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Economics Combines Love For Others And Self Interest.

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Try to imagine a frozen-over train station in Hudson, New York, at 6:00 p.m. on a Sunday night on a holiday weekend. The interns and I had hoped there would be taxis there. We were wrong. It was a bad mistake. We had a 40-mile drive to make to get to the stone house at the American Institute for Economic Research.

The weather was not cooperating. All flights had been canceled. The roads were frozen over. The thermometer registered 7 degrees Fahrenheit. This was not a night on which you want to leave your home for any reason.

We tried Uber. No drivers. We tried again. No drivers. We started examining the benches at the train station to see if they could be used as beds. But the heating in the train station was not good. The forecast said that the temperature overnight would fall to 30 degrees below zero. We would wake with frostbite. Hey, it would make a good story.

I tried Uber one last time. Someone picked up! The car was on its way. Be there in 15 minutes, said the app. My goodness, what a world. Uber was only legalized here about a year ago. Now it is a lifesaver.

Right on time, a man’s car drove through the desolate parking lot, the tires crunching through the frozen snow. We left the station to go outside, put our bags in the trunk, and drove off, slowly and carefully because there was no point at which the tires met the road. This would be a perilous journey. We made it safely home. Seeing the warm lights shine through the windows as we drove up to the house was a beautiful sight.

The Calculus of Compassion

I’m so grateful to this nice man, this stranger who saved us, and the Uber app that made it possible. Along the way I asked about the motivation. I pointed to the money. He said that he will only make $30 but he is glad to help. That touched me, so I began to dig deeper, trying to find out what led him our way.

He said that he saw the first two requests. But he was sitting by the fire with his wife, safe from the storm. Why bundle up in such conditions? When the third request came in, he felt a pang of conscience. There are three people waiting at a desolate train station. They need help. He bundled up and set out on the frozen roads to be valuable to other people.

It’s a beautiful reminder: there are human beings behind these mobile apps. Drivers can reject or accept. It’s up to them. No municipal taxi was running. To come out on a night like this approaches a heroic enterprise. My initial assumption that the driver did it for the money was wrong. The money is nice but doesn’t motivate heroism. There is something else going on. He wanted to be valuable to others. He wanted to help.

Here we observe an interesting example of the complications of human drive and its interaction with the economics of the material world. Might the driver have shown up without the profit motive? Maybe. But how would he have known about our plight? We used a profit-making app that was built and is maintained through a system of profits. What’s more, it does in fact make sense that this driver would be compensated for his work.

Enterprise, this story shows, is moved forward through a complex set of human motivations that include the desire for money but also the desire to serve and be valuable to others. The material means to provide for ourselves and the desire to be useful to others are both crucial here, and they are not in conflict.

Greed and benevolence work together. Material acquisition and love of one’s neighbor are harmonious. It’s the combination of the two that makes up the driving force of economic progress.

I’m thinking of another case from the Hudson train station. There is a snack bar. The people there sell coffee, candy, muffins, and tea. I ordered a beer. The woman said they don’t carry it. I asked why not. She said it’s because the snack bar is run by a local charity and so they don’t think serving beer is a good idea. I asked what it means for a snack bar to be run by a charity. She said it means that she doesn’t get paid. She is just there to raise money by selling things to people so that all the profits (however meager) go to the charity.

Realizing this changed my whole outlook on the enterprise. But for love, compassion, dedication, commitment to the well-being of others, travelers could not get coffee and snacks. Because people are willing to commit their time without pay, it is there, not as a profit-making enterprise but as a charity, helping on both ends: tending to the needs of travelers and also raising money to help the community.

Here again we see the fusing of economics and love. It comes together without dictate, without mandate, without central direction, without a top-down command to care for others. The motivation comes from within. But here again we see on display this essential but often unrecognized motivating force: the need to be valuable to other people.

Strangers and Love

Let’s return to my driver and the mobile app that brought his services to us. He was a stranger. I had never met him. Never will again. And yet we had a beautiful experience together, all thanks to technology and enterprise.

There are political arguments about this. Is Uber putting out of business the taxis? Is it paying drivers enough? Should drivers have to submit to a great degree of regulation? Because of these questions, cities have banned Uber in many parts of the world.

Think of the human loss, the missed opportunities to bring people together for mutual benefit, the forgone chances for people to serve people. This is what enterprise is all about.

Those who do not understand this miss the whole point. Economics is not just about making money. It’s also about a chance to be valuable to others, to the world, to yourself. Banking money and showing love can and do exist in a harmonious relationship. Bring them together under just the right conditions, and you feel the same inner warmth we all felt when finally arriving back home in safety, preparing to sleep well with the knowledge that thanks to free enterprise, we would wake without frostbite and our wonderful benefactor would wake knowing that he both did a good deed the night before and made just enough money to say it was materially worth his time.

