Abstract
Synopsis : We now know that humans are predominantly social beings and that their sociality does not lend itself to the purely functional society in which modern economics seems to reside. The question that arises is whether economics’ claim for universality and ethical neutrality can survive such acknowledgements. In other words, can the main building block of modern economics—the conception of the individual—accommodate the sociality we uncovered in the previous two chapters while maintaining the same organisational principle of competitive decentralisation as the universal recipe for economic organisation.
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Notes
- 1.
This, we did in conjunction with the notion of individual fitness as opposed to the more complex notion of inclusive fitness.
- 2.
There is a considerable literature on the distinction between selfish and self-interest behaviour. In the context of Smith, this lies at the heart of what came to be known as Das Adam Smith Problem, which in itself generated a mountain of literature. I will deal with some of this later in the book, but at this stage the interested reader may wish to look at Griswold (1999) or Strum, just to whet your appetite.
- 3.
This is known as Die Methodenstreit , which raged in the second half of the nineteenth century and where the debate surrounded the question of whether one can analyse economic interactions in isolation from the rest of the social environment. I will not elaborate here about this but the subject will be explained in more details later in this chapter.
- 4.
It is what Hayek calls constructivist rationality, which is also echoed in Vernon Smith (1998).
- 5.
Simon (1986) claimed that we all agree that people act for a reason. What we cannot agree about is that reason.
- 6.
More recently, the idea that there is more than one form of rationality has gained some limited grounds. Vernon Smith (1998), for instance, also distinguishes between two types of rationality where one is the result of a deductive process while the other, a more rule-based behaviour, is a product of the environment which he calls ecological. I will focus on Weber, who, in my view, better conceives the differences between these two types of rationality.
- 7.
Within the context of the more familiar utilitarian framework, the distinction between the two types of rationality corresponds to the distinction between what is known as ‘act utilitarianism’ and ‘rule utilitarianism’. The former corresponds to instrumental form of rationality, while the latter corresponds to the expressive notion of rationality.
- 8.
Weber , M (1978 [1922]) Economy and Society Eds G Roth and C Wittich, University of California Press. (pp. 25–26). It is significant to note, though we shall not explore this here, that the Austrian idea of purposeful actions (praxeology) that was developed by von Mises corresponds to the two forms which Weber calls rational.
- 9.
The countries I looked at included Australia, Canada, Finland, Germany, Japan, the Netherlands, Norway, Sweden, Spain, the UK and the USA.
- 10.
WVS: wave 5: 2005–2009.
- 11.
I am referring here to Durkheim’s mechanical solidarity. It is not the universal benefits to society of having principles of justice which make me adhere to them but just my wish to be part of it. In a similar manner, one should note that the role of the universal test in Kant’s categorical imperatives is not the cause of duty though a mechanism to establish the contents of such duties. In other words, we do not adhere to morality because it is useful but moral rules must be based on some principles of expediency.
- 12.
This example is taken from an experiment reported in a paper by Kahneman et al. (2004).
- 13.
In a class that I taught at LSE for students in the Master in Management degree (about 130 high fee-paying students), only 21% thought that this was unfair. This discrepancy—and many more like this—tells us something more general about the (in) significance of such investigations for our understanding of the world. These differences are also related to studies which have shown that students of economics or business internalise either that which they learn or that there is a selection bias. Either way, it tells us that behaviour is (a) potentially learnt and (b) diverse. Namely, it is not inconceivable that people behave in a particular way because they have been exposed to a system which rewards such a behaviour or, that at any point in time, there are different forms of behaviour guiding individuals in society.
- 14.
With the risk of shooting myself in the foot, it is worth noting here the short story by von Kleist called Michael Kohlhaas in which he describes how the blind adherence to a principle of justice may lead to a complete catastrophe. But what I mean by non-utilitarian rules could be a rule of justice which is not based on leading to universal benefit. It could be a deontological rather than a teleological principle.
- 15.
In terms of modern notion of utility maximisation, this corresponds to the following question: the utility of how many other agents in society make up the domain of one’s own utility function?
- 16.
Again, consider a small village community. Before technological developments, all members of the village are known to you, and when one acts, one can detect clearly the effects of one’s actions on all others and one can thus judge an action by these consequences. When technology expands the circle of one’s interdependence (there is now a large city nearby and it is becoming easier to move around and communicate), the same village community becomes somewhat less significant in one’s consideration. As one is now a member of the region, or the nation, one can act on their behalf even if individual members of the village (about whom one would now care less—increased social distance) are not necessarily benefitting from this action.
- 17.
Sugden (1991), for instance, considers rational choice theory as a theory which prescribes the best way of achieving given desires.
- 18.
In some sense, the action itself is a consequence of one’s values. Will such values be conditioned on the consequences of the action? To some extent the answer must be affirmative: it is inconceivable that an action will be valued if it is harmful. But what is meant by this is far more general than the immediate outcome of a single action. Namely, if the general practice of an action serves a general long-term social purpose (by holding society together—diachronic order), the immediate consequences of the actions may not play a role on one’s consideration.
