The Legacy of John Nash and His Challenge to Homo Economicus: Why Now Is a Good Time to Study Economics

 
 

Economics takes for granted the problematic view that everyone acts in their self-interest, and that this is the best way of understanding the world. The latest research within the discipline is, however, transforming these fundamental assumptions.

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On Saturday, May 23, John Nash died in a tragic car crash, which also killed his wife, Alicia. John Nash completed his doctorate in mathematics at Princeton University in 1950, and worked there as a senior researcher from 1995 until his death. Nash’s profound contribution to game theory should be seen as part of a broader evolution of the discipline of economics into a more holistic social science, something for which he should be commended.

Anyone holding an economics degree has undergone the strange experience of sitting in a beginner’s class and being told to assume that we are all completely self-interested. I suffered this fate studying economics at Queen Mary, University of London, and then I suffered it all over again taking a class in formal modeling at the University of Oxford. If there is ever such a thing as brainwashing, this ritual is a good example.

Like many students, I questioned the assumption that man is simply homo economicus. Surely, I protested, people are sometimes capable of seeking the good of others. As any economics student will be able to tell you, the reply I got was not that I was wrong, exactly. Instead, I was told, “we just have to make this assumption before going further.” Teaching economics this way is like ushering students into Plato’s cave and then telling them that if they don’t assume the shadows on the wall are real, they will have nothing else to go by. Homo economicus is the only robust, repeatable model of human behavior, it is explained—the only consistent measuring tool for the social sciences and its best starting point.

The assumption that we all act in our self-interest is normative, making it the most consistently taught ethical theory in the three to five years of an undergraduate economics degree. This has had its effects. In a 1993 article in The Journal of Economic Perspectives, Frank, Gilovich, and Regan review numerous studies of economics students and conclude that over the course of their studies they become less-generous individuals. Economics students are, for example, more likely to free-ride when it is time to make a group contribution to something that will benefit all. As their studies proceed, economics students are progressively less likely to return a wrongly sent envelope with $100 inside to the sender (a test of honesty). And it is not only students who seem to have been negatively affected: economics professors also have been found to give less money to charity than professors of other disciplines. They’re as much as twice as likely to give nothing at all.

So, not only has economics been guilty of brainwashing students into viewing the human person as self-interested, that brainwashing seems to work.

Imagine my unease, then, at finding myself seated for an interview in front of four Oxford economics professors after writing a funding application to study the connections between virtue theory and economics. And then imagine my dizziness at receiving the award.

Something has shifted in the discipline of economics, and this is due to the work of Nash and others. Now the best response to those worried about homo economicus assumptions is: yes, the assumptions are backward, and that is why they are being thrown overboard.

A Changing Set of Assumptions

The strength of homo economicus premises lay in their ability to provide simple models that distilled economic forces and gave policymakers an easy picture of what effects would result from what choices. However, the over-confidence that resulted led to some brutal applications that failed to appreciate the complexities of real life. The Chicago School, for example, famously promoted free market principles, partly by means of the ideologized Washington Consensus, attempting to transform the economies of Latin America and Africa by opening doors to trade, removing subsidy programs, and privatizing state industries. Unfortunately, this set of policy proposals was ultimately only a rushed and insensitive affirmation of individual greed as a solution to economic inefficiencies, and it contributed to decades of political turmoil and economic destitution.

Many economists believe that the free market ideals of the 1970s and the 1980s have become deeply misrepresented by those outside their discipline, and that most people forget the communist theories against which neoclassicist economists were making a defense. That may be true, but the enemy’s vice does not guarantee the soldier’s virtue; there is much the neoclassicists overindulged in.

Whether or not the normative basis of neoclassical economics was necessary then, it is certainly not necessary now. Indeed, homo economicus assumptions are incompatible, over the long term, with the vocation of a social science, because they over-commit to the purity of “the model,” which is ultimately only a mathematical demonstration that finds perfection through internal consistency. As such, the assumptions of homo economicus are unswayed by what is actually happening in society.

