Posts Tagged ‘individualism’


Lots of folks have been asking me about the significance of the so-called Nobel Prize in economics that was awarded yesterday to Richard Thaler.

They’re interested because they’ve read or heard about the large catalog of exceptions to the usual neoclassical rule of rational decision-making that has been compiled by Thaler and other behavioral economists.

One of my favorites is the “ultimatum game,” in which a player proposes an allocation of an endowment (say $5) and the second player can accept or reject the proposal. If the proposal is accepted, both players get paid according to the proposal; if the proposal is rejected, both players get nothing. What Thaler and his coauthors found is that most of the second players would reject proposals that would give them less than 25 percent of the endowment—even though, rationally, they’d be better off with even one penny in the initial offer. In other words, many individuals are willing to pay a cost (i.e., get nothing) in order to punish individuals who make an “unfair” proposal to them. Such a notion of fairness is anathema to the kind of self-interested, rational decision-making that is central to neoclassical economic theory.

Other exceptions include the “endowment effect” (for the tendency of individuals to value items more just because they own them), the theory of “mental accounting” (according to which individuals can overcome cognitive limitations by simplifying the economic environment in systematic ways, such as using separate funds for different household expenditures), the planner-doer model (in which individuals are both myopic doers for short-term decisions and farsighted planners for decisions that have long-run implications), and so on—all of which have implications for a wide variety of economic behavior and institutions, from consumption to financial markets.

So, what is the significance of Thaler’s approach economics?

As I see it, there are three stories that can be told about behavioral economics. The first one is the official story, as told by the Nobel committee, which starts from the proposition that “economics involves understanding human behaviour in economic decision-making situations and in markets.” But, since “people are complicated beings,” and even though the neoclassical model “provided solutions to important and complicated economic problems,” Thaler’s work (alone and with his coauthors) has contributed to expanding and refining economic analysis by considering psychological traits that systematically influence economic decisions—thus creating a “a flourishing area of research” and providing “economists with a richer set of analytical and experimental tools for understanding and predicting human behavior.”

A second story is provided by Yahya Madra (in Contending Economic Theories, with Richard Wolff and Stephen Resnick): behavioral economics forms part of what he calls “late neoclassical theory” that both poses critical questions about neoclassical homo economicus and threatens to overrun the limits of neoclassical theory by offering “a completely new vision of how to specify the economic behavior of individuals.” Thus,

Based on its psychological explorations, behavioral economics confronts a choice: will it remain a research field that merely catalogs various shortcomings of the traditional neoclassical model and account of human behavior or will it break from neoclassical theory to formulate a new theory of human behavior?

A third story stems from a recognition that behavioral economics challenges some aspects of neoclassical economics—by pointing out many of the ways individuals are guided by forms of decisionmaking that violate the rule of self-interested rationality presumed by traditional neoclassical economists—and yet remains within the strictures of neoclassical economics—by focusing on individual behavior and using rational decision-making as the goal.

Thus, Thaler’s work and the work of most behavioral economists focuses on the limits to individual rationality and not on the perverse incentives and structures that plague contemporary capitalism. There’s no mention of the ways wealthy individuals and large corporations, precisely because of their high incomes and profits, are able to make individually rational decisions that—as in the crash of 2007-08—have negative social ramifications for everyone else. Nor is there a discussion of the different kinds of rationalities that are implicit in different ways of organizing the economy. As I wrote back in 2011, “is there a difference between how capitalists (who appropriate the surplus for doing nothing) and workers (who actually produce the surplus) might decide to distribute the surplus to others?”

Moreover, while behavioral economics have compiled a long list of exceptions to neoclassical rationality, they still use the neoclassical ideal as the horizon of their work. This can be seen in what is probably the best known of Thaler’s writings (with coauthor Cass Sunstein), the idea of “libertarian paternalism.” According to this view, “beneficial changes in behavior can be achieved by minimally invasive policies that nudge people to make the right decisions for themselves.” Thus, for example, Thaler proposed changing the default option in defined-contribution pension plans from having to actively sign up for the plan (which leads to suboptimal outcomes) to automatically joining the plan at some default savings rate and in some default investment strategy (which approximates rational decision-making).

