All kinds of motives affect the economic activities. Economics and notably the neoclassical theory try to simplify the complex of motivations as much as possible. Often the ideal-type of the homo economicus is used, in despite of the many objections. The present column shows why this assumption is not realistic. Notably the importance of group actions and the accompanying morals or ethics are discussed.
Previous columns have analyzed the homo economicus, notably because the Leninist paradigm dislikes the concept so much. The study of the economical behaviour at least requires a sound vision on man. In the course of the human history the vision on man has changed radically many times. For instance in the recent past: in the nineteenth century the theory of the evolutionary development bred the idea, that the social behaviour of people is large determined by instincts.
In a previous column it is told that the American economist Thorstein Veblen attributes the attitude of workmanship to people. At the time science was still highly speculative. For instance, the German political scientist Karl Kautsky invented various human impulses, including self-denial, courage, loyalty, discipline, sincerity and ambition1. Kautsky believes that these virtues are innate, because they are essential for the struggle for life and for the conservation of man as a species. He also mentions sympathy, a feeling which is previously attributed to mankind by Adam Smith.
Certainly after the Second World War this idea is again abandoned, perhaps due to the aversion from the biological theories of the German fascism. The science of the social psychology becomes popular, so that the human behaviour can be attributed to cognitive processes. Emotional deviations are treated with the cognitive therapy. The corresponding vision of man is the tabula rasa, the blank slate, which represents the newborn child. It is obvious that this has political consequences. For instance, the Leninists are convinced, that apparently the social regime can create Leninist personalities.
Since the nineties of the twentieth century the vision of man as a blank slate is again questioned. The biological factor returns, but in a more subtle manner. The human behaviour is regulated by chemical processes in the brain, where an important role is attributed to the neuro-modulators. Besides, new insights are obtained by studying the behaviour of other primates2. For instance, the sociology develops the idea, that the human societies are characterized by the competition for positions, so that people devote their life to the acquisition of a higher hierarchical function.
It is obvious that a sound vision of man is essential. When a political ideal sins against human nature, then it is doomed to fail. The irrationality must be known, both of the masses and of its leaders. Thus one tries to explain the economic behaviour in a realistic and credible manner. Since the Renaissance economics has developed the human ideal-type of the homo economicus. The present column elaborates on this ideal-type, and tries to shed some light on its applicability and its similarity with reality.
The Dutch economist P. Hennipman has made an in-depth study of the homo economicus in his book Economisch motief en economisch principe3. The contents of the present paragraph is mainly based on this book. Those who are interested in the nature of the economic behaviour, must study the human motives. On this portal various attempts have already been made with columns about the motivation for work and about the attitude towards labour. It concerns a socio-psychological subject, where it is essential to define the concepts in a clear manner. For, besides the motives other, similar, terms are used, such as the needs, the utility, the interests, the preferences and the satisfaction4.
The human behaviour drives forward the economic process. Therefore the cultural, social and historical factors will determine the economy. Think about institutions and the technological progress. Nevertheless it is possible to find universal phenomena. Hennipman describes how the classical paradigm accepts just one economical motive, namely the desire for wealth. This idea actually emerged from the mercantilists, but it is Adam Smith, the founder of the classical paradigm, who puts her in a logical frame. A well-known passage in his book An inquiry into the nature and causes of the wealth of nations is: "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".
Apparently the economists develop an abstraction or ideal-type of man, which gives a dominant role to self-interest over other impulses. The actions are directed towards the acquisition of wealth, for instance by striving for a maximal profit. This ideal-type is the classical homo economicus, who perhaps obtained his final shape in the texts of the English economist Nassau W. Senior. At the time this find was unfortunately used as an excuse for a most repulsive exploitation of the workers. Therefore Karl Marx complains in the first volume of Das Kapital: "Now the question was no longer whether some assumption was right, but whether that assumption was useful or harmful for capital"5.
So the people were not very fond of the classical paradigm. Besides, its scientific value turns out to be disappointing. First, Hennipman states, that the homo economicus becomes only an option, after the development of a sophisticated monetary system. Thus the homo economicus is not truly universal. Moreover, in the optimization of profit the short-term and long-term goals can conflict. But the most important objection is, that the classical paradigm is merely pertinent to the production. It can not explain the consumer behaviour. That is indigestible.
