Traditional Economics Failed. Here's a New Blueprint. - Evonomics http://evonomics.com/traditional-economics-failed-heres-a-new-blueprint/ (via Instapaper)
By Eric Liu and Nick Hanauer Politics in democracy can be understood many ways, but on one level it is the expression of where people believe their self-interest lies— that is to say, “what is good for me?” Even when voters vote according to primal affinities or fears rather than economic advantage (as Thomas Frank, in What’s the Matter With Kansas?, lamented of poor whites who vote Republican), it is because they’ve come to define self-interest more in terms of those primal identities than in terms of dollars and cents. This is not proof of the stupidity of such voters. It is proof of the malleability and multidimensionality of self-interest. While the degree to which human beings pursue that which they think is good for them has not and will probably never change, what they believe is good for them can change and from time to time has, radically. We assert a simple proposition: that fundamental shifts in popular understanding of how the world works necessarily produce fundamental shifts in our conception of self-interest, which in turn necessarily produce fundamental shifts in how we think to order our societies. Consider for a moment this simple example: For the overwhelming majority of human history, people looked up into the sky and saw the sun, moon, stars, and planets revolve around the earth. This bedrock assumption based on everyday observation framed our self-conception as a species and our interpretation of everything around us. Alas, it was completely wrong. Advances in both observation technology and scientific understanding allowed people to first see, and much later accept, that in fact the earth was not the center of the universe, but rather, a speck in an ever-enlarging and increasingly humbling and complex cosmos. We are not the center of the universe. Get Evonomics in your inbox It’s worth reflecting for a moment on the fact that the evidence for this scientific truth was there the whole time. But people didn’t perceive it until concepts like gravity allowed us to imagine the possibility of orbits. New understanding turns simple observation into meaningful perception. Without it, what one observes can be radically misinterpreted. New understanding can completely change the way we see a situation and how we see our self-interest with respect to it. Concepts determine, and often distort, percepts. Today, most of the public is unaware that we are in the midst of a moment of new understanding. In recent decades, a revolution has taken place in our scientific and mathematical understanding of the systemic nature of the world we inhabit. –We used to understand the world as stable and predictable, and now we see that it is unstable and inherently impossible to predict. –We used to assume that what you do in one place has little or no effect on what happens in another place, but now we understand that small differences in initial choices can cascade into huge variations in ultimate consequences. –We used to assume that people are primarily rational, and now we see that they are primarily emotional. Now, consider: how might these new shifts in understanding affect our sense of who we are and what is good for us? A Second Enlightenment and the Radical Redefinition of Self-Interest In traditional economic theory, as in politics, we Americans are taught to believe that selfishness is next to godliness. We are taught that the market is at its most efficient when individuals act rationally to maximize their own self-interest without regard to the effects on anyone else. We are taught that democracy is at its most functional when individuals and factions pursue their own self-interest aggressively. In both instances, we are taught that an invisible hand converts this relentless clash and competition of self-seekers into a greater good. These teachings are half right: most people indeed are looking out for themselves. We have no illusions about that. But the teachings are half wrong in that they enshrine a particular, and particularly narrow, notion of what it means to look out for oneself. Conventional wisdom conflates self-interest and selfishness. It makes sense to be self-interested in the long run. It does not make sense to be reflexively selfish in every transaction. And that, unfortunately, is what market fundamentalism and libertarian politics promote: a brand of selfishness that is profoundly against our actual interest. Let’s back up a step. When Thomas Jefferson wrote in the Declaration of Independence that certain truths were held to be “self-evident,” he was not recording a timeless fact; he was asserting one into being. Today we read his words through the filter of modernity. We assume that those truths had always been self-evident. But they weren’t. They most certainly were not a generation before Jefferson wrote. In the quarter century between 1750 and 1775, in a confluence of dramatic changes in science, politics, religion, and economics, a group of enlightened British colonists in America grew gradually more open to the idea that all men are created equal and are endowed by their Creator with certain unalienable rights. It took Jefferson’s assertion, and the