The problem is, there’s no discussion of the idea that workers would benefit from an alternative to defined-contribution plans—whether defined-benefit plans or the expansion of Social Security. It’s all about taking the institutional structure as given and “nudging” individuals, via the appropriate design of mechanisms, to make the kinds of rational decisions that are presumed within neoclassical economics.

Paraphrasing that nineteenth-century critic of political economy, we can say that economic decision-making appears, at first sight, a very trivial thing, and easily understood. Its analysis shows that it is, in reality, a very queer thing, abounding in metaphysical subtleties and theological niceties. We might credit Thaler and other behavioral economists, then, for having taken a first step in challenging the traditional neoclassical account of rational decision-making. But they stop far short of examining the perverse incentives that are built into the current economic system or the alternative rationalities that could serve as the basis for a different way of organizing economic and social life. And, in terms of economic theory, they appear not to be able to imagine another way of thinking about the economy, as a process without an individual subject.

However, taking any of those steps would never be recognized with a Nobel Prize in economics.


Mark Tansey, “Discarding the Frame” (1993″

Obviously, recent events—such as Brexit, Donald Trump’s presidency, and the rise of Bernie Sanders and Jeremy Corbyn—have surprised many experts and shaken up the existing common sense. Some have therefore begun to make the case that an era has come to an end.

The problem, of course, is while the old may be dying, it’s not all clear the new can be born. And, as Antonio Gramsci warned during the previous world-shaking crisis, “in this interregnum morbid phenomena of the most varied kind come to pass.”

For Pankaj Mishra, it is the era of neoliberalism that has come to an end.

In this new reality, the rhetoric of the conservative right echoes that of the socialistic left as it tries to acknowledge the politically explosive problem of inequality. The leaders of Britain and the United States, two countries that practically invented global capitalism, flirt with rejecting the free-trade zones (the European Union, Nafta) they helped build.

Mishra is correct in tracing British neoliberalism—at least, I hasten to add, its most recent phase—through both the Conservative and Labour Parties, from Margaret Thatcher to Tony Blair and David Cameron.* All of them, albeit in different ways, celebrated and defended individual initiative, self-regulating markets, cheap credit, privatized social services, and greater international trade—bolstered by military adventurism abroad. Similarly, in the United States, Reaganism extended through both Bush administrations as well as the presidencies of Bill Clinton and Barak Obama—and would have been continued by Hillary Clinton—with analogous promises of prosperity based on unleashing competitive market forces, together with military interventions in other countries.

Without a doubt, the combination of capitalist instability—the worst crisis of capitalism since the first Great Depression—and obscene levels of inequality—parallel to the years leading up to the crash of 1929—not to mention the interminable military conflicts that have deflected funding at home and created waves of refugees from war-torn zones, has called into question the legacy and presumptions of Thatcherism and Reaganism.

Where I think Mishra goes wrong is in arguing that “A new economic consensus is quickly replacing the neoliberal one to which Blair and Clinton, as well as Thatcher and Reagan, subscribed.” Yes, in both the United Kingdom and the United States—in the campaign rhetoric of Theresa May and Trump, and in the actual policy proposals of Corbyn and Sanders—neoliberalism has been challenged. But precisely because the existing framing of the questions has not changed, a new economic consensus—an alternative common sense—cannot be born.

To put it differently, the neoliberal frame has been discarded but the ongoing debate remains framed by the terms that gave rise to neoliberalism in the first place. What I mean by that is, while recent criticisms of neoliberalism have emphasized the myriad problems created by individualism and free markets, the current discussion forgets about or overlooks the even-deeper problems based on and associated with capitalism itself. So, once again, we’re caught in the pendulum swing between a more private, market-oriented form of capitalism and a more public, government-regulated form of capitalism. The former has failed—that era does seem to be crumbling—and so now we begin to turn (as we did during the last system-wide economic crisis) to the latter.**

However, the issue that keeps getting swept under the political rug is, how do we deal with the surplus? If the surplus is left largely in private hands, and the vast majority who produce it have no say in how it’s appropriated and distributed, it should come as no surprise that we continue to see a whole host of “morbid phenomena”—from toxic urban water and a burning tower block to a new wave of corporate concentration  and still-escalating inequality.

