The Science Of Human Nature Is Proving Classical Economics False. What Comes Next?

In a previous post, I wrote about the emerging view of human nature as fundamentally cooperative and group-oriented rather than simply self-interested as most conservatives believe.  I noted that this paradigm shift has important implications for progressives in a political sense.  We should not shy away from appeals to cooperative instincts and the common good because they are “fuzzy” and “soft”.  Instead they should be front and center because they touch something deep within our basic nature.

But that’s not all the implications of these new findings.  There are also very important implications for economic policy.  Start with middle class economics.  This school of thought, associated with progressive economists like Robert Reich, Joseph Stiglitz, Paul Krugman and progressive institutions like (ahem) the Center for American Progress, ties progressive policy proposals directly to the interests and capabilities of the middle class. Since the middle class as a group embraces a huge swathe of American society, this is a very promising framework for a group-oriented appeal.

The new theory of human nature also casts considerable doubt on the standard model of economics, based around neoclassical assumptions that people are solely motivated by self-interested concerns.  As we have just seen, they aren’t, which poses a rather fundamental problem for mainstream economics.  The problem deepens when the other key part of the standard economic model is recalled: people rationally, efficiently and effectively pursue that self-interest at all times, carefully calculating probabilities and assessing costs and benefits so they can get the best possible deal for themselves—like a sort of self-interested Mr. Spock.  People aren’t like that either, as the evolving science of behavioral economics has clearly established.

Behavioral economics has found, based on observation of actual people making decisions, that people don’t understand probability, under- and over-estimate risk, respond heavily to how choices are framed and generally fail, in a wide variety of contexts, to “rationally” pursue their goals.  These results, now widely accepted even within mainstream economics, have been well-summarized by Cass Sustein and Richard Thaler in their book Nudge and by Daniel Kahneman in his book Thinking Fast and Slow.

So we’re not purely self-interested and we do a spotty job of pursuing that self-interest when we try.  What does this say about standard models of the economy based on aggregating the assumed efficient, self-interested actions of millions and “proving” that everything works out for the best if those efficient, self-interested individuals are left alone?  Nothing good.

And indeed nothing good has come out of applying that model for three decades.  There has been no growth boom and no rapid rise in living standards.  In fact, both overall economic growth and, especially, living standards growth have been relatively slow by historical standards.  And instead of unleashing a frenzy of creative solutions to long-standing economic problems, deregulated economies have just made most of them worse: more speculative bubbles; more risky investments; more inequality; more unemployment; more bad jobs; and so on.  Finally, risky economic behavior got completely out of control and the resulting financial meltdown sent the economy into the biggest nose-dive since the Great Depression.

It’s fair to say the mainstream economic model now lies in ruins.  Its core assumptions have been tested and found wanting.  Unleashing purely rational, purely self-interested individuals to do whatever they want has proved to be a recipe for stagnation at best and utter disaster at worst.  And the reason is simple: these individuals don’t exist and never will.  Therefore, the market will never work as the current standard economic model says it should.  Instead, an effective economics should accept the preferences and inclinations of actually-existing people and reject the limits that imaginary perfect markets supposedly put on economic objectives.

These points have been made and made forcefully by very prominent progressive economists like Krugman, Stiglitz, George Akerlof and Robert Shiller among many others.   But, as noted recently by economic journalist John Cassidy, we have yet to see the emergence of a “new Keynes” with a positive theory of how the economy works that can replace the standard model.  That is not to say there are not at least the beginnings of such a theory.  Again, the emerging middle class economics school of thought is starting to generate both the theoretical and empirical work that could lead to a true alternative paradigm to neoclassical economics.

But as yet there is no worked-out theory that connects the microfoundations of actual human behavior to the macro outcomes that economic policy is concerned with.  The microfoundations of the standard model—completely self-interested homo economicus—however unrealistic are mathematically tractable in a way that lends itself to macro analysis.  The same is not true for our new, more accurate, but complicated, understanding of human motivation.   But the micro-macro connection will have to be bridged if our new Keynes is to emerge and consolidate a theory to guide a new era of capitalist growth.

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Why We Must Put Nature Back to Work, Part 2

Image: ChangingClimate.osu.edu

By Bill Becker, via Huffington Post

In its new assessment of America’s infrastructure, the American Society of Civil Engineers (ASCE) found that much of it is aging and substandard. Among the systems needing repairs are dams, levees and storm water controls that are important to protecting the American people from the growing impacts of climate change.

