Mismodelling Human Beings

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Published on Credo Economics on July 21, 2017

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“rational economic men” in love, politics and everyday life

This chapter explores the assumptions about human nature on which mainstream economics is based. The description of “rational economic man” ignores most psychological and psychotherapy understandings of people.

Key to the conceptual confidence trick are assumptions about what people in general are like. It is all based on an implicit modelling of human beings. Certain types of behaviour (the type that allows economists to model people and markets) are called “rational”. Now, you might think that this description of people is meant by economists to be applicable only to economic and market activities. Certainly this was the point of view of one of the founders of the famous Chicago school of economics, Frank Knight. Although committed to the alleged virtues of the market, Knight was not naive about how far you could take economic analysis. In his book Risk, Uncertainty and Profit he concluded that economics only applied to the satisfaction of wants, and that this business of satisfying wants by no means accounted for all of human activity. Indeed Knight questioned how far one could go with a “scienti c treatment” of human activity and wrote of his own views:

In his views on this subject the writer is very much an irrationalist. In his view the whole interpretation of life as activity directed towards securing anything considered as really wanted, is highly artificial and unreal. (Backhouse, 2002, p. 204)

Some contemporary economists of the Chicago school don’t see it this way. If people are calculating their individual self interest in their economic dealings why should one assume that they do not do the same thing in their political, their social and their interpersonal dealings? Should we not also assume that government ocials are calculating their interests too? At the very least, why should contact between business and government not lead to a cosy relationship, particularly if people can leave government posts and get lucrative jobs with industry? What about bribes and kickbacks from business for special favours?

As I argued earlier, we can take the idea from Anaïs Nin that we do not see things as they are – we see things as we are. There is likely to be a loop in which a theory which describes how people are assumed to be, when powerfully propagated in textbooks as “social science”, will have an influence on how people behave. With economics we have a theory which argues that if people just look after their own interest that’s OK because “an invisible hand” described by wizard intellectuals delivers an approximation to an optimal allocation of resources. Under the influence of a view like this, concern about what is in a wider interest is not likely to blossom. It is unlikely to figure as a motivation or concern. As individualists people will look no further than themselves. They do not need to look further than themselves because the “invisible hand” will do the rest.

It is quite logical to believe that if people are actually like this then their attitude to the community and to the state will be framed in the same terms. Such people, customers of the state, rather than citizens and members of communities, will then have an interest in getting the best deal from the state to pursue their own individual agendas.

the context of Keynesian economics

When I studied economics at the end of the 1960s, the textbooks, for example by Paul A Samuelson, pictured a world where the state was essentially benevolent and independent from business. A democratic process determined what policies the state would adopt and economists were the technical advisers making clear what the policy options were. There was an implied idea that governments, politicians and public offcials would regulate markets without being contaminated by the self-interest motivation of those markets. The idea that the state could be captured by business interests while the majority of the people were effectively excluded from real influence was not expressed in the textbooks.

At that time, at the end of the 1960s, experience of the depression and then of the war had left an effect on public consciousness, including the consciousness of the elite itself – and it left its mark on economics. Fighting the war had been a massive common project which was collectively transforming. The values of British people shifted as a result of the equalising effect of the Second World War – rationing, conscription, the abolition of first class carriages in trains, evacuation and sharing bomb shelters. Military outlays as a per cent of national income in the UK went from 15% of national income in 1939 to 44% in 1940 to 53% in 1941 and as high as 55% in 1943. (Harrison (ed), 1998) After the war, the sense of what could be done when people worked together and decided what was a priority was quite different and there was a collective rejection of the idea of returning to the politics and economics of the 1930s. (Addison, 1975)

This was the context in which the welfare state and Keynesian economics was adopted. The allocation of resources mobilised for, and by, the state was something that a majority of ordinary people believed in. The mood was little different in the United States too, albeit that the US, having won the war, went straight into the cold war, involvement in Korea and the anti-communist hysteria of McCarthyism. Nevertheless there was a different context for textbooks like that of Paul Samuelson.

But by the late 1960s things were beginning to change again. Young people like myself took the welfare state for granted and chafed under the authoritarian paternalism of the elite. These conditions created the basis for a valid questioning of the disinterestedness of the state and its o cials. This idea evolved into “the new left ” but also towards the political right. A very different analysis to that of Samuelson in regard to the relationship between business and the state took hold in economics.

the rise of the chicago school

The idea that the state could be, and was captured by interest groups was valid. The hostility to the communist planned economy, the personal libertarianism born in cynicism about the paternalism and corruption of officials, as well as by backlashes against politicians, officials and the state, led to the growth of fervent market fundamentalism spearheaded by economists at Chicago University. Their ideal was to go all the way and for the state to be driven out of market activity to the maximum extent possible.

