171. "Socio-Economics: Humanizing the Dismal Science" The Washington Post (January 11, 1987).
Answer the following questions: Did you make your 1986 IRA contribution on any day after Jan. 2, 1986?
Did you ever vote or make a contribution to public TV?
Have your friends, relatives or clerics ever influenced you to alter any of your goals?
If you answer these questions in the affirmative, your behavior illustrates why the core assumptions of mainstream economics are wrong, and why a new science is emerging to explain how and why people make choices. This new discipline - called socio-economics - blends elements of psychology and political science as well as sociology with economics.
Socio-economics focuses on three core assumptions that lie at the root of mainstream (known in academia as neoclassical) economics:
People are rational. This assumption of standard economics is contradicted by your IRA. If people were perfect economic logicians, every body would invest in their IRAs on the first possible date, so their money would earn maximum tax-deferred interest. Socio-economics points out that most people are not that rational. They have poor memories. They invest in their IRAs when their accountants remind them to or when the subject is discussed in newspapers or ads. Similarly, people buy insurance without understanding the policy, pay stockbrokers for advice that does not improve their investment compared to no-load (charge-free) mutual funds, and otherwise routinely make decisions that are not rational.
People are out to “maximize” themselves. This contested assumption is at the heart of the argument that just won the Nobel Prize for economist James Buchanan of George Mason University. He went as far as to say that politicians are just like the rest of us: They put the maximization of their own interests and those of their special-interest clients ahead of the general welfare. But what has puzzled mainstream economists is that people make contributions to public TV or bother to vote. Individuals get nothing in return personally for this behavior. Why do they do it? Socio-economists argue that people have dual personalities. They are indeed part debased (drawn by quests for pleasure and self-interest). But they are also part noble (seeking to serve higher purposes and act morally).
The “decision-making unit” is an individual, free standing. Mainstream economics assumes everyone makes up his or her own mind independently. No one is swayed by friends or leaders - and certainly not by advertising. Socio-economics, on the other hand, assumes the decision-making units are individuals integrated into one or more social groups, ethnic groups, classes and subcultures. Individuals do render the final decisions, but usually within the context of values, beliefs, ideas and guidelines instilled in them by others, reinforced by their social circles.
Disputing the Creed of Greed
Put together, instead of adopting the mainstream economics assumption that people are like two-legged calculators - efficient, cold-blooded and on their own - socio-economics assumes people to be muddle-headed and internally conflicted, part selfish but part caring and morally dedicated, often - but not always - moving in herds.
Mainstream economics - which is taught in most American universities, used by corporations and government and inculcated into MBAs- sees individuals as out to get as much as they can get for themselves. Greed is the implied creed. People are thought of as being quite able to set goals clearly and find the most efficient means to implement these goals, even if this involves a complex searching out and processing of information. Above all, individual humans are believed to be willing and able to make their own decisions.
Socio-economics’ image of the decision-makers is fundamentally more complex: Goals are not neat but confused. People seek to serve themselves but also care about others and their community and desire to be “good.” People are poor thinkers but often are sensitive to their considerations than efficiency. As a rule, they move in step with their fellow persons. But they are also - though less often - able to strike out on their own.
Using these assumptions, socio-economics attempts to explain how hard people work, how much they save and what they purchase.
While mainstream economics is well entrenched, socio-economics is but a young upstart. Its foundations may be ancient - found in Kantian philosophy, humanistic psychology and traditional sociology. But its application to economic issues is mainly recent. In fact, most people who work in socio-economics are not even identified by that or any other common label. And, as is often the case in a rising, challenging group - they do not necessarily agree with one another. But the new approach is being fashioned in a series of books and in articles in such journals as Economics and Psychology, Economics and Philosophy and Journal of Behavioral Economics by scholars such as Harvard economist Harvey Leibenstein, University of Michigan psychologist James Morgan, Berkeley sociologist Neil Smelser, Oxford economist and philosopher Amartya Sen, and Albert Hirschmann, an economist at the Institute for Advanced Studies at Princeton.
Is socio-economics a science? Can it predict? As a very new discipline, its track record is limited. However, a number of its predictions hold true. For example, the amount of insurance people purchase reflects much less the results of their shopping around than the extent to which they trust their agent. The amount they save reflects not merely the level of interest rates, taxes, and other economic factors, but also the extent to which people believe it is indecent to be dependent on one’s children and the government. Social stigma will stop one out of every three Americans eligible to go on welfare from taking it in 1987.
Is socio-economics preconceived by ideology? The fact is that its advocates hail from quite varied persuasions. Indeed, its interest in values, community and institutions makes it as attractive to social conservatives as it is to advocates of participatory democracy. But ultimately, it is a scholarly, intellectual undertaking, not a partisan enterprise.
Socio-economics may not solve all or even most of our economic problems. It does though, provide a new scientific and intellectual way to think about and deal with them.
The Conflicted, Judging Self
Behind the mathematical equations, the grand theories and the technical jargon of various social sciences, there are powerful images of human nature - conceptions of what people are basically like - that explain a great deal.
