Sat Sep 11th, 2010 at 05:25:15 AM EST
One of the bedrock assumptions of economic theory for the last few decades has never been true. When an error is both generally acknowledged and fervently embraced there is usually a good (and unfortunate) explanation, and this is no exception.
Cross posted from Pruning Shears.
No Associated Press content was harmed in the writing of this post
While reading ECONned by Yves Smith I was struck by the following from her coverage of neoclassical economics (p. 99):
Nobel Prize winner Amartya Sen uses an anecdote to illustrate the problem of assuming actors act solely out of self-interest:
Central to [the] problem is the assumption that when asked a question, the individual gives an answer which will maximize his personal gain. How good is this assumption? I doubt it is very good. "Where is the railway station?" he asks me. "There," I say, pointing to the post office, "and would you please post this letter for me on the way?" "Yes," he says, determined to open the envelope and check whether it contains something valuable."Sen's story illustrates that society rests on the assumption of a basic level of cooperation and trustworthiness, since the behavior he parodies, of extreme self interest, does not jibe with what most of us experience on our day-to-day lives. But neoclassical economics offers a polar view, that people are strictly self-motivated, and then assumes a simple solution, that they will nevertheless be bound by the agreements they enter into. You can see how this breaks down: if individuals aren't restrained by morality or the need to maintain appearances, why wouldn't they cheat on their promises?
The belief that people are strictly self-motivated is an idée fixe
among economists, yet it is obviously false. Smith gives several counter-examples, such as altruism and church attendance, along with the neoclassical-confounding case of self improvement. (Trying to quit smoking, lose weight or do any other kind of self-denial with a long term benefit is literally inexplicable in neoclassical terms of self-motivation.)
One of the Smith's theses seems to be that over the past few decades economists aspired to "elevate" their work from the relatively unglamorous and plodding realm of engineering (number crunching) to the rarefied air of science. They fell in love with mathematical modeling and endeavored to find an equation for everything. Unfortunately, they appropriated scientific airs without bringing along scientific rigor.
For instance, if a theory confronts a counterexample, the theory is no longer valid and must be changed. A properly disciplined investigation of the self-motivated hypothesis would look like this: "Proposition: People act solely out of self interest. But altruism exists and has no obvious element of self interest. Therefore the proposition is false."
Neoclassical economists did the exact opposite; they conjured up extravagant fictions to explain why counterexamples actually fit the theory (altruism really is about self interest) or else dismissed them as noise that had no impact and could be ignored. Yet in a proper scientific environment the response would be: back to the drawing board.
Now, even scientists have been known to fall in love with their models and theories, and to ferociously attack those who challenge them. Even taking that into account, though, it's remarkable how widely believed the self-interest model still is. It is so easily falsified that something else has to explain its persistence. The something else is on Wall Street and in Washington.
From a business perspective, nothing is better than a model that basically says, every man for himself. Everyone goes after what they want, and not only does it all work out in the end but it produces the best of all possible outcomes. In an environment like that regulation is oppressive and government can only make things worse. In practice it is something close to a state of nature; this is why libertarianism makes the most sense when you are healthy and well off.
The political culture has absorbed that message too, which is a great relief to conservatives. If government can only make things worse, then the obvious response is to do nothing (which the GOP has become phenomenally skilled at). That is tremendously appealing to much of the governing class - including many ostensibly on the left. Doing something is hard; doing nothing is easy. If the economic system produces the ideal result on its own then that certainly takes a lot off the federal government's plate doesn't it?
Smith thoroughly examines the vast disservice done to us by neoclassical economists, and there is obviously no way to do justice to her whole analysis in a single blog post. One of the themes she returns to a number of times, though, is how they celebrate selfishness (let's call it what it is already) as a virtue. Hell, their patron saint put it just that simply. And even though it has been overwhelmingly disproven both in theory and in practice, it remains in favor because it is terribly useful to the political and economic elite. Which means, unfortunately, that changing that belief requires more than just demonstrating its falsehood.