I’m reading a number of books on economics & finance at the moment including The Origin of Wealth by Eric D. Beinhocker, the subtitle of which Evolution, Complexity and the radical remaking of Economics describes its focus.
In this book, Beinhocker describes developments in the field of complexity economics in the last 15-odd years, which, in my understanding, seems to be about conceptualising economics arising from interacting agents each possessing incomplete information and processing capabilities.
The novel is very interesting – here is an excerpt on the fundamentals of political ideologies (the Left/Right divide) from pages 418-421.
Human Nature and Strong Reciprocity
If one digs deeply into the Left-Right divide, down to its philosophical and historical core, one finds two conflicting views of human nature. On the Left is the view that human beings are inherently altruistic; that greed and selfishness stem not from human nature, but from the construction of the social order; and that humans can be made better through a more just society. The lineage of this view descends from Jean-Jacques Rousseau and Karl Marx. On the Right is the view that human beings are inherently self-regarding and that the pursuit of self-interest is an inalienable right. The most effective system of government is one that accommodates rather than attempts to change this aspect of human nature. As the eighteenth-century Scottish philosopher David Hume put it, “in contriving any system of government … every man ought to be supposed to be a knave and to have no other end, in all his actions, than his private interests.” The Right claims, however, that if people pursue their self-interest through the mechanisms of markets, then the general interests of Society will be served as well. The lineage of this view descends from Hume, John Locke, and Thomas Hobbes. One might be surprised not to see Adam Smith’s name on this list. But as the economists Herbert Gintis, Samuel Bowles, and Ernst Fehr, and the anthropologist Robert Boyd point out, Smith actually took a more nuanced view. In his Wealth of Nations, Smith indeed showed how self-interest, mediated by markets, can lead to social benefit. But in his other great work, The Theory of Moral Sentiments, Smith also said, “How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortunes of others.” In other words, Smith took a more rounded view of human behavior, one that acknowledged the coexistence of both the self-interested and altruistic sides of human nature. Gintis and his colleagues claim that modern research shows that both the historical Left and Right views of human nature are too simplistic. For centuries, the question of the self-regarding versus the altruistic nature of humankind was a philosophical question and ultimately a matter of opinion. Since the 1980s, however, it has become a scientific question. A substantial body of evidence from controlled experiments, empirical studies, anthropological field work, and the application of game theory has now yielded an answer: Smith was basically right. Human beings are neither inherently altruistic nor selfish; instead they are what researchers call conditional cooperators and altruistic punishers. Giontis and his colleagues refer to this type of behavior as strong reciprocity and define it as “a predisposition to cooperate with others, and to punish (even at personal cost if necessary) those who violate the norms of cooperation, even when it is implausible to expect these costs will be recovered at a later date.” This is the behavior we saw in our earlier discussion of the ultimatum game and the evolving Prisoner’s Dilemma. In essence, people try to follow the Golden Rule, but with a slight twist: do unto others as you would have them do unto you (i.e., conditional cooperation) – but if others don’t do unto you, then nail them, even at personal cost to yourself (i.e., altruistic punishment). People have a highly developed sense of whom they can trust and whom they cannot, to whom they owe favors and who owes favors to them, and whether they are being taken advantage of. As the old adage says, “Fool me once, shame on you: fool me twice, shame on me.” The universality of strong reciprocity behavior is staggering; it has been found in groups of people ranging from modern industrial societies, to remote hunter-gatherer tribes. There is a debate as to how much of this behavior is genetic versus cultural, but there are three pieces of evidence that point strongly to a genetic basis. First is the fact that strong reciprocity shows up in widely varying cultures – no society has been found that does not exhibit some form of it, thus indicating that its origins are not purely cultural. Second is the fact that similar behaviors have been observed in a number of primate species. And third, a biochemical basis for the behavior has been discovered in oxytocin, a brain hormone that plays a critical role in generating feelings of trust and eliciting cooperation in humans. Although strong reciprocity appears to be universal, there is, however, a great diversity of ways in which different societies exhibit and enforce the behavior, thus making it likely that its development has been a case of coevolution between genes and culture. The evolutionary logic for strong reciprocity is simple: in a world of non-zero-sum games, conditional cooperators perform better than agents following either purely selfish or purely altruistic strategies. Even though no single strategy dominated Kristian Lindgren’s evolving Prisoner’s Dilemma model, it is no coincidence that the strategies that rose to the top tended to be variations on the conditional cooperator theme. Likewise, when researchers surveyed results of the ultimatum game played by people around the world, they found that the society that came the closest to behaving according to the self-interested rationality assumed by Traditional Economics was the Machiguenga people of the Peruvian rain forest. The