Human Nature

It’s Time to Base Economics on Human Nature, Not Homo Economicus

How human nature defies the laws of economics

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By Jonathan Rowe

When Jimmy Wales, a refugee from options trading, set out to create an encyclopedia online, he thought first of the Britanica model, except with volunteers. He assigned articles to professional experts, and established panels for peer reviews. Then he started to write one himself – on options trading – and realized it was a drag.

It was like “handing in an essay at grad school,” he said later. So Wales shifted gears. He kept the volunteer model; but made it an open and social experience rather than a hierarchical one. Anyone could write an entry, on anything. The peer reviewers would be the readers themselves, who could correct factual errors and omissions, and challenge biases.

To a conventional manager it might sound like a recipe for chaos. Yet within two weeks, the project had generated more articles than it did in two years of the top-down model. The result is Wikipedia, the free online encyclopedia that now has over 10 million articles in 253 languages and over 2.6 million in English alone. Users have made well over 150 million edits since July 2002.

To an economist it doesn’t make sense. People don’t work for free. Readers are “consumers,” not producers; and consumers do not produce what they consume. Yet they are doing so; and this kind of social co-production is flourishing not only on the Web, but in the society at large.

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In the U.S. and elsewhere, people are turning their backs on everyday low prices and choosing the social cohesion and productivity of their local Main Streets instead. Researchers and software designers are foregoing property rights – i.e. patents — to their work and are releasing it over the Web for free. So doing they are enriching the public domain that sustains their own work and also that of others.

All of this – and more – defies the supposed “laws” of economics. In terms of the prevailing model it is as though someone dropped a ball and it went up instead of down. People aren’t supposed to work for nothing. They aren’t supposed to resist low prices and patent lucre. They aren’t supposed to but they are – and not because they are saints, or “altruists;” but rather because something in their nature wants to be engaged this way with other people. Sometimes, it’s just because it’s fun.

Not long ago it was possible to dismiss such behavior as alternative and eccentric – the phantasms of the fringe that, like ‘60s communes, eventually would come crashing down to earth.. But now, through the Web, it is taking root at the core of the emerging economy The result has been a kind of Western version of the fall of the Berlin Wall – an enlarged range of economic possibility, and a challenge to central assumptions of conventional economic thought.

In cancer research, as in many other fields, the trend has been to seek truth in ever-smaller pieces. As the focus has narrowed from the body to the cell and then to the gene, the social and environmental context has tended to fall off the radar. We get stories of heroic researchers and survivors, but the pollutants that might trigger a genetic disposition are mentioned little if at all.

Something similar has happened in economics. A human economy is a social system, and by definition. It revolves around relationships and interactions, and the people who actually make the economy work understand this. The copious management literature dwells on such things as teamwork and corporate culture. Advertisers, who must deal with people as they are, play to the social cravings for acceptance, esteem, belonging and the like.

It seems so obvious. Yet for most economists, context barely exists. Where the cancer researcher fixates on the individual cell or gene, the economist does so on a hypothetical molecule of economic action called homo economicus. This is the character that inhabits the economics texts, and the computer models that are the silent dictators of analysis and policy. Econ, as I will call him, is a myopic integer of self-seeking, who goes through life with a relentless and unfailing calculus of personal loss and gain. He has no social affinities, is oblivious of social context, and has no capacity or inclination to think of anyone besides him or her self.

Basically he represents the psycho-emotional development of a three year old, only with better math skills. And this notion of human nature frames both the desired ends of policy and the means deemed possible for attaining them. Success is when he gratifies his supposed desires by spending more money. Failure is when he spends less. Either we can try to bribe this slug to be more responsible, through tax breaks and the like. (This is called “market-based” policy.”) Or else we impose rules and regulations to whip him into shape.

Both are necessary of course. But necessary is not sufficient. It is not possible to create a tax bribe for every good thing that needs to happen, nor a regulatory cudgel to stop everything that is bad. There’s a need for new ways to activate human energies to meet human needs, without resort to bribery or fear, and independent of Wall Street and the financial casino generally.

But that can’t happen if human nature really is as economists have assumed. Much has been written on the obsolescence of the old model in terms of finite material resources. Now we need to look at how that model is disconnected from the realities of human nature as well.

Homo economicus was not born of dispassionate inquiry into human nature, or for that matter, inquiry of any kind. It is rather a polemical construct, designed during a particular era in history to achieve particular political ends. Basically, the story began with the efforts to shed the secular authority of the Roman church, especially in matters that today would be called “economic.” Jesus had said we have to choose between God and Mammon, “He who loves God” St. Augustine said “is not much in love with money.” The qualifier added a bit of wiggle room but not much.

