Listening to Australian historian Robert Mann’s recent lecture at the Melbourne Writers’ Festival on whether neo-liberalism has a future, I was struck by the deficiency of the rush to psychological explanation. In seeking to analyse the supposed inadequacies of the free-market ideology, there is an increasing tendency to rely on psychology as the master discipline, the new ‘commmon sense’ that will unlock the secrets of collective human behaviour. Just as the neo-liberals championed the perfectly rational economic actor, homo economicus, who as an individual is unrecognisable from any other perfectly rational individual, so the latest commentators attempt to correct and complete the picture by pointing out that this vision misses out humanity’s essential irrationalism, epitomised by a host of psychological quirks – which set the bounds for Kahneman and Tversky’s bounded rationality. But whether for or against the unfettered free market, these supposedly conflicting approaches share much more than they disagree on: namely a confidence that what goes on in our heads is what it’s all about. Robert Mann cited a couple of recent books which happen to take just this approach:
First Animal Spirits by George Ackerloff and Robert Shiller. The subtitle makes it clear: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism. The argument is that in their fetishising of rational actors the neo-liberals dramatically underestimated the human capacity for irrational behaviour. We can correct their view by bringing psychology, as the study of defective thinking, back in. The first sentences of the book set out the authors’ stall very clearly:
TO UNDERSTAND HOW economies work and how we can manage them and prosper, we must pay attention to the thought patterns that animate people’s ideas and feelings, their animal spirits. We will never really understand important economic events unless we confront the fact that their causes are largely mental in nature.
Second, The Myth of the Rational Market, by Justin Fox. The subtitle of Ch 14 indicates the tone:
The efficient market’s critics triumph by showing why irrational market forces can sometimes be just as pervasive as the rational ones.
In these works we are seeing that the new configuration of economic thought is not just moving back to Keynes, it’s adding a generous dose of psychologising to the Keynsian medicine. And its surely understandable that the efficient market hypothesis should be challenged on this basis when there seems to be significant empirical evidence that the ‘patterns that animate people’s ideas and feelings’ do matter.
But to focus on psychology is to concede too much to Individualism, which according to Grid-group cultural theory, is the dominant ‘pattern’ that inspires neo-liberalism. Just as it is Individualist to put faith in the Cornucopian free market, it is equally Individualist to assume the unique locus of social and economic organisation is the individual human brain.
I am arguing that the patterns that matter are not ‘thought’ patterns, as per Ackerloff and Shiller, but social patterns such as those explicated by Cultural Theory, or, going back further, the ‘culture patterns’ identified by Robert K Merton. It is the social patterns that encourage us to think certain thoughts. (For example, an employee of Goldman Sachs would have had a hard time in 2006 thinking the world was anything other than extremely bountiful). Those who ask, with disdain, where exactly these patterns could possibly be if they are not primarily in the mind, are captive to the same Individualism which failed spectacularly to foresee the great financial crash of 2008. Had they been clearer-sighted about the partiality of their own viewpoints, they would have recognised, perhaps, the possibility for there to be more to life than Individualism and Individualist institutions. The patterns don’t happen in us, they happen between us and they also include Egalitarianism, Hierarchy and Fatalism. Of course our thoughts influence our institutions, but this flow of influence is bi-directional, and the space between the individual and the collective is hardly exhaustively charted.
Explanations for the demise of neo-liberalism that fail to take into account these patterns in favour of psychological explanation risk being incomplete and/or mistaken.
So now we are digging a new hole for ourselves: returning to the Hierarchical economics of Keynes (Hierarchical in a technical sense, since it proposes a managerial method for having one’s cake and eating it too), whilst continuing to justfy it on the basis of Individualist appeals to psychology. This combination is, to say the least, quite unstable.
“Utility theory presupposes a human brain that is capable of impossibly elaborate calculations. Herbert Simon, seeing this flaw, suggested instead that…rationality is bounded as to its scope and power, and the rational being aims not to maximize but to satisfice, that is, to find a zone of satisfaction with several criteria. In this approach, bounded rationality is not necessarily negative, although many commentators have seen boundedness as a limitation on rational thought…. The argument we have been developing about the minds of social beings suggests, on the contrary, that bounded rationality is a special kind of human cleverness, that allows the individual mind to hand over some of the work of thinking to habit or institutions. It is not just an economy in psychic energy, or just a skill for avoiding overload, but a way of tapping into the experience of other persons. Is this a weakness? Your answer depends on what sort of bias you have about institutions or, to put it into the same terms, how you regard this faculty depends on the way your reasoning is bounded.”
(Douglas & Ney 1998, p.120)
“When institutions make classifications for us, we seem to lose some independence that we might conceivably have otherwise had. This thought is one that we have every reason, as individuals, to resist. Living together, we take individual responsibility, and we lay it upon one another. We take responsibility for our deeds, but even more voluntarily for our thoughts. Our social interaction consists very much in telling each other what right thinking is, and passing blame on wrong thinking. This is indeed how we build institutions, squeezing each other’s ideas into a common shape, so that we can prove rightness by sheer numbers of independent assent…. Institutions systematically direct individual memory, and channel our perceptions into forms compatible with the relations they authorize. They fix processes that are essentially dynamic, they hide their influence, and they rouse our emotions to a standardized pitch on standardized issues. Add to all this that they endow themselves with rightness, and send their mutual corroboration cascading through all the levels of our information system. No wonder they easily recruit us into joining their narcissistic self-contemplation. Any problems we try to think about are automatically transformed into their own organizational problems…[so,] if the institution is one that depends on participation, it will reply to our frantic question: ‘More participation!’ If it is one that depends on authority, it will only reply: ‘More authority!’ Institutions have the pathetic megalomania of the computer whose whole vision of the world is its own program. For us, the hope of intellectual independence is to resist, and the necessary first step in resistance is to discover how the institutional grip is laid upon our mind.”
(Douglas, 1986 How Institutions Think. Syracuse University Press, pp91-2)
You can read more on the financial crisis:
Accountability is the problem, now what’s the solution?
Economics as storytelling
Why did no one see it coming?
How to avoid nasty surprises