(upbeat music) - Who makes the choice to answer in the neoclassical economics what causes individuals? They emphasize individuals to the extent of advocating what they call
methodological individualism, namely the view that every explanation has to ultimately end in individualism. So nothing like classes. I mean, classes are
made up of individuals, so in order to properly
understand what say Marx called the working class, you need to go down to the individual level and explain the choices
made by those individuals and aggregate them to
more macro dimension. Now, this individualist vision is of course not the only way
to theorize about the economy and society, but this
has been the dominant way at least in the last few
decades, since the 1980s. This individualist vision
is essentially a parable of individual freedom. So the vision is that individuals
can get anything they want if they're willing to pay the right price, whether it's ethical, resource, food, or some toy that the children will forget by next Christmas. People can produce anything without being told what to produce. If they can make money, they can use that production method that they find most profitable, whether it's, I don't know, some microchip made with
high-tech machines or, I don't know, footballs owned by some poor children in Pakistan. There's no higher authority whether it's the central planning
board of a Soviet style or feudal lord or even the Pope. Who can dictate what
individuals should do? So that's a very kind of powerful message. This is about freedom. And on this basis, actually
many free-market economists have argued that there is
an inseparable relationship between economic freedom
and political freedom. This is the very inflation
message coming from books like Frederick Hayek's
"The Road to Serfdom" or Milton Friedman's "Free to Choose." Moreover, the individualist
view provides a paradoxical but very powerful moral justification of the market mechanism. We, as individuals, all make choices only for ourselves in this vision. We're not trying to
further some greater good, but the paradoxical
result is the maximization of social welfare, and in this vision, we don't need individuals to be good to run an efficient economy, in that they would, the individualist visionaries would argue that it's exactly because people are bad, people are self-seeking that
the economy is efficient. In this context, this quote Adam Smith has been very popular. "It is not from the
benevolence of the butcher, "the brewer, or the baker
that we expect our dinner, "but from their regard
to their own interest." Now, in a similar context, Milton Friedman said that duty of corporations is
ruthlessly maximizing profit. Then the society, if it wants, can tax the corporation and use the money to do nicer things, but if they don't do that, the corporations don't do that, the economy will be less efficient. This is a very powerful
moral justification of this individualist
vision of the economy. In response to this quote from Adam Smith, the Swedish journalist
Katrine Marcal wrote this very interesting book called "Who Cooked Adam Smith's Dinner?" She's asking, okay, Mr.
Adam Smith, you say it's because of all these
self-seeking behaviors of brewer, butcher, baker that you have your dinner. Well, actually, who cooked your dinner? You didn't cook it. Yeah, in his case, it
turns out to be his mother, because he was never married. And when his mother passed away, one of his cousins came
in and cooked for him, so Michelle is asking, look, I mean, household work has been completely
written out by economics. He talks about butchers and bakers that are selling
things and him having dinner, but what happens in between? There is no mention. Anyways, it's a very interesting and easy-to-read introduction
to feminist economics, so you might want to check that out. So these are very appealing political and moral justifications have been very influential in making a lot of people accept this
vision as the correct vision of our economy and society, but when you look at this more carefully, there are quite a few serious problems. Well, first of all, as for
the political justification, actually in reality there is no clear relationship between our countries' economic freedom and political freedom. A lot of dictatorships had
very free market policies like Chile under General Pinochet. A lot of democracies
have low economic freedom because they have high taxes
and lots of regulations, so in this view, I mean,
Scandinavia is a very bad place. I mean, there is no
economic freedom there, what, not no but, little
economic freedom there. And indeed, many supporters of this individualist view have argued that political freedom can be and has to be sacrificed
for economic freedom. This is why people like Hayek and the Chicago economist Harberger openly supported Chilean military dictatorship. They said the most important
freedom is the freedom to use your property to make money. And if someone is trying
to meddle with that, like the socialist government
of Salvador Allende, it's only right that that group is removed and economic freedom restored. In terms of the moral justifications, we know that there are lots of economic theories including neoclassical market failure approach that says that unrestrained pursuit of self-interest by
individuals may not produce socially desirable economic outcomes. Individual costs and benefits
diverge from social costs and benefits very often to
use the neoclassical language, because of things like externality, public goods, monopoly, so actually, you cannot allow individuals to engage in unconstrained self-seeking. That is actually bad for society, so that moral justification given in this code actually collapses. It's not simply because
of the power of the idea that this view has become dominant. You have to put it in the
context of real-world politics, because this individualist
view does not question the underlying distribution of income, wealth, and power, and therefore it is very much liked by people who hold strong positions
in the status quo. We may also add that there are funding of particular political parties that have pro-market