- 19.
The word ‘intrinsic’ is perhaps too strong as what I am referring to are the attributes which people give to an action and not necessarily something which is universally in it. So for instance, to always tell things the way they appear to you is an intrinsic characteristic of a behaviour; but when we say that we always tell the truth, we are attributing a value to this intrinsic feature. So, what I am talking about is the latter rather than the former so while it may not be purely intrinsic, I use the term as juxtaposition to the consequentialistic approach.
- 20.
As we discussed in the previous chapter, the fact that things may have a general purpose is not the same as a consequentialist approach. Acting properly may have an overarching purpose of ensuring the preservation of society but as this is well beyond the proposed consequences to the individual actor, I do not think that it is correct to label it consequentialist. It is a bit reminiscent of the issue which was raised about inclusive fitness.
- 21.
It is important to emphasise here that we are not referring only to actions which are evidently social, i.e., aimed at someone else. We are referring here to any action an individual may perform. The level of one’s sociality is bound to affect the way one behaves directly towards the others as well as when his action intends nothing to them. When an agent is about to do something, which is entirely aimed at serving his own affairs, the attention that he or she would give to the possible effects that the action may have on the other is bound to be a reflection of his or her sociality. In the case of the snow shovels a person may wish to raise the price to $20 but refrain from doing so because he or she is aware of what it means to the other. Both the agent who raises the price and the one who does not could be acting on their own interest but the difference between them is the weight they give in their considerations to the effect of their self-serving action on the other.
- 22.
On the face of it there seems to be some logical necessity embedded in this. Instrumentally rational agents always choose the best means to an end. If they are free to make such choices, and no one can affect the set from which they choose, surely every outcome must be efficient in the sense that everyone managed to achieve the best possible end. But we have already seen that this is not as obvious as it may appear; and that when other agents affect the set from which they choose and asymmetries, which emerge between agents are manifested in power, information and ownership structures, the command which agents may have over the outcomes they face is not really conducive to efficiency.
- 23.
However, a quick word of caution is needed here. The choice of the word utility reflects the history of the model and its original formulations rather than its significance in economics’ paradigmatic core. According to Utilitarianism (see, for instance, Bentham (1789) through Gossen (1854), Sidgewick (1907[1874]) and Jevons (1888) and I deliberately exclude J. S. Mill from this list as I have argued elsewhere that he cannot be considered as a utilitarian in the Benthamite sense (Witztum 2005a), people derive a measurable degree of satisfaction from things and everything is nothing short of a calculus of pleasure and pain. The implication of this for our story is that choosing the best means to an end implies that we are always seeking to maximise our pleasure from life. If utility maximisation implies pleasure maximisation, then it cannot be argued that this is a universal and ethically neutral conception of the individual. While the notions of pleasure and pain are surely universal, the drive to maximise the former cannot be seen as such. Nor is it ethically neutral as Utilitarianism implies a very specific ethical structure. But economics does not claim to hold a utilitarian view of the world. Notice that the utility function in economic analysis simply represents the order of preferences and not the nature of one’s reason to prefer one bundle over another (this ordinal notion of representation was promoted by Pareto and has been adopted by the subject ever since). The neutrality of the economic presumption rests on the ability to give a multitude of reasons other than pleasure to one’s preferences. Consequently, in the economic approach, the representation of one’s preferences is invariant to any monotonic transformation. This means that if under a particular function one prefers consequence \( {x}_1 \) over \( {x}_2, \) by attributing the numbers 20 and 10 to each one of them respectively (\( {u}_1=u\left({x}_1\right)=20; \) \( {u}_2=u\left({x}_2\right)=10\Big), \) one can take this function and multiply it by 100 and so increase the ‘utility’ of each bundle. This does not alter the fact that one prefers consequence \( {x}_1 \) over \( {x}_2, \) nor does it tell us why this is the case. But one thing should be clear, for the neutrality to be sustained the value attributed to the bundle must remain meaningless. It is interesting to note that in recent years there seem to have been a desire to move back towards the Benthamite notion of utility. Invoking notions of experienced utility (Kahneman et al. 1997) as well as the new literature about happiness are a call for a return to the attribution of some forms of measurable pleasure which will, of course, considerably restrict the universality and neutrality of economics.
- 24.
The significance of this cannot be overstated. In the end, the focus of economic analysis on incentives rather than motivation is an expression of this line of reasoning. Only a consequentialist rational agent will shirk at work, evade tax or even perform a criminal act only on the basis of the proposed consequences to him or her rather than because of any conviction that such acts are socially/morally unacceptable.
- 25.