Revolution that followed, to make those truths self-evident. We point this out as a simple reminder. Every so often in history, new truths about human nature and the nature of human societies crystallize. Such paradigmatic shifts build gradually but cascade suddenly. This has certainly been the case with prevailing ideas about what constitutes self-interest. Self-interest, it turns out, is not a fixed entity that can be objectively defined and held constant. It is a malleable, culturally embodied notion. Think about it. Before the Enlightenment, the average serf believed that his destiny was foreordained. He fatalistically understood the scope of life’s possibility to be circumscribed by his status at birth. His concept of self-interest extended only as far as that of his nobleman. His station was fixed, and reinforced by tradition and social ritual. His hopes for betterment were pinned on the afterlife. Post-Enlightenment, that all changed. The average European now believed he was master of his own destiny. Instead of worrying about his odds of a good afterlife, he worried about improving his lot here and now. He was motivated to advance beyond what had seemed fated. He was inclined to be skeptical about received notions of what was possible in life. The multiple revolutions of the Enlightenment— scientific, philosophical, spiritual, material, political— substituted reason for doctrine, agency for fatalism, independence for obedience, scientific method for superstition, human ambition for divine predestination. Driving this change was a new physics and mathematics that made the world seem rational and linear and subject to human mastery. The science of that age had enormous explanatory and predictive power, and it yielded an entirely new way of conceptualizing self-interest. Now the individual, relying on his own wits, was to be celebrated for looking out for himself— and was expected to do so. As physics developed into a story of zero-sum collisions, as man mastered steam and made machines, as Darwin’s theories of natural selection and evolution took hold, the binding and life-defining power of old traditions and institutions waned. A new belief seeped osmotically across disciplines and domains: Every man can make himself anew. And before long, this mutated into another ethic: Every man for himself. Compared to the backward-looking, authority-worshipping, passive notion of self-interest that had previously prevailed, this, to be sure, was astounding progress. It was liberation. Nowhere more than in America— a land of wide-open spaces, small populations, and easily erased histories— did this atomized ideal of self-interest take hold. As Steven Watts describes in his groundbreaking history The Republic Reborn, “the cult of the self-made man” emerged in the first three decades after Independence. The civic ethos of the founding evaporated amidst the giddy free-agent opportunity to stake a claim and enrich oneself. Two centuries later, our greed-celebrating, ambition-soaked culture still echoes this original song of self-interest and individualism. Over time, the rational self-seeking of the American has been elevated into an ideology now as strong and totalizing as the divine right of kings once was in medieval Europe. Homo economicus, the rationalist self-seeker of orthodox economics, along with his cousin Homo politicus, gradually came to define what is considered normal in the market and politics. We’ve convinced ourselves that a million individual acts of selfishness magically add up to a common good. And we’ve paid a great price for such arrogance. We have today a dominant legal and economic doctrine that treats people as disconnected automatons and treats the mess we leave behind as someone else’s problem. We also have, in the Great Recession, painful evidence of the limits of this doctrine’s usefulness. But now a new story is unfolding. Our century is yielding a second Enlightenment, and the narrative it offers about what makes us tick, individually and collectively, is infinitely more sophisticated than what we got the last time around. Since the mid-1960s, there have been profound advances in how we understand the systemic nature of botany, biology, physics, computer science, neuroscience, oceanography, atmospheric science, cognitive science, zoology, psychology, epidemiology, and even, yes, economics. Across these fields, a set of conceptual shifts is underway: Simple → Complex Atomistic → Networked Equilibrium → Disequilibrium Linear → Non-linear Mechanistic → Behavioral Efficient → Effective Predictive → Adaptive Independent → Interdependent Individual ability → Group diversity Rational calculator → Irrational approximators Selfish → Strongly reciprocal Win-lose → Win-win or lose-lose Competition → Cooperation Simple → Complex The reductionist spirit of the first Enlightenment yielded a passion for classification— of species, of races, of types of all kinds of things— and this had the virtue of clarifying and simplifying what had once seemed fuzzy. But Enlightenment mathematics was limited in its ability to depict complicated systems like ecosystems and economies. The second Enlightenment is giving us the tools to understand complexity, as Scott Page and John Miller explain in Complex Adaptive Systems. Such systems— whether