How Economics Made Me a Progressive: Part II – The Homo Economicus Prescription

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At the same time as many economists ignore the potential role of pro-market ideology in distorting their empiricism, many also ignore the prescriptive role of their models. In particular, I would like to use this second part to talk about the role of self-interest in society.

The notion of self-interest as societally beneficial was codified in Smith’s Wealth of Nations, one of the most influential books in all of economics. Smith famously argued that “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but rather from their regard to their own interest.” That is, Smith argues in his book that the material things we enjoy are delivered to us precisely because people pursue their own interests. Our needs and wants are met simply as a result of mutually advantageous transactions, as opposed to acts of charity.

Smith has since been used as a clarion call for those who believe in conservative economic policy, arguing that, in the immortal words of Gordon Gekko, “Greed is Good.” However, as is often the case with great thinkers, Smith’s writings don’t seem to be all that well understood among the general population (and sometimes even amongst those with some education in economics). One will not find in The Wealth of Nations any sort of vindication for economic behaviour that interests one person at the direct expense of another. Indeed, Smith’s understanding of the role of individual interest in advancing society becomes a much more elaborate tapestry when we also look at his other famous book, The Theory of Moral Sentiments. Tellingly, Smith writes in this book that

“How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it, except the pleasure of seeing it.”

In other words, Smith believed that there was something fundamental in human nature that meant that, even though we may seem to be concerned primarily with our own interest, we are not content to see others in a state of hardship. Either Smith held two contradictory ideas about our pursuit of self-interest, or he did not believe it was advantageous for man to pursue his interests to the detriment of others. I am of the opinion that Smith was not an advocate for self-interest in the way it has come to be understood within economics.

Self-interest reached its current zenith in economics due to the introduction of game theory, which was brought to the discipline by John Nash. Game theory is at its core simply a way of modeling human interactions which says that people take into consideration other people’s optimal choices when making their own decision. Behind this model, however, is a deeper statement about how humans behave. Effectively, humans are modeled to be pitted against one another. Game theory accepts that there are circumstances in which interests may coincide. However, the world is essentially modeled as every man and woman for themselves.

John Nash was a brilliant mathematician. He was also a paranoid schizophrenic, and in his autobiography he describes substantial parts of his work as “delusionally influenced”. For this reason, while I am awed by Nash’s logical prowess, I find it hard to accept the characterisation of human behaviour that sits behind much of game theory. (If you are interested, Adam Curtis’ documentary series The Trap, in which he interviews Nash, is very good. In it, Nash speaks quite openly of his doubts about how he modeled human behaviour).

At the same time, the data confronts the portrait of human nature that is painted by game-theoretic models based on pure self-interest. The Trust Game, The Dictator Game, and the Ultimatum Game are three types of experiments that were developed in order to examine whether humans actually tend to behave according to pure self-interest (for brevity I won’t describe the experimental set-up, though it is quite easy to find with a quick Google search). Tellingly, humans consistently do not conform to the predictions of these models, and instead exhibit a tendency to ensure that both participants in the experiment receive some kind of advantageous outcome.

Anecdotally, I’m sure you can see this in your own life. It’s the off feeling you get when you decide to pursue a course of action that benefits you but harms another. It’s the simple fact that you would prefer to live in a world where other people did not suffer absolute poverty. Basic observations such as these suggest that your personal preferences consist of more than simply your narrow self-interest.

From an evolutionary perspective, this makes perfect sense. Homo sapiens have been so amazingly successful as a species not because of our physical prowess, but because we have sufficient cognitive capacity to cooperate in large groups. This is largely a result of our capacity for ‘fictive language’ (the ability to develop narratives to understand the world and ourselves), which means we have been far better at forming communities than other species in the great ape family. There is something primal and fundamental within us that recognises the importance of coexistence.

It is interesting to observe that there are two groups of people who have a tendency to behave in experiments according to the prescriptions of pure self-interest. The first is verifiable psychopaths. The second is economists. This fact is kind of funny, but I also find it slightly disturbing. The reason is that it suggests that people who are exposed to the notion that pure self-interest is proper and natural human behaviour actually come to operate according to that principle. This suggests that economics has gradually morphed into more than simply an analytical discipline. It has become a kind of prescription for human behaviour.

Orthodox economists, seeing the pursuit of pure self-interest as normal and healthy for society, go on to characterise it as exactly that. The concept and the rhetoric filters through to our political leaders, into our popular culture, and ultimately on to us. However, if we are ever to effectively tackle the great challenges we face as a species, we are going to need to move away from a narrow focus on our individual wants and rediscover our immense potential for cooperation.

3 thoughts on “How Economics Made Me a Progressive: Part II – The Homo Economicus Prescription

  1. Hey Tom! This was a real good read.
    Heartening to read an argument for progressive perspectives of economics from someone within the discipline.
    Thanks for writing this!

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