The Price of Everything - Eduardo Porter [114]
Belief in unbounded rationality is not economics’ only flaw. The self-serving Homo economicus—willing to relentlessly pursue her individual preferences—is too narrow a being. The model fails to explain behaviors that are a fundamental part of who we are. Wedded to the notion that individuals will only do something if they get something in return, economics cannot properly explain why people help strangers whom they will never see again. It believes that people who reject free money must be crazy. But there are many instances of people rejecting payment for doing things they believe to be intrinsically good for society. In one experiment, Swedish women who were offered fifty kroner for their blood donations cut their donation rates in half. It was as if the payment crowded out an intrinsic nonmonetary incentive to give.
Homo economicus must be stripped of unbridled selfishness and modeled to fit a world where the relative distribution of prosperity is often more important than individual satisfaction. It must incorporate how the social norms built over evolutionary time to enhance societies’ ability to survive feed into people’s preferences even though they may not contribute to their immediate well-being. A comprehensive model of humankind must understand that people pursue not what they want but what they think they want, and how these objectives can diverge. It must include people who will pay an exorbitant price for a license plate precisely because its price is exorbitant, as if sticker shock were a desirable attribute. It must incorporate people’s persistent lack of self-control, even when they know that indulging their appetites—whether smoking, overeating, or forgetting to save for a rainy day—will carry a high price in the end.
Including all these dimensions of humanity is likely to turn economics into a messier, less mathematically elegant discipline than the one we’ve been used to for the past half century, which thought that one simple process—a relentless drive to maximize our objective well-being—could explain every human behavior. It will have to tag on other considerations, and understand how they interact with self-gratification. It is likely to be more tentative. But, in exchange, the new economics will provide a more comprehensive understanding of the world. Also important, it will be able to grapple with the many ways in which the decisions we make based on the prices arrayed before us can take us in directions that, individually or as a society, we would rather avoid.
BEYOND THE CHANGE of the discipline of economics, the more interesting question is how the global meltdown will change capitalism itself. In 2008, as the financial disaster spread outward from New York to London, Zurich, and around the world, many announced the end of the era of so-called Anglo-Saxon capitalism of small government and unfettered markets. “Self-regulation is finished, laissez-faire is finished, the idea of an all powerful market which is always right is finished,” said France’s president, Nicolas Sarkozy. Peer Steinbrück, Germany’s finance minister at the time, argued that “the US will lose its status as the superpower of the world financial system.” Some policy makers have touted a Chinese model of capitalism, in which the state exerts direct control over huge swaths of economic activity, including credit allocation and the price of the nation’s currency, to fuel export-led development. As the global economic balance shifts—the OECD club of industrial nations estimates that nonmembers will make up 57 percent