The Moral Economy – review of a compelling new field of economics

It is common to contrast those who want to interpret the world and those who want to change it. Karl Marx had a formulation to that same effect. 

Modern economics can claim to do both. Economic interpretation is powerful because people so often accept its claims and act on its prescriptions. But what if the influence that economics typically has is simply to arrange matters so as to fit more closely its pre-ordained interpretation? 

There are plenty of examples of economic policy that assumes text book solutions and, for better or for worse, is pushed and pushed, despite reverses, until the reality comes closer to what the text book describes. 

When we use the word ‘market’, we use a metaphor for interpretation that is extraordinarily plastic. True markets, for the sale of produce in urban settlements, pre-date modern economists by thousands of years, but the reality of most markets today bear no relation to those original local markets, nor are they a good approximation of the economic text books.

So, what happens if pushing the text book model changes things for the worse? Well, then the text books would need to change for a start. This is part of the work of Professor Samuel Bowles who works at the Santa Fe Institute, leading a programme of work on behavioural sciences. With CORE (Curriculum Open-access Resources for Economics), an international collaboration of economists, he is currently developing a new curriculum for undergraduate economics.

Bowles is a brilliant thinker, whose work crosses boundaries across academic disciplines. His last book, A Co-operative Species: human reciprocity and its evolution, written with Herb Gintis, combined modelling, archaeology and evolution in order to re-tell the biggest story of all, the story of humanity. I reviewed the book on this blog some years ago. 

The subtitle of his latest book, The Moral Economy, summarises the argument of the chapters that follow, each based on a lecture he gave at Yale, in nine short words: why good incentives are no substitute for good citizens.

The idea that people respond to financial incentives is core to modern economics. By and large, if there is an opportunity to do so, economic policy argues that you should introduce financial incentives where there were none, and the outcomes will be better.

In the words of Paul Ekins and Manfred Max-Neef in their 1992 edited book Real-Life Economics, economics of this kind can be useful but that use is “limited by the extremity of many of its assumptions, about human behaviour, social structure and the nature of the biosphere.

In recent years, the profession has been active in qualifying those assumptions and exploring new tools for a new economics. When we respond, we don’t necessarily do so entirely rationally is the lesson from the field of behavioural economics. When we overshoot the critical carrying capacity of nature, scale rather than efficiency alone defines what will give better outcomes is the lesson from the field of ecological economics.

The field of experimental economics is one that has used the tool of game theory to understand how people are likely to behave in practice. What emerges from games such as the Ultimatum Game, tested around the world, is evidence that people will often act in ways that are co-operative rather than purely self-regarding. The reason is not down to incentives, but to values.

Sam Bowles is a pioneer in this field and the book tells the story of what happens if people are assumed to be self-interested, incentives driven. All too often, they become self-interested and incentives driven, because that is the signal they are given. That process works where markets work, for example where contracts are complete and there are no big spillover effects (externalities). But it can fail to work, and work to create damage, where this is not the case. 

Introducing financial incentives can ‘crowd out’ social norms. So for example, if you pay children to read books, they are less likely to sustain reading over time, when payments stop. If you pay them to draw pictures, the artwork is of lower quality. If you pay people to recycle, you can reduce the propensity of people to recycle without payment. 

The signal at work is that because there is payment, the behaviour of others is seen as instrumental and self interested. On the time-honoured principle of ‘I will if you will’ we are then less likely to act simply because we feel it is the right thing to do.

Bowles points to other examples of the same effect. Putting explicit conditions into a contract to cover breaches of the contract, for example, increases the likelihood of a breach.

Bowles cites the case of the Boston Fire Commissioner who was suspicious of firemen calling off sick and threatened to dock the pay of anyone off sick for more than fifteen days. The result was a spike in sickness, with a tenfold increase in firemen calling in sick on Christmas and New Years Day. The Commissioner in effect signalled that what he focused on was contract and enforcement. What was set aside was trust and values. Goodwill went out of the window.

