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Toward replacing the “Economic Man” Premiss, for a better political economy Prof. Mark Lindley University of Hyderabad School of Economics 8 September 2015 A notable feature of the Economic Man Premiss (EMP) is that it is directly and explicitly about us. (What are we like as human beings?) In this lecture I will: (A) cite some typical modern formulations of the EMP, and point out that in recent years, psychologists have convinced some mainstream economists that it is scientifically weak (and I will suggest why psychologists hadn’t focused earlier on this fact), (B) argue that the EMP is socially noxious (while also pointing out that the Communist “New Man” premiss was catastrophic), (C) show that Adam Smith did not subscribe to the EMP, and then (D) offer some suggestions as to what it should be replaced with. (A) Here are three typical modern statements of the EMP: At www.businessdictionary.com, “economic man” is defined as an “imaginary ‘perfectly rational person’ who, by always thinking marginally, maximizes his or her economic welfare....” Wikipedia says [s]he is “rational and narrowly self-interested”. According to Prof. Pulin Nayak (recently retired from the Delhi School of Economics), “Rational economic agents are expected to maximize their individual well being ... without any concern for the welfare of the other members of society.” However, John Maynard Keynes pointed out (in Chapter 12 of his General Theory) that “[A] large proportion of our positive activities depend on spontaneous optimism. Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as the result of animal spirits – a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities.” (N.B. A rational decision would be the result of some such calculation of probabilities and possible benefits.) And, Robert Shiller of Yale University – who is acknowledged to be a top expert nowadays on stock-market and real-estate speculation (and who will soon serve as president of the American Economic Association) – has found, by research which has included questionnaires filled out by stock-market dealers, that “Most stock-market investors [in the USA] do not [in fact] pay much attention to fundamental indicators of value” in regard to the stocks they are buying and selling. (Meanwhile, Chinese investors have also been remarkably irrational.) According to a respected current textbook on economics, “The assumption of maximizing behavior lies at the heart of economic analysis.... Our model assumes that individuals make choices in a way that achieves a maximum value for some clearly defined objective. In using such a model, economists do not assume that people actually go through the calculations.... What economists do argue is that people’s behavior is broadly consistent with such a model. People may not consciously seek to maximize anything, but they behave as though they do.” Could the fudge here in the words, “as though”, be a hint that maybe the EMP is becoming less pervasive in modern economic teaching? No! EMP-advocates love the fudge. It was championed in an essay by Milton Friedman, “The Methodology of Positive Economics” (1953), which has been described as having been, in the 20th century, “the most influential work on economic methodology”. Friedman said: “A meaningful scientific hypothesis or theory typically asserts that certain forces are, and other forces are not, important in understanding a particular class of phenomena. It is frequently convenient to present such a hypothesis by stating that the phenomena it is desired to predict behave in the world of observation as if [his italics] they occurred in a hypothetical and highly simplified world containing only the forces that the hypothesis asserts to be important. In general, there is more than one ... set of ‘assumptions’ in terms of which the theory can be presented. The choice among such alternative assumptions is made on the grounds of the resulting economy, clarity, and precision in presenting the hypothesis; their capacity to bring indirect evidence [my italics] to bear on the validity of the hypothesis by suggesting some of its implications that can be readily checked with observation; ... and similar considerations. “Such a theory cannot be tested by comparing its ‘assumptions’ directly [my italics] with ‘reality’. Indeed, there is no meaningful way in which this can be done. Complete ‘realism’ is clearly unattainable, and the question whether a theory is realistic ‘enough’ can be settled only by seeing whether it yields predictions that are good enough for the purpose in hand or that are better than predictions from alternative theories.” [pp.40-41] According to this elaborate argument for belittling the value of direct evidence, a theory based on a clearly inaccurate premiss is valid if it yields good predictions. Market-economic theory is notorious, however, for not reliably yielding good predictions. Of course if various economists make mutually contrary predictions (which is usually the case – unlike in physics where engineers routinely agree as to whether the bridge will hold up, the rocket will take off, etc.), nearly always some of the predictions will turn out to be true. Everyone knows, however, that inaccurate predictions are characteristic of the profession. This last May, Prof. Richard Thaler declared, during a bookrelease function (I was there) for his most recent book, that to study economics nowadays in the USA at post-graduate level makes the students lose good common sense. Thaler is a behavioral economist at the University of Chicago. He had hilarious arguments about this in the 1980s with Milton Friedman et al. The first word in the title of this recent book of his can readily be taken as sarcastic: Misbehaving: The Making of Behavioral Economics. Thaler is now the president of the American Economic Association. In 2002 the Bank of Sweden awarded half of its annual “Prize in Economic Sciences in Honor of Alfred Nobel” to another behavioral economist, Daniel Kahneman, for “having integrated insights from psychological research into economic science”. Kahneman and Amos Tversky (his main colleague, who had died in 1996 and so was ineligible to get the prize since it is not given posthumously) had – for example – studied quantitatively (and published their findings in 1973) the “availability heuristic” whereby the more readily available a bit of information is, the faster people “process” it mentally, and the faster they do that, the more they are likely to believe it (even if it is of dubious validity) and to resist considering other relevant information. Commercial and non-commercial propagandists have known this for a long time, but 20th-century market economists didn’t include it in their theorizing. And there was also, of course, the “affect heuristic”, the role of “gut