Do economists dream of electric sheep?

In the Philip Dick novel Do Androids Dream of Electric Sheep (later turned into the movie Blade Runner), when androids are as intelligent as people, it is the capacity for empathy that is the mark of the human. Empathy plays an important part in David C Rose’s account of The Moral Foundation of Economic Behavior – or rather, what he describes as ‘the empathy problem’. The problem is that in large and complex societies like a modern economy, opportunistic behaviour that benefits the individual (for example, shirking at work because nobody can truly monitor your effort, or pirating a digital song or movie, or insider dealing) damages collective outcomes but only harms other identifiable individuals to a minuscule degree. We feel empathy with other people, not with corporations or society as a whole.

Economics notoriously assumes that people in fact act like androids in their decisions, but Rose argues that can’t be true. In small groups, economic exchange and co-operation are policed by the fact that people know each other. If you ‘cheat’ in your own immediate self-interest, you will be found out, and shamed. You will know your victims personally and feel guilty. So it turns out the self-interest over anything but the immediate moment will lead to co-operation. But economic prosperity as we know it now in the developed countries requires co-operation in large groups, very large. And it must be hard to achieve because many economies haven’t managed. Opportunism is rife and entrepreneurship remains small scale. Trust is confined to the family or community or ethnic group, so transactions costs are high and growth limited.

Rose argues that the development of certain institutions helped combat opportunism. Certain institutions help make opportunism imprudent by introducing sanctions – but they only help when there is a risk of detection. In fact, many institutions themselves depend on the existence of a reasonably high  level of generalized trust. To achieve co-operative behaviour when this risk is negligible, successful economies need to develop internalised moral rules. People need to have instilled in them from childhood a sense of duty, so culture is important. Laws and lawyers are no substitute for moral restraint on selfish behaviour. “We are inclined to under-estimate how much we actually trust each other – especially relative to how much people trust each other in most of the rest of the world,” Rose writes of the US (and other prosperous economies). (p55)

In sum, if a society is to enjoy the economic benefits of large scale and the specialization and trade it enables, they have to make people feel sufficiently guilty about behaving badly. This is not natural, or hardwired in human psychology. Breaching moral restraints needs to feel wrong, whereas positive actions simply need to bring one some benefit.

Rose’s aim in the book is to demonstrate that the economist’s usual approach to trust, basing it on incentives via the argument that there are mutual benefits from high trust, is not valid in a large-scale complex economy. “This is because as any society closes in on being a high trust society, the gains to opportunistic behavior skyrocket if opportunism is only combated by prudential restraint [ie. the fear of being found out].” (p220) Rather, high trust is created by a moral foundation that has nothing to do with empathy – feeling bad about harming people – but instead is a culture-based and hard-won set of foundational rules for eliminating bad behaviour.

The book ends with what Rose describes as a ‘troubling speculation’ that this moral foundation has crumbled in the West. He points to the plentiful evidence of a decline in trust in the US. And it will not be tackled by asserting that moral behaviour is in our own interest really. We have to restrain our tendency to act selfishly because it’s just the right thing to do.

All in all, this is a very interesting and timely argument. It builds on earlier work by Robert Frank, especially What Price the Moral High Ground: Ethical Dilemmas in Competitive Environments. I’m not a philosopher, only a flighty economist, so I must admit that I found the more philosophy-based parts of the book pretty hard going. However, the message is important and sobering. Do western economies any longer have the solid moral foundations on which their prosperity was built, or is the dystopia of Blade Runner ahead of us?

The Moral Foundation of Economic Behavior