Jia Lyng Tang

Designing Perfectly Rational Humans: Economics between Philosophy, Cognitive Sciences, and Technology

For all of the seemingly unintelligible jargon and charts usually employed when talking about economics, what economists fundamentally do is study human behavior and interactions. Economists make inquiries and assumptions about human nature, which is the starting point of their economic theories and models. Furthermore, the particular way economists think about us humans ultimately affects many aspects of our lives—for better or for worse—as economic analysis is normally considered a determinant in the formulation of laws and policies that conform to the functioning of societies. As psychologist Daniel Kahneman says:

Economists bring [...] a unique set of intellectual tools, a clear conception of the forces that drive human action, and a rigorous way of working out the social implications of individual choices. Economists are also the gatekeepers who control the flow of facts and ideas from the worlds of social science and technology to the world of policy. The findings of educators, epidemiologists and sociologists as well as the inventions of scientists and engineers are almost always filtered through an economic analysis before they are allowed to influence the decisions of policy makers. In performing their function as gatekeepers, economists do not only apply the results of scientific investigation. They also bring to bear their beliefs about human nature.[1]

So, what is the economists’ view of human nature? Most economists would put it very simply: humans are essentially self-interested and rational; they respond to incentives, optimize resources and outcomes, and act independently based on full and relevant information. In short, humans are seen as perfect economic agents. Economists have seriously played with this ideal of rationality and self-interest, to the point that the caricature of Homo economicus was no more a joke, but truly a tenet for the discipline; and in their most well-intentioned attempts, economists trusted in those rational premises to push humanity into a higher level of welfare and development. How and why, in the mind of economists, we humans as social beings have left behind all the doubts, tensions, and pitfalls of reason and emotion, to be seen as a civilization of utmost self-controlled, amoral, opportunistic strategists? The turn from thinking of regular people to conceiving Homo economicus happened around the nineteenth century, when economists felt discontent with their status of social science, and envied the methodologies and achievements of natural scientists. “Scientificization” was the road taken to “legitimize economics among the scholarly disciplines.”[2]

From Ethics to Mathematics: An Unreasonable Path to Economic Rationality

The history of economic thought can be traced back to ancient times, with its origins in moral and social philosophy. Notably, until the eighteenth century economic thinkers kept close attention to the various ethical and psychological nuances of economic transactions. The unprecedented changes provoked by the Industrial, American, and French Revolutions brought new wealth, new conflicts, and the desire of a new man and a new social order.

On the eve of those events, Adam Smith wrote The Theory of Moral Sentiments (1759) and An Inquiry into the Nature and Causes of the Wealth of the Nations (1776), the two only books he published in life. The Wealth of the Nations is considered one of the founding texts of the nascent discipline of modern economics, and is commonly regarded as an apologia of unrestricted free-markets moved by self-interested rational agents. However, Smith ambitioned an intellectual project much more comprehensive than a treatise on markets and economy. Smith was a moral philosopher immersed into the construction of an overarching “Science of Man,” which comprised the fundaments of ethics and the sociability of the humankind—a sociability from which justice, science, arts, laws, and government were derived.[3] As part of this all-encompassing theory, Smith’s ideas about the economy could only be fully understood when associated with the principles laid down in The Theory of Moral Sentiments; namely, his view on how individual’s feelings for oneself and for others contribute to develop the sense of right and wrong, and how such sentiments are implicated in the social, economic, and political structures. Smith believed that the natural processes of socialization and learned exchange between individuals (of sentiments, ideas, and things) promoted fairness, justice and order—moral values that were for him the basis of civil society. Thus, he argued for a “natural liberty” by which individual efforts produced social good.

Notwithstanding, generations of economists have dismissed the first of Smith’s publications, clinging to a few aphorisms about the invisible hand and the non-benevolent butcher of The Wealth of the Nations. While recent authors firmly defend that one work was intended to be read with reference to the other, and have tried to redeem Smith’s reputation from its reductionist cold-hearted version,[4] for the sake of the modern economics practice those were biographical matters not to be considered; rather, they were a curiosity for historians.

