Economics makes you selfish

selfish

I was motivated to write this post by fellow Australian young economist Gabriela D’Souza

“After Taking Economics, Students Become More Selfish and Expect Worse of Others” Well that’s just common sense.

— Gabriela D’Souza (@gabster0191) October 24, 2013

I disagree. Selfishness is not common sense.

It all seems to have started with this article, part of the periodic publicity the sprouts up around new studies into the selfishness of economists and economics students.

There is now quite a deal of evidence that economists are ‘more selfish’ than other groups. Here is some research showing lower rates of donations by economics students. Here is research showing economics students lie more, and here is a good summary of other research.  The evidence is overwhelming that economists act in ways which most people find unacceptably selfish.

To me this body of evidence reveals the massive disconnect between mainstream theory in economics, that rests on the fundamental notion that greed or selfishness is the driver of coordination in a market economy, and the reality that social cooperation rests fundamentally on trust.

I would certainly agree with Francis Amasa Walker’s 1879 interpretation of the apparent social “odor” of economists arising from their disregard of “…the customs and beliefs that tie individuals to their occupations and locations and lead them to act in ways contrary to the predictions of economic theory.”

As Frans de Waal explains  “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… 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.”

Without justifying this behaviour, let me just make it clear that economic indoctrination teaches that this apparently selfish behaviour is both what everyone actually does (despite ample evidence to the contrary), and that through self interest we prosper. They have swallowed this iconic Adam Smith quote hook line and sinker.

It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest

I want to use this post to provide an example of how such a view, an economic way of thinking, can lead you astray in everyday life. I draw on ideas from my good friend Uwe Dulleck, whose expertise is credence goods.

Credence goods are those whose value or utility can never be known by the buyer due to information asymmetries.  The classic examples are doctors, who can prescribe medication for a diagnosed illness which you will never know is what you are truly suffering from.  Or car mechanics, who diagnose mechanical failures and sell repairs, without the customer being able to know whether such repairs were either needed or carried out.

As usual Uwe’s research centres on some important questions

Under which conditions do experts have an incentive to exploit the informational problems associated with markets for diagnosis and treatment? What types of fraud exist? What are the methods and institutions for dealing with these informational problems? Under which conditions does the market provide incentives to deter fraudulent behaviour? And what happens if all or some of those conditions are violated?

Uwe introduces a simple example of a behaviour that, by economic reasoning, is expected to reduce fraud in credence goods markets

For some of us a feasible solution might be… to ask the mechanic to put the replaced part in the back of the car and to inspect the defect of this part.

Uwe is cautious about whether this advice is sound.  As am I. But I reckon that most economists would be more than happy to take this advice based on the ‘economic intuition’.

But does the common sense of unselfish non-economists also support this behaviour? Or is this an example of how the economic model of self-interest can lead us astray? I suggest the latter. And as a peek at my conclusion, the behaviour I might advise is to buy the mechanic a six-pack of beer.

Imagine you are a mechanic. Occasionally you realise that a customer is a bit of a sucker with too much money, so you charge them a little extra for some repairs you didn’t do. Most of the time you are pretty straightforward and honest.

One day a new customer comes in. They don’t seem particularly knowledge about cars, and since this is their first visit there is nothing to suggest they will become a regular customer.  You diagnose the problem with their car, which is a very typical problem in that model, and explain that the repair could involve replacing certain parts, but you won’t know till you start taking things apart. This new customer agrees to go ahead with the repair, but asks you to put the old parts in the boot when you are done. It’s an odd request.

You realise that by making this request the customer has revealed that they are less knowledgable about cars than you thought, have no trust in you, and are solely relying on seeing a bunch of parts in the boot to judge your service.

What do you do? I’ll tell you what I would do. I would grab a bunch of parts from around the workshop and stick them in the boot, then charge for parts and repairs I didn’t do.

By following the behaviour suggested by a model of selfish individuals you have inadvertently signalled you complete ignorance about cars and a complete lack of trust.

