Economics, Literature and Scepticism

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I am a PhD student in Economics. I am originally from South Africa and plan to return there after my PhD. I completed my M. Comm in Economics and my MA In Creative Writing (Poetry) at the University of Cape Town, where I worked as a lecturer before starting my PhD.

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Tuesday, July 29, 2008

Homo Economicus Evolves, or not

Posted by Simon Halliday | Tuesday, July 29, 2008 | Category: , | Today I comment on the final piece (of the three part series) involving John List. This final piece, Levitt and List (2008) 'Homo Economicus Evolves', is basically a summing up of the research that Levitt and List did for their 2007 JEP piece (part 1 of the series), with some additional points and research emerging from List's JPE piece (part 2 of the series). I will simply comment on those additional pieces as the basic ideas have already been summarized in my two previous posts.

Recall that their main drive is to discuss the extent to which social preferences (altruism, reciprocity, inequity aversion) are actually drivers for human behaviour outside of the laboratory. The argument ranges from differences in social norms, self-selection into experiments vs. self-selection into markets to degree of scrutiny and so forth. They bring up two examples, one from card-trading enthusiasts, from List (2006) and another on farm-behaviour by Bandiera, Iwan Rasul and Barankay (2005). Looking at the card-trading example List found that there were differences in behaviour: individuals acted more prosocially in the lab than they did in the field - the caveat being that these individuals with whom they interact are people who they will probably not see again and that the others did not have a chance to get the card's quality graded. This is all well and good, but it does not rule out prosocial preferences in their entirety - they seem to have left out the idea of parochial altruism, the 'dark side' of altruism in which individuals are altruistic but only towards people they know rather than towards society in general. Social distance can decrease the likelihood for social preferences to be active - not necessarily a good thing for interactions in the market place.

From Bandiera et al. they argue:
[F]arm worker behavior is consistent with a model of social preferences when workers can be monitored. Yet, this disappears when workers cannot monitor each other, which rules out pure altruism as the underlying cause. Being monitored proves to be the critical factor. (910, my emphasis)
Ruling out pure altruism does not mean that you have ruled out the entire class of social preferences that could be present in such situations. Monitoring is particularly important for reciprocity, which is a social preference. Hence what they seem to be saying is that, in order for certain human-motivated social preferences to work we need to have certain institutions in place. Why do I say this? Strong reciprocity - a much documented social preference - requires monitoring in order to allow for punishment of defectors. If we cannot monitor one another, even if we would cooperate in the situation normally, undermines the architecture required for the maintenance of social preferences. Blanket non-monitoring doesn't tell us anything new. What should we do instead? Maybe have experiments where individuals have a 'chance' of being monitored, rather than simply making that probability zero, or look for other ways to replicate more everyday circumstances. What is relevant about this point is that the anonymity and lack of ability to monitor individuals in certain market interactions means that individuals will, in all likelihood, look for ways to cheat: think of financial markets, or Enron, or the recent credit crisis. Unmonitorability (if that's a word) and anonymity would have undermined whatever social preferences may have been present. What does matter, however, is the interpretation that social preferences and institutions go hand in hand. This point has been made regularly and is one to which I will return in later posts. Levitt and List go on to comment that economics is 'at a crossroads'. They argue that growing distant from generalizability is a bad thing, they don't want different models for different contexts but rather a 'unified theory'. They also argue for empirical relevance, by testing laboratory results against field experiments that could validate or undermine the laboratory results. These are two separate criticisms, the first based to some extent on Stigler (1965) when he argued that economic theories should be judged by three criteria: generality, congruence with reality, and tractability. This crossroads highlights the first two. The question remains whether it is at all feasible for economics to maintain generality while also maintaining congruence with reality. I don't believe this is the forum to enter that question quite yet, but suffice to say that where economics has attempted to have 'general theories' previously, it has fallen flat on its face when it came to congruence with reality.

O. Bandiera, R. Iwan Rasul, I. Barankay, Q. J. Econ. 120, 917 (2005).

J. A. List, J. Polit. Econ. 114, 1 (2006).

Levitt, S.D., List, J.A. (2008). ECONOMICS: Homo economicus Evolves. Science, 319(5865), 909-910. DOI: 10.1126/science.1153640
G. Stigler, Essays in the History of Economics (Univ. of Chicago Press, Chicago, 1965).

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