Smith was an exponent of the British Enlightenment, which emphasized “social virtues” and was tied to the practical questions of the amelioration of society, giving reason a distinctive yet instrumental role. On the other hand, “the Enlightenment”, as a generally disseminated term, is identified with the French Enlightenment, which had a utopian, universalistic interpretation of reason. Reason, in the French acception, appealed to nothing less than the “regeneration” of man. French philosophers occupied themselves with the ideal of human perfectibility and with the elaboration of abstract principles, regardless of possible practical applications.[5]

The pursuit of an abstract, perfectible, rational man was very compelling for those dedicated to analyzing an increasingly intricate economy—especially in such convulsive times. Additionally, the very notion of an economic “system” conveyed itself as rationality and as a sort of “scientific” abstraction. As positivist approaches to sciences spread out, Smith’s ideas were taken over. By the mid-nineteenth century, different schools of economic thought started to converge into what is known as the Neoclassical Theory[6] —and since then, the rational man stripped of moral judgments definitely prevailed.

Despite technological progress and growing urbanization, economists of the nineteenth and early twentieth centuries lived in a society still rooted in an agricultural mentality of scarcity.[7] Neoclassical economists took scarcity as the foundation of their theory, focusing economics on “the problem of fulfilling the unlimited wants of humankind with […] scarce resources.”[8] The Neoclassical Theory asserts that, because of scarcity, agents (individuals and firms) must allocate their limited resources in the most efficient way, according to rational preferences: each agent is perfectly informed and avoids any option which could leave him/ herself worse off. Consequently, individuals maximize utility (the economic equivalent of “value” or “happiness”), firms maximize profits, and the markets work. Rationality, in this proposition, brings out a connotation of rationing and greed.

Economists counterbalanced their scarcity-constrained pessimism with a positivist confidence in a future propelled by “hard science” and technology. Indeed, already in the eighteenth century economists were inspired by the insights of natural sciences, transferring some of them into their economic hypotheses.[9] It was from the neoclassical period, however, that economists began advocating the heavy use of mathematical notation to codify economic reasoning. Instead of “political economy,” authors favored the term “economics”—more consonant to physics and mathematics—as the adequate denomination for the discipline. Universities and schools offering studies on Political Economy renamed such departments; and since the postwar, what is taught as introduction to economics, in courses all over the world, is the neoclassical theory. Although the belief in rational agents and perfect markets was shaken during the 1930s Depression, in the second half of the twentieth century Neoclassical Economics became so dominant that today it is carelessly given as synonym to economic thinking.

Among practitioners and the academia, the merging of economics and mathematics was mainly celebrated. For decades, economists were proud of their intellectual accomplishments: the profusion of equations was persuading enough to represent a proof of “verifiable” economic theories. Economists borrowed tools and language directly from the physicists, and succeeded; mathematically supported models and “laws” of economics were faithfully embraced by policy makers and rewarded with Nobel Prizes. A mathematical framing was particularly enticing to politicians and bureaucrats in need to show “measurable results and deliverables.”

The Economic Profession in a Quandary

Criticisms to neoclassical economics were somewhat silent, until the global financial crisis of 2008 burst. Then, economists were put in the spotlight, in every media, as the whole world was asking why no one warned about the coming disaster. The best brains in the economic sphere spent years of hard work perfecting their formulas; how could they not predict the problem? Trying to address the perplexity even of the Queen Elizabeth II, the British Academy gathered its most eminent experts in the economy, who responded in a letter:
So in summary, Your Majesty, the failure to foresee the timing, extent and severity of the crisis and to head it off, while it had many causes, was principally a failure of the collective imagination of many bright people, both in this country and internationally, to understand the risks to the system as a whole.[10]