Nevertheless, the mental inertness and conservatism have the effect, that the classical paradigm lasts for an entire century - and for yet another century in the Soviet Union. But then the neoclassical paradigm emerges. It is also called the subjective theory, or the marginalist theory, or the paradigm of the marginal utility. The neoclassical paradigm abandons the ambition to discover the human motives, and it highlights the method (the principle), which underlies the human behaviour. The paradigm assumes, that the motives and goals are purely subjective. Therefore it abolishes in principe the idea of the homo economicus.
According to the neoclassical paradigm the actions of the people are determined by the method of the maximization of the satisfaction of their needs. In the interpretation of Hennipman the needs are dictated by the motives, and they do not require a further elaboration. The individual himself chooses (subjectively) what satisfies him or her. The satisfaction can originate from an egoistic action, but from an altruistic action as well. In other words, the needs can be moral, or even irrational and imaginary. The strongest motive will simply be pursued6.
Nevertheless, the method of the maximal satisfaction yields two derived requirements. First, the individual must try to minimize the costs of his actions. For, the individual disposes merely of limited means. Hennipman calls this the technical principle. And second, it is obvious that the individual must act in an effective manner. Although the goals are subjective and free, each individual will in reason aim for their realization. This also implies, that individuals have certain expectations with regard to the future, and operate according to a plan. Loyal readers recognize in this requirement the expectations theory of V.H. Vroom.
The individual of the neoclassical paradigm is more sympathetic than the egoistic classical homo economicus. But also the theory becomes meaningless, because the human motives are ignored. Subjective needs are not necessarily rational or reasonable. There is some truth in this statement, because it is well known that needs and preferences change with time. In case of an irrational behaviour even the expectations theory of Vroom must be questioned. Besides, the future is never certain. The individual must include these uncertainties in his actions, as far as they are relevant for attaining his goals. That is to say, even the decisions about investments are subjective.
The absence of any meaning in the neoclassical paradigm compels some economists to yet assume certain motives. The simplest approach is to study merely the truly observable behaviour. This is called the theory of the revealed preferences. Hennipman does not endorse her, because observations do not explain anything. A more concrete approach is the assumption of hedonistic motives. They were proposed by the English philosopher Jeremy Bentham, who distinguishes between the two motives of pleasure and pain. Each individual tries to make his pleasure maximal, and to minimize his pain. The ideas of Bentham precedes the classical paradigm, but this could not integrate them. In the neoclassical paradigm these motives form the basis for the theory of the marginal utility7.
The neoclassical economists generally assume, that the individual acts in a rational manner. They commonly even assume, that the individual has exact expectations about the future, and therefore is omniscient. It is silently assumed, that the maximization of utility is directed towards the self-interest. This is clearly expressed in the assumption, that the enterprises are motivated by the realization of a maximal profit. Thus the neoclassical economists return again to the classical homo economicus, although they do not like to admit this. Incidentally, this is not true for several other modern paradigms, such as the Keynesianism.
Hennipman has presented the fundamentals for explaining the human actions. At the end of the previous paragraph it is stated, that additional assumptions are necessary in order to analyse the real world. An interesting attempt is made by the Dutch economist Paul Frijters in his book An economic theory of greed, love, groups and networks8. Frijters takes the homo economicus as his starting point, and succeeds in deriving the altruism (love) from the egoistical motives (notably greed). The love develops in the individual members of groups, who hope for reciprocity, without the power to extort it.
The formation of groups has advantages, because power is tied to groups, often within an institutional framework. All those groups are connected by a network, so that information can be exchanged. The concepts of the group and of the network are absent in the present neoclassical paradigm. The network allows to limit the transaction costs of the enterprises (such as search costs for the best partner). Here the four ingredients of the model of Frijters are apparent: the homo economicus, the network, groups and love9.
As soon as the homo economicus enters a group, he must pay by means of a painful adaptation. Incidentally, before the individual is often not aware of this process, so that altruism in the model is not necessarily a calculated behaviour. It is even possible, that the desire for reprocity does not enter the conscious mind (which will hamper the utility maximization!). The homo economicus of Frijters is irrationally rational. But although the reciprocity is not always guaranteed, yet the group members tend to favour each other. Frijters supposes, that the formation of groups is a biological urge.
Needs or desires have a physical component, a psychical component, and a social component. Power is sought in the hope, that it will become a source of pleasure. This behaviour is accompanied by imagination. Group power requires, that the members are disciplined by means of rewards and sanctions. For, man is not a blank slate. Those who do not adapt, are expelled from the group. An attitude of love makes the adaptation easier to bear. Groups stimulate the individual learning, and they act more rationally than individuals.