This was inconvenient for the emerging commercial class. The concept of virtue had to be made more business friendly. Over time, greed became the more genteel interest, the kind of trait a gentleman might cultivate. The indulgence of it became a calling, and pecuniary success a sign of election. Then came the notion that truly turned the old moral universe upside down. Things were so arranged, in this new view, that the pursuit of interest, rather than the overcoming of it, was what really worked to the benefit of all.

The Creator, in his eternal wisdom, had thus aligned unredeemed human nature with the general good. The greedy could have at it without criticism or remorse. Adam Smith did not invent the “invisible hand.” The notion had been in circulation for more than a century. But in The Wealth of Nations Smith cast it in terms of a compelling economic narrative that meshed neatly with the aspirations of his day. What Freud did for the sexual appetites, Smith and others did for the acquisitive ones.

Yet there were lingering residues of social affinity, which Smith himself had developed in his previous (and in his view superior) book, The Theory of Moral Sentiments. These non-market concerns were implicit in his concept of the invisible hand. Smith envisioned a market of individual entrepreneurs – not corporations – rooted in communities in which the “moral sentiments” – as he called them — would come fully into play.

It was the profession that claimed Smith’s legacy, that stripped away this essential part of his scheme. Throughout the 19th century, economists sought the stature and respectability of science; and this required a shrunken focus on things that could be easily quantified in terms of price. Social context had to go. The appearance of science required also an elemental molecule of economic action that was uncomplicated and predictable. Thus was born homo economicus, the hypothetical character created for the pre-existing script.

Math became the lens that determined what could be seen; economists defined humanity to fit the theory, rather than the theory to describe reality. Economic debate has been in the thrall of this strange construct ever since.

The construct seemed to work for a while. There was lots of room for error — space and resources aplenty, and human needs that seemed as inexhaustible as the resources with which they would be met. Milton Friedman, an evangelist of the new gospel, argued famously that it made no difference whether or not homo economicus was an accurate portrayal. The economy worked as though it was, and so what difference did it make?

But Friedman was a little like the man who falls blindfolded from a tall building and thinks he’s flying. The apparent success was based upon depletion and exhaustion that the evangelists conveniently ignored. There also is a missing social valence that people experience as chronic loneliness and craving, and hungers that can not be filled. Some twenty-five percent of Americans told USA Today that they have no one they can confide in, despite our collective immersion in technology of “communication” that supposedly brings us closer.

Research has confirmed moreover what most of us knew already – which is that beyond a certain point, more stuff doesn’t make us happier to begin with. Often it makes us miserable – as compulsive eaters and shoppers could readily attest. Yet for all this, most of us depend upon the machinery that depends in turn upon this misery. And besides, what is the alternative? Homo economicus typically has been posed against the other extreme, the “altruist” who seeks to help others without regard for him or her self. Adam Smith put the question this way in one of his most quoted passages.

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. We address ourselves, not to their humanity, but to their self-love.

Selflessness or selfishness — either work with the gravitational pull of ordinary human nature, or else rely on a temporary suspension of it in the form of “altruism.” Given those alternatives, most people would choose to assume that the dropped ball eventually comes down. This is especially so considering how the altruistic model can degenerate into the statist coercion of the former Soviet Union, when human goodness fails as it often does.

Smith’s formulation is rhetorically effective. But what if it does not present all the choices? What if there is something else in ordinary, human nature that likes to be engaged with other people — not because it is virtuous or altruistic but simply because it’s the way we humans are? And what if this something can provide the basis for a new way of thinking about a human economy – both the work it does and the satisfactions it provides?

I have an in-law who does rural development work in the Philippines. One project involved a water system for a mountain village, and proceeded in two stages. In the first, the water was piped to a common containment pool. In stage two it went from there to individual houses.

The assumption was that people would appreciate the convenience and do their wash at home, the way we Americans do. Yet even after stage two was completed, women in the village continued to use the common pool in the morning to wash clothes, as is the tradition in that country. For these women the washing was not just domestic work. It was a social occasion; and the new system produced not just water, but a setting for that sociability as well.

Water wasn’t just a commodity. It had social content. The women were not just passive consumers. They also were co-producers of the social interaction that the water provided the occasion for. This social productivity couldn’t have happened in the “convenience” of their homes; because convenience in that case would be another word for loneliness and isolation. It would be what happens in an economy when the social content is stripped away.

