September 20, 2014


The Looming Death of Homo Economicus  (Dennis J. Snower, 9/18/14, Project Syndicate)

This is a transformation on the scale of the shift, more than 8,000 years ago, from nomadic hunter-gatherer societies to settled agricultural ones, which eventually led to the rise of cities. A similar transformation occurred in Europe in the tenth century, with the emergence of guilds - associations of skilled workers who controlled the practice of their craft in a particular town - which paved the way for the Industrial Revolution. [...]

Mainstream economics offers a straightforward analysis of and policy response to such a transformation. Whenever technological or other changes allow for people to be compensated for the benefits that they confer on one another (minus the costs), the price-based market system can adjust. When the changes create externalities, economic restructuring is required - say, adjustments in taxes and subsidies, regulatory shifts, or property-rights upgrading - to offset the costs and benefits for which the market cannot compensate. And when the changes give rise to particularly high levels of inequality, redistributive measures are needed.

This approach is based on the assumption that, if everyone is fully compensated for the net benefits that they confer on others, individuals pursuing their own self-interest will, as Adam Smith put it, be led, "as if by an invisible hand," to serve the public interest as well. According to this view, everyone is Homo economicus: a self-interested, fully rational individualist.

But, as past "great transformations" demonstrate, this approach is inadequate, because it neglects the social underpinnings of market economies. In such economies, contracts tend to be honored voluntarily, not through coercive enforcement. What makes these economies function is not a policeman protecting every shop window, but rather people's trust, fairness, and fellow-feeling to honor promises and obey the prevailing rules. Where this social glue is lacking - such as between Israelis and Palestinians - people cannot exploit all of the available economic opportunities.

This link is apparent in the deep social significance of most of an individual's economic transactions. When people acquire expensive cars, designer clothing, and opulent houses, they generally seek social recognition. When couples or friends give gifts to one another or take vacations together, they perform economic transactions inspired by affiliation and care.

In short, mainstream economics - and the concept of homo economicus - recognizes only half of what makes us human. We are undoubtedly motivated by self-interest. But we are also fundamentally social creatures.

This oversight is particularly crippling in view of the impending transformation, which will upend the underpinnings of contemporary society. Indeed, at present, despite unprecedented economic integration and new opportunities for cooperation, our social interactions remain atomized.

No one--beyond the libertarian fringe--has believed in homo economicus for a while now.  The notion that economic decisions are rational never bore much scrutiny.

But what's really interesting, and disconcerting, is that the transformation that is occurring has the potential to render us even more atomized, unless we maintain a culture as powerful as our economics.  That's because the Third Way reforms being undertaken throughout the Anglosphere and Scandinavia (Protestant Northern Europe) borrow so much from the classical economics of Adam Smith.  Essentially, they are premised on a personalized welfare net, wherein individuals use their own savings accounts to fund education, housing, unemployment, health care and retirement, although the funding of said accounts may come from the broader society.  They exploit the miracle of compound interest to make virtually every member of society affluent.  But, given the extent to which human relationships have been built around the interdependence required to get us through difficult times and difficult lives, liberating everyone from such cares is a two-edged sword.

Built into the emerging new system is one massively helpful reality, ownership of accounts that are dependent on economic performance gives everyone a literally vested interest in same.  This is a tremendous force for stabilization, giving everyone some skin in the game.  But it will need to be accompanied by socially conservative politics--restoration of marriage; defense of life; depopulation of cities and integration of suburbs; devolution of political power to more local polities; support for civic organizations; maintenance of public education as a vehicle for civics lessons; non-interference with religion; etc.--if we are to maintain and refurbish familial, religious and civil social networks.

This is one of the main reasons why the Third Way is not utopian. There are inherent dangers in even so promising an economic transformation. 

Posted by at September 20, 2014 6:53 AM

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