The Psychology of Economists

Originally published February 7, 1983

A CURIOSITY of economic thought is its frequent dependence on what economists call psychology. My choice of words is deliberate, for what economists call psychology has only the most casual relation to what psychologists call psychology.

Examples appear on almost every page, certainly in every chapter, of all the great practitioners, from Adam Smith to the present. The latest economics fad (“Rational Expectations“) is based on concepts that pretend to be psychological. My favorite example – favorite because it comes from the work of the greatest economist of this century – will be found on page 96 of The General Theory of Employment, Interest, and Money by John Maynard Keynes.

“The fundamental psychological law,” Keynes writes, “upon which we are entitled to depend with great confidence both a priori from our knowledge of human nature and from the detailed facts of experience, is that men are disposed, as a rule and on the average, to increase their consumption as their income increases, but not by as much as the increase in their income.”

Of a lesser man than Keynes one might be tempted to say that he wrote so emphatically because he was aware his evidence was so slim. In any case, one may scour all the psychology textbooks in the land and read with close attention the 24 volumes of the Complete Psychological Works of Sigmund Freud, not to mention the writings of everyone from Erik Erikson to B.F. Skinner and even as far out as Noam Chomsky, and one will never find the faintest adumbration of this allegedly dependable psychological law.

The most familiar example of economists’ use of a purported psychological law is of course the profit motive. Psychologists talk of motives from time to time, but never of this one, while economists – especially conservative and radical economists – sometimes seem to talk of little else. One wonders, therefore, what it is that economists are trying to say, and why they should be trying to say it in this particular way.

The profit motive turns out, on examination, to be truly protean. I obviously am not interested in money this minute, so I must be scheming to get it eventually. Or I find prestige profitable. Or I get my kicks from being praised for doing good, or even from actually doing good. Or I yield a little to the proletariat today to forestall the revolution tomorrow. Or I mistakenly think I’m turning a profit when I’m barely keeping up with inflation. Or I believe I’ll be richly rewarded in heaven.

The only way the profit motive can be maintained at all is by pretending that everything is in some way profitable. What explains everything, however, explains nothing in particular. And if there is no way I can avoid being motivated by profit, then it follows that there is no way you can motivate me: I’m already motivated. You may try to disillusion me about my chances of heaven, but only by convincing me of the relevance of some other version of the motive. You can’t free me from, or stimulate me by, the profit motive itself.

Economists nevertheless stay the course, so to say, with motives because this procedure has a certain advantage. Writing nine years before The Wealth of Nations, Sir James Steuart observed that the “principle of self-interest” is the “only motive which a statesman should make use of, to engage a free people to concur in the plans which he lays down for their government.” Otherwise, he explained, “the statesman would be bewildered,” for “Everyone might consider the interest of his country in a different light.” Restricting one’s inquiries to matters that aren’t bewildering is a little like the vaudeville wheeze about the drunk looking for his lost wallet at the street corner because the light was better there. But it is more than that: It is an effort to establish an impersonal foundation for economics.

Establishment of this impersonality was the great achievement of Adam Smith, whose work swept Steuart’s into near-oblivion. Smith’s “invisible hand” was a truly world-historical idea: It changed the world. Its first appearance is worth quoting in extenso:”

“By preferring the support of domestic products to that of foreign industry, [every individual] intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for society that it was no part of it. By pursuing his own interest he frequently promotes that of society more effectually than he really intends to promote it. I have never known much good done by those who affected to trade for the public good. It is an affectation, indeed, not very common among merchants,” Smith adds drily, “and very few words need be employed in dissuading them from it.”

There are several aspects of this passage that may be astonishing. First, it comes not at the beginning of the book (where Smith put his famous analysis of the division of labor) but halfway through it, an incidental point in an argument against import restrictions. Second, it is not stated as an immutable rule (Nor is it always the worse …” frequently” “I have never  known much good … “). Third, it is based on merchants’ preferences (which no longer exist, if they ever did) for domestic over foreign products. Fourth, it is connected with the rest of economics only as an afterthought (“as in many other cases”). Yet the invisible hand shook the world.

Smith’s less metaphorical, and perhaps as often quoted, statement of the idea comes some 225 pages further on: “… the obvious and simple system of natural liberty establishes itself of its own accord. Every man, as long as he does not violate the laws of justice, is left perfectly free to pursue his own interest in his own way, and to bring both his industry and capital into competition with those of any other men or order of men.” That appears at the end of an attack on the physiocrats. But this time Smith goes on to state explicitly the factor of the idea that gave it its historical power: “The sovereign is completely discharged from a duty … for the proper performance of which no human wisdom or knowledge could ever be sufficient; the duty of superintending the industry of private people, and of directing it towards the employments most suitable to the interest of society.”

