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!’ ”