Saturday, May 12, 2007

Folk economics and
evolutionary psychology

Emory University economist, Paul H. Rubin, writing in the Washington Post:
Our primitive ancestors lived in a world that was essentially static; there was little societal or technological change from one generation to the next. This meant that our ancestors lived in a world that was zero sum -- if a particular gain happened to one group of humans, it came at the expense of another.

This is the world our minds evolved to understand. To this day, we often see the gain of some people and assume it has come at the expense of others. Economists have argued for more than two centuries that voluntary trade, whether domestic or international, is positive sum: it benefits both parties, or else the exchange wouldn't occur.
A useful analogy is between speech and reading. All humans growing up in a normal environment learn to speak, but reading must be taught because it does not come naturally. Folk economic beliefs are like speech -- we get them without trying. A deeper understanding of economics is like reading -- it must be taught.

America's success in lowering its barriers to outsiders shows that we can and do learn. But like reading, we must teach each generation anew.
One of the things that struck me when I came to the Middle East five years ago was the degree of effort that goes toward influencing rewards. The belief is prevalent that rewards are not based on merit, that rewards can be influenced through negotiation and badgering, and that if someone else in an organization gets a reward it comes at someone else's expense. The view is that effort is best directed towards getting a bigger share of a fixed pie. It is not believed that the pie can be made larger.

If others are expending effort on influence and are seeing results, then you too must expend effort on influence as well. To some degree the presumption that influence matters is self-fulfilling -- those in authority too often take the short-sighted way out and bow to the pressure to use their influence to make exceptions. So exceptions become the rule. I have seen, though, that organizations here that can avoid the short-sighted approach out-perform their rivals in the marketplace. A reputation for awarding on merit is hard won, and hard to maintain, but it can pay.

One of my firm beliefs is that people are fundamentally the same, and that differences in the wealth of nations has much to do with differences in societies' institutions. In particular, Rubin's evolutionary psychology argument that all people are biological programmed to think zero sum is compelling. And, yes, every generation needs to be taught to read that the world is not that way. But that teaching won't stick if society is so pervaded with influence that merit doesn't pay.

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Anonymous Acad Ronin said...

Zero-sum thinking is one basis for the prohibition on interest that some religions apparently favor. In a world without technical progress, ie, a zero-sum world, the real rate of interest is zero. In that world, people borrow to overcome misfortune. Charging such people interest means profiting from the misfortunes of others, which is socially disruptive.

10:33 PM  
Anonymous Marlena said...

Really effective data, thanks for this article.

3:25 PM  

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