In the words of Paul Krugman, “economists, as a group, mistook beauty, clad in impressive-looking mathematics, for truth. [...] Unfortunately, this romanticized and sanitized vision of the economy led most economists to ignore all the things that can go wrong.”[11] James K. Galbraith, on the other hand, does not concede the excuse of beauty: “The clumsy mathematics of the modern mainstream economics journal article is not like this. [...] The purpose, one suspects, is to intimidate and not to clarify.”[12] For Wolfgang Kasper, many “still cling to the neoclassical paradigm, because it makes teaching and research easy, facilitates publications and builds on established professional networks.”[13] And Joseph Stiglitz acknowledges that “changing paradigms is not easy. Too many have invested too much in the wrong models.”[14]

While the sudden lack of credibility in the profession gave opportunity for a number of critical voices to raise, defending non-mainstream economic positions—and alleging that there were actually a few warnings against such a wrong path, but also echoing complaints on how the skeptics of the neoclassical model were ostracized, both in academic and professional circles—what came into evidence is that the field of economics is now adrift. Surely, economists disagreeing with each other on every single topic has always been a frequent picture in everyday news. But although such discussions may have involved serious concerns as unemployment or debt rates, before the crisis economists have disputed mostly over the details and refinements of how to apply the neoclassical theory, not really questioning its postulates. Eventually, the last financial crash made them feel really lost.[15] It seems however that more and more of them recognize that those models based on the deeply ingrained premise of rational, all-knowing, selfish agents didn’t work. Economists, yet puzzled, admit that the “collective imagination of many bright people” failed to imagine that human behavior and rationality are much more complex than their most sophisticated equations.

New Perspectives on Rationality: Cognitive Sciences and Information Technologies

The common understanding of the word “rationality” is rather strict; often, it is opposed to emotions:
we have a prevailing view in our society—not only in the policy world, but in many spheres—that we are divided creatures. Reason, which is trustworthy, is separate from emotions, which are suspect. Society progresses to the extent that reason can suppress the passions.[16]

But the process by which we make rational decisions is not so clear-cut. In fact, a new body of research in cognitive and neurosciences, stemming from the works of Antonio Damasio,[17] has shown that rational decision-making is only made possible because emotional, intuitive, induced, and instinctive factors give us the necessary inputs to assess between different situations. Particularly, emotions take part in our ability to set goals, prioritize and perform rationally. Without emotional inputs, we would not have the drive to take any action, and we would tend to be perpetually shifting between alternative options, unable to arrive at a good decision.[18] These findings, allied to technological advances in equipment and procedures which analyze the brain and mind in relation to the body and to other influences, have spanned across a variety of disciplines investigating human behavior (for instance, psychology, linguistics, philosophy, anthropology, sociology, medicine, artificial intelligence), contributing as well to the surge of new branches of interdisciplinary economic research, such as behavioral economics, behavioral finance, and neuroeconomics.

Rationality in mainstream economics is understood as a pure cost-benefit analysis. It is about seeking the most cost-effective means to achieve a specific want, whose intrinsic qualities are irrelevant (wants do not need to be explained). Costs of given actions are weighed against benefits, and choice will be made for the option that maximizes personal advantage. Behavioral economics challenges this position, claiming that human rationality is bounded, as are our attention, willpower, and selfishness. Humans are not able to make such efficient analysis of every situation, as stated in orthodox economic theory. Because human capacity to collect, process, and retain information is limited and flawed, we often rely on heuristics (approximate rules of thumb), and not on strict logic. We can also be primed by underlying factors of which we are not aware. We have frequent problems of willpower, doing the opposite of what we know would be the best for us (think of overeating, procrastination, traffic infractions). Finally, our self-interest is neither unlimited nor self-standing, depending on elements like social and environmental conditions and the psychological mechanisms of reward and satisfaction.

The beginnings of behavioral economics are related to the works of Herbert Simon and his theory of Bounded Rationality (people irrationally seek satisfaction, instead of maximizing utility), and of psychologists Amos Tversky and Kahneman, who compared economic models of rational behavior to their cognitive models of decision-making under uncertainty and risk.[19] Behavioral economics applies psychological and cognitive parameters in the design of economic experiments, including a wider set of variables into the generation of formal models. Neuroeconomics contributes with another layer of information, by observing brain activity during the experiments through neural recording techniques (fMRI, PET, EEG, and others). Behavioral finance makes use of the behavioral approach to analyze systematic errors and inefficiencies in market behavior.