In the analysis of uncertainty, the one-to-one correspondence between action and outcome is also broken and the same action can lead to different outcomes in different states of nature. If we have two actions and, say, two states of nature, then it is quite possible that an agent will prefer the outcome of action 1 in state 1 over the outcome of action 2 in state 1 yet prefer the outcome of action 2 in state 2 over the outcome of action 1 in state 2.
- 26.
The reason why this matters is because allowing any value of π would mean that we can explain any outcome as the choice of a rational agent. The moment we are in this position we are facing the serious charge that when one can explain everything, one is really explaining nothing.
- 27.
Notice that if we assume that the individual first ranks the actions and only afterwards the benefits, then the preferences will resemble a lexicographic form of an order for which there is no mechanism of real-number representation.
- 28.
This, of course, is the foundation of the expansion of economics into other areas of the social science (see, in particular, Becker and Colman).
- 29.
In other words, we do not include assets or capital in the story. This is of no significance to what we are trying to establish here but it does make one wonder whether the problems of current economic thinking are the problems of capitalism or something deeper than that (individualism?).
- 30.
The obvious reason for this is that of solvability. Had labour been a desirable economic good with which we can obtain other economic good, reason suggests that we would want to work all the time. This is what is known as a corner solution which means that the model of the rational utility maximiser does not give us any interesting insight into the decision of the agent. Naturally, one can modify this by saying that labour has a more rapid decline in the utility of each additional hour, which means that we will always choose to be at a point where the utility of an additional hour is negative. How well it captures the attitudes people have to work is a different matter.
- 31.
We have already noted that this is far from obvious. One may indeed desire something which is scarce and yet not wish to have endless quantities of it. One can extend this to mean that the fact that all economic goods are desired and scarce does not mean that individuals want to have endless quantities of economic goods.
- 32.
Just to reiterate what we said before: the presence of marginal utility analysis poses a challenge to the view of the neutrality and universality of ordinal utility. Even though the representation of our preferences is still invariant to monotonic transformations, we still claim that we can equate the effects that one good will have on us with the effects of another. This common denominator suggests that utility is a measure of some form of satisfaction and not, as is usually claimed, a universal representation of preferences.
- 33.
And we are not dealing now with future generations and so on.
- 34.
Clearly, Hobbes and Locke, whom we discussed before, exemplify the two alternative extremes for such explanations. The case of Durkheim and Spencer is also a story which attempts to explain the formation of social bonds but instead of being a hypothetical contract, their examination is evolutionary in nature.
- 35.
The problem here concerns the preferences that one has behind the veil of ignorance.
- 36.
Naturally, the height allegory here is just a representation of the difference in their ability. At this stage, we are referring to natural rather than acquired abilities.
- 37.
May I remind the reader that this does not look so strange if one takes into account that in a world of finite number of economic good (as is our case here) wanting more of the same things is just a metaphor for wanting more, perhaps different, economic goods. Having said this, there is an issue with regard to whether the desirability of economic goods—which have not yet been introduced—is in itself natural or manufactured by the way in which the economy is organised. Many of the goods which people seem to desire serve a social rather than a personal purpose. This raises the question of whether we can treat such desirability as preceding the design of the economic system or a consequence of it.
- 38.
As this is a state of certainty without any hidden actions, Coase Theorem, which we discussed in Chap. 2, applies in the sense that the distribution of ownership does not matter from the point of view of efficiency. We chose this form of structure so as to capture the relationship between the two without getting into the question of how they will trade in the goods themselves.
- 39.
We are not asking here how the allocation of labour between the two types of occupations will come about. Clearly, for Robinson and Friday to work in the area in which they have comparative advantage, the relative wages in those fields should send them to work in the right place. While this is an important aspect of the exercise, at this stage we will not inquire further into how this happens and will come back to it later. We will just assume that they have been properly allocated by the market.
- 40.
In the case we drew, where the indifference curve is actually tangent to the blue line (the production function), the agents will be in a similar position. What we mean by this is that their income in terms of the combined fruits—made up of profits and wages—will be the same as that which they have contributed to the economy (the blue line). This seems to suggest a certain equity principle but it is important to bear in mind that this is not at all a necessary outcome. As will be shown below, it is more likely that outcomes will be such where one agent gets more than he contributed while the other gets less. At this stage, we assumed all to be almost identical and, therefore, the market outcome does not seem to blatantly violate any principle of equity. One can already detect here that if equity requires moves along the blue line, then it is clearly in the opposite direction to that of the preferences we have described thus far. We will explore this more in the next section.
- 41.
This is reminiscent of the repeatedly used quote from Adam Smith, according to which ‘[i]t 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’ [WN, pp. 26–27]. This is normally used to demonstrate the power of self-interest to benefit the others but this can only be so understood by people who are not familiar with Smith’s complete theory. It may be true that the pursuit of one’s interest may benefit the others but we must bear in mind that this was not the foundation of society in Smith. Society precedes the division of labour and the question is not just whether the butcher, the baker and the brewer act out of self-interest but whether there are social institutions which ensure that such actions will not harm others.