feelings” (distinct from rational reflection) whereby, among other things, the more beneficial something seems, the less risky it seems. (People do often get “seduced and abandoned”.) This latter syndrome is part of what Keynes meant when he referred to “animal spirits”, and it obviously affected the big dupes in the financial crash of 2007-08 (which all of the most prominent economic theorists and officials failed to see approaching). (A quick definition of “heuristic” is “mental shortcut”.) The Bank’s award to Kahneman was IMHO tantamount to an acknowledgment that (a) the EMP could be deconstructed by showing how scientific psychologists have discredited its corollary of “rational behavior” – and therefore (b) to teach economic theory on the basis of the EMP is pseudo-scientific. The EMP is really just a common-sense postulate, like “Muslims are terrorists”, “Americans like to torture”, “Humans naturally engage in a war of all against all”, etc. FOOTNOTE: The “war-of-all-against-all” notion (bellum omnium contra omnes) is due to Thomas Hobbes (1651). He said: “It may seem strange to some man that has not well weighed these things that Nature should thus dissociate and render men apt to invade and destroy one another.... Let him therefore consider with himself: when taking a journey, he arms himself and seeks to go well accompanied; when going to sleep, he locks his doors; when even in his house he locks his chests.... Does he not there as much accuse mankind by his actions as I do by my words?” Do you think that everyone wants to rob you, or just deprived and/or emotionally unbalanced people? I will return to this issue later in the lecture. Back in 1993, Douglass North, upon receiving his “Prize in Economic Sciences in Honor of Alfred Nobel”, declared that “It is necessary to dismantle the rationality assumption underlying economic theory in order to approach constructively the nature of human learning.” Harvard economics professor Stephen Marglin has remarked, correctly IMHO, that “There are many ways of resolving the tensions between individualism and holism, between self-interest and obligation to others, ... [and] between the claims of various communities on our allegiance ... but as presently constituted, economics [i.e. neoclassical economic theory] is hobbled by an ideology in which these tensions are replaced by a set of pseudo-universals about human nature. A dismal science indeed.” Why didn’t psychologists investigate sooner how people behave with their money? I think one reason was that economists before Keynes didn’t even try to integrate theory of economic value with theory of money. Whereas Keynes in his theorizing took account of the fact that a lot of people in modern societies regard money as a “link between the present and future” (and not least via interest rates), earlier theorists had tended to treat money as a merely incidental element in the economy, a way of fine-honing barter, as it were. What would motivate psychologists to study in detail people’s behavior in regard to an aspect of the economy which the economic theorists themselves didn’t fuss very much about? (B): It seems clear to me that teaching the EMP is not only pseudo-scientific but also socially harmful. The professors who teach it may say that it is just an assertion about objective reality: about the way Human Nature eternally is, rather than the way it ought to be. However, I think that teaching the EMP conveys latently a noxious message to students and teachers alike. This is a picture of a Harvard Business School graduation. (A picture can sometimes be worth a thousand words.) According to Prof. Jeffrey Sachs, who has been a remarkably effective “economic clinician” helping to improve economic performance in various countries of the world: “Our greatest national illusion [in the USA] is that a healthy society can be organized around the single-minded pursuit of wealth. The ferocity of the quest for wealth throughout society has left Americans exhausted and deprived of the benefits of social trust, honesty and compassion. Our society has turned harsh, with the elites on Wall Street, in Big Oil, and in Washington among the most irresponsible and selfish of all.... We [in the USA] can escape our current economic illusions by creating a mindful society, one that promotes the personal virtues of self-awareness and moderation, and the civic virtue[s] of compassion....” This is, in effect, an application to the USA nowadays of the point stated as follows in 1984 by Albert Hirshman, Professor of Social Science at the Princeton Institute for Advanced Study: “Once a social system such as capitalism convinces everyone that it can dispense with morality and public spirit, the universal pursuit of self-interest being all that is needed for satisfactory performance, the system will undermine its own viability, which in fact is premised on civic behaviour and on the respect of certain moral norms to a far greater extent than capitalism’s official ideology avows.” In this sentence Hirshman was reformulating a point which had been made by British political economist Fred Hirsh in his book Social Limits to Growth (1976). Stephen Marglin has observed that market-economic theory “relies on value judgements implicit in [its] foundational assumptions about the self-interested individual, about rational calculation, about unlimited wants, and about the nation-state, and it is these assumptions that make [genuine] community invisible [in the theory].” Of course not all the influence comes directly from business schools and university economics departments. EMP-type thinking permeates American culture via public contests emphasizing competition – with cheating often admired – in regard to personal beauty, musical performance etc. as well as in sports. (Is this your own preferred way of enjoying things like personal beauty and music?) Ideas influence people for better or worse in their given situations. (Historically savvy economists are familiar with Keynes’s remark that “The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood.... Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually slaves of some defunct economist.”) It seems to me that the EMP, since it implicitly equates “utility” with individual “maximizing”, has influenced people for the worse. There have been some attempts to measure the influence by means of questionnaires and game-experiments. The results are often fuzzy, but they do tend to suggest that economics students and/or economists are more likely than other people to make one-sided offers in “Ultimatum” bargaining games, to defect in a Prisoner’s-Dilemma game, and to expect their partners to defect, and, in general, to be free-riders. Economics students have been found to be less generous in donating to charitable institutions than other people are; and, they are more likely to tell lies. The research has indicated that such “differences in cooperativeness are caused in part by training in economics”. (For an additional, recent sampling of such findings, see http://qz.com/137754/economics-is-making-us-greedier/.) FOOTNOTE: A useful term, “satisfice” (from "suffice” and “satisfy”), was coined in 1956 by Herbert Simon. He said that, "organisms adapt well enough to ‘satisfice’; they do not, in general, ‘optimize’ ”; he suggested, however, that for human decision-making, if the costs entailed in getting and sifting information about all possible options are taken account of, then satisficing is shown to be a strategy for maximizing. This is a foolproof way to safeguard the notion of the perfect “rationalism” of the ideal “Economic Man”. However, a currently active psychologist, Prof. Barry Schwartz, has described some ways of “diagnosing” a person’s “propensity to maximize” (which he thus sees implicitly as a sickness) instead of satisficing. He distinguishes as follows between “perfectionists” and “maximizers”: “I think that perfectionists have very high standards that they don’t expect to meet, whereas maximizers have very high standards that they do expect to meet.... Perfectionists may not be as happy with the results of their actions as they should be, but they seem to be happier with the results of their actions than maximizers are with the results of theirs.” An excessively ideological outlook is one in which some key idea is given more importance than it merits under current conditions, and people are thereby influenced for the worse. It seems to me that because of the EMP, business-school-type economics can be rightly accused of having nowadays a noxious on-the-ground effect, what with the dangerous current and looming environmental conditions and the dangerously increasing levels of monetary inequality in the New Gilded Age. There have IMHO been also some other defective key ideas in neoclassical economic theory; this lecture, however, is due to my belief that economics teachers are, via the EMP, promoting unbridled greed – with big split-second financial dealings and the like – and ecologically reckless expansion of GNPs. The “reckless expansion” is macroeconomic. (I will say more about this later.) The “unbridled greed” is microeconomic: Prospective businessmen are taught, via the EMP, that professonal competence depends on monetary maximizing first and foremost for themselves (since they are to be shining examples of “economic men”), regardless of “externalities”. Banksters are thus admired by businessmen and economists alike, and there is no big effort within the business and economics professions to ostracize the “I’ll-be-gone-by-then” CEOs. The prevailing view in those professions is that whatever is impossible to prove illegal and punish adequately is OK – just natural maximizing. According to Jeffrey Sachs, “[President Ronald] Reagan helped plant the notion that society could benefit, not by insisting on the civic virtue of the wealthy, but by cutting [rich people’s] tax rates and thereby unleashing their entrepreneurial zeal. Whether such entrepreneurial zeal was unleashed is debatable, but there is little doubt that a lot of pent-up greed was released, greed that infected the political system and that still haunts America today.” Reagan was president from 1981 to 1989. Between 1980 and 1990 the top federal personal-income-tax rate was reduced from 70% to 35%. (It had been 91% in 1963, the year of President Kennedy’s assassination; there had thus been, in fact, some reduction of the top rate already before Reagan’s presidency.) TWO FOOTNOTES: (1) “Progressive taxation” – i.e. the idea of obliging the rich to pay a higher percentage of their incomes than the poor pay of their incomes – goes back in the USA to an economics professor, E. R. A. Seligman, whose grad students included Ambedkar and J. C. Kumarappa. However, the more progressive the taxation, the stronger the state has to be to implement it. (2) The difficulty nowadays of enacting and implementing effective legal sanctions against criminal CEOs and banksters in the USA is heightened by the fact, mentioned in a recent interview with Francis Fukuyama, that “rent-seeking extractive elite coalitions have [now] captured the state” in the USA. Fukuyama is famous for his optimistic book, The End of History (1992), which said that after the globalization of the American way of life, there would be no further socio-cultural evolution. His views today are rather different; he speaks of “getting to Denmark” (i.e. Denmark’s political culture). An eminent German economist (non-Marxist) of the second half of the 19th century, Karl Knies, said in 1853 that “Human self-love [Selbstliebe] does not inherently entail any denial of love for one’s family, one’s neighbor, one’s fatherland. [It was an era of strong nationalism in Germany.] Self-addiction [Selbstsuche; this is what the EMP inculcates] does entail this denial; it has a ‘private’ and negative element that cannot be blended with the love of anything that does not fall within the individual’s ego. Selfaddiction is self-love combined with indifference to, [or] disrespect for, [or] enmity toward every other individual and toward the community, [and hence] readiness [Bereitwilligkeit] to plunder them. Human self-love is instinctive, normal, decent. Self-addiction is an oddity of character, abnormal to human nature.” The 1850s were before the advent of neoclassical economics and hence of university professors emphasizing and implicitly cultivating (via the EMP) “self-addiction” in Knies’s sense of the term. Sophisticated university economists nowadays sometimes admit, in response to criticism, that the EMP posits a distorted ideal of human nature, but they justify the ideal as being a useful (this was Friedman’s claim) and innocent simplification. It is indeed useful in the sense that they can, on the basis of it, readily make graphs and inaccurate predictions. However, the advocacy of the EMP is not “innocent” in American civil society nowadays. A clear on-the-ground feature of it is the hatefulness with which it is sustained in political discourse in the USA. Although Ayn Rand died in 1982, her influence is still salient in the Republican Party (the political party which dominates the legislatures and the Supreme Court). Historically informed economists are familiar also with the abusive statements of Ludwig von Mises, whose professorship in New York was subsidized by a right-wing political NGO. And, there exists a well documented article (accessible at www.academia.edu/3252760/The_Strange_Case_of_Dr_Hayek_and_Mr_Hayek) arguing that an emotional trait similar to hatefulness permeated the character of von Mises’s disciple, Friedrich von Hayek, whose The Road to Serfdom, first published in 1945, was a best-seller in the USA in the 