Two recent books indicate that a quiet revolution is challenging the foundations of the dismal science, promising radical changes in how we view many aspects of organizations, public policy, and even social life. As with the rise of behavioral economics, this revolution emanates from psychology.
CAMBRIDGE – Why do people vote, if doing so is costly and highly unlikely to affect the outcome? Why do people go above and beyond the call of duty at their jobs?
Two recent books – Identity Economics by Nobel laureate George Akerlof and Rachel Kranton and The Moral Economy by Sam Bowles – indicate that a quiet revolution is challenging the foundations of the dismal science, promising radical changes in how we view many aspects of organizations, public policy, and even social life. As with the rise of behavioral economics (which already includes six Nobel laureates among its leaders), this revolution emanates from psychology. But while behavioral economics relies on cognitive psychology, this one is rooted in moral psychology.
As with most revolutions, this one is not happening because, as Thomas Huxley surmised, a beautiful old theory has been killed by ugly new facts. The ugly facts have been apparent for a while, but people cannot abandon one mental framework unless another one can take its place: in the end, beautiful old theories are killed only by newer, more powerful theories.
For a long time, economic theory aspired to the elegance of Euclidean geometry, where all true statements can be derived from five apparently incontrovertible axioms, such as the notion that there is only one line that connects two points in space. In the nineteenth century, mathematicians explored the consequences of relaxing one of those axioms and discovered the geometries of curved spaces, where an infinite number of longitudinal lines can pass through the poles of a sphere.
The axioms underpinning traditional economics embody a view of human behavior known as homo economicus: we choose among the available options that which we want or prefer the most. But what makes us want or prefer something?
Economics has long assumed that whatever informs our preferences is exogenous to the issue at hand: de gustibus non est disputandum, as George Stigler and Gary Becker argued. But with a few reasonable assumptions, such as the idea that more is better than less, you can make many predictions about how people will behave.
The behavioral economics revolution questioned the idea that we are good at making these judgments. In the process, they subjected the assumptions underlying homo economicus to experimental tests and found them wanting. But this led at most to the idea of nudging people into better decisions, such as forcing them to opt out of rather than into better choices.
The new revolution may have been triggered by an uncomfortable finding of the old one. Consider the so-called ultimatum game, in which a player is given a sum of money, say, $100. He must offer a share of that money to a second player. If the latter accepts the offer, both get to keep the money. If not, they both get nothing.
Homo economicus would give $1 to the second player, who should accept the offer, because $1 is better than zero dollars. But people throughout the world tend to reject offers below $30. Why?
The new revolution assumes that when we make choices, we do not merely consider which of the available options we like the most. We are also asking ourselves what we ought to do.
In fact, according to moral psychology, our moral sentiments, on which Adam Smith wrote his other famous book, evolved to regulate behavior. We are the most cooperative species on earth because our feelings evolved to sustain cooperation, to put “us” before “me.” These feelings include guilt, shame, outrage, empathy, sympathy, dread, disgust, and a whole cocktail of other sentiments. We reject offers in the ultimatum game because we feel they are unfair.
Akerlof and Kranton propose a simple addition to the conventional economic model of human behavior. Besides the standard selfish elements that define our preferences, they argue that people see themselves as members of “social categories” with which they identify. Each of these social categories – for example, being a Christian, a father, a mason, a neighbor, or a sportsman – has an associated norm or ideal. And, because people derive satisfaction from behaving in accordance with the ideal, they behave not just to acquire, but also to become.
Bowles shows that we have distinct frameworks for analyzing situations. In particular, giving people monetary incentives may work in market-like situations. But, as a now-famous study of Haifa daycare centers showed, imposing fines on people who picked up their kids late actually had the opposite effect: if a fine is like a price, people may find that it is a price worth paying.
But without the fine, coming late constitutes impolite, rude, or disrespectful behavior toward the caregivers, which self-respecting people would avoid, even without fines. Unfortunately, this other-regarding view of behavior has been de-emphasized both in the corporate and the public domain. Instead, strategies have been derived from the view that all our behaviors are selfish, with the intellectual challenge being to design “incentive-compatible” mechanisms or contracts, an effort that has also been recognized with Nobel Prizes.
But, as George Price showed long ago, Darwinian evolution may have made us altruistic, at least toward people we perceive as members of the group we call “us.” The new revolution in economics may find a place for strategies based on affecting ideals and identities, not just taxes and subsidies. In the process, we may understand that we vote because that is what citizens ought to do, and we excel at our jobs because we strive for respect and self-realization, not just a raise.
If successful, the new revolution may lead to strategies that make us more responsive to our better angels. Economics and our view of human behavior need not be dismal. It may even become inspirational.
Ricardo Hausmann, a former minister of planning of Venezuela and former Chief Economist of the Inter-American Development Bank, is Director of the Center for International Development at Harvard University and a professor of economics at the Harvard Kennedy School.
Aren’t we pussyfooting round the obvious? The idea that we are driven by a pleasure-pain calculus to maximise pleasure or minimise pain as individuals (‘the consumer is king’ theory) is the destructive foundation of liberal individualism and freedom ideology: in this view men are imagined to be bound to each other only by the cash nexus! we arelike billiard balls just bouncingoff each other etc.
Such a view, objectively assessed, is sociopathic, the psychology of the psycopath. Writ large it guides the destruction of industries and countries in the pursuit of profit-maximisation. Its morality is the absurd utilitarian fantasy in which it is pretended to substitute traditional morality by chasing ‘the greatest good of the greatest number’ as if we could successfully predict, with a sort of social logarithm calculus.