- 42.
Edward Gibbon Wakefield interpreted Adam Smith’s division of labour as consisting of what he calls Simple and Complex co-operation . J. S. Mill fully accepts this as the correct interpretation of Smith and develops it further. Accordingly, when people divide their labour within an industry (simple division of labour), they rely on the division of labour across industries to ensure that he or she can still maintain themselves. We will develop this theme a bit later in the classical context.
- 43.
Though this is reminiscent of the problem of the prisoner’s dilemma in a game-theoretic framework, I would like to emphasise that I am making the argument in its non-strategic sense. It is true that the idea of game theory is an expression of the fact that people are aware of the effects of their actions on the others (or rather, being self-interested, the effects of the actions of the others on them), but I do not find game theory as a good metaphor for the social contract. While there are, no doubt, domains of economic interaction which can be identified as strategic, the more general nature of economics is more likely to be non-strategic. We will return to the role of game theory in socialising the individual later in the book.
- 44.
We shall further explore the possibility of modifying the instrumentally rational utility maximiser into a social agent in the next section.
- 45.
When one considers the effects of an action if taken by a multitude of individuals, one is looking at a notional outcome rather than the specific outcome of the action one is about to take. As such, it is not the consequence of the specific action which one is considering but rather the habitual performance of such an act by a large number of individuals. This means that the appropriateness of an action will not be a function of its actual immediate consequence—which is needed for instrumental rationality—but rather a rule of behaviour which is independent of these outcomes.
- 46.
Note that this is not a game-theoretic set-up as in the large system for which this is a simile; it is not a particular other individual whom we know that our action will affect but a more general sense of the other.
- 47.
From a formal perspective, this creates a real difficulty for the idea of rational utility maximiser as it suggests a form of lexicographic ordering which does not lend itself to standard real-number representation (i.e. utility functions).
- 48.
We still assume, for simplicity sake, that wages will be successful in allocating the individuals into the work in which they have comparative advantage. We will revisit the question further down the line.
- 49.
Whether or not one can think of the value of leisure, for an instrumentally rational agent, as a reflection of his or her, consideration for the other depends on whether instrumental rationality can capture notions like that of duty where there is no substitutability between those things one prefers. We will discuss further whether we can socialise the rational utility maximiser in the following section.
- 50.
Assuming for the moment that the social scene does not include the time which they spend at work. This is, of course, a fallacy but one which is very much in line with the way many economists would see the social world.
- 51.
The anomaly which is implied by this and dominates standard economic analysis is that people who may wish to achieve something collectively will then undermine it through their individual decisions. This is, of course, part of the nature of instrumental rationality and we will discuss this further down the chapter and in the Epilogue.
- 52.
In both cases we assumed that they entered society for self-interested reasons. In the case of the instrumentally rational, it stayed the objective within society but for the expressively rational agent, the emergence of society influences the purpose of the endeavour.
- 53.
In this development, we omit leisure from the list of economic goods. While this may be consistent with a presumption that individuals may act expressively as far as labour (and, hence, leisure) is concerned, this is not what is meant here as they work the same number of hours when they are alone as when they get into the social arrangement. What changes is what they do with their time and it is in this where the problem of co-ordination is now focused.
- 54.
If there were a difference we would have faced a form of lexicographic order which does not lend itself to real-number, or utility function, representation.
- 55.
It may be useful to point out that the term ‘self-interest’ is really only meaningful in the social context. In a pre-social state, one cannot really have ‘self-interest’ as there are no other interests one could have adopted. So the difference between the notion of ‘self-interest’ in a pre-social state and a social state is in that the latter is cognitively so, while the former is not.
- 56.
This, of course, is not a necessity and we may indeed be in a situation where one of them gets less than what he had contributed but is still better off than he was before. This, in turn, will raise the question whether he should stay indifferent but we will soon touch upon this.
- 57.
Formally, if their utility function is now \( {\overline{u}}_i\left[{\overline{z}}_i\left({L^i}_e\right)\right], \) then the change in utility as a result of an increase in leisure will have the following effect: \( \frac{d{\overline{u}}_i}{d{L^i}_e}=\frac{\partial {\overline{u}}_i}{\partial {L^i}_e}+\frac{\partial {\overline{u}}_i}{\partial {x}_i}\cdot \frac{\partial {x}_i}{\partial {L^i}_e}+\frac{\partial {\overline{u}}_i}{\partial {\overline{u}}_j}\cdot \frac{\partial {\overline{u}}_j}{\partial {x}_j}\cdot \frac{\partial {x}_j}{\partial {L^i}_e}, \) which is exactly what is listed in (a), (b) and (c) above. At the optimal choice the value of this should be equal to zero, which means that as the second and third elements are negative, the first element (the marginal utility of leisure) must be very large. As standard analysis suggests that marginal utility of anything is diminishing, it implies that leisure should be minimal (thus making it very precious).