In the model of Frijters the network does not possess power or morals. These are hallmarks of groups. Even the nation-state is a group, and therefore merely a collection of nodes in the network. The individuals are a member of countless groups and sub-groups. It has already been remarked, that individuals do not possess power, but groups do. Groups are constantly making contacts with other groups, and thus they create the relations within the network. They are born contact makers. Relations can always be broken, but against a price, and thus against an investment. This network is the model of the free, formal market and of the division of labour.
The model of groups and networks is clear and appealing. Frijters has even performed calculations in order to simulate the total collapse of the Russian economy after 199210. This shows how important a good functioning network is. It symbolizes the state of the entrepreneurial spirit. At the same time the model is rather elusive. For instance, it is difficult to separate networks and groups, because they can transform into each other. Perhaps the model is so interesting, because it is an all-including exposure of the neoclassical ideal-type. For, although Frijters takes the homo economicus as his starting-point, it must still be concluded that the arguments impair many aspects of the neoclassical paradigm.
First Hennipman strips the neoclassical paradigm of its feathers, and describes the individual as a being, striving for satisfaction in a subjective, irrational-rational manner. Then Frijters takes the homo economicus, and makes it dissolve into the group. The solution is enforced on the individual, because he must adapt to the morals of the group. Therefore the individual motives are subjected to a constant dynamical changed. This shatters the rationally calculating, self-interested homo economicus. Hennipman accepts the possibility, that the adaptation is based on an individual calculation. But in the model of Frijters the morals are definitely an independent economic factor.
This paragraph will elaborate further on altruism and the morals, using mainly sociological knowledge. For, by definition these pertain to group processes. Here and there the individual motives will be translated into utility functions, because this is the best manner to explain the economic actions. It turns out, that the maximization of the individual utility does not necessarily coincide with the hedonistic behaviour. For instance, the economic philosopher J.J. Graafland defines in his book Economics, ethics and the market the altruism by means of the formula11
(1) Ui(x) = (1 − r) × ui(x) + r × uj(x)
In the formula 1 ui(x) is the utility that the individual i himself acquires due to the choice x, and uj(x) is the utility, that another j individual obtains from it. Apparently the function ui represents the utility of a pure hedonist. The factor r (lying in the interval [0;1]) determines the value, that i attaches to the utility of j. In other words, it measures the altruism of i, whereas 1-r measures the degree of hedonism. Thus Ui
Most neoclassical economists assume, that the individual is a pure hedonist (r=0). For then the exchange relations between the individuals on the market can be modeled in a rather simple mathematical model. Each individual i has his own field of iso-utility or indifference curves ui(x,y) = constant, where x and y represent two exchangeable choices. Such an iso-utility curve ui(x,y), which is supposed to be concave, fixes the substitution rates (that is to say, the exchangeability) of the various alternative choices. The reader can check this in the column about the Edgeworth box.
In the situation of the type, as sketched by Frijters, r deviates from 0, and therefore the simple neoclassical exchange model does not suffice. Now a more complex model is needed, with a diversity of motives, in the spirit of Hennipman. Here one abandons the usual argument, which is put forward in the common text books about microeconomics. Frijters even goes a step further than the formula 1. Namely, suppose that the choice x is itself a deed of altruism, which strengthens the relation of i with the group of the individual j. In that case the choice of the individual i will reinforce his bind with the morals of the group. In other words, his identify is slightly modified. The individual i intensifies his own altruism.
A more altruistic identity becomes visible in a different value of the weighing factor r. Apparently that factor is a function r(x) of the choice x. Assume moreover, that the individual i made his choice, because it would provide him with a quantity qi(x) of a certain good. That would yield a hedonistic utility of ui(x) = vi(qi(x)), where the function vi is the utility of the quantity qi. However, the a priori expectation of i is not realized, because she is undermined by the choice x. For, due to his increased altruism the individual i will no longer want to keep the entire quantity qi(x), but he will give a fraction ξj to the individual j in the group. This example illustrates in a disconcerting manner the actual dynamics of the individual motives. Finally, the choice x provides i with a utility12
(2) Ui(x) = (1 − r(x)) × vi(qi(x) − ξj) + r(x) × vj(qj(x) + ξj)
An individual can not foresee all dynamics in his motives. Therefore the expextations of the individual suffer from imagination and inaccuracy. Even a pure hedonist with r(x)=0 will err in his estimations of his future needs. The cause is the so-called preference drift. That is to say, when the wealth of an individual i changes, then he will soon develop new needs. Possibilities emerge, which before were unknown, and they create a new dissatisfaction.