Behavioral economics has categorized a number of the deviation patterns of human behavior from the ideal rational agent. For example, when making decisions, we usually fear a possible loss much more than we appreciate potential gains; we respond differently depending on how a question is put, even if either proposition mean the same; the order of things, the unnoticed presence or design of an object, involuntary body movements, all have a degree of influence in our actions.[20] Through modeling, behavioral economics aims to evaluate the impact of such influences; some behavioral economists go further and suggest integrating these findings into different forms of policy design.[21] These developments help bring a less idealized, more empirical vision of human behavior into the study of economics, employing cognitive experiments and observations of real world situations, yet still remain attached to the rigor of mathematical modeling.

Meanwhile, fast-developing information technologies are also dealing with the issue of humans’ imperfect cognitive abilities, but in another direction. Much of the applied research in this area intentionally pursue flawless rationality by identifying and correcting our faults through devices that try to artificially extend, mimic or surpass human intellect. Attention, reasoning, perception, and analytical skills are being altered and/ or expanded through intensive use of increasingly potent and advanced computing power, challenging the boundaries between human and machine capabilities. The use of cognitive-enhancing technologies is already taking place under a variety of forms, in many of the productivity tools and leisure gadgets available nowadays—which are expected to become progressively ubiquitous and embedded. Clearly, this is transforming our behavior and our economies in significant and unforeseen ways;[22] still, we humans and specially the younger generations tend to absorb and then take such changes for granted (as has happened with today’s Internet search engines, online travel booking, and stock market trading algorithms).

Concerning economics and its need for a better interpretation of the behavior of economic agents, the omnipresence of information technologies means that agents can be human, can be non-human, or can be improved human decision-makers—with their respective, uneven levels of rationality, flaws, and biases. In many sectors of the economy, some decisions are already subordinate to partially or completely automatized systems.[23] Adding to the mosaic of discrepancies in economic behavior analysis, it is important to consider the aggravation of wealth gaps, among and within countries, as poorer individuals have lesser and worse conditions to make appropriate economic choices.[24]

What’s Next for Economics?

For a long time, economics was obliviously and uncomfortably enclosed in an isolationist, static, and cryptic position. Eager to conquer as much respect and admiration as other disciplines, the economic profession managed to stretch its authority into academia and policy, but was not truly open to collaborate (internally or externally) neither to reevaluate its precepts—even though collaboration, reevaluation, and transparency were in countless circumstances needed, asked, and opportune.

As we see, however, economists have started to amend this attitude. The post-crisis atmosphere indicates that there is no alternative: clutching to delusive metatheories will not keep the problems away. As individuals today are able to access multiple and better sources of information, they are keen to apprehend the state of affairs and to demand plausible answers; hence, economists can no longer make claims in the void and protect themselves behind a purposely obscure knowledge. The prevalent opinion among intellectuals, the lay public and business people, along with non-mainstream economists, is that economies and economics entangle elements of our lives and societies much too important to leave solely in the hands of theoretical purists and indoctrinated policy-makers.

Overall, economics must continuously refine its understanding of human beings and the myriad of processes we humans create. To better comprehend and represent human behavior, overture to other fields of knowledge is peremptory. Not only the paradigm of strictly rational and self-interested agents cannot be sustained, any immutable ideation of human behavior is from its inception misleading, as the versatile human nature is ever changing and evolving. This capacity of adaptation and reinvention is inherent to us; it is the evolutionary key that has allowed our success as a species.

Likewise, economics must evolve and adjust in order to stay connected to its objects of study, keeping track of changes without loosing historical perspective. Economics has by large neglected history, despite having extensively incorporated data from the past in its mathematical models, in the form of statistics; commonly, economic analysis was merely about making simple extrapolations for the future from dry statistical sets deprived of context. This economics of frozen numbers couldn’t help but offer a distorted picture of a static, atemporal world.

