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Kiel Institute Focus 26

November 6, 2014 
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Competition and Cooperation – What Needs to Change in Economics*

by Dennis J. Snower

 

Are economists superfluous? Since the last financial crisis a debate has raged as to whether economists still have much relevant insight to offer citizens and politicians alike. Even German Chancellor Angela Merkel recently called upon economists at the meeting of Nobel laureates in Lindau to deliver more practical recommendations to policymakers and to revise their conceptual structure of what is described as economic success. Economics is now in the defensive, in a predicament of its own doing.

The criticism is paradoxical. Economics still is hugely influential: most public policy—ranging from employment to social policy, from environmental to resource policy, from monetary to fiscal policy or health policy—is firmly based on mainstream economic assumptions. The way in which most economic phenomena—inflation, unemployment, growth, inequality, etc.—are treated in the media and public discussion also relies implicitly on the paradigms to be found in economics textbooks.

In response to this paradox—widespread dissatisfaction with economics and widespread dependence on mainstream economic thinking—I claim that economics needs to change in one profound way: the domain of “economics” must change, that is, the content of what is considered to be economics must be redefined.

It is assumed in established economics literature today that every person is Homo Economicus, a rational, self-interested individual, concerned primarily with material goods and services. On this basis, the mainstream economics textbooks define economics to be the study of the allocation and distribution of resources. Resources are assumed to be perpetually scarce since human wants are alleged to be infinite. The basic economic problem is that we must choose what goods and services to produce with scarce resources and decide whose needs are to be satisfied by these goods and services. In free market economies, this allocation and distribution of scarce resources is achieved through buying and selling in economic markets with flexible prices: whatever is scarce is costly. Whoever really wants something must pay more for it, etc.

The fundamental problem with this approach is that Homo Economicus is a misleading account of how humans actually behave. They are not exclusively rational, because most of their behavior is substantially motivated by emotions and heuristics. They are not exclusively self-interested, since they have capacities for fairness, empathy, compassion, and care. They are not exclusively individualistic, since their preferences are significantly determined by the social groups to which they belong. They are not primarily concerned with material things, since much of their economic behavior is motivated not by the consumption of goods and services, but by the pursuit of interpersonal relationships and enactment of social relations.

In adopting the concept of Homo Economicus, the discipline of economics has lost sight of the goal of our economic activities. It is not to make ourselves as rich as possible. Instead, we do what we do in the quest to achieve wellbeing—a much broader conception of wellbeing.

For this reason, economics should not be merely about the allocation and distribution of scarce resources, but rather about the material basis of human wellbeing. This is not merely a semantic exercise. After all, Homo Economics is not only a simplifying theoretical construct for economic models. Instead, people use the image of Homo Economics to understand their economic dealings and relationships and increasingly act accordingly. The more we focus on allocation and distribution, the more our efforts to achieve widespread wellbeing recede into the background of our consciousness.

Large bodies of scientific evidence gathered over the last few decades shows that—once people’s basic material needs have been met—the perception of happiness does not grow in tandem with material prosperity, at least not for the population as a whole. The reason why a population-wide rise in income has diminishing returns on reported happiness is that people quickly become accustomed to their more affluent lifestyles and they measure their happiness relative to those around them. At the same time, a persistent, materially motivated quest for growth has negative consequences, namely resource depletion, environmental degradation, and endless conflicts over material possessions.

Why do we do this? Based on the accumulated research in recent years, there are some answers: first of all, because we have acquired the habit of pursuing wealth and habits are difficult to break; because everyone around us is doing so as well; and because we systematically overestimate the satisfaction we will gain with the next new car, mobile phone or designer handbag.

What actually does provide sustainable wellbeing? Studies from various disciplines—such as psychology, anthropology, sociology, neurology—have meanwhile delivered important answers to this question. The following factors are important in this respect, across time, countries and cultures:

  • being active: personal achievement and environmental mastery;
  • becoming aware: mindfulness, curiosity, learning, personal growth, and achieving the “flow” by engaging in activities that draw on our strengths;
  • accepting and respecting: self-acceptance and tolerance of others, self-respect and respect for others;
  • connecting: affiliative personal relationships; a sense of social belonging; cooperative contributions to the workplace and society; and creating trustworthiness and trust;
  • giving: seeking to promote the happiness and relieve the suffering of others; and using one’s greatest abilities in the service of others.

