The retreat of "scientific selfishness," a literature review

Neoclassical economics was built on the straw-man of "homo economicus," an inherently selfish utility-maximizing actor, and since the mid-1970s, we've been building systems and institutions that take this kind of sociopathic behavior for granted.

But the rise of experimental economics, coupled with increasing dysfunction — stagnation, market concentration, inequality, political instability — has put "scientific selfishness" (and the just-so stories that make sociopathy the path to Pareto-optimal outcomes) in retreat, and both the biosciences and the social sciences have been invigorated with new accounts of human behavior.

My favorite book on the subject is Yochai Benkler's
The Penguin and the Leviathan: How Cooperation Triumphs over Self-Interest
, a voraciously readable and fascinating title from 2011 (you can get a flavor of it from Benkler's outstanding book-talk at Harvard's Berkman Center, above.

But Benkler was way ahead of the curve. Since Penguin and Leviathan, there has been a steady drumbeat of new titles tackling the subject, and Oxford economics prof Paul Collier rounds up a literature review in the current Times Literary Supplement.

As it happened, I rewatched the Benkler talk yesterday and was riveted by one part of it, where he described an econ experiment based on a short (seven-round) Prisoner's Dilemma game, played with both fighter pilots and university students. In one condition, the subjects were told that the name of the game was "The Community Game." In the other, they were told that it was "The Wall Street Game." In the "community" condition, 70% of the players co-operated, all the way to the final round, and every player was better off as a result. In the "Wall Street" condition, 70% defected from the start, and then the remaining players mostly joined in, with the result that they were all worse off.

Prisoner's Dilemma games are often cited as evidence of intrinsic selfishness, but what if it turns out that telling people that selfishness is OK is why they behave selfishly, whereas a normative statement of solidarity turns that on its head? What if 40 years of neoliberal "greed is good" doctrine is why all our institutions (including the White House) are helmed by greedy, dishonest cheaters?

After all, if selfishness is innate to the human condition, why do even hedge-fund managers tell their small children to share with the other kids?

Aldred takes an unusual approach to critiquing the modern economic canon: he recounts in some detail the history of who came up with the ideas that now form it, and how their ideas came to drive out others. In effect, his book is an application of the general network approach to how ideas spread, as analysed by Centola, to the domain of the economics profession. The approach is indeed illuminating. Here is Friedrich von Hayek initiating the idea that "government is the problem" and the spreading of that idea through a purpose-formed network organization, the Mont Pelerin Society. Here are John von Neumann and John Nash inventing Game Theory, with its equation of rationality with non-cooperation, and its spread through the simple narrative of the Prisoners' Dilemma. (Von Neumann jumped ship from this brave new world, converting to Catholicism, while anyone who has seen A Beautiful Mind, 2001, will know what became of John Nash.) Here is Ronald Coase inventing the Theory of Social Cost: as long as actions such as the right to pollute are clearly assigned, and can be bought and sold, outcomes are economically efficient regardless of how the rights are assigned. A law that granted "the right to pollute" would simply induce payments from victims to polluters to desist, as long as the damage exceeded the gain to the polluter. Aldred shows how Coase, who was a lovely, gentle man, lost control of his own theorem: he meant it as a reductio ad absurdum, which revealed that the long-ignored costs of enforcing transactions must be important. Instead, it was taken at face value and applied to the law, having been spread by the influential jurist Richard Posner. In this view considerations such as blame, moral right and justice – would a right to pollute be reasonable? – came to be dismissed as irreconcilable and unimportant tussles about distribution. The rational discourse of the courts, Posner argued, should focus only on the criterion of achieving economic efficiency. Here is Mancur Olsen and his proof that social co-operation is impossible because it is irrational. Here is Gary Becker reducing moral values to "individual preferences" equivalent to tastes for food. Here are Milton Friedman and Leonard J. Savage dismissing uncertainty and reducing everything to probabilities which, with sufficient past data, can be estimated correctly. The profession's connivance in this dismissal of radical uncertainty was the original sin that led to the Global Financial Crisis, as events that the probability-driven models had predicted would each happen only once every n-billion years occurred in quick succession. Aldred does not discuss an alternative to Economic Man, but his approach reveals that its constituent ideas were, and should be, questioned. They became the canon because of contingent, network effects – who knew whom – rather than through the sort of iron laws analogous to the classical physics to which economists aspire.

Greed is dead
(via Naked Capitalism)