There was an interesting discussion at my workplace recently. As a quick point of background information, I work at a policy ‘institute’ — the East Asia Forum — but we have a distinct economics bent and many of our senior staff are economists by trade.
We’d recently begun a staff meeting and one of the supervisors was requesting that the law students in our employ not leave abandoned print runs of constitutional and international law notes in the photocopy room, where they could be spied by the other, non East Asia Forum users of the room and make us look bad/unprofessional.
After a bit of Banter one of my colleagues, a Doctor of Asian Studies and fledgling economists remarked that: ‘well at least now that I am an economist I can say the photocopy room is a tragedy of the commons—I was behaving perfectly rationally when I did that’.
The subtle problems imbedded in this comment are the topic of this paper. Specifically, I want to talk about the fact that purely self-interested actions are defined by economics not as ‘purely self-interested actions’, but as ‘rational actions’. This implies that other-regarding actions are irrational.
Allow me to explain using another office analogy—the stationary cabinet. The cabinet is a commons. According to an economist, everyone would be perfectly rational in pillaging the cabinet and leaving nothing for everyone else. In fact, for the providers of the cabinet to expect anything else is foolish. Either they need to introduce some sort of pricing mechanism or a degree of regulation.
But pricing would defeat the purpose of having a stationary cabinet—why not just go to Officeworks instead—and regulation might have an adverse effect. For example, a study of office regulations designed to ensure employees worked to a certain standard in terms of hours and output found that in such workplaces where rules and codes were in abundance, employees worked only up to the standard required by the regulations and no further. Innovation, effort beyond the call of duty, initiative and enthusiasm were rare. In the case of the stationary cabinet, people might always take exactly what they are allowed even when they don’t need anything. Such a situation might be quite suitable to some businesses (call centres and factories come to mind), but for most, creative capital, a sunny work environment and the potential for tremendous output at times of need are more important than regularly recurring production figures.
The correct course of action would just be to encourage ethical behavior. If people only take what they need then there will always be enough for everyone. This seems like a pretty standard case of prisoner’s dilemma, and the obvious option (to an ethicist), as in all prisoner’s dilemma’s, is to cooperate to ensure a mutually beneficial outcome.
This brings me to another startling aspect of economic theory that I have come across recently and probably still don’t correctly understand. That is, from an economic point of view (mathematically modeled) the rational choice for each individual involved in a prisoner’s dilemma is to defect. This seems to the largely the fault of the algorithmic role of the fact that in cases where one individual defects and the other cooperates (rather than where both defect) the individual who cooperates gets particularly screwed.
Let me explain that in a little bit more detail. In a standard prisoner’s dilemma two convicts are placed in separate interrogation rooms. Prior to entering the rooms they have agreed on a story that they are going to tell the police. If one decides to tell the story this is referred to as ‘cooperating’. If one decides not to this is termed ‘defecting’. Players (prisoner’s dilemma is an example of ‘game’ theory) score different points depending on the outcome of the interrogation. If both cooperate they both achieve a good outcome—they are both let off, but with suspicion—this would amount to say, 8 points. If one defects and the other cooperates the one who defects scores an outstanding outcome, representing his complete freedom from conviction and suspicion—12 points; the other individual, who got screwed, scores horribly: –2 points; he goes to jail. If both players defect neither does particularly well, but their conflicting stories do nothing to help the police either: they each score 0.
An ethicist looks at this situation and says, if both behave in an other-regarding manner, they both do well—they get a ‘good’ result. Consider it from the convict’s points of view: you get off. If one decides to be a bastard he gets an outstanding result, but runs the risk of getting a terrible result. Why bother when you can be certain of a good result should you both be sensible.
In economics however, math gets involved, and things go far up shit creek. The difference between the absolute worst outcome (defect/co-op) and the slightly worse outcome (defect/defect), and similar the good (co-op/co-op) and outstanding (defect/co-op) outcome, produces a model which suggests the optimal, rational, thing for each person to do is defect. The issue here is basically that math takes the humanity out of the scenario. People don’t need perfect outcomes if they can get a good outcome.
Thing about it this way: what society would you rather live in, one where you and your neighbor both earn $80 000, or one where you earn $120 000 and your neighbor lives on the street? Some people don’t seem to give a shit about their neighbor. They are bastards, but what’s more, they don’t seem to factor in that their neighbor will be hanging around their trash cans, asking them for change, sticking up the street, scaring their kids in the playground and ruining the aesthetic of their cities. On balance, their life might actually be far more amicable if everyone was doing well. It’s not like that extra $40 000 actually made much difference.
This seems to be what America does not understand. Money is not an end in itself, and the total wealth of a country is largely irrelevant if the relative wealth of its citizens is hideously skewed. An enormous study has recently been published which virtually conclusively shows that social wellbeing (things like infant mortality, literacy, average age, crime etc) is significantly better in Western advanced countries with lower relative differences in wealth than in those with high differences. The United States consistently performs near bottom on these measures despite being the most affluent nation on the planet.
This brings me to my next point, which is that economics consistently misses the point of human life. It consistently substitutes measures of wealth and production for measures of happiness (for a definition follow the link) and wellbeing.
