21 Sep 2011

Golden culture

Some people dislike economics for its central emphasis on individual behavior motivated by rational self-interest. They see these words and assume that economists believe in some form of every-man-for-himself cold calculation.

Economists have not helped with this impression: many propose theories of behavior based on "homo economicus" models in which individuals are only concerned with improving their own situation -- even if others should suffer.

These models are used for two reasons: first, they fit into simple mathematical models that can be easily manipulated to produce "results." Second, they fit into a shallow reading of Adam Smith's notion of an Invisible Hand promoting the Wealth of Nations (1776), i.e., people looking out for themselves while trucking and bartering will increase the wealth of everyone by providing opportunities for trade.

Non-economists have had a hard time arguing with this asocial "methodological individualism" because the math seems to be logical and unassailable (the complexity of the math doesn't help), and it's hard to defeat "U_i = f(x_1, x_2)" with "that doesn't feel right."

Fortunately, other economists have been exploring the realities of these theories. "Good" economists know that individuals include the happiness of others within their version of "self interest." These economists have used experimental economics to show that predictions in the simple math models are just not right. (I think that my simple model makes WAY more sense.)

All of this text is a lead up to a simple short story: Last night [16 Sep], I left my gold ring on the gym key that I left hanging in the locker, right next to the men's room exit. (I took off the ring to work out.)

My mother gave me that ring in 1987, and it's worth a lot to me. It's also worth a lot for its gold content -- at least $500+ at any gold dealer.

So there were three possible outcomes for when I went to the gym this morning:
  1. The ring was still hanging (unlikely, given the dozens of guys who would walk by it after I left).
  2. Someone took the ring, to sell it.
  3. Someone handed it into the front desk.
Now ask yourself what you would do if you found that ring -- and also ask yourself WHY you would do that. Perhaps you would take the ring and sell it, because $500 is handy and finder's keepers. Or perhaps you would ask yourself how you would feel if you lost a ring or how you would act if you were watching yourself as an outsider -- thought experiments that Adam Smith explored in his 1759 book, The Theory of Moral Sentiments (see this and this post).

In fact, the relevant question is not what you or I would do, but what would the average guy do who was leaving the locker room. It's clear that some would take the ring home, but also that others -- probably a majority -- would turn the ring in. The ratio between selfish guys and social guys was not really relevant last night -- the first guy to see the ring was the guy that mattered -- but it IS relevant when it comes to talking about repeated social interaction.

Put differently, we treat strangers according to the average mix of selfish/social values in the people around us. If most people are selfish (for cultural, economic or political reasons), then we tend to expect selfish and act selfish. If most are social -- treating each other as extensions of themselves -- then we tend to assume that we should also act that way.

The implications of these mixes are obvious, and have been deeply explored in experimental labs: a group of selfish people that fights over the spoils will end up poorer than a group of social people who cooperate to be fair to each other. (This discussion underlies Part 2 of my book.)

Those actions determine the Wealth of Nations in the long run; in the short run, they determine how safe, happy and generous we feel.

Bottom Line: I feel good this morning because someone turned in my ring :)