At a time when government funding is strained, can nature offer some of the protection that engineered structures were built to provide? And can nature do it at lower cost? I asked three of the United States’ premier experts on ecosystem services: Keith Bowers, president of Biohabitats Inc. in Baltimore; Dr. Bob Costanza, the ecological economist who coauthored one of the world’s first assessments of the economic value of ecosystem service; and Prof. Ed Barbier, a prolific author on the topic and a professor of economics at the University of Wyoming.

In Part 1 of the interview, we discussed how ecosystem services should be defined and how we can better quantify their value.

Q: Are there examples where ecosystems actually reduce pressure on local government budgets – in other words, on taxpayers?

Bowers: Yes. The classic example is the water supply system for New York City. Instead of upgrading and building new water treatment facilities, the City decided to invest in protecting the source of the water in the Catskills. As a result they have saved billions of dollars while indirectly protecting a whole host of ecosystem functions and services that are enjoyed by the region at large.

There are other examples around the world including the protection and restoration of mangrove wetlands that protect against storm surges along coastal areas while also providing the nursery grounds for the shrimping and seafood industry. We are also recognizing that tree canopy in urban environments modifies the microclimate and absorbs storm water, greatly reducing energy demands and the need for extensive storm water collection and treatment systems.

Q: What cities are making the most effort these days to utilize ecosystems and their services? Who are the leaders?

Bowers: Federal clean water regulations are driving many cities to begin utilizing ecosystem services to assist them with meeting performance criteria. It’s great to see that many cities are beginning to embrace what we call green infrastructure — that is, using natural systems and their processes to replace gray infrastructure — the pipes, roads, walls, and concrete that we have been using for the past 100 years. Cities with aging infrastructure are beginning to turn to green infrastructure as a viable, and in most cases, a cost-competitive and more effective alternative to conventional gray infrastructure. This is especially true when you begin to calculate the natural capital, or the ecosystem services that green infrastructure provides on top of its primary use.

Q: With all their benefits, ecosystems need to be understood as assets in our states and communities. Has anyone done an inventory of ecosystem services?

Costanza: The U.S. Environmental Protection Agency, the United States Geological Service, the Department of Agriculture and the U.S. Forest Service all have programs on ecosystem services. The EPA is creating a national atlas of ecosystem services that will be useful at multiple scales. In addition, some cities are taking stock. For example, Seattle has completed a 3-year study of the benefits provided by its urban forest.

Q: As you all know, rural areas also are important to protecting ecosystems. For example, forest lands need to be preserved for carbon sequestration. Poor farming practices deplete the fertility of our soils. Logging and tilling can cause runoff that increases flooding and water pollution. The national agriculture program is coming up for reauthorization again this fall. What changes do we need in national policy to make sure we’re not subsidizing the loss of rural ecosystem services?

Bowers: As Wes Jackson, the founder of the Land Institute, says, it’s all about soils. We need an agriculture program that fist and foremost protects the structure, fertility and regenerative capacity of soils to provide us with the food and fiber we need. We also need to consider the ecosystem services that rural lands, including farmland, have the capacity to provide.

We need to be taking a whole-systems approach, looking at not only what the landscape can provide with regard to food and fiber, but how it can do so in a way that supports a full array of wildlife species; protects wetlands, aquifers and rivers; restores wildlife corridors and regenerates ecological processes that contribute to soil health.

Q: Are we seeing any progress in protecting ecosystem services worldwide?

Barbier: Global ecosystems and freshwater sources are clearly endangered by current patterns of economic development. Over the past 50 years, ecosystems have been modified more rapidly and extensively than in any comparable period in human history, largely to meet rapidly growing demands for food, fresh water, timber, fiber and fuel.

The result has been a considerable decline in the economic benefits provided by ecosystems. According to the Millennium Ecosystem Assessment, approximately 60% of the major global ecosystem services have been degraded or used unsustainably, including freshwater capture, fisheries, air and water purification, and the regulation of regional and local climate, natural hazards, and pests.

However, we may be slowly waking up to the current global ecological crisis, given the recent, large-scale coastal disasters that have occurred worldwide: the December 2004 Indian Ocean Tsunami; the 2005 Hurricanes Katrina and Rita in the US Gulf Coast; the 2011 earthquake, tsunami and Fukushima nuclear disaster in Japan; and finally, last year’s Hurricane Sandy in the Northeastern United States. Collectively, these disasters are a powerful reminder of the vulnerability of growing human coastal populations to natural disasters, and the important role of coastal ecosystems in this relationship.