There are two reasons for this. The first is that it is difficult to track and model wellbeing and happiness, and easy to track and model wealth and production. This is being addressed, albeit slowly. In the meantime, there are various negative flow on effects into culture and governance. For example, one political science colleague of mine recently pointed out that increasingly, the task of government is to maximize the productiveness of its citizenry. This is obviously senseless. If everyone in the country starts working an extra 2 hours per week you’ll see a spike in productivity; but this is unlikely to be correlated with a spike in wellbeing or happiness (quite the opposite actually). So why have we strayed onto this path? At what point did we start organizing our societies based on production and consumption when these have little intrinsic relationship to what makes our lives worth living? Bobby Kennedy expressed this brilliantly nearly 50 years ago! ‘in short, [GDP] measures everything except that which is worthwhile.’
The second reason is a little more subtle, which is that economics never was about maximizing human happiness and wellbeing, and always about maximizing production and wealth. This wasn’t a problem until we started to think of economics as the social science and not simply another area of research. I recall a comment on a Ted.com talk recently: ‘as always, technology and economics will come up with a solution’.
As always?!
I have a great deal of respect for the ability of good economic theory to produce an efficient outcome, maximize wealth, and sometimes even contribute to an efficacious outcome, but the suggestion that economics can make society real, truly livable, is bollocks. In fact, and I have written a whole article on this, the economic need for constant growth has contributed to the perpetuation of a materialistic culture which encourages us to work more and spend less time on friends, family, travel and extra-curricular activities like hobbies or civic practices that, in the majority of cases, are actually responsible for the meaning in people’s lives. Economics may find a way out of the GFC and provide a neat mechanism for correcting climate change, but until it can take into account the full capacities of human beings it will remain a severely limited and often dangerous area of theory. So long as we include economic perspectives in the policy discourse without acknowledging the very narrow definition of ‘rational’ at the core of the discipline, not to mention the absence of ethical principles from its foundational theories, we are pre-disposing ourselves towards a value set that is several steps removed from our central needs. This is not to say that economics, purely conceived, has anything to do with ethics or existentialism, it doesn’t. But it is to suggest that we need to keep these things in mind, and in priority, when we are discussing and applying economic ways of problem solving.
When Adam Smith laid down the foundation of modern economics in the Wealth of Nations way back in the 18th century, he was well aware of the fact that his emphasis on free reign of market forces had the potential to produce severe externalities with the potential to devastate the wellbeing and enjoyment of mankind. Hence he emphasized the need for a ‘moral code’ that would govern decisions in the market, and discussed the role of government in imposing regulations in such cases where it may be necessary. He acknowledged that these were rare, but he was genuinely concerned about, for example, the dehumanizing effects of working for 60 hours a week, for 30 years, putting pin-heads on pins in a factory.
Such a moral approach to markets worked fine until the (fortuitous) collapse of Christianity, at which point traditional morality experienced a bit of an implosion and nothing solid has really come along to fill the vacuum.
But this wouldn’t be so much of a problem if neo-liberal economic rationalism wasn’t increasingly becoming a common source of ethical principles. Increasingly, our decisions in the market are guided by an attitude that whatever the market encourages us to do is good. ‘My behavior is perfectly rational’ is becoming more than just an excuse for behaving like a bastard—it is now often an acceptable counter to claims that you are a bastard.
This trend seems to be a part of a general cultural shift towards the attitude that the market is intrinsically good; as though it can do no wrong. But the realities of market failure and externalities are everywhere around us today and emphasized by classic economic theory.
It is crucial that we remember that the market is a tool which we should only apply when it produces the outcomes we want, much like we would only use a standard hammer to knock in nails and not to flatten out meat for a Schnitzel. As a fan of markets generally, I think there are very few cases where the application of market principles will not produce good policy outcomes, but even I recognize that regulation has a place. As a consequence I see carbon taxes and similar proposals as ideal technologies for solving their associated policy conundrums, but I also strongly hold that regulation to prevent reckless bank behavior as sensible and necessary.
Admittedly it is very hard to draw the line in most cases, and often, the perfect solution is obscured because it falls between ideological positions rather than in them. For example, it would be ludicrous to have government intervention in the application of bonuses to CEOS. Businesses can do what they want. What needs to be communicated is that it is the best interests of business to provide bonuses over a long term period, say a minimum of five years, as this prevents reckless short term profit seeking and ensures sustainable growth and regular profits. Similar, Michael Moore’s proposal that the US government impose itself upon Michigan car manufacturers and force them to produce green cars, reduce executive salaries and decline layoffs is economically stupid. What needs to be communicated to Michigan is that it is similarly economically stupid to keep producing obsolete gas guzzlers in the quantities these companies do.
There is a much more complex question here about how to motivate executives who are all in a club together and don’t actually care so much about their companies as keeping each other happy. I can’t address this question here. All I want to emphasize is that the market is usually good, but privatizing the Ozone layer is insanity, just like it is insanity to think that if you let people give out bad loans without taking on the risk involved in those loans you won’t end up with a god-awful bubble.
Returning to my initial theme, the key thing going forward is to remember that life and society is about human flourishing. If a decidedly economic mindframe is not doing that then we need to be less decidedly economic. There are no absolute values. The market is just another tool in our box, along with utilitarianism, the categorical imperative, government regulation etc. Use it where appropriate. And for God’s sake, being a bastard is never rational!
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