With respect to our imperfect economic behavior, the reality is that imperfections prevent economies from becoming stationary. Economies are dynamic because humans, by trial and error, promote exchange, enterprise, innovation, unexpected discoveries, wars, crime, environmental disasters, solidarity, and every sort of incremental or disruptive advances and mistakes—whose consequences, all in all, are unpredictable. The complexity of human actions and of economies cannot be grasped only through mathematical models, sophisticated as they might be, if they lack the kind of thoughtful judgment and perspicacity that constitute what is called a wise assessment. The current paradigm impelled economists to produce fine assemblages of equations, with variables and coefficients meticulously organized and analyzed in discrete parts—all of which is not the same as making sense of the whole figure.

Instead, economists may think more in terms of emergence.[25] Emergent entities are composed by many different elements that interact; from the patterns of these interactions a new entity arises, which has distinct, novel properties. The result is thus greater than the sum of the parts, and their interrelations work top-down and bottom-up. Therefore, emergent systems cannot be studied by taking their constituents separately. Economies and human behavior can be seen as phenomena of emergence.

In a similar direction, economists should regard rationality not as an independent, omniscient data-crunching capacity, but as a creation of the mind (an emergent entity itself). As fruit of the processes of individual and collective minds, economic decisions are subject to potentially all kinds of endogenous and exogenous conditioning issues. As the mind can be challenged, trained, and developed, so can reasoning and rationality be improved: by education, by better living conditions, by social ties, by technology. And as the mind can reflect, feel, fail, react, and invent, so may economic rationality be less about crude self-interest and more about sense, receptiveness, exchange, and serendipitous findings.

At last, the perfectly rational humans that economists once envisioned are already part of the history of economic thought. Now economists must strive for better economics, and let humans be just humans.

[1] Daniel Kahneman: “Introduction,” in: Edge: A Short Course In Behavioral Economics. October 1, 2008. Status: 12/04/2011, http://www.edge.org/3rd_culture/thaler_sendhil08/thaler_sendhil_index.html.

[2] E. Roy Weintraub: “Neoclassical Economics,” in: The Concise Encyclopedia of Economics. Status: 12/04/2011, http://www.econlib.org/library/Enc1/NeoclassicalEconomics.html.

[3] See Nicholas Phillipson: Adam Smith: An Enlightened Life. New Haven 2010.

[4] See Emma Rothschild: Economic Sentiments: Adam Smith, Condorcet and the Enlightenment. Cambridge 2002.

[5] See Gertrude Himmelfarb: “The Idea of Compassion: the British vs. the French Enlightenment,” in: National Affairs, 145, (Fall 2001), p. 3–24.

[6] The transition from “Classical” Political Economy to Neoclassical Economics is due to the Marginal Revolution and its proposition of Value Theory and Distribution Theory, according to which the value of an object is not inherent, but depends on supply and demand.

[7] See Wolfgang Kasper: What’s wrong with Neoclassical Orthodoxy? An Overdue Methodenstreit. November 2010. Status: 12/04/2011, www.nzbr.org.nz/site/nzbr/files/Kasper%20paper%204.pdf.

[8] “Economics Basics: Utility,” in: Investopedia. Status: 12/04/2011, http://www.investopedia.com/university/economics/economics5.asp#axzz1rkNGoo2j

[9] For instance, Richard Cantillon’s competition markets imitated Isaac Newton’s laws of inertia and gravity; the Physiocrats’ circular flow of income emulated body blood circulation; W.S. Jevons related growth cycles with the periodicity of sunspots.

[10] Tim Besley and Peter Hennessy in a letter to Queen Elizabeth II, British Academy, London (07/22/2009)

[11] Paul Krugman: “How Did Economists Get It So Wrong?” in: The New York Times, (09/06/2009).