Traditionally, economies have abounded in this invisible (to us) social dimension. Commerce and exchange served to generate human interaction as well as stuff. The first markets in Western history arose in courtyards that surrounded churches; the social event came first; commerce glommed on later. The barn raisings and harvest bees of the American frontier showed the same social productivity in the context of private property. Traditional Main Streets did the same.

Economists typically dismiss this phenomenon as a remnant of a primitive, pre-market time. We have moved up the scale of being from social cohesion to the liquidity of the market, and from human interaction to engagement with stuff. Yet the cohesion was central to the emergence of the modern market in the first place. Renaissance Florence long has been regarded as the Petri dish for this new economic world, but the businessmen there were not the competitive integers that economists long have supposed. The place was, rather, abuzz with commercial networks, the members of which helped one another on a reciprocal basis.

Even today, for all the touting of competitive rigors, most of the actual work of the economy is done in settings that are cooperative and social.

Peter Holt, a successful businessman and owner of the San Antonio Spurs of the National Basketball Association, told Sports Illustrated that he came out of Viet Nam with a “grasp of how the collective good keeps people alive.” Applied to business – including that of the Spurs – this means operating on the principle that “none of us are as smart as all of us,” he said.

This shouldn’t come as a surprise. Healthy economies work this way because it’s how life works. As Peter Kropotkin pointed out a century ago in his classic study Mutual Aid : A Factor of Evolution, survival among both animals and humans has depended more on cooperation than on heroic efforts of isolated individuals. More recently, evolutionary biologists have confirmed Kropotkin’s insight, from genes and microbes on up. The old Darwinian drama of each against all has yielded to one that is more like the women at the water hole.

Even economists are starting to come around. At long last, a new branch called “behavioral economics” has begun to observe how humans actually behave, as opposed to how the model says they should. It has found what most of us knew already – namely, that we humans aren’t just calculating machines of self-interest. (Often we aren’t very good at that to begin with.) The research has demonstrated social instincts where economists before saw only pecuniary ones. We care about the fairness of transactions, for example, and not just whether we ourselves come out ahead.

Being social creatures, moreover, we act differently in different settings. We don’t have a fixed economic nature. When a local merchant makes a change mistake in our favor most of us will point that out. If a credit card company makes such a mistake, we are more likely to think of all the times the company has gouged us, and consider it rough justice. Ditto with vending machines. What’s the point in showing fairness to a shark?

The implications are large. If we humans are disposed to favor reciprocity and justice; and if historically, economic settings were such as to reinforce that disposition; and more, if the sociability that once resulted answers to a real human need, then the economy is failing today in a way that goes almost entirely unnoticed. That people are trying to revive such things as traditional main streets, and neighborhoods with front porches and shared common spaces, becomes less surprising.

These aren’t just the hobbyhorses of a nostalgic rear guard. They are about an economy worthy of the name. More broadly, they suggest the emergence of a kind of parallel economy that meets needs the corporate market doesn’t, and gives expression to the energies that market tends to repress.

The World Wide Web has been more than a boost to “the economy.” It has begun to change the nature of the economy. What Pittsburgh was to steel and Detroit to cars, the Web has been to social productivity – a setting that brings the factors together in a new and generative way.

Wikipedia founder Jimmy Wales says that most of the operating expenses for his project come from donations. He has transferred ownership to a foundation, thus forsaking, potentially, some $2-3 billion dollars. Still, it is not saintliness or “altruism” that drives this engine, but rather whatever it is that makes Filipina villagers want to wash clothes together, and neighbors want to share stories on a front porch or stoop.

This dynamic does not parse readily through the conceptual apparatus of economic logic. There is no rationing of supply via a system of scarcity and price, nor activation of it through the prospect of reward. Instead, production and consumption – which are iron categories in the texts — have turned into something that has elements of both. Wikipedia users are co-producers of that which they “consume.” They are producing socially, through their interaction with one another – and for the sake of that interaction, not because it gives them money with which to buy something else.

The reigning economics is concerned with settings and incentives that activate the “me” side of human nature. The next economics will study the activation of this “we” side as well. “What we are seeing now,” writes Yochai Benkler, in his book The Wealth of Networks, “is the emergence of more effective collective action practices that are decentralized but do not rely on either the price system or a managerial structure for coordination.” In other words, social co-production.