This article first appeared at AIER 1-21-19.

Jeffrey A. Tucker is Editorial Director for the American Institute for Economic Research.

Public Choice Economics Strips Away The Mythology From Politics And Government.

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Economists know a lot about incentives and individual motivation and how they impact decision-making. They’ve known it since the 18thCentury, ever since Adam Smith completed his Theory of Moral Sentiments and Inquiry Into The Nature And Causes Of The Wealth Of Nations. The term we have come to use for individual motivation is self-interest. This means that people seek betterment – they want to improve their circumstances, and to make their future better than their past. Individuals pursuing self-interest works out well for everyone because it turns out that we each do well when we make successful economic exchanges that serve others’ needs and offer others the greatest value. The better we each become at service, the more we earn, and the greater the productivity and the more betterment for everyone. Self-interest is the catalyst for the great self-organizing economic system of betterment. Even though the individual is, according to Smith, intending only his own gain, “he is, in this. ….led by an invisible hand to promote an end that was no part of his intention.”

“By pursuing his own interest, he frequently promotes that of the society more effectually than when he really intends to promote it. “

“I have never known much good done by those who affected to trade for the public good.”

Recognizing Self-Interest In Politicians And Bureaucrats.

Since we have understood self-interest for more than two centuries, why was it that economists, deeply knowledgeable about individual motivation, had a blind spot about politicians and government? The perpetrators in those two lines of work claimed to be in the business of public service. They talk about the public interest. For a long time, economists, normally so rational and objective, swallowed this mythology hook, line and sinker. Perhaps it was wishful thinking.

Until the 1960’s, that is, when a theme emerged in economics that has acquired the name Public Choice Theory.  (One of the consistent attributes of economic theorists is that they prefer goofy opaque names for their fields of research.) What Public Choice Theory really means is politics and government stripped of their mythology.

The core tenet of Public Choice Theory is the recognition of self-interest in individuals in the field of politics and government. People are not different when they act as politicians, bureaucrats or even voters. Politicians seek election, bureaucrats seek to advance their own careers, voters vote their pocket book. The unit of analysis is individuals and their personal incentives. “The people”, “society” and “the public” are not real entities that make decisions. Individuals make decisions, based on the incentives facing them.

The Different Impact Of Self-Interest In Private Markets Compared To Politics And Government.

In private markets, incentives are based on the consequences of our own individual actions. We can calculate them, learn from feedback, and keep trying harder.

In politics, this is not the case. The election-seeking politician responds to a group that he or she believes will be the majority of voters. Kenneth Arrow, who was one of the leading Public Choice theorists, demonstrated mathematically that there is no mechanism of political choice that can truly represent the preferences of all voters or even a decent compromise. It’s called Arrow’s Impossibility Theorem. The result is the dictatorship of the majority.

The will of the majority voters will be imposed on the minority, irrespective of the minority’s preferences. Within the majority voting cohort, there is often a well-organized special interest group that is particularly good at applying political pressure through organizing and fundraising and political spending. So the election-seeking politician responds to them.

This group may run advertising and political messaging campaigns. Public Choice theory makes it clear that voting is irrational for the individual, since the possibility of making a difference in an election result is close to zero. Consequently, the incentives for the individual are stacked against spending time on information gathering – hence the phenomenon of the uninformed voter. The special interest group might run some crass and attention-getting ads that drive home a message like “my opponent is evil” at some level. This may be all the information the voter has.

Enter The Bureaucrats.

Once elected, the political representative is incented to delegate responsibility to government agencies and their bureaucrats. This saves the time and effort of studying issues and writing legislation. The agency bureaucrats secure their positions through civil service appointment, not elections, and their incentives are for more funding, more discretion, more control and more prestige among their agency peers. They, too, seek the support of special interest groups through discriminatory transfers of wealth from the broader citizenry. They give farmers subsidies in farm bills at the expense of the food-buying public. They give exporters tariff protection at the expense of domestic consumers. Public Choice Theory demonstrates that even Presidents and Supreme Court Justices are incented to maintain the “stability of the system”, which means not rocking the special interest boats.

No Point To Throwing The Bums Out.

This analysis also makes it clear that the policy outcomes will not change when different individuals are elected. The same voting mechanisms and the same bureaucratic response to special interest influence will prevail. There’s no point to throwing the bums out. Democracy itself is a sham.

Critics of free markets like to point to what they call “market failure”. Public Choice economists point out that “government failure” is the norm.

We’ve known this since Adam Smith’s time. Two centuries of folly have intervened.

 

Photo by Joakim Honkasalo on Unsplash

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