Questioning some dimensions of neoliberalism does not, in and of itself, constitute a new economic consensus. I’m willing to admit it is a start. But, as long as remain within the present framing of the issues, as long as we cannot show how unreasonable the existing reason is, we cannot say the existing era has actually come to an end and a new era is upon us.

For that we need a new common sense, one that identifies capitalism itself as the problem and imagines and enacts a different relationship to the surplus.


*I add that caveat because, as I argued a year ago,

Neoliberal ideas about self-governing individuals and a self-organizing economic system have been articulated since the beginning of capitalism. . .capitalism has been governed by many different (incomplete and contested) projects over the past three centuries or so. Sometimes, it has been more private and oriented around free markets (as it has been with neoliberalism); at other times, more public or state oriented and focused on regulated markets (as it was under the Depression-era New Deals and during the immediate postwar period).

**And even then it’s only a beginning—since, we need to remember, both Sanders and Corbyn did lose in their respective electoral contests. And, at least in the United States, the terms of neoliberalism are still being invoked—for example, by Ron Johnson, Republican senator from Wisconsin—in the current healthcare debate

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Vermont has been devastated by Tropical Storm Irene. People all over the country and around the world have seen the photos and videos. It’s hard not to look and to keep looking. The sheer destructive power of the water is terrifying.

Amazingly, only 3 Vermonters have died from the storm but scores of homes, businesses, and bridges have been destroyed and hundreds of roads washed out. Individual families and whole towns were isolated for days, many without power, telephone or internet connections, and even passable roads in or out.

But there’s something else I think we need to theorize and discuss: the communities that quickly emerged to first survive and help one another and then to begin to reconstruct lives, homes, public buildings, and roads in the aftermath of the storm.

I wasn’t in Vermont during or after the storm but, because I spend a lot of time there, I received personal accounts and was closely following the news (via newspapers and blogs). The stories are amazing, and they’re all a testament to the resilience and solidarity of people who were able to shift into collective ways of being and working in, it seems, an instant.  And this in a country that is as profoundly individualist as it is (where individual, personal gain is often taken to be the only goal), in which coming together to do anything substantial to provide decent jobs for the 26 million people who remain without a job or underemployed or to repair the decaying physical and social infrastructure has been impossible.

Against that background—of enormous natural devastation in Vermont and a country bent on self-destruction—the stories of collectivity in Vermont are even more impressive.

Here are some stories I’ve heard from friends:

  • A neighbor who happened to have a generator, hearing that another neighbor couldn’t keep her insulin cold since the power was off, shut down his generator, threw it into the backup of his pick-up truck, and then drove down the almost-impassable road to restore refrigeration.
  • One couple was stranded without power or telephone in the house of friends, having gone there on a short “vacation”—and, after the storm, without any way of leaving the local community (since the roads in all four directions had been washed out). Neighbors (some living miles away), who hadn’t met them before, stopped in on a daily basis to check in on them and to bring them what they could—vegetables from the garden, a 5-gallon container of water, and so on.
  • The local road was washed out. So, someone in the area who happened to have earth-moving equipment went out to repair the road, in an attempt to make it at least passable, until outside help came in.
  • Someone else, who lived in a less-devastated town, had decided he would join others and hike in—some 6-10 miles—in order to check on people and to deliver emergency supplies.

And, in the town of Rochester (also isolated for days, without food, water, and power), the community came together in other extraordinary ways: groups of people assembled to help owners of destroyed homes salvage what they could of their belongings; the local supermarket gave away its perishables to local residents; an inn served free meals every night; and the town met every day in a local church to discuss the current situation and to decide what needed to be done.

I could go on for pages and pages. My point is, these are all examples of people coming together—without any direction or assistance from the state or national governments, much less assistance from large private corporations—in order to help one another during and after a devastating event. Only later, after days, did the National Guard, public utilities, road crews, and so on appear to assist these local communities. (To be clear: I’m not romanticizing local self-sufficiency. The infrastructure of these towns will only be rebuilt in the coming months with outside assistance.)

Now, I almost didn’t write this post, because I felt the stories were almost too cheesy or heart-warming. But there are some larger issues at stake.