Because economists have instead largely remained committed to the mission of better understanding society, curiosity about reality is—for all the stubbornness of homo economicus—slowly winning out over the quest for simplicity.

Behavioral Economics, Game Theory, and the Break with Utilitarianism

Burgeoning fascination with behavioral economics, which complements sociology and psychology by deferring to empirical results on how humans act, testifies to this newfound curiosity. A good example is the work of another Nobel Prize laureate, Daniel Kahneman, who looks at the complex ways humans reason about different economic goods, frequently confounding what economic models previously suggested.

Even before this resurgence in behavioralism, research from the 1920s onwards by Von Neumann and Morgenstern first inspired what is now known as game theory, which Nash then developed to such devastating effect. Von Neumann and Morgenstern coined the concept of “expected utility” to work alongside the more common understanding of individual utility. Nash then built on this through investigation into mutually understood, self-reinforcing expectations. The “Nash equilibrium”—a concept now relied on throughout economics—refers to a stable set of mutual expectations where each individual operates on the basis of what he or she thinks others are most likely to do.

This mode of thinking amounts to a fundamental break with the utilitarian roots of modern economics. By including expected utility in their theories, Von Neumann, Morgenstern, and Nash made allowance for how we think others see any given economic situation. This is not a disavowal of principles of self-interest, but a deepening of them for understanding strategic interaction. The irony is that, philosophically speaking, as soon as one admits we are able to see how others see a situation, we are implicitly admitting a capacity of humans to think in terms of common solutions interpretable to all.

Three Recent Economists Refuting Homo Economicus

Now is an exciting time to study economics, because some of the most impressive research being done today is exploring this very area, building on the work of Nash and others. Economists are connecting behavioral observation of how humans actually go about making decisions to theoretical appreciation of our ability to think beyond immediate self-interest.

Such crossovers are pervasive in the work of three other recent economics Nobel Prize laureates. Elinor Ostrom, the first woman ever to receive the prize, wrote extensively on human cooperation and how it is that people come together in pursuit of common goals, even when it is not in their immediate self-interest. Crucially, Ostrom did not take a position that people are fundamentally altruistic; instead, she side-stepped simplistic human nature debates through appeal to the social and habitual ways in which humans interact and coordinate.

The well-known economist of the developing world, Amartya Sen, has made even more explicit what philosophers will immediately recognize as an appeal to Aristotelian ideas of the person governed by habits, not strict self-interest. His most widely read book, Development as Freedom, repeatedly references Aristotle and argues in favor of a theory of development that identifies community-based functions of the person as the best way to guarantee human fulfillment. This is a far cry from maximizing greedy instincts. After winning his Nobel Prize, Sen went on to write a book exposing the illogical economic modeling at play in his late friend John Rawls’s Theory of Justice. Rawls’s theory depends on homo economicus individuals organizing relations through contract, which for the discipline of economics is like trying to bring an elderly football player out of retirement to win you the Super Bowl. Rawls’s position depends on a fundamental incommunicability of goods, which Nash’s appeal to strategic interaction bypasses.

The third laureate to have helped encourage this evolution in contemporary economics is Kenneth J. Arrow, famous for demonstrating the fallacy of allocating social welfare by means of having citizens declare what benefits they want. Arrow also made explicit appeal to the role human virtues play in all economic activity. Significantly, his lecture series and subsequent book The Limits of Organization showed that all institutions depend to some degree on trust among participants which cannot, ultimately, be explained by a theory of self-interest.

As I explain in a recent paper, the work of these three Nobel laureates depends on Aristotelian conceptions of habit and virtue, which they articulate more or less openly at different points in their research careers.

It may still be mandatory for economics undergraduates to pass through the archaic initiation ceremony of assuming we are all self-interested. But insofar as economics departments are committed to the findings of Nash and others who have built on his way of thinking, researchers are being forced to break from the utilitarian principles that originally set the discipline in motion. This makes it a surprisingly good time to study economics.

Dominic Burbidge is a postdoctoral research associate of the James Madison Program in American Ideals and Institutions at Princeton University. He completed his doctorate at Oriel College, Oxford University.

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