How Might a World of Altruists Function Economically?

In my last posting, I noted that one of my readers, Annie, a biologist, suggested that as long as we were hypothetically splicing altruism into our genome, we might as well make it dominant. In that posting I evaluated research bearing on that issue, and concluded that the dominance of an altruism gene may well matter, but it is not conclusive. See Altruism and Tipping Points for that discussion: http://theverylongview.blogspot.com/2009/09/today-i-turn-to-comment-made-by-annie.html

As promised, I said I would later turn to her follow-up questions. Paraphrasing, Annie reflects: would a fictional future world of altruistic humans then implode under the weight of the sort of forces that thwarted past efforts at creating Utopian communities? That is, once H. sapiens was stripped of his single-minded selfishness, doesn’t social science theory, especially economics, predict that he will fail to have the incentives to make an economic society function effectively? Might we see altruistic humans gravitate first to socialism, and then to the dismal denouement of past socialist experiments?

I have spent a bit of time reflecting on this knotty set of questions, and cannot promise a comprehensive answer, but will try to do some meager justice to these questions today.

The main idea, as I understand it, is this: doesn’t economics (a la Adam Smith) say that it is not through our mutual benevolence, but instead through our collective self-interest at work in markets, that leads to the greater good? And, if we cannot any longer count on self-interest exclusively driving our behavior, might we not then lose the benefit of market systems, turn perhaps to socialist alternatives, and then fail for the reasons that socialist systems generally fail (in part due to a poor alignment of incentives between effort and reward)?

I think the answer, simply, is that this is actually not something to worry about. Unfortunately, the argument is complex and a bit long-winded.

First, indulge me in a quick review of Adam Smith, the broadly acknowledged founder of economics. Students of economics know that in 1776 Smith published his Wealth of Nations, in which he argued against Mercantilism and in favor of a market-based system that encouraged and rewarded productive economic activity (as opposed to the accumulation of precious metals and other accounts reflecting long-term trade imbalances). Smith is unfortunately remembered for having famously said:

It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages. Nobody but a beggar chooses to depend chiefly upon the benevolence of his fellow-citizens.

This was a bold assertion, and a brilliant one. Economists spent the following century or two showing that an economic system that met certain qualifications – for example, one in which rational self-interested people interact without compulsion and with all the information they need to conduct their work related affairs – had the potential, quite remarkably, to do as well for society overall as any other system could possibly do. With the help of late 19th century engineers, the mathematics employed in this so-called general equilibrium analysis was sound, and the result was downright Panglossian; this is the best of all possible worlds. In formal, mathematical analyses of this problem, the equilibrium result was actually called – and I am not making this up – “the bliss point.”

And all of this without an altruistic gene in sight.

There may be no more powerful idea in the history of political economy. That a society could actualize its economic potential without calling upon its citizens to do any more than selfishly interact in the marketplace is, not remarkably, quite palatable. Smith’s original idea that selfish individual behaviors could lead to a collectively moral result has great appeal – as selfish behavior is surely easier to count on than altruistic behavior.*

Again, this was a bold assertion, and a brilliant one – but also one taken terribly out of context.

Adam Smith held university teaching posts in logic, jurisprudence, and moral philosophy – economics was not yet an academic discipline. Before The Wealth of Nations, Smith had written the critical and well received Theory of Moral Sentiments in which Smith had very carefully examined the philosophical question of human virtue. This is not the place, and I not expert enough, to do justice to Smith’s contribution to this branch of philosophy. Suffice it say, he rejected his teacher, Francis Hutcheson’s, idea that moral virtue constituted a sixth sense, and replaced that idea with one of an internal spectator – what we might today call a conscience. Smith thought that people are concerned with how their conduct will be judged by others and they sought to anticipate moral condemnation by reflecting in advance on the likely reactions of others to their social and economic conduct. While Smith did recognize that there was a risk of partiality (what we today may call motivational bias) that might lead people to judge themselves too lightly, Smith felt that human beings were by nature invested with an “original desire to please” and an “original aversion to offend.” Smith in fact argued that men became fit for society only when they learn to control their self-regarding passions in favor of social rules of conduct. In his writings on jurisprudence within TMS, Smith clarifies this for me by arguing that justice “is the main pillar that upholds the whole edifice” and the rules of conduct with respect to justice are actually the clearest. (Smith argues that the rules of justice are comparable to grammar while the rules of virtue are more akin to an aesthetic code. If he had access to Chomsky two centuries later, he might have pursued the analogy further, and asserted that the desire for justice is hard-wired into human beings. I suspect Smith believed this.)

