The Road to Synthesis
“The ideas which are here expressed so laboriously are extremely simple and should be obvious. The difficulty lies, not in the new ideas, but in escaping from the old ones, which ramify, for those brought up as most of us have been, into every corner of our minds.”
– John Maynard Keynes
Behavioral science needs a general theory of its own design. For decades it has relied upon the central theory of economics, the rational man, but has met roadblocks along the way. An article by Colin Strong addresses this need in an excellent manner, and I encourage you to read it. Whether this new theory replaces the rational man or complements it, it is long past time for this development to come to fruition. For goodness sake, we’ve been saying this since 1836! Let’s take a moment and see what many have said before us, understand what is at stake if we remain stagnant, and end with a suggestion on how we should proceed.
Turning a Blind Eye
Mill, Hayek, and Keynes are perfect examples of the acknowledgment that the rational man is irrational (to an extent) and that this theory is lacking. In major works of theirs they offer statements regarding homo economicus. In his essay that introduced homo economicus, “On the Definition of Political Economy and of the Method of Investigation Proper to It” Mill states that it would be absurd if we truly believed men were completely rational.
“Not that any political economist was ever so absurd as to suppose that mankind are really thus constituted, but because this is the mode in which science must necessarily proceed. When an effect depends upon a concurrence of causes, those causes must be studied one at a time, and their laws separately investigated, if we wish, through the causes, to obtain the power of either predicting or controlling the effect; since the law of the effect is compounded of the laws of all the causes which determine it.”
Mill provides this statement and argues (in the quote below) that it is necessary for economists to synthesize actual human behavior with the abstract model of homo economicus.
“The method of the practical philosopher consists, therefore, of two processes; the one analytical, the other synthetical. He must analyze the existing state of society into its elements, not dropping and losing any of them by the way. After referring to the experience of individual man to learn the law of each of these elements, that is, to learn what are its natural effects, and how much of the effect follows from so much of the cause when not counteracted by any other cause, there remains an operation of synthesis; to put all these effects together, and, from what they are separately, to collect what would be the effect of all the causes acting at once.”
Mill realized that homo economicus is lacking and needed a more robust view of human behavior, but he left that work for those who would come after him. Rather than change quickly we proceeded for another hundred years and ignored synthesis. However, we didn’t continue without warning from others.
Hayek disliked the rational man theory due to its connection to French individualism or “false, rationalistic individualism” as he calls it. In his work Individualism and the Economic Order Hayek says the following.
“This contrast between the true, antirationalistic and the false, rationalistic individualism permeates all social thought. But because both theories have become known by the same name, and partly because the classical economists of the nineteenth century, and particularly John Stuart Mill and Herbert Spencer, were almost as much influenced by the French as by the English tradition, all sorts of conceptions and assumptions completely alien to true individualism have come to be regarded as essential parts of its doctrine. Perhaps the best illustration of the current misconceptions of the individualism of Adam Smith and his group is the common belief that they have invented the bogey of the “economic man”
Hayek’s disdain for this pseudo-individualism is apparent in the remainder of that essay. For Hayek, the rational man conflicted with his Nobel Prize-winning work on man’s knowledge. With so many individuals who were experts in their own field, the economy functioned far better due to their aggregate knowledge rather than on the knowledge of a select few in power. If we were hyper-rational, it would be possible for one individual or a group of them to plan an economy from the top down. This central planning stands in stark opposition to his views in The Road to Serfdom. Despite his protestations, the two forms of individualism fused into what we know today, and rationalism still holds firm. Two warnings were ignored. Perhaps a warning in the form of gentle disclaimers would be more effective.
Keynes’s comments on “animal spirits” have been well documented. He thought that an individual wasn’t as rational or aware of the economy as theory seemed to suggest. In the chapter Long Term Expectation from his book The General Theory, Keynes provides disclaimers regarding his thoughts on investing due to man’s behavior.
“Even apart from the instability due to speculation, there is the instability due to the characteristic of human nature that a large proportion of our positive activities depend on spontaneous optimism rather than on a mathematical expectation, whether moral or hedonistic or economic.”
Keynes suggests that there are more factors to decision-making than economic calculation. I believe we would be hard-pressed to find anyone who would disagree with this sentiment. Yet, there are some who may push back and say that I am misrepresenting Keynes’s views. That is a fair comment and I think accurate if we relied on this quote alone. The following quote does show that Keynes did not think we should throw rational expectations out the door.