- 58.
Rawls’s (1973) A Theory of Justice, to which we referred earlier, is a theory of social institutions which is based on choices people would make in a pre-social state but without knowing who they will be once society is formed. This is known as the veil of ignorance. However, there is always the question of whose preferences are going to be used behind the veil of ignorance.
- 59.
This can be seen by a shift upwards of the red line in the above diagram on the left. There is nothing inherent in social considerations to suggest that leisure should be seen by the agent as an inferior economic good.
- 60.
Williamson (1975, p. 255) famously defined ‘opportunism’ as ‘self-interest seeking with guile’. Namely, it is not self-interest which defines opportunism but rather the other way around. If the socially minded instrumentally rational utility maximiser is an opportunist, then he is not very different from the self-interested one. Williamson also noted: ‘Economic man is a much more subtle and devious creature than the usual self-interest seeking assumption reveals’ (ibid.). It is worth noting that some of the definitions also require the absence of a plan for an opportunistic act to take place but the case of the rational utility maximiser is that it is a plan to be opportunistic. One wants to maximise utility, and if there is a change in price, one will change the choice regardless of what it means to anyone else and as long as it serves one’s own preferences.
- 61.
And here we have the vast literature which deals with how norms are created or how co-operative behaviour emerges. Most of this literature is based on evolutionary games analysis. Alternatively, one could think of Kantian notions like that of the universal test or the Smithian notion of the impartial spectator.
- 62.
Recall that if the rational utility maximiser—in its most generalised form—is not the right conception of the individual, the generalised proof about the effectiveness of markets as a form of social organisation is severely undermined.
- 63.
See, for instance, Manski (2000).
- 64.
There is, of course, the question of the extent to which game theory is an appropriate analytical tool to analyse economic interaction. There are evidently cases in which individuals interact in a way in which it is clear how the action of each one would affect the other but this cannot be extended to the majority of economic interaction. Nor would the nature of strategic interaction necessarily be the one embedded in the concept of Nash equilibrium. In the latter, agents make their decisions taking into account the responses of the other agent. However, prior to the Nash story there was the Maximin-Minimax idea, which is more in line with the non-strategic interaction typical of most economic behaviours. In this case (the von-Neumann approach), individuals are aware of all possible outcomes and simply select one regardless of what the other agent will do. This is very similar to the price-taking behaviour and would therefore suggest as much sociality as the standard economic model. For an interesting discussion on the development of Game theory, see Giocoli (2003).
- 65.
We noted in Chap. 1 that already in Adam Smith we can find the understanding that humans are naturally social and, therefore, almost by definition, dependent on one another. However, this does not tell us anything about the nature of their sociality. People, argues Smith, are always in need of each other’s assistance but this assistance can either be provided in a mercenary way from a self-interested motive or be provided in a disinterested manner from motives of fellow feelings and benevolence (TMS, p. 83). Indeed, the moment that the division of labour takes place people become dependent on one another and the mere development of the division of labour already suggests that there is a degree of trust among them. This is so because they will need to co-ordinate their actions both in production and in consumption and in this sense they will inevitably have to co-operate. But they will do this whether they have fellow feeling and disinterested motives or mercenary self-interested motivation. As we mentioned earlier, when J. S. Mill refers to Smith’s idea of the division of labour, he uses Wakefield’s take on it, which uses the word ‘co-operation’ explicitly without any reference to the way, or motivation, behind such co-operation . Namely, classical scholars have always understood that behind the competitive model of The Wealth of Nations stands a basic idea of co-operation . What is less evident is the reason for this co-operative behaviour. In our case of Robinson and Friday, it was clear that each one of them can benefit from coming together (and dividing their labour) but does this mean that it is these benefits that brought them together in the first place or that the presence of the other has not influenced their view of the world?
- 66.
Indeed, the problem of the prisoner’s dilemma emerges here as it is a one-off game. The problem will persist in a finitely repeated case as well but may not emerge in the infinitely repeated case. The reason is that there is clear incentive for agents to renege on their tacit agreement and choose D when the other is choosing C. However, each agent may expect the same thing of the other and, therefore, they would end up playing (D,D). In the infinite repetition case, the agent will have to weigh the benefit of defection today with a string of punitive actions by the other player. If the other agent credibly threatens continued defection if the player defects even once, then the player will have to weigh the gain of 10 today with the present value of an infinite string of 5s. It is possible that this would mean that the agent will always prefer to co-operate. As the infinite repeated game is more likely to be relevant for economic interaction, there does not seem to be an obvious issue here. However, experimental evidence is always based on either a one-off or a finitely repeated story in which the expectation is for the agent to defect. It is in this context that the evidence raises doubts over the role of the standard notion of the rational utility maximiser.
- 67.
