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.
READER COMMENTS
David Henderson
Sep 8 2022 at 3:53pm
This is wonderful.
My wife and I traded off between TV, fan, and overhead lights. We often have all 3 on. We settled for 1 and sometimes 2.
Jose Pablo
Sep 8 2022 at 8:56pm
Definition:
Being selfish: doing whatever you prefer to do (I assume here that your revealed preferences maximize your utility, which is “selfish”)
Solidarity: being forced to do whatever other person (or group of persons) believes (or pretends to believe) is better for society as a whole. That’s what politicians mean, most of the time / always, when they use “solidarity”.
Under this definition, founding (and/or funding) a non-profit organization to preserve polar bears is “selfish” but paying your taxes is “solidarity”.
With this definition Californians behavior was selfish.
“Solidarity” would have been the police going door by door forcing you to lower your thermostat because the Californian legislature had passed a law saying that was the right thing to do.
Following this definition no solidarity!”
Thomas Lee Hutcheson
Sep 9 2022 at 7:01pm
An odd conception of “solidarity.”
artifex
Sep 8 2022 at 9:24pm
Voting is easy to explain from a narrow self-interest perspective! Social clubs that give their members benefits (social, financial, influence, protection, power) balance growing their numbers (which increases the benefits for each member) with incentivizing member participation and avoiding low-commitment members (which requires limiting their numbers).
To limit their numbers and incentivize high participation, they use tests of loyalty and commitment. To be meaningful, the tests require that the members make some sacrifices. The sacrifices can’t be too great or even potential high-commitment members won’t join or stay in the club. In practice, these clubs often require sacrifices in your beliefs and identity. To join or stay in a religious club or a political club, you have to credibly renounce your option to later join the other competing religious or political clubs (and get the benefits of these clubs) and you have to adopt the beliefs of the club as part of your identity.
False beliefs make better tests of loyalty and commitment (you’re not likely to already hold them or to want to hold them for reasons other than your loyalty to the club; and they require more sacrifices, due to being false), and beliefs that are opposite to those of competing social clubs also make better tests, so religious and political beliefs tend to be false, and their justifications absurd, more often than you’d expect just from chance.
For successful clubs, members adopt the beliefs of the club as their real beliefs because honest signals are more convincing and less cognitively costly. If you don’t really hold the beliefs, you have to constantly keep track of your public beliefs and your real private beliefs and you risk eventually being detected and ostracized. So it’s in your interest to really adopt the beliefs, even if they’re false and even damaging beliefs to have (but they can’t be too damaging, or people might not stay in the club). Since it’s difficult to consciously adopt a belief you don’t really think is true and to forget that you did so, it instead has to happen partly in less conscious ways.
And since members of the social clubs do adopt the beliefs of the clubs as their own, many of them continue to hold these beliefs even long after it would otherwise no longer be in their interest (for example, because their religion has fell out of favor). And since they do hold the beliefs, they act according to these beliefs even when they don’t think anyone is watching. And that includes voting.
If you look at it independently, voting might not seem justified from a narrow self-interest perspective in the absence of superrationality, but if you look at voting as implied by something that is a requirement to be part of a social club that gives you benefits, then it is so justified.
This model
is simpler than the “and put a much lower but still positive weight on the utility of their fellow citizen” model (because it doesn’t add that additional hypothesis and instead explains people’s behavior using only their own self-interest),
explains way more things about the world (for example, why religious beliefs are so absurd, why government policies are so bad (even worse than you’d expect from chance), why most apparent attempts at altruism are ineffective or counterproductive, why there exist political groups that have beliefs that change and even reverse over time yet somehow always end up being exactly opposite on issues that seem like they should be mostly independent).
artifex
Sep 8 2022 at 9:27pm
WordPress ate all the formatting except the blockquote? 🤷
Scott Sumner
Sep 8 2022 at 9:56pm
Most of the people I know (including me) don’t vote because they are part of some sort of social club.
artifex
Sep 9 2022 at 12:41am
I believe that. I think my explanation is just one of at least 30 reasons why people vote. Some of them fall within a narrow self-interest perspective. So it’s not a behavior that’s hard to explain.
No single explanation of voting could be a full explanation because there is real solidarity, there is real altruism, there are people imitating other people, there are messages urging people to vote (which people might do since the cost isn’t that great), there are heuristics and confusions causing people to vote, and there are places (like Australia and Singapore) where voting is compulsory.
Voting explained by solidarity (weight given to utility of citizens living nearby) would predict greater turnout for local elections, but instead turnout is way lower for local elections. I predict it is also true that, among most of the people you know, turnout in local elections is lower than in presidential elections. If I’m right, then social clubs and solidarity together aren’t sufficient to explain the voting behavior of the people you know.
Scott Sumner
Sep 9 2022 at 12:46pm
That sounds reasonable.