1990s. Trolls constantly send poison-pen “antisocialism” blogs and comments to Web media in the USA. The personalities of Ayn Rand, von Mises and von Hayek were saturated with hatred of communism. FOOTNOTE: Ayn Rand grew up in St Petersburg, where her father owned and operated a pharmacy which was confiscated in the wake of the 1917 revolution. In the mid-1920s she studied screenwriting at the State Institute for Cinema Arts, helped make a film of propaganda-soaked Bolshevik fiction, discarded her original name (Alisa Zinov'yevna Rosenbaum), and emigrated to the USA. Fiercely opposed to the concept of the welfare state, she criticized von Mises and von Hayek for assessing the desirability of social institutions and of public policies according to which ones they thought would tend to augment most the sum of human benefit as measured in terms of happiness or pleasure or the satisfaction of human desires. She said that such thinking is better suited to providing a moral basis for socialism than for capitalism, and so could be used to defend capitalism only by means of special pleading and distorted reasoning. (Was she right?) It is important, however, not to react to that kind of noxious passion by reviving the implicitly (and often explicitly) hateridden ideological concept of the “New Man” as propounded in the USSR, and in the Chinese Republic under Mao, where peasant revolutionaries tried to change too much, far too soon and far too crudely, in cultures steeped traditionally in authoritarianism. Since your textbooks don’t use a “New Man” premiss, we don’t need an entire lecture about it; a few illustrative points will do. Here are some illustrative facts in regard to China, from James Pusey’s Lu Xun and Evolution (1998): Lu Xun (the name is pronounced like “Loo Shoon”) was the most eminent 20th-century Chinese intellectual. In 1918 he wrote, in his Madman’s Diary: “I opened a history book and found, scrawled over every page, the words ren-yi daode [benevolence, righteousness, morality]. I perused the book half the night before I made out the words between the words – two words that filled the book: chi ren [Eat people!].” Lu Xun said that the Chinese Revolution of 1911 had failed because it had not wrested power from the ruling, “people-eating” gentry class; the Manchus had been deposed, but the Chinese who had held local power under them continued to hold power and still “ate people”. According to Lu Xun in 1925: “When the revolution [of 1911] finally began, the whole pack of gentry with their stinking pretensions immediately became as scared as stray dogs, and coiled their queues on top of their heads. The revolutionaries behaved in a 'civilized' manner, saying 'All shall be reformed. We do not beat dogs in the water. Let them climb out.' So they climbed out, they lay low until the latter half of 1913, the time of the Second Revolution, and then they burst out to help ... bite a host of revolutionaries to death, and China once again sank day by day into darkness. And so it is to this day [1925].” The Chinese revolutionaries ought, he said, to “postpone 'fair play'”, otherwise “this present state [in 1925] of chaos could last forever”. Lu Xun believed that future human beings, “true human beings”, would be completely humane (this is a “New Man” notion), but that it was necessary meanwhile to treat inhumanely the present inhumane, since they were, as the term itself hints, not truly human. He overlooked that those who dehumanize their enemies do so to themselves as well. It happened during the “Great Leap Forward” (1958-62) with its man-made mass famine, and again during the “Decade of Disaster” (1966-76) when “Lu Xun’s revolutionary spirit” (notwithstanding that he was never a Communist) of “beating dogs in the water” was extolled to justify horrors. And meanwhile a founding father of the USSR, Leon Trotsky, declared in 1924 that “Man will make it his purpose to master his own [individualistic] feelings, to raise his instincts to the heights of [collectivist] consciousness, to make them transparent, to extend the wires of his will into hidden recesses, and thereby to raise himself to a new plane, to create a higher social biologic type, or, if you please, a superman.” This stainless steel statue, 24½ meters high, was designed by a Soviet Russian sculptress and displayed at the 1937 World’s Fair in Paris: The EMP should be replaced with a serviceable model of human behavioral tendencies which avoids alike its own ideological bias and that of the revolutionaries’ “New Man” precept. (C): The “Adam Smith problem” discussed by historians of philosophy and of economic theory is relevant here. It is easy for ideologists to make a fetish of The Wealth of Nations (TWN), since its author was indeed a great thinker about psychological human nature. Was his concept of it coherent? (If not, then he wasn’t a very good university professor of philosophy, was he?) The “problem” is due to the fact that the ideologists attribute the EMP to him by cherry-picking from TWN certain remarks which he did not present as basic to his argument, but made here and there in the course of particular topical discussions – most notably in the chapter on restraining the importation of such goods as could be produced domestically. He mentioned here and there that people at certain moments are thinking of their own material interests – for instance when buying bread from the baker or meat from the butcher (and sometimes, I would suppose, haggling to arrive at a price which the butcher or baker and the customer would both agree is fair). He did not deny that at other moments the same people would charitably assist their neighborhood butcher or baker if, say, a mishap hurt the man’s family – which would hardly be the case if everyone were out maximize his or her individual well being without any concern for the welfare of the other members of society. Moreover, after publishing TWN Smith polished and republished his Theory of Moral Sentiments, which offers at the outset (Part 1, Section 1, Chapter 1, first paragraph) a passage intended obviously to debunk a biased concept of human nature such as is often drawn nowadays from a superficial reading of TWN or from hearsay. He said: “How selfish soever man may be supposed, there are evidently some principles [my italics; I will refer back later to this phrase] in his nature, which interest him in the fortunes of others, and render their happiness necessary to him [my italics], though he derives nothing from it except the pleasure of seeing it. Of this kind is pity or compassion, the emotion we feel for the misery of others, when we either see it, or are made to conceive it in a very lively manner. That we often derive sorrow from the sorrow of others, is a matter of fact too obvious to require any instances to prove it, for this sentiment, like all other original