Adam Smith felt that these desires were so strong that when he wrote the Wealth of Nations seventeen years later, he may have worried that the altruistic tendencies of people would be so strong as to possibly interfere with their economic activities. On the other hand, Smith did not appear to doubt that if their economic system failed to be just, men would not rush to remedy those injustices. Smith was never remotely what would be later called a Social Darwinist; Smith did not imagine that injustices wrought by markets were somehow virtuous, nor, as far as I can tell, did he think that his followers would ever come to such a crude and selfish belief.

There are two points I must make at this juncture. One, the use of Adam Smith today to justify the idea that men are selfish, and this is as it should be, is very sad, as it is a terrible misreading of Smith. For anyone to argue that free market capitalism, as they imagine was described by Smith, is meant to rule out universal health care, or economic injustices of any sort, would mortify the old professor, who argued that justice was the number one concern of any civilized society – he felt it was in a category of its own. In modern political discourse, in which we are asked to choose between the Right’s emphasis on liberty and the Left’s emphasis on justice, Smith sided with today’s Left. It is an interesting intellectual twist that he is a hero of the Right.

Two, Annie’s point has deep intellectual roots. The very man who gave us homo economicus (or economic man, as we understand him today) thought long and hard at the outset about whether or not excessive moral sentiment (a form of altruism) might interfere with economic activity.

Unfortunately, as I understand Smith, he never answered the question. For an answer, I need to move ahead from the late 18th century and discuss markets and incentives. Remember that the question is this: even if we could all become altruists in time to solve our biggest problems, won’t that interfere with the workings of our political economic systems and lead to ineffective results anyway?

Let me first look at the question of markets and when and how they work (and when and how they fail).

When do markets work? They can work when the social and private marginal costs and benefits are equal. That is, when all the costs and all the benefits of an action accrue to the decision-makers involved. When two people are trading money for product, and the total costs of producing the product – and earning the money to pay for it – are fully internalized by the two parties, markets can be best. If social and private costs diverge, as in the case of pollution, markets can still work as long as taxes are used to re-align those diverging costs. If polluters pay a tax that reflects the cost imposed on those not party to the transaction, then the market can still work. If social and private benefits diverge, as in the case of providing music on the town green for which villagers pay and outsiders do not, markets will provide the right amount of music if it finds a way to charge the right sort of fees to the outsiders. (And the challenge of doing so is not actually easy.)

If innovation leads to market share, profitability and value – those who paid to innovate capture the benefits and pay the costs – markets can work, but even then they may not. Sometimes the fixed costs of the innovation are very high and the actual cost of disseminating the benefits after innovation are marginally low (think pharmaceuticals) – so the needs of the market to fully internalize costs and benefits leads to an inadequate provision of the product (e.g., medicine) to the poorest segments of the market.

Markets tend to fail outright in many cases. They fail to provide for so-called public goods. The classic example is National Security: free riding would be too easy, as those who did not pay would be protected by the same intelligence and military system protecting those who purchased national security in its market. National Parks suffer, but not as dramatically, as do the Arts. Clean air and water suffer greatly, as they are obvious public goods. The cost to me of cleaning the waterways in my community far exceeds the benefit to me individually, or to all the people I could charge in a private market under most circumstances. Markets also fail in cases of so-called Natural Monopolies, in which the optimal scale of the firm is so large that it would dominate the market and distort the allocation of benefits through its pricing power.

But markets have even a smaller chance when some of benefit and cost devolves to participants who have no say at all. They have no say because they have no role in the market. This can be because they have no money (markets are “one dollar, one vote”), they have no right (perhaps they do not have citizenship and therefore cannot participate in the provision of the public good), or they are not yet born. Climate change due to carbon emissions is imposing its burdens not only on those of us emitting lots of carbon, but on those who are too poor to emit much carbon at all but are unable to force us to behave (poor sub-Saharan farmers may pay the starkest price during the next forty years, and they have had little capacity to influence the US into signing the Kyoto protocol). The least able to speak up are those who are not yet born. Our great grandchildren will pay a significant price for our pollution today, and in what market in 2060 shall they impose a cost upon us today?

Keep in mind those Seven Generations and the Iroquois who did keep them in mind (if we can believe them). It is not free enterprise that solves intergenerational problems of distributive justice. While one may believe that socialism is in theory capable of it, only the very young at heart could hold out hope for a socialist solution. If there is an alternative way to that end, we have not yet discovered it.