There are, in fact, three general forms of games which have been the focus of attention in demonstrating that the expectations derived from the standard model of the instrumentally self-interested rational utility maximiser do not match the results. The first is the ultimatum game (see, a summary of evidence in Oostebeek et al. (2004) as well as Schmitt (2004), Heinrich et al. (2004) and Camerer et al. (2011)). The other two are more directly associated with prisoner’s dilemma situations and they are comprised of the oligopolistic games (see, for instance, a summary in Engel (2007)) and the public good games (see, for instance, a summary in Chaudhuri (2011)).
- 68.
Two main lines of explanations have been developed in response to these findings. The first is an attempt to introduce the other (either directly or through ethical concepts like fairness or reciprocity) into the world of the instrumentally rational utility maximiser (see, for instance, Fehr and Schmidt (1999) and Charness and Rabin (2002)). The second is to develop a complex evolutionary story that will explain why instrumentally rational agent may nevertheless choose to co-operate (see, for instance, Verbeek (2002), Bowles and Gintis (2011)). Both lines of reasoning are based on the presumption that self-interested individuals will not choose to co-operate and that the behaviour of the co-operating socially minded individuals can still be captured by the instrumentally rational utility maximiser. Binmore (2012), for instance, sums it up well when he says that ‘not only do game theorists agree that human beings are social animals who cooperate most of the time, we think that they are usually rational to do so’ (p. 278).
- 69.
In fact, given that the oligopoly and the public good are virtually the same game (in terms of its set-up but not in terms of the story behind it), it is not evident how the fact that the outcome in the one case has adverse effects on others, while in the other it does not, becomes an explicit part of the analysis.
- 70.
He also uses the term ‘friendship co-operation’ as opposed to ‘exchange co-operation’ to discuss the differences between the two forms of co-operation but only the former one is considered to be a fully blown form of co-operation (see Toumela 2000, p. 369).
- 71.
This is the case of social preferences to which we referred in an earlier footnote and which produces an outcome that is in line with the interest of a selfish person. Note that (10,5) is not really an option as the other agent would also choose D and the self-interested agent would end up with 6 instead of 8. The fact that the game leads to a prisoner’s dilemma could very well be a problem of how relevant is game theory to economics rather than to look for solutions for a non-problem.
- 72.
This process in which norms of behaviour develop over time is clearly designed to support the interest of the individual even though they may be based on reciprocity or even empathy. The development of social norms has long been associated with the behaviour of self-interested agent in exact same manner as the underlying civility of market exchange in standard economics has always been presupposed.
- 73.
- 74.
Bowles and Gintis (2011) go out of their way to claim that the co-operative behaviour we observe in experiments must be a reflection of genuine sociality and ‘Like de Tocqueville’s [in his Democracy in America (1830)], we object to the tautological extension of the principle of self-interest’ (p. 441). They concede that ‘It goes without saying that … even cultural evolution may be strongly biased towards proliferation of behaviours leading to individual success’ (ibid.), but claim that the self-interested explanations of co-operation are only true in the case of repeated interactions. The evidence from experiments is always based on one-off or finite repetitions. Moreover, they claim that the co-operation they are referring to is about ‘individual behaviour that incurs personal costs to engage in joint activity that confers benefits exceeding these costs to other members of one’s group’ (p. 430). However, while we accept that the Hamiltonian principle of inclusive fitness which they describe in this sentence suggests genuine sociality, we do not accept that this is what they mean. They provide an example of the public good game as a demonstration to someone incurring costs (paying rather than freeriding) while conferring benefits (exceeding these costs) on the others. But this is NOT the Hamiltonian principle and it is a perfectly self-interested position to take. The agent that incurs the costs is receiving benefits which exceed these costs. The fact that the other agent receives benefits too is neither here nor there. Individuals do not freeride because they want to benefit themselves from the public good and think that if they contributed, as did the others, the benefits will be greater. This is self-interest pure and simple! The fact that they may rely on a norm not to take advantage of the other and to defect in the last minute is no more a social norm than the tacit understanding in standard economic analysis that people do not steal, or cheat or lie.
- 75.
Namely, the consequence of the action is still \( {\overline{z}}_i=\left({L^i}_e,{x}_i\left({L^i}_e,{L^j}_e\right),{u}_j\left({x}_j\left({L^i}_e,{L^j}_e\right)\right)\right),i,j=R,F, \) but in the space of leisure and x we do not note the effect on the other explicitly but rather through its effect on the utility of leisure.
- 76.
For simplicity of exposition we assume that \( {\underset{\_}{\pi}}^R+{\overline{\omega}}^R={\overline{\pi}}^R+{\underset{\_}{\omega}}^R. \)
- 77.
