Mark Buchanan — Why Homo Economicus Might Actually Be an Idiot

The findings could have important implications for policy makers. They suggest that institutions -- that is, the details that define how people interact -- have a big influence. The cooperative Homo socialis emerges only in the right institutional environment and can easily be exterminated by the wrong one. Institutions built on self-interest, such as corporate-governance rules that require executives to place the interests of shareholders over those of society, may perversely prevent more cooperation from emerging only because they take an outdated view of human behavior.

The take-home point is that Homo economicus is an oversimplified caricature who, in many situations, fails to benefit from real possibilities. Greed isn’t good, as Gordon Gekko famously said in the film “Wall Street.” In many cases, it’s not even very smart.

Neoclassical economics is based on methodological individualism — methodological atomism, really —  that assumes that individuals are free agents acting rationally in maximizing utility.  This supposedly results in the optimal resource allocation through efficiency of resource use guided by the invisible hand of the market through the profit motive and price discovery — the "butcher and baker" thing from Adam Smith.

On the other hand, systems thinkers and institutionalists counter that this is not representational. Reality doesn't work that way. Humans are social animals (as Aristotle observed millennia ago). They hunted in packs rather than as lone wolves, and they lived in communities, participating in community life. Social groups, from families, to clans, to tribes were nested in nations, as different levels of "society." 

Activity in these groups as characterized by rituals (conventions, traditions), now called "culture," and formal arrangements now called institutions, such as the form of governance and method of adjudication of disputes, and shared education of the young. Human beings never lived alone, outside of social context, as free agents making decisions independently. The lone hunter is not a human evolutionary trait, as it is for most cat species, for instance. Models based on this myth are bound to fail representationally.

In addition, all wisdom traditions worldwide from time immemorial teach that pursuit of self-interest leads to moral decrepitude and spiritual decay of both individuals and societies, while following the Golden Rule leads to moral integrity and spiritual advancement. While economics in claiming to be a positive science holds that it is amoral, the reality is that utility maximization is not only not representational of humans, it is also normative, specifically license for anti-social behavior.

One of the most successful evolutionary traits is the ability to organize. A smaller but well-organized group will almost always best a larger but less-organized one in competition for resources. Life scientists call this "return on coordination." Even those who are most committed to the principle of maximizing self-interest — thieves — know that organized crime is much more lucrative than hunting alone, even if they have to divide the take.

Mark Buchanan is not an economist, but rather a "real" scientist — theoretical physicist actually. While 19th century physicists were atomists, and neoclassical economics was modeled on 19th century physics, contemporary scientists are system thinkers that look to information systems and energy flow rather than the motion of billiard balls in classical space and time. Conventional economists haven't caught up with the scientific world.

Moreover, the social Darwinism that underlies neoclassical economist misreads even Darwin at that time, and evolutionary theory has developed significantly since then. Again, conventional economists have not kept up, resembling priests and magicians more than contemporary scientists in their ideological commitment to myths long ago debunked.

The odd thing is that there is even any discussion about this. The rest of the scientific world has moved far past the 19th century while conventional economics remains mired in it. The business world has moved beyond it, too. This would be laughable in its stupidity, but it is a tragedy when applied to policy making. The only people more naive than conventional economists are politicians and billionaires advocating laissez-faire. Oh, wait. Maybe there is more to it than stupidity?

Bloomberg
Why Homo Economicus Might Actually Be an Idiot
Mark Buchanan
(h/t Mark Thoma at Economist's View)