Freeman

FEATURE

That Cold-Hearted Discipline

Good economics teaches cooperation and the limits of politics, not greed

OCTOBER 30, 2013 by DAVID J. HEBERT

But of all the duties of beneficence, those which gratitude recommends to us approach nearest to what is called a perfect and complete obligation. What friendship, what generosity, what charity, would prompt us to do with universal approbation, is still more free, and can still less be extorted by force than the duties of gratitude. — Adam Smith, The Theory of Moral Sentiments

A recent article by Wharton Professor Adam Grant has been popping up here and there, most recently in Psychology Today. Grant suggests that studying economics breeds greed, and he cites several studies to support his claim. The studies conclude economics professors give less money to charity than other professions, economics students are more likely to deceive others for personal gain, and people who study economics have less of a concern for fairness and tend to think that “greed” is okay.

To his credit, Grant does consider the alternative: that maybe economics actually attracts greedy people or that greedy people tend to thrive by studying economics. He dismisses these possibilities by noting that “there is evidence for selection...but this doesn’t rule out the possibility that studying economics pushes people further toward the selfish extreme.” He goes on to chide practitioners of the discipline for teaching self-interest in the classroom.

Finally, he concludes with four points that are meant to provide evidence of the social harm in studying economics, which can be summarized in two overarching points:

1) Economics justifies greedy behavior, and

2) Studying economics makes people less altruistic.

Economics Justifies Greedy Behavior?

Studying economics, and specifically the role of incentives, teaches us that relying on altruism is a brave assumption that has but limited applicability. For example, among people we know, we can rely on a certain degree of altruism or benevolence. I know, for example, that my family and friends will be there for me not because I pay them to do so, but because they care about me. Similarly, they know I will be there for them. However, I don’t know the same thing about random people I encounter on the street.

And yet in order to enjoy the immense wealth that the division of labor affords us, society demands that we have interactions both with people we know well and people we do not know at all. These two distinct spheres of activity require two distinct forms of cooperation, which one might get from reading Adam Smith’s twin pillars of economics: The Theory of Moral Sentiments and The Wealth of Nations.

More tidily, perhaps, F. A. Hayek describes this situation in The Fatal Conceit by noting the difference between the macroeconomy and the microeconomy. Macro, in this context, refers to society as a whole, while micro refers to just the people to whom we are close. Hayek says that if we were to apply the same rules of the family unit to the macro, as would be the case if we were to allocate resources altruistically, we would destroy the macro. This is because there would be a complete lack of economic calculation, resources would be misallocated, and plans would fail to be coordinated (see these articles for more on economic calculation).

Hayek also notes that the reverse is true: If we were to apply the rules of the market to the family, we would destroy it as well. We don’t need prices and incomes at the dinner table to allocate the food. Even the most ardent defender of markets would agree that having prices and such as the means of allocating food at the dinner table would be wrong, just like paying your friends to help you move across town would be strange. (Beer and pizza don't count.)

Instead, students of economics recognize not that greed is good, as the saying goes, but that greed can be transformed into the service of others given the proper institutional setting. That institutional setting, which has been thoroughly discussed elsewhere, is one that celebrates the role of property rights, prices, and profits (and losses) and recognizes their role in creating the incentives to properly husband resources, generates the information about the relative scarcities of various goods and transmits this information to consumers and producers in a quick and efficient manner, all of which provides a feedback mechanism to drive continued innovation.

Economics Makes People Less Altruistic?

Grant cites a 2005 article by Neil Gandal et. al. as concluding that “students who planned to study economics rated helpfulness, honesty, loyalty, and responsibility as just as important as students who were studying communications, political science, and sociology,” but that by the third year, economics students rated these values “significantly less important than first-year economics students.”

While the Gandal study does include such conclusions, it also includes much more. For example, economics students attribute less importance to fairness. Evidencing this, Gandal points out that, when questioned about the allocation of radio frequencies to different mobile-phone service providers, students who study economics are more likely to advocate selling the rights to the highest bidder while students of other disciplines are more likely to advocate for allocating the rights to “anybody who meets some minimal eligibility criteria.”

Students of economics do not advocate for property rights because we are greedy; we advocate for property rights because we understand and take seriously potential incentive problems in politics. The notion of minimal eligibility requirements may sound nice, for example, but problems may lie in who gets to draw that line, by what process that line gets drawn, and the incentives faced by the line-drawers. As Madison points out in Federalist 51, “If men were angels, no government would be necessary. If angels were to govern men, neither external nor internal controls on government would be necessary.”

Economics students know men are no angels. And as Nobel laureate James Buchanan points out, government officials are human beings, too, with their own hopes, dreams, and aspirations—and yes, forms of avarice. Supporting the allocation of resources to the highest bidder sidesteps the issues raised by these potential incentive problems. This means that the choice of how to allocate resources fundamentally comes down to a choice of institutions.

We can have a central authority establish guidelines by which anyone who wants can use the radio frequencies, or we can let the market decide. The former leads to a standard tragedy of the commons problem, whereby the radio frequency gets overused. In the case of cell phones, this means that the frequency would be crowded with multiple conversations simultaneously; imagine trying to shout to your friend across a crowded bar. The latter leads to the frequencies being allocated to the person who is best able to utilize them to serve the general population. So AT&T, for example, gets exclusive rights to a certain bandwidth and then tries to figure out how to best serve its customers. In this case, the customer gets to enjoy a clear phone call without the distraction of several other conversations in their ear simultaneously.

In any case, these are not examples of quelling altruism, but of keeping it in its place.

Less Greed, More Cooperation

Viewed in this light, economics does not so much teach greed but rather the beauty of cooperation. How else could we explain how a woolen coat gets made, how Paris gets fed, or how a pencil gets made? And if allocating, say, radio frequencies based on highest valued use makes people learn to discard fairness, well, how exactly is that a bad thing?

ABOUT

DAVID J. HEBERT

David Hebert is an Assistant Professor of Economics at Ferris State University. His interests include public finance and property rights.

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