Machiguenga’s cultural norms for strong reciprocity are not as well developed as those of other societies, and as a result, Machiguenga culture is characterized by selfishness, mutual suspicion, and low cooperation. Their society has not advanced beyond family units of organization, and not surprisingly they were among the poorest people of the groups tested. A Traditional economist might argue that strong reciprocity is just another form of self-interest. After all, people cooperate to serve their own ends. Cooperation does indeed pay off in a non-zero-sum world, but there are two crucial distinctions between strong reciprocity and Traditional self-interest. First, Traditional Homo economicus does not care about the process of economic interaction, only whether the outcome maximizes the agent’s self-interest. Experiments show, however, that real people care not only about outcomes, but about whether the process itself was fair. Second, as the ultimatum game shows, people will punish unfair behavior, even at a cost to themselves, and even if they have no hope of recovering that cost in the future. In other words, when people feel as if they’ve really been cheated, they can do some pretty crazy stuff. That is certainly a departure from self-interested rationality. The economic and political ramifications of strong reciprocity may not be immediately obvious, but once we change the core assumptions of human behavior, a lot changes. As an example, consider the issue of public support for the welfare state. In the 1930s through the 1960s,
U.S. government programs to help the less fortunate generally enjoyed widespread popular support. That support dropped dramatically in the 1970s through the 1990s. The reasons for this drop have been the subject of much debate. Those on the Left argue that the lack of support stems from racism, as those receiving benefits are overwhelmingly minorities, and the rise of the selfish “me” generation during this period – in other words, a lack of altruism. The favored explanation of the ?Right is that people finally woke up to the ineffectuality of most welfare programs, thought it was a waste of their taxes, and wanted their money back – in other words, self-interest. Using a combination of surveys, experiments, and focus groups, Christina Fong, Bowles, and Gintis found significant evidence that the swing in attitude was really due to neither of these explanations, but to strong reciprocity in action. When the social programs were instituted, those receiving benefits were viewed primarily as people who wanted jobs but who, because of bad luck and the vagaries of the economy, could not get them. Social norms supported the idea that such people deserve help. In more recent times, however, the popular perception has shifted to the idea that people on benefits are lazy, not interested in work, and abusing the generosity of society. Those behaviors violate reciprocity norms, and are seen as warranting the withdrawal of support and even punishment. The authors suggest that social policies should be designed specifically to “mobilize rather than offend reciprocal values.” For example, policies that are consistent with strong reciprocity include providing skills training for those who want to work, giving incentives for the poor to accumulate savings, supporting entrepreneurial activities in deprived areas, and improving educational opportunities for the disadvantaged. Likewise, strong reciprocity norms encourage people to categorize the disadvantaged into the deserving and undeserving. Programs that reflect this distinction tend to enjoy broad support. For example, (
U.S.) state programs that provide unemployment insurance tend to be popular because workers pay into them while employed, and then if they have bad luck and are laid off, draw on the benefits. Likewise, Social Security has enjoyed over seventy years of popular bipartisan support largely because it is consistent with reciprocity norms – people cannot help getting old, and those who pay into the system benefit from it. On the other hand, programs that run counter to these norms and benefit “undeserving” people tend to be controversial; for example, welfare programs that give benefits with no reciprocal requirements such as work or training, or rehabilitation programs for drug users whose problems are viewed as a consequence of their own actions. But again, if reciprocal action is required (e.g., welfare recipients must work, or drug users must stay clean) then the programs tend to be popularly supported. Strong reciprocity helps explain the attempts by the new Left in the United States and the
United Kingdom to bring personal responsibility back into the progressive agenda.
Clinton’s reform of welfare to include work requirements, and Blair’s campaign to be “tough on crime, and tough on the causes of crime” are prime examples. The Right has also begun to tap into these norms; for example, the faith-based initiatives supported by the Bush administration combine social goals with religiously inspired values of responsibility and reciprocity. Human beings are neither the pure-hearted, altruistic creatures of Rousseau, nor the heartless, selfish creatures of Hume. Smith, the economist and moral philosopher, was ultimately right – humans are both. The Complexity Economics view on strong reciprocity means that the Left can finally turn away from Rousseau’s view that all social ills are society’s fault, and admit a role for personal responsibility. And, likewise, the Right can turn away from Hume’s notion that society must be constructed assuming the worst of human behavior, and admit a role for our more generous instincts.
Complexity Economics has shown, however, that individual agent behavior is only one piece of the puzzle. It is the combination of individual behavior and institutional structures that creates the emergent behavior of the system. This leads us to the next great debate between Left and Right – the role of markets versus states.