1 Economic Theory and Contemporary Social Problems

The Human Side of Economic Analysis: Economic Environments and the Evolution of Norms and Preferences Herb ert Gintis Paul Romer Department of Economics Department of Economics University of Massachusetts University of California, Berkeley Amherst, MA 01003 Berkeley, CA 94720 July 15, 1998 1 Economic Theory and Contemporary Social Problems From its inception conventional economic theory was designed to deal with the pro- duction and consumption of marketable goods and services. With the growth of the welfare state and the need for demand management in the p ost World War I I p erio d, economic theory broadened its p ersp ective to include public go o ds and a state sector, considerably improving its ability to deal with the role of government in a ecting economic stability, growth, and equity. But economic theory to day faces a novel set of so cial problems for which it remains ill-prepared. This research pro ject addresses a key element in the underlying structure of economic theory contributing to its current weakness: its representation of the individual human actor. Conventional economics uses a rational actor mo del that treats the individual as a self-interested utility maximizer with preferences over a narrow range of p ersonal consumption items. Preferences in the rational actor mo del are moreover considered as determined outside the economic system and una ected by the individual's economic b ehavior. As we do cument b elow, a considerable body of empirical evidence contra- dicts this view: p eople are motivated by duty and obligation as well as utility, they have preferences over the well-b eing of others (they are b oth altruistic and vengeful), they are concerned with issues of equity and dignity in interp ersonal relations, their preferences are determined in part by the character of the economic institutions within which they op erate, and their well b eing dep ends on the quality of their so cial relations and the extent to which they have develop ed their p ersonal capacities, not only on the quantity and quality of the go o ds and services at their disp osal. Ignoring these asp ects of human preferences doubtless has served economic theory well in dealing with the traditional problems of state and market. But the same cannot be said concerning its cogency in dealing with such contemp orary so cial concerns as 1 crime, drug abuse and other forms of so cially pathological b ehavior, environmental quality and sustainable growth, the public p erception of morality and fairness in the welfare state, the tendency for markets and the welfare state to undermine communities and the family, the role of incentives in a ecting p opulation dynamics, and other problems in which economic p olicy is implicated either as cause or p otential cure. 2 The Unasked Question in Economics: Where do Preferences Come From? Economists currently make p olicy recommendations based on a mo del of the economy in which individual preferences are determined through so cial and biological pro cesses that are outside the economic system. In e ect, traditional economic theory recognizes that individuals pro duce go o ds and services, but do es not recognize that the economy pro duces p eople, their preferences, and their values. Thus economic theory do es not recognize that economic institutions and p olicies should b e judged not only according to the go o ds and services they engender, but typ es of p ersonal development they foster and reward. As a result, economists thus systematically undervalue p olicy approaches that either draw up on the explicitly normative resources of agents (e.g., altruism, recipro cal altruism, and other forms of co op erative b ehavior), or rely up on changing 1 norms in directions favorable to the solution of economic problems. Until recently the lib eral ethic of de gustibus non est disputandem reigned supreme| some two decades ago Paul Samuelson, for instance, singled the notion that \some preferences are b etter than others" (Gintis, 1972) for criticism in his Nob el Prize ad- dress, on grounds of its illib erality. Hence until recently reasonable observers would have assessed the receptivity of mainstream economists to dealing with the impact of preferences on so cial welfare as meager at b est. However the notion that some preferences are sup erior to others in their capacity to contribute to individual well b eing and to promote so cial welfare has b een com- p ellingly argued from a variety of approaches (Elster, 1979; Sen 1982,1985; Doyal and Gough, 1991), and no longer b ears the illib eral connotations once attributed to it. On the contrary, so cial theorists and p olicy makers, not to mention citizens and vot- ers, are increasingly concerned ab out the preferences p eople have, given the ostensible breakdown of civility, decline of community and traditional morality, and rise of so cial pathology exhibited in the advanced economies. These concerns help explain the lively interest economists have shown in the recent work of Gary Becker and his coauthors, who attempt to reconcile addictive b ehavior with the rational actor mo del (Becker and Murphy, 1988; Becker et al., 1994). This pro ject intends to investigate the impact of preferences on individual and so cial 1 This weakness of traditional economics is analyzed in Gintis 1972, 1974; Bowles and Gintis, 1986). 