1. People, preferences and society Lecture 13 – academic year 2014/15 Introduction to Economics Fabio Landini

2. 2 What do we do today? Lect. 11: In because of opportunism public goods and commons are subject to problems of free-riding Lect. 11: common solutions: state intervention and property rights enforcement Lect. 13: sometime however cooperation can be sustained also without external intervention… “pro-social man”…

3. 3 Question of the day How can large cooperative endeavours be sustained without external interventions? Example: Wikipedia Wikipedia is a public good: non rival, non- excludable. The model of the “economic man” would predict things such as Wikipedia (or FOSS) to be destined to failure in because of free- riding… instead they are there…

4. 4 Model of behaviour To explain why people do what they do, economists make use of three terms: constraints, preferences, and beliefs. Constraints: are the limits on the actions that an individual or a society can take; Preferences: are the relative values one places on the various outcomes that one’s actions might bring about. Beliefs: are one’s understandings of the actions necessary to bring about particular outcome.

5. 5 Economic man The standard view of the economic man assumes that: a) Preferences: people care about outcome that themselves but not those that affect others (self-interest); b) Beliefs: people assume that everyone is this way and that everyone knows that everyone is this way. Finally the standard view does not ask where preferences come from (exogenous)…

6. 6 Economic man reconsidered Recent research provides evidence that these assumptions are not consistent with actual behaviour… How do we interpret results in the Ultimatum Game?

7. 7 Economic man reconsidered Respondent: preference for reciprocity – willingness to pay a price (rejecting low offers) to punish a proposer that makes unacceptably low offers. Proposers: preference for altruism vs. self- interest + beliefs that the other is reciprocator. In both cases the assumptions underlying the economic man are violated.

8. 8 Economic man reconsidered Violations are not limited to these games: People often do not steal or cheat on their taxes even when they are sure they could get away with it; In several countries people vote for income transfer to the poor, knowing that these programs require higher taxes on most income earners; Act of extreme altruism towards strangers.

9. 9 Economic man reconsidered Obviously, this does not mean that people are not selfish at all. Rather, what research show is that there are heterogeneous preferences. “Being selfish is what some people are are all of the time and what all of the people are some of the time. But the rest of the people, the rest of the time, are sometime altruistic, sometime reciprocal, sometime spiteful, and so on...” (A. Lincoln)

10. 10 Human nature and cultural differences If preferences are heterogeneous, where do they come from then? To answer this question a group of economists and anthropologists run a famous study in 15 small-scale societies in Africa, Asia and Latin America. Participants play games similar to the Ultimatum.

11. 11 Human nature and cultural differences 1)The typical behaviour varied significantly from group to group (heterogeneity) 2)In no group they found the “economic man” behaviour to be typical 3)Variations in behaviour from one group to another seemed to reflect differences in how people make their living.

12. 12 Human nature and cultural differences If this difference in behaviour is due to difference in preferences (and not beliefs), where does this difference come from? Some of our preferences are certainly influenced by our genes… human nature… Example: sweet or fatty foods. However, in spite of these, similar countries (e.g. France and Italy) eat very different things.

13. 13 Human nature and cultural differences The reason is that most of our tastes are not inherited genetically, but rather learned from others. Preferences that are learned from others are part of what is called culture. Culture: aspect of behaviour (preferences, beliefs) that are learned from others. Too simplistic? Sure, but at least it helps to clarify the difference “nature” vs. “nurture”.

14. 14 The economy produces people The same researchers of the 15-small scale societies study did a step further. The classified societies depending on the degree to which “cooperation” and “market integration” played an important role in the real social system. Example: Lamalera (Indonesia) whale hunters were ranked first in cooperation. Aim: differences in social system could explain the observed differences in behaviour.

15. 15 The economy produces people Guess what they found… In societies with more cooperation proposers made higher offers (on average), and low offers were more likely to be rejected. In societies with more market integration… … the same: market transactions require social norms that sustain reciprocal trust to function. This finding is at the same a celebration and rebuttal of Marx’s structure/supestrcuture….

16. 16 The economy produces people Making the point more general: economic institutions shape people’s preferences. Example: Art. 18 and Jobs Act. Obviously, when we talk about economic institutions we do not consider only firms, and markets but also other types of organization, e.g. schools. Example: study on the role of school in developing personality traits that are valued the most also by job supervisors.

17. 17 Summary Humans exhibit heterogeneous preferences with some individual being more pro-social than others. In general, the selfish economic man is rare. Preferences derive mainly from culture Culture is itself influenced by economic institutions. The combination of all these things is indeed what makes homo sapience a unique species…

18. 18 The cooperative species All animals compete (e.g. for food or reproductive success). Some of them exchange goods (e.g. “cleaner fish”). Few of them even respect property rights (e.g. spiders).

19. 19 The cooperative species However humans are unique among animals in that large number of unrelated people cooperate to produce the goods and service we require. We also cooperate across generations (think about the pension system). In some cases this is possible thanks to humanly- devised rules that forces us to cooperate. In several cases, however, this cooperation is sustained thanks to our cooperative attitude (e.g. voters, Wikipedia, etc.)

20. 20 Conclusion Economists often stress the value of competition as sources of progress... However, for a market economy to work also cooperation is important.....and the latter can be achieved because society is not composed only of “economic men”. Although this is “new” in the field economics it was clear to Adam Smith: he wrote The Theory of Moral Sentiments before the Wealth of Nations...

21. 21 Next week We start with Macro….