they are stock markets or immune systems, biospheres or political movements— are made of interacting agents, operating interdependently and unpredictably, learning from experience at individual and collective levels. The patterns we see are not mere aggregations of isolated acts but are the dynamic, emergent properties of all these interactions. The way these patterns behave may not be predictable, but they can be understood. We understand now how whirlpools arise from turbulence, or how bubbles emerge from economic activity. Atomistic → Networked The first Enlightenment was excellent for breaking phenomena into component parts, ever smaller and more discrete. It was an atomic worldview that conceptualized us as separate and independent. The second Enlightenment proves that while we are made of atoms we are not atoms— that is, we behave not in atomistic ways but as permeable, changeable parts of great networks and ecosystems. In particular, human societies are made up of vast, many-to-many networks that have far greater impact on us as individuals and on the shape and nature of our communities than we ever realized. The “six degrees” phenomenon is not a party game; it is a way of seeing more clearly what Albert-Laszlo Barabasi, author of Linked, describes as “scale-free networks”: networks with an uneven distribution of connectedness, whose unevenness shapes how people behave. Recognizing ourselves as part of networks— rather than as isolated agents or even niches in a hierarchy— enables us to see behavior as contagious, even many degrees away. We are all on the network, part of the same web, for better or worse. Thus does consumption of Middle East oil produce climate change, which creates drought in North Africa, which raises food prices there, which leads a vendor in Tunis to set himself afire, which sparks a revolution that upends the Middle East. Equilibrium → Disequilibrium Classical economics, with us still today, relied upon 19th-century ideas from physics about systems in equilibrium. On this account, shocks or inputs to the system eventually result in the system going back to equilibrium, like water in a bucket or a ball bearing in a bowl (or the body returning to “stasis” after “sickness”). Such systems are closed, stable, and predictable. By contrast, complex systems like ecosystems and economies (or hurricanes or Facebook) are open and never stay in equilibrium. In non-equilibrium systems, a tiny input can create a catastrophic change— the so-called butterfly effect. The natural, emergent state of such systems— open rather than closed— is not stability but rather booms and busts, bubbles and crashes. It is from this tumult, says Eric Beinhocker, author of the magisterial The Origin of Wealth, that evolutionary opportunities for innovation and wealth creation arise. Linear → Non-linear The first Enlightenment emphasized linear, predictable models for change, whether at the atomic or the global level. The second Enlightenment emphasizes the butterfly effect, path dependence, high sensitivity to initial conditions and high volatility thereafter: in short, it gives us chaos, complexity, and non-linearity. What once seemed predictable is now understood to be quite unpredictable. Mechanistic → Behavioral The first Enlightenment made the stable, order-seeking machine the generative metaphor for economic activity (assembly lines), social organization (political machines), and government’s role (that of a mechanic or clockmaker). The second Enlightenment studies not how people process things independently but rather how they behave interdependently. As David Brooks describes in The Social Animal, behavior is contagious, often unconsciously and unpredictably so, and individual choices can cascade suddenly into great waves of social change. Efficient → Effective The metaphors of the Enlightenment, taken to scale during the Industrial Age, led us to conceptualize markets as running with “machine-like efficiency” and frictionless alignment of supply and demand. But in fact, complex systems are tuned not for efficiency but for effectiveness— not for perfect solutions but for adaptive, resilient, good-enough solutions. This, as Rafe Sagarin depicts in the interdisciplinary survey Natural Security, is how nature works. It is how social and economic systems work too. Evolution relentlessly churns out effective, good-enough-for-now solutions in an ever-changing landscape of challenges. Effectiveness is often inefficient, usually messy, and always short-lived, such that a system that works for one era may not work for another. Predictive → Adaptive In the old Enlightenment and the machine age that followed, inputs were assumed to predict outputs. In the second Enlightenment, once we recognize that the laws that govern the world are laws of complex systems, we must trade the story of inputs and predictability for a story of influence and ever-shifting adaptation. In complex human societies, individuals act and adapt to changing circumstances; their adaptations in turn influence the next round of action, and so on. This picture of how neither risks nor outcomes can be fully anticipated makes flexibility and resilience more valuable at every scale of decision-making. Independent → Interdependent The Enlightenment allowed us to see