I’m singling out coasts because more than 123 million Americans live in coastal counties and the number is growing. That’s nearly 40% of our population that is vulnerable to climate impacts such as rising ocean levels and more severe coastal storms. We see the same vulnerability at the global level. There are a few points to keep in mind.

First, coastal human population densities across the globe are nearly three times that of inland areas, and they are increasingly exponentially. Thus as the human population grows, we are packing more people into our coastlines than ever before.

Second, many estuarine, coastal and marine ecosystems naturally protect coastlines from storm surges, wind, flooding, erosion and other impacts of storms, but as coastal development and populations expand, these systems are disappearing rapidly. Their resulting loss and degradation due to human activities is intense and increasing, such that 50% of salt marshes, 35% of mangroves, 30% of coral reefs, and 29% of sea grasses are either lost or degraded worldwide. Such rapid decline and deterioration of these systems are making coastlines more vulnerable.

Third, across all the cities worldwide, about 40 million people are exposed to a one-in-100-year extreme coastal flooding event, and by 2070, it will be 150 million people. Consequently, because of the growth of urban populations generally, and cities in coastal areas specifically, more and more cities are facing the growing risks of major storm events such as Hurricanes Sandy or Katrina.

Finally, the most vulnerable populations are likely to be in the poorest countries, and thus the least able to afford the risks and damages posed by coastal storms and floods. Around 14% of the population, and 21% of the urban dwellers in developing countries, live in low-elevation coastal zones that are exposed to these risks and damages.

Given these trends, there is an urgent need to develop a long-term strategy for investing in reducing the vulnerability of coastal populations to storm events. Such a strategy should have two primary features: protecting coastlines and populations to the risks posed by damaging storms, and restoring valuable coastal systems such as salt marshes, coral reefs, mangroves, sea grasses and sand dunes.

Once again, however, we are back to the crisis in ecological capital – without our understanding what we are losing as ecosystems are irreversibly converted, and the consequences for human welfare – then an import source of economic wealth is irretrievably lost, and as a consequence, the most vulnerable will suffer.

Q: The vulnerability of populations that are least able to cope is an issue that seems to cut across climate disruption. Is there also a relationship between poverty and the loss of ecosystem services?

Barbier: When any form of wealth of an economy declines, it is the poor that suffer disproportionately more. The same is true for the continuing decline in ecological capital worldwide. Poor people in developing countries will be most affected by the continuing loss of these critical ecological services.

In my book, Scarcity and Frontiers: How Economies Have Developed Through Natural Resource Scarcity, I argue that the world is entering a new era, the “Age of Ecological Scarcity”. The main development challenge of this era is the implications for global poverty. Exacerbating the problem is that, compared to past eras in human history, economic growth through exploiting abundant “frontiers” of land and natural resources will no longer be the means to improve the livelihoods of the poorest human populations.

The rural poor in developing regions tend to be clustered in areas of ecologically fragile land, which are already prone to degradation, water stress and poor soils. In addition, by 2019, half of the developing world will be in cities and by 2050, 5.33 billion people, or 67% of the population in developed countries, will inhabit urban areas. This brisk pace of urbanization means that the growing populations in the cities will be confronted with increased congestion and pollution and rising energy, water and raw material demands.

Although such environmental problems are similar to those faced by industrialized countries, the pace and scale of urban population growth in developing countries are likely to lead to more severe and acute health and welfare impacts.

Bill Becker is executive director of the Presidential Climate Action Project and co-director of The Future We Want. Parts of this interview were extracted from a recent blog post by Prof. Barbier and an upcoming article by Bob Costanza. This piece was reprinted with permission.

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The Good News About Human Nature: Most People Aren’t Jerks

She was wrong.

A broad breakdown in societal trust has undermined the idea of a common good that can be served by the collective disposition of resources. Voters trust neither government nor most individuals in society to fairly pursue the common good. Instead, they see both government and individuals as fundamentally selfish and out for themselves, not others.

This view of human nature has been a consensus until recently. That consensus can be traced back to the 1957 publication of Atlas Shrugged by Ayn Rand, a 1,200 novel that, in essence, advocated the unfettered pursuit of self-interest as the organizing principle for society. Despite the fact that the book became a best-seller, not many critics and intellectuals took it or its thesis seriously at the time. Who could possibly believe that a society based strictly on selfishness could work?

