The Good, The Bad, The Economy

Does human nature rule out a better world?

Occupying Econ 101

Is this really the best of all possible worlds?

Last September, as the Occupy demonstrations were picking up steam in lower Manhattan, I found myself struggling with a distinctly different set of problems. Though my university, Brown, attracts plenty of the idealistic, socially active kids you might associate with its image of progressive education, our economics department, whose undergraduate program I was helping to oversee, was dealing with a large number of disappointed students for whom there weren’t enough seats in overcrowded classrooms. Principles of Economics had become the most popular course on campus, and economics the most popular concentration (the local equivalent of a major), with as many as one in seven undergraduates selecting it from among some eighty other possibilities. To complicate matters, we were trying to limit our upper-level course enrollments to a maximum of 100 students per class and to create a set of senior seminars with much smaller numbers. These quality-improving efforts were running smack into the strong current of student demand, with no prospect of short-term relief via the hiring of additional faculty.

Were students pouring into economics classrooms because the gross malfunctioning of our market institutions in the late ’00 decade piqued interest in what makes the system tick? Were they diving into economics so that their generation could avoid unleashing such a crisis on their own children? Or were they simply going for the most bankable major they could take given that the world they’d graduate into was looking so insecure? Judging by a colleague’s frustration with the lack of thoughtful questions by students in one of his classes, it seemed more the latter. He was scratching his head over how supposedly bright students could merely sit and take notes when shown the theoretical proof that the competitive market achieves perfect efficiency. Less than a year after the financial market meltdown, why didn’t students rise from their seats and demand to know what that had to do with the real world, he wondered? Instead, the most popular question was: will this be covered on the exam?

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As an economics department, of course, we may get a biased sample, containing more than the usual share of those students who’ve decided to put their financial fortunes first. Members of our particular audience may be that much more likely to nod in agreement when exposed to our discipline’s standard assumption that the motive of the decision-maker can be assumed to be self-interest. Having accepted this idea, it might not seem very far-fetched to them that some economic theories seem to assert that we’re already living in the best of all possible worlds. It might also not be a long stretch, to them, if questions about why our economic system generates so much inequality were to be answered by the response that inequality is a necessary consequence of the need to motivate effort and investment with material rewards.

No doubt there’s a grain of truth in that idea. But the world is a good deal more complicated than it suggests. Why was far less inequality adequate for sustaining much higher rates of economic growth in the United States of the 1950s and ‘60s than in the 1920s? Why is a return to higher inequality required today? Why do many Latin American countries have very high inequality but not much economic growth? Why do some Asian countries have much lower inequality but much more growth? If people are so self-interested, why are millions of dollars donated every year to improve the facilities of your university? Why do hundreds forego more lucrative careers in the private sector to work on basic research and teaching? Why are billions of dollars donated to help the world’s poorest, with fresh additional flows following well-publicized disasters? Why do many studies suggest that motivations other than the pocketbook are often powerful boosters of creative energy and productivity? Why have hundreds of millionaires supported measures to restore progressivity in our tax system?

In recent years, research within economics itself has begun to go well beyond the simple assumptions still reflected in the introductory textbooks. The public has heard of behavioral economics, but mainly the part that investigates where economists’ assumption of perfect rationality breaks down and the actual cognitive equipment of human beings enters the picture. An equally large but less widely appreciated body of research has begun investigating the social side of human behavior, with findings about the complexity of human nature that dovetail nicely with those of the other behavioral sciences but that may take years to integrate well into the mainstream of economic thought, with its commitment to simpler assumptions.

In the experimental economics lab, each volunteer participant can earn money through careful decision-making and wise interactions with other participants. In many of these experiments, the idea that “nice guys finish last” is shot to shreds as cooperators outcompete more single-minded “maximizers of own payoff.” Talk, which our professors had always told us was “cheap,” gives rise to trust and trustworthiness, often proving mutually beneficial. We see no lack of aggression, but a type of aggressive action that seems to violate the rule of self-interest—namely paying to punish the uncooperativeness of others—makes possible some of the most successful cases of cooperation.

So, has the paradigm been turned on its head, with people now cooperative and not self-interested? Has the appeal to selfish incentives lost its grounding, and should my Wall Street-bound students leave class early to join hands with the other 99% on the streets outside the stock exchange? As you guessed, it’s not that simple. And it will take more than one posting to begin fleshing out the implications of the new behavioral and experimental economics of social interaction, for our economy and for our hopes of a better world.

 

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

 

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