461. Market ideology: Autonomy
Another fundamental tenet of economic science, related to the tenets of freedom and variety, is methodological individualism: explanations must originate from the autonomous individual. The tenet of autonomy is also related to the tenet of self-interest, discussed in item 54 of this blog.
Economics deviated from autonomy when it started using game theory, where people interact strategically, choosing actions while taking into account actual or possible actions of others. An important example is the prisoner’s dilemma, where individuals are locked into a joint position that is worse than they could have achieved when all committing to a different strategy. This arose in the financial crisis, for example, when every bank felt forced to incur too high risks because other banks were doing it as well, which ended up in the need for the government to save the banks
However, the problem of non-autonomy, or heteronomy, is much more pervasive and deep, and here I turn to philosophy. In earlier items of this blog (23, 40, 55) I argued that that people are inherently social, cognitively and morally, developing ideas and norms from interaction between them.
Some of this is taken into account in the relatively new development of behavioural economics, which takes into account insights from social psychology. When making a choice and taking action, people employ cognitive shortcuts, heuristics, which are efficient but often irrational, and take into account the social situation, and how it is framed: how, from what perspective and in what context, questions are asked and options are presented. In item 34 I elaborated the notion of framing in terms of scripts.
However, that sits uneasily in the body of economic thought, as a bit of an anomaly, and is not well integrated in the fundamentals of economics. So let us again dig a bit deeper.
In his Sources of the self Charles Taylor traces the appearance in history, since around 1500, of what he called the ‘disengaged self’. I discussed this in item 52. This developed into the notion of an autonomous, rational individual, and that became part of liberal ideology and economic science.
In his Dilemmas and connections Charles Taylor noted that in contemporary society there is an uneasy mix of ideas from Enlightenment and Romanticism. Both contribute to a culture of individualism. From the Enlightenment: ideas of rationality (rational design, rational choice, efficiency, …). From Romanticism: diversity, individuality, feelings and emotions, realization of the authentic self, self-expression, … The Enlightenment is found in science, management, and increasingly also in public administration (e.g. in health care, education, …). Romanticism is found in the private sphere of self, family, friends, clubs, ….
Apart from social influence on individual thought and action, there are important phenomena of herd behaviour in economics, which destabilize the economy, in bubbles and their burst. Ordinarily, one would expect that when prices rise, demand falls, but in capital markets rising prices are taken as an indication of further rise in the future, so demand increases until prices far exceed real value, and after the boom a bust becomes inevitable. And in the bust the reverse happens: falling prices from sales of shares are taken as an indication of further fall so that sales multiply. Busts are often more radical than booms because people are more averse to taking losses than they are eager to make gains.