That skepticism was obliterated in the next several decades. One of the key blows was struck by evolutionary biologist Richard Dawkins, whose 1976 book, The Selfish Gene, argued that the gene is the fundamental unit of natural selection and has only one imperative: successfully reproducing itself in competition with other genes. We (and other animals), as bearers of these “selfish” genes, will therefore carry those traits — and only those traits –that help these genes reproduce. Dawkins implied that was all you needed to know to understand human nature, an idea that quickly led to an explosion of selfish gene-based explanations for every aspect of human behavior.

Then, in 1980, Milton Friedman, with his wife, Rose, published Free to Choose, a no-holds-barred polemic in favor of self-interested individuals making “rational”, unregulated decisions and against anything that interfered with this process, especially government action. So, in a powerful conjunction of economics and evolutionary biology, Ayn Rand’s glorification of selfishness gained the imprimatur of serious science. Being selfish was just human nature and should not be fought. Indeed, any attempt to do so was bound to do more harm than good. Thus was the original reaction to Atlas Shrugged turned on its head. Who could possibly believe that a society based on anything other than selfishness could work?

No doubt Ayn Rand would have been delighted with the progress of her big idea in the subsequent decade. Ronald Reagan was elected US president and Margaret Thatcher became Prime Minister of the UK, both practicing a politics best summarized as “government is the problem, not the solution” and both preaching an economic gospel that glorified the individual pursuit of wealth above all else. And her disciple, Alan Greenspan, was appointed head of the Federal Reserve in 1987 and remained there for 19 years, treated reverentially by both Democratic and Republican administrations.

Also in the 1980s, the breakdown of the postwar welfare states became undeniable and, by, the end of the decade, the Soviet Union and other “socialist” countries had ignominiously collapsed. Conservatives argued that all this was real world confirmation of Rand’s core idea: those who interfered with human selfishness would reap the whirlwind.

But right at its moment of greatest success, the conservative case on human nature was being fatally undermined. New thinking and research in evolutionary science showed that the “selfishness is all” camp was completely missing the mark on what makes humanity distinctive. It is not competition for individual reproductive success but rather cooperation for group reproductive success, facilitated by our capacities for symbolic thought (language) and transmission of learned information (culture), that has led to our success as a species.

In short, the key to understanding human nature is not the selfish gene, bur rather the “selfless gene”. The selfless gene allowed our ancestors to think and act as a group, thereby outcompeting other chimp-like species—literally leaving them in the dust. Moreover, our cooperative nature allowed us to build ever more complex ways of interacting with one another, which led to further evolution in the traits that facilitate cooperation (referred to as “gene-culture coevolution”). The end result of this dynamic was civilization and, eventually, the global interconnected society we live in today.

This is who we are. We are defined by our sense of fairness, adherence to group norms, willingness to punish those who violate such norms, willingness to share, and willingness to work for the good of the group, along with the high-level cognitive and cultural traits that enable us to be that way. We are not a species of seven billion selfish individuals, uninterested in anything save our own welfare and willing to cheerfully break any rule and hurt any other individual to secure it. Indeed, we think of such people as sociopaths and if their tendencies actually dominated humanity we would still be back on the savannah with the rest of the chimp-like species.

So the former consensus view on human nature is just plain wrong. It’s not the case that societies must rely exclusively on self-interest or die. In fact, societies have only prospered by transcending self-interest and harnessing the group-oriented instincts that make us human. As E.O. Wilson puts it in his new book, The Social Conquest of Earth, “At the higher level of….biological organization, groups compete with groups, favoring cooperative social traits among members of the same group. At the lower level, members of the same group compete with one another in a manner that leads to self-serving behavior. The opposition between the two levels of natural selection has resulted in a chimeric genotype in each person. It renders each of us part saint and part sinner.” (p. 289)

This makes clear that the center-left can only be successful if it sells its program as one that binds people together as a group, with attendant benefits and responsibilities. Otherwise, the “sinner” side of people will dominate over the “saint” side, reinforcing current levels of distrust and encouraging people to simply look out for themselves. Therefore, instead of shying away from appeals to cooperative instincts and the common good as somehow soft-headed, progressives should think of such appeals as the most realistic, theoretically sound way of building support for their initiatives. This is the profound implication of the new theory of human nature.

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