The Good, The Bad, The Economy

Does human nature rule out a better world?

Even Economists Are Discovering that Humans Can Cooperate

How do the butcher and baker keep the sidewalk clean?

For generations, the meat and potatoes of economics textbooks was the market environment in which society hums along optimally when the individual looks out for her own advantage, with no concern for the welfare of others. If the butcher, the baker, the hairdresser and the yoga instructor each try to earn as much as possible with no regard for anyone else’s well-being, then the invisible hand of the marketplace leads them inexorably towards serving their customers with the greatest possible efficiency, since providing good cuts of meat, draughts of bear and loaves of bread at low prices wins repeat business, making both customer and shopkeeper better off.

But efficient economic interaction requires more than an invisible hand. Who will pave the road in front of the shops and keep those pesky banana peels off the sidewalk? Who will prevent passers-through from taking what they wish from the shops without paying? Who will provide a currency allowing customers to engage in exchange with the shop owners when the latter don’t happen to need what the customers produce in their own trades? And what will keep the issuer of that currency from printing too much of it, driving down the value of people’s earnings and savings? Some of the answers might lie with government, but how does it come into being, and what makes it responsive to the people we hope it will serve?

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Governments are one of two familiar solutions to a wide class of puzzles economists call ‘problems of collective action.’ What these problems have in common is that everyone benefits when the thing in question—a clean sidewalk, breathable air, stable currency, or law and order, for instance—is provided. But a given individual benefits even more if it’s provided while he himself escapes from doing his part or paying his share—being, as the phrase goes, a free-rider.

People sometimes solve the problem without government—for instance, the shopkeepers get together and agree to take turns sweeping the sidewalk. Often, they feel tempted to shirk their parts, but if the agreement is mutually beneficial, cooperation just might work. The danger of its falling apart and the fact that each keeps an eye on the other and is ready to criticize any failure to do the job properly are among the keys to success.

Government might seem like a much better bet, of course, since with an effective one in place, no voluntarism seems to be needed. After all, everyone can be compelled to do their part (i.e., pay their taxes) on pain of imprisonment or a fine (a heftier tax). The whole problem of collective action seems possible to waive away!

But like much else that seems so, that answer is too good to be true. For one thing, calling on government isn’t always feasible. If you share an apartment with two friends, you can’t credibly threaten them with arrest if they fail to carry their weight on the dishwashing or bathroom cleaning chores. Business partners and members of workgroups likewise can’t call on government to solve their problems of cooperation. Some collective action problems are simply too local to bear the cost of government surveillance and intervention.

More fundamentally, the view of government as a faithful tool of a country, state or city’s people holds even as an approximation in only a few of the world’s countries, and there only thanks to long histories of institution building and to ongoing vigilance by attentive citizenries and a free press. Put differently, though government can force people to pay their share of the cost of public services once it’s been brought into existence, keeping government responsive to the public’s interest and preventing it from using its powers arbitrarily to extract wealth from whomever those in power wish to pick on, lingers on as a problem that requires voluntary collective actions, after all. Citizens must care enough to read the newspapers, watch the TV programs or monitor the internet sites that report on signs of political malfeasance, making such reporting viable through advertising revenues or (in the case of public radio) voluntary donations. Enough of them must take upon themselves the cost of showing up to vote despite the fact that one vote has only the most negligible of chances of changing the outcome. There must be whistleblowers within government prepared to take risks to help expose misbehavior. It would even help to have the occasional public spirited politician or bureaucrat who polices herself, making watchdogs and press oversight a little less crucial.

The upshot is that where pure selfishness seemed sufficient to address society’s needs when meat, beer and bread were the issues, there are many equally vital domains in which capacities to transcend selfishness and to do something for the general good are required. If people are at base self-interested, as economics textbooks used to (and sometimes still) assume, how does society manage?

The answer that’s been emerging from the social side of behavioral and experimental economics resembles a line of thought prevalent in other fields that focus on the evolution of human behavior, including parts of evolutionary psychology, anthropology, ethology, and sociobiology. In brief, social dilemmas—situations in which the interests of people as individuals and their shared interests as groups are in tension—are ubiquitous in the life of any society. Humans have been social animals since before they were fully human. And many human behaviors are governed not by rational deliberation but by innate predispositions which are fashioned into action tendencies by the wealth of social cues to which each of us is exposed from birth through our years long maturation process and on into adult life. Our behavioral inclinations give us capacities to cooperate with others that a purely rational and purely selfish being like the economic man of the Econ 101 textbook would be hard-pressed to replicate.

The evidence for the social/behavioral underpinnings of cooperation in economic interactions comes especially from the controlled experiments in decision-making used in the field called experimental economics. Typically, we recruit some student volunteers, tell them they can earn money in consequence of their decisions and the decisions of others, present a decision problem, and let them interact via computer terminals. More representative subject pools are also recruited, where possible. It’s important to note that experimental economics is not all behavioral in flavor, and that many of the economics experiments that do investigate behavioral theories are more about perceptual biases, such as paradoxical decisions in the face of risk or trade-offs between present and future consumption, than about decision-making in social interactions. But many hundreds of experimental studies have had a social focus, and they’ve yielded an impressive body of evidence that social predispositions or preferences once assumed absent or irrelevant by the traditional economics of the rational individual actor are very much present and are of more than secondary importance to understanding key institutional and policy problems. These studies are beginning to change the nature of economic research and even, slowly, how we teach our students. The experimental economics of social interaction will be described in postings to follow.

Louis Putterman is an economics professor at Brown. He is the author of The Good, The Bad, The Economy.

Louis Putterman, Ph.D is an economics professor at Brown.



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