Human Nature

Why Economics Is Really Psychology on Steroids

Why economists are so often wrong

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By Jonathan Rowe

What is called “economics” is really psychology on steroids. It starts with a model of human nature and extrapolates an entire scenario for how the world works from that. The model is homo economicus,the myopic protoganist of the economics texts. This hypothetical person has no social affinities, no lapses of judgment or hang-ups, no capacity even for thinking about anyone besides him or herself. He goes through life with an unfailing and relentless calculus of personal loss and gain.

As I explained in The Tragedy of Economics this portrayal of our basic nature did not arise from actual inquiry. Homo economicus was from the beginning a polemical construct, devised to serve political ends. At first this was to help undermine the secular authority of the Roman Church, and then the divine right of kings. More recently it has served to justify a fundamentalism of what is called “the market.” Along the way, it has provided economists with the semblance of a predictable atom of economic activity. This has enabled them to declaim under the banner of “science,” and has given them a hook on which to hang their arcane math.

Today, psychologists can only roll their eyes at this naïve portrayal. People who have to deal with actual humans in market settings – such as advertisers and corporate managers – find it borderline irrelevant. A new field called “behavioral economics” (which ought to be redundant but revealingly is not) is picking apart homo economicus within the temple of the profession itself.

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The only people who still take the model seriously are economists themselves. There is an element of projection in this; studies have shown that economists tend to resemble homo economicus more than the rest of us do. Nevertheless the model remains the ghost in the machinery of economic analysis, and defines in large measure our sense of the possible. When ideologues argue that our only choice is between a corporate market and a bureaucratic state, it is the assumption of homo economicus that makes this so.

Yet before our eyes, another reality is emerging – or rather re-emerging, because it once served humanity for centuries. That reality is the commons, which derives from a different side of human nature, and therefore operates on different principles than the market supposedly does. That other side is not the sappy, self-sacrificing altruist that marketophiles posit as the only alternative to their model of human behavior. Nor is it the grim utilitarian socialist. Rather, it is whatever resides in us that wants to be engaged with and around other people – whether to accomplish a task or just because it is fun.

This convivial side of economic life is beyond the bandwidth of most economic thought. The corporate market tends to repress it, and partly for that very reason it has been fighting its way back through the concrete. Cyberspace and the World Wide Web gave it a vast and unenclosed new realm, much as the New World once did for the surging energies of Old Europe. [David Bollier tells the story in his book, Viral Spiral.]

Yet the Web has been just the most visible and suggestive venue for something that has been happening throughout the culture. Spontaneously, and in a multitude of ways, people are trying to resurrect the social dimension of economic life that the corporate market version increasingly has displaced.

An example is the revival of the urban commons – settings that encourage in physical space the kind of social dynamic that occurs virtually on the Web. City and civic leaders have begun to grasp that the best way to bring back life to downtown is to create spaces where life wants to be. Portland’s Pioneer Square has become a reference point for the movement, along with older spaces such as New York’s Central Park and Boston’s Common and Copley Square.

A more recent shining example comes from an unlikely city, Detroit. Back in the 1970s, in the wake of devastating riots, Detroit tried to revive its downtown through a corporate megalith called Renaissance Center. The Ren Cen became a walled fortress and metaphorically enough, home to General Motors. Then, in the late 1990s, someone in Detroit proposed the opposite approach: a large inviting public space. The result was Campus Martius, in the middle of the old downtown. The Motor City even displaced cars to make room for people. Life is returning to that part of the city. People actually are coming in from the suburbs to experience what the city offers that suburbs can’t. Investment is coming too – over half a billion dollars worth and growing.

Something similar is happening at the neighborhood level. Instead of retreating to their own patches of urban turf, neighbors are tearing down their back fences to create larger shared spaces. This happened at Montgomery Park, an inner city oasis in Boston’s South End. The Baltimore city council recently passed an ordinance to make it easier for neighbors to close off back alleys to make secure commons. The mayor has embraced the idea; and over the past year more than fifty neighborhood groups have begun the process. (There are some 466 miles of alleys in the city so the potential is large.)

