Saturation Point

Last time I looked, airport lounges were still frequented by ambitious junior execs carrying biographies of Warren Buffett or Sam Ghosn or books promising to teach you how to run your company like Hannibal or Dracula or Vishnu. In recent years, though, there's been a shift in the demographic for business books, and the best-seller shelves of my local Hodges Figgis and Waterstones always feature at least one example of lay economics, popular economics, economics for dummies, or the like. Steven Levitt's Freakonomics was the first of these that crossed my radar, but Tim Harford's Undercover Economist and The Logic of Life have capitalized on Levitt's success, and now we have The Ecomomic Naturalist, Predictably Irrational, and Mark Buchanan's The Social Atom. The difference between these books and those targeted specifically at businessmen and women is their level of ambition. In much the same way that evolutionary psychology and sociobiology books a few years back seemed to promise to explain everything, these authors now tell us that it is in fact economics that can, if properly applied, explain everything about how the world works. And not just humam behaviour, but animal and cell behaviour too. All we need is to apply economic principles correctly, and all will be explained.

Not that this is just your old-fashioned bourgeois classical economics, however. No way, Jose. This is the new, updated, biodegradable, non-toxic economics, an economics that has learned its lesson. In short, it is an economics that has taken on board many of the discoveries of psychology, sociobiology, and the social sciences and renewed itself. You see, for years, economists have laboured under the misapprehension that their theories could be worked out entirely in the classroom or on paper, using an abstraction they called Homo Economicus, an entirely rational, self-seeking individual who could be relied upon to pursue his own interests accurately and consistently. Only in recent times has it occurred to anyone in the discipline, apparently, to test those theories in experimental conditions, and lo and behold, yer actual flesh-and-blood human beings don't behave like Homo Economicus at all, because it transpires that human beings have to make their decisions with finite, imperfect knowledge and that they do not always seek to further their own personal interests; sometimes they even harm their own interests for the benefit of the group to which they belong. It isn't that human beings are NOT rational, it's simply that their reasoning takes place in very definite, non-abstract conditions.

Now all this has been known for a long time to anyone with the sense to give reality the benefit of the doubt when comparing it against economic theory. And, in fact, a lot of what you'll find in these books has been long known to economists too. they just seem to have been reluctant to face up to it, a fact, as Mark Buchanan points out, that we should find worrying, given the amount of influnece and power we permit economists over our lives.

I'm explaining all this to you so that you don't have to go out and buy ANY of these books. Because, in essence, they're identical. And in the Business section of the Irish Times this weekend, Fintan O'Toole reviewed yet another, Basic Instincts: Human Nature and the New Economics, by Pete Lunn. In his review, O'Toole tells us,

If the accepted notions of basic human instincts don't really work, how can we build a surer foundation? Lunn turns to the emerging discipline of behavioural economics, which, unlike the orthodox model, is based on actual observation of real people. It draws on the systematic study of the ways in which we make choices.

The Ultimatum Game, which Lunn calls "the equivalent of the atom in economic analysis", is a good example. In the experiment, a person is given a sum of money on condition that they share it with a stranger, and has to decide the appropriate proportion to offer. Both sides know that if the offer is accepted, both get to keep their share. If it is declined, all the money is taken back.

According to classical economics, the stranger should accept whatever is offered, since the alternative is to get nothing. Knowing this, the first person should make a low offer.

But actually, most people will not accept low offers at all and most people will not actually make such offers. Across different societies, and even when the money involved is real and substantial, people prefer notions of fairness and honour to simple selfish desires.

With both rigorous logic and demotic charm, Lunn builds on this and other findings to make a persuasive and highly thought-provoking case that conventional economics is actually far too pessimistic in its assumptions about human instincts. We balance our greed with notions of fairness, with a liking for familiarity and an aversion to risk, with a valuing of relationships, and with a strong instinct for co-operation.

The Ultimatum Game appears, I can say with some confidence, in nearly all the above books I have linked to, and probably in "Business Success the Vishnu Way" too. What amazes me is that the results of the experiment should come as such a surprise to economists. Even apes, when faced with the above scenario, share out the wealth equally. If we have €100 and I offer you €1 and keep €99 for myself, according to classical economics it would be irrational for me to refuse because doing so means we get nothing, whereas if I accept, I come out up on the deal. But who in their right mind is going to walk out of the room knowing that they've put themselves at such a huge disadvantage to someone else? Whether or not you believe in an innate sense of fairness, I wouldn't want to feel so disadvantaged, and if I know that, if I'm the one offering the money, I know that my offer is likely to be refused unless I offer something close to an equal distribution of the goods. What's so surprising about that?

The most interesting finding from this experiment, however, was that when it was carried out amongst students, the most selfish behaviour, the behaviour regarded as most rational by classical economics, was exhibited by those students studying Economics. In other words, being taught to perceive the world through the googles of classical economic theory, altered the way students conceptualized their relationship with other humans and with the world as a whole. Now, that IS worrying when we think how much power and influence economists have.

Mark Buchanan's book is, I can safely say, the last of these books on the topic I shall be reading. It was one analogy too far. Rather than use classical economics as his guiding metaphor for understanding society, he uses physics, comparing humans to atoms. This simile omits so much that it wouldn't get past the first term of an A level sociology class. It's bad enough when economists overstep the bounds of their competence. When physicists are doing it too, you know the market for these books has jumped the shark.