[12] James K. Galbraith: “Who Are These Economists Anyway?” in: Thought and Action, The NEA Higher Education Journal (Fall 2009), pp. 85–97, p. 86.

[13] Kasper: Neoclassical Orthodoxy (2010).

[14] Joseph Stiglitz: “Needed: A New Economic Paradigm,” in: Financial Times, (08/19/2010).

[15] Among several articles and other public manifestations of soul-searching, it is noticeable for instance that:
- universities, teachers and professionals are questioning the curricula, the relevance and the purpose of economics courses (Kasper: Neoclassical Orthodoxy [2010] and “How Has The Crisis Changed The Teaching of Economics?” in: The Economist, [09/17/2010]. Status: 12/04/2011, http://www.economist.com/economics/byinvitation/questions/how_has_crisis_changed_teaching_economics?page=1);
- economists associations consider imposing a code of ethics to the profession (George DeMartino: “On The Need for Professional Economic Ethics,” in: The Economist, (01/06/2011). Status: 12/04/2011, http://www.economist.com/blogs/freeexchange/2011/01/economics_1);
- billionaire financier George Soros sponsored the creation of an ambitious Institute for New Economic Thinking, whose goal is to find a new paradigm for the discipline and “to inspire the economics profession to engage the challenges of the 21st century” (Institute for New Economic Thinking: Why INET? Status: 12/04/2011, http://ineteconomics.org/about/why-inet).

[16] David Brooks: “The New Humanism,” in: The New York Times (03/08/2011).

[17] Antonio Damasio: Descartes’ Error: Emotion, Reason and The Human Brain. New York 1995.

[18] See Paul Bloom: Introduction to Psychology (Spring 2007). Status: 12/04/2011, http://oyc.yale.edu/psychology/introduction-to-psychology.

[19] See Daniel Kahneman, Amos Tversky: “Prospect Theory: An Analysis of Decision Under Risk,” in: Econometrica, 47, no. 2 (March 1979), pp. 263–292.

[20] A notorious illustration of how to “nudge” human behavior: Amsterdam Schiphol airport used to bear heavy expenses just to clean its male restrooms, until it realized that, concerning urinals, men behave better when there is something to target at. Etching a fly close to the urinal drains reduced the maintenance costs by 80 percent. Since then, this solution has been replicated in different versions around the world.

[21] See Richard Thaler, Cass Sunstein, John Baltz: “Choice Architecture,” in: Social Science Research Network (April 2010).

[22] For a selection of articles speculating on the social and economic implications of the advancement and pervasive use of information and cognitive-enhancing technologies, see: Jamais Cascio: “Get Smarter,” in: The Atlantic (July/ August 2009); Martin Ford: “Anything You Can Do, Robots Can Do Better,” in: The Atlantic (February 2011); Paul Krugman: “White Collars Turn Blue,” in: The New York Times (09/29/1996); John Markoff: “Armies of Expensive Lawyers, Replaced by Cheaper Software,” in: The New York Times (03/04/2011); “I, Robot-Manager,” Schumpeter Column, in: The Economist (03/31/2011); Clive Thompson: “What is I.B.M.’s Watson?” in: The New York Times (06/16/2010).

[23] Many financial mechanisms are based on highly automated procedures, and this was deemed as one of the reasons why the last credit crisis couldn’t be contained, spreading from the default of subprime mortgages in the United States to the entire global financial sector.

[24] For a comparative reading between an orthodox and a behavioral analysis of decision-making under extreme poverty, see William Easterly: The Elusive Quest For Growth: Economists’ Adventures and Misadventures in The Tropics. Cambridge, MA 2001, and the works of Sendhil Mullainathan, Status: 12/04/2011, http://www.economics.harvard.edu/faculty/mullainathan/papers_mullainathan.

[25] One of the influential thinkers who had been close to the idea of emergence was the economist and philosopher Friedrich Hayek (1899–1992), who defended the thesis of spontaneous order and limited human knowledge in the frameworks of law, politics, and markets.

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