Today we sometimes witness a nearly religious version of market fundamentalism. Many politicians and businessmen are in this camp, and this fervor has recently been at the forefront in the health care insurance reform debate. The idea that collective good can come from individually selfish behavior, while an arguably good thing, does not imply that additional good cannot come from selfless or at least socially aware behavior. Somehow, many market fundamentalists adopt the view that if selfish behavior is good, unselfish behavior is somehow bad. There is no need to treat the common rhetoric behind this convoluted idea, but we do need to deal with their strongest case. Their best argument is that the attempt to implement selfless behavior will distort market incentives and push us away from the bliss point. This idea connects back to Annie’s idea that incentive structures may fail if we navigate away from selfish interactions in market based systems.

So what do we expect would happen if altruists took over? Would markets fail?

What is the argument that they might? We do know that when selfish individuals interact (although, descriptively, we do not know if there has ever really been a case of purely selfish people interacting in a market for long) markets can only do their magic if at a minimum the costs and benefits devolving from market actions accrue exclusively to the decision-makers. That is, there are no externalities. This applies to labor markets, of course, so people should be rewarded in proportion to their efforts for optimal labor supply to be induced. (According to economic theory, markets can at best reward workers in proportion to the value of their marginal labor productivity, which is not the same as effort. It is a function of a host of individual factors, as well as a host of other factors completely out of the control of the worker. So a perfect alignment of effort and incentive is not ever really feasible.) The Marxist maxim, “to each according to his ability, to each according to his need” violates this principle, at least in spirit, as the ablest are presumably subsidizing the neediest in such a system. The long term implied effect, in a world of selfish individuals, would be that the ablest would withdraw some of their effort as they perceive that it is not fairly rewarded. But, it also has to be noted that Neo-Marxians spent considerable time arguing that such slacking occurs in capitalist systems, too, so this is not actually a condemnation of socialist work relations per se, although most economists would still argue that the misalignment of compensation and productivity was indeed greater in socialist systems, and so slacking was a greater problem there than elsewhere.

Modern theorists such as Herbert Gintis make a point of asserting that a descriptively accurate view of H. Sapiens must account for some altruistic tendencies but it need not abandon the notion of optimization. What this means is that while honest researchers must accept the definitive conclusion of a generation of behavioral science research that has shown that most people are not maximizers of a personal utility function which is purely selfish in content, researchers need not abandon the convenience of optimizing behavior altogether. Annie’s query about the future of markets and politics in the face of an onslaught of altruists has actually received some attention in this limited sense. Folks such as Gintis have been asserting that assessing the behavior of economic agents who optimize a more complex utility function – one that is partly selfish and partly something else – is not insurmountable. In fact, they have begun that work. While there is no evidence that they have gone so far as to help us with Annie’s question, they have given us a good starting point.

That starting point is this: if we place our optimizing agents into formal models – replacing selfish agents with altruistic agents – what really changes? The mental experiment might go like this. Our new agents care about their own well-being, to be sure, but they also care about other things. We know they care about fairness. They care about justice of both process and outcome. They don’t want to see some people suffer terribly. They care about those whose voices are too weak to be heard by markets and politicians – the poorest, the outsiders, and the unborn. If we simulate this model, what might we expect to change – now and in the long run?

In the short run, we expect that optimizing altruistic agents will expend somewhat less attention on the maximization of their income, and more to advance their values. They will remain committed to the desire to have their rewards respond to their efforts: this is critically unchanged. Now, however, they perceive reward more broadly, so whereas the purely selfish agent might care only about his personal compensation, our (optimizing) altruist will be well motivated if his self-interest plus his other values are advanced in proportion to his labors. When they discuss their own labor contracts, they will show a tendency to favor a fairer distribution of rewards (say bonuses or use of sick days) than they did before. To the extent that they are altruistic, they may even be willing to sacrifice something small in order to advance a fairer distribution overall. Just as in the case of purely-selfish workers, they may slack off in their efforts if they perceive that their work effort is not being fairly rewarded (unless their altruism takes the form of an enhanced work ethic – which there is little evidence to support). Or they may wish to reciprocate good behavior on the part of others, even if this means some self-sacrifice to do so. Further – and this is a topic I have not yet addressed in this Blog – altruism, in the formal sense, also means that people are willing to pay something to punish those who violate their values. (This is actually a critical part of the theory of altruism –altruists are good enforcers of social norms, and they both reward and punish.) So in a world of altruists in power, the huge Wall Street bonuses might have encountered even more of the resistance the House Republicans and Blue Dogs gave to the proposed bailouts under Bush 43 and early Obama – as they clearly violated most people’s sense of fairness. (We only gave in because we were told we had to in order to avoid even worse consequences. No one argued it was fair. A so-called reciprocal altruist would have been willing to pay an even greater cost, let's say in terms of time to economic recovery, in order to punish Wall Street than would purely selfish people. Think about that.)