Now imagine you are the mechanic who dealt with this customer and they didn’t ask for you to put the old parts in the boot. Maybe you still fleeced them a little and replaced a couple of parts that really didn’t need replacing. When the customer comes to collect the car they bring you six-pack of beer and thank you for your good work as they are so dependent on having a reliable car.

Would you fleece them again next time?

My point is that society deals with credence goods through the establishment of trust, either through non-market signals, like memberships of reputable societies, or ongoing social relationships. That mainstream economic theory ignores the fundamental role of trust and the cooperative behaviours that results from it, leaves their advice typically unsuited for many circumstances.  As experimentalists know, in repeated games many forms of cooperation can become entrenched, yet most economic theory relies on the selfish response to a one-shot game.

Until economic courses around the world move beyond indoctrinating students into “cardboard version of human nature” we will continue to have selfish economists.

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Comments

  1. Perhaps, “selfish” is not the right word, but may be the closest one that can be employed for laymen.

    I think it is more related to the idea that a Homo sapiens is an extremely complex machine, a biophysical machine, but a machine nonetheless. Biophysics, biochemistry, molecular biology, brain science, etc., appear to point to that idea.

    Perhaps, economists are embracing real science for once and modelling human behaviours based on this “people are machines” idea? If this were the case and if they are true to their belief then they should act like machines themselves, too. Who can blame them?

  2. “Until economic courses around the world move beyond indoctrinating students into “cardboard version of human nature” we will continue to have selfish economists.”

    Spot on. I honestly don’t think many economics professors actually believe humans are completely rational people, but they still teach this (even if it is solely to make their maths work). Even if they do add some nuance (ie people have feelings, etc) they tend to brush over it. Perhaps this is where we can learn from the Austrian school – economics as an examination of exchange.

    I don’t think Adam Smith’s passage precludes trust. Self-interest still requires trust. In fact in repeated transaction, it is self-interested to have trust. Again, this is an abuse of Smith in the teaching.

    I don’t know if you read Pete Boettke’s The Social Responsibility of Economists http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2310305 I haven’t but reading the exec summary I feel a bit uneasy.

    • Econ professors aren’t stupid. They aren’t glossing over anything. They are teaching a simple model of human behaviour based on a set of refutable hypotheses and assumptions (read the introduction to any of Silberberg’s econ text books for a honest summary of what econ modelling does and does not claim to do).
      If you want to model the effect of feelings. Do a course in economic modeling and add a feeling assumption to your model by adding a constraint of some description. Done.

      Rather than concentrate on teaching economics differently. Maybe concentrate on recruiting students that aren’t so stupid that they think a simplistic model actually represents literal reality.
      But then again, those surveys are so obviously biased by self selection that i wouldn’t waste time changing anything at all.

      • Yeh good point, but then you’ve got to ask the question of how good is the economics curriculum when they teach neoclassical economics with very little else? What is the value of an economics degree at the moment? There’s no critical thinking, no competing ideas, no politics. What is the point of teaching models replete with maths, without philosophy or any real conception of reality? You are teaching tools without knowing what to do with them. The basic ‘economic way of thinking’ is not even taught that well. Steve Keen’s perspective on economics education in Australia is spot on. I see value in models that academics teach, but it needs to be supplemented with history of thought, history, philosophy, political economy, and there should be a more critical focus.

      • Mmm. I would have to disagree with your very generous interpretation of the discipline.

        “They are teaching a simple model of human behaviour based on a set of refutable hypotheses and assumptions”

        Many of which have been tested and refuted! Yet they still get taught as if they are empirically proven fact, on par with many of the laws developed in physical sciences.

        “Econ professors aren’t stupid”

        Again, some aren’t. But from my experience many really do buy into their models as accurate depiction of reality, even without a shred of hard evidence.

        “But then again, those surveys are so obviously biased by self selection that i wouldn’t waste time changing anything at all”

        Actually, the surveys are much more rigorous in their approach than most tests of economic theory. Many have quite controlled conditions for data generation. No one disputes the fact that if you teach a bunch of students the nash equilibrium for the prisoners dilemma that they actually play that strategy when you get them in the lab. Even if most non-econ student play cooperative strategies (they usually dominate in repeated PI games).

