Realising Value: The unselfish core of economics

Rubinstein (2006) noted that one of the most contentious assumption in mainstream economics is that of selfishness. He further discussed evidence that students of economics become more selfish by studying economics and questioned whether this was the right path for the subject to follow.

Many years have passed since his criticism. However, Rubinstein is just one in a whole string of distinguished economists who have pointed out the problem of basing economic modelling on empirically flawed assumptions. I remember as an undergraduate in the late 1980’ies how our lecturer in economic psychology was providing us with evidence that showed that the assumption of the selfish rational utility maximising economic agent was flawed, and how the lecturer in micro economics was trying to defend the model with Friedman’s ‘as if’ assumption. However the point of the evidence is that consumers do not even behave as if they were selfish agents.

Whilst evolutionary biologists have responded to the evidence by formulating new theories such as group selection to explain the optimality of cooperation and sharing over selfishness for survival, economists are still teaching first year undergraduates the same material as they taught 30 years ago, despite even more accumulated evidence of the flawed assumption of selfishness.

Given the increasing body of evidence of fairness and cooperation in the animal kingdom which is mainly due to synergies that can only be realised that way, the question to ask is why selfishness became the norm and deviations from it were considered puzzling.

We shall see that the answer to this question is quite interesting. The idea came from Adam Smith who was an 18th century moral philosopher. It should be remembered that in his time, i.e. the 18th century, selfishness was deeply resented as it was considered not to serve the common good. Thus to fully appreciate the contribution of Adam Smith it is useful to bear in mind that he approached the problem of optimal resource allocation from the perspective of a moral philosopher. What was interesting from the perspective of moral philosophy was that self-interest could serve the common good, thus self-interest was not detrimental but on the contrary could enable that resources would be allocated in a way that maximised their value for society given the preferences of its inhabitants. He thus noted that the self-interested economic man was a force for good in the market, as his behaviour would imply that prices would reflect the costs and thus enable that resources would be allocated where their value in use were the greatest.

This result was compelling not only as it the resolved the moral dilemma of self-interest versus the common good, but also because it offered a solution to the problem of maximising the value that society could achieve from a given set of resources.

As this was such a powerful result, it is not surprising that the economics profession spent more than 200 years to formalise his intuition. Doing so economists identified all the conditions that needed to be satisfied for Smith’s conclusions to hold and competition policy became a tool for trying to make the world get closer to the assumptions of the model, as it was known that if those were satisfied we would achieve an optimal allocation of resources.

However, the question that was not asked was whether fairness and cooperative behaviour would enable people to realise even more value out of a given set of resources. Adam Smith’s conclusion only applied to the production and exchange of purely private goods, but in the economy there are goods that can be shared or that require cooperation to be realised. In particular at the hunter-gatherer stage and the period of sedation when the human brain was still developing, the production of most goods as well as the ability to survive was based on synergies that required cooperation. In such a situation more value could be realised from limited resources by sharing and cooperating rather than acting selfishly. This can also be observed in packs where dogs bring back prey to share with the dogs that stayed guarding the den with the puppies.

So this focus on selfishness has its origins in a moral philosopher making a clever point
that selfishness need not be as bad as it was held to be.

What does this imply for economics?

I would argue that there is a core of economic principles that does not rely on any behavioural assumptions, and therefore can provide us with insights as to why people (as well as primates) sometimes cooperate and sometimes don’t. This core has to do with the principles of creating, cultivating and realising value.

At the heart of economics is the fact that the value society can derive from its resources depends on how they are used. Economic principles help us understand how we can create, cultivate and realise value from resources. When humans invented the flute some 35000years ago, they created a source of value. Gaining skills to play it, and improving its tone were means of cultivating it, and playing it were means of realising value.

By using and combining resources in a new way we can thus create new sources of value, which enables us to derive more value from them than in their original state. In the case of a flute it generated more value than the stick it was made from. And this is the fundamental economic principle of production, whereby we change matter in an irreversible way that makes it more useful for our purposes.

Now the motivation for creating value does not require any assumption of selfishness. There are many examples of innovators who are totally unselfish and motivated by the joy of innovating.

Thus fundamental economic principles explain why it is possible to create, cultivate and realise more value from resources.

The question is then how this happens in practice.

We can understand the existence of various institutions as means of realising such values, where the firm is an institution for realising value from production, the market one for realising value from exchange, the public sector one for realising value from public goods, and family and friends an institution for realising value from shared resources and so on.

However, neither in production nor in exchange do we need an assumption of selfishness for the value to be realised. The key is the existence of gains from production and/or trade. If these gains are split fairly, there will certainly be an incentive to produce and/or exchange as long as there are some gains to split.

Thus there is a core of economics that provide us with an understanding of why we can realise more value from resources, that is separate from the mechanism of realising them. For some goods it does not matter whether people are selfish or not for the value to be realised, whereas for other goods the value can only be realised if people share and cooperate.

References

Rubinstein (2006) Dilemmas of an Economic Theorist Econometrica 865-883

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