By Dr Susanna E. Sallstrom Matthews
`It is not the rate at which we manage to exploit the material world around us, to the detriment of the environment, that maximises prosperity; it is by becoming more accomplished ourselves, such that we can use the world around us more intelligently, that is the true source of prosperity. Economic motivations make us do the former, whereas intrinsic motivations enable us to achieve the latter.’ S.E.S. Matthews The Solution to the Paradox of Economics
This is a non-technical summary of the research I conducted during my years at Cambridge that made me solve the paradox why economics is not flawed for the reasons that economists currently believe, but for reasons that are much more fundamental to our existence.
There is a mathematical reason for why economic ideas, in the words of Dalai Lama, `turned the world upside down’. The reason was because the theory left out the rationality of pursuits that make us thrive by increasing the value in use we can derive from limited resources. Instead economists told us we should treat means (material goods and money) as ends and ends (humans) as means. This is why we stopped thinking of material goods as means enabling the pursuit of desirable ends to leave mother Earth in a more prosperous and beautiful state than we found her, and instead joined the economists world view that treated the acquisition of material goods as the ends. This is why the belief that it was optimal to be motivated by means to trade and not what are desirable ends of human pursuits, made the wheels spin faster and faster exploiting the material world around us, with waste accelerating at an unsustainable rate (Trentmann 2016), instead of maximising the rate of progress towards less wasteful and more prosperous solutions. This phenomenon is addressed by Erixon and Weigel (2016) in the book ‘The Innovation Illusion: Why so little is created by so many working so hard.’
Hence, the problem of the present age are due to that economic ideas made us go against the logic of life, which is progress not greed. Economic ideas are based on principles of economic value in trade, which are motivations that make us maximise what we take from limited material resources and minimise what we give of an unlimited intangible resource (our own talent). The wider implementation of these ideas have worked against progress, since they are the opposite to the rationality of purposive intrinsic motivations that are behind progress, which is to maximise what we give to planet Earth of ourselves and minimise what we take.
The logic of life is to serve our higher purpose, which in the words of Aristotle is where our talents meet the needs of the world. This is also a motivation that has been found to make us the happiest by bringing the greatest meaning to our lives according to Victor Frankl. However, economic ideas made many firms and organisations go against evidence in psychology how to design a workplace to maximise creativity, productivity and job satisfaction, and instead implemented economic ideas to maximise the use of competition and extrinsic rewards in organisations. And the consequences for job satisfaction, innovation and productivity have not been pretty, according to evidence cited in Erixon and Weigel (2016)
A Journey of Discovery of a Mathematical Blind Spot
Mainstream economics, that I have taught at Cambridge University for 17 years, having previously been a Fellow of St John’s College and University Lecturer in the Faculty of Economics, before taking a career break, does interestingly enough not contain any mathematical principles for sustainable growth. Hence, not only is it a theory that is entrepreneurless, it does not convey any economic guidance on one of the most pressing economic matters to humanity, namely the principles that would maximise the rate of convergence to a sustainable economy.
Issues of sustainability, human well-being, increase in income inequality, economic volatility, slow down in productivity growth, and lack of breakthrough innovations are all topics of major economic concern today. To gain maximum momentum in a revolution to a sustainable economy, what we need more than anything else is to maximise the rate of progress towards less wasteful solutions to meet our material requisites for well-being. This is why the evidence in Erixon and Weigel (2016) that firms have become hidebound, compliant and risk averse putting cash in financial markets instead of investing in frontier developments is serious, since it demonstrates that current incentive structures and motivations in society is actively hindering economic progress towards better solutions instead of maximally facilitating it. So why did the greater reliance on economic ideas in production and organisations hinder instead of promoting progress?
The research that made me solve the paradox of economics was conducted with the purpose to understand all this evidence that falsified the assumptions of the models I taught and invalidated their usefulness in the real world. This irrelevance of economic theory is a moral dilemma for economists that Ariel Rubinstein expressed in his Presidential Address to the Econometric Society as follows: ‘Are we members of an unproductive occupation that only appears to others to be useful?’
Since Rubinstein’s critic there has been an increase in empirical research which has confirmed the failures of economic ideas, and many books have since been written presenting evidence of economic paradoxes that were caused by these ideas. Yet, none of them has hitherto solved the basic paradox that gave rise to all these paradoxes. Hence, the reaction from an Editor at Cambridge University Press when I presented my book proposal to him was that I should call my book `The Solution to the Paradox of Economics’, as this is what made it distinct from all other books that are addressing rather than solving economic paradoxes.