The preference drift is explained in the column about the cardinal scale of the marginal utility. There the Leninist economist K.K. val'tukh describes how the central planning agency estimates the future needs. The subsistence minimum shifts upwards with time, and the perspectivistic needs also expand. The same column shows how the Dutch economist Bernard van Praag measures that it is more difficult to satisfy wealthy individuals than poor ones. A poor individual, who suddenly becomes rich, will be happy for some time. However, eventually habituation sets in, and the formerly poor individual develops the same needs as the other rich individuals. He will lose some of his gained satisfaction13.
In the column about the attitude towards labour it has been explained, that the Leninist sociologist Rudhard Stollberg disapproves of the common satisfaction as a measure. Instead he prefers an alternative index, the so-called gratification of labour. For, it turns out that a part of the workers with a bad attitude towards labour are still appeased with their own situation. The explanation for this strange phenomenon is that they have lapsed into a situation of resignation. Thus their iso-utility field u(x, y) shrinks, as it were. The needs of these workers approach the saturation, simply because they can not imagine anything else14.
Stollberg discovers the opposite of this behaviour with the workers with a good attitude towards labour. Namely, it turns out that here a part of the workers is unexpectedly dissatisfied with their own situation. Due to their high expectations they are stimulated to be creative and search for improvements. They develop an entrepreneurial spirit. The results of Stollberg undermine the ideal-type of the homo economicus in two aspects. First, apparently some individual lose the impulse to maximize their utility or satisfaction. Second, it is hardly possible to predict the individual satisfaction in a given situation. This imposes considerable limitations on the ability to make choices, which maximize utility.
In general the neoclassical paradigm assumes, that the markets are in a state of perfect competition. In reality this situation merely occurs in rare cases. Usually the individuals are able to partly externalize their costs, and to be parasites of society, as it were15. In such cases the parasitical individuals must be corrected by means of formal laws and imposed norms. Thus they are embedded in the group. For instance, Frijters states that individuals are willing to pay tax levies, more than is to be expected from the homo economicus. The reason is that the individuals appreciate their membership of the nation-state.
Morals dictate norms, which are imposed on the individual needs. Such imposed needs are absolute, and therefore they can not be exchanged for other needs, such as the neoclassical paradigm assumes. Think about human rights. Graafland mentions as an example the mutual respect between the members of a group, which can not be redeemed with material objects16. Apparently the human needs have a certain hierarchy, which makes them mutually incomparable (in lingo: incommensurable). The morals limit the individual freedom of choice. This restrains the costs of choosing. Unfortunately, in extreme cases the individuals could enter a blind alley, as soon as they become easy-going, and acquiesce in the fate of their group.
The market can only function as long as the actors can trust the reputation of the enterprises and institutions17. This fact is incompatible with the homo economicus, who is a born opportunist. In many situations the individuals simply search for means to survive. The aim is not the maximal satisfaction, but a sufficient satisfaction. The same behaviour is observable for groups, who prefer to "muddle on". Even enterprises often attach more value to the survival motive than to the profit motive. They are risk averse to such an extent, that the weighing of costs and benefits does not look rational.
The fear for the material loss is already mentioned in the work of the English philosopher Thomas Hobbes. The individuals measure their needs with respect to the social norm, so on a relative scale, and not to some absolute standard18. Therefore many consumer goods are called positional goods. There is a constant social competition, based on the needs of imitation, on the one hand, and originality, on the other hand. The utility functions are mutually dependent. This process is clearly observable in fashion. Those who are too poor to participate, feel frustrated and dissatisfied. That undermines the quality of life. It is clear that the abundance of choice for the wealthy individuals is also pleasant, in addition to the status19.
It can be expected that the postional competition will increase, according as the social wealth rises, simply because more needs become conceivable. Thus the progress is a double-edged sword for the individual satisfaction. Perhaps the satisfaction must indeed be replaced by gratification, as Stollberg suggests, so that the individual development (the intellectual pleasure) replaces the consumptive pleasure. The social individualisation since the Renaissance pushes really in this direction. It concerns a process of psychological sublimation of the impulses, that may go in any direction.
Just like Frijters the French economic philosopher François-Régis Mahieu believes that the reciprocity in the group leads to more welfare for its members20. Thanks to the group the individual disposes of a rucksack, filled with rights and duties, which he can use in times of need. Since there is no market for rights and duties, they may not equilibrate, for instance for a certain generation. In the developing states the informal social network (for instance the tribe) is essential for the individual survival. There the individual must distribute his time in an optimal way over the various informal and formal (market) activities. It is clear, that these phenomena can not be reconciled with the neoclassical paradigm.