Individuals are not what they are supposed to be

This piece is an extract from Ha-Joon Ghang's book "Economics: the user's guide" Who are the economic actors "even individuals are not what they are supposed to be". Classical economics and the neo classicals argue that individuals by seeking their self interest - but constrained by the self interest of their fellow indiividuals - produce an economy that regulates itself towards the common good. This is the "invisible hand" of Adam Smith. Ha-Joon Chang argues that is is overly simplified. Individuals are shaped by the society in which they are embedded from cradle to grave. From conventional language, hair dressing and vestimentary styles, behaviour in society, family upbringing, primary, secondary and university education, mass media, government information. Independant thinking as opposed to "there is no alternative" the mark of society as it is, is very difficult nowdays.

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Individualist economic theories misrepresent the reality of economic decision-making by downplaying, or even ignoring, the role of organizations. Worse, they are not even very good at understanding individuals.

The divided individual: individuals have `multiple selves'

The individualist economists emphasize that the individual is the smallest irreducible social unit. It is obviously so in the physical sense. But philosophers, psychologists and even some economists have long debated whether the individual can be seen as an entity that cannot be divided up further. Individuals don't need to suffer multi-polar disorder to possess conflicting preferences within themselves. This multiple-self problem is widespread. Even though the term may be unfamiliar, it is something that most of us have experienced.

We often see the same person behaving completely differently under different circumstances. A man may be a very selfish person when it comes to sharing domestic work with his wife but in a war may be willing to sacrifice his life for his comrades. This happens because people have multiple roles in their lives - a husband and a foot soldier in the above example. They are expected to, and do, act differently in different roles.

Sometimes it is due to weakness of will - we decide to do something in the future but fail to do it when the timecomes. This bothered the old Greek philosophers sufficiently that they even invented a word for it - akrasia. For example, we decide to lead a healthier lifestyle but then see our willpower crumble in front of a tempting dessert. Anticipating this, we may devise tricks to prevent our `other self' from asserting itself later, like Ulysses asking to be tied to his ship's mast in order not to be seduced by the Sirens. You declare at the beginning of dinner that you are on a diet and won't be having a dessert to be prevented from ordering one later, for fear of losing face (and you can always have a few compensatory chocolate cookies when you go back home).

The embedded individual: individuals are formed by their societies

The multiple-self problem shows that individuals are not atoms because they can be broken down further. They are not atoms also because they are not clearly separable from other individuals.

Economists 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. The idea is best summarized in the maxim `De gustibus non est disputandum' (`Taste is not a matter of dispute').
Yet our preferences are strongly formed by our social environment - family, neighbourhood, schooling, social class and so on. Coming from different backgrounds, you don't just consume different things but you get to want different things. This process of socialization means that we cannot really treat individuals as atoms separable from each other.

Individuals are - if we use a fancy term - `embedded' in their societies. If individuals are products of society, Margaret Thatcher was seriously wrong when she famously (or infamously) said, `There is no such thing as society. There are individual men and women, and there are families.' There cannot be such a thing as an individual without society.

In a scene from the 198os cult BBC sci-fi comedy Red Dwarf, Dave Lister, the protagonist of the show, who is a Liverpudlian working-class slob, guiltily confesses that he's been to a wine bar once, as if he had committed some kind of crime (but then some of his friends would have called him a `class traitor' for that). Some young people from poorer classes in Britain, even after decades of government policy encouraging university education for them, still believe that 'unis' are simply not for them. In most societies, women have been conditioned into believing that `hard' professions such as science, engineering, law and economics are not for them.

It is an enduring theme in literature and cinema - My Fair Lady (the movie version of George Bernard Shaw's play Pygmalion), Willy Russell's Educating Rita (play and movie) and Marcel Pagnol's La Gloire de mon père (book and movie) - how education, and the resulting exposure to different lifestyles, will tear you away from your own people. You will want different things from what they want - and what you once wanted yourself.
Of course, people have free will and can - and do - make choices that go against what they are supposed to want and choose, given their backgrounds, as Rita did by choosing to do a university degree in Educating Rita. But our environment strongly influences who we are, what we want and what we choose to do. Individuals are products of their societies.

The impressionable individual: individuals are deliberately manipulated by others

Our preferences are not just shaped by our environment but often deliberately manipulated by others who want us to think and act in the ways they want. All aspects of human life - political propaganda, education, religious teachings, the mass media - involve such manipulation to one degree or another.
The most well-known instance is advertising. Some economists, following the works of George Stigler, a leading free-market economist of the 196os and the 197os, have argued that advertising is basically about providing information about the existence, prices and attributes of various products, rather than manipulation of preferences. However, most economists agree with John Kenneth Galbraith's seminal 1958 book The Affluent Society that much of advertising is about making potential consumers want the product more eagerly than they would otherwise do - or even want things that they never knew they needed.
Advertisements may associate a product with a celebrity, a sport team (which company logos does your favourite football or baseball team have on its uniform?) or with a fancy lifestyle. They may use memory triggers, which work on our subconscious. They may be aired at times when viewers are most susceptible (that's why you get TV advertisements for snacks around 9-10 p.m.). And not to forget product placements in movies, savagely satirized in the film The Truman Show. I still remember Mococoa, made with `all natural cocoa beans from the upper slopes of Mount Nicaragua'.

Individual preferences are also manipulated at a more fundamental level through the propagation of free-market ideologies by those want constraints on their profit-seeking minimized (so we're back to the politics of ideas again). Corporations and rich individuals generously finance think tanks that produce pro-market ideas, such as the Heritage Foundation in the US and the Institute of Economic Affairs in the UK. They donate campaign funds to pro-market political parties and politicians. Some big companies use their advertising spending to favour business-friendly media.
Once poor people are persuaded that their poverty is their own fault, that whoever has made a lot of money must deserve it and that they too could become rich if they tried hard enough, life becomes easier for the rich. The poor, often against their own interests, begin to demand fewer redistributive taxes, less welfare spending, less regulation on business and fewer worker rights.

Individual preferences - not just of consumers but also of tax-payers, workers and voters - can be, and often are, deliberately manipulated. Individuals are not the `sovereign' entities that they are portrayed as in individualist economic theories.

The complicated individual: individuals are not just selfish

Individualist economic theories assume that individuals are selfish. When combined with the assumption of rationality, the conclusion is that we should let individuals do as they please; they know what is best for themselves and how to achieve their goals.

Economists, philosophers, psychologists and other social scientists have for centuries questioned the assumption of self-seeking individuals. The literature is huge, and many points are quite obscure, even if they are theoretically important. Let's stick to the main points.

Self-seeking itself is too simplistically defined, with the implicit assumption that individuals are incapable of recognizing long-term, systemic consequences of their actions. Some European capitalists in the nineteenth century argued for a ban on child labour, despite the fact that such regulation would reduce their profits. They understood that continued exploitation of children without education would lower the quality of the workforce, harming all capitalists, including themselves, in the long run. In other words, people can, and do, pursue enlightened self-interest.

Sometimes we are just generous. People care about other people and act against their self-interest to help others. Many people give to charities, volunteer for charitable activities and help strangers in trouble. A fireman enters a burning house to save an old lady trapped inside and a passer-by jumps into rough sea to save drowning children, even knowing that they themselves may be killed in the process. The evidence is endless. Only those who are blinded by a belief in the model of the self-seeking individual would try to ignore it .6

Human beings are complicated. Yes, most people are self-seeking much of the time, but they are also moved by patriotism, class solidarity, altruism, sense of fairness (or justice), honesty, commitment to an ideology, sense of duty, vicariousness, friendship, love, pursuit of beauty, idle curiosity and much else besides. The very fact that there are so many different words describing human motives is testimony to the fact that we are complicated creatures.

The bumbling individual: individuals are not very rational

Individualist economic theories assume individuals to be rational - that is, they know all possible states of the world in the future, make complicated calculations about the likelihood of each of these states and exactly know their preferences over them, thereby choosing the best possible course of action on each and every decision occasion. Once again, the implication is that we should let people be, because `they know what they are doing'.
The individualist economic model assumes the kind of rationality that no one possesses - Herbert Simon called it `Olympian rationality' or `hyper-rationality'. The standard defence is that it does not matter whether a theory's underlying assumptions are realistic or not, so long as the model predicts events accurately. This kind of defence rings hollow these days, when an economic theory assuming hyper-rationality, known as the Efficient Market Hypothesis (EMH), played a key role in the making of the zoo8 global financial crisis by making policy-makers believe that financial markets needed no regulation.

The problem is, simply put, that human beings are not very rational - or that they possess only bounded rationality.* The list of non-rational behaviour is endless. We are too easily swayed by instincts and emotion in our decisions - wishful thinking, panic, herd instinct and what not. Our decisions are heavily affected by the `framing' of the question when they shouldn't, in the sense that we may make different decisions about essentially the same problem, depending on the way it is presented. And we tend to over-react to new information and under-react to existing information; this is frequently observed in the financial market. We normally operate with an intuitive, heuristic (short-cut) system of thinking, which results in poor logical thinking. Above all, we are over-confident about our own rationality (*) There is a huge amount of evidence, well presented in accessible form in books like Peter Ubel's Free Market Madness, George Akerlof's and Robert Shiller's Animal Spirits and the psychologist and 2002 Nobel Economics laureate Daniel Kahnemann's Thinking, Fast and Slow.

Concluding Remarks: Only Imperfect Individuals Can Make Real Choices

A paradoxical result of conceptualizing individuals as highly imperfect beings - with limited rationality, complex and conflicting motives, gullibility, social conditioning and even internal contradictions - is that it actually makes individuals count more, rather than less.

It is exactly because we admit that individuals are products of society that we can appreciate more the free will of those who make choices that go against social conventions, prevailing ideologies or their class backgrounds. When we accept that human rationality is limited, we get to appreciate more the initiatives exercised by entrepreneurs when they embark on an `irrational' venture that everyone else thinks is going to fail (which, when successful, is called an innovation). In other words, only when we admit the imperfect nature of human beings can we talk about `real' choices - not the empty choices that people are destined to make in the world of perfect individuals, in which they always know which is the best course of action.

Emphasizing the importance of `real' choices is not to suggest that we can make any choice we like. Self-help books may tell you that you can do or become anything if you choose to. But the options that people can choose from (or their choice sets) are usually severely limited. This could be because of the meagreness of the resources they command; as Karl Marx dramatically put it, the workers of early capitalism had only the choice between working eighty hours a week in harsh conditions and starving to death, because they had no independent means to support themselves. The limited choice set may also be, as I argued above, because we have been taught to limit the range of what we want and what we think may be possible through the socialization process and deliberate manipulation of our preferences.

Like all great novels and movies, the real economic world is populated by complex and flawed characters, both individuals and organizations. Theorizing about them (or about anything), of course, has to involve some degrees of generalization and simplification, but the dominant economic theories go too far in simplifying things.

Only when we take into account the multi-faceted and limited nature of individuals while recognizing the importance of large organizations with complex structure and internal decision mechanisms will we be able to build theories that allow us to understand the complexity of choices in real-world economics.