view, pro-corporate view. Some of these people and companies might channel advertising spending towards a particular news media which
tend to support this view, so another problem with
this individualist vision and this is something that has been very much emphasized by people like Herbert Simon and
John Kenneth Galbraith. These economists have
looked at the reality and tried to see how
economic decisions are made, and they pointed out, look, at least from the late 19th century, this individualist vision of the economy has become outdated, because with the rise of
these giant corporations, you started having this very complicated
decision-making structure, which makes our decisions in a way that is completely different
from what individuals do. Basically, the reality is that most important economic
actions in our economies have been undertaken not by individuals, not by free individuals, but by large organizations
with hierarchical, that is, power based,
decision-making structures. Corporations, governments, trade unions, and increasingly even international organizations. So individualist economic
theories misrepresent the reality of economic decision-making by downplaying or even completely ignoring
the role of organizations. The neoclassical economists emphasize that the individual is the
smallest irreducible social unit. But philosophers, psychologists, and even some economists have long debated whether
the individual is an entity that cannot be divided further. All individuals possess conflicting preferences within themselves. This is known as the
multiple self problem. Now, of course this kind
of phenomenon happens because people have multiple
roles in their lives. So a man might be completely selfish in terms of sharing household
work with his partner, but then he might be so selfless in a war and is willing to take a
bullet for his comrade. In different contexts,
different value systems, different preferences
that rise up above water and that control the person. In another context, it would
be another set of preferences. Another reason why it is
the multiple self problem is due to what is known as
the weakness of will. You know the story of Ulysses. He was sailing through this place where there were these sirens
who sing beautiful songs and hypnotize the sailors so that their ships crash and sink. But then Ulysses figured out
in order to navigate this, you have to make the
sailors deaf by putting wax in their ear, but then he had
to hear things to navigate, so he asked people who tie
him, the mast of the ship, so that he cannot jump to these sirens. Basically, sometimes we
have weakness of will. We decide that I'm going to
live a healthy lifestyle, and then I go to a restaurant and then I see chocolate
brownies in the menu and then my will just crumbles
and I have to order it. Now, this problem of weakness of will bothered especially
the Greek philosophers, the old days, so much
that they even invented a name for it, akrasia. So basically, the point is that because of different roles that we play in different contexts, and because of our weakness of will, we are internally divided. We're not a coherent being. The second aspect is what I
call the embedded individual. Individuals are not atoms because they are not clearly separable from other individuals. They are embedded in the society. Let me explain what I mean. Economies working in the
individualist tradition do not ask where individual preferences come from. They treat them as the ultimate data, generated from within
sovereign individuals, and the idea is best summarized
in this Latin phrase, which I'm not even going to try to read. I never learned Latin, but
translated, this means taste is not a matter of dispute. So you don't ask questions about why people like this, like that. If people like, I don't know, trashy TV shows, give them to them. Yet, our preferences are very strongly formed by our social environment. Our family, our neighborhoods, our schooling, our social classes. Now, this is different
but when I first came to this country in the late
80s as a graduate student, wine drinking was not
very widespread here. So people normally drank beer and they considered that
people drinking wine as this pompous upper-middle-class people and working-class people, the joke would be like going to a wine bar would be
becoming a class traitor. But then I saw this very
interesting advertisement for a French beer in which the stereotype was completely reversed. So this French beer advertisement was like this very trendy
young people clubbing. They were drinking beer, and it would be kind of
interspersed with these scenes of really kind of grumpy old
man sitting in provincial bars in France drinking wine like this. So in that country, actually
the beer was the trendy thing. So coming from different backgrounds, you don't just consume different things but you actually want different things. This is known as the
process of socialization. You basically get trained by
the society how to behave. And this means that we can't
really treat individuals as atoms separable from each other, because individuals are, if you use a fancy term,
embedded in the society. They are not free of society. The third reason why the
neoclassical individualist vision is problematic is because
individuals are impressionable. We can be and we are deliberately
manipulated by others. So the socialization process
may not be deliberate. Simply coming from a
working-class background or coming from an immigrant family, no one is deliberately
teaching you what to think, how to behave, but you kind
of imbibe those things, but sometimes this influence is exercised deliberately by others. Now, frankly, most aspects of human life, whether it's education, religious teaching, the mass media, they all have some
element of manipulation. So I'm not necessarily
using this word manipulation in totally negative sense, but we have to recognize
this dimension if we are to fully understand how
individuals think and behave, and this manipulative aspect is taken seriously by some countries. So in countries like Sweden, Norway, and the state of Quebec in Canada, there could be other countries, advertising for children