First, of course, is the issue of collectivity itself. In Vermont (but also in many other places, during and after many different kinds of disasters), we witness people coming together in various kinds of collectivities that remain hidden in “normal” everyday life. What is it that keeps such collectivities hidden from view (such that we can refer to the United States as a uniformly individualist nation), and what is that allows them to exist and to flourish (against, it often seems, all odds in a get-what-you-can-as-quickly-as-you-can-and-to-hell-with-the-consequences-for-others capitalist nation)? And how is it that people are able to react and organize so quickly to help one another and to rebuild the infrastructure necessary for the community to survive and to continue?

Second, why is it that mainstream economists, politicians, and others don’t understand—or don’t have the guts or inclination to recognize and support—the power of such collectivities to solve the jobs problem in the United States? Why, a friend remarked when he heard some of these stories, can’t Obama just announce that he’s going to pay the communities who are already doing the work and call it job creation? It’s certainly better than some plan to give tax credits to “job creators” to—perhaps, maybe someday—hire a few more workers. Here we have a collective response that doesn’t need the name of individuals getting a newly created job just for them. And, of course, it’s better than any scheme Keynesians have ever come up with to bury some money and then dig it up.

Back in 1928, a year after the last devastating flood of similar magnitude [video], Calvin Coolidge gave his “brave little Vermont” speech:

I love Vermont because of her hills and valleys, her scenery and invigorating climate, but most of all because of her indomitable people. They are a race of pioneers who have almost beggared themselves to serve others. If the spirit of liberty should vanish in other parts of the Union, and support of our institutions should languish, it could all be replenished from the generous store held by the people of this brave little state of Vermont.

During the past week, the communities of Vermont have shown what mainstream economists and politicians in the United States overlook or deny: that people do not have to suffer on their own and that collective solutions can be found to the economic and social devastation this country has suffered during recent years.

I still have some pieces of unfinished business. . .

Like the latest report [pdf] from the National Alliance to End Homelessness, which looks at changes in homelessness nationwide from 2008 to 2009. The findings—for example, that homelessness rose (in 31 states and the District of Columbia) after years of declining rates and numbers of homeless people—are certainly not surprising but they confirm the harsh toll exacted by high unemployment and cuts in social services during the Second Great Depression.

And the fact that, according to University of California-Irvine biology professor Diane K. O’Dowd and research professors at Harvard University, Yale University, the Massachusetts Institute of Technology, and elsewhere, “reward systems at universities heavily favor science, math and engineering research at the expense of teaching.” This is one of the unfortunate trends, and not just in the sciences, of the new corporate university.

Then there’s Tyler Cowen’s unfortunate initial dismissal of Michel Foucault’s work (“Most of his books have not held up very well as history, even if he succeeded in drawing people’s attention to some neglected factors.  On top of that, his theoretical framework is incoherent.”), although in a subsequent post he does admit that reading Foucault “is one useful path out of extreme positions of methodological individualism.” Most economists have remained mostly ignorant of Foucault’s writings (not knowing enough to even be dismissive). But I can recommend two useful references: one general, Gary Gutting’s Foucault: A Very Short Introduction (Oxford University Press, 2005); and one specifically for economics, Jack Amariglio’s “The Body, Economic Discourse, and Power: An Economist’s Introduction to Foucault,” History of Political Economy 20 (1988): 583-613.

And Maxine Udall’s unfortunate defense of the “science of economics,” as a critique of David Brooks’s idea of economics as art, in which she conflates economics with the concepts and mathematical models of neoclassical economics. Even on those grounds, she mistakenly assumes (in discussing the economics of health), she assumes that resources are being efficiently allocated to health care—thus putting the economy on its production possibilities frontier and creating a false tradeoff between taking “resources away from health advantaged people in order to give them to health disadvantaged people.” She should know both that are non-neoclassical theories of the economics of health and that current the health care system in the United States is far below its potential.

Finally, there’s George Demartino’s superb summary of the state of discussion within the American Economic Association about conflict of interest and disclosure.

Economists are creative people who love to solve pressing social problems. If we haven’t yet solved the problem of conflict of interest in economics, perhaps it’s not because the problem is so darn difficult. Perhaps it’s because we’ve never really tried.

Done! Now, back to building that bridge. . .