2 welfare in two di erent directions. First, there is strong and comp elling evidence that preferences are not formed outside the economic system, but rather are constituted through the interaction b etween individuals and the face-to-face communities to which they b elong. Thus to the extent that economic p olicies weaken communities, they weaken p ersonal development as well. This argument has b een carefully develop ed outside of economic theory(Anderson, Chiricos, and Waldo (1977); Ellickson (1987); Tittle (1980); Putnam (1994), Taylor (forthcoming). Within economics, Bowles (1994) and Bowles and Gintis (1995) have develop ed evolutionary mo dels of the place of community among the governance institutions of mo dern economies (other governance institutions b eing markets and states). In these mo dels, communities represent distinct cultural environments characterized by information structures, systems of sanctions and rewards, and learning opp ortunities unavailable in other forms of governance. Communities thus provide the context for rep eated, face-to-face interactions among agents that transmit and stabilize norms and reputations, while disciplining agents in away not available to the relatively anonymous institutions of state and market. We intend to supp ort further development and testing of these mo dels. A second direction of research on preference change involves assessing under what conditions and to what extent individual preferences and individual welfare coincide. Many students of mo dern so cial life b elieve that p eople in general overstate the im- p ortance of individual income in promoting p ersonal welfare, and systematically un- derstate the imp ortance of other economically relevant so cial go o ds, such as p ersonal dignity, rewarding work, happy family life, and strong ties to community (Lane, 1993). This issue is of extreme imp ortance, b ecause the economist's stress on income as a source of well b eing leads to an overarching emphasis on economic growth as a mea- sure of so cial welfare, in situation where the resource-using character of economic growth is inimical to environmental balance and may lead to excessively inegalitarian economic p olicies (Oswald 1994,1995). Easterlin (1974, 1995) and Blanch ower, Os- wald, and Warr (1993) suggest that economic growth do es not correlate strongly with so cial welfare, b oth b ecause income is a relatively weak predictor of well-b eing except for the p o or, and b ecause individual welfare dep ends on one's p osition in the income distribution rather than one's absolute level of material auence. 3 Prospects for a Broader Model of Human Action Three developments make us optimistic that a serious attempt at broadening the economic mo del of individual action can succeed. The rst is that as economists have applied the rational actor mo del to an ever-widening range of individual b ehavior, its limitations have b ecome increasingly evident. The most reasonable setting for the rational actor mo del is the consumer in the sup ermarket cho osing a commo dity bundle sub ject to a budget constraint. But if it is generally valid, the mo del must also apply 3 to such so cially complex areas as the co op eration, con ict, and equity in the rm; criminal b ehavior; marriage, divorce, family size, and the care of children; education and skill-acquisition, long-term trade-o s between commo dity consumption and environmental quality; voting b ehavior and the organization of the public sector; addictive b ehavior; as well as gender, racial, ethnic, and religious discrimination. The traditional rational actor mo del is simply not suited to mo deling such areas of economic life. The second development is a growing concern with what Rob ert Putnam (1994) calls an \erosion of so cial capital." This concern, which is evident across the p olitical sp ectrum, has undermined the relevance of the assumption that preferences are xed and exogenously given. Two decades ago the lib eral ethic of de gustibus non est disputandem reigned supreme. However the notion that some preferences are sup erior to others in their capacity to contribute to individual well b eing and to promote so cial welfare has b een comp ellingly argued from a variety of approaches (Elster, 1979; Sen 1982,1985; Doyal and Gough, 1991).

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