We know that economic ideas have taken humanity in an unsustainable direction, making humanity not merely a threat to other living species, but also a threat to herself. However, the reason for why the economic ideas, that were based on the assumption of the optimality of selfish greed, were implemented on such a large scale, despite full knowledge that they were misaligned with human nature (which implied they could not be aligned with the rationality of survival), was because economists did not themselves understand why their ideas were empirically flawed.
It is today commonly believed that economics is flawed because it is a too rational approach, and that all the evidence in psychology that contradicts the assumptions and predictions of economic theory is therefore evidence of human ‘irrationality’. It is also commonly believed that the reason for why economics cannot capture the rationality of institutions, morality, values, ideas, aesthetic pursuits, entrepreneurship and sustainable growth in prosperity, is because it is a mathematical approach. It is further believed to have failed because of the impossibility of turning the world into a copy of the model, where all goods can be priced. Hence, that economic ideas are right in principle but do not work in practice.
However, none of the explanations thus far could be the real reason for the failures of economic ideas, since they all confirm rather than resolve the paradox why human nature is not aligned with the rationality of utility maximisation. If economic principles were the solution to the economic problem of survival, human nature would have evolved to be aligned with these motivations.
The main argument that has been holding economists back from spotting what has been logically implied from the evidence all the time, was that the anomalies in economics were shared with evolutionary biology. Survival ultimately comes down to solving the economic problem of meeting the material requisites for well-being, hence as noted by Keynes `we have expressly evolved by nature-with all our impulses and deepest instincts – for the purpose of solving the economic problem.’
This is why the belief that Adam Smith’s ideas had proven that selfish economic motivations were aligned with the objective of survival (which as it turns out rested on a mathematically flawed intuition), impeded the ability of economists to understand why human nature was not consistent with this belief. Failing to resolve this paradox, economists defended the theory with the argument that people behaved `as if’ they were maximising utility since they would not survive unless they did.
Today economists have changed the tune. Faced with all the evidence from the economic consequences from the experiment of aligning organisations and institutions with economic motivations that go against human nature, Roderick (2016) notes in his book `The rights and wrongs of economics’ that economists should be more humble. Yet, he does not resolve the paradox why economic ideas lacked the generality economists once granted them, he only accepts the evidence that they do.
Hence, economists have to this day remained blissfully unaware of why the basic economic intuition they convey at Mainstream Economics Departments all over the world is flawed not for the reasons they currently believe, which is that what they teach is right in principles but flawed in practice, but because the core models are based on a mathematical intuition that is a violation of the Euclidean geometry of the economic problem.
This is hopefully going to change in due course, as I have solved the paradox that resolves anomalies in economics, since they were due to a mathematically flawed interpretation of Adam Smith’s solution to the value paradox. All the economic ideas that have failed in practice were flawed because they were mathematically flawed.
The inability to solve this paradox for so long created an illusion of rationality from economic ideas that has become so deeply ingrained that some people seem to believe that human nature is not aligned with the rationality of survival. Possibly without realising that such beliefs would imply they believed more in a theory of evolution than the reality of evolution. What kept me going was that I found it more likely Mother Nature was right and that the theory must be incomplete, than the other way round. Hence, my approach was one of trying to understand the logic of human nature from the point of view of the economic problem of providing for the material requisites to thrive and survive when competing for limited resources.
The key pieces of evidence that helped me solve the paradox that explained the logic of human nature were: First evidence in archaeology that aesthetic pursuits were not a by product of economic prosperity, but pre-dated them with a substantial margin, as they can be traced back to the animal kingdom, and have manifested themselves in human societies further back than homo sapiens. What the evidence suggests is that human prosperity had aesthetic origins rather than the other way around. Second that Maslow’s idea that there was a hierarchy of needs, has been contradicted by evidence, since there is no evidence of a hierarchy of needs. This suggested that different human needs played complementary functions in solving the economic problem. Third, that the phenomena that had puzzled evolutionary biologists had one thing in common, they were all the pursuits that make us thrive, i.e. why life evolved into a pattern including states of harmony in nature where animals sleep and recreate, altruism our mathematical, aesthetic and musical abilities. In short evolutionary biology could explain the origins of everything that is bad in life, war, conflict, deceit, bullying and selfish behaviour, but could not explain the facets of life that make us thrive, which implied a mathematical dimension was missing from the theory. Fourth evidence in psychology that humans were more creative and productive when being intrinsically motivated in a cooperative environment, than when given economic incentives in a competitive environment, contradicted economic intuition that we achieve better outcomes by maximising competition.
