The altruism in economics: Getting to the heart of money

Standard economic theory states that people are interested only in their own material gain. But new insights from behavioral economics show that altruism rather than avarice is our primary motivation.

Jeremy Mercer | May 2009 issue

Photo: Image Source Photography/Veer

The City of Yonkers, New York, wound up in a distressing predicament early this year. The municipal budget was running a deficit and the economic crisis was sorely aggravating the problem. Layoffs were needed and among the casualties were six firefighters, including, most regrettably, a young man who’d recently rescued several children from a burning apartment building. The job cuts were due to go into effect the first week of January.
But then something remarkable happened. The men and women of the Yonkers Fire Department offered to work days free for six months so the city could save money and their colleagues could save their jobs. The deal was approved by 75 percent of firefighters and the layoffs were avoided. “Everyone is aware of what is going on with the economy,” explains Patrick Brady, president of the local firefighter’s union. “We banded together and voted to save our brethren.”
Amid the job losses, the home foreclosures and the bankruptcies of this crushing recession, these sorts of stories provide a rare glimmer of hope. Across the country and around the world, people are sharing jobs or accepting reduced wages in order to help their colleagues and prevent wider unemployment. (See How to avoid layoffs for more stories of recessionary selflessness.) President Barack Obama even lauded these efforts in his inauguration speech, saying it’s “the selflessness of workers who would rather cut their hours than see a friend lose their job which sees us through our darkest hours.”
Indeed, this selflessness is heartening. But such altruism is also evidence that the standard economic theory our financial system has been built upon is hopelessly flawed. For the past 50 years, economic policy has been poisoned by the cynical premise that people are innately selfish and materialistic. This is what has been taught in economics classes; this is what has informed government decisions such as bank deregulation; and this is what has spawned the Wall Street culture of “greed is good.”
Now the basic tenets of economics are being reconsidered. A growing body of experimental work by behavioral economists proves altruism not only exists but is one of our primary motivations, even in financial affairs. And if some progressive economists have their way, we may be on the cusp of a more humane era in which altruism, not avarice, becomes the trait our economic system nourishes. “It is increasingly obvious that people are motivated by morality; people are motivated by ethics,” says Herbert Gintis, an emeritus professor at the University of Massachusetts and one of the leading economists studying altruism. “We may be seeing a possible renaissance of economic theory.”
Economics has long been known as the “dismal science” for its ruthless view that people are motivated solely by their financial or material interests. The roots of this theory can be traced to Adam Smith, who proposed that individuals acting selfishly form an “invisible hand” that creates the best society possible. “By pursuing his own interest,” wrote the 18th-century Scottish philosopher in The Wealth of Nations, “he frequently promotes that of the society more effectually than when he really intends to promote it.” A century later, political economist John Stuart Mill inspired the term “Homo economicus” by invoking man as “a being who inevitably does that by which he may obtain the greatest amount of necessaries, conveniences and luxuries, with the smallest quantity of labor and physical self-denial.”
These propositions became the pillars of traditional economics and were embraced by George Stigler, Milton Friedman, Alan Greenspan and the other titans who shaped the economy in the second half of the 20th century. Trickle-down theory, laissez-faire capitalism and supply-side economics are all edifices constructed on the foundation that people are rational, self-interested financial actors. Nobody captured the doctrine more succinctly than Stigler, the late Nobel laureate who ignited the crusade against government regulation: “[Smith’s] construct of the self-interest-seeking individual in a competitive environment is Newtonian in its universality,” he wrote.
Alas, all this was a distortion. Smith was actually something of a humanist who, in The Theory of Moral Sentiments, celebrated the altruistic instinct. “How selfish soever man may be supposed,” wrote Smith, “there are evidently some principles in his nature, which interest him in the fortune of others and render their happiness necessary to him, though he derives nothing from it except the pleasure of seeing it.” The problem for Smith, and the generations of economists who followed, was that “moral sentiments” were difficult to quantify. So they were ultimately excluded from economic theory.
It was evolutionary biologists, with their penchant for field observation, who started to explore the question in an empirical manner. It began with Charles Darwin, who was amazed by the cooperation among bees; moved to William Hamilton, who studied altruism among rabbits; and went on to include Robert Trivers’ work on sharing among vampire bats. Once altruism was established in the natural world, the same analytical eye inevitably turned toward the human sphere.
In 1973, a landmark experiment was conducted at blood banks in Kansas City and Denver. It was inspired by the “crowding out” theory of British social researcher Richard Titmuss, the idea that people perform certain tasks, such as donating blood, for the common good, but that their motivation would be “crowded out” if they were offered a financial reward. The two blood banks were ideal testing grounds because both had “willing” files bearing the names of previous donors. For the experiment, a control group was sent the typical letter announcing a blood drive; a test group was sent the same correspondence offering $10 for a donation. The results were decisive: Within the control group, 93 percent responded to the call to donate; for those offered a cash reward, only 65 percent contributed. “I felt we’d made a real breakthrough,” recalls Bill Upton, who ran the experiment as a psychology student at Cornell University in Ithaca, New York, in the 1970s. “It was significant evidence that money wasn’t necessarily an incentive.”
In fact, the result was remarkable for two reasons. First, it contradicted standard economic theory and proved the existence of human altruism. Second, this major advancement in understanding financial motivation had been made by a psychology student using a sociologist’s theory. Where were the economists?
The reality is that for most of history, economists have preferred theory to experimentation. This changed when the field of behavioral economics began to take shape in the 1970s. The movement adopted insights from psychology along with the empirical methods used in other social sciences to bring a fuller picture of human motivation and decision-making to economics. Behavioral economics has now blossomed into one of the field’s most influential disciplines, with its practitioners populating the bestseller lists and advising the White House and its experiments resonating throughout academia.
Once the experimenting began, the hallowed economic pillars began to crumble. What was perhaps the most important development occurred in 1982 when German economists at the University of Cologne created the Ultimatum Game. In this experiment, Player A is given $10 and Player B is given nothing. Player A must make an offer to Player B; both parties keep the money only if that offer is accepted. According to standard economic theory, the minimum offer of $1 should be made and accepted because it represents a clear financial gain for Player B. But in the thousands of times the experiment has been run, the average accepted offer is $4 and offers of less than $3 are routinely rejected. People, it turned out, were more concerned about equality than financial gain. “Fairness is fairly universal,” says Werner Güth, one of the economists who ran the experiment.
Such a statement may seem so obvious as to be banal. After all, the idea that people have an innate morality has been tossed about for millennia, from Plato’s Meno to the French philosopher Auguste Comte’s invention of the word “altruism” in the 19th century. But for economists weaned on the brutal model of Homo economicus, proof of something as simple as fairness was revolutionary.