Jon Murphy
Sep 9 2022 at 6:42am
I think you’re absolutely right in this post. In fact, I just wrote a post that will be here in a bit on exactly the point about we do take others into account and why I think the reasoning for carbon and other externality taxes is weaker than economic theory indicates.
Adam Smith said we want to be both loved and lovely. We do the right thing because it’s the right thing
Thomas Lee Hutcheson
Sep 9 2022 at 7:07pm
How much weaker? How much lower is the solidarity-inclusive optimal taxon net CO2 emissions compared to the no-solidarity optimal tax? Also feel free to include numerical estimates of the effects of public choice considerations.
Jon Murphy
Sep 10 2022 at 8:17am
It’s quite impossible to give precise numbers, isn’t it? I doubt even asking someone to measure how much they take into account others wellbeing will result in a Pigouvian actionable number.
But, if course, it’s irrelevant for me (or anyone) to guess a ex ante figure. As you know, costs are ephemeral and prices are only known ex post, not ex ante. We can only see what emerges and go from there. My point is strictly about how to think about the ex post results.
Jose Pablo
Sep 9 2022 at 11:17am
One, maybe interesting question, related with your post is why the pricing mechanism failed to prevent a shortage in the electricity market.
Following your co-blogger Pierre Lemieux free-markets shortages shouldn’t exist in free markets. Which kind of make sense, the price of the last available Mwh in the Californian system should have been infinite (but it wasn’t).
The logical conclusion would be that this market is not free. Not familiar with the electricity market in California but I assume the generation market is pretty close to free and the transportation/distribution market is regulated. If the problem was in this last one, then there is no mystery: regulated markets should be expected to produce shortages. If the problem was in the generation market, then understanding why the pricing mechanism didn’t perform their job would be useful.
I mean, “solidarity” is kind of cute, but I would not rely on it to design a robust electricity market in California.
Scott Sumner
Sep 10 2022 at 12:45pm
I agree with your final sentence (although “cute” is too dismissive.) But shortages can exist in free markets due to sticky prices imposed by sellers.
Monte
Sep 10 2022 at 2:42am
This is an interesting observation. Solidarity amongst Americans (or our transatlantic cousins, the British) tends to be latent, manifesting itself particularly in times of extreme duress or tragedy. Are there examples of other more market-oriented countries that exhibit the same character under these circumstances?
Scott Sumner
Sep 10 2022 at 12:47pm
Northwestern Europe, Canada, Australia, New Zealand, Japan are all places with a notable amount of civic solidarity.
Monte
Sep 11 2022 at 3:47am
Maybe it’s a question of degree. Crisis such as the one currently being experienced in California are minor compared, say, to 9/11 or the Boston Marathon bombing that brought out true solidarity in Americans. I’m not picking on Californians, but can’t we reasonably assume they were acting more out of self-interest (from fear of a blackout) rather than out of a genuine sense of civic duty when “the state’s Office of Emergency Services sent out a text alert to people…asking them to conserve power if they could.”?
Aren’t citizens of authoritarian regimes equally inclined to unite in solidarity during natural disasters as those in more market-oriented ones?
Scott Sumner
Sep 11 2022 at 12:15pm
“Aren’t citizens of authoritarian regimes equally inclined to unite in solidarity during natural disasters as those in more market-oriented ones?”
I doubt it. But that would be an interesting question to investigate. One study showed that UN diplomats from low trust societies were more likely to shirk their duty to pay parking tickets in NYC than diplomats from high trust societies. Unfortunately, that doesn’t address your crisis issue.
Pierre Lemieux
Sep 10 2022 at 4:28pm
Hayek’s theory of the rules of just conduct in a spontaneous order seems especially relevant on this sort of issue. To summarize, rules of just conduct have developed to create and maintain an abstract social order where no agreement on ends is required. He would probably end up agreeing with your post, but not without voicing two caveats. The first one would be to warn you gently (he was a gentle man) against the term “solidarity.” In The Mirage of Social Justice (p. 313), he wrote:
This solidarity, he argues, is a remnant of tribal instincts. Perhaps this is what Jose Pablo was getting at above.
The second Hayekian caveat would probably be the following. Being at the point where Leviathan has to text the populace about “how to use their knowledge for their purposes” (which is how he defines freedom) in the purchase electricity, even if it is not to impose a mandate as he most often does), shows how far down we are on “the road to serfdom.”
Scott Sumner
Sep 11 2022 at 12:17pm
“The first one would be to warn you gently (he was a gentle man) against the term “solidarity.””
I’m a contrarian who enjoys using terms in unconventional ways. As an analogy, Daniel Klein is trying to reclaim the term “liberalism” from the left.
Jose Pablo
Sep 13 2022 at 12:40pm
Solidarity is the beginning of a slippery slope.
The distance between “cute” solidarity (like the one described in this post), and “socially mandatory” solidarity is very narrow.
Once bad step from solidarity and you end up in the “cage of norms” of primitive societies. It was smart from Hayek not liking it.
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