Fifth piece of evidence was the aesthetic philanthropic liberalism in 19th century Sweden, which was associated with an unprecedented level of productive innovations per capita, many of which were due to nurturing talent irrespective of where it grew in the country. This was a liberalism that was less focussed on enforcing competition, and more focused on social bonding and aesthetic pursuits, having laid the foundation for the culture of voluntary associations in Sweden. It was the way in which it was a more progressive liberalism due to being more in tune with human nature, that was informative about the optimality of human nature.
Economists had hitherto tried to explain anomalies by making the link to survival weaker, however to solve the paradox required us to make that link stronger. This is what made me decide to derive mathematical foundations for the economic problem of meeting material requisites, which is when I discovered the mathematical blind-spot that resolves the anomalies that have puzzled economists for more than a century and a half. Working from first principles of survival which is to gain access to a resource and to be able to derive value in use from it, I saw, I had derived mathematical foundations for the value paradox that Adam Smith had attempted to solve, but as it turns out did not completely solve. And this made me see what had caused all the anomalies, since economists had modelled the economic problem in a way that was not consistent with the objective of survival. The way they had modelled it was a violation of the Euclidean geometry of the economic problem, which is a mathematical blind spot.
The Solution to the Value Paradox
What economists modelled and believed Adam Smith had proven was never mathematically implied from Adam Smith’s solution to the following value paradox:
The things which have the greatest value in use have frequently little or no value in exchange; and on the contrary, those which have the greatest value in exchange have frequently little or no value in use.
This paradox explains why the clerisy has always been suspicious of money and markets, since they make us value what is scarce, i.e. material possession that divides humanity, instead of what we can have in abundance, i.e. the joy of deeper friendships nurtured through the shared consumption of intangible goods that unites us. Adam Smith’s fame is largely due to having partly solved this paradox by explaining the rationality of money in exchange and how price by being informative about relative resource utilisation at the moment, could help us allocate resources more optimally in the short term.
In my paper ` The Solution to The Value Paradox: Why Humans are aligned with Purpose not Profit’ (2017) I show that his solution to the value paradox never mathematically implied that selfish greed was an optimal motivation, other than in a one shot interaction in trade. What was mathematically implied was the opposite, namely that economic value represented a rationality that pulled in the opposite direction to the creative altruistic and purposive motivations that give life an optimal sense of direction towards enhanced resource utilisation. Hence, whilst trade in markets is a complementary source of wealth in the short term to production and innovation, economic value is a rationality that by its very nature is intrinsically short term, since it had its origins in trade which added a short term rationality to survival.
This explains why the central idea of neo-liberalism to maximise competition and be directly selfishly motivated by economic value, which made countries focus on GDP instead of the ends, companies on profit instead of purpose, and workers on extrinsic rewards instead of meaning, has made the whole economy short term, with waste accelerating and productivity growth decelerating.
What was mathematically implied from the value paradox was that intrinsic purposive altruistic creative cooperative motivations were optimal in production. The point of the value paradox, which the economic profession has hitherto failed to see, was that it was simply a reflection of that trade and production are orthogonal means of meeting material requisites for survival, and therefore for strict mathematical reasons are governed by the opposite principles. Hence, it is intrinsic in the economic problem that it consists of two complementary motivations that pull in the opposite directions. The short term rationality of economic means for trade, and the rationality of pursuits of optimal ends that optimally prepares the ground for the future.
In the short term we are better off selling our labour for income, however acquiring more skills is what optimally prepares the ground for the future. In the short term we are better off cheating on our customers and being greedy, however treating customers fairly and selling and honest product is what optimally prepares the ground for repeat sales in the future. In the short term we are better off being motivated by feeding flawed beliefs and current fads, however what optimally prepares the ground for the future is to be the force that changes those flawed beliefs and nurture more prosperous tastes. In the short term we are better off competing to try to get a larger share of the pie, however what optimally prepares the ground for the future is to share and cooperate.
The economic problem consists of the pursuit of rational ends, which is a rationality based on enhanced resource utilisation, and the rationality of trading the means for those pursuit in the short term, which is a rationality based on the allocation of resources in the short term. It was a failure to model that simple geometry of the economic problem that caused all the puzzles, paradoxes and divisions within economics, and indeed explains why mainstream economics does not contain mathematical principles for sustainable growth.
It is the geometry of the economic problem of two complementary opposing forces to gain access to, one the one hand, and derive more value in use from resources, on the other, that explains why humans have in all times been telling stories about a battle between good (altruistic cooperative aesthetic motivations) and evil (selfish competitive materialistic motivations), since these are two sides of the same coin of the economic problem of competition to thrive and survive from limited resources. That good is winning over evil in these stories, is the victory of motivations that unites humanity and make us flourish and prosper due to enabling us to derive more value in use from limited resources over motivations that are intrinsically short term and make us tear one another apart to gain access to more resources.
The elevation of the status of selfish materialistic economic motivations in the 20th century, was due to a misunderstanding of Adam Smith’s solution, since his solution that economic value was a measure of scarcity and did not measure value in use, confirmed received wisdom. Namely that economic motivations represented a rationality that was the opposite to the rationality of survival, but were nonetheless complementary motivations in short term that enabled us to more optimally utilise resources short term in pursuits of optimal ends.
Hence, the discoveries of Charles Darwin and Adam Smith were theories that explained the origins of the evolution of our selfish materialistic motivations (the ego) and our greed (attachment to money). The reason for why their theories could not explain the rationality of the living force, which demonstrates itself in the human ability to be mathematical, creative, loving, musical and aesthetic, was because Adam Smith did not appear to have seen what was logically implied from the value paradox. Darwin appear not to have seen it either why the rationality of the living force by mathematical necessity was orthogonal to rather than aligned with the rationality of the filter of natural selection. The rationality of the living force of constant renewal, evolution, increase in biodiversity and the pursuit of ends that maximise the ability to thrive from limited resources, is that it influences the coarseness of that filter. In the context of economics the rationality of optimal pursuits to acquire more prosperous tastes, production and innovation, and thus the mathematical principles behind sustainable growth in prosperity due to enhanced resource utilisation, were left out.
Why Economic Ideas created an illusion of rationality
All the economic ideas that have been subject to criticism were flawed on pure economic grounds, i.e. they were not consistent with the mathematical logic of the economic problem. Hence, they were not ‘rational’ ideas but were presented as if they were, because they were based on mathematical models. However, due to a mathematical blind spot economists did not see that they had constructed models that violated the Euclidean geometry of the economic problem. Hence, there is a purely logical reason for why economic ideas have not maximised profits and growth, nor made us optimally utilise our limited resources to make us thrive and find meaning in life.
Economic value is only informative about the present, since it is a reflection of current tastes value and beliefs, technologies and market conditions, and therein lie its rationality. Hence, it plays an important role minimising costs of rational pursuits of optimal ends giving us incentives to maximise the use of underutilised resources that are cheap, and stay away from overutilised resources that are expensive. Economists believed economic value to be more informative than it is about the future, due to not having modelled the economic problem in a way that explained the rationality of adaptive tastes. The belief that it was optimal to be motivated by a moving target of means for trade that is informative about demand was a mathematically flawed intuition that is the cause of economic instabilities and bubbles, that has lead to excessive growth in capital markets instead of productive innovations.
GDP, is not informative about the causes of economic growth. If growth in GDP is due to enhanced resource utilisation that is a permanent increase in our ability to derive more value in use from limited resources, such as the invention of hydro power, which optimally prepares the ground for the future, then it is good news. But if it is caused by making our future prospects worse, for example due to cutting down the lungs of the Earth, then it is bad news. It is optimal to be motivated by rational causes of increased prosperity, not a short term measure of their economic value at present.
Fairness not selfish greed is an optimal motivation in business. It is a flawed intuition that selfish greed will maximise our ability to realise gains from trade and production. Fairness, i.e. to share the economic gains in transactions and teamwork makes it more likely gains will be realised than greed. It is also a motivation that optimally prepares the ground for the future, since people are more likely to wish to trade or work with us in the future if they felt we treated them fairly than if we were greedy and exploited them.