On a public level, our society of altruists might promote more progressive taxation, more justice in foreign policy, more environmental conservation on both individual and political levels. It might also involve more social safety nets for the neediest, so in some ways it will certainly resemble a more socialistic approach, but the key difference is that the system is now meeting their desires more than such a system would serve purely selfish egoists.

So far, so good, I think. In our mental experiment, a world of altruists would have the private impact of making compensation systems more just and public investments both more just and more far-sighted. We would probably come to resemble Sweden’s social democracy over time. One cannot say ex ante that these changes would not for the good. I am inclined to think they would be.

In the long run, the critical question seems to be whether a polis of altruists would choose entirely different social-economic methods or even systems. Would they fall prey to a form of naïve socialism in which they come to believe, as did many economists at one time, that they can do a better job of planning for the general well being, including the future, than does the market-based, socially-oriented, altruistically-motivated democracy at their disposal? I don’t see why this would be a risk, but perhaps it is. An old adage is often mistakenly attributed to Churchill, but the real idea was written by Francois Guisot (1787-1874): "Not to be a Republican at twenty is proof of want of heart; to be one at thirty is proof of want of head." A contemporary of Churchill, Georges Clemenceau (1841-1929), revived it: "Not to be a socialist at twenty is proof of want of heart; to be one at thirty is proof of want of head." I assume it goes almost without saying that Guisot’s double entendre works better in his era than did Clemenceau’s careless adaptation in his.** I need to share Clemenceau, however, as my question is this: would our world of altruists be so “full of heart” that they are “young at heart," and thus vulnerable to the naivete that leads to optimism about socialistic arrangements? And if so, what would be the likely result?

There are two questions relevant to our argument. One, would altruists be inclined to choose to abandon a Swedish style social democracy in favor of a socialist planning system and, two, would socialism fail in the hands of altruists?

I have no answer for the former, although I see Annie’s point. If the level of altruism was sufficiently other-regarding (and self-sacrificing) I suppose such a society might choose to believe that the vagaries of the capitalist business cycle is such – and their sense of the injustice of some paying a higher price than others so great – that they wish to do what others have done before them, and seek to isolate themselves from a capitalistic, globalized world. I do not find this compelling, and imagine that a world of good hearted people are not so naïve as to ignore the lessons of the past, but that is not to say that this fictional society would not come to believe that they, in all their goodness, could do better than Soviet or Chinese style socialism – and better than being part of a market-based world system in which others, less generous than they, have great influence on the state of their economy.

Would socialism, if adopted, fail in the hands of altruists? Even modern (or even futuristic) altruists – who would presumably avoid the temptations of unequal access and privilege that has plagued socialist systems – and have at their disposal the best super computers, would probably fall prey to the informational burdens of socialist planning. See http://theverylongview.blogspot.com/2009/09/today-i-turn-to-mitchells-second-major.html for a more detailed argument. In this case, the road to hell may well be paved by the very best of intentions, but the outcome may still be unfortunate.

In the end, however, even if altruists tried to make socialism work and failed at it, would they be inclined to stay that unfortunate course? I would like to think that such a society, one in which every member cares so much about the well being of each other, would be moved to try something else. Further, along another line of thought, the best arguments for socialism have to do with the removal of a socio-economic system from the world wide forces of capitalism and its business cycles. But true altruists care about future generations, and if they are thinking clearly, they would realize that worldwide, multilateral cooperation is necessary to stem climate change sufficiently to assure future generations everywhere of a habitable world. Even if a society of altruists were perfectly clean and green, they cannot save the planet without moving others to their cause. This would mean that altruists would need to stay actively engaged, and not withdraw. I know this no proof, but I think that it is most likely that a world of altruists would not be likely to withdraw unproductively from the world economy, and neither would a market-based democracy implode due to poor incentives. Further, I think the logic is good that altruists would not find market incentive systems incompatible with their well being. They would revise those incentives, favoring values such as fairness and justice, but this would not be at all harmful.

So I think the Blog's "case" remains that one, altruism is both necessary for successful climate change policy, and two, not incompatible with economic effectiveness long term, as long as we are hopeful that altruists would not be both youthfully naïve and stubborn about the dangers of planned economic and social systems.

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* Nonetheless, this moral idea held little sway with Smith’s contemporary Scottish enlightenment moral philosophers.
** Other versions are easily found on the web: This one is common. Not to be a Democrat at twenty shows lack of heart, not to be a Republican at forty shows lack of head, and attributed to Churchill, who might have thought the terms meaningless in this context.