When did homo economicus become such a jerk?

(Note: The following is basically a reaction paper I wrote for an independent study. I’m going to be posting some of these, when the spirit moves me. This one was based on a reading of some chunks of Marshall’s Principles of Economics and Mancur Olson’s The Logic of Collective Action.)
Alfred Marshall’s Principles of Economics was the first dominant neoclassical economics textbook. First published in 1890, Marshall’s Principles brought the mathematical tools of Jevons and Walras to the masses, as well as introducing several innovations of its own (such as quasi-rents, as a way to describe the rent-like income derived from the exploitation of capital investments). What Principles did not do, however, was exclude from its analysis all human motivations outside of narrowly conceived economic self-interest. Contemporary influential works, from outside of the neoclassical tradition, included a thorough analysis of human motivations (see, for example, Veblen’s The Theory of the Leisure Class). Marshall focuses on self-interest, and its capacity to explain the workings of the economic system, but he explicitly includes other motivations as necessary parts of our understanding. By the 1950s, however, as Marshall’s text gave way to Samuelson’s, and the mathematical-Keynesian synthesis became ascendant in economic theory (cf. Yonay 1998), the caveats and nuance of the original conception of economic man were lost along the way. In this post I will explicate Marshall’s understanding of human nature, and contrast it to that of Mancur Olson, to argue that Olson’s highly influential work created a pseudo-problem by taking the notion of homo economicus a bit too seriously.

On page 1 of the tome that is the Principles of Economics, Marshall introduces the study of economics as the “study of mankind in the ordinary business of life; it examines that part of individual and social action which is most closely connected with the attainment and with the use of the material requisites of wellbeing.” (One wonders if Marshall was in contact with Weber!) In the next paragraph, Marshall goes on to argue that “the two great forming agencies of the world’s history have been the religious and the economic.” The study of economics is relatively recent in growth, Marshall argues, because only recently have economic affairs become a separated realm: “Business is more clearly marked off from other concerns; the rights of individuals as against others and as against the community are more sharply defined…” (5) Thus, it now makes sense to study economics as a separate field.

Marshall cautions, however, that we should not characterize the modern age by the rise of competition. Rather, “It is deliberateness, and not selfishness, that is the characteristic of the modern age.” (6) With more echoes of Weber, Marshall parameterizes modernity by the rise of the rational actor, not by selfishness. Why not? Because the modern era does not show an overabundance of selfishness:

“…family affection leads to much more self-sacrifice and devotion than it used to do; and sympathy with those who are strangers to us is a growing source of a kind of deliberate unselfishness, that never existed before the modern age. That country which is the birthplace of modern competition devotes a larger part of its income than any other to charitable uses, and spent twenty millions on purchasing freedom of the slaves in the West Indies.” (6)

Indeed, Marshall goes so far as to claim that “No doubt men, even now, are capable of much more unselfish service than they generally render: the supreme aim of the economist is to discover how this latent social asset can be developed most quickly, and turned to account most wisely.” (7, emphasis added) So, it is pretty clear that Marshall did not think of modern man, nor primitive man, as primarily motivated by self-interest.*

Decades later, Mancur Olson published a highly influential work of social and political theory that helped bring rational choice-style analysis to the forefront of organizational and political theory: The Logic of Collective Action. Olson argues that existing theories of group behavior naively assumed that actors with common interests would naturally aggregate into groups that acted on behalf of those common interests. Through a combination of game theoretic logic and persuasive rhetoric, Olson demonstrates that except in certain special circumstances (such as when one actor gains tremendously more than the others, or when groups are very small and commitments can be enforced easily), self-interested individuals will not invest in public goods. All that’s well and good except… why would our prior be that individuals are narrowly self-interested? Indeed, given that self-interested individuals cannot easily act collectively, doesn’t the existence of so many forms of collective action suggest precisely that individuals are not self-interested?

To be fair to Olson, the object of his study is not to explain the existence of collective actors, but rather their absence. Olson reiterates this in his conclusion: “The existence of large unorganized groups with common interests is therefore quite consistent with the basic argument of this study. But the large unorganized groups not only provide evidence for this basic argument of this study: they also suffer if it is true.” (167) Certainly, there is merit to analysis of the difficulties that such large groups face in organizing, and the role that various commitment mechanisms and enforceable regimes can play. That said, I wonder to what extent Olson’s solution creates a pseudo-problem – the explanation of those groups of collective actors that exist. By focusing solely on self-interest, by being unwilling to let altruism (in varying quantities) explain anything, Olson (along with most of rational choice theory and economics in the 20th century) creates conundrums that would never have troubled Marshall.

* Marshall also notes that even self-interest is often interest on behalf of one’s family. Otherwise, why work hard to leave an inheritance? Or provide at all for one’s children?

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6 Comments

  1. joshmccabe

     /  September 20, 2009

    Good post. I agree that economists too often (always?) assume monetary maximization in their definition of rational action. I must say that I have encountered resistance (from economists and non-economists alike) when I try to expand the idea of rational action beyond this to include things like altruism or ideology. This, I am told, makes it tautological since all action is then rational.

  2. @Josh – Hence Quiggin’s Critique:

    First, most rational actor models assume that “rationality” can be represented as “maximization of self-interest”. This assumption is either false or vacuous. Those committed to egoistic rationality tend, when challenged, to oscillate between falsehood and vacuity, in much the manner of the function sin (1/x) as x approaches zero.

    The trick, it seems to me, would be to find plausible preference functions and then test them against data and see if they help explain the world. For example, a prof here at Michigan who does work via agent-based modeling does a lot of work in the Schelling tradition – figure out how much of the world you can explain with relatively straightforward but non-trivial preference assumptions. But those preferences don’t have to be selfish. One paper she mentioned explains dating networks at high schools via the rule “Don’t date your ex’s ex’s ex.” Apparently, it does a really good job of generating the observed patterns in high schools. Rational? Sure, in the vacuous way that anything can be. Narrowly self-interested? Not really, more just wacky. But interesting.

  3. Brian Pitt

     /  September 22, 2009

    Great Post Dan!

    Hey Josh, I think part of the reason why non-rational choice folks circumscribe the rational actor analytic is to allow MaxU to be falsifiable. And then, they reject its applicability to the “real world.” Inflexible rational choicers, e.g., neoclassical economists and poly-sci model builders, on the other hand, are committed to MaxU because it is quite straightforward and beautifully fits agent-based models as Dan noted.

    My personal position is that the rational actor analytic is far too powerful to not become very familiar with it’s flexibility and its expansive application – regardless of what area of the social sciences you inhabit. But, remain “flexible” in application. That is, make use of analytical narratives that explain how choice is invariably embedded.

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