The introduction of a discount factor was a mathematically flawed intuition that made economists believe that we should trade off means with ends, which is not rational. It is a rational pursuit for a business to be motivated by survival in a market, and hence frontier developments of products that enable people to derive more value in use from limited resources as part of a sustainable life style, is the pursuit of a rational end. Profits it the short term are means to pursue rational ends to survive. In a similar way the use of discount factors in cost benefit analysis, was again confusing ends with means. Our current resources are means and we should put them into uses that optimally prepares the ground for the future, i.e. they should be used in optimal pursuits. There is no trade-off, it is simply a matter of sensing what is an optimal sense of direction for economic activity, i.e. what is the best way to optimally prepare the ground for the future. The mathematically flawed idea that we should be trading off the purpose of survival with current means contributed to making the economy short term.
Another area where a flawed mathematical intuition created an illusion of rationality was decisions under uncertainty. Hayek already noted that it was not rational to make decisions based on subjective beliefs about future economic values. However, he did not see that it was a flawed intuition due to a mathematical error. An optimal motivation under uncertainty is to be motivated by investment in variables that are positively correlated with survival, i.e. to increase the odds of success. Hence, firms should not be motivated by subjective expectations about future economic values, but instead be intrinsically motivated by variables that are positively correlated with future profits.
The mathematical error that caused the anomalies made all decisions biased towards boosting the short term instead of optimally preparing the ground for the future. Hence, it was believing in a mathematically flawed intuition about what maximises profits and growth in prosperity that has made the economy short term.
It took 200 years to change thousands of years of received wisdom that it was optimal to be altruistically motivated by the pursuit of rational aesthetic ends that made us more able to thrive from limited resources in ways that united humanity which made us leave the Earth in a more beautiful state than we found her, to instead believe that it was optimal to maximally nurture selfish materialistic short term survival instincts that have made us leave the Earth in a worse state than we found her.
The solution to the paradox of economics is the final piece in the puzzle that resolves why it was this change in beliefs that made us realign institutions that had evolved for centuries to solve the economic problem to instead be aligned with short term selfish survival instincts that for pure reasons of logic have taken humanity in an unsustainable direction.
Principles for sustainable growth are simple,since they just require us to be motivated by what humanity before the ideas that selfishness was optimal has always known were optimal motivations in life. Namely to use the material world around us for the pursuit of ends that unite us, which are goods that if shared makes everyone have more of them, i.e. cultural goods non-material goods like stories pieces of music and so on, not ends that divide us, namely money. And pursuits that make us leave the world in a better state than we found her, such as the pursuit of knowledge solving paradoxes that divides humanity and projects that leave the Earth in a more beautiful prosperous state than we found her. This is what gives our life the greatest sense of purpose and meaning, and also what will maximise the rate of progress towards a sustainable economy.
There are several policy implications from this, since the main obstacle today is not that we don’t realise we got ourselves into a mess, but how to get out of it! Institutions needs to be realigned again to nurture a sense of purpose and intrinsic motivations for the pursuit of rational ends. We need to once more reward and recognise altruistic efforts in the service of humanity, instead of rewarding cynicism and selfish serving behaviour. This could take time, since institutions have for long rewarded selfish cynical behaviour. At the same time, there is a general recognition economic ideas were wrong and businesses and organisation are already realigning themselves with greater focus on purpose.
There are reasons to believe that a change back to running society according to principles that are aligned with the rationality of our human nature will be quicker, than the change induced by mathematically flawed beliefs that went against our nature and made us change institutions to be less aligned with the motivations that make us thrive and lead lives full of meaning. Many people continued believing in the optimality of our nature and nurturing aesthetic pursuits and idealistic motivations, which did not optimally prepare them for a society that favours selfish behaviour. However it means that there are already many people who do not need to change what they believe in, since they never believed that selfish greed was an optimal motivation in life, but will welcome a change in society to make institutions more in tune with what they already believe in.
It is difficult to imagine a more meaningful pursuit in life than saving humanity from the inevitable truth that evolution selects for minimum waste. A wasteful species will not be long lived for this planet, but will destroy herself in war over limited resources. So who would not wish to be part of and play a role in a story of transforming society to a prosperous sustainable economy?