“We should not conclude from this that everything depends on waves of irrational psychology. On the contrary, the state of long-term expectation is often steady, and, even when it is not, the other factors exert their compensating effects. We are merely reminding ourselves that human decisions affecting the future, whether personal or political or economic, cannot depend on strict mathematical expectation, since the basis for making such calculations does not exist; and that it is our innate urge to activity which makes the wheels go round, our rational selves choosing between the alternatives as best we are able, calculating where we can, but often falling back for our motive on whim sentiment or chance.”
Although each of these men spent little time addressing the rational man, it is clear they thought it important to comment on this theory. It may seem as if I am attempting to reinterpret their work but that is far from the truth. I am simply showing that these men, like many individuals today, suggested that rational man was not an accurate model alone and that more was missing from the equation. Before I address what is missing, we should ask the question, what do we gain from changing our course and lose if we don’t?
The Great Depression, the Great Recession, and COVID-19 all share a common trait. Our predictions were lacking and that is putting it lightly. Relying on the prevailing model of economics is the same as a man sitting in a boat on dry land and wondering why he is not moving even though he understands the mechanics of the boat itself. I’m not saying that economics is useless. Overall, we understand quite a bit when it comes to the macroeconomy and its properties. The problem is, we don’t understand the microeconomy and its individuals. We cannot predict, our work is inaccurate, and the longer we fail, the less we are trusted.
Does this sound dramatic? I hope so! We have spent 186 years hoping that the rational model would prove perfect for predicting crises, people, and the future but to no avail. So why are we holding onto rational man? I think Hayek’s observation regarding individualism is the key. Western academia (the primary provider of economic theory) has adopted the individualism that Hayek addresses in his essay. Over time this has permeated all aspects of the social sciences. Elina Halonen hits the nail on the head in her article The success of “Nudge” is fundamentally WEIRD.
“As uncomfortable as it might be to consider, science is influenced by the scientist’s cultural background and the context they are doing research in: the topic of study, the assumptions/premises, the choice of methods (epistemology/ontology) and of course the interpretation and generalisability assumptions.”
This statement rings true when we consider Western priorities and how they have become the focus of economic study. We continue to assume that the utility people desire to maximize is financial because we put money over many things. We assume that money, status, and wealth will solve all problems. They don’t and they never will. So long as economics ignores insight from other cultures and continues to prioritize the mentioned factors as the primary drivers of behavior, it will fail to understand humanity. Likewise, if behavioral economics/science does not adjust or abandon the rational man, it too will fail in its endeavor due to a false foundation.
Human behavior is unscientific. No matter what theory comes next it should be built upon this core tenet. There is no predictive pattern that applies to all humans. There is no common decision-making trait that applies to every person. The longer we try and reduce human behavior to a general theory (focused on wealth) that encompasses all humans past and present, we will fail. Look at this quote from Scientific American.
“A new study published October 3 in the journal Proceedings of the National Academy of Sciences (PNAS) has found that human feelings can accurately be expressed numerically and have more predictive power for how we behave than formal studies of socioeconomic factors like household income and employment status. “These ‘made up’ numbers actually carry a huge amount of information, even though we don’t know how humans achieve this,” says study co-author Andrew Oswald, a professor of economics and behavioral science at the University of Warwick.”
If traditional models and metrics fail, what should we do? We need to synthesize this abstract concept (rational man) with real-world behavior. We must keep general theory in its place, the macro, and make way for new theory where it is needed, the micro. How should we do this?
First, we need to move away from being overly scientific. That’s not to say that our methods should abandon the scientific method. On the contrary, by continuing to test and understand the outcomes of human decision-making through a scientific lens, we can more confidently say we can’t predict them. This should give us comfort rather than cause fear.
Second, we need to begin conducting international studies that compare behavior across contexts. It is encouraging to see work being done in India and South America and this must continue. Building theory off WEIRD contexts alone is weird. We need to understand behavior across international contexts and compare to see the effects of culture.
Third, we should be ready to adopt a unifying theory that says humans are unpredictable (the only prediction I feel confident making) rather than irrational or rational. If you want to keep the rational model, fine, so long as you stipulate that people don’t behave that way. If you want to scrap it, be careful not to fall into the trap of a general theory as those before us.
We have spent hundreds of years knowing we need to synthesize abstract behavior with real behavior. Instead, we ignored that job and left it for others to do. In so doing, we have spent decades on work that at times yielded little to no fruit. It is time to devote ourselves to the journey ahead. It is time to admit defeat in prediction, consider culture’s place in behavior, and accept a model that presumes unpredictability. It’s time we embark on the road to synthesis.