It would be fatuous to suggest that an entire economy could operate on commons principles any time soon. Among other things there is the matter of cash. The devotees who contribute to Firefox, Wikipedia and Linux have the time because they get money from the market somehow. The two realms are symbiotic, for the present at least, and perhaps necessarily so. Much as managers have rediscovered the importance of social productivity within their corporations, we are relearning that same lesson outside the corporation as well.

Publishing can’t thrive without a free English language, technology without a free culture of science, baseball without the basic format of the box score that is available to all news outlets and fans. Just so, a corporate market generally cannot thrive without a parallel economy that operates on principles different from its own. Nor for that matter can the government. Police alone can’t make a neighborhood safe, schools alone can’t educate, without something else going on that probably is more important.

What does seem clear is that the commons economy is likely to keep growing. It does what the corporate market can’t, and that increasingly is what most needs to be done. We need, increasingly, clean air and water, more than the stuff that results in foul air and water. We need functioning communities more than the centrifugal energies of the global market that have tended to rip communities apart. Not that we don’t need markets and stuff. But the balance needs to shift back; and the countervailing energies of commons productivity – both natural and social – will be central to that shift.

This is something that most economists today don’t know even how to think about, let alone encourage. It is off their mental maps, which are out of synch with the new terrain. At least now we know that this terrain is not a fantasy of New Age idealists. It does not require heroic acts of human generosity – what the economists call “altruism” – in order to exist. It is, rather, grounded in the ordinary, mundane human nature upon which an economy operates. We are social creatures. We like to be engaged with other people, in one way or another, just as we like to experience monetary gain.

The proof lies in the way this is happening now, spontaneously and without central direction. Together it represents the start of what is likely to become the next big turn of the economic wheel, and puts the most basic questions about an economy back on the table. What is it, really? What is it for? Most importantly, what is the model of human nature on which it is based? In the face of financial and ecological conundrums that defy solution within the old frameworks, the answers presents the possibility of a new way out that draws from one that is centuries old.

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  • Scott

    It’s a misconception that economists believe that Economics is involved in all human decision making. When one chooses which flavor of ice cream they are essentially calculating their expected utility and cost/benefit. That is a mutually beneficial nonpersonal exchange.

    I can model my marriage in the same fashion but this type of human interaction is personal and doesn’t follow the same rules. Its not all about self interest in this case. Social norms and customs also play a big role in human behavior.

    Also, money is not what economics is all about. It’s about mutually beneficial exchange in nonpersonal interactions. Money is merely the medium of exchange. People gain utility in more ways than money and Economics recognizes this. The Wikipedia example is explained by people getting satisfaction out of donating and editing the site because they value an accurate online encyclopedia. There is nothing non economic about it, people are being compensated, just not with money.

    Economists are greatly respected, perhaps overly so, and influence policy so I can see the skepticism. Just keep in mind that Economics just focuses on a specific area of human behavior such as rational choice and self interest. Eventhough there is a great deal of overlap with other social sciences, economics doesn’t explain everything. Which is what you observed. However you are not observing a failure of economics.

    • Cullen Fahey

      What about the other economic schools that do handle all the extra disciplines. Like applying fluid dynamics to trade imbalances or thermodynamics to human choice? Post-Autistic Economics!

  • Derryl Hermanutz

    Rowe has identified a core “moral” failing of mainstream economics.

    As Rowe observes, economics tells people we are and we “should be” self-serving personal wealth maximizers, and devil take the hindmost. As capitalist materialism replaced Christian spirituality (or secular humanism) as the West’s operative religion, economic preaching of human nature as essentially greedy — and greed is good — took on the aura of a religious imperative.

    There is a normative aspect to cultural teachings like these. If you tell people how they “should be”, most of them will try to be that way. Religions never fully succeed in re-forming the values that people feel and live by. But they certainly make people behave “more” in the ways they “should” (self-serving) and less in the ways they “shouldn’t” (sacrificing an opportunity for gain, by serving some alternate value like friendship or empathy or simple neighborliness).

    So if you preach human nature as greedy, self-serving and competitive, most people will believe they “should” try to be that way, even if they don’t actually “feel” that way.

    So from this perspective, the teaching of mainstream economics is making people worse as human beings, and better as beasts driven by a myopic focus on material gain without regard for the human, social, and environmental consequences of their narrowly self-serving behavior.

  • JeffMowatt

    “Economics, and indeed human civilization, can only be
    measured and calibrated in terms of human beings. Everything in
    economics has to be adjusted for people, first, and abandoning the
    illusory numerical analyses that inevitably put numbers ahead of people,
    capitalism ahead of democracy, and degradation ahead of compassion.” That was the beginning of people-centered economics: