Where Adam Smith went wrong

Source: Cosmos Magazine

One of the central axioms of economics is that people are selfish.  An axiom is something which is "self-evidently true", and the belief that people are selfish is treated as a given in most economic analysis and underpins theories about the price system and the behaviour of markets.   But what if it's not true?  What if people are not selfish, but instead a mixture of selfish and selfless, individual and co-operative?  What if people regard fairness and straight dealing as valuable and necessary in social relationships? Economics is essentially an analysis of social relationships.

So this experiment published in the journal Science is extremely interesting.

An international experiment involving over 17,000 lost wallets has revealed that humans are far more honest and altruistic than anyone, including professional economists, had ever imagined.

The research, published in the journal Science, shows that our sense of self and the desire to help others are sometimes more powerful than self-interest.

The Scottish philosopher Adam Smith placed self-interest at the heart of human behaviour in his 1776 work The Wealth of Nations. 

Classical economics still holds that rational self-interest is the key to economic activity and will, as a by-product, generate social benefits; but such assumptions don’t always lead to accurate predictions about human behaviour.

Alain Cohn and Christian Lukas Zünd of the University of Michigan, in the US, Michel André Maréchal of the University of Zurich, in Switzerland, and David Tannenbaum, of the University of Utah, Salt Lake City, in the US have carried out a series of studies that show self-interest is only part of the picture.

The team set out to see if “people act more dishonestly when they have a greater economic incentive to do so”. This is the prediction from classic economic models based on rational self-interest, which “suggest that, all else equal, honest behaviour will become less common as the material incentives for dishonesty increase”.

Our understanding of honesty, up until now, has largely come from laboratory work, but exactly how these results translate to real world activity has been far from clear.

The key question is “whether such settings predict honesty outside the lab, where dishonesty often harms others, suggests Shaul Sharvi, of the University of Amsterdam, Netherlands, in a companion perspective in the same journal.

Cohn and team set out to test how honest people actually are in real life, something they call “civic honesty”. To do so, they went to 355 cities across 40 countries and handed in 17,303 “lost” wallets to banks, theatres, museums, post offices, hotels and various public offices, including those of branches of law enforcement.

Each wallet was transparent and contained a collection of variables: a key; a grocery list and three identical business cards with the owner’s identity and email address; and either US$13.45 in local currency or no money at all. These wallets were dropped off by research assistants claiming to be in a hurry who left no contact details.

The test then was to see at what rate people tried to contact the owners to return the wallet. Classic economic theory says that the wallets containing money should be returned at a lower rate than those without.

Cohn and colleagues found that the exact opposite was true. In 38 of the 40 countries, “citizens were overwhelmingly more likely to report lost wallets with money than without”. This effect was even more pronounced when the amount of money was increased sevenfold.

Confounded by these findings, the researchers controlled for competing interpretations and other variables, such as fear of being identified and getting in trouble. In doing so they found that the presence of a key, something valuable to the wallet’s owner but useless to the “finder” of the wallet, also increased the likelihood of the wallet being returned.

[Read more here]

Don't get me wrong.  I'm not saying that the world is all 'my little pony' with rainbows and magic fairy dust.   People can be selfish.   Yet, we are also co-operative and ethical, kind and thoughtful.  Gordon Gekko in the film Wall Street said "Greed is good".  No it isn't, and most people don't think it is.  He said "loyalty is for spaniels".  Nope.  And the problem with economics is that its assumption that greed underpins all economic relationships has encouraged people to think it underpins all relationships.

Frans de Waal said:

In 1879, American economist Francis Walker tried to explain why members of his profession were in such "bad odor amongst real people". He blamed it on their inability to understand why human behavior fails to comply with economic theory. We do not always act the way economists think we should, mainly because we're both less selfish and less rational than economists think we are. Economists are being indoctrinated into a cardboard version of human nature, which they hold true to such a degree that their own behavior has begun to resemble it. Psychological tests have shown that economics majors are more egoistic than the average college student. Exposure in class after class to the capitalist self-interest model apparently kills off whatever prosocial tendencies these students have to begin with. They give up trusting others, and conversely others give up trusting them. Hence the bad odor.

And:

Don’t believe anyone who says that since nature is based on a struggle for life, we need to live like this as well. Many animals survive not by eliminating each other or by keeping everything for themselves, but by cooperating and sharing. This applies most definitely to pack hunters, such as wolves or killer whales, but also our closest relatives, the primates. In a study in Taï National Park, in Ivory Coast, chimpanzees took care of group mates wounded by leopards, licking their blood, carefully removing dirt, and waving away flies that came near the wounds. They protected injured companions, and slowed down during travel in order to accommodate them. 

All of this makes perfect sense given that chimpanzees live in groups for a reason, the same way wolves and humans are group animals for a reason. If man is wolf to man, he is so in every sense, not just the negative one. We would not be where we are today had our ancestors been socially aloof. What we need is a complete overhaul of assumptions about human nature. Too many economists and politicians model human society on the perpetual struggle they believe exists in nature, but which is a mere projection. Like magicians, they first throw their ideological prejudices into the hat of nature, then pull them out by their very ears to show how much nature agrees with them. It’s a trick for which we have fallen for too long. Obviously, competition is part of the picture, but humans can’t live by competition alone.

Neo-liberalism has made our society more unkind, less cohesive, and more unpleasant.  Inequality has increased, and so has division and hatred of others—the poor, the rich, strangers, Mexicans, Blacks, gays, women, immigrants.  We need a new economics, and a new politics.  Too many politicians have done just 6 months or a year of economics study, and they imbibe unthinking economic "truths".   If you have studied more economics, you learn that the simplistic nostrums of Economics 1 aren't always true.  Yet these nostrums guide our economies and polities, and have produced toxic results.