"People are a lot dumber and nicer than economists think"

Hello Interactors,

Cued by shifting hues comes a call for the leaves to fall. Which means Interplace, like the weather, turns to the tumultuous territory of economics. Economics, like fall weather, is not all that predictable — both systems morph in response to layers of interconnected webs of complex systems that adapt, respond, and influence social, environmental, and political interactions.

I recently heard Sean Carroll, an influential theoretical physicist known for his work in quantum mechanics, interview Samuel Bowles, an influential economist specializing in economic inequality. They covered an array of topics including the history and future of economics, and physics, in response to growing attention to complexity science.

They harkened back to the industrial age and a time when physicists, mathematicians, philosophers, and newly emerging economists were collaborating — building theories, models, steam engines, looms, and calculation machines. It was a complicated time, rich with invention, but also relatively simple by today’s standards.

Hearing this history in the context of the current U.S. United Auto Workers strike made me wonder if perhaps Biden’s fascination with ‘building back better’ America’s industrial past is rooted in a nostalgic yearning for a simpler past.

This labor action arouses a sense of nationalism and nostalgia for the 'good old days' that Trump ignited but Biden just may have usurped. But the industrial sector, however romanticized, now represents a small fraction of jobs in America.

Humans have a penchant for simplifying complex narratives, yearning for an era where gears of industry moved in predictable cycles much like the changing seasons. But these two scientists highlight how the economy in which we exist has advanced in complexity and is ripe for evolution.

Now let’s go.

FROM CLASSIC TO COMPLEX: THE ECONOMIC SHIFT

In the interview, Bowles talks of the history of economic thought, beginning with Adam Smith, an intellectual pillar of the Industrial Revolution and an acclaimed father of economics. Adam Smith's notion of the 'invisible hand,' lauded for its portrayal of self-regulating markets, is heavily scrutinized today.

This famous metaphor has long been the cornerstone of classical economics and conservative politics, purporting that individual self-interest inadvertently contributes to the overall good of society in ‘invisible’ ways. Bowles explains how Smith could observe, amidst the new factory economy in Scotland — complete with newly built cotton mills and shirt factories — how the shirt buyer and seller both acted according to their self-interest. And then, almost as if by magic, an efficient allocation of resources emerged and along with it a social contract.

In simple transactions, like buying a shirt, Bowles illustrates how Smith's model functions well. The seller sets a price based on the costs of production and a desire for profit; the buyer accepts this price based on their valuation of the shirt. The transaction is smooth, the contract 'complete,' and market forces work to adjust supply, demand, and pricing in a seemingly natural order.

He offers another historical example that perpetuated the illusion of simple economic models of physics in economics. One of the early influential neoclassical economists, Irving Fisher, built a physical hydraulic model in the early 1900s as part of his dissertation. He used interconnected tanks and pipes to simulate supply and demand. It provided a visceral example of a 'complete contract' where the variables are manageable and the outcomes somewhat foreseeable.

Reflecting on this, Bowles offers,

“Now, there are all kinds of models like that in economics in which the metaphor really is transportation, things moving from here to there.”

However, this 'invisible hand' stumbles when confronted with the complex market forces of the labor required to manufacture a good like a shirt. Bowles believes it wasn’t until 1972, when the Nobel prize winner in economics, Kenneth Arrow, complicate the image of the ‘invisible hand’ as it relates to the labor market.

His work, particularly his Impossibility Theorem, mathematically demonstrated the challenges inherent in collective decision-making and the limits of market efficiency. Whereas the transaction of buying a shirt can be fully described and agreed upon by both parties, making it a 'complete contract,' labor contracts often can't offer this level of specificity and predictability.

Contracts in labor markets become fuzzy. They’re incomplete abstractions that only offer one guarantee — that an employee be present on the job. Their performance is harder to guarantee. Without constant observation of performance, the employer has no guarantees a worker is working hard or hardly working.