ourselves as individuals and agents. Free from supernatural authority, people were first allowed and then expected to act independently and selfishly for themselves. This extraordinary cultural shift sparked invention, innovation, and the autonomy we expect in our daily lives. But this mode of thinking, particularly applied to the American frontier, persuaded us that we were independent rather than interdependent. A new understanding of systems and human behavior and physiology shows this to be untrue. From the quantum level up, we are far more interdependent than our politics and culture generally let us think. We are at all times both cause and effect. Our mirror neurons and evolved social rites mean that how we behave influences how others behave, and how they behave influences us. The permutating patterns formed by those interactions become the shape our societies take. And obviously, the denser and more connected the network— compare, say, America today with America 300 years ago— the greater these effects. Rational calculator → Irrational approximators The Enlightenment encouraged scientists to apply mathematics and physics to human nature and social dynamics, but these were of course blunt instruments for such complex work, requiring many simplifying assumptions. Over time, the caveat that these assumptions were simplifying fell away and what was left was a mechanical view that people are rational calculators of their own interest. Economists even today assume that an ordinary consumer can make complex instantaneous calculations about net present value and risk when making decisions in grocery stores between tomatoes and carrots. This homo economicus stands at the center of traditional economics, and his predilection for perfect rationality and selfishness permeates our politics and culture. By contrast, the behavioral science of our times is pulling us back to common sense and reminding us that people are often irrational or at least a-rational and emotional, and that we are at best approximators of interest who often don’t know what’s best for us and even when we do, often don’t do it. This accounts for the “animal spirits” of fear, longing, and greed that seem to drive markets in unpredictable and irrational ways. Selfish → Strongly reciprocal For centuries, a bedrock economic, legal, and social assumption was that people were inherently so selfish that they could not be expected to support or aid others not in their own genetic line. Now the study of human behavior reinforces the neglected fact that we are hardwired equally to be cooperative. As social psychologist Dacher Keltner writes in Born to Be Good, humans could not have survived and evolved without the social organization that only cooperation, mutuality, and reciprocity make possible. In fact, we are so tilted toward cooperation that we punish non-cooperators in our communities, even at cost to ourselves. This “strong reciprocation” strategy reflects a deep recognition, made instinctual through millennia of group activity, that all behavior is contagious, and that rewarding good with good and bad with punishment is the best way to protect our societies and therefore ourselves. Reciprocity makes compassion not a form of weakness but a model of strength; it makes pro-social morality not just moral but natural and smart. Win-lose → Win-win or lose-lose The story that grew out of Enlightenment rationalism and then Social Darwinism had a strong streak of “your gain is my loss.” The more that people and groups were seen as competing isles of ambition, all struggling for survival, the more life was analogized at every turn into a win-lose scenario. But the stories and science of the second Enlightenment prove what has long been a parallel intuition: that in fact, the evolution of humanity from cave dweller to Facebooker is the story of increasing adoption of nonzero, or positive-sum, attitudes; and that societies capable of setting up win-win (or lose-lose) scenarios always win. Robert Wright’s Nonzero describes this dynamic across civilizations. Unhealthy societies think zero-sum and fight over a pie of fixed size. Healthy societies think 1 + 1 = 3 and operate from a norm that the pie can grow. Open, non-equilibrium systems have synergies that generate increasing returns and make the whole greater than the sum of the parts. The proper goal of politics and economics is to maximize those increasing returns and win-win scenarios. Competition → Cooperation A fundamental assumption of traditional economics is that competitiveness creates prosperity. This view, descended from a misreading of Adam Smith and Charles Darwin, weds the invisible hand of the market to the natural selection of nature. It justifies atomistic self-seeking. A clearer understanding of how evolutionary forces work in complex adaptive human society shows that cooperation is the true foundation of prosperity (as does a full reading Adam Smith’s lesser-known masterpiece A Theory of Moral Sentiments). Competition properly understood—in nature or in business—is between groups of cooperators. Groups that know how to cooperate—whose members attend to social and emotional skills like empathy—defeat those that do not. That’s because only cooperation can create symbiotic, nonzero outcomes. And those nonzero outcomes, borne