This has taken many forms (considered today by many as ‘economic imperialism’). There is Coleman (1993) in sociology, where it has now reached an unprecedented expression in the form of Gintis and Helbing (2015) who took the idea to an extreme when they suggest a rational utility maximiser basis for a new analytical core for sociology. Becker is perhaps the most well-known example of this. In his Nobel Prize lecture, he said: ‘An important step in extending the traditional analysis of individual rational choice to analyse social issues beyond those usually considered by economists is to incorporate into the theory a much richer class of attitudes, preferences and calculations’ (Becker 1996, p. 139). So he is both in favour of using the rational utility maximiser in social analysis and in favour of socialising the rational utility maximiser. Tullock (2002) provides a rationale for the development of Public Choice Theory in his essay ‘People are People: The Elements of Public Choice Theory’. The entire collection of his essays entitled Economics and Government (2005) is dedicated to the connection between the Homo economicus and Homo politicus.
- 78.
Which is exactly what modern economics consider itself to be: universal and appropriate to any form of sociality or social organisation (see Chaps. 1 and 2).
- 79.
Which is very much the traditions of Becker, Tullock, Coleman and most of what is considered nowadays as modern political economy.
- 80.
Recall that the relationship between the spheres and within them is a function of technology, the nature and extent of the social bond (abstract cognitive development) and its distance from the natural social association. Initially, the social and the economic, and, subsequently, the civic, are the same group of people. As abstract cognition develops (and with it, technology), the social and the economic no longer overlap but they are now bound together through the notion of civic society into which the more abstract sense of sociality is now mapped. In such a case, social distance in both the social and the economic will be dominated by the effects of the more abstract notion of sociality: the civic society.
- 81.
As the abstract and cognitive sense of sociality expands, people whom we do not know personally but with whom we may interact economically may still belong to the group with which we identify as our social group.
- 82.
In the context of more abstract cognitive association, we are more likely to consider the value of an action in terms of its logical and universal effect on society rather than through its direct effects on individuals with whom we do not have any real personal relationship.
- 83.
This is true both to the paradigmatic core, where the competitive outcome is predicated on some hidden assumptions about the willingness of rational agents to uphold laws and to avoid harming or cheating the others, and to game theory. In terms of behavioural economics, only when people co-operate will their pursuit of self-interest be successful. This co-operation , they would like to claim, is a result of Smith’s notion of sympathy, though, as we argued, this would have been equally commensurate with naked selfishness. In terms of the terminology of Chap. 1, The Wealth of Nations produces a synchronic order. The fact that it is supported by The Theory of Moral Sentiments in the sense that the self-interested agents of the WN are ethical beings (described in the TMS) suggests that this order is also diachronic. I, of course, dispute this claim and interpretation of Smith’s work and we will discuss this in the next chapter.
- 84.
Hollander (1985), for instance, is an example of a prominent historian who draws a direct methodological line from Smith and Ricardo through J. S. Mill to Walrasian neo classical economics.
- 85.
Hausman (1992), for instance, provides a modern take on this Millian justification but for him this gives rise to what he calls the ‘inexact science’ of economics. But Mill’s position was more complex than is being supposed. In part, the complication regarding Mill’s position on this question was derived from the controversy over Mill’s attitude towards laissez-faire, which seemed to have changed since the time he wrote the Principles of Political Economy. To some, like, Leslie (1969 [1870]) or, more recently, T. W. Hutchison (1978) and P. Schwartz (1972) the only way to explain Mill’s criticism of laissez-faire is by his shift away from the Ricardian orthodoxy based on an isolated economic analysis towards the historical school which emphasised social dynamics. There is more about the English methodenstreit in, for instance, G. C. G. Moore (1995, 1999). Hollander (1985) was right to point out that this is not a plausible explanation as most of Mill’s social ideas already exist in the Principles of Political Economy (1848). However, his interpretation suggests that the explanation for Mill’s apprehension regarding the competitive paradigm rests entirely on what may be called ‘disturbing causes’. I disagree with both interpretations of Mill’s position towards the laissez-faire and believe that the answer lies in what one may call the distinction between the static and the dynamic (see, Witztum 2005a). But whatever is the case, Mill of the logic definitely defended the conditional and separate study of economics. The issue was then, as it is now, whether such separation also means independence.
- 86.
This can be a complex measure comprised of income, distribution of income, social cohesion (alienation), crime rates and other variables contributing to the social sense of wellbeing. Naturally, one of the questions that will follow is whether this aggregate can be separated according to the influence of each type of motives. At this stage we assume this not to be possible; namely, the level of material wellbeing cannot be separated from the level of income distribution and, subsequently, crime and social cohesion.
- 87.
Note that here, there exists a system of general equilibrium which explains how \( {M}_1 \), expressed by all members of society, leads to a particular social state given the other motives and sentiments. This ‘general’ equilibrium is, in fact, partial equilibrium if we take all other motives into consideration.
- 88.
Which means that both S and the various motives can be captured by real numbers. The purpose of this exercise is not to make this claim but simply to try to derive some logical insight into the significance of the isolation of one variable from the others in the study of functional relationship.
- 89.