passions of human nature, is by no means confined to the virtuous or the humane, though they may feel it with the most exquisite sensibility. The greatest ruffian, the most hardened violator of the laws of society, is not altogether without it.” I think that people nowadays derive, from observing the happiness of friendly other people, not only a vicarious sense of that happiness, but also a sense of security for themselves, and I think they are likely to get a feeling of in security from becoming aware of other people’s strong discontent. Apart from that, the passage can be taken – mistakenly – to imply that Smith regarded human psychological nature as bi-polar, i.e. swinging between material selfishness and a pleasurable “moral sentiment” (upon observing or inferring that other people are happy). However, the passage, while describing “pity or compassion”, says that this is one among several principles (“some principles”) which may guide people when they are not being selfish. FOOTNOTE: Amartya Sen, in the course of setting out in 1977 his good reasons for scorning the EMP, said that Smith’s notion of sympathy “corresponds to the case in which the concern for others directly affects one’s [sense of one’s] own welfare”, and that some human actions arise instead out of “commitment” impelling the individual to sacrifice deliberately some of his or her own welfare (perhaps for the sake of the welfare of the community or society). Steven Marglin, no less brilliant than Amartya, included in his book (which I have already cited) on “How Thinking Like an Economist Undermines Community” some remarkable true accounts of such behavior. A bi-polar concept can also be derived, mistakenly, from the fact that Adam Smith wrote only two of the several books on human nature which he intended to write. He was going to write about the theory and history of law and government, as well as about various branches of literature, and he did begin to write a book on jurisprudence, but, to his dismay, didn’t manage to finish it. According to a view of self-interest which can be inferred correctly from the books that he finished, normal self-interest consists of having a proper regard for self which elicits the approval of an imagined “impartial spectator” because it does not harm other people. This view harmonizes with Knies’s rejection of “self-addiction” and with the following precept of Adam Smith’s beloved mentor (“never to be forgotten”) and predecessor at the University of Glasgow, Francis Hutcheson: “[Everyone] has a natural right to exert his powers, according to his own judgement and inclination, ...in all such industry, labour or amusements as are not hurtful to others in their persons or goods, while [i.e. if at that time] no more public interest [i.e. no public interest above and beyond that of having everyone be free to exercise this qualified “natural right”] necessarily requires his labours or requires that his activities should be under the direction of others. This right we call natural liberty. Every man has a sense of this right.” Here is a glimpse of Adam Smith seeming to toy with a possible approach to a bi-polar concept, but actually hinting at a threeway classification: “...[M]an, who can subsist only in society, was fitted by nature to that situation for which he was made. All the members of human society stand in need of each others' assistance, and are likewise exposed to mutual injuries. Where the necessary assistance is reciprocally afforded from love, from gratitude, from friendship, and esteem [N.B.: these are different causes!], the society flourishes and is happy. All the different members of it are bound together by the agreeable bands of love and affection, and are, as it were, drawn to one common centre of mutual good offices. “But though [i.e., if] the necessary assistance should not be [i.e., is not] afforded from such generous and disinterested motives, though [i.e., if] among the different members of the society there should be [i.e., there is] no mutual love and affection, the society, though less happy and agreeable, will not necessarily be dissolved [i.e. completely disbanded, i.e. with everyone presumably becoming hermits]. Society may subsist among different men, as among different merchants, from a sense of its utility, without any mutual love or affection; and though no man in it should owe any obligation, or be bound in gratitude to any other, it may still be upheld by a mercenary exchange of good offices to an agreed valuation. “Society, however, cannot subsist among those who are at all times ready to hurt and injure one another....” Of the three theoretical possibilities evoked in this passage, the last one amounts to the Hobbesian concept, mentioned earlier in this lecture, of a primitive “war of all against all” (an anthropologically absurd fiction), while the second one – the equally unrealistic theoretical model of a society devoid of mutual love and affection – matches, to a considerable extent, an ideal which was advocated by Hayek (in his last treatise, The Fatal Conceit: The Errors of Socialism) for practical adoption in modern society. A trace of this latter ideal can be detected in Douglass North’s unstinting praise, which will be cited later in this lecture, for “anonymous, impersonal exchange”. However, economic theory was in Adam Smith’s day regarded as a branch of moral philosophy. (Economists were not yet pretending, with equations that don’t have reliable predictive power, to be like physicists, whose equations do have it.) As such, it would merge at some point with the part of moral philosophy which would focus on governing (and which Adam Smith was planning to write about). Many theorists positing the EMP as a basis for an allegedly “positive” science (i.e. devoid of moral values) of material wealth are moral advocates of laissez faire, arguing that the government ought to avoid taking any direct action for the welfare of the governed, it ought to restrict itself to maintaining law and order. This is poor political science, but at least those ideologists have understood that economic and political theory merge. FOOTNOTE: John Stuart Mill’s famous definition (1836) of “political economy” tended, on the contrary, to divorce economic theory from political science. He defined political economy as a branch of moral philosophy which “does not treat the whole of man’s nature as modified by the social state, nor of the whole conduct of man in society”, but instead “is concerned with him solely as a being who desires to possess wealth, and who is capable of judging the comparative efficacy of means for obtaining that end.” He admitted that this amounted to positing “an arbitrary [my italics] definition of man, as a being who inevitably does that by which he may obtain the greatest amount of necessaries, conveniences, and luxuries, with the