Dostoiyevsky’s book ‘Notes from Underground’ was a good start in the demolition process.
Here’s what’s missing from the Ultimatum game. If I take $1, I’m signaling the other player that I am a chump, who can be screwed without consequences for $1. And for this screwing, I should be happy. In the real world, I would mistrust the other player, assuming he will screw me again for much higher stakes, without hesitation. Keep your effing dollar.
Almost every economic decision is really about social power, bargaining power, and positioning for future interactions – a near-total blind spot in economic thinking.
“But with a few reasonable assumptions, such as the idea that more is better than less, you can make many predictions about how people will behave.”
You also have to take into consideration that ‘enough is as good as a feast’ and not everyone is prepared to work beyond minimally to produce useless heaps of ‘gold’. Though they may well work themselves to death for a principle or a hobby.
This is a great article. But don’t get carried away. The famous study of Haifa daycare centers simply proves what we know already — namely that a rational maximizer is going to act in his (or her) best interest. If he or she routinely violates social norms by picking up kids late, that will hurt his reputation. On the other hand, if he has the option of paying a fine, then he will no longer be perceived as exploiting the situation at the expense of others. You seem to be mistaking homo economicus for Sen’s “rational fool” who (as Matt Ridley points out) in fact is not rational at all, but only a fool.
This developing school of thought is highly contingent upon the perception of the group with whom we choose to cooperate, due to shared values or the cohort; the Age of Aquarius to Dallas or The Hunger Games. The Millennials do not have a shared vision of themselves based on popular series or movie. This new generation is harder to typify but appear to echo the social conscious of their grandparents. As noted in the article “….The new revolution in economics may find a place for strategies based on affecting ideals and identities, not just taxes and subsidies….” Hence the need for inclusion of the UK’s sustainable development goals (SDGs) in corporate and governmental reviews.
It is funny to resort to morals, which nice people do adhere to while the really big players are allowed to care a shit about it and to mess up the planet according to their whim. What should be revolutionary about such a narrow way of theoretical thinking? No truly relevant law of nature concerning the complete eco-social process is being discovered.
“If a fine is like a price, people may find that it is a price worth paying”
Indeed! Just like traded carbon emissions credits are just a new form of Papal indulgencies
The point about economics as many have pointed out is that its object of study is a social world that it helped create. It’s a bit of an echo chamber. So, the existence of amoral “agents” should not be of any surprise (I’m a banker — I should know!). This has been a theme of the so-called “heterodox” economists like Sam Bowles for some time. I’m glad those views are now firmly in the public domain. Theories are not neutral. I’m not a professional economist, but much of modern economics writing seems sadly anachronistic with its agents driven solely by “incentives” without any recognition or sense of an inner life or an understanding that altruism itself is not just another utility-maximizing behavior — somehow removing “social” from social life seems to be a dead end. Maybe we can actually improve on the quality of life of our “agents” both in theory and practice.
How this can pass as “new” and “revolutionary” is baffling to me. Nothing against Ricardo Hausmann – as he even points to these facts in the article -, but WE knew this. That people act according to lofty ideals that they cherish is something that Adam Smith knew. It’s not a complicated puzzle that was solved. That people act in accordance to their own view of their “role” in society is not new. Perhaps if economist ever bothered to look to social and political sciences, they would have known this all along.
I am not trying to drive a wedge between the social sciences here. I am arguing for the opposite. This is not a revolution in the field of economics. Nor is this anything new. It can’t be. It is merely a sign that what is commonsense is actually happening: that economist begin to see beyond their mathematical models removed from reality to discover that a lot of what is baffling has already been widely studied in other social disciplines.
Interesting, and probably true. It suggests that you should do a social analysis on groups, their ideals and their goals before you do an economic analysis, or take any public policy initiatives. But that will be difficult for governments in diverse states, where the goals and ideals of different groups can conflict. Will diversity then come to be seen as a plague, and ethnic cleansing as a necessary tool of national development? Identity politics reinforced by identity economics could have some ugly results.
Men or women in the street like me have known for ages that people go above and beyond the call at their jobs, striving for respect and self-realization. It is quite bizzare some economists can be awarded the Nobel Prize for coming to know such a simple fact so late.
Economics made a big error from the beginning in that it built itself on the notion of a homo economicus, which did not exist at all. But we have built our society or our industrial society with the helpf of such economics, and our industry has become such a gigantic entity covering all over the world, so our initial, small mistake has become such a gigantic mistake that we are put in a labyrinth. May I hope what Mr. Hausmann calls newer, more powerful theories will get us out of it, at least the 99 percent if not the 1 percent?
Yoshi I’m not an economist. An accountant once told me that his job was to tell a business where it had been not where it was going. An economist appears to be very similar but apparently tries not to use fixed numbers. Because of this there are a wide range of economic points of view allowing policy makers to select the right supporting view for their policy. Frequently a mathematical model is used in this and when the model is proven wrong it is modified and said to have been right except for the bit which has been added to correct the output. Central Banks employ a lot of economists and their main output is to usually move interest rates a fraction of a percentage up or down, its a mystery to me that it is so complicated
Norman Lamont was the UK Chancellor of the Exchequer and trained as an economist. He oversaw Black Wednesday 1992 which cost the UK 3.3 Billion GBP in one day and he jacked up interest rates to 15%. GBP was being sold on the currency market and he kept buying it back at a high rate to try and prop it up. George Soros for one simply bought cheap GBP and sold it to Lamont to repeat ad infinitum if possible. This occurred after Lamont was babbling on about green shoots. It was reported he only realised he had lost when he got a taxi and the driver said it was good try but had failed.
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