Traditional main streets serve much the same function. The growing antipathy to Wal-Mart and other big box stories comes from more than a concern about sub-living wages. “They don’t sell small-town quality of life on any Wal-Mart shelf,” said an opponent, “and once they take it from you, you can’t buy it back from them at any price.” Another put it more simply. “This is our town, not Wal-Mart’s

The social productivity of traditional main streets has a multiplier effect. Studies have shown that localities with large numbers of home grown businesses, along with community institutions and family farms, have higher median incomes and lower unemployment. States in which a large share of the retail business is locally owned, rank higher on a wide range of social, economic and civic measures.

One scholar who has studied this phenomenon, Charles Tolbert of Baylor University, cites a gas station owner in one town who switched from self-service to full service during a recession, and hired ten additional people. He had to charge more, but most of his customers kept coming anyway, because they understood that the extra pennies per gallon were providing jobs for their neighbors. Homo economicus wouldn’t get it. Most of us actual people do.

Nowhere is the reclamation of the commons more in evidence than in regard to food. Food is where the human economy began. It once served as a locus of community — in the growing, selling, cooking and eating — but today that dimension is largely gone. Most of us have no idea where our food even comes from, beyond the supermarket. We scarf down Egg McMuffins in the enclosure of our cars. One result has been the social equivalent of empty calories — a hunger that no amount of eating seems to fill.

Farmers’ markets have been one answer to both improve our diets and enrich our experience of community. The growth in markets has been remarkable — from 1,755 in the U.S. in 1994 to 4,385 last year. (By comparison, Whole Foods now has about 270 outlets in the U.S. and England.) Farmers Markets are not just – or even mainly — about organic food. They are about local food, and the opportunity to deal face to face with the people who produce it. They also are about the festive sociability of the market itself.

People go to partake of the bustle and good spirits, something that doesn’t much happen at Safeway or even Whole Foods. “See you at the farmers’ market on Saturday” is a common leave-taking in my town.

Community gardens have grown in a similar manner, and for some of the same reasons. There now are some 18,000 of them in the U.S. alone, according to the American Community Gardening Association. These gardens replicate in urban settings some of the social dynamics of the traditional rural commons; neighbors share tools and help one another when the need arises.

Perhaps no institution better embodies more the revival spontaneous sociability associated with the commons than the local coffee shop. Not that long ago, coffeehouses in the U.S. were associated with college towns, bohemia, and dark angry poetry. Today they are everywhere — from some 585 in the U.S. in 1989, the number grew to more than 20,000 today. It might seem that most of them are Starbucks. But according to the Specialty Coffee Association of America, independent shops still outnumber that ubiquitous chain.

For all its corporate prefab quality, moreover, even Starbucks provides a space in which to meet people, or simply sit in the anonymous company of others. In suburban malls, it is the closest thing to a commons to be found. Starbucks knows that it is selling not just caffeine but also a sociable “third place” between the private spheres of home and work. Even when people look busy working on computers they are open to serendipitous encounters, and are partaking of the flow of life.

You could write the history of human inquiry and freedom from the standpoint of coffee shops. Stock markets and scientific societies began in them, as did Lloyds of London, the insurance exchange. Richard Steele ran the Tatler, the first modern newspaper, out of London’s Grecian coffee house, and used it as his postal address. The American and French Revolutions were fomented by men who, as one writer put it, saw the prospect of change “in the depths of their black drink.”

Jurgen Habermas and others have argued that coffee shops are where civil society itself began. Whether one goes that far or not, they clearly played a role; and the revival of coffee house culture today—and the larger urge for a commons-based society of which it is part – suggests opportunities for social change. Sociability and action are connected. You are more likely to join with others in a cause if you are familiar with them first. The farmer-populists started out at Grange picnics, the civil rights movement in Southern churches.

Ralph Nader’s father, a Lebanese immigrant who ran a restaurant in Connecticut, once observed that television “has replaced the dictator’s ban on three on more people gathering in one place without a permit.” But now that people are reclaiming the urban commons and going out in public again, who knows what will happen.

Originally published here.