        Lastly, in my view teaching economics differently is the key to cultivating a generation of economics researchers and policy advisors who are not afraid of looking outside the very limited optimising/marginal/fixed preferences framework that defines the neoclassical school and the majority of undergraduate courses.

      • IMO I think you’re all missing the point!

        It matters not whether the graduate believes the model represents reality or not. The models taught are demanded by employers and hence supplied by education providers because they can convince the layman they represent reality. Graduates are tools to be used by employers. The economics graduate function is, by and large, not to engage in critical thinking or find some veritable truth, but to arrange evidence in such a way that it makes a convincing case for one thing or another to a viewer who has no idea what the evidence is actually saying. Thus we can (and frequently do) have two ‘economists’ look at the same data and tell two competing and vastly different stories depending on where their (or their employers’) self interest lies.

        If you really wanted to make a change it is the public that needs education about what the ‘economists’ are telling them. Without a more sceptical public the incentive to use economics graduates to bamboozle your audience with econospeak and models based on inhuman behaviour remains (it is not human to be entirely rational with perfect information). However I am pretty skeptical about how effective any public education to this end could actually be (the required change is more cultural IMO).

        The economist profession, by and large, constitute the prophets or soothsayers of our times. There has always been demand for those who can claim to read the entrails of dead animals to tell the future, and there always will be! That we now dress up our soothsayers with ‘regression analysis’ instead of ‘haruspicy’ and say they are ‘practicing a science’ not ‘divining the will of the gods’ is moot; albeit a little sickening and, IMO, a debasement of a good word.

        PS For your interest, I am a trained economist and my work involves economic interpretation, but my first degree was philosophy, with a particular interest in critical reasoning, logic and game theory.

      • Johnson, good point, but I only half agree. I think some employers demand it, but some don’t. We need people who can do modelling and maths, and we need some who can think economically. They are often not the same (although you do probably want your quants knowing good economics). In government – where I work – we need people with broad knowledge in economics, politics, even philosophy, and of course some history. This is why economics could perhaps benefit from two streams of teaching and learning. I didn’t need 3rd year macro and econometrics for my work, because I don’t want to be an economics professor or a modeller, etc. And yet I studied it and hated it – what did it show me about the world? Next to nothing. For my work, I mainly need to be able to think economically.

        University of Sydney saw a long hard fight to have a separate stream of economics taught. I think this should occur, or at least give more choice (and less compulsory neoclassical economics, please!). After uni I went and taught myself classical, new institutional, and austrian economics, as well as public choice theory, and economic history, because without it, I was really dangerous, and also really useless. And now I actually appreciate neoclassical more, because I know what to do with it.

  3. I don’t agree with Ayn Rand’s blanket condemnation of “altruism”, but she had a point in the other direction to the one you are making, Rumples.

    That is, too much of it also has unintended consequences that would have been worth avoiding.

    So as you say, we need common sense and reason to get everything in balance.

    Human traits and perceptions do change under changing conditions – what we now call “liferaft ethics” would have been the state of a high proportion of humanity for a high proportion of history.

    We are forever judging people in the past who existed under totally different conditions, based on our own contemporary assumptions of “plenty”.

  4. Good stuff, Rumple. The economically rational reaction of the mechanic to a gift six pack is to share one with the customer and confide that the universal allocator is about to blow and preventative replacement will save thousands. He might get another present; he will certainly get more work.

  5. I don’t necessarily think that economics makes you more ‘selfish’ but rather that it trains you to evaluate decisions in a different way, the way of homo economicus, and is likely to increase how economists order preferences for money above altruism especially where a ‘value’ for the utility can not be defined specifically.

    I am acutely aware of how different my decision making process is to those around me, and not just that I spreadsheet it using forecasts and expectations, but that I now tend to monetise my decisions to the extreme. I have seriously considered the utility of a house through the increased ability of dog ownership against my expectations of future house price drops to decide: “would a puppy be worth $xx which is the expected value where there is a 50 per cent likelihood of losing 20% of the property value in the case of the bubble popping, or moderate appreciation in all other cases?”

