Some economic models rely on the assumption that people are entirely selfish. But these models tend to be internally inconsistent, as they often assume an economic regime that could not possibly exist if people had absolutely no regard for the broader society. At a minimum, a market economy requires at least some willingness of people to refrain from rent seeking in the form of barriers to commerce.
People are somewhat selfish. Most people care a great deal about their own interests, and somewhat less about the interests of strangers that they have never met. Nonetheless, people often engage in activities (such as voting) that are hard to explain from a narrow self-interest perspective. People seem to have at least some sense of solidarity with others, which shows up in a willingness to fight for one’s country or to pursue philanthropic causes.
A Bloomberg article about a power crisis in California caught my eye:
A timely mobile alert may have prevented hundreds of thousands of Californians from being plunged into darkness in the middle of a heat wave Tuesday night.
Just before 5:30 p.m. local time, California’s grid operator ordered its highest level of emergency, warning that blackouts were imminent. Then, at 5:48 p.m., the state’s Office of Emergency Services sent out a text alert to people in targeted counties, asking them to conserve power if they could.
Within five minutes the grid emergency was all but over.
This graph shows the impact:
It is possible that some power consumers wrongly assumed that their decision to turn down the AC would have a significant impact on the risk of a blackout. That decision would be consistent with selfishness. Given California’s vast population, however, any individual power reduction would be a drop in the bucket.
I’m certain that at least some California consumers understood that their decision to turn off the AC would have little overall effect on blackout risk, and did so out of solidarity with society as a whole. How can I be certain? Because I received this text message, at a time the outside temperature was in the high 90s. I immediately shut down our central air conditioning. I suspect that other people had the same thought process.
Homo economicus is a reasonable approximation for some purposes. A more realistic economic model, however, would assume that people care a lot about their own self-interest and put a much lower but still positive weight on the utility of their fellow citizen. In addition, people have more solidarity with people that live nearby than with those who live far away.
Countries with a high level of solidarity, such as Denmark, tend to have more effective governance than countries where most people have a low level of solidarity with strangers, such as Afghanistan. More specifically, countries with a great deal of solidarity tend to be more market-oriented than countries where people have less solidarity with strangers.
Back in 2008, I wrote a paper that touched on these issues, which began as follows:
The Great Danes: Cultural Values and Neoliberal Reforms
“Virtually every commercial transaction has within itself an element of trust . . . It can be plausibly argued that much of the economic backwardness in the world can be explained by the lack of mutual confidence.” (Kenneth Arrow, Gifts and Exchanges, Philosophy and Public Affairs, 1972, p. 357.)
I don’t know whether Arrow is correct, but the following anecdote might help to illustrate the concept that Arrow had in mind. While traveling in Northern Michigan this summer I noticed farm stands by the edge of the road selling cherries. Often, no salesperson was present. One simply placed a five dollar bill in a small metal box, and drove away with a quart of cherries. This system makes one realize the enormous waste of labor resources involved in someone waiting by the roadside for motorists to stop and purchase cherries, and may be one reason why high-trust societies tend to be relatively prosperous.