and propelled by ever-increasing trust and cooperation, create a feedback loop of ever-increasing economic growth and social health. Now: what does all this have to do with self-interest? Everything. Our previous understanding of the world animated and enables a primitive and narrow perspective on self-interest, giving us such notions as: – I should be able to do whatever I please, so long as it doesn’t directly harm someone else. -Your loss is my gain. -It’s survival of the fittest—only the strong survive. -Rugged individualism wins. -We are a nation of self-made people. -Every man for himself. Until recently, these beliefs—we aptly call them “rationalizations”—could be backed, even if speciously, by references to science and laws of nature. But now, to anyone really paying attention, they can’t. Today, emerging from our knowledge of emergence, complexity, and innate human behavior, a different story about self-interest is taking shape, and it sounds more like this: -What goes around comes around. -The better you do, the better I do. -It’s survival of the smartest—only the cooperative survive. -Teamwork wins. -There’s no such thing as a self-made person. -All for one, one for all. Let’s be clear here: we are not talking about a sudden embrace of saintly self-denial. We are talking about humans correcting their vision—as they did when they recognized that the sun didn’t orbit the earth; as they did when they acknowledged that germs, not humours, caused sickness. We are talking about humans seeing, with long-overdue clarity, and with all our millennia of self-preservation instincts intact, a simple truth: True self-interest is mutual interest. The best way to improve your likelihood of surviving and thriving is to make sure those around you survive and thrive. Notwithstanding American mythology about selfishness making the world go round, humans have in fact evolved—have been selected—to look out for others in their group and, in so doing, to look out for self. We exist today because this is how our ancestors behaved. We evolve today by ensuring that our definition of “our group” is wide enough to take advantage of diversity and narrow enough to be actionable. This is a story, in short, about self-interest that is smart, or “self-interest properly understood,” as Tocqueville put it. It is a true story. It tells of neither altruism nor raw simple selfishness. Altruism is admirable, but not common enough to support a durable moral or political system. Raw Selfishness may seem like the savvy stance, but is in fact self-defeating: tragedies of the commons are so called because they kill first the commons and then the people. True self-interest is mutual interest. This is even more urgently true in the age of global climate change, terror, drugs, pop culture, marketing, and so forth than it was in the age of hunter-gatherers. We are aware that many have used the “newest science” to justify outlandish views and schemes, or to lend a patina of certainty to things ineffable. It would be easy to characterize our reliance on new science as similarly naive. We are also aware, acutely, that the Machinebrain thinking we criticize is itself the direct product of science, and that our remedy may appear strangely to be a fresh dose of the illness. But while skepticism is warranted, there is an important difference: today’s science is most useful in how it demonstrates the limits of science, Complexity and evolutionary theory doesn’t give you mastery over the systems we inhabit; it simply informs us about their inherent unpredictability and instability. These new perspectives should not make us more certain of our approaches, but rather, more keenly aware of how our approaches can go wrong or become outmoded, and how necessary it is in civic life to be able to adjust to changes in fact and experience. Where the rationalist schemes of central planners on the left and market fundamentalists on the right have led to costly hubris, public policy informed by the new science should now lead to constant humility. In a sense, the latest wave of scientific understanding merely confirms what we, in our bones, know to be true: that no one is an island; and that someone who thinks he can take for himself, everyone else be damned, causes a society to become to sick to sustain anyone. Indeed, he or she who defends his own immediate gain, for either the longer term or the greater good, causes a society to prosper so much as to pay back his investment of deferred gratification. True self-interest is mutual interest. The contract between the new and old stories of self-interest —like any paradigmatic shift in the public imagination—is not just a philosophical curiosity. It plays out in how we interpret and understand—and therefore, prepare for or prevent—calamities like global financial meltdowns or catastrophic climate change or political gridlock. And it will transform the way we think about three basic elements of a democratic society: citizenship, economy, government. 2016 March 20 (c) 2011 by Eric Liu and Nick Hanauer. Excerpted from The Gardens of Democracy by permission of Sasquatch Books. BE INVOLVED We welcome you to take part in the next evolution of economics. Sign up now to be kept in the loop! 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