    I also think that too many years of economics study has eliminated whatever small amount of maternal instinct I had, granted it was not much to begin with. Nevertheless, children are (as far as I can tell from a distance) not rational, have no consistent set of preferences and therefore I really don’t understand them. Some would call my behaviour selfish, however I think it is selfish either way given you are acting on preference, I am just trained to be acutely aware behaviour resulting from self interest.

    TMI – your welcome.

    • I am similar to you Miss P, in that I do NPV calculations on big decisions like buying a house (and so haven’t bought one since I moved back to Oz).

      Strangely I choose not to have a dog for they very reason you don’t have kids (much to my daughter’s disgust).

      On children I have 3. Trouble with NPVing kids, is that positive value they provide is very difficult to measure. How do you measure the value of:
      – Giving you a sense of purpose by providing and caring for them
      – Looking into the eyes of your child minutes after they are born
      – Having someone who genuinely loves you to look after you when you are old and frail
      – Their questioning, that makes you re-evaluate and change your beliefs and assumptions on many things.

      • I think that perhaps due to limited availability of unbiased data on the value of kids that I have, for the purpose of my NPV, attributed them zero positive experience value and therefore nappy changing, screaming and lost holiday opportunities result in a very poor CBA. Perhaps it is not unlike CBA for the environmental issues in valuing future benefits…

        My mother once said to me as we headed to the US just prior to my starting at a private secondary school: we could do this every second year if we didn’t send you to a private school. And I thought: I could travel overseas every year (or more) if I don’t have kids at all (which I do). She might regret that statement now.

        I’d love to see if economists have on average more or less children (or cars, or puppies) than the average.

        Dumpling: I think that the problem with selfish is that everyone has a very clear definition, but no one agrees on it. It is such a relative concept based on individual valuations of the merit of behaviours.

      • “Dumpling: I think that the problem with selfish is that everyone has a very clear definition, but no one agrees on it. It is such a relative concept based on individual valuations of the merit of behaviours.”

        Exactly!! Everyone draws a line at a different place.

  6. I totally reject the premise that markets don’t deal with concepts like trust, friendship and goodwill.

    The market is the sphere of all voluntary actions, decisions and exchanges.

    The very fact that people willingly give their time to support their communities, help their families, help out the elderly, maintain friendships and build relationships (whilst not being forced to do so at the point of a gun) proves that the market does indeed cover all social interactions and exchanges.

    The only thing the market does not encompass is the use of violence, fraud or coercion. These are the weapons of the state and not the market.

    • “I totally reject the premise that markets don’t deal with concepts like trust, friendship and goodwill”

      As do I. Markets are actually quite good at this. According to vast bulk of economic theory however, markets are very bad at dealing with trust and social relations.

      But markets only work when they are ‘nested’ in regulatory framework (torts and contract law, safety regulations etc, clear property rights etc). Markets inherently rely on the violence and coercion of the State to function.

      Finally, no economic theory suggests that all voluntary behaviour is a market. That I support my children does not fit into any model of markets, despite many economists trying to squeeze such behaviours into an optimising construct.

      • Contracts and enforcement can easily be provided by private agencies.

        In fact it would be better provided by a competitive market than a monopoly state-run system of courts, police and law and order.

        But if we put aside that for now, we still have never seen a government that delivers these core requirements of property rights and enforcement without overstepping these bounds and trampling those very rights.

    • The only thing the market does not encompass is the use of violence, fraud or coercion. These are the weapons of the state and not the market.

      What ?

      Fraud is a key “weapon” of the market.

      It’s why, for example, we have laws against false advertising. Or requiring full disclose by financial advisers.

      As for “coercion” – one can only consider that solely the province of the State if one believes the crazy notion that the only form of coercion is physical threat.

  7. It’s a seductive idea, that society was communal and trust-based, filled with selfless agents, sorry, ‘human beings’ (damn economists), before those scurrilous economists came along with their ‘theories’. Nevertheless, we can defer to Marcel Proust on this one, ‘Remembrance of things past is not necessarily remembrance of things as they were.’