Thus the regularity of the profit motive became a lever to pry from the backs of mankind the age-old oppressions of sovereign lords. It was as liberating an idea as Copernican heliocentrism or the Newtonian laws of motion, which, by making the natural universe regular, freed mankind from intimidation by priestly revelations.

For two centuries economists have searched for and disputed over impersonal economic laws: from Say’s Law that “the creation of one product immediately opens a vent [demand] for other products” and Ricardo’s Law of Comparative Advantage (see “How Our Sun May Rise Again,” NL, July 12-26, 1982) to the Phillips and Laffer Curves (both now discredited) and other contemporary marriages of active imaginations with analytic geometry. Marx joined in the search: “It is not,” he writes in The Holy Family, “a matter of what this or that proletarian or even the proletariat as a whole pictures at present as its goal. It is a matter of what the proletariat is in actuality and what, in accordance with this being, it will historically be compelled to do.”

What was launched in search of freedom from arbitrary domination has paradoxically come aground on sociohistorical compulsion.

IN THE MEANTIME there are other consequences of the reliance on universal motivation, particularly profit motivation. Though this motive must become, as we have seen, protean in definition, it is construed narrowly in application. The argument goes that since men do things only for profit, the way to get them to do things is to make the doing profitable – to quickly and lavishly reward with money. This has always been the rationale of conservative economics and is by no means the invention of George Gilder or of Reagan, Regan or Kemp. What follows, of course, is that greed becomes a virtue.

That is a terrible notion. It is also a terrible choice as the ground of public policy; if you encourage greed, you will surely discover a great deal of it hitherto hiding under stones. Greed is, moreover, in the end an ineffectual basis for public policy. That is to say, it is ineffectual if your ultimate aim is something other than more greed. It is simply not true that most men and women are mostly motivated by greed. So when you try to run your economy on greed, you are running on a very few cylinders. We’re now experiencing how badly this works.

Similar inefficiency will plague you no matter what motive you select to base your economics on. A universal instinct of workmanship is as formless as universal greed. Motives are as individual as the individuals alleged to be motivated. A person’s motives are what he says they are. Gandhi was not out to make a buck; and if you charge him with hypocrisy because your theory says that everyone is out to make a buck, you lay yourself open to the same charge. And if disinterested discourse is thereby foreclosed, it becomes impossible to claim valid impartiality for any statement, including the original proposal of universal motivation. The rest is silence.

Motivation is the wrong idea, anyhow. It suggests what people do automatically, what they are programmed to do, what they “really” do. ‘Insofar as psychology inquires into such doings, it is no longer a suitable foundation for political economy. It played a necessary role in freeing us from the divine right of kings. The issue now, though, is not freedom from but freedom for. Our problem is not psychological but moral. It is not a question of determinism but of determination. As one of the prolegomena to any future economics, one can say that its task will be the discovery of conditions for free and responsible action[1].

The New Leader


[1] In this article, and especially the closing paragraphs, one can see the precursor to the arguments made in The End of Economic Man

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2 comments
  1. Like VividHunter I particularly like this article. It is the first seed, the first crystallization of the viewpoint on economics that are later published in my father’s books (see footnote above).

    Reading it I kept thinking of this article by Jonathan Lehrer on how smart people (like economists) can’t help but make short-cut assumptions that are quite wrong, assumptions like “the profit motive:” http://www.newyorker.com/online/blogs/frontal-cortex/2012/06/daniel-kahneman-bias-studies.html

  2. Prof. Michael McGandy writes:

    Dear Doug,
    There is a Millerian cadence at times and a certain insistence on being clear that I would say also owes something to Miller. But such claims are debatable. What is not debatable is that George took this wholesale from Miller:
    “What explains everything, however, explains nothing in particular.”

    This is from “The Paradox of Cause,” and is part of Miller’s critique of pure mechanism in which every explanation is causal in the efficient sense of that term (see Aristotle’s four causes:http://en.wikipedia.org/wiki/Four_causes). Any total explanation undermines itself, Miller argued, in part because it flattens (and distorts) the phenomena of experience and in part because it leads to something like infinite regress wherein one must ask what caused causality. (Thus Aristotle’s world of four causes is richer and more true to experience than a world in which only efficient causality is recognized.) The principle Miller articulated can be applied beyond causality and George uses it to good effect re the profit motive as a causal factor in economic psychology.

    Supplanting the psychological with the moral, as George does at the end of the essay, is fundamentally Millerian, though, I must say, Miller is by no means unique in asserting this priority.

    Keep up the good work!

    Michael

    Editor: here’s a link to “The Paradox of Cause”: http://books.google.com/books/about/The_Paradox_of_Cause_and_Other_Essays.html?id=9AgMtuTRC3sC

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