2016 January 16


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  • Pingback: Economics Is Really Psychology on Steroids - Ev...()

  • I would have to say that economics may be even more like sociology since it’s as much a result of the interaction of humans rather than an internal discussion may have. And one could even say when referencing historical economic theories (revering what dead guys said centuries ago) – it’s little more than cultural anthropology. Of course economists may regard this blasphemy. But all they’re doing is adding some numbers to it justify their claims of it being a hard science. In the end – it’s just subjective interpretation of people’s behavior. But that’s just my opinion. 🙂

  • Derryl Hermanutz

    “Town life” — smallish urban centers surrounded by family farmers producing wholesome organic foods — satisfies human social needs and economic needs at the same time. Town life — whether in actual towns or in town-like communities within cities — is “human scale” life. This is the insight of the Leopold Kohr, EF Schumacher “Small is Beautiful” counter-argument against the idea of “global civilization” and the supposed economies of scale of transnational corporate Bigness.

    So much energy and effort goes into simply propping up and maintaining the bureaucratic and physical machinery of the great Big lumbering global systems, that eventually they turn to diseconomies of scale that are disguised by externalizing the costs onto “society” and internalizing the benefits into corporate profitability.

    Modern industries like electronics are essentially global rather than local because they depend on global supply chains to feed in all the necessary inputs (rare earths, copper, plastics, electronic components, etc) into centralized assembly plants, and global markets to sell the finished outputs. Oil and other natural resource mining and refining industries that produce hi-tech industrial materials like plastics, aluminum, steel and copper area also essentially global and large/corporate scale endeavors, that cannot be successfully replicated at small local scales.

    It was John K Galbraith who, in his 1967 book, The New Industrial State, pointed out that large richly-capitalized corporate collectives are the only scale of enterprises capable of marshalling the necessary factors (including diverse fields of specialized technical knowledge, coordinated via management teams) to apply science to the development of technological processes; and to commercialize “good ideas” into mass market consumer products like smartphones.

    Galbraith was not so much critical of the state-corporate “planning system” as he was critical of the delusory “conventional wisdom” of mainstream economics that the corporate state is a “free market economic system”. It is not. The modern corporate state is exactly “the mercantilist system” — populated by global corporations like the state-chartered, Royal navy-supported, British East India Company — whose predations against “free enterprise” and nation’s economic interests Adam Smith railed mightily in his 1776 opus.

    Smith presented his free market economy of owner/operator small businesses — local farmers, crafters and tradespeople, when a “factory” was a guy and a few employees working together in a workshop with technologically simple tools and techniques — as a socially and economically superior “alternative” to state-sponsored corporatism.

    “Scale” matters. A free market is populated by numerous small scale businesses, whose “profits” become the owner’s personal income, and whose owners-managers directly suffer the “market discipline” of their own mistakes. The large scale and absentee shareholder ownership structure of of corporate enterprises separates manager errors from the direct market discipline of not only loss of income, but loss of personal savings and wealth to pay for the mistakes. A corporation can suffer a billion dollar loss one year, but the corporate executives who oversaw those losses are not expected to dip into their personal fortunes to pay the billion dollars. The losses are covered by corporate debt, that is repaid out of future profits, that were supposed to be distributed to shareholders as future dividends. When a small business “loses money”, the small business “onwer” pays the money out of his/her own pocket. That is what “market discipline” looks like.

    Town life “smallness” would be less than idyllic, if it was not supplemented by global corporate industrialism that produces the hi-tech fruits that only large scale enterprises can produce.

    So there are really two economies. There is the free market economy that is populated by small businesses. And there is “the planning system” that is populated by governments and Big corporations. And the question becomes, Are the governments who support the nation’s Big global corporations, capable of also serving the interests of their populations of “small” individuals and businesses? Or are global corporations in the process of taking global government “private”, and superceding the power of political government to “govern”?

  • ari9999

    Jonathan Rowe was not just a terrific writer but a force in the emerging commons movement, having co-founded On The Commons (onthecommons.org). You might have honored his memory by mentioning the latter in your capsule bio.

    You might also have credited Rowe’s original February 2009 publication of this “psychology on steroids” piece, which appears here: http://jonathanrowe.org/why-economists-are-so-often-wrong.

    Republishing it “2016 January 16” without at least a courtesy citation could leave readers with the unfortunate misimpression that Rowe wrote the piece for Evonomics and published it here in 2016. It would have been a miraculous feat, as he passed in 2011.

    Courtesy citations on all Evonomics pieces, where applicable, would reflect the generosity of spirit which helps sustain and enhance the intellectual commons of which Evonomics is a valuable part — valuable by virtue of curating and serving up thought-provoking and occasionally inspiring perspectives. If only you could serve up a decent cup of coffee with the content!

