Oct 222011
 

My recent Atlantic review of Yochai Benkler’s new book on cooperation and selfishness is heavy on the assumption that evidence of our lack of selfishness poses a real problem for standard free-market models of human behavior. And it surely does. A couple bits from the review:

The Penguin and the Leviathan seeks to dismantle the pervasive assumption that humans are motivated primarily by narrow self-interest. This is a seductive axiom, from standard economic analysis to fields like public-choice theory and game theory.

And:

While most readers should be amenable to this conclusion, it is hard to overstate the extent to which it clashes with economic dogma. Nobel Prize-winning economist and New York Times columnist Paul Krugman chastised his profession in a 2009 essay for “mistaking beauty for truth,” claiming that economists had “turned a blind eye to the limitations of human rationality.” This vision of rationalityassumes the very narrow version of selfish motivation that Benkler deflates, and yet it continues to be central to the practice of economics.

But there’s another aspect here that I had hoped to weave into the review but didn’t because of length and complexity. And that is, basically, that selfishness is only one of the two big, high-level reasons why markets work better than planning. The other piece, arguably of equal if not greater importance, is complexity. Here’s Arnold Kling in a Q&A with (yes) himself:

Q: Why are so many intellectuals hostile to capitalism?

A: Because many intellectuals do not have first-hand knowledge of economics. They have heard that “incentives matter,” and this confirms their impression that capitalism is based on greed. Even intellectuals with training in economics take away from “incentives matter” the message that “we” (meaning intellectuals making policy) should manage, or at least tweak, everyone else’s incentives.

Q: How would you break down that hostility to capitalism?

A: By de-emphasizing “Incentives matter” and instead emphasizing that “unintended consequences matter.” That is the message of Adam Smith. It is the message of Hayek. Once we embed people in complex economic and political systems, selfish intentions can turn out well (because of competition), and good intentions can turn out badly (because of imperfect knowledge).

Dismantling the assumption of selfishness raises problems for free market economics, but one still has to grapple with the Hayekian emphasis on complexity, information, and unintended consequences. I’ve written about this before, as I think the internet also raises some important questions on that assumption too. From that post:

Markets prevail over central planning in large part due to the stupidity cognitive constraints of central planners.  We can only gather and process so much information.  Which means our actions have unforeseen consequences, the future is hard to predict, etc.  Here I’ll lean on Cass Sunstein channelling Hayek in his book Infotopia:

Hayek claims that the great advantage of prices is that they aggregate both the information and the tastes of numerous people, incorporating far more material than could possibly be assembled by any central planner or board… For Hayek, the key economics question is how to incorporate that unorganized and dispersed knowledge.  That problem cannot possibly be solved by any particular person or board.  Central planners cannot have access to all of the knowledge held by particular people.  Taken as a whole, the knowledge held by those people is far greater than that held by even the most well-chosen experts. (pg. 119)

I go on to throw out some thoughts on how the internet is changing the way in which we think about information overload, and how that might be relevant to markets. But the point I want to make here is simple: my review focuses on the problems with selfishness as an assumption, and how that matters for economics. It’s a mistake to ignore the Hayekian side of the free market coin. So, even though I couldn’t fit it in the review, I wanted to raise it here. If I were a free market economist and I wanted to dismiss Benkler, I’d use Hayek.

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