By Dr. Annavajhula J.C. Bose
Department of Economics, SRCC (University of Delhi)
In “Jab We Met”, an all-time box-office hit Bollywood movie, the hero and the chatterbox heroine get into a cab at the Ratlam railway station in Madhya Pradesh, and the cab-driver immediately flips out a lively blip, “Tum Kya Jaano, Tum Kya Ho?” What do you know what you are, precisely? In this post, I briefly review how the subject of economics variously talks about you in this regard.
Classical Economics was the fascinating school that originated in the eighteenth century and extended into the early twentieth century. The evergreen political economists here are Adam Smith, David Ricardo, John Stuart Mill and Alfred Marshall. In this economics, you acting in your own self-interest would, through markets, promote the general welfare of society. This was unfortunately vulgarized to mean that if you only behave with self-interest, you will do what is best for the entire society. Actually, this Adam Smith’s concept of ‘invisible hand’ was more complex. You do have selfish desires but they will be held in check both by the ‘moral sentiments’ (the universal desire for self-respect and the respect of others) and also by the fortunate accident by which ‘in many cases’ selfish acts can ‘promote the public interest’. Your ‘animal spirits’ are also optimistic, motivated by a desire to improve the human condition. Alfred Marshall specifically focused on the ‘reduction of poverty so as to allow people to develop their higher moral and intellectual faculties, rather than being condemned to lives of desperate effort for simple survival’!
Neoclassical Economics came into existence unfortunately as mathematical economics with the great Paul Samuelson as its architect in 1948. It is the dominant school of economics even now. Economics is ‘value free’ without reference to any human goals or values. And it is deduced from the ‘rationality axiom’. An axiom is a statement that is self-evident, without need of proof. According to the rationality axiom, you maximize your utility. This also means that you maximize your ‘self-interest’ or ‘well-being’. You are a rational economic man in that the pursuit of self-interest is the only thing that you do. The economy is a collection of profit-maximising sellers and utility maximizing buyers interacting through the mysterious ‘perfectly competitive markets’. Now, this rational behavior is ‘optimizing behaviour’ as well. This means that you have complete knowledge of all choices and you achieve an optimal (best possible) outcome subject to the constraints of income, resources including time, physical or intellectual capacity, etc.
This rational behavioural claim is made a bit realistic with the ‘bounded rationality’ hypothesis, which says that you make choices among a somewhat arbitrary subset of all possible options due to limits on information or time or cognitive abilities. You may show up ‘satisficing rationality’ by choosing an outcome that would be satisfactory and then seek an option that at least reaches that standard. Or, you may demonstrate ‘meliorating rationality’. You start from the present level of well-being and continuously attempt to do better. Or, you radiate ‘path dependent rationality’. Which means that your choice now depends on what has happened in the past.
Behavioural Economics as a subfield of Microeconomics, pioneered by psychologists, is on the rapid rise now. It has discovered you as an irrational person. Scientific experiments are conducted to demonstrate copiously that your behavior does not match the neoclassical rationality. Your decision making is more often than not is distorted by influences not related to your goals. Outsiders can affect your decisions. For example, in choosing, you may place undue importance on particular, atypical, information because it is readily available or vivid. You can be influenced by clever changes in the way a particular decision is presented to you. Or, you put overreliance on a piece of information that is not at all relevant as a reference point when you are making a decision. You tend to place undue emphasis on pleasures or gains or benefits received today unmindful of the painful implications of your decision for the future. You are found to be unhappy with the purchases of complex products and happy with the purchases of simple products on the basis of attentive, reasoned deliberations. Because you are irrational, little wonder that corporations gravitate toward behavior that fattens profits, even if their products do more harm than good. And politicians are too happy to indulge in the easy appeal of greed and fear instead of offering sound information on which you can make good decisions as a voter.
In Communist Economics, you prefer to live in a commune like the ‘kibbutz’ in Israel. You are totally irrational by the neoclassical rationality axiom. Your behavior is altruistic. You have a concern for the well-being of others with no thought about yourself!
In Real-World Contextual Economics which is fortunately on the rise now, slowly though, you are neither like in Communist Economics nor like in Neoclassical Economics. Some elements of altruism enter into your decision making contrary to the simple and elegant neoclassical model of rational selfishness. You are motivated by a desire to advance the ‘common good’ of society, of which your interests are only a part. You see your own well-being as connected to the larger well-being of society. You are often willing to participate in the creation of social benefits as long as you feel that others are also contributing. Rationality is redefined by saying that you choose goals such that when you achieve the goals, you are glad to have done so, and the pursuit of the goal itself contributes to well-being, and also you pursue goals in a manner that you expect will lead toward their achievement. In this redefinition, the goals are neither entirely self-interested nor entirely altruistic. Common experiential observations have found you to be a typical person operating with some mixture of these kinds of goals. Although most adults attempt to act like you, as Behavioural Economics has found out, “sometimes lack of information, the influence of conflicting emotions, or influence from others who are pursuing different goals may cause rational actors to choose goals that are not consistent with well-being or to do things that lead away from their goals.”
So, in light of the above, what do you really think, what you are in terms of your economic behaviour? Rational or irrational or neither rational nor irrational?
Note and think about this. The “self-interest assumption, read literally, has no theoretical or empirical support of any sort. It is a kind of superstition. Anyone who has bothered to look around, or to read the world’s history and literature, or even just to watch a few Bollywood films, would notice that people often act on the basis of other-regarding motives—love, kindness, solidarity, compassion, reciprocity, patriotism, public-spiritedness, and more. Some even make great sacrifices for their friends, family, community, or country.”
Heinz Kohler. 1989. Comparative Economic Systems. Scott, Foresman and Co.
Neva Goodwin; Jonathan Harris; Julie A. Nelson; Brian Roach; and Mariano Torras. 2014. Principles of Economics in Context. M.E. Sharpe.
Jean Dreze. 2017. Sense & Solidarity: Jholawala Economics for Everyone. Oxford University Press.