Posted: 9/19/2014
Trigger
Just read “The Looming Death of Homo Economicus”. I am always in enthralled when economists try to explain human nature and sell it as the latest greatest wisdom of economics.
Dennis J. Snower (Ph. D. is from Princeton University) is is President of the Kiel Institute for the World Economy. The Kiel Institute is one of Germany’s leading economic research institutes. I am sure, the late Herbert Giersch, later in life a more classical liberal minded economist and predecessor at the institute would have had a serious talk with this guy.
About The Homo Economicus
The death knell has famously rung many times for this poor human of economic theoretical imagination and abstraction. However, the understanding of this human is very simple. It is human individualism and freedom that drive economic prosperity benefiting all humans and the human condition.
Of course, humans engaging in economic activities do not do this in egoistic isolation. An economic transaction is only mutually beneficial if both parties voluntarily and without force choose to execute the transaction. This is economics 101 at least since Adam Smith and going back much further in history.
Professor Snower’s Great Insight
The professor gives a bombastic introduction in the above article like “This is a transformation on the scale of the shift, more than 8,000 years ago, from nomadic hunter-gatherer societies to settled agricultural ones, which eventually led to the rise of cities. … What is already clear, however, is that, like previous transformations, this one will involve a fundamental change in all of our economic relations and the social relations that support them.” (emphasis added).
He goes on (emphasis added): “individuals pursuing their own self-interest will, as Adam Smith put it, be led, “as if by an invisible hand,” to serve the public interest as well. According to this view, everyone is Homo economicus: a self-interested, fully rational individualist.”
Well, the Invisible Hand has been mocked and ridiculed many times by prominent economists and others since. Prof. Snower is also, probably deliberately, prone to a fundamental misunderstanding of the human individual and the Invisible Hand as expounded by the Scottish Adam Smith (How I wish Scotland had gone independent yesterday, i.e. 9/18/2014).
Now, Prof. Snower tells us (emphasis added): “But, as past “great transformations” demonstrate, this approach is inadequate, because it neglects the social underpinnings of market economies. In such economies, contracts tend to be honored voluntarily, not through coercive enforcement. What makes these economies function is not a policeman protecting every shop window, but rather people’s trust, fairness, and fellow-feeling to honor promises and obey the prevailing rules. Where this social glue is lacking – such as between Israelis and Palestinians – people cannot exploit all of the available economic opportunities. … In short, mainstream economics – and the concept of homo economicus – recognizes only half of what makes us human. We are undoubtedly motivated by self-interest. But we are also fundamentally social creatures.”
I don’t think that Adam Smith or any other non mainstream economist according to Prof. Snower neglected the “social underpinnings” as Prof. Snower sees it.
The above reference to the lacking social glue between Israelis and Palestinians by Prof. Snower is incredibly naive and pathetic!
Mainstream Economics According To Snower
The salient excerpt from the article above (emphasis added): “Mainstream economics offers a straightforward analysis of and policy response to such a transformation. Whenever technological or other changes allow for people to be compensated for the benefits that they confer on one another (minus the costs), the price-based market system can adjust. When the changes create externalities, economic restructuring is required – say, adjustments in taxes and subsidies, regulatory shifts, or property-rights upgrading – to offset the costs and benefits for which the market cannot compensate. And when the changes give rise to particularly high levels of inequality, redistributive measures are needed.”
Professor Snower is clearly a big government and authoritarian economist. I don’t have the time to elaborate further here, but to anyone with a brain this is clear from this excerpt.
I would also strongly argue what Professor Snower sells here as “mainstream economics” is anything but mainstream. Who determines what externalities are or high levels of inequality? Are government redistributive measures really called for?
Emphasis Added
I am always wondering why so many people as prominent as Professor Snower do not bother to add emphasis to parts of their article where they think the import of their opinion lies. It would greatly help Human Economicus to quickly figure out where the person is coming from and not waste time and effort by having to read the whole article.
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