Mind of the market…
Cactus’s thoughts on taxes got me to thinking about trade, and the purpose of trade.
Behavioral economists tried this experiment with people in face to face trade situations. Of course it is not definitive of anything, but it does point up a huge flaw in the economics of today.
…that “Economic Man” is rational, self-maximizing and efficient in making choices—make no sense. Take economic profit versus psychological fairness as an example.
Behavioral economists employ an experimental procedure called the Ultimatum Game. It goes something like this. You are given $100 to split between yourself and your game partner. Whatever division of the money you propose, if your partner accepts it, you are both richer by that amount. How much should you offer? Why not suggest a $90–$10 split? If your game partner is a rational, self-interested money maximizer, he isn’t going to turn down a free 10 bucks, is he? He is. Research shows that proposals that deviate much beyond a $70–$30 split are usually rejected.
Why? Because they aren’t fair. Says who? Says the moral emotion of “reciprocal altruism,” which evolved over the Paleolithic eons to demand fairness on the part of our potential exchange partners. “I’ll scratch your back if you’ll scratch mine” only works if I know you will respond with something approaching parity. The moral sense of fairness is hardwired into our brains and is an emotion shared by most people and primates tested for it. Thousands of experimental trials with subjects from Western countries have consistently revealed a sense of injustice at low-ball offers. Further, we now have a sizable body of data from peoples in non-Western cultures around the world, including those living close to how our Paleolithic ancestors lived, and although their responses vary more than those of modern peoples living in market economies do, they still show a strong aversion to unfairness.
The deeper evolution of this phenomenon can be seen in the behavior of our primate cousins. In studies with both chimpanzees and capuchin monkeys, Emory University primatologists Frans de Waal and Sarah Brosnan found that when two individuals work together on a task for which only one is rewarded with a desired food, if the reward recipient does not share that food with his task partner, the partner will refuse to participate in future tasks and will express emotions that are clearly meant to convey displeasure at the injustice. In another experiment in which two capuchins were trained to exchange a granite stone for a cucumber slice, they made the trade 95 percent of the time. But if one monkey received a grape instead (a delicacy capuchins greatly prefer over cucumbers), the other monkey cooperated only 60 percent of the time, sometimes even refusing the cucumber slice altogether. In a third condition in which one monkey received a grape without even having to swap a granite stone for it, the other monkey cooperated only 20 percent of the time. And in several instances, they became so outraged at the inequity of the outcome they heaved the cucumber slice back at the human experimenters!
Such results suggest that all primates (including us) evolved a sense of justice, a moral emotion that signals to the individual that an exchange was fair or unfair. Fairness evolved as a stable strategy for maintaining social harmony in our ancestors’ small bands, where cooperation was reinforced and became the rule while freeloading was punished and became the exception. What would appear to be irrational economic choices today—such as turning down a free $10 with a sense of righteous injustice—were, at one time, rational when seen through the lens of evolution.
Just as it is a myth that evolution is driven solely by “selfish genes” and that organisms are exclusively greedy, selfish and competitive, it is a myth that the economy is driven by people who are exclusively greedy, selfish and competitive. The fact is, we are equitably selfish and selfless, cooperative and competitive. There exists in both life and economies mutual struggle and mutual aid. In the main, however, the balance in our nature is heavily on the side of good over evil. Markets are moral, and modern economies are founded on our virtuous nature. The Gordon Gekko “Greed Is Good” model of business is the exception, and the Google Guys “Don’t Be Evil” model of business is the rule. If this were not the case, market capitalism would have imploded long ago.
I found myself thinking of the picture of people standing in line waiting to get on a ride at Six Flags, the only thing keeping the line intact being social convention, trust that the convention works overall, and that exceptions to the rule are small or manageable. Maybe some occasional ‘police action’ on the part of the ticket taker. People do cut in but the line does not dissolve, and the people who do cut in are highly dependent on the line maintaining itself.
Then I found myself wondering if it is only predators who get ahead, and some who also simply work hard? (Many predators do work very hard). Is the narrative we are stuck with, that trade does not have a mutual interest and mutual aid component, really what we believe? And where does that fall into economic descriptions? Hence trade might have more than one dimension? Most of us trade for mutual benefit and aid, so making 3.5 billion in one year and being on the money alpha list is less important?
Update: Priors on this question: Sammy and cactus thought
Update 2: Mark Thoma has a reference and post on the modern issue. Some of the comments are great for compliance issues in today’s trade world and public policy.