In the bicentenary of Smith’s The Wealth of Nations, to remind the reader, Friedman declared that the invisible hand of Adam Smith not only successfully directs self-interest in the creation of wealth but also directs sympathy which governs charitable activities.
- 90.
Some may argue that care too is an economic question. While this may be true as some of it is desirable and scarce, there are some aspects of care which are not necessarily part of the economic problem as they may not be scarce.
- 91.
Notice that this is another expression of the inadequacy of the notion of the socially minded instrumentally rational utility maximiser. We could have explained these two indifference curves as representing the preferences of socially minded individuals who care about the effects of their actions on the other (and thus reduces their utility from leisure), but instead we say that their initial attitudes towards leisure differed considerably. In other words, the self-interested individual is virtually indistinguishable from the socially minded one.
- 92.
The quantity each one of them produces is denoted by the blue line and it is higher than their original production line because of the division of labour which allows them to concentrate in that in which they have a comparative advantage. However, while point B′ denotes the quantity of fruits produced by each one of them, there is another factor of production involved (either land or the managerial skills of the owner—the return for which comes in the form of profits [or rent]). This means that one could say that the blue line represents the combined effort of the owner (of land, or business) and the worker and, hence, it does not really reflect the exact contribution of each worker. Still, if we consider the fact that labour here is the major factor of production, the blue line may be treated as mainly the contribution of labour. Alternatively, we could say that both of them contribute equally in their capacity as owners or managers but the one who contributes more labour gets less than the one who contributes less labour. Either way, the point made here is not predicated on this interpretation but merely requires the presence of inequality. Robinson has clearly gained much more from the move to society (A to B) than Friday.
- 93.
Diagrammatically, Friday’s net loss of profits will be the small triangular between A and B in the right-hand diagram + the green rectangular attached to point A in the left-hand diagram which used to be part of his wages before the change. His gains are the part of the shaded blue area in the right-hand diagram which is below the broken line from A. In the left-hand diagram, his gains are the red rectangular above the broken line from A. As we assumed a higher elasticity than unity, we know that his wage income will fall, though it is not clear whether his profit income (including the transfer) will increase and if it did whether the increase will be sufficient to offset the losses in wage income.
- 94.
This is so if we assume that the profits are simple rents and not a reward to the managerial skills of the owner/manager. If it were the latter, then such a transfer will have similar effects as the taxation on wages.
- 95.
This is consistent with the meta-economics literature developing from neuroscience, which demonstrates that social pain is captured by the same part of the brain as individual pain. See, for instance, Lynne (2006).
- 96.
Which is also consistent with Mill’s notion of the ‘train of reasoning’ as a means to overcome the problems of deduction in the social sciences. For a full discussion of these issues, please consult Witztum (2005a).
- 97.
Lipkes (1999) observes that in similar circumstances—Mill’s attitudes towards the aristocracy—‘[t]he morality of a people came to be more important for Mill than its prosperity’ (p. 20). It is quite evident that in Mill’s view the morality of the people is a precondition for their prosperity.
- 98.
- 99.
Which was also the subject of our discussion in the previous chapter.
- 100.
Peart and Levy (2003) provide an insightful account to the role of sympathy as the distinguishing factor of classical economics.
- 101.
See, for instance, Mill’s discussion of remedies to poverty (PPE Chap. 9 book 2). There is also an interesting discussion on the role of reciprocity in the formation of sympathetic attitudes in Peart and Levy (2003). In Witztum (2005b) there is a discussion of a similar point in Smith. There, however, it is not so much a question of character formation as that of different manifestations of rational behaviour.
- 102.
Which, for Mill, is what would happen if people became more co-operative: ‘In [increased co-operation] or some such mode, the existing accumulation of capital might honestly, and by a kind of spontaneous process, become in the end the joint property of all who participate in their productive employment: a transformation which, thus effected, … would be the nearest approach to social justice, and the most beneficial ordering of industrial affairs for the universal good, which it is possible at present to foresee’ (PPE, pp. 791–792).
- 103.
Ownership could give people full command over the fruits of their efforts but only if there is no interdependence. Once people depend on each other, the command one has over the fruits of one’s effort depends on other social arrangements. Moreover, Mill proposes to alter the habits of the labouring people by working on their intelligence (education) and poverty (income) (PPE, p. 380). Giving them ownership over a plot of land will not necessarily solve the problem. For the connection between his views on ownership in agriculture and the future of the labouring classes, see PPE, pp. 762–763.
- 104.
Note that we are not arguing that even when people are expressively rational there are no decisions that they will take which are more akin to the way an instrumentally rational agent will behave. What we are saying is that in actions where there is a clear potential effect on the other, expressive will be the form of rationality. As the efficient working of markets is predicated on all markets being competitive, this will not be the case when agents behave expressively in some parts of the economy.
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Witztum, A. (2019). The Conception of the Individual in Modern Economic Analysis. In: The Betrayal of Liberal Economics. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-10671-3_3
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