smallest quantity of labour and physical self-denial with which they can be obtained.” Neoclassical economists posited that this originally arbitrary premiss is a valid scientific law. An obvious (to me) reason why a bi-polar model would most likely be no better than the EMP is that it may fit in too well with a crude “good vs evil” way of assessing social realities. (D): If the EMP is to be dismissed, what should replace it? Why not the relevant findings of scientific psychology? True sciences accept the findings of related sciences. It is deeply discrediting to academic economists that they have persisted in teaching their students their own version of psychology – the EMP – rather than a scientific version. The following four topics of psychological study may be among the most relevant to economic theory: FOOTNOTE: I will not include “love of Humankind” in this list of topics, but it does exist in some people. These photos are of medical workers who volunteered to combat a recent ebola epidemic. MORE EXAMPLES: When the government in Iceland offered recently to take 50 Syrian refugees, a poet there said this number was too small. So, 10,000 citizens offered (on a Facebook webpage) to host Syrian refugees. “I have an extra room in a spacious apartment which I am more than happy to share along with my time and overall support” and “I’m happy to look after children, take them to kindergarten, school and wherever they need. I can cook for people and show them friendship and warmth. I can pay the airfare for one small family. I can contribute with my expertise and assist pregnant women with pre-natal care.” There have been analogous phenomena in Great Britain (“All these people just rallied and suddenly everything was happening”) and Germany (“Volunteers offered hot tea, food and toys as ... migrants arrived on a special train service from Austria, finally reaching Germany, which had held out an open hand to them.” “Angela Merkel? Egal, ich kümmer mich lieber selbst.” “Angela Merkel? Whatever, I’d rather take care of it myself.”) 1. “Selfishness”: Knies’s normal self-love. Every individual, with certain exceptions, looks out for and is primarily responsible for his or her own welfare. (The exceptions are the helpless people, including infants, imbeciles and the very senile. Adam Smith overlooked this when he said, “Every man [my italics] is, no doubt, by nature, first and principally recommended to his own care; and as he is fitter to take care of himself than of any other person, it is fit and right that it should be so.”) An individual deprived of something that (s)he needs will try to get it and/or an off-target substitute). The more aware (s)he is of the lack, the more pronounced the effort will be, unless (s)he is somehow too weak to make an effort. (We have all seen televised images of children rendered so weak by starvation that they no longer brush the flies off their faces.) 2. Cooperation and “belongingness”. (This is a sociological term: people like belonging to groups and like sharing their joys and sorrows with each other; hermits are freakish; Homo sapiens is a social animal.) The “closer” people feel to one another, the more they are likely to cooperate, except in some cases where they are competing against each other to fill strongly felt needs. And sometimes they don’t merely cooperate, they also love one another. Have you noticed this? According to one of the most brilliant economists of the 20th century, Kenneth Boulding, “We are not sent into this world to walk it in solitude. We are born to love, as we are born to breathe and eat and drink.” It is not the whole truth about human nature, but it is there. I think “closeness” between individuals has four causes: (1) perceived consanguinity (of various degrees); (2) membership in the same face-to-face community (the degree of cooperation depending on the community’s size and degree of intimacy; a partnership is a small community); (3) membership in the same “imagined community” (such as a nation or a big religious cult; these are merely “imagined” communities, because the members are, for the most part, unacquainted personally with each other); and (4) “elective affinity”. In all cases, the degree of cooperation increases when an “enemy in common” is perceived. And, strong people are likely to seek vengeance against a perceived enemy of their imagined community, even if they themselves have not been directly hurt. TWO FOOTNOTES: (1) If you felt that the existence of Humankind was threatened by something, would you cooperate with your worst recent human enemy to eliminate that danger? (2) “Symbiosis” means “cooperation between different biological species”. A quick example is between shepherds and sheep dogs. Biologists say that the evolution (more than 1500 million years ago) from bacteria, i.e. single-cell organisms without nuclei, to single-cell organisms with nuclei was via “endosymbiosis” (symbiosis within the body of an organism) between large bacteria and small ones which could get inside the large ones but which the large ones couldn’t digest. (And then came, ca.800 million years ago, the evolution of multicellular organisms.) Each of us humans is full of endosymbiosis with “good bacteria”; most of the cells in your body don’t have your DNA. 3. Competition – for scarce resources or sometimes for merely abstract status – between individuals and, more destructively, between communities. Archeological and anthropological evidence confirms that competition among humans is weak if natural resources are plentiful and the population density very low. Thomas Malthus said (ca.1800, when the total human population was ca.1000 million) that human population tends naturally to expand faster than does “the power of the earth to produce subsistence for man”, and that wars – i.e. willfully deadly competitions between human groups – were therefore very likely. (And indeed there were, for instance, ca.60 million European war killings in the first half of the 20th century.) FOOTNOTE: Malthus said that famine and pestilence were also inevitable. Here are rough data about the worst recent examples: ca.35 million deaths from starvation in China between 1958 and 1962; a similar number of people currently infected with HIV/AIDS. 4. “Plasticity” – to a certain extent – of human nature and, hence, institutionalized motivations and constraints. I will discuss this topic after the next citation. The citation on the next two slides is from Samuel Bowles and Herbert Gintis, A Cooperative Species: Human Reciprocity and its Evolution (Princeton University Press, 2011) and draws upon the “sociobiological” premiss that some basic aspects of human social behavior have resulted from biological evolution. FOOTNOTE: Herbert Gintis is the author of Game Theory Evolving: A Problem-Centered Introduction to Modeling Strategic Interaction (Princeton, 2nd ed., 2009). Samuel Bowles is an economics professor whose father was the USA’s first ambassador to the Republic of India. Gintis and Bowles co-authored, together with Robert Boyd and Ernst Fehr (a top figure in the history of experimental economics), a book published in 2005 by MIT and entitled Moral Sentiments and Material Interests: The Foundations of Cooperation in Economic Life. Notice, at the beginning of this title, the tip of the hat to Adam Smith. The term “Pleistocene” near the beginning of the citation refers to a time period spanning from some 2½ million years ago until some 12 thousand years ago. (Agriculture gradually became important after the Pleistocene.) The evolution of the DNA of the ancestors of the present-day people appears to have diverged some 200 thousand years ago from that of the kinds of Homo sapiens that proved unfit to survive. (Will Homo sapiens survive for the next few hundred years?) The males among those humans with the somewhat newfangled DNA were hunters of big game: “Our Late Pleistocene ancestors inhabited the large-mammal-rich African savannah and other environments in which cooperation in acquiring and sharing food yielded substantial benefits at relatively low cost. The slow [individual] human life-history with prolonged periods of dependency of the young also made the cooperation of non-kin in child rearing and provisioning beneficial. As a result, members of groups that sustained cooperative strategies for provisioning, child-rearing, sanctioning non-cooperators, defending against hostile neighbors, and truthfully sharing information had significant advantages over non-sharing groups. “...Our ancestors used their [linguistic] capacities to learn from one another and to transmit information to create distinctive social environments. The resulting institutional and cultural niches reduced the costs borne by altruistic cooperators.... Among these socially constructed environments, three were particularly important: group-structured populations with frequent and lethal intergroup competition, within-group leveling practices such as sharing food and information, and ... institutions that internalized socially beneficial preferences.” That last phrase, “internalized socially beneficial preferences”, refers to cultural customs, taboos etc. motivating people to do or not do things which the experiences of generations had shown to be socially beneficial or harmful. Language is involved in maintaining taboos and other beneficial customs, and also in “sanctioning non-cooperators” and “truthfully sharing information”. These are among the “sustained cooperative strategies” mentioned in the previous paragraph. Language is thus instrumental in creating and maintaining formal and informal institutions. The citation refers also to “creating distinctive (my italics) social environments”. The word “distinctive” allows for the fact that Homo sapiens sapiens, after migrating into places with various different environmental conditions, developed somewhat different “social environments”, suited to those distinctive conditions. Each culture has customs and moral codes, but they are not uniform from one culture to another. (Linguistic evidence apropos is that terms for moral precepts are quite problematic to translate into the language of a substantially different culture.) This is why I call psychological human nature “somewhat plastic”. FOOTNOTE: It is not infinitely so. Steven Pinker’s popular book, The Blank Slate: The Modern Denial of Human Nature (2002), cites a lot of evidence that human behavior is substantially shaped by evolutionary psychological adaptations. Humankind’s capacity to develop moral codes is invaluable, but history has bequeathed to us some moral precepts which have become outmoded because of new circumstances. FOOTNOTE: This is a difficulty with the great religions: they are centuries old and some of their precepts are outmoded. It could be that a proposed premiss about moral precepts – or lack thereof – is valid under certain circumstances but invalid under certain other circumstances. The experiences of individuals, communities and societies yield their values. As Albert Hirshman put it (in his article which I have cited): “Changes in values do occur from time to time in the lives of individuals, of generations, and from one generation to another, and ... those changes and their effects on behavior are worth exploring [by social scientists].” The EMP is, however, a quasi-religious precept among many teachers of microeconomics. Its macroeconomic counterpart is embodied in the GDP and GNP objectives that an increased rate of production/consumption is always better in all environmental conditions and no matter how big the rate may already have become. An eminent American economist, Herman Daly, pointed out, in 1971, that “The American people have been told by ... the President's Council of Economic Advisors that, ‘If it is agreed that economic output is a good thing it follows by definition that there is not enough of it.’ ... Has the learned council forgotten about diminishing marginal benefit and increasing marginal costs? ... Growth in GNP should cease when decreasing marginal [human] benefits become equal to increasing marginal [human] costs.... We [Western-trained market economists] take the real [human] costs of increasing GNP as measured by the defensive expenditures incurred to protect ourselves from the unwanted side effects [i.e. from the negative “externalities”,] and [we] add these expenditures to GNP [and call the resulting total good!].” More than 25 years later, a less eminent Turkish economist whom I also admire, Ozay Mehmet, called for “a shift from a priori deductive theorizing formulated as blueprints from outside, towards a more inductive, factual research agenda”: “Careful study and evaluation of internal institutions and cultural norms are essential, and should be based on hard evidence.... In the words of Douglass North...: ‘We need to know much more about culturally derived norms of behavior....’” I too appreciate North’s insights that “it is necessary to dismantle the rationality assumption underlying economic theory”, and that “institutions [formal and informal] form the incentive structure of a society”. FOOTNOTE: Louis Althusser, a Marxist professor of philosophy in Paris in the 1960s and '70s, maintained that Marx would not posit a “general human nature” but would instead say that “human nature” depends on how the society in which the people are living happens to be organized. According to Althusser, Marx not only argued that people's needs are to a considerable extent shaped by their social environment, but also rejected the idea that there can be a scientifically worthwhile theory about what people are like without also a theory about how they have become like that. According to North, “[A]s