Milton Friedman and Arnold Harberger welcome the boys to class at the Chicago school of Economics. https://www.flickr.com/photos/donkeyhotey/4396155916/ https://creativecommons.org/licenses/by-sa/2.0/
Milton Friedman and Arnold Harberger welcome the boys to class at the chicago school of Economics.
https://www.flickr.com/photos/donkeyhotey/4396155916/ https://creativecommons.org/licenses/by-sa/2.0/

To a new generation of Chicago economists, the rational utility calculating individual was a description that could be applied to the understanding of all human behaviour, not just that in the market place.

For example, to Gary Becker at Chicago, racism is a preference choice of who you want to live near and who an employer might want to employ. Note, Becker did not see himself as endorsing or condemning – he merely saw himself explaining and drawing out the consequences.

The model of “rational economic behaviour” was used by Becker and another theorist, Richard Posner, to explain “love”, marriage and prostitution in a utilitarian framework. Marriage is a relationship involving “reciprocal service provision” which saves on the transaction costs like pricing each “service” that a couple provide for each other, as in removing the need to keep accounts for these services. In this way of thinking prostitution is, by contrast, thought of as a “spot” sexual transaction where it is “more efficient” to pay for the service in money.

The same approach is used by Becker to explain crime. Most people don’t steal because it would not be profitable but in the life circumstances of criminals, the rational maximisation of costs and bene ts of crime does make it pay. This is another form of the redistribution of income in the same broad category as government welfare programmes. (Nelson R. H., 2001, pp. 166-189)

The trouble with this view is that it is at best tautologically true in a sense that is banal. People do things because they want to and thus, they must get satisfaction or utility from doing and deciding what they do. However, it makes little sense of the many actions taken by people where they are con icted; where they act in ways that involve self-sacrifice for moral reasons; where there is genuine anguish about their difficult decisions and where they do things because they think they ought to, not because it gives them any satisfaction at all. They act altruistically, get depressed, act out of compassion, and do crazy things. None of these fit into the model.

a faulty view of humanity

As Kalle Lasn puts it, in the book Meme Wars: The Creative Destruction of Neoclassical Economics “Neoclassical economics has achieved its coherence as a science by amputating most of human nature.” (Lasn, 2012)

This amputation is done on the assumption that unless some internal measure of happiness or freedom from pain – utility – acts as a common yardstick, it is not possible for human beings to evaluate between options and make their choices. However, as philosopher Alan Holland points out:

Happiness is not a homogenous item, but a mosaic of heterogeneous elements. There is just no common substance – no utility – by which to compare, for example, the suffering experienced by an experimental animal with the understanding gained by the experiment. Nor is this a point about moral reasons only but about reasons generally. The determined egoist, confronting a chocolate bar that will ruin his or her waistline, will soon find that he or she has to decide between vanity and greed, and will just as surely fail to find an appropriate value in terms of which to compare the alternatives. Self-interest is not such a value as it is as heterogeneous an objective as happiness. (Holland, 2002, p. 27)

As the example of Britain after World War II shows, values shift according to social, economic and political conditions. This alone makes nonsense of the idea that people are driven by personal utility calculations in the manner described by neoclassical economists.

Rather, psychologists have looked at what motivates people all around the world in different cultures and have come up with a more complex picture. Decades of research and hundreds of cross-cultural studies have identified consistently occurring human values which can be grouped into ten broad categories: universalism, benevolence, tradition, conformity, security, power, achievement, hedonism, stimulation and self-direction. (PIRC, 2011, pp. 12-20)

Each of us is motivated by all 10 of the value categories, albeit to varying degrees – and the ten groups of values can be divided along two major axes:

1. Self-enhancement (based on the pursuit of personal status and success) as opposed to self-transcendence (generally concerned with the well-being of others)
2. Openness to change (centred on independence and readiness for change) as opposed to conservation values (not referring to environmental or nature conservation, but to “order, self- restriction, preservation of the past and resistance to change”) (PIRC, 2011, p. 17)

Mainstream economists have identified a part of what motivates people but mislead because they have too narrow a view. The values that economists describe as motivating people are best described as “extrinsic”. Values that are centred on external approval and rewards e.g. wealth, material success, concern about image, social status, prestige, social power and authority. However, people are motivated by intrinsic motivations too. One of the themes of this book is to show that we get a clearer picture of reality when we describe actions and economic consequences arising from different starting motivations – some of which are anti-social and some of which are pro-social.

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