The Altruism in Economics
Standard economic theory states that people are interested only in
their own material gain. But new insights from behavioral economics
show that altruism rather than avarice is our primary motivation.
Jeremy Mercer – http://www.dailygood.org/more.php?n=3716
It was evolutionary biologists, with their penchant for field
observation, who started to explore the question in an empirical
manner. It began with Charles Darwin, who was amazed by the cooperation
among bees; moved to William Hamilton, who studied altruism among
rabbits; and went on to include Robert Trivers’ work on sharing among
vampire bats. Once altruism was established in the natural world, the
same analytical eye inevitably turned toward the human sphere.
In 1973, a landmark experiment was conducted at blood banks in Kansas
City and Denver. It was inspired by the “crowding out” theory of
British social researcher Richard Titmuss, the idea that people perform
certain tasks, such as donating blood, for the common good, but that
their motivation would be “crowded out” if they were offered a
financial reward. The two blood banks were ideal testing grounds
because both had “willing” files bearing the names of previous donors.
For the experiment, a control group was sent the typical letter
announcing a blood drive; a test group was sent the same correspondence
offering $10 for a donation. The results were decisive: Within the
control group, 93 percent responded to the call to donate; for those
offered a cash reward, only 65 percent contributed. “I felt we’d made a
real breakthrough,” recalls Bill Upton, who ran the experiment as a
psychology student at Cornell University in Ithaca, New York, in the
1970s. “It was significant evidence that money wasn’t necessarily an
incentive.”
In fact, the result was remarkable for two reasons. First, it
contradicted standard economic theory and proved the existence of human
altruism. Second, this major advancement in understanding financial
motivation had been made by a psychology student using a sociologist’s
theory. Where were the economists?
The reality is that for most of history, economists have preferred
theory to experimentation. This changed when the field of behavioral
economics began to take shape in the 1970s. The movement adopted
insights from psychology along with the empirical methods used in other
social sciences to bring a fuller picture of human motivation and
decision-making to economics. Behavioral economics has now blossomed
into one of the field’s most influential disciplines, with its
practitioners populating the bestseller lists and advising the White
House and its experiments resonating throughout academia.
Once the experimenting began, the hallowed economic pillars began to
crumble. What was perhaps the most important development occurred in
1982 when German economists at the University of Cologne created the
Ultimatum Game. In this experiment, Player A is given $10 and Player B
is given nothing. Player A must make an offer to Player B; both parties
keep the money only if that offer is accepted. According to standard
economic theory, the minimum offer of $1 should be made and accepted
because it represents a clear financial gain for Player B. But in the
thousands of times the experiment has been run, the average accepted
offer is $4 and offers of less than $3 are routinely rejected. People,
it turned out, were more concerned about equality than financial gain.
“Fairness is fairly universal,” says Werner Güth, one of the economists
who ran the experiment.
Such a statement may seem so obvious as to be banal. After all, the
idea that people have an innate morality has been tossed about for
millennia, from Plato’s Meno to the French philosopher Auguste Comte’s
invention of the word “altruism” in the 19th century. But for
economists weaned on the brutal model of Homo economicus, proof of
something as simple as fairness was revolutionary.
The evidence wasn’t just coming from controlled experiments. In the
1990s, Swiss government officials wanted to build a nuclear waste
facility outside the village of Wolfenschiessen. After a robust public
awareness campaign, a bare majority of villagers—51 percent—supported
the project. In hopes of bringing more people on board, payments of up
to $8,700 per person was offered; instead, support plummeted to 25
percent. Villagers said they considered the money a bribe and felt
belittled that their moral quandary had become a financial transaction.
“The message was clear: People are much more altruistic than standard
economics claims,” says Bruno Frey, an economist at the University of
Zurich who studied the Wolfenschiessen case. “The challenge is for
economists to nurture this intrinsic motivation instead of crowding it
out.”
Behavioral economists Uri Gneezy and Aldo Rustichini conducted another
revealing study. Several daycare centers in Israel had problems with
parents picking up their children late, so the economists devised a
system of nominal fines—about $3 for each late pickup—to see if this
would prompt punctuality. On the contrary, tardiness soared, the rate
sometimes tripling. The conclusion? Fines rendered lateness acceptable
because it became a financial transaction, while social norms—respect
for the daycare workers, for example—were a better motivator for
punctuality.
Intrigued, Gneezy and Rustichini went on to show that volunteers
collected more money for charities than those who were paid to canvas.
“The traditional assumption in economics was that people would do
anything for a material payoff,” says Gneezy. “This assumption took
economics a long way, and it is still a good assumption in situations,
such as two traders on the floor at the stock exchange. But there are
situations where other relationships, communal relationships, are
preferable.”
Perhaps not surprisingly, traditional economists revolted. As Kristin
Monroe, an expert in altruism and political theory at the University of
California, Irvine, famously wrote, they tried to “squeeze a fat lady
into a corset” by awkwardly forcing these new findings into the cynical
confines of standard economic theory. The “warm glow theory,” for
example, argues that behaving generously provides pleasure, which is a
benefit, thus making altruism “impure.” Other experiments proved people
are more likely to behave selflessly in public settings, rendering
altruism a cost incurred to enhance one’s reputation. However, prying
into a gift horse’s mouth in search of cavities doesn’t make the gift
horse vanish. The essential had been accomplished: Economists were
admitting, however reluctantly, that altruism existed.
If it feels as though economists are getting an unfair shake, consider
the following. In the 1990s, another Cornell University economist,
Robert Frank, tested the hypothesis that “exposure to the self-interest
model commonly used in economics alters the extent to which people
behave in self-interested ways.” Among the findings: Economics majors
made less generous offers when playing the Ultimatum Game; economics
professors gave less to charity than their university colleagues; and
when asked to imagine they’d found somebody else’s $100 bill, economics
students were three times more likely to say they’d keep the money than
students from the astronomy department. “Economics training doesn’t
make you more honest,” Frank says. “It’s wildly implausible. It would
be like water running uphill.”
This cynicism comes with disturbing consequences: Negativity begets
negativity. The Swiss economists Armin Falk and Michael Kosfeld
conducted a seminal study in 2004 on distrust in the business
environment. They found that people treated with suspicion are less
motivated. A company might, for example, enact a policy forbidding
private Internet use at the office and there would be no impact on
morale. However, if the company installs spy software on employees’
computers, morale plunges.
This is another economic phenomenon redolent of evolutionary biology,
the “tit-for-tat” survival strategy. Under this model, on meeting a
stranger, the initial gesture should be conciliatory (a smile or a
handshake are human demonstrations of goodwill). But from that point
on, one should act as the stranger acts: hostile if hostile,
cooperative if cooperative. In short, do unto others as they do unto
you. By this logic, if an economic system treats people as mercenaries,
mercenaries they will be. But the reverse is also true:
Treat people as
moral and altruistic, and most will be.
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