior, always so difficult and tedious to control, but in one’s attitude to victims'”[emphasis added].

This book may have opened our eyes to the 20th century. But it was written by a psychiatrist. How does economics come into it?

The Economics of Individual (Ir-) Responsibility 

In both classical and neoclassic economics, the unit of analysis is the individual human being. (For immediate purposes, the separation between “classical” and “neoclassical” will be taken as the “Marginal Revolution” in the theory of consumer demand beginning roughly in the 1870s. This distinction is not important to what follows.) When the focus shifts to the theory of the firm, the unifying element is the assumption of profit maximization that directs the diverse strivings of the firm’s members toward a single goal.

Free markets are governed by the principle of mutually beneficial voluntary exchange. Mutual benefit provides the motivation to exchange voluntarily. There is a tacit presumption that each individual is responsible for his or her actions; that is, neither is liable for the actions of the other. This is entirely logical, since each one is the reigning expert on his or her wants, desires, shortcomings, plans and expectations. Neither can possibly know as much about the other as he or she knows about himself or herself. Thus, the concept of individual responsibility is an automatic byproduct of the philosophy of free markets.

No wonder, then, that Adam Smith trafficked in moral philosophy. The surprising thing is that somewhere along the way this got lost in the transition of economists to men in white coats peddling business forecasts of future growth rates of GDP and interest rates.

Contrast the relationship between human beings engaging in free trade and that between analyst and patient in today’s “therapeutic state.” The patient has a problem. No surprise there, since all of us do virtually all the time. The patient has an incentive to view this problem as beyond his control – if not a physical illness, then a neurosis, a complex, an addiction, a “sickness” of a metaphoric kind. The incentive is multi-pronged.

First, his lack of control relieves him of responsibility. He has no moral responsibility for having created, nurtured or tolerated it. Since he has no responsibility for it, he need feel no guilt over it.

Second, he now has a moral claim on the resources of others that did not previously exist. This claim is a form of real income that may become tangible if he can extract voluntary charity from them or involuntary payment in the form of government subsidies.

Third, his status as a moral claimant who suffers from a problem not of his own making makes him a victim. Victim status makes him a member of a recognized interest group. In addition to the possibility of extracting tangible real income via charity or government subsidies, he can also receive the psychic benefit that goes with public recognition as a member of a victim class.

Now shift attention to the analyst, whose incentives run parallel with those of the patient. He has an incentive to identify the patient’s problem as either a physical sickness or a psychic “mental illness.” Either way, this identification immediately relieves him of any guilt that might otherwise attach to treating the patient. Now he is merely a doctor treating a sick patient. He need feel no guilt over that.

And once his doctor status is secure, the analyst has no qualms about filing an intellectual lien on the assets of the public, either by appealing to their charitable sympathies of to their legal responsibilities as citizens and taxpayers.

Victims require saving. Saving requires saviors. Saviors are heroic figures. Thus, analysts earn psychic benefits from assuming heroic public status, just as patients gain psychic benefits from assuming victim status.

When two groups of people have so much to gain from pursuing a congruent sequence of activities, what does economic logic say will happen? The “equimarginal principle” – the fundamental principle of economic optimization underlying the theories of consumer demand, the firm and input supply – says that as long as the marginal benefit of an activity exceeds its marginal cost, economic actors will increase their pursuit of the activity. Indeed, if two non-competing groups find that their ends coincide, the groups may even collude, either openly or tacitly, to further those ends.

And that is just what has happened in mental health during the 20th century. Psychologists and patients have tacitly colluded to enlarge the “mental-health” establishment. That is what Theodore Dalrymple has had the temerity to point out in his politically incorrect book. Its political incorrectness is its outstanding virtue; its sole vice is its economic incorrectness. Where Dalrymple has made a literary-career specialty of telling unpopular and unpleasant truths about havoc wreaked by the pseudo-science of modern psychology, he has been unaccountably reticent in failing to disclose the economic logic underlying his position.