The most celebrated case perhaps of payments ‘crowding out’ values was raised decades ago by the LSE Professor Richard Titmuss – the effect of paying for blood donations when it had been voluntary: the result in short was worse all round, higher costs, less blood collected.

The contemporary Titmuss Professor at the LSE, Julian LeGrand, reached a slightly different view. He had a go at modelling the effect of crowding out in his 2006 book Motivation, Agency, and Public Policy: Of Knights and Knaves, Pawns and Queens. His view in short was that if you could sustain payments at high enough of a level, then financial incentives could pay off through efficiency gains. As a result, he argued for the extension of policies such as competition between providers in education and health services. 

He did not at the time have access to the kind of behavioural models that Bowles sets out. And what he did not address directly was the potential downsides on social norms over time that might support children’s wellbeing or patients’ health. As ever, it is easy to assume that values are just fixed and unchangeable – like nature, always there, always to be drawn down. In reality, the right values can become over time as scarce as nature can be overstressed.

Rather than crowding out people’s values, is it possible to find ways to ‘crowd in’ those same values? Throughout his book, Bowles is interested in questions like this of governance… how should society be organised? Where can collective action make a positive difference?

An example is the effect of everyday institutions. Bowles cites public good experiments in Japan and Brazil which showed that those who contribute more are more likely to be members of fishing co-operatives. 

In part this is the influence of social norms, remembering both that people tend to align with how others around them behave, and that co-operation can breed co-operation. Markets are not necessarily bad for values. Honesty can be a key to a commercial moral syndrome, as Jane Jacobs argued. Business leaders in Costa Rica were more likely to be generous than economics students in the USA. That probably says more about Costa Rica though than it does about CEOs worldwide.

Bowles uses the example of presents to demonstrate the limits to markets and money. “Economists know that money is the perfect gift – it replaces the giver’s less well-informed choice of a present with the recipient’s own choice when she takes the money and buys the perfect gift for herself. But at holiday time, few economists give money to their friends, family or colleagues. We know that money cannot convey thoughtfulness, romantic interest, concern, whimsy or any of the other messages that gifts express.

The writers of the best-selling Freakonomics series are champions of the idea that incentives have a powerful effect across society. Their response to the kind of evidence that Bowles and others set out is to suggest that anything that motivates people beyond money can also be embraced as ‘non-financial incentives’. But this simply extends the metaphor – it doesn’t help us get closer to a more realistic account of human behaviour.

Bowles looks instead at identity and the influence this has on how we behave. “When people engage in trade, produce goods and services, save and invest, vote and advocate policies, they are attempting not only to get things but to be someone, both in their own eyes and in the eyes of others. Our motives in other words are constitutive as well as acquisitive.

He concludes with a series of points of advice for policy makers, each of which is a call for a more considered response than the idea that bringing activities into the market is the simple route to success. It is not, he jokes, a bumper sticker, but the message is that “social norms facilitate mutually beneficial economic interactions in those cases where contracts cannot cover everything that matters to parties to the exchange. Examples include the work ethic of the employee, the creativity of the software engineer, or the honesty of the borrower or asset manager.

The world is moving precisely in the direction of such ‘incomplete contracts’, as “the wealth of nations shifts from steel, grain and other goods readily subject to contract to producing and sharing intangible knowledge, caring for the young and the elderly, and the other forms of wealth characteristic of what is called the ‘weightless economy.’

If you simply want to change the world, without taking the trouble to interpret it, you are in the realm of guesswork and ideology. That is where conventional economics has been for some time, so caught up in its own measures of success that it has failed to question whether if the assumptions are wrong, the measures of success might be no less flawed. 

The good news for the interpreters, is that the world is more open to engaging on the basis of values than economics has led us to believe. Data from a wide range of behavioural experiments suggest that twice as many subjects exhibit co-operative choices (meaning that they returned favours even when not doing so would give them higher payoffs) as self-regarding choices. A moral economy doesn’t have to reinvent people’s values, but affirm them.

There is a compelling case to change the world… but to do so, we should also look at how we interpret the world, to understand what it is we need to conserve. 

That way lies the moral economy.

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