These positive experiences of the good life do not dissipate under the forces of habit. Quite the contrary: they create sustainable wellbeing for ourselves—and also for others. In addition to its current focus on the material basis of this life experience, economics should investigate the relationship between these experiences and traditional economic activities. If our objective is comprehensive wellbeing, then economic success must not merely be measured in terms of GDP growth. Chancellor Merkel also raised this demand in Lindau, and she was quite right in doing so.

But this is where things become complicated. After all, the previously mentioned determinants of wellbeing cannot be measured by a single metric. In recent years there have been numerous initiatives by traditional economists, behavioral economist and happiness economists to develop new measurements for wellbeing and the quality of life. Germany's lower house of parliament (Bundestag) had set up a dedicated commission to this end. Other countries use such key figures as a basis for political decisions.

But our wellbeing is not a homogeneous entity that can be measured so easily. The wellbeing that is relevant to us at any given time often depends on our social context. The friskiness and laughter of a child can be delightful to us in one situation but it may disturb us and raise our defences in another. Whoever hopes that one or two new key figures can give us guidance in future for economic decisions to raise the level of wellbeing will be disappointed.

These considerations should not call into question the significance of market mechanisms in promoting human material welfare. These mechanisms remain the most efficient instrument for generating economic synergies in economies that are politically and socially stable. Yet economists need to supplement their traditional models in order to integrate our material efforts in the context of a lifestyle that provides permanent satisfaction.

We need to ask ourselves what areas of our life are determined by market forces and whether this is necessarily in our best interests. If we increasingly have decisions controlled by market forces in our belief in Homo Economicus, we could crowd out other motivations such as a sense of responsibility, compassion and trust, that might actually give us a great deal more fulfilment in life.

We could then find answers to quite practical questions: does it make sense to reward children with money for good school performance? Is it sensible for countries to sell immigration quotas? Should we have military service delegated to private contractors?

Together with the well-known neuroscientist and psychologist Tania Singer, I have begun to develop these ideas in a new field, “Caring Economics”, which is meant to help us recognize how we may enhance our caring faculties in order to enable us to cooperate better in the face of our proliferating trans-national and trans-cultural problems. We distinguish between positional efforts with which we want to improve our own lot but at the expense of others being placed in a worse position. These are zero-sum pursuits, since society as a whole is not placed in a better position. On the other hand, there are non-positional pursuits in which we advance not only our own position but that of others as well. The sum total therefore is a positive outcome.

If we succeed in establishing cooperative approaches alongside competition-related ones, we will find new solutions for negotiations concerning such global problems as climate change or financial crises that no country can hope to resolve on its own.

We are still at the beginning of this research initiative, but the objective is clear: with the leitbild of Homo Economicus alone, we as economists will not be able to uncover the paths to sustainable wellbeing. We need to understand further human capacities social affiliation, trust, and empathy. To this end, we will need to carry out research in collaboration with other disciplines dealing with the foundations of human behavior. These are not purely theoretical considerations, but about questions that can be translated into practical policy. The German Federal Chancellery Office is in the process of setting up a project group that is to make findings of behavioral economics capable of being used for political decision-making processes. There are similar teams in the US and the United Kingdom. This shows that if we economists are open to new approaches and carry out research by inter-disciplinary means, we will be better able to justify our huge influence on politics and society and to show that we are far from being superfluous.

(This article was published in German on 11 October 2014 under the heading “Adieu, Homo oeconomicus” in Süddeutsche Zeitung as part of the series “Ökonomie neu denken” (Rethinking economics).

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*The Kiel Institute Focus Series presents papers on current economic policy topics. Their authors are solely responsible for their content and their views or any policy recommendations they may make do not necessarily represent the views or recommendations of the Institute.