Why is it Important to Acknowledge the Role of Individual Responsibility in Economics?

In the most important excerpt quoted above, Dalrymple acknowledges that “the genuinely disturbed get short shrift.” These are people who suffer from psychoses formerly diagnosed as “mental illness” and treated with (utterly useless) psychotherapy. Thanks to the onetime heretics who refused to knuckle under to Freudian dogma, we now know that schizophrenia and manic depression (currently called bi-polar disorder) are neurochemical disorders of the brain. As is true with the most intractable physical disorders, we can offer only limited medical therapy for these conditions. But even this help is often denied to those who need it most.

Dalrymple rightly sees the outlines of the problem because he has spent a lifetime within the system as prison doctor and psychiatrist in private practice. As a resident of the U.K., he lived under Great Britain’s infamous National Health Service (NHS). He knows the workings of government the way a gulag prisoner knows the workings of a concentration camp. But it would be expecting too much to hope that a man who spent his life acquiring expertise in medicine and psychiatry and emerged alive from the toils of NHS should also be conversant with economic theory.

The reason for the denial of therapy to the “genuinely disturbed” is straightforward. The victims are unable to act as their own advocates. The treatment of so-called mental illness is plagued by a version of Gresham’s Law (“bad money drives out good money”), in which bad therapy drives out good therapy. The pseudo-victims are the squeaky wheels, greased by their own financial and political resources and the very fact that their lack of true illness yields better “results” from treatment. Because the treatment of mental illness is a jealously guarded prerogative of government and government budget-allocation is a jealously guarded prerogative of politicians, funds allocated to the treatment of the truly psychotic are a small slice of an already-small pie.

Individual responsibility is vital to the operation of civil society. It goes hand-in-hand with human freedom and free markets. But it breaks down in the rare – but real – cases where individuals are incapable of acting in their own behalf.

As things stand, government is the agency designated to act for those who cannot act for themselves. For example, children cannot enter into contracts for employment without the consent of their parents or guardian. Just to make sure that this position is not abused, children’s earnings are subject to protection by trusts. Child-welfare agencies also exist (ostensibly) to prevent other types of abuse. But when it comes to mental health, government is a walking, talking, breathing conflict of interest. Essentially, it is in the same conflicted position as the analyst because government is not a neutral party. It does not act for “the common good” because there is no “common good” – there are only diverse goods. This diversity can be reconciled only by a mechanism that allows relative value to be placed on each good so that the tradeoffs required by the reconciliation can be made efficiently and consistently. When government becomes the arbiter in a situation when its decision can produce more government, it always decides in favor of government intervention. (The only exception is when it is called upon to perform a true function of government, which would require a sacrifice of some other non-essential government activity – in which case it always chooses the non-essential over the essential.) Relying on government, with its built-in conflict of interest, is what got us in the fix we’re in.

When people cannot act in their own behalf, somebody must act for them. Their closest relatives or spouse are the first place to turn. When they cannot or will not act and government is disqualified, the only alternative is private charity.

Why has the word “charity” acquired a pejorative tinge? After all, research shows that Americans are very much inclined to support charitable causes. The problem is that too many Americans are still bewitched by the wish-fulfillment fantasy of government as problem-solver of first resort. Were government confined to its true functions, we would have the additional real income and discretion with which to solve the problems that government is now purporting – but failing – to solve.

As Dalrymple notes, the paradigm for any problem relating to health is to identify a “new” disorder, spread the alarm about its “epidemic” status and demand (what else?) government action at once, if not sooner. The good news about Dalrymple’s book is that the “problem” is vastly smaller than advertised. The bad news is that a real problem exists that is not being addressed and is immune to government action. In fact, the best thing would be to keep government away altogether. The worst news of all is that the attempt to solve the non-existent problem has created a worse one – the erosion of the irreplaceable concept of individual responsibility.

The key to sorting all this out is the economic logic underlying it all.