under the age of 12 is banned. So there is no advertisement for toys. Yeah, when I was raising my
son, I mean I could see that. I mean, as soon as something
comes on TV, he wants it. Why shouldn't you? Well, even in this
country, which has rather kind of a liberal attitude
towards these things, I mean, the advertisement
for cigarette is banned, so people do recognize the manipulative
dimensions of advertising. Individual preferences are manipulated at the more fundamental level. Some people trying to
impart certain worldview that make their lives easier through funding political parties, funding research, giving
advertising revenue to particular types of media and so on. So if you can convince poor people that their poverty is
entirely their fault, if you convince those people that they shouldn't be
asking anything from society, they should all try to
stand on their own feet, and if you can make them think that this is a very noble moral position, then you don't need to deal with poverty, because the poor people will
then only blame themselves and try to cope with it in any way they can without demanding that there should be
a bigger welfare state or targeted poverty programs
or help with poor children. But that makes the life of the
rich and the powerful easier. And then there's the issue of what I call the complicated individual. Basically meaning that the individuals have complex motivations. They are not unidimensionally
selfish beings as portrayed in neoclassical economics. Now, of course when you say this, quite a few neoclassical
economists will say, oh no, no, no, we recognize
the existence of other motives, but then they say, we're just making a convenient assumption. It's not essential to neoclassical theory. When people say that, I think
they are being disingenuous, because if it was such a
kind of non-consequential, such a marginal assumption, which is made only for
the sake of convenience, why do 99% of neoclassical articles assume unidimensional
self-seeking individuals? At least you can say that
neoclassical economists tend to assume that self-seeking
is the most natural motive, and most important motive. Maybe not the only motive but the most natural and most important. And when combined with the
assumption of rationality, which we are going to
going into a bit later, the conclusion is that we should let individuals do what they want. They know what they want, they know how to achieve it
in the most effective way because they are rational beings. Let them be. There comes the recommendation for laissez-faire free-market policies. Of course, people have, including many economists, but also philosophers, psychologists, and other people have
for centuries questioned this assumption of selfish individual. Well, essentially, let me just give you two broad main points. The first point is that self-seeking is, self is actually too narrowly defined. With the implicit assumption that individuals are incapable of recognizing long-term
systematic consequences of their actions, something that is known as
enlightened self-interest. In the 19th century, some capitalists in Europe actually openly
advocated regulating child labor. They were not doing it
entirely for the benefit of the children because these
were people who recognized that if you made these children
work and not go to school, the quality of future
labor force will be low. They wanted a better educated, healthier labor force, and they said, for that, we need to regulate child labor, even though that meant these people being able to make less money, because they were all using
child labor at the time. So this is an example of
enlightened self-interest. It's for your long-term benefit, but you're willing to sacrifice
short-term benefit for that. I mean, this is not unrecognized, but very rarely incorporated into neoclassical economic theories. And the second main point is this vision of selfish individual is very often wrong, simply wrong, because people
are not entirely selfish. Many people give to charities. They give their time to charities. They help strangers. I mean, these are just
altruistic behavior. It's not even long-term self-interest, enlightened self-interest, because you are helping a stranger. I mean, the chance of that stranger reciprocating is basically zero. I mean, to give you some
more extreme examples, a firemen enters a burning
building to save an old lady, a stranger jumps into a
sea to save some children, even though they know that
there is a very high chance of themselves being killed. I mean, how more altruistic can you be? When you die, any amount of possible benefit
cannot compensate for it, but people still do it. The point that I'm trying
to make is not to deny that people are selfish. Very often, probably in
majority of the cases, we are selfish, but we're also
moved by other motivations. Patriotism or class solidarity. Our sense of fairness. Friendship, love, even idle curiosity. Now, the very fact that
there are so many words that describe human
motivations actually is a proof that we are very complex beings. Yeah, so actually,
economists have wasted a lot of times trying to reconcile
reality with their theories. So there have been huge
debate on why people vote. Economists cannot understand because going to the voting
booth costs you some time and maybe money, and the chance of you affecting the
election is basically zero. So why should people vote? For ordinary people,
this is not a paradox. This is what you do. This is your duty. This is your commitment. This is your participation but when you have this
unidimensional view of selfishness, it's something that you
cannot understand, why? Why would people do that? So basically, we have to recognize that we have very complex motivations. Very often, we are selfish, but that is not the only
motivation that we have, and ignoring those complexity of motivations make our economic
theories so much poorer. And finally, we have what I
call the bumbling individual, individuals that are not
as rational as assumed in neoclassical economic theory. In neoclassical theory, individuals are rational in the sense that they ignore all the possible states of the world in the future, and they're able to make very
