Nick Hanauer — How to Destroy Neoliberalism: Kill ‘Homo Economicus’

I believe that these corrosive moral claims derive from a fundamentally flawed understanding of how market capitalism works, grounded in the dubious assumption that human beings are “homo economicus”: perfectly selfish, perfectly rational, and relentlessly self-maximizing. It is this behavioral model upon which all the other models of orthodox economics are built. And it is nonsense.

The last 40 years of research across multiple scientific disciplines has proven, with certainty, that homo economicus does not exist. Outside of economic models, this is simply not how real humans behave. Rather, Homo sapiens have evolved to be other-regarding, reciprocal, heuristic, and intuitive moral creatures. We can be selfish, yes—even cruel. But it is our highly evolved prosocial nature—our innate facility for cooperation, not competition—that has enabled our species to dominate the planet, and to build such an extraordinary—and extraordinarily complex—quality of life. Pro-sociality is our economic super power.

Economists are not wrong when they attribute the material advances of modernity to market capitalism’s genius for self-organizing an increasingly complex and intricate division of knowledge, knowhow, and labor. But it’s important to recognize that the division of labor was not invented in the pin factories of Adam Smith’s eighteenth century Scotland; at some level, it has been a defining feature of all human societies since at least the cognitive revolution. Even our least complex societies, small bands of hunter-gatherers, are characterized by a division of labor—hunting and gathering—if largely along gender lines. The division of labor is a trait that is universal to our prosocial species.

Viewed through this prosocial lens, we can see that the highly specialized division of labor that characterizes our modern economy was not made possible by market capitalism. Rather, market capitalism was made possible by our fundamentally prosocial facility for cooperation, which is all the division of labor really is.…

The following observation is critical.

This dispute over behavioral models has profound non-academic consequences. Many economists, while acknowledging its flaws, still defend homo-economicus as a useful fiction—a tool for modeling and understanding the economic world. But it is much more than just an economic model. It is also a story we tell ourselves about ourselves that gives both permission and encouragement to some of the worst excesses of modern capitalism, and of contemporary moral and social life...

While models purport to be descriptive, they function as metaphors. All models are limited in the interest of economy and tractability. It is simply not possible to construct a complete description of a system that is complicated, let alone complex. The purpose of the model is to isolate important relationships and regularities using the model as an analogy, whether its construction is conceptual or mathematical. The question is then how useful is the model in elucidating relations and regularities that are not evident without analysis.

There is nothing inherently wrong with exploring a domain using all models that may be useful in this regard. Those that are actually useful will be used and eventually the others will be discarded or supplanted.

The economic model based on homo economicus as outlived its usefulness for several reasons. The first is a descriptive issue. The second is a normative one.

The first is that the scope of such models is too limited to provide much useful information. The assumes humans in the "state of nature" following evolutionary principles based on survival of the fittest" through competition in a symmetrical environment. Thus, the appeal to "spontaneous natural order" on the conditions that "imperfections," such as prosocial policy, are minimized.

This state of affairs doesn't apply to modern societies and their embedded economics that are highly influenced by culture and institutions. This means that in econometrics, important information will be put aside for modeling convenient, e.g., in the interest of mathematical tractability. The result is that model equilibria may not reflect observed events accurately. This is accounted for using ceteris paribus although conditions are actually changing, positing constants when conditions call for variables, and an indefinite "long run."

The second is more serious because it is normative. Conclusions that purport to be positive are used normatively and prescriptively. This is especially the case when models use technical terms take from ordinary language. Even if the terms are defined operationally, the ordinary language meaning comes along, altering not only the denotation but also the connotation. For example, "debt" as a liability becomes "debt" as something bad, dangerous, and to be avoided.

None of this is in way "scientific" regardless the trappings in the terminology of science.

If we accept that it is true—if we internalize that most people are mostly selfish—and then we look around the world at all of the unambiguous prosperity and goodness in it, then it follows logically, it must be true, by definition, that a billion individual acts of selfishness magically transubstantiate into prosperity and the common good. If it is true that humans really are just selfish maximizers, then selfishness must be the cause of prosperity. And it must be true that the more selfish we are, the more prosperous we all become. Under this logical construct, the only good decision is a business decision—“Greed is good”—and the only purpose of the corporation must be to maximize shareholder value, humanity be damned. Welcome to our neoliberal world.

But if, instead, we accept a prosocial behavioral model that correctly describes human beings as uniquely cooperative and intuitively moral creatures, then logically, the golden rule of economics must be the Golden Rule: Do business with others as you would have them do business with you. This is a story about ourselves that grants us permission and encouragement to be our best selves. It is a virtuous story that also has the virtue of being true....

Unfortunately, Hanauer then concludes, without justification, that capitalism is the solution rather than the problem. The problem is the approach to capitalism.

Capitalism is the greatest problem-solving social technology ever invented. But knowing that capitalism works is different than knowing why it works. And contrary to economic orthodoxy, it is reciprocity, not selfishness that guides it—indeed—as if by an invisible hand. It is social reciprocity that builds the high levels of trust necessary for large networks of people to cooperate at scale. And it is only through these networks of highly-cooperative specialists that the complexity that defines our modern economy can emerge....

I argue that this cannot be true and it is contradicted by what he said previously.

It is generally agreed that there are three major factors of economic productions — capital, land and labor. Rent is income generated without productive work. Feudalism is a system that favors the ownership of land and extraction of rent through agriculture. Capitalism is a system that favors the ownership of industrial and finance capital and extraction of rent through ownership of capital.

What is needed instead of a rejiggering of capitalism is an integrated system that balances capital, land and labor, that is, the means of production with people and the environment. This is different from most definitions of socialism and might be termed holism or ecologism, or some such that denote a condition of harmony, balance, and wellbeing of people and the planet.

What is required is a vision of possibilities and plans to actualize them. This design process may be speeded up by necessity as climate change begins to bite down harder.

Evonomics
How to Destroy Neoliberalism: Kill ‘Homo Economicus’ — Debunking the failed paradigm of traditional economics

Nick Hanauer