Although few mainstream economists remember or care, for example, a particular brand of utilitarian ethics lies at the root of their discipline: the notion that what people are out to maximize is their happiness.
Typically, mainstream economists have argued that people do not act out of altruism or love of others, but that they get up in the morning and do their chores because they will get something in exchange, something they want. Because people have one overarching motive, in this view, they know clearly what they want and arrange their “preferences” into neat consistent patterns. (This feature, of course, makes the mathematicization of mainstream economics much easier. All it requires is the assumption that God wired people on ways that make it easier to do mainstream economics.)
Socio-economics, in contrast, draws on ethics that people consider necessary and binding; it sees people as torn between their urges and their values. People differ from animals in their capacity to judge their inclinations; individuals stand above themselves and examine what they are seeking to do. Sometimes their urges win, sometimes their conscience.
Take, for example, the saving example mentioned above. One major mainstream economic theory assumes people save all their working days so when they retire, they can spend the money, aiming to have their savings book exhausted about when they pass away. But in fact, many people miss the mark by very large amounts and reduce their assets surprisingly little after retirement.
Socio-economists argue that is because people save for additional reasons: They believe, for example, that they ought to help their children (even if the children are in their 30s or 40s) or that it is not “nice” to be dependent on the government or on their kids. Similarly, people entitled to welfare fail to sign up because they adopt the societal notion that it is morally abhorrent to be on the dole.
Studies of why people pay taxes show that they not only calculate the “benefits” from cheating and the “costs” of being caught but are influenced by how legitimate they consider the government to be and the goals on which it spends their tax dollars. Vietnam and Watergate thus explain in part the rise of the underground economies, as does the rise of Me-ism as a social philosophy.
Poor, Caring Thinkers.
Herbert Simon of Carnegie Mellon got a Novel Prize in economics in 1978 for showing (among other things) that people do not think through most questions. Long before they reach the maximal solution, they stop collecting information and processing what they have. They often grab the first satisfactory solution that pops up. (Not just consumers and investors; governments do the same).
In recent years, a group of psychologists, led by Daniel Kahneman of Berkeley and Amos Tversky of Stanford, have shown that people’s minds contain systematic biases that prevent them from thinking right. For example, in poker, if they have won or lost a lot, they tend to “raise” more than average, even when the odds are poor.
While Simon, Kahneman and Tversky focused on what are called cognitive limitations (those of the mind), Irving Janis, a Berkeley psychologist, and Leon Mann, a psychologist at Flinders University of South Australia, highlight the emotional ones. Taking on a debt, for example, involves calculating the future. Will I get a raise next year? Will interest rates fall? These often cannot be foretold, however. This makes people anxious and draws them to make decisions in ways that are not rational. The behavior ranges from procrastination to freneticism.
On the other hand, emotions sometimes help decisions. A sudden fright can cause us to move rapidly out of danger without stopping to think. But whether emotions help or hinder, people rarely make the cold-blooded calculations mainstream economists assume.
Thus, there slowly emerges the new socio-economic conception of how people make choices:
Most choices are not decisions at all. A monumental study of millions of purchases over more than four decades, published by Harvard University Press, shows that about 70 percent of purchases are made out of habit: People buy the same thing they bought last time. Mainstream economists argue this shows people found that more comparative shopping would not improve their lot. Socio-economists respond that there is much habit-buying, whether or not it would pay to shop around.
Decisions are boxed in by emotion and values. Far from examining all the alternatives that deserve attention, most people limit themselves because their emotions and values tell them some options are “unthinkable.” Very few high school or college graduates consider becoming a funeral parlor director - not because it is a poor career choice or a declining industry but because the option is simply not considered. Similarly, when middle-class parents have a sudden cash shortfall, they do not consider having their children panhandle or sell blood. After World War II Americans did not buy German and Japanese cars, whether or not they were a better value than American cars.
Most decisions are not based on the examination of many options. There is only a small sub-set of options (often just two) among which people choose on the basis of facts and logic. Here they run into intellectual limitations - such as their inability to focus attention for long, to remember much or to calculate probabilities.
Group decisions often prevail. The image mainstream economists have of decision-makers is that of the homemaker going down the aisle in the supermarket, or the investor calling his or her broker - isolated individuals acting on their own. In effect, most people are members of one or more social groups. These are not groups that people feel oppressed by - “them” in other words. They are groups of which the person feels very much a part - “we.”
What seem to the untrained eye like individual decisions tend to reflect what the members of the we-groups have urged upon them. Thus, foreign cars may be “in” these days in many yuppies suburbs, but not in working-class neighborhoods in Detroit. In the Northeast, many people mix soda with scotch; in the Midwest, the mix tends to be ginger ale. Obviously, millions of people in each region have not simply decided, individually, what to have or drink and happened to hit on the same item. Shared social factors may have played a good part in their decision.
The forces of habit, emotions, values, short attention span and group-think may render the process inefficient from the viewpoint of an objective observer. But in socio-economic terms, these influences are often quite justified. People simply have other concerns than those of a supposedly rational, utility-maximizing economic animal.