human beings [in various communities] became increasingly interdependent [in the course of history], more complex institutional structures were necessary to capture the potential gains from trade. Such evolution requires that the society develop institutions that will permit anonymous, impersonal exchange across time and space ... capturing the productivity gains that came from the specialization and division of labor that have produced the Wealth of Nations.” I think that North did not deal adequately with J. C. Kumarappa’s challenging argument (he probably never read it) that “For transferring purchasing power, money and credit are unsurpassed. [But] an honest exchange ... should also include transfers of human and moral values. These last two are not represented in a money transaction.” (I would agree with Kumarappa that the transfer of human and moral values is not inherent in the mechanism of buying or selling a commodity – which can often be done, for instance, via machines. But I think that when it is not done mechanically, people can infuse the operation with some transfer of such values, starting with courtesy and building up more or less from there.) And, I think North’s premiss that the “central issue” (from here to eternity?) of economic development is “the evolution of political and economic institutions that create an economic environment that induces increasing productivity ” (my italics) harbours a normative bias in favour of maximizing production: (North’s “central issue”) 9 Bigger GNP/GWP Some kind of distribution _____________ (Viability of the natural environment? What’s that got to do with it?) The macro-objectives of political economy should instead be (IMHO) as follows: (“Macro-rationality”= trying to maximize this) 9 Human welfare Adequate _____________ Ecological consumption sustainability € (21st-century opportunity-cost issue) I participate in the “Degrowth Movement” (as shown in the lower right corner at http://barcelona.degrowth.org) because it seems to me that the crunch between production/consumption and sustainability is beginning to tighten so much that short-term sustainability is becoming impossible for many people. Some of the international refugees, for instance, are not just opportunists but are desperate; and I am afraid that the wave may become a lasting tide because of environmental degradation. If Robert Solow’s belief (1974) that there could never be in the foreseeable future a problem of sustainability (“The world has been exhausting its exhaustible resources since the first cave-man chipped a flint, and I imagine the process will go on for a long, long time”) was correct, then fat material GNPs might conceivably benefit everyone via trickle-down. But was his imagination a reliable guide to reality? I admit that to give up the EMP would have a big effect not only on elementary microeconomic theory but also on some implications of “new welfare economics” based on the concept of Pareto efficiency. In regard to such concerns, however, consider what Solow told the American Economic Association in 1985: “Economic activity is embedded in a web of social institutions, customs, beliefs, and attitudes. Concrete outcomes are indubitably affected by these background factors, some of which change slowly and gradually, others erratically.... “To my way of thinking, the true functions of analytical economics are best described informally: to organize our necessarily incomplete perceptions about the economy, to see connections that the untutored eye would miss, to tell plausible – sometimes even convincing – causal stories with the help if a few central principles, and to make rough quantitative judgements about the consequences of economic policy and other exogenous events. In this scheme of things, the end product of economic analysis is likely to be a collection of models contingent on society’s circumstances – on the historical context, you might say – and not a single model for all seasons. “...It would be a useful principle that economists should actually believe the empirical assertions they make.... Economic theory can only gain from being taught something about the range of possibilities in human societies. “...If you read the same journals I do, you may have noticed that modern economics has an ambition and style rather different from those I have been advocating. My impression is that the best and brightest in the profession [this is an implicit reference to a well known book, The Best and the Brightest (1972), about the stupid policies which President Kennedy’s “whiz kids” had designed in the 1960s in regard to Vietnam] proceed as if economics is the physics of society.... We [economists] are socialized to the belief that there is one true model and that it can be discovered or imposed if only you will make the proper assumptions and impute validity to econometric results that are transparently lacking in power. “...Hard sciences dealing with complex systems – but possibly less complex than the U.S. economy – like the hydrogen bomb or the optic nerve seem to succeed because they can isolate, they can experiment, they can make repeated observations under controlled conditions. Other sciences, like astronomy, succeed because they can make long series of observations under natural but essentially stationary conditions, and because the forces being studied are not swamped by noise [data-wise]. Neither of these roads to success is open to economists.... [W]e need a different approach. The function of the economist in this [different] approach is still to make models and test them as best one can, but the models are more likely to be partial in scope and limited in applicability.... What is here today may be gone tomorrow, or, if not tomorrow, then in ten or twenty years’ time.” EMOTIONAL ADDENDUM: In honour of Adam Smith’s intention to write about literature, here are some relevant extracts from a renowned novel, Joseph Conrad’s Heart of Darkness (1899, based on his own experiences in the 1890s in the Belgian Congo): “To tear treasure out of the bowels of the land was their desire.” “These chaps were not much account, really…. They were conquerors, and for that you want only brute force – a nothing to boast of, when you have it, since your strength is just an accident arising from the weakness of others. They grabbed what they could get for the sake of what was to be got…. The conquest of the earth, which mostly means the taking it away from those who have a different complexion or slightly flatter noses than ourselves, is not a pretty thing when you look into it too much.” “Since I had peeped over the edge myself, I understand better the meaning of his stare, that could not see the flame of the candle, but was wide enough to ... penetrate all the hearts that beat in the darkness. He had summed up – he had judged: ‘The horror!’ ”