The truth that economists forgot: we're human
Sydney Morning Herald June 7 2003
Why Homo Economicus is a most unlikely creature. Ross Gittins explains.
The most effective attacks on conventional economics are launched by renegade economists. Why? Because they know where the bodies are buried.
Clive Hamilton, director of the Canberra think-tank the Australia Institute, is a former econocrat with a PhD in economics.
His book, Growth Fetish, published by Allen & Unwin, is a powerful attack on conventional economics and its rarely examined assumption that unending growth in the consumption of goods and services is what will make us happy.
Hamilton argues that economists have created a story about how the world works based on certain aspects of human behaviour: self-interested calculation, individualism and materialism.
"The strangeness of the economists' world," he says, "arises from the fact that they recognise only this form of behaviour as valid and insist on imposing it on everything that people do."
In other words, Homo Economicus - the person who inhabits the economists' models - bears only a passing resemblance to you and me. The economists have seized on a few aspects of human nature and assumed (because it makes their models easier to play with) that this is all there is to us.
Even this wouldn't matter if the aspects of our nature they've seized on were the ones that are most influential in the way we think and act. But they're not.
It's true, for instance, that we can be terribly self-interested in our behaviour (especially if you define altruistic behaviour as a form of self-gratification) and it's true that, on occasion, we can all be quite calculating.
But, as the Nobel prize winning economist George Akerlof has observed, the theory really assumes that people - "economic agents" in the jargon - are emotionless geniuses.
We carefully and unfailingly calculate which among all the options available to us is the most advantageous, and our calculations are never affected by our emotions - not by pity, love, light-heartedness, generosity, pride, anger, concerns about face, fear or anything else.
In truth, Akerlof says, economic agents are just average people with emotions and limited foresight.
Cognitive psychologists have demonstrated that the human brain is simply not capable of making the many hundreds of rigorously logical calculations a day that would be needed to make us "rational".
And the new school of behavioural economics - which draws on the insights of psychology - has shown how the economic decisions we make rely on a host of brain-saving mental short cuts (known as "heuristics") and are influenced by our emotional reactions to the circumstances in which decisions present themselves to us.
They've shown, too, that our attitudes and behaviour are influenced by something the economists define right out of the picture: perceptions of fairness.
That brings us to the next item on Hamilton's list of conventional economics' flawed assumptions: individualism.
The neo-classical model examines the behaviour of economic agents as individuals, not as part of a group. We don't care about the people around us, and their attitudes and behaviour have no influence on our attitudes and behaviour - with one notable exception: other people's behaviour matters to the extent that it affects the prices we pay.
This flies in the face of the most obvious truth that man is a social animal. We care deeply about the people around us - particularly what they think of us - and our attitudes and behaviour are heavily influenced by the attitudes and behaviour of others.
How's this for a weakness in the model: economists never doubt for a moment that if someone's annual income rises by $1000, they'll be happy. It never enters the economist's mind that, if my income rises by $1000 while everyone else's rises by $2000, I'll be either murderously angry or suicidally depressed.
Man is, in many respects, not just a social animal, but a herd animal. When house prices are shooting up because lots of people are "trading up the market", we feel an almost irresistible urge to join in before we miss out.
When everyone's raving about a new film, or a new book, more and more people want to see it or read it. And why is it that, every Christmas, there's one particular toy that every kid wants (and that sells out early)?
Most of us have a herd-like desire to "fit in", to be appropriately dressed (which means to be wearing much the same as what everyone else in our group is wearing), to keep up with the Joneses - and, increasingly, to get ahead of the Joneses.
But from the laughable assumption that we're all rugged individualists flow two key assumptions of market economics.
The first is that a consumer's preferences are "exogenously determined". Each of us knows exactly what it is we want to buy, and all we're waiting to be told is the prices we have to pay. Once we know that, we adjust the quantities on our lifestyle shopping list so as to maximise the "utility" we derive from what we have to spend.
Similarly, individuals know exactly what they want to achieve with their lives - how hard they want to strive to become rich, for instance - and they just keep beavering away at it.
The claim is that there's nothing the economic system - the market - can do to change our clearly defined preferences. And from this flows the other assumption of "consumer sovereignty".
In a capitalist economy, it's not the capitalist who's king, it's the consumer. The only way for a business to maximise its profit is to produce exactly what it is the consumer wishes to buy.
And the consumer is supposed to be sovereign in another sense: no one has the right to question the wisdom of his or her choices. Within the constraints of their income, the consumer will always choose to buy that collection of goods and services which, no matter how bizarre or dubious, maximises their utility.
No outsider could nominate a different collection that would yield the individual greater utility.
But this is hugely unrealistic. Hamilton writes that "consumers' preferences do not develop 'outside the system'; they are created and reinforced by the system, so that consumer sovereignty is a myth".
We're emotional beings, our preferences keep changing and are easily influenced by the attitudes and actions of the people around us. More to the point, they're easily influenced by the producers themselves, via their advertising and marketing.
Economists hate talking about advertising. When pressed, they seek to dismiss it by claiming it's purely informational.
But we all know this is nonsense. We know advertisers sell the sizzle, not the steak. Some of the most creative minds in the country sell stuff by playing on our emotions. They associate the most prosaic products with a life of love, glamour, success and happiness.
We all know these unspoken promises are absurd, but we're all influenced by them because they pervade our lives.
The first chapter in any introductory economics textbook tells us that economics is about the unending search for solutions to the eternal "economic problem": the sad truth that our resources are finite, but our wants are infinite. Economics grapples with the "problem of scarcity" that arises from this conflict.
Hamilton, however, argues that for most people in the rich countries, the economic problem has been solved. After 200 years of rising real incomes, capitalism "has moved to a phase of abundance, and abundance broadly spread".
And this has turned the economists' model on its head. Unending growth in the consumption of goods and services doesn't create happiness.
Rather, unhappiness sustains economic growth. The marketers and advertisers have to play on, and play up, our discontents, holding out the promise that another tub of margarine - or a Rolex watch - will bring us to nirvana.
The producers have to con us into keeping up our consumption so that production can keep growing. This makes sense?
Ross Gittins is the Herald's Economics Editor. -------------- next part -------------- An HTML attachment was scrubbed... URL: <../attachments/20030607/e053dd65/attachment.htm>