    Strictly IMO, failure to cite sources (where applicable) is discourteous to original publishers and, further, could be misconstrued as a sort of plagiarism: appearing to take credit for being the original publisher of a work when in fact you are not.

    Citing also adds value for readers. How? Identifying the provenance of an idea provides context for evaluating and exploring it. Adding incremental value, however modest, could translate into incrementally more donations. Put another way: Be more generous with readers (at no added cost to yourself) and perhaps they will be more generous with you.

    One correction: your embedded link to “The Tragedy of Economics” is broken. Here’s the good URL: http://jonathanrowe.org/the-tragedy-of-economics-market-theory-vs-human-nature.

    A final note. My comments regarding Evonomics are intended as constructive criticism. I take the time to offer it for one reason: because you’re worth it. Otherwise I wouldn’t bother.

  • ViperRum

    It is amazing how completely blinkered these writers are. They write as if economics is a monolithic group where EVERYONE shares the same views. This is just simply Bravo Sierra. It is the most rank straw man possible. There are plenty of economists who did NOT and do NOT think that Homo economicus (BTW, it should be italicized guys, I can’t in these comments, but you guys can) is the way these things work. The works of economists like F.A. Hayek, Adam Smith, and a number of others show that this caricature of humans is just that. I was listening to a podcast via EconTalk that had Don Boudreaux on Prof. Boudreaux made the comment that if a person were to act in accord with Homo Economicus that person would rightly be viewed as a sociopath.

    Hayek for example looked at things like psychology, religion, law and legislation, etc. The results of the Ultimatum Game have given rise to Homo reciprocans, where reciprocity is an important factor in human activities. Economists ARE using these extensions and working with them.

    And at the end of the day these articles are really nothing short of just bitching and whining. Fine, Homo economicus has run its course and we need to start thinking of things differently. The old Keynesian hydraulic models are Bravo Sierra, BTW you guys do seem to like Stiglitz…a strong believer in the Keynesian Bravo Sierra. So what do you propose to take its place? A new economics, well…maybe you should stop the whine articles (BTW, do you guys want some cheese?) and start writing articles about how things should be viewed.

    Or maybe pointing to economists like Hayek, Alchien, Buchanan, Coase, Williamson and others who have made substantial contributions that are indeed heterodox and even congruent with the view that the economy is more like an ecosystem than a mechanical system. For example, Coase’s work questioned the power of the market. Why do firms form if the market is so efficient? His answer was transactions costs. That using the market comes with costs which he called transactions costs. This was a completely overlooked aspect of markets and help explains why firms form. Also, there is David Rose who has done research on trust as a pre-condition for having a working market. He points to Adam Smith’s pin factory model which is an example of cooperation providing a substantial increase in productivity and asks, if this is so awesome why doesn’t it happen more often? The answer he came up with is: Trust. You have to have a culture of trust for specialization to be possible.

    This article is just flat out crap. Yes, I know the author is dead, but wow…this guy was just simply clueless about much of the non-mainline research out there. This is not the kind of thing I’d want to be what people remember me by…a stunning level of ignorance.

  • ViperRum

    I’ll just leave this here too….

    https://www.researchgate.net/profile/Ernst_Fehr/publication/247058320_Reciprocity_and_economics_The_economic_implications_of_Homo_Reciprocans_1_This_paper_is_part_of_a_research_project_on_the_impact_of_social_norms_on_wage_formation_It_is_financed_by_the_Swiss_National_/links/5672cdb408ae1557cf4931b2.pdf

    Here is the abstract,

    “A large number of studies suggest that reciprocity constitutes a basic motivational
    drive. This paper shows that reciprocity can account for a wide range of empirical
    phenomena: It (1) is a powerful effort elicitation device, (2) explains why employers refuse
    to hire underbidders and, hence, why wages are downwardly rigid, (3) gives rise to
    non-compensating wage differentials and to a positive correlation between profits and
    wages, (4) provides a rationale for the absence of explicit financial incentives, and (5) is
    a key force that sustains social norms.”

    The that ALL economists are stuck with Homo economicus is laughably wrong and just boneheaded.