    • Actually, there is a very interesting distinction between being selfish, and acting in the way economic theory predicts. You can also be selfish by forming alliances with others who you act selflessly towards. You then become selfish as a group but act with trust towards those inside the group.

      This process is almost untouched by economic analysis (and is my current area of research). But it governs so much of our behaviour. Once we embed economic choices in the social networks that represent trusted groups and other we get very different expected behaviour.

      So it’s not that I think there is some mysterious past in which humans where selfless cooperators. We have always had social ties and groups which govern who we trust and who we don’t.

      The story is far more interesting than economic theory suggests.

      • The problem today is that we have a global crisis of trust. It starts from the top (the government, the system etc.) and goes down, so it is not unusual to not trust people who you don’t know and are not from your surrounding. When students maybe realize, much earlier in life than other people, that there are some groups of people who one should never trust, but which are actually the rulers of all other people’s lives, it is common sense to expect them to become less trustful and more selfish. In addition, they learn very early who is the model for financial and wealth success in our world – the least trustable people – the ones from Wall Street.

  8. It seems to me an inevitable consequence, that focussing an inordinate percentage of one’s time / attention on the subject of economics, means focussing an inordinate percentage of one’s time / attention on the subject of Money.

    “In Keynes’s view capitalism’s driving force is a vice which he called ‘love of money’ … in the General Theory ‘the propensity to hoard’ or ‘liquidity preference’ plays a vital part in the mechanics of an economy’s rundown, once something has happened to make investment less attractive. And this links up with Keynes’s sense that, at some level too deep to be captured by mathematics, ‘love of money’ as an end, not a means, is at the root of the world’s economic problem.”

    – Robert Skidelsky; “John Maynard Keynes: Vol. 2, The Economist As Saviour 1920-1937” (1994)

    Take from that what you will.

  9. Great article R, very interesting.

    Reinforces that people often don’t behave in ways that traditional economists predict they will.

  10. Contracts and enforcement can easily be provided by private agencies.

    Thankfully having a democratic government frees us from spending all our time and energy fighting with one another. Forming gangs and fighting is not really the best way to live. Why not form one most powerful gang and work to make it a nice one? – That’s democatic government in a nutshell.

  11. Their regard for their own self interest is what led many of Ireland’s food producers in the 1850’s to export food while the poor of the nation died of starvation.

  12. The Michael Moore documentary “The Corporation” is a similar situation to that of economics students. Corporations are by nature sociopaths. They have little interest in anything other than one value – profit (this is required by law). Everything else is only relevant to that end, with the possible exception of the senior management’s self interest.

    • And the best way to make profit, is to provide value to the customer in a free market.

      Rent-seeking is always bad and needs to be limited.

      But a system with no profit/income incentive has not yet been discovered, that delivers more benefits than disbenefits. A tempered system is serving us relatively well. It is the rent seeking that is getting out of hand, and this is nothing to do with the motivations to provide honest goods and services.

  13. Cam, my mind has been working away on your interesting comments.

    I see Adam Smith’s comment about the self interest of the butcher, brewer and baker as still of central importance.

    What has happened since Smith’s time, is that specialisation and trade and clustering in cities, has led to “impersonal” transactions. We no longer all know our village butcher, baker and brewer. But the modern equivalents are all the more anxious to satisfy our wants honestly for their own good, not less so.

    The case of the car mechanic is a widespread result of the evolution of specialties that did not exist at one time, but with which we now all conduct transactions at one time or other.

    It is the ease with which knowledge is spread in modern market clusters that is the safeguard against crooked behaviour of the kind you describe. It only takes one or two misdemeanours to be “outed” to destroy a crook’s business. Therefore the self-interest thesis holds good as a general rule. Misbehaviour is the exception, not the rule.

    Where there is a massive problem, is in “investment” and finance, where things are not so easy to understand. Medical malfeasance or a crooked car mechanic will be understood by all with a single news item to cover it. But almost no-one has worked out the systemic rip-offs going on in full view, in the finance and property sectors.