complicated calculations about the probability of each of the state and then they do cost-benefit calculation, and they make a decision. The implication is that we let people be, because they know what they're doing. This notion of rationality assumed in most neoclassical economic
models is a rationality that no one actually in reality possesses. Herbert Simon actually called
this Olympian rationality. It's like God-like rationality, the gods that reside in the
Greek mountain of Olympus. It's not human, or some people
call this hyper-rationality. So it's a totally unrealistic assumption but when you point it out, the standard rebuttal from
many neoclassical economists is that of course it's just
a simplifying assumption, but as far as that the
resulting prediction is correct, who cares whether the
assumption is realistic or not? These days, this kind of
defense really rings hollow, because behind the 2008 financial crisis was this theory called
efficient market hypothesis, which is basically
predicated on this assumption that humans have hyper-rationality, and that has given us predictions that this kind of crisis
will never happen. Well, the point is that people are basically not very rational. Herbert Simon called
this bounded rationality, and so we're too easily swayed by emotion, in our decisions, we've seen this in the financial market recently, euphoria, wishful thinking, panic, herd instinct, undue
pessimism and whatnot. Our decision is heavily
affected by the framing of the question, so you
could give the two questions of same substance and people
will respond differently. So for example, I mean, as a minor example, there
was this research showing that if you asked students to
register by a certain date, but in one version you say, if you don't do that, you'll get fine. In another version, you'll
get a discount if you apply, sorry, if you register early. The substance of the kind
of the thing's the same but the researchers found that people registered early if it was put as a penalty rather than early register discount. I'm not enough of a psychologist to tell you why this is the case, but it's a very simple
example related to students that show us how the framing
of the question is relevant. Psychologists have shown that we tend to overreact
to new information, and underreact to existing ones. Once again, a lot of research in the financial market has shown this. Daniel Kahneman, the
psychologist who actually, earlier in his career
worked with Herbert Simon and got the Nobel Prize in
Economics in 2002, argued that we have two systems of thinking. One is intuitive, heuristic system, the other is a rational thinking system, and Kahneman pointed out
that most of the time, we are working with this
heuristic way of thinking, and only when we really kinda concentrate, we mobilize our rationalist thinking, so this means that most of the time, we're making lots of irrational decisions. So this is not to say humans are incapable of rational thinking, rational choice, but this is not what they usually do. And above all, we are overconfident about our own rationality. We think we are clever
than what we really are. So unless you try to incorporate some of these aspects into your theory, your theories are going
to be highly unrealistic and produce a misleading results. It's been at least 100 years, possibly 150 years that individuals as decision-makers have become marginal. I would say it's basically
18th-century vision of the economy when, yes, I mean, companies were
basically one capitalist, 25 workers being beaten up
by the capitalist personally all the time and shouted at. Yeah, in that kind of economy, maybe you can reasonably apply
this individualist theories, but today the world is
completely different. Now, I mean, you have these
huge transnational corporations. The largest 200 transnational
corporations produce something like 10% of world GDP. Some of them employ millions of people. In many countries, our
governments have huge influence on how the economy is run. Usually they are the
biggest single employer. In many countries, they
could employ upward of 20% of the labor force. Individuals are not the atomistic single-minded self-sufficient
rational beings that is assumed in
neoclassical economic theories. A paradoxical result of
conceptualizing individuals as highly imperfect beings, different from what is assumed in the standard neoclassical economics is that it actually makes
individuals count more, not less, because, for example, it's exactly because that we admit that individuals are products of society that we can appreciate more the free will of those who make decisions that go against social conventions, prevailing ideologies and
their class background. When we accept that human
rationality is limited, we get to appreciate more the initiatives exercised
by entrepreneurs. So actually, in a world
of perfect rationality, there would be no entrepreneurs, because everyone knows what is
a good business opportunity. And everyone will be doing it. It's just a matter of getting there a bit earlier than others. Now, of course, by
emphasizing the importance of real choices, does not mean that we can do anything we want. If you watched, I don't know, Disney movies or read
too many self-help books, you might think that
you can achieve anything if you believe in yourself. But the options that people choose from or can choose from are
usually very limited. Very often, it's because
of the limited resources that they command, but it is also because they are socially
conditioned and are, well, basically, taught to limit
the range of what they want and what they think may be possible. This is done through the sort of less deliberate
socialization process, but also through deliberate manipulation of people's preferences. So I think we need to question
this vision of the individual and vision of the economy, made up of these particular type of individuals assumed
in neoclassical theory, and only when we
incorporate the multifaceted and limited nature of individuals, we can begin to build the theories that allow us to understand
the complexity of the world, and that I think is the most
important intellectual project that the economists have to confront.