But the employer, capable of paying more than the minimum wage to ensure good performance, holds sway over the employee’s behavior. So, if an employee wants to keep their job, they’d better work as hard as possible — until, sometimes, it becomes impossibly hard.

Labor unions, like the United Auto Workers, exist to even this power imbalance by bargaining for fair wages and working conditions. How do they bargain? By choosing to not do the one thing their contract requires – be present on the job. This forces a negotiation, a conversation.

And this is where Bowles, and other economists, are looking to take the field of economics, stating,

“…in recent years, some economists, myself included, have been more attracted to the idea that economic interactions are more like a conversation. So, we should really be thinking about linguistics. That is, I'm having a conversation with you, and in saying what I'm saying now, I'm anticipating your response. And very often I'm having a conversation with somebody with some intention that I would like this person to agree to go to see a film with me, or to agree to work on a paper, and so on. But I'm anticipating what that person's intention is too, of course, in endless regress.”

COMPLEXITY OF COOPERATION: GAME THEORY AND THE REAL WORLD

Finding common ground, coming to agreement, typically requires both parties to have to give something up — to compromise. Economists often lean on a branch of mathematics to model these interactions called Game Theory. Game Theory offers methods to analyze scenarios where the outcome for each participant depends on the choices of all involved.

One experiment used to explore game theory is called the Prisoner’s Dilemma. In this scenario, two prisoners must decide whether to cooperate and remain silent upon interrogation or betray each other to the authorities. Although cooperation would yield a better outcome for both, the rational choice for each individual, given the uncertainty of the other's action, is to betray, often leading to a suboptimal result for all involved.

Bowles has spent a good chunk of his career using this dilemma in experiments worldwide to explore issues of trust, collaboration, and the challenges that emerge when incentives may not align with collective well-being. He’s gone so far as to explore whether the human species is genetically predisposed to selfishness or altruism. His conclusions are published in the book "A Cooperative Species: Human Reciprocity and Its Evolution."

Bowles concludes in the interview that there is

“strong experimental evidence that we are generous in many circumstances. We have models and data which suggests that there might even be a genetic predisposition. And of course, we know there are many cultural reasons why we'd be taught to be that way.”

Of course, every critic of altruism will bring up free-loaders — people who contribute relatively little but aren’t shy about taking their fair share. In Bowles experiments, he’s found “free-riders” are routinely punished even at the expense of self-interest.

In a multi-round public goods game resembling an expanded Prisoner's Dilemma, initial contributions to a shared good start off high but dwindle as players notice others free riding. When a punishment mechanism is introduced, like allowing participants to spend some of their earnings to penalize free-riders, contributions to the public good surge back up, eventually rendering punishment unnecessary.

This dynamic suggests that human behavior in such systems is nuanced: while people are initially willing to cooperate, they adapt to avoid being exploited. Moreover, when given the chance, they actively invest to punish free riders, even at a personal cost.

Bearing this in mind, Bowles believes “if you're thinking of a new economic paradigm, you have to come down on that somehow.” Bowles believes there’s enough evidence today to say it’s wrong to believe humans are purely rational, intelligent actors who act in their own self interest. In his words, “You can't say we're selfish and really smart.”

Instead, he says

“The bumper sticker for my paradigm is ‘People are a lot dumber and nicer than economists think.’”

I like Samuel Bowles use of a linguistics lens to explore economic systems. It’s a compelling touchpoint where natural and social sciences converge around interactions. The nuances of real world economics, he suggests, can be explored but not defined by sterile, mathematical models. We need methodologies that unravel those nested webs of complexities influenced by cultural narratives, historical and political context, and social relationships.

These dynamics are exemplified in the ongoing negotiations between the United Auto Workers and their employers and politicians — talks that encapsulate more than mere contractual details but a convoluted and ever-changing web of expectations, intentions, and power dynamics.

As society evolves, Bowles advocates for a commensurate evolution in our economic models, one that can accommodate these rich human interactions. It signifies a shift from seeking objective certainties to acknowledging the inherently uncertain, dynamic, and complex landscape of the intricate systems that define our world.

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