Solution News Source

The altruism in economics: Getting to the heart of money

Standard economic theory states that people are interested only in their own material gain. But new insights from behavioral economics show that altruism rather than avarice is our primary motivation.

Jeremy Mercer | May 2009 issue

Photo: Image Source Photography/Veer

The City of Yonkers, New York, wound up in a distressing predicament early this year. The municipal budget was running a deficit and the economic crisis was sorely aggravating the problem. Layoffs were needed and among the casualties were six firefighters, including, most regrettably, a young man who’d recently rescued several children from a burning apartment building. The job cuts were due to go into effect the first week of January.
But then something remarkable happened. The men and women of the Yonkers Fire Department offered to work days free for six months so the city could save money and their colleagues could save their jobs. The deal was approved by 75 percent of firefighters and the layoffs were avoided. “Everyone is aware of what is going on with the economy,” explains Patrick Brady, president of the local firefighter’s union. “We banded together and voted to save our brethren.”
Amid the job losses, the home foreclosures and the bankruptcies of this crushing recession, these sorts of stories provide a rare glimmer of hope. Across the country and around the world, people are sharing jobs or accepting reduced wages in order to help their colleagues and prevent wider unemployment. (See How to avoid layoffs for more stories of recessionary selflessness.) President Barack Obama even lauded these efforts in his inauguration speech, saying it’s “the selflessness of workers who would rather cut their hours than see a friend lose their job which sees us through our darkest hours.”
Indeed, this selflessness is heartening. But such altruism is also evidence that the standard economic theory our financial system has been built upon is hopelessly flawed. For the past 50 years, economic policy has been poisoned by the cynical premise that people are innately selfish and materialistic. This is what has been taught in economics classes; this is what has informed government decisions such as bank deregulation; and this is what has spawned the Wall Street culture of “greed is good.”
Now the basic tenets of economics are being reconsidered. A growing body of experimental work by behavioral economists proves altruism not only exists but is one of our primary motivations, even in financial affairs. And if some progressive economists have their way, we may be on the cusp of a more humane era in which altruism, not avarice, becomes the trait our economic system nourishes. “It is increasingly obvious that people are motivated by morality; people are motivated by ethics,” says Herbert Gintis, an emeritus professor at the University of Massachusetts and one of the leading economists studying altruism. “We may be seeing a possible renaissance of economic theory.”
Economics has long been known as the “dismal science” for its ruthless view that people are motivated solely by their financial or material interests. The roots of this theory can be traced to Adam Smith, who proposed that individuals acting selfishly form an “invisible hand” that creates the best society possible. “By pursuing his own interest,” wrote the 18th-century Scottish philosopher in The Wealth of Nations, “he frequently promotes that of the society more effectually than when he really intends to promote it.” A century later, political economist John Stuart Mill inspired the term “Homo economicus” by invoking man as “a being who inevitably does that by which he may obtain the greatest amount of necessaries, conveniences and luxuries, with the smallest quantity of labor and physical self-denial.”
These propositions became the pillars of traditional economics and were embraced by George Stigler, Milton Friedman, Alan Greenspan and the other titans who shaped the economy in the second half of the 20th century. Trickle-down theory, laissez-faire capitalism and supply-side economics are all edifices constructed on the foundation that people are rational, self-interested financial actors. Nobody captured the doctrine more succinctly than Stigler, the late Nobel laureate who ignited the crusade against government regulation: “[Smith’s] construct of the self-interest-seeking individual in a competitive environment is Newtonian in its universality,” he wrote.
Alas, all this was a distortion. Smith was actually something of a humanist who, in The Theory of Moral Sentiments, celebrated the altruistic instinct. “How selfish soever man may be supposed,” wrote Smith, “there are evidently some principles in his nature, which interest him in the fortune of others and render their happiness necessary to him, though he derives nothing from it except the pleasure of seeing it.” The problem for Smith, and the generations of economists who followed, was that “moral sentiments” were difficult to quantify. So they were ultimately excluded from economic theory.
It was evolutionary biologists, with their penchant for field observation, who started to explore the question in an empirical manner. It began with Charles Darwin, who was amazed by the cooperation among bees; moved to William Hamilton, who studied altruism among rabbits; and went on to include Robert Trivers’ work on sharing among vampire bats. Once altruism was established in the natural world, the same analytical eye inevitably turned toward the human sphere.
In 1973, a landmark experiment was conducted at blood banks in Kansas City and Denver. It was inspired by the “crowding out” theory of British social researcher Richard Titmuss, the idea that people perform certain tasks, such as donating blood, for the common good, but that their motivation would be “crowded out” if they were offered a financial reward. The two blood banks were ideal testing grounds because both had “willing” files bearing the names of previous donors. For the experiment, a control group was sent the typical letter announcing a blood drive; a test group was sent the same correspondence offering $10 for a donation. The results were decisive: Within the control group, 93 percent responded to the call to donate; for those offered a cash reward, only 65 percent contributed. “I felt we’d made a real breakthrough,” recalls Bill Upton, who ran the experiment as a psychology student at Cornell University in Ithaca, New York, in the 1970s. “It was significant evidence that money wasn’t necessarily an incentive.”
In fact, the result was remarkable for two reasons. First, it contradicted standard economic theory and proved the existence of human altruism. Second, this major advancement in understanding financial motivation had been made by a psychology student using a sociologist’s theory. Where were the economists?
The reality is that for most of history, economists have preferred theory to experimentation. This changed when the field of behavioral economics began to take shape in the 1970s. The movement adopted insights from psychology along with the empirical methods used in other social sciences to bring a fuller picture of human motivation and decision-making to economics. Behavioral economics has now blossomed into one of the field’s most influential disciplines, with its practitioners populating the bestseller lists and advising the White House and its experiments resonating throughout academia.
Once the experimenting began, the hallowed economic pillars began to crumble. What was perhaps the most important development occurred in 1982 when German economists at the University of Cologne created the Ultimatum Game. In this experiment, Player A is given $10 and Player B is given nothing. Player A must make an offer to Player B; both parties keep the money only if that offer is accepted. According to standard economic theory, the minimum offer of $1 should be made and accepted because it represents a clear financial gain for Player B. But in the thousands of times the experiment has been run, the average accepted offer is $4 and offers of less than $3 are routinely rejected. People, it turned out, were more concerned about equality than financial gain. “Fairness is fairly universal,” says Werner Güth, one of the economists who ran the experiment.
Such a statement may seem so obvious as to be banal. After all, the idea that people have an innate morality has been tossed about for millennia, from Plato’s Meno to the French philosopher Auguste Comte’s invention of the word “altruism” in the 19th century. But for economists weaned on the brutal model of Homo economicus, proof of something as simple as fairness was revolutionary.

Solution News Source

SIGN UP

TO GET A Free DAILY